As filed with the Securities and Exchange Commission on January 13, 1999.

                                                   Registration No. 333-________
================================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM S-1
             REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

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

                                    Delaware
         --------------------------------------------------------------
         (State or other jurisdiction of incorporation or organization)

                                      5129
            --------------------------------------------------------
            (Primary Standard Industrial Classification Code Number)

                                   59-2646820
                      ------------------------------------
                      (I.R.S. Employer Identification No.)

                  1250 East Hallandale Beach Blvd., Suite 501,
                       Hallandale, Fl 33009 (954) 458-7636
   --------------------------------------------------------------------------
   (Address and telephone number of Registrant's principal executive offices)

                      Shalom Z. Hirschman, M.D., President
                  1250 East Hallandale Beach Blvd., Suite 501,
                       Hallandale, Fl 33009 (954) 458-7636
           ---------------------------------------------------------
            (Name, address and telephone number of agent for service)
                                 ---------------
                                   Copies to:
                            CHARLES J. RENNERT, ESQ.
                          Berman Wolfe & Rennert, P.A.
                          NationsBank Tower, Suite 3500
                            Miami, Florida 33131-2130
                     (305) 577-4177 Phone (305) 373-6036 Fax
                                 ---------------
Approximate date of commencement of proposed sale of the securities to the
public: As soon as practicable after the effectiveness of this Registration
Statement.

If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]

If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] _________

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] _________

If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [ ]


<PAGE>

                         CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
                                                    Proposed maximum         Proposed maximum
   Title of each class of         Amount to        offering price per       aggregate offering           Amount of
securities to be registered     be registered           share(1)                 price(1)             registration fee
---------------------------     -------------           --------                 --------             ----------------
<S>                              <C>                     <C>                    <C>                         <C>    
Common Stock par                 49,700,731              $.1925                  $9,567,391                 $2,700
value $.00001 per share                                                                                    --------
Total Fee                                                                                                   $2,700
                                                                                                           ========
</TABLE>
-----------------------
(1)   Estimated solely for the purpose of calculating the registration fee on
      the basis of the average of the closing bid and ask prices of the Common
      Stock on January 11, 1999, as reported on the OTC Electronic Bulletin
      Board.

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

         THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.


                      [This Space Intentionally Left Blank]




<PAGE>



            Prospectus subject to completion, dated January 13, 1999.

                          ADVANCED VIRAL RESEARCH CORP.
                        49,700,731 SHARES OF COMMON STOCK

         This Prospectus relates to the sale of up to 49,700,731 shares of
common stock, par value $.00001 per share (the "Common Stock"), of Advanced
Viral Research Corp. (the "Company") offered for the account of certain
shareholders of the Company (the "Selling Shareholders"). These 49,700,731
shares (the "Shares") include (i) 41,666,667 shares of Common Stock issued or
reserved for issuance upon the conversion of a 7% Convertible Debenture due
October 31, 2008 issued by the Company (the "Debenture"); (ii) 750,000 shares of
Common Stock reserved for issuance upon the exercise of warrants issued in
connection with the Debenture (the "Debenture Warrants"); (iii) 4,917,276 shares
of Common Stock held by certain shareholders; and (iv) 2,366,788 shares of
Common Stock reserved for issuance upon the exercise of warrants (the "Purchase
Warrants"). The actual number of shares of Common Stock issued or issuable upon
conversion of the Debenture is subject to adjustment and could be materially
less or more than the above estimated amount, depending upon factors that cannot
be predicted by the Company at this time, including, among others, the future
market price of the Common Stock.

         The Selling Shareholders may offer and sell the Shares through public
or private transactions and may sell the Shares at market prices prevailing at
the time of sale, at prices related to such prevailing prices, at negotiated
prices or at fixed prices. The Selling Shareholders may also transfer the Shares
in other ways. The Selling Shareholders and any brokers and dealers involved in
sales of the Shares offered under this Prospectus may be deemed to be
"underwriters" within the meaning of the Securities Act of 1933, as amended (the
"Securities Act"), and the commissions or discounts and other compensation paid
to those brokers and dealers may be regarded as underwriters' compensation. See
"Selling Shareholders" and "Plan of Distribution."

         The Company will not receive any of the proceeds from the sale of the
Shares by the Selling Shareholders. The Company will receive proceeds upon the
exercise of the Debenture Warrants and the Purchase Warrants (collectively, the
"1998 Warrants"), and has agreed to bear substantially all expenses of
registration of the Shares under federal and state securities laws, other than
commissions, fees and discounts of underwriters, brokers, dealers and agents,
and to indemnify the Selling Shareholders against certain liabilities, including
liabilities under the Securities Act.

         The Common Stock is listed for trading on the National Association of
Securities Dealers, Inc.'s OTC Bulletin Board (the "Bulletin Board") under the
symbol "ADVR." On January 11, 1999 the low and high bid prices for the Common
Stock on the Bulletin Board were $.19 and $.198, respectively.

         Investing in the Common Stock involves certain risks. See "High Risk
Factors" beginning on page 7.

         Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this Prospectus. Any representation to the contrary is a
criminal offense.

                The date of this Prospectus is __________, 1999.

++++++The information in this prospectus is not complete and may be changed. The
Selling Shareholders may not sell these securities until the registration
statement filed with the Securities Exchange Commission is effective. This
Prospectus is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.++++++


<PAGE>

                                TABLE OF CONTENTS


PROSPECTUS SUMMARY...........................................................1
   The Company...............................................................1
   Recent Developments.......................................................4
   The Offering..............................................................5

SUMMARY FINANCIAL DATA.......................................................6
   Summary Statement of Operations Data......................................6
   Summary Balance Sheet Data................................................6

WHERE YOU CAN FIND MORE INFORMATION..........................................7

FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE  ............................7

HIGH RISK FACTORS............................................................8

USE OF PROCEEDS.............................................................17

MARKET PRICE OF AND DIVIDENDS ON THE .......................................17

COMMON STOCK AND RELATED SHAREHOLDER MATTERS................................17
   Market Information.......................................................17
   Shareholders.............................................................17
   Dividend Policy..........................................................18

CAPITALIZATION..............................................................18

SELECTED CONSOLIDATED FINANCIAL DATA........................................19
   Selected Statement of Operations Data....................................19
   Selected Balance Sheet Data..............................................20

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.......................................................21
   Results of Operations....................................................21
   Liquidity................................................................22
   Capital Resources........................................................23
   Year 2000 Compliance.....................................................26

BUSINESS....................................................................26
   Overview ................................................................26
   Background of RETICULOSE.................................................27
   Exclusive Rights of the Company to RETICULOSE and Production
      Arrangements .........................................................31
   Government Regulation....................................................34
   The Investigational New Drug Application Process.........................34

                                        i

<PAGE>



   Testing Agreements.......................................................44
   Marketing And Sales......................................................52
   Competition..............................................................52
   Employees................................................................53
   Consulting Agreements....................................................53
   Exclusive Distribution Agreements........................................56

MANAGEMENT..................................................................60
   Executive Officers and Directors.........................................60
   Director Compensation....................................................61
   Executive Officer Compensation...........................................61
   Employment Contracts, Termination of Employment and
      Change-in-Control Arrangements........................................62

PRINCIPAL SHAREHOLDERS......................................................64

SELLING SHAREHOLDERS........................................................66

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............................67

DESCRIPTION OF SECURITIES...................................................67
   Common Stock.............................................................67

PLAN OF DISTRIBUTION........................................................67

LEGAL MATTERS...............................................................68

EXPERTS.....................................................................69

GLOSSARY OF TERMS...........................................................69

INDEX TO FINANCIAL STATEMENTS..............................................F-1


                                       ii

<PAGE>


                               PROSPECTUS SUMMARY

         This summary highlights information contained elsewhere in this
Prospectus. It is not complete and does not contain all of the information that
you should consider before investing in the Common Stock. You should read the
entire Prospectus carefully, including"High Risk Factors," the financial
statements, and "Where You Can Find More Information," before making any
decision to invest in the Common Stock.

The Company

         Advanced Viral Research Corp. (the "Company") was incorporated on July
31, 1985, under the laws of the State of Delaware, to engage in the production
and marketing, promotion and sale of the pharmaceutical product with the trade
name RETICULOSE, an anti-viral peptide-nucleic acid complex preparation.
RETICULOSE has not been approved for sale or use. See "Business -- Government
Regulation," "-- Marketing and Sales," and "-- Exclusive Distribution
Agreements." Accordingly, unless and until such approval is granted in the
United States or another "developed or developing country," sales of RETICULOSE
will not be significant, and there can be no assurance that they will be
significant even if approval is granted. The Company is in the developmental
stage, and has not yet commenced any commercial operations.

         History of RETICULOSE. RETICULOSE, the rights to which were acquired by
the Company in 1986, was marketed and used in the United States and elsewhere in
the world during the 1940's through the early 1960's. See "Business --
Background of RETICULOSE," and "-- Exclusive Rights of the Company to RETICULOSE
and Production Arrangements." In 1962 RETICULOSE was classified as a "new drug"
by the Food and Drug Administration of the United States Department of Health
and Human Services ("FDA"), requiring FDA approval for sale in the United
States. Legal action by the FDA resulted in RETICULOSE being withdrawn from the
United States market. See "Business -- Background of RETICULOSE." In 1967 and
1968, two applications for approval of RETICULOSE, one for sale and the other
for human clinical research in the United States, were filed and withdrawn
without prejudice on indications from the FDA that the applications would not be
approved. See "Business -- Background of RETICULOSE" and "The Investigational
New Drug Application Process." See generally, "Glossary" and "High Risk
Factors." Other than a report published in August 1996 by Shalom Hirschman, then
consultant, now President, Chief Executive Officer and a director of the
Company, none of the reports summarized in this Prospectus is more recent than
1969 because of a general lack of research interest in RETICULOSE. THE FDA HAS
REQUESTED THAT THE COMPANY DEMONSTRATE THAT THE COMPANY'S CURRENT FORMULATION OF
RETICULOSE IS IDENTICAL TO THE FORMULATION REPORTED IN THE REPORTS.

         Bernard Friedland, former President and current Chairman of the Board
of the Company, as sponsor, submitted to the FDA on September 20, 1984 an
application for a study, on human subjects, of the efficacy of RETICULOSE upon
AIDS: the Notice of Claimed Investigational Exemption for a New Drug ("IND").
Under FDA regulations, the Company is not permitted to engage in or authorize
human studies regarding RETICULOSE if the FDA notifies the Company of "serious
deficiencies that require correction before human studies can begin or that
would require restriction

                                        1

<PAGE>


of human studies until correction," until the Company is notified that the
material that it has submitted to correct the deficiencies is "satisfactory."

         In response to two deficiency letters from the FDA, the Company, on
March 6, 1992, submitted to the FDA additional information, including findings
from independent research laboratories, intending, among other things, to
procure the FDA's approval to conduct human clinical trials for RETICULOSE (the
"March 1992 FDA Submission"). On July 31, 1992, the Company received a third
deficiency letter from the FDA, dated July 27, 1992 (the "July 1992 Deficiency
Letter"), which provided detailed comments with respect to chemistry,
toxicology, microbiology and clinical areas requiring further studies and
actions on the part of the Company. BEFORE SEPTEMBER 1995, THE COMPANY RECEIVED
FURTHER CORRESPONDENCE FROM THE FDA, WHICH STATED, AMONG OTHER COMMENTS, THAT
THE COMPANY'S PRIOR SUBMISSIONS TO THE FDA DID NOT PROVIDE AN ADEQUATE RESPONSE
TO THE FDA'S EARLIER REQUEST FOR PRECLINICAL INFORMATION AND ACCORDINGLY THE
COMPANY'S IND WAS "INACTIVATED." The Company believes that the use of the term
"inactivated" indicates the FDA's position that the Company did not comply with
the FDA's written requests articulated in several deficiency letters within a
reasonable time. Accordingly, the Company believes it must refile or amend the
IND in order for the IND to be continued to be reviewed by the FDA. The Company
has not formally responded to the July 1992 Deficiency Letter or the 1995
deficiency letter. No assurances can be given that the Company's IND will ever
be approved by the FDA or that results of any testing will demonstrate that
RETICULOSE is safe or effective in the treatment of disease. The Company is
currently in the preliminary stage of preparing a new IND for filing with the
FDA (the "New IND"), although there can be no assurances as to the costs or the
timing of the filing of the New IND, if at all. Even if the New IND is filed,
the Company currently does not believe it has the resources to complete the FDA
approval process. The Company intends to allocate certain funds from the sale of
the Debenture and the exercise of certain stock options and warrants, for the
purpose of filing the New IND with the FDA. No assurance can be given, however,
that any options or warrants will be exercised, that the New IND will be
accepted by the FDA or that any tests previously conducted or to be conducted
will satisfy FDA requirements. See "Business -- The Investigational New Drug
Application Process" and "-- Testing Agreements -- Testing in the United States
of America."

         Testing of RETICULOSE. Open label clinical trials of RETICULOSE on
Human Papilloma Virus (HPV) at two separate hospitals located in Buenos Aires,
Argentina (the "HPV Clinical Trial") indicated clinical improvement in half, and
adverse side effects in none, of the 20 patients tested. See "Business --
Testing Agreements -- Argentina Agreements."

         Laboratory tests of RETICULOSE (the "Hirschman Study") at the Mount
Sinai School of Medicine, New York, New York under the supervision of Shalom Z.
Hirschman, M.D., then Professor of Medicine and Director of the Division of
Infectious Diseases of the Mount Sinai School of Medicine, currently the
Company's President and Chief Executive Officer, demonstrate that RETICULOSE
stimulates the production of a unique set of chemokines, including Interleukin 1
(IL-1), Interleukin 6 (IL-6) and Gamma Interferon, and inhibits the replication
of HIV in cell cultures.

                                       2

<PAGE>


         The first stage of a double-blind, randomized, placebo-controlled
clinical trial using RETICULOSE in the treatment of AIDS was completed in late
November 1996 (the "AIDS Clinical Trial"). The AIDS Clinical Trial is being
conducted at the Queen Elizabeth Hospital, Bridgetown, Barbados. Other than the
AIDS Clinical Trial, no controlled double-blind clinical trials of RETICULOSE
have commenced. The Company believes, however, based on certain prior history
and the published data for the years 1951 until 1962, largely anecdotal, that
RETICULOSE is an anti-viral pharmaceutical product which is safe and effective
in treating a number of interferon related viruses such as Asian Influenza,
Viral Pneumonia, Virus Infectious Hepatitis, Mumps, Encephalitis, Herpes Simplex
and Herpes Zoster. However, two articles published in 1962 in recognized medical
journals questioned the efficacy of RETICULOSE on certain viral diseases in
laboratory tests. There can be no assurance of the success of such testing or
whether such testing or any other potential testing that may be commenced will
result in FDA approval. See "High Risk Factors -- RETICULOSE -- Limited Medical
Acceptance and No Assurance of Effectiveness" and "Business -- Background of
RETICULOSE."

         In March 1997, the Company entered into a Material Transfer Agreement
-- Cooperative Research and Development Agreement (the "NCI Agreement") with
certain governmental agencies (including the FDA) represented by The National
Cancer Institute (collectively, the "Government Agencies"). The purpose of the
NCI Agreement is for Dr. Howard Young, Section Chief, Laboratory of Experimental
Immunology, Division of Basic Sciences, the National Cancer Institute, to
determine the molecular mechanism by which RETICULOSE may specifically enhance
transcription of the gamma interferon gene. The Company intends to supply
RETICULOSE to the Government Agencies for the purpose of research by the
Government Agencies in accordance with a research plan attached to the NCI
Agreement, subject to the conditions stated in the NCI Agreement. The NCI
Agreement provides for non-disclosure by the Government Agencies and an
understanding that the Company and the Government Agencies will enter into
licenses to one another on terms to be negotiated in the future, in the event
the research produces an invention. Either the Company or the Government
Agencies may terminate the NCI Agreement upon 30 days prior written notice to
the other. Pursuant to an agreement dated March 19, 1998, the NCI Agreement has
been extended for an additional one year period and provides for the continued
study of the basic mechanisms of immune responses, the investigation of
anti-tumor activity of RETICULOSE and its effect on rheumatoid arthritis. See
"Business -- Testing Agreements -- National Cancer Institute Study."

         In February 1998, the Company entered into a Concurrent Agreement with
DCT S.R.L., an Argentine corporation ("DCT"), whereby the Company agreed to
provide DCT or its assignees up to $412,960 to cover the costs of a study on 65
patients to compare the results of treatment of AIDS patients using a three-drug
cocktail and RETICULOSE versus AIDS patients taking a three-drug cocktail and a
placebo. See "Business -- Testing Agreements -- Argentina Agreement."

         In May 1998, the Company entered into an agreement with DCT (the
"Rheumatoid Arthritis Agreement") whereby the Company agreed to provide DCT or
its assignees up to $94,950 to cover the costs of a controlled study in 30
patients to determine the efficacy of RETICULOSE for the treatment of rheumatoid
arthritis in humans.

                                       3

<PAGE>

         In July 1998, the Company authorized the expenditure of up to $135,000
to study the effects of RETICULOSE in inhibiting the mutation of the AIDS virus
on patients in Argentina and Barbados. See"Business -- Testing Agreements --
Argentina Agreement" and "-- Barbados Study."

Recent Developments

         RBB Convertible Debenture and Warrants. On November 16, 1998, pursuant
to a Securities Purchase Agreement, the Company sold to RBB Bank
Aktiengesellschaft ("RBB") as agent for the accounts of certain persons
(collectively, the "Investors"): (i) a 7% Convertible Debenture due October 31,
2008 in the principal amount of $1,500,000 (the "Debenture"), and (ii) two
warrants to purchase a total of 750,000 shares of Common Stock (the "Debenture
Warrants"), for an aggregate purchase price of $1,500,000 (the "RBB Agreement").
The sale of the Debenture and the Debenture Warrants was made pursuant to
Regulation S promulgated by the Securities and Exchange Commission (the
"Commission") under the Securities Act. The Company relied on the
representations, warranties and covenants made by RBB in the RBB Agreement
relating to the sale of the Debenture and the Debenture Warrants for all the
facts necessary to make the Regulation S exemption to the registration
requirements under the Securities Act available.

         In connection with the sale of the Debenture and the Debenture
Warrants, the Company paid RBB a placement fee equal to 7% of the aggregate
purchase price. All or a portion of the Debenture may be converted into shares
of Common Stock equal to the principal amount and accrued and unpaid interest
outstanding under the Debenture on the conversion date divided by the Applicable
Conversion Price. "Applicable Conversion Price,"as provided in the RBB
Agreement, means the lesser of: (i) $.20 and (ii) the product obtained by
multiplying (a) the Average Closing Price times (b) 0.72. "Average Closing
Price" with respect to any conversion elected to be made by the holder will be
the average of the daily closing prices on the Bulletin Board for the three
consecutive trading days, as selected by the holder, out of ten trading days
immediately preceding the date on which the holder gives the Company a written
notice of the holder's election to convert outstanding principal of the
Debenture. Accrued interest under the Debenture is payable semiannually on
January 1 and July 1 of each year at the rate of 7% per annum on the unpaid
principal balance from the date of issuance until the date of the interest
payment. The Debenture will mature on October 31, 2008.

         At its option, the Company may prepay the Debenture at any time prior
to maturity without premium or penalty at a price equal to the principal amount
of the Debenture plus accrued and unpaid interest thereon. The Debentures may
not be converted by the holder after the third day preceding the specified
prepayment date contained in the Company's notice of its intent to prepay
pursuant to the RBB Agreement.

         One of the Debenture Warrants entitles the holder thereof to purchase
in the aggregate 375,000 shares of Common Stock at an exercise price of $.20 per
share. The other Debenture Warrant entitles the holder thereof to purchase in
the aggregate 375,000 shares of Common Stock at an exercise price of $.24 per
share. Both Debenture Warrants are exercisable at any time and from time to time
until October 31, 2008.

         Under the terms of the RBB Agreement, the Company is required to file
with the Commission this Registration Statement to register the Common Stock
issuable upon conversion of the Debenture and upon exercise of the Debenture
Warrants to allow the Investors to resell such Common Stock to the public. In
the event this Registration Statement is not declared effective by the
Commission on or before April 13, 1999 (the "Effective Deadline"), the Company
is obligated under the RBB Agreement to pay RBB a penalty equal to the sum of
(x) $30,000 and (y) $1,500 for each day lapsed

                                        4

<PAGE>


after the Effective Deadline, until this Registration Statement is declared
effective by the Commission, provided, however, that total penalties shall not
exceed $100,000 in the aggregate.

         Purchase Agreement and Warrants. On December 22, 1998, pursuant to a
Securities Purchase Agreement (the "Purchase Agreement"), the Company issued to
certain purchasers (collectively, the "Purchasers") (i) 4,917,276 shares of
Common Stock, and (ii) four warrants to purchase a total of 2,366,788 shares of
Common Stock, including (x) two warrants to purchase 1,966,788 shares of Common
Stock and (y) a finder's fee paid to Harborview Group consisting of two warrants
to purchase 400,000 shares of Common Stock (collectively, the "Purchase
Warrants") for an aggregate purchase price of $802,500.

         Two of the Purchase Warrants entitle the holders thereof to purchase
983,394 and 983,394 shares of Common Stock at exercise prices of $.2040 and
$.2448 per share, respectively. The other two Purchase Warrants which relate to
the finder's fee entitle the holders thereof to purchase 200,000 and 200,000
shares of Common Stock at exercise prices of $.2040 and $.2448 per share,
respectively. All four Purchase Warrants are exercisable at any time and from
time to time until December 31, 2003.

         Under the terms of the Purchase Agreement, the Company is required to
file with the Commission this Registration Statement to register the Common
Stock issued thereunder and upon exercise of the Purchase Warrants to allow the
Purchasers to resell such Common Stock to the public. The Purchase Agreement
further provides that, in the event this Registration Statement is not declared
effective by the Commission on or before May 21, 1999 (the "Effective
Deadline"), the Company is required to pay to the Purchasers a penalty of
$30,000 (allocated pro rata to each Purchaser as set forth in the Purchase
Agreement) for each full calendar month or portion thereof lapsed after the
Effective Deadline, until this Registration Statement is declared effective,
provided, however, that total penalties shall not exceed $100,000 in the
aggregate.

         The Company currently maintains offices at 1250 East Hallandale Beach
Boulevard, Suite 501, Hallandale, Florida 33009 and 200 Corporate Boulevard
South, Yonkers, New York 10701. Its telephone number in Hallandale, Florida is
(954) 458-7636 and its telephone number in Yonkers, New York is (914) 376-7383.
See "Business -- Property."

The Offering

<TABLE>
<S>                                                          <C>
         Common Stock being offered.......................... 49,700,731 shares(1)
         Common Stock outstanding............................ 346,123,638 shares(1)

         Use of Proceeds..................................... The Company will not receive any of the
                                                              proceeds from the sale of  the Shares offered
                                                              hereunder by the Selling Shareholders.  The
                                                              offering  is made to fulfill the Company's
                                                              contractual obligations to the Selling
                                                              Shareholders to register the Shares held by the
                                                              Selling Shareholders.  See "Use of Proceeds."
</TABLE>


                                        5

<PAGE>



<TABLE>
<S>                                                           <C>
         High Risk Factors................................... Prospective purchasers should consider
                                                              carefully certain risks concerning the Company
                                                              and its business, including those described
                                                              under "High Risk Factors -- Limited
                                                              Operations; No Present Source of Revenues;
                                                              No Record of Earnings and Accumulated
                                                              Deficit"; "Qualification Regarding Going
                                                              Concern"; "Risks Associated with Outstanding
                                                              Convertible Debenture"; Elimination of
                                                              Liability for Directors"; Failure of
                                                              RETICULOSE to be Approved for Sale by the
                                                              FDA"; "Single Product -- Very Limited Sales";
                                                              and "RETICULOSE -- Limited Medical
                                                              Acceptance and No Assurance of
                                                              Effectiveness," among other factors.
</TABLE>

----------------
(1) This amount includes (i) 41,666,667 shares issuable upon full conversion of
    the Debenture, which amount may fluctuate depending upon, among other 
    things, the future market price of the Company's Common Stock and (ii) 
    3,116,788 shares of Common Stock issuable upon exercise of the 1998 
    Warrants. Excludes 32,800,549 shares issuable upon the exercise of certain
    stock options and warrants.


                             SUMMARY FINANCIAL DATA

Summary Statement of Operations Data


<TABLE>
<CAPTION>
                                                                                                          (Unaudited)
                                                      Years Ended December 31                            9 Mos. Ended
                             --------------------------------------------------------------------------  September 30
                                       1993          1994           1995           1996           1997          1998
                                      ------        ------         ------         ------         ------        -----
<S>                                <C>           <C>            <C>          <C>            <C>           <C>
Net revenues                         $23,892       $84,852        $68,483       $102,907       $121,923       $80,289
Net income (loss)                  ($563,309)    ($440,837)     ($401,884)   ($1,154,740)   ($4,141,729)  ($3,118,824)
Net income (loss) per common           ($.00)        ($.00)         ($.00)         ($.00)         ($.00)        ($.00)
share
Weighted average # of shares     232,151,991   238,354,491    248,002,608    257,645,815    274,534,277   290,194,958
</TABLE>


Summary Balance Sheet Data


<TABLE>
<CAPTION>
                                                                                                          
                                                               December 31                                (Unaudited)
                             --------------------------------------------------------------------------  September 30
                                       1993          1994           1995           1996           1997          1998
                                      ------        ------         ------         ------         ------        -----
<S>                              <C>           <C>            <C>            <C>            <C>           <C>       
Total Assets                        $572,507      $452,264       $796,241     $1,716,800     $4,189,842    $1,779,767
Long-term debt                             -             -              -              -     $2,384,793             -
Stockholders' equity per                $.00          $.00           $.00           $.01           $.00          $.01
common share
Shares outstanding at year end   236,276,991   241,616,991    251,181,774    247,031,058    277,962,574   296,422,907
</TABLE>


                                        6

<PAGE>


                       WHERE YOU CAN FIND MORE INFORMATION

         The Company files annual, quarterly and current reports, proxy
statements and other information with the Commission. You may read and copy any
reports, statements or other information filed by either company at the
Commission's public reference rooms in Washington, D.C., New York City and
Chicago. Please call the Commission at 1-800-SEC-0330 for further information on
the public reference rooms. The Company's filings are also available to the
public from commercial document retrieval services and at the Internet web site
maintained by the Commission at http://www.sec.gov.

         The Company filed a Registration Statement on Form S-1 (the
"Registration Statement") to register with the Commission the resale of the
Shares issued or issuable to the Selling Shareholders as provided herein. This
Prospectus is a part of that Registration Statement and constitutes a prospectus
of the Company. As permitted by the Commission's rules, this Prospectus does not
contain all of the information you can find in the Registration Statement or the
exhibits to the Registration Statement. This Prospectus summarizes some of the
documents that are exhibits to the Registration Statement, and you should refer
to the exhibits for a more complete description of the matters covered by those
documents.

         The Company has not authorized anyone to give any information regarding
the offering of the Shares that is different from what is contained in this
Prospectus. This Prospectus is not an offer to sell or a solicitation of anyone
to whom it would be unlawful to make an offer of solicitation. You should not
assume that the information contained in this Prospectus is accurate as of any
time after the date of this Prospectus, and neither the mailing of this
Prospectus to the Company's shareholders nor the issuance of the Shares should
create any implication to the contrary.


                 FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE

         This document contains "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. These statements relate
to expectations concerning matters that are not historical facts. Although the
Company believes that the expectations reflected in such forward-looking
statements are reasonable, it can give any assurance that such expectations will
prove to have been correct. Important factors that could cause actual results to
differ materially from such expectations ("Cautionary Statements") are disclosed
herein and therein, including, without limitation in conjunction with the
forward-looking statements included under "High Risk Factors." All
forward-looking statements attributable to the Company are expressly qualified
in their entirety by the Cautionary Statements described herein.

         The Company makes no express or implied representation or warranty as
to the attainability of the projected or estimated financial information set
forth herein or as to the accuracy or completeness of the assumptions from which
such projected or estimated information is derived. Projections or estimations
of the Company's future performance are necessarily subject to a high degree of
uncertainty and may vary materially from actual results. Reference is made to
the particular discussions set forth under "High Risk Factors," and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

                                        7

<PAGE>

                                HIGH RISK FACTORS

         THE SECURITIES OFFERED HEREBY ARE HIGHLY SPECULATIVE IN NATURE AND
INVOLVE A HIGH DEGREE OF RISK. THEY SHOULD BE PURCHASED ONLY BY PERSONS WHO CAN
AFFORD TO LOSE THEIR ENTIRE INVESTMENT. THEREFORE, EACH PROSPECTIVE PURCHASER
SHOULD, PRIOR TO PURCHASE, CONSIDER VERY CAREFULLY THE FOLLOWING RISK FACTORS,
AS WELL AS ALL OTHER INFORMATION SET FORTH ELSEWHERE IN THIS PROSPECTUS,
PARTICULARLY THE INFORMATION CONTAINED IN THE CONSOLIDATED FINANCIAL STATEMENTS
HEREIN.

         Limited Operations; No Present Source of Revenues; No Record of
Earnings and Accumulated Deficit. The Company was incorporated under the laws of
the State of Delaware on July 31, 1985, has a very limited operating history,
has only insignificant operating revenues and must be considered promotional and
still in its early developmental stage. From inception through September 30,
1998, the Company had an accumulated deficit of $12,112,090. The Company is
dependent upon approval of RETICULOSE for sale before it can begin any
significant commercial operations.

         No applications for approval have been filed in any country, except for
the IND submitted to the FDA on September 20, 1984 by Bernard Friedland, former
President and current Chairman of the Board of the Company, as sponsor. Under
FDA regulations, the Company is not permitted to engage in or authorize human
studies regarding RETICULOSE if the FDA notifies the Company of "serious
deficiencies that require correction before human studies can begin or that
would require restriction of human studies until correction" until the Company
is notified that the material that it has submitted to correct the deficiencies
is "satisfactory." The Company has received and responded to two deficiency
letters from the FDA, which responses were not deemed adequate. BEFORE SEPTEMBER
1995, THE COMPANY RECEIVED FURTHER CORRESPONDENCE FROM THE FDA, WHICH STATED,
AMONG OTHER COMMENTS, THAT THE COMPANY'S PRIOR SUBMISSIONS TO THE FDA DID NOT
PROVIDE AN ADEQUATE RESPONSE TO THE FDA'S EARLIER REQUEST FOR PRECLINICAL
INFORMATION AND ACCORDINGLY THE COMPANY'S IND WAS "INACTIVATED." The Company has
not formally responded to a third deficiency letter (i.e., the July 1992
Deficiency Letter) or the 1995 deficiency letter. See "Business -- the
Investigational New Drug Application Process." No assurances can be given that
the Company's IND will ever be approved by the FDA or that results of any future
testing will demonstrate that RETICULOSE is safe or effective in the treatment
of disease. See "Business -- Testing Agreements -- Argentina Agreements," "--
Government Regulation," "-- Marketing and Sales," and "-- Exclusive Distribution
Agreements." See also the discussion of the Hirschman Study and the AIDS
Clinical Trial under "Business -- Background of RETICULOSE." There can be no
assurance, however, that the HPV Clinical Trial, the AIDS Clinical Trial or any
other potential testing that may be commenced will prove successful.


                                       8

<PAGE>


         The Company's cash position, from time to time, has been the result of
the proceeds from the Company's initial public offering on May 16, 1986, the
exercise of warrants issued in connection with the initial public offering, the
exercise of certain stock options, the sale of convertible debentures in 1997
and 1998, fees paid for distribution rights by the Company's exclusive
distributors which fees also included deposits on purchases of RETICULOSE by a
distributor, and limited sales of RETICULOSE for testing purposes. See
"Management's Discussion and Analysis and Results of Operations -- Capital
Resources." Although the Company's cash position has recently improved due to
the Company's recent sale of securities, the Company's cash position of
approximately $673,041 as of September 30, 1998 is largely due to stock options
being exercised and the proceeds of convertible debentures sold in 1997. Such
funds will not be adequate to pay all the costs associated with the full range
of continued research and development and testing, as well as the clinical
trials that may be required by the FDA, in order to obtain approval for the IND
to test RETICULOSE in the United States, which is a prerequisite for being able
to market and sell RETICULOSE in the United States. However, the Company's cash
position is sufficient to fund the ongoing AIDS Clinical Trial, which costs not
yet expended are estimated at $75,000. Unless and until RETICULOSE is approved
for sale in the United States or in another developed or developing country, or
one or more of the Company's distributors obtains approval for the sale of
RETICULOSE in any of their respective territories, the Company will be dependent
upon the continued sale of its securities and/or the exercise of options and
warrants for funds to meet its continued cash requirements. In such event, the
Company may be dependent on the willingness of third parties to accept shares of
the Common Stock, options or warrants to acquire shares of the Common Stock as
compensation to conduct tests or provide other services to the Company. No
assurance can be given that such financing or services, if and when required,
will be available, or if available, will be at terms acceptable to the Company.
Any issuance of a substantial number of additional shares of Common Stock would
also dilute the ownership of present shareholders.

         Potential investors should be made aware of the difficulties
encountered by any business enterprise in its development stage, especially in
view of the intense competition from existing and more established businesses in
the medical/pharmaceutical fields, most of which have substantial capital assets
and income to fund any research, development, promotional and marketing programs
and regulatory protocols that are necessary in connection with
medical/pharmaceutical products. See "Business -- Competition." There is nothing
at this time upon which to base any assumption that the Company will either
generate operating revenues or will ever be able to operate on a profitable
basis. If the Company's plans prove to be unsuccessful, its shareholders and
holders of options and warrants may lose all or a substantial portion of their
investment. See "Business -- Testing Agreements" and "-- Exclusive Distribution
Agreements."

         Qualification Regarding Going Concern. The Company's independent
accountants' report on the Company's consolidated financial statements for the
fiscal year ended December 31, 1997, includes an explanatory paragraph in Note 2
to the Consolidated Financial Statements stating that the Company's ability to
continue operations is dependent upon its continued sale of its securities for
funds to meet its cash requirements, which factors raise substantial doubt about
the Company's ability to continue as a going concern. Further, the accountant's
report does not include any adjustments that might result from the outcome of
this uncertainty. The Company has no immediate plan to issue any securities,
otherwise than upon the possible exercise of options or warrants or the
conversion of the Debenture. The Company has suffered material losses from
operations during its limited operating history.


                                        9

<PAGE>

         The Company is dependent upon registration of RETICULOSE for sale in
the United States or in another developed or developing country before it can
begin commercial operations. The Company's cash position may be inadequate to
pay all the costs associated with the full range of testing and clinical trials
required by the FDA. Management does not anticipate registration or other
approval of RETICULOSE in an industrially developed or developing country in the
immediate future. Unless and until RETICULOSE is approved for sale in the United
States or another such country or unless RETICULOSE is approved for sale in one
or more of its distributors' territories with both a material population and
healthy profile, the Company may be dependent upon the continued sale of its
securities or the exercise of its options or warrants for funds to meet its cash
requirements. In addition, the Company may seek debt financing, but no
agreements have been entered into or identified with regard to any financing
except the Debenture described under "Management's Discussion and Analysis and
Results of Operations -- Capital Resources." In the event that financing is not
available, in order to continue operations, management anticipates that they
will have to defer their salaries. No assurances can be given that other debt
financing will be readily obtainable on favorable terms, that the Company will
be able to sustain its operations until approval for sale of RETICULOSE is
granted or that any such approval will be granted. The Consolidated Financial
Statements do not include any adjustments relating to the recoverability and
classification of recorded assets and classification of liabilities that might
be necessary should the Company be unable to continue in existence. See
"Management's Discussion and Analysis and Results of Operations" and "Notes to
Consolidated Financial Statements."

         Elimination of Liability for Directors. The Company's Certificate of
Incorporation was amended on December 30, 1987, to limit or eliminate director
liability by incorporating new Article Eleventh, which provides: "A director of
the Corporation shall not be personally liable to the Corporation or its
shareholders 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 shareholders, (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."

         Failure of RETICULOSE to be Approved for Sale by the FDA. Management of
the Company believes that the United States constitutes one of the major and
most profitable pharmaceutical markets in the world. Since 1962, when
RETICULOSE, among many other drugs, was reclassified as a "new drug" by the FDA,
the Company has not been able to market RETICULOSE in the United States. This
has been the direct result of its inability to satisfy the regulatory protocols
and the substantial preapproval requirements imposed by the FDA upon the
introduction of any new or unapproved drug product, which include lengthy and
detailed laboratory and clinical testing procedures, sampling activities and
other costly and time consuming procedures. There is no assurance that FDA
approval for the sale of RETICULOSE in the United States will ever be obtained
or that the results of the current AIDS Clinical Trial or any other clinical
studies and tests will be sufficient to lead to FDA approval of an IND for
clinical testing of RETICULOSE on humans in the United States. Further, there
can be no assurance that RETICULOSE will ever be approved by any developed or
developing country, without which no significant revenues will ever be generated
by the Company from the sale of RETICULOSE.


                                       10

<PAGE>

         Single Product -- Very Limited Sales. There have been no sales by the
Company of RETICULOSE, except for insignificant revenues related to distribution
of the drug for testing purposes. RETICULOSE is not currently marketed or
approved for sale or use, and there can be no assurance that it will be approved
for sale or use in the future. The Company has currently in effect exclusive
distribution agreements with distributors to market and sell RETICULOSE, subject
to each distributor obtaining regulatory approval, in the following countries:
China, Japan, Hong Kong, Macao, and Taiwan (AVIX International Pharmaceutical
Corp., a New York corporation ("AVIX")); Mexico (AVIX); Channel Islands, Isle of
Man, British West Indies, Jamaica, Haiti, Bermuda, Belize and Saudi Arabia
(Commonwealth Pharmaceuticals, a corporation organized under the laws of Cayman
Islands, British West Indies ("Commonwealth")); and Argentina, Bolivia,
Paraguay, Uruguay, Brazil, and Chile (DCT). The Company is dependent upon
obtaining regulatory approval of RETICULOSE for sale and use in the United
States, in other developed countries, or alternatively in one or more of its
distributors' territories in order to have the potential for significant
distribution and sales of RETICULOSE. There can be no assurance that any
significant sales will be generated by the Company's distribution agreements,
and further, there can be no assurance that any such distributors will receive
timely, if ever, necessary approvals to market RETICULOSE in their respective
territories. See "Business -- Exclusive Distribution Agreements."

         RETICULOSE - Limited Medical Acceptance and No Assurance of
Effectiveness. RETICULOSE is neither widely known nor accepted by the medical
community nor approved for use in the United States for any purpose by the FDA.
Two articles published in 1962 in recognized medical journals have questioned
the anti-viral effect of RETICULOSE on Mumps, Encephalitis and Herpes Simplex
utilizing tissue culture; on Herpes Simplex in students; and on Lansing Polio
and mouse adapted and egg adapted Influenza: A. C. Kempe, "Failure to
Demonstrate Antiviral Activity of RETICULOSE," American Journal of Diseases of
Children, Vol. 103, May 1962, and Behbehani, "The Effect of RETICULOSE on Viral
Infections of Experimental Animals," Southern Medical Journal, Vol. 55, February
1962. The only "double blind" study of RETICULOSE completed by or for the
Company is the AIDS Clinical Trial.

         Although the Company has filed the IND with the FDA, it must first
satisfy the FDA that the current formulation of RETICULOSE is identical to the
formulation reported on in the prior anecdotal history and studies. In the
opinion of Mr. Friedland, former President and currently Chairman of the Board
of Directors of the Company, a peptide study conducted by the University of
Wisconsin Biotechnology Center in 1987 and 1988 exclusively for the Company (the
"Wisconsin Study") showed that the peptide analyses of four RETICULOSE samples,
two of which were 16 years old and manufactured by Key Pharmaceuticals Limited,
and two of which were one year old and manufactured by Advance Viral Research
Limited, indicated that all four product samples were essentially the same
product as demonstrated by reverse phase high performance liquid chromatography.
According to the Wisconsin Study, additional analyses conducted by gel cell
electrophoresis demonstrated that all four samples were essentially of the same
composition, which validate both stability and identical structure of the
RETICULOSE product represented by aged and new samples. It is uncertain whether
the FDA has accepted the Wisconsin Study as proof that the current formulation
of RETICULOSE is identical to the formulation reported in prior anecdotal
history and studies. Should the Wisconsin Study not satisfy the FDA, and should
the FDA not consider such prior anecdotal history, RETICULOSE will continue to
be considered as a new drug. In such event, the uncertain amount of time and
costs required for IND approval as a result of the


                                       11

<PAGE>


FDA not accepting the prior history of the drug can be expected to be
financially burdensome and have a material adverse effect on the Company and its
likelihood of ever obtaining any requisite approval in the United States. The
Company is dependent on the AIDS Clinical Trial and other tests and trials that
may be commenced in the future, the results of which, if successful, may assist
the Company in receiving an IND for testing on humans in the United States.

         The March 1992 FDA Submission included, among other things, findings
from certain independent research laboratories, including the Wisconsin Study.
The purpose of the March 1992 FDA Submission was to obtain FDA approval for the
Company to conduct human clinical trials regarding the efficacy of RETICULOSE
upon AIDS. The FDA responded with the July 1992 Deficiency Letter and additional
correspondence in September 1995. The Company has not formally responded to the
FDA.

         There can be no assurance that the FDA will approve the sale or even
the testing on humans of RETICULOSE in the United States, or that RETICULOSE
will be effective in treating viruses of any variety on a wide scale or any
other basis. See "Management's Discussion and Analysis and Results of
Operations", "Business -- The Investigational New Drug Process" and "Testing
Agreements."

         Additional Financing Necessary. Management believes that its current
liquid assets after giving effect to the proceeds which have been derived from
the sale of the Debenture and other securities should be sufficient to enable
the Company to conduct its contemplated activities for at least 12 months and
conduct day to day operations at present levels, based upon monthly operating
expenses as of September 30, 1998 of approximately $300,000. See "Use of
Proceeds." In addition to the Debenture, the Company currently has outstanding:
(i) the Debenture Warrants and the Purchase Warrants (collectively, the "1998
Warrants"); (ii) six currently exercisable warrants (collectively, the "1997
Warrants"), three of which each entitle the holder to purchase 178,378 shares of
Common Stock, and three of which each entitle the holder to purchase 600,000
shares of Common Stock, at exercise prices of $.288, $.576, $.864, $.20, $.23
and $.27 per share, respectively, and (iv) stock options held by certain persons
to purchase approximately 30,465,415 shares of Common Stock at exercise prices
ranging from $.11 to $.36 per option share (collectively, the "Options"). The
exercise prices of certain of the Options are significantly below the prevailing
market price of the Company's Common Stock. See "Management's Discussion and
Analysis and Results of Operations."

         The Company may require additional equity and/or debt financing in the
future to meet the considerable costs of human clinical trials, should the FDA
grant permission for such trials. Such costs have not been ascertained by the
Company. If no options or warrants are exercised, management believes that the
Company will be able to continue its business, which remains in the development
stage, at current levels for approximately 12 months. There can be no assurance
that any additional financing will be available or, if available, that it can be
obtained on terms satisfactory to management. If the Company does not obtain
material proceeds from the exercise of options or warrants, the Company could be
dependent upon joint ventures with, or the sale of certain rights regarding
RETICULOSE to, third parties, the terms of which might not be advantageous to
the Company. See "Management's Discussion and Analysis and Results of
Operations" and "Business -- Exclusive Distribution Agreements." There can be no
assurance that the 1998 Warrants, the


                                       12

<PAGE>


underlying shares of which are registered for sale under the Registration
Statement, the Options, or the 1997 Warrants will be exercised in their
entirety, if at all.

         Lack of Product Liability Insurance. The Company, like any
pharmaceutical manufacturer, could be subjected to claims for adverse reactions
resulting from the use of RETICULOSE. Although the Company is unaware of any
such claims or threatened claims since RETICULOSE was initially marketed in the
1940's, one study noted adverse reactions in guinea pigs. 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
RETICULOSE. As of the date hereof, the Company does not have product liability
insurance. The Company has not allocated any portion of the proceeds that it may
receive upon the exercise of any options or warrants, of which there can be no
assurance, to the cost of product liability insurance. There can be no assurance
that the Company would be able to secure such insurance in adequate amounts, at
reasonable premiums, if it determined to do so. Should the Company be unable to
secure product liability insurance, the risk of loss to the Company in the event
of claims would be greatly increased and could materially adversely affect the
Company.

         Lack of Patent Protection. The Company does not presently have a patent
for RETICULOSE, however, the Company has two patents for the use of RETICULOSE
as a treatment (the "Use Patents"). The Company currently has 32 patent
applications pending with the U.S. Patent Office. 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. The Company has retained patent
counsel for the purpose pursuing additional patent protection for RETICULOSE.
However, there is no certainty that patents will be granted, or if granted, that
the patents will be sustained if judicially attacked, and, if declared valid,
that the patents, in fact, will operate to protect the Company from others
copying RETICULOSE. The Company has relied upon laws protecting proprietary
information and trade secrets and upon confidentiality agreements to protect its
rights to RETICULOSE and the processes for its manufacture, but there can be no
assurance that such efforts and procedures will continue to be successful and
protect the Company from any competition in the future. See "Business -- Testing
Agreements -- National Cancer Institute Study."

         Potential Claim for Royalties. If the Company were successful in
selling RETICULOSE, the Company could be subject to claims from the heirs and
the Estate of Mr. Biagio E. LaPenta in connection with royalty payments on the
sale of RETICULOSE. Biagio LaPenta, the heir of Dr. Vincent LaPenta and then
owner of the rights to RETICULOSE transferred such rights in 1965 to Key Inc.,
subject to an alleged royalty arrangement ("Alleged Contract") whereby Key Inc.
was allegedly obligated to deliver royalties to Biagio LaPenta on sales of
RETICULOSE. The Company is aware of litigation commenced by Biagio LaPenta
against Key Inc., the purpose of which was to cause Key Inc., to pay to Biagio
LaPenta royalties as per the Alleged Contract (the "LaPenta Suit"). The Company
believes the LaPenta Suit was unsuccessful and dismissed with no liability on
the part of Key. In February 1973, Cepher Chen Yan-Sun purchased all of the
outstanding shares of Key Inc., among other things, thereby acquiring the rights
to RETICULOSE. Mr. Chen was declared bankrupt by a Hong Kong Bankruptcy Court.
In 1984, Messrs. William Bregman and Friedland purchased from the Hong Kong
Bankruptcy Court Receiver, among other things, the rights to RETICULOSE. The
Company's counsel in the Bahamas, Nottage, Miller & Co., has advised Messrs.
Bregman and Friedland that any royalty claims were barred as a result of the
purchase from the Hong Kong


                                       13

<PAGE>


Bankruptcy Court. Biagio LaPenta died in 1976. The Company would vigorously
contest any royalty claim. See "Business -- Background of RETICULOSE."

         Limited Staff for Operations -- Reliance Upon Officers and Key
Personnel. The Company is currently wholly dependent upon the personal efforts
and abilities of its three full-time, executive officers, only one of whom,
Bernard Friedland, Chairman of the Board, has any experience in the
pharmaceutical industry. See "Management -- Executive Officers and Directors"
for further information concerning the extent, nature and scope of its officers'
business experience. The loss or unavailability to the Company of the services
of Bernard Friedland or Shalom Z. Hirschman, M.D., President and Chief Executive
Officer, could have a material adverse effect on the Company's business
prospects and any potential earning capacity, and, therefore, the Company has
obtained "key-man" insurance on the lives of Mr. Friedland and Dr. Hirschman in
the amounts of $400,000 and $1,000,000, respectively. See "Use of Proceeds." In
the event the Company's level of operations shall significantly increase, the
business may depend upon its abilities to attract and hire additional management
and staff employees. There can be no assurance that the Company will be able to
secure such additional management and staff, if necessary.

         Government Regulation. The FDA and comparable regulatory agencies in
foreign countries impose substantial requirements upon the introduction of
therapeutic drug products including lengthy and detailed laboratory and clinical
testing procedures, sampling activities and other costly and time consuming
procedures. There is no assurance that FDA approval for the sale of RETICULOSE
in the United States will ever be obtained or that the Company will have
adequate funds to finance the necessary clinical studies and related costs. A
New Drug Application ("NDA") was filed with the FDA for RETICULOSE by Key
Pharmaceuticals Limited ("Key"), a subsidiary of Key Pharmaceuticals Inc. ("Key
Inc.") in May 1967 and subsequently withdrawn without prejudice. Key filed an
IND in November 1968 and withdrew it without prejudice in 1972, shortly before
RETICULOSE was sold to Mr. Cepher Chen Yan-Sun of Singapore. Mr. Chen
subsequently was declared bankrupt. See "Business -- Background of RETICULOSE."
In 1984, Bernard Friedland filed an IND regarding which the FDA has issued four
letters of deficiency and which in 1995 was declared "inactivated". The effect
of the FDA and foreign government regulation will be to delay marketing of
RETICULOSE for a considerable period of time, to impose costly procedures upon
the Company's activities and to impede and/or prevent the Company's ability to
compete with larger companies in its industry. The extent of potentially adverse
government regulations which might arise from future legislation or
administrative action cannot be predicted. In recent years, developing "Third
World" countries have become increasingly thorough in the registration and
licensing of pharmaceutical products. Registration or approval of a
pharmaceutical product in one or more other countries is a prerequisite to
obtaining registration for sale in many Third World countries. In any event,
there can be no assurance that sales in Third World countries may produce
significant revenue for the Company.

         Intense Competition. There are inherent difficulties for any
development stage company, such as the Company, seeking to enter an established
field, particularly a field as capital intensive as the manufacture and sale of
pharmaceuticals. The Company can expect to encounter intense competition from
well known pharmaceutical companies and chemical companies engaged in the
development and marketing of therapeutic drug products. Almost all of such
companies are substantially larger, possessing far greater capital resources,
more substantial operating histories and


                                       14

<PAGE>

records of successful operations, greater personnel and other resources, and
more extensive facilities than the Company now has or will have in the
foreseeable future. Accordingly, such companies are and probably will continue
to remain in a far better position to compete in this industry than the Company.
Such companies may succeed in discovering, developing and marketing products
that are either as effective or more effective than RETICULOSE, which has not
yet been established or proven to be effective as an anti-viral agent to the
FDA's or any other regulatory agency's standards. The Company is not currently,
and there can be no assurances that in the foreseeable future the Company will
be, a significant factor in the pharmaceutical field. Additionally, small
development stage entities, such as the Company, with very limited resources,
are at a very serious disadvantage in attempting to operate in a market against
established Competitors. See "Business -- Competition."

         Voting Control by Present Management. As of January 11, 1999, the
current officers and directors of the Company beneficially owned 91,671,133
shares of Common Stock of the Company or approximately 29% of the 301,340,183
shares of Common Stock deemed outstanding on that date for the purposes of the
percentage calculation, including certain shares underlying options held by
Shalom Z. Hirschman. As there are no cumulative voting rights, current members
of management, by virtue of their stock ownership, can be expected to influence
substantially the election of all of the directors of the Company and thereby
continue to impact substantially the Company's business, affairs and policies.
See "Principal Shareholders" and "Description of Securities."

         No Dividends and None Anticipated. The Company has not paid any
dividends upon its Common Stock since its inception and it does not currently
anticipate paying any dividends upon its Common Stock in the foreseeable future.
See "Dividend Policy", and "Description of Securities."

         Lack of Underwriter. The Shares offered hereby will be sold directly by
the Selling Shareholders, from time to time in the market, without an
underwriter. Because an underwriter is not involved in this offering, the
services that an underwriter typically would render will not be available to
purchasers of the Shares. Such services typically include, among others,
confirmation of the representations and warranties of the material facts
contained in the prospectus. There has been no independent confirmation or due
diligence investigation undertaken by any third party of any of the
representations made in this Prospectus, which is normally an obligation
undertaken by an underwriter.

         Benefit to Certain Officers and Directors. Upon completion of the
Company's initial public offering on May 16, 1986, the Company paid $50,000 to
its affiliate LTD in consideration for the acquisition of exclusive rights to
manufacture and market RETICULOSE. In addition, the Company purchased
approximately 15,000 ampules of RETICULOSE from LTD for $45,000 and was
obligated to pay LTD $3.00 per ampule of RETICULOSE for the initial 100,000
ampules (including these 15,000 ampules) purchased the first year and $2.00 per
ampule purchased thereafter. The Company, on December 16, 1987, acquired LTD.
See "Business -- Exclusive Rights of the Company to RETICULOSE and Production
Arrangements." Such $95,000 was used to prepare LTD's manufacturing facility
based upon what the Company believed was required for the production of
RETICULOSE. Bernard Friedland, then President and a director of the Company, and
William Bregman, Secretary-Treasurer and a director of the Company, were also
officers and directors and owner of 99.6% of the LTD. stock. Messrs. Friedland
and Bregman continue to hold such LTD Stock as trustees for the Company.


                                       15

<PAGE>


         Broker-Dealer Sales of the Company's Common Stock. The Common Stock is
subject to the Securities Enforcement and Penny Stock Reform Act of 1990, which
requires additional disclosure relating to the market for penny stocks in
connection with trades in any stock defined as a penny stock. Commission
regulations generally define a penny stock to be an equity security that has a
market price of less than $5.00 per share, subject to certain exceptions. Unless
an exception is available, the regulations require the delivery, prior to any
transaction involving a penny stock, of a disclosure schedule explaining the
penny stock market and the risks associated therewith.

         In addition, because the Company's securities do not meet the
exceptions to the penny stock regulations cited above, trading in the Company's
securities is covered by Rule 15g-9 promulgated under the Exchange Act for
securities that are not listed on The Nasdaq Stock Market or any national
securities exchange. Under such rule, broker/dealers who recommend such
securities to persons other than established customers and accredited investors
must make a special written suitability determination for the purchaser and
receive the purchaser's written agreement to a transaction prior to sale.
Securities also are exempt from this rule if the market price is at least $5.00
per share.

         Because the Company's securities are subject to the regulations
applicable to penny stocks, the market liquidity for the Company's securities
may be adversely affected. The regulations on penny stocks limit the ability of
broker/dealers to sell the Company's securities and thus the ability of
purchasers of the Company's securities to sell their securities in the secondary
market.

         In addition, certain states may have rules and regulations that impose
additional sales practice requirements on broker-dealers who sell the Common
Stock.



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                                       16

<PAGE>


                                 USE OF PROCEEDS

         The Company will not receive any of the proceeds from the sale of the
Shares offered hereunder by the Selling Shareholders. The offering is made to
fulfill the Company's contractual obligations to the Selling Shareholders to
register the Shares held by the Selling Shareholders.


                      MARKET PRICE OF AND DIVIDENDS ON THE
                  COMMON STOCK AND RELATED SHAREHOLDER MATTERS

Market Information

         The principal United States market in which the Common Stock is traded
is the National Association of Securities Dealers Bulletin Board (the "Bulletin
Board"). The following table shows the range of reported low bid and high bid
quotations for the Common Stock for each full quarterly period during the
Company's two most recent fiscal years ended December 31, 1996 and 1997, and for
the first, second and third quarters of 1998, as reported on the Bulletin Board.
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 necessarily
represent actual transactions.


                                                   Low Bid         High Bid
                                                 (Per Share)      (Per Share)
-----------------------------------------------------------------------------
Quarter Ending March 31, 1996.......................$0.15            $0.19
Quarter Ending June 30, 1996.........................0.35             0.8125
Quarter Ending September 30, 1996....................0.44             0.75
Quarter Ending December 31, 1996.....................0.26             0.62

Quarter Ending March 31, 1997........................0.26             0.47
Quarter Ending June 30, 1997.........................0.16             0.31
Quarter Ending September 30, 1997....................0.15             0.33
Quarter Ending December 31, 1997.....................0.175            0.345

Quarter Ending March 31, 1998........................0.18             0.4375
Quarter Ending June 30, 1998.........................0.245            0.46
Quarter Ending September 30, 1998....................0.16             0.30

Shareholders

         As of January 11, 1999, the approximate number of holders of record of
the Common Stock was 2,769, inclusive of those brokerage firms and/or clearing
houses holding the shares of Common Stock for their clientele (with each such
brokerage house and/or clearing house being considered as one holder).


                                       17

<PAGE>


Dividend Policy

         The Company has not declared or paid any dividends on its shares of
Common Stock. The Company intends to retain future earnings, if any, that may be
generated from the Company's operations to finance the operations and expansion
of the Company and, accordingly, does not plan, for the reasonably foreseeable
future, to pay dividends to holders of the Common Stock. Any decision as to the
future payment of dividends will depend on the results of operations and
financial position of the Company and such other factors as the Company's Board
of Directors, in its discretion, deems relevant.


                                 CAPITALIZATION

         The following table sets forth the capitalization of the Company at
September 30, 1998. This table should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements, including the notes thereto, included elsewhere in
this Prospectus.

<TABLE>
<CAPTION>
                                                                                                                  Pro Forma
                                                                                      September 30, 1998        As Adjusted (1)
                                                                                      ------------------      ------------------
<S>                                                                                      <C>                    <C>
Long-term Debt:
   Convertible Debenture issued in November, 1997                                       $          -              $1,500,000
                                                                                        ============           =============
Stockholders' Equity:
   Common Stock, $.00001 par value; 1,000,000,000 shares authorized;
   296,422,907 shares outstanding as of September 30, 1998....................................$2,964                  $3,461
   Additional paid-in-capital............................................................$13,651,982             $16,650,092
   Deficit accumulated in the Development Stage.........................................($12,112,090)           ($12,112,090)
   Deferred Compensation Costs..............................................................($29,536)               ($29,536)
                                                                                        ------------           -------------
Total Stockholders' Equity................................................................$1,513,320              $4,511,927
                                                                                        ============           =============
</TABLE>

------------------
(1) Assumes issuance of all shares being registered pursuant to this 
    Registration Statement.



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                                       18

<PAGE>


                      SELECTED CONSOLIDATED FINANCIAL DATA

         The following selected historical financial data of the Company as of
and for the years ended December 31, 1993, 1994, 1995, 1996, and 1997 have been
derived from the audited financial statements of the Company. The following
selected consolidated financial data of the Company as of September 30, 1998 and
for the nine months ended September 30, 1997 and 1998 have been derived from the
Company's unaudited financial statements included elsewhere in this Prospectus.
The selected consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements and notes thereto
included elsewhere in this Prospectus.

Selected Statement of Operations Data


<TABLE>
<CAPTION>
                                                                                                             (Unaudited)
                                                       Years Ended December 31                              9 Mos. Ended
                               ---------------------------------------------------------------------------- September 30
                                        1993          1994           1995          1996           1997          1998 
                                       ------        ------         ------        ------         ------        ------
<S>                                  <C>          <C>           <C>         <C>             <C>           <C>
Revenues:
   Sales                             $ 12,000      $ 22,402       $ 27,328    $   24,111     $    2,278    $      656
   Interest                            11,892         7,450         16,155        46,796        111,845        79,533
                                                                                                              
   Other income                           ---        55,000         25,000        32,000          7,800           100
                                          ---        ------         ------        ------         ------        ------
                                       23,892        84,852         68,483       102,907        121,923        80,289
Costs and Expenses:
   Research and development           204,110        30,040         34,931       255,660        817,603       611,090
   General and administrative         368,448       478,984        420,757       983,256      1,681,436     1,711,532
   Depreciation and                    14,643        16,665         14,679        18,731        138,245       570,260
     amortization
   Interest                               ---           ---            ---           ---      1,626,368       306,231
                                          ---           ---            ---           ---      ---------       -------
                                      587,201       525,689        470,367     1,257,647      4,263,652     3,199,113
                                     --------       -------        -------     ---------      ---------     ---------
Net Loss                            ($563,309)    ($440,837)     ($401,884)  ($1,154,740)   ($4,141,729)  ($3,118,824)
                                     =========     =========      =========   ===========    ===========   ===========

Net Loss Per Share of
Common Stock - Basic and 
Diluted                                ($0.00)       ($0.00)        ($0.00)       ($0.00)        ($0.00)       ($0.00)

Weighted Average Number of                                                                                            
Common Shares Outstanding         232,151,991   238,354,491    248,002,608   257,645,815    274,534,277   290,194,958
                                  ===========   ===========    ===========   ===========    ===========   ===========
</TABLE>




                      [This Space Intentionally Left Blank]






                                       19

<PAGE>



Selected Balance Sheet Data


<TABLE>
<CAPTION>
                                                                                                            
                                                                    December 31                             (Unaudited)
                               ---------------------------------------------------------------------------- September 30
                                        1993          1994           1995          1996           1997          1998
                                       ------        ------         ------        ------         ------        ------
<S>                                   <C>           <C>            <C>         <C>            <C>             <C>
Assets:
Current Assets:
    Cash and cash equivalents        $ 57,023     $ 211,203      $  65,230    $   61,396     $  236,059     $ 485,041
    Investments                       257,963         5,000        479,000     1,378,841      2,984,902       188,000
    Inventory                             ---           ---         18,091        19,729         19,729        19,729
    Other current assets               11,746        10,163         12,967        16,081         20,240        23,837
                                       ------        ------         ------        ------         ------        ------
Total current assets                  326,732       232,604        575,288     1,476,047      3,260,930       716,607

Property and Equipment                230,213       224,098        214,494       207,209        485,661       734,477
Other Assets                           15,562         1,800          6,459        33,544        443,251       328,683
                                       ------      --------          -----        ------      ---------     ---------
         Total assets                $572,507     $ 452,264      $ 796,241    $1,716,800     $4,189,842    $1,779,767
                                      =======      ========        =======     =========      =========     =========
                                                     

Liabilities and Stockholders' Equity
Current Liabilities:
   Accounts payable and other        $  8,150     $  40,244      $  14,651    $   54,474     $  375,606    $  266,447
                                        ------       ------         ------        ------        -------       -------
Total current liabilities               8,150        40,244         14,651        54,474        375,606       266,447
Convertible Debenture, Net                              ---            ---           ---      2,384,793           ---
Total Liabilities                       8,150        40,244         14,651        54,474      2,760,399       266,447
                                        -----        ------         ------        ------      ---------       -------

Stockholders' Equity:
  Common stock;                         2,363         2,416          2,512         2,671          2,779         2,964
1,000,000,000 shares, par
  value $.00001 authorized
  Additional paid-in capital        3,416,070     3,704,517      4,475,875     7,003,351     10,512,767    13,651,982
  Subscription receivable                 ---           ---            ---       (19,000)       (19,000)          ---
  Deficit accumulated during       (2,854,076)   (3,294,913)    (3,696,797)   (4,851,537)    (8,993,266)  (12,112,090)
  the development stage
   Deferred compensation cost             ---           ---            ---      (473,159)       (73,837)      (29,536)
                                      -------       -------        -------     ---------      ---------     ---------
Total stockholders' equity            564,357       412,020        781,590     1,662,326      1,429,443     1,513,320
                                      -------       -------        -------     ---------      ---------     ---------

Total liabilities and               $ 572,507     $ 452,264      $ 796,241    $1,716,800     $4,189,842   $ 1,779,767
  stockholders' equity                =======       =======        =======     =========      =========     =========

Shares outstanding at year end    236,276,991   241,616,991    251,181,774   247,031,058    277,962,574   296,422,907
                                  ===========   ===========    ===========   ===========    ===========   ===========
</TABLE>



                                       20

<PAGE>


                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

         The following discussion of the results of operations and financial
condition of the Company should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto included elsewhere in this
Prospectus.

Results of Operations

         For the nine month periods ended September 30, 1998 and September 30,
1997, the Company incurred losses of $3,118,824 ($.01 per share) and $2,197,071
($.01 per share). The Company's increased losses during 1998 are principally due
to increased general and administrative expense ($1,711,532 for the nine months
ended September 30, 1998 vs. $1,299,897 for the nine months ended September 30,
1997) primarily resulting from the employment of additional research
professionals and rent and operating costs associated with the Yonkers, New York
office and laboratory; amortization of loan costs related to the February and
October Debentures (discussed below) included in depreciation and amortization
($221,228 for the nine months ended September 30, 1998 vs. $106,285 for the nine
months ended September 30, 1997); and increased research and development expense
($611,090 for the nine months ended September 30, 1998 vs. $360,781 for the nine
months ended September 30, 1997). Lack of sales revenues also contributed to the
Company's losses.

         There were sales of $656 and $2,278, respectively, during the nine
month periods ended September 30, 1998 and September 30, 1997. All sales during
these periods resulted from distributors purchasing RETICULOSE for testing
purposes. Interest income was $79,533 and $63,879 for the nine month periods
ended September 30, 1998 and September 30, 1997.

         During the years ended December 31, 1997, 1996, and 1995, the Company
incurred losses of $4,141,729 ($.00 per share), $1,154,740 ($.00 per share), and
$401,884 ($.00 per share), respectively. The Company's increased losses for the
year ended December 31, 1997 as compared with the years ended December 31, 1996
and 1995 were attributable primarily to the employment of Shalom Z. Hirschman,
M.D. as President and Chief Executive Officer of the Company ($325,000 for 1997
vs $68,750 for 1996 and $0 for 1995), interest charges as a result of the
beneficial conversion feature associated with the February Debenture and the
October Debenture ($1,626,368 for 1997 vs $0 for 1996 and 1995), increased
research and development expense ($817,603 for 1997 vs $255,600 for 1996 and
$34,931 for 1995), opening and maintenance costs of the Company's Yonkers, NY
office ($57,000 for 1997 vs $0 for 1996 and 1995), and the implementation of
Statement of Financial Accounting Standards Board (SFAS) No. 123, "Accounting
for Stock-Based Compensation," which accounted for stock options granted and
recorded as compensation expense ($399,322 for 1997 vs $287,341 for 1996 and $0
for 1995). Administrative expenses and the lack of sales revenues also
contributed to the Company's losses.

         There were $2,278, $24,111 and $27,328 in sales revenues for 1997, 1996
and 1995, respectively. All sales revenues resulted from distributors purchasing
RETICULOSE for testing purposes. Interest income was $111,845, $46,796 and
$16,155 in 1997, 1996 and 1995, respectively.


                                       21

<PAGE>


In 1997, 1996 and 1995, the Company collected $0, $32,000 and $25,000 for the
sale of territorial rights.

         Although there can be no assurance of the amount of sales, if any, the
Company believes that it will generate sales revenue at least with respect to
testing of RETICULOSE pursuant to its agreements with exclusive distributors
from initial testing in their respective territories. However, there will be no
likelihood of significant sales of RETICULOSE unless and until requisite
approvals are obtained in such territories.

Liquidity

         As of September 30, 1998, and December 31, 1997 and 1996, the Company
had current liquid assets (cash and cash equivalents and investments) of
$673,041, $3,220,961 and $1,476,047, respectively. As of September 30, 1998, and
December 31, 1997 and 1996, the Company had total assets of $1,779,767,
$4,189,842 and $1,716,800, respectively. The decrease in liquid assets and total
assets from December 31, 1997 to September 30, 1998 was primarily attributable
to the increased expenditures for research and development and increased general
and administrative expenses (including rent and payroll). The increase in liquid
assets and total assets from December 31, 1996 to December 31, 1997 was
primarily attributable to the proceeds from the October Debenture. See "Capital
Resources."

         For the fiscal year ended December 31, 1997, the Company had non-cash
charges of (i) had amortization of deferred compensation cost of approximately
$400,000 with respect to stock options granted, pursuant to SFAS 123, and (ii)
amortization of deferred interest on beneficial conversion features of
approximately $1.6 million.

         The Company expended approximately $244,000 and $300,000 for leasehold
improvements and furniture and equipment at the Company's Yonkers, New York
office during the nine months ended September 30, 1998 and the fiscal year ended
December 31, 1997, respectively.

         Until RETICULOSE is registered for sale, sales of RETICULOSE are not
expected to generate significant revenues. There can be no assurances that
RETICULOSE will be available for sale or, even if available, that it would
generate significant revenues. FDA approval to begin human clinical trials will
require significant cash expenditures, the amount of which is not currently
determinable. BEFORE SEPTEMBER 1995, THE COMPANY RECEIVED CORRESPONDENCE FROM
THE FOOD AND DRUG ADMINISTRATION OF THE UNITED STATES DEPARTMENT OF HEALTH AND
HUMAN SERVICES (THE "FDA"), WHICH STATED, AMONG OTHER COMMENTS, THAT THE
COMPANY'S PRIOR SUBMISSIONS TO THE FDA DID NOT PROVIDE AN ADEQUATE RESPONSE TO
THE FDA'S EARLIER REQUEST FOR PRECLINICAL INFORMATION AND ACCORDINGLY THE
COMPANY'S NOTICE OF CLAIMED INVESTIGATIONAL EXEMPTION FOR A NEW DRUG SUBMITTED
TO THE FDA ON SEPTEMBER 20, 1984 WAS "INACTIVATED."


                                       22

<PAGE>


         If the Company does not begin to generate revenues from the sale of
RETICULOSE, and if the Company does not receive significant funds from the
exercise of additional stock options, it shall be dependent upon additional debt
and/or equity financing, of which there can be no assurance, or it must reduce
expenses or further limit operations.

Capital Resources

         The Company in the past has been dependent upon sales of shares of its
Common Stock, $.00001 par value (the "Common Stock"), and upon the exercise of
its warrants issued in the Company's initial public offering in 1986, all of
which have expired. Since the expiration of such warrants, the Company has been
dependent upon the proceeds from the continued sale of securities, including the
exercise of outstanding options for the funds required to continue operations at
present levels and to fund the planned Research and Development and Clinical
Trials and Testing of RETICULOSE.

         In February 1997 and October 1997, in order to finance research and
development, the Company sold $1,000,000 and $3,000,000, respectively, principal
amount of its ten-year 7% Convertible Debentures (the "February Debenture" and
the "October Debenture," collectively, the "1997 Debentures") due February 28,
2007 and August 30, 2007, respectively, to RBB in offshore transactions pursuant
to Regulation S under the Securities Act of 1933, as amended. Accrued interest
under the 1997 Debentures was payable semiannually, computed at the rate of 7%
per annum on the unpaid principal balance from the date of issuance until the
date of interest payment. The Debentures were convertible, at the option of the
holder, into shares of Common Stock pursuant to specified formulas. On April 22,
1997, June 6, 1997, July 3, 1997 and August 20, 1997, pursuant to notice by the
holder, RBB, to the Company under the February Debenture, $330,000, $134,000,
$270,000 and $266,000, respectively, of the principal amount of the February
Debenture was converted into 1,648,352, 894,526, 2,323,580 and 1,809,524 shares
of the Common Stock, respectively. As of August 20, 1997 the February Debenture
was fully converted. On December 9, 1997, January 7, 1998, January 14, 1998,
February 19, 1998, February 23, 1998, March 31, 1998, May 4, 1998 and May 5,
1998, pursuant to notice by the holder, RBB, to the Company, $120,000, $133,000,
$341,250, $750,000, $335,750, $425,000, $275,000 and $620,000, respectively, of
the October Debenture was converted into 772,201, 1,017,011, 2,512,887,
5,114,218, 1,498,884, 1,870,869, 1,491,485, and 3,299,979 shares of Common
Stock, respectively. As of May 5, 1998, the October Debenture was fully
converted.

         In connection with the issuance of the 1997 Debentures, the Company
issued to RBB six warrants (the "1997 Warrants") to purchase Common Stock, three
of such warrants entitling the holder to purchase, from the February 21, 1997
through February 28, 2007, 178,378 shares of the Common Stock, and three of such
warrants entitling the holder to purchase, from August 30, 1997 through August
30, 2007, 600,000 shares of the Common Stock. The exercise prices of the 1997
Warrants are $.288, $.576, $.864, $.20, $.23 and $.27 per warrant share,
respectively. Each 1997 Warrant provides that the holder may elect to receive a
reduced number of shares of Common Stock on the basis of a cashless exercise;
that number of shares bears the same proportion to the total number shares
issuable under that 1997 Warrant as the excess of the market value of shares of
Common Stock over the warrant exercise price bears to that market value. Each
1997 Warrant


                                       23

<PAGE>


contains anti-dilution provisions which provide for the adjustment of warrant
price and warrant shares as more particularly set forth therein.

         Based on the terms for conversion associated with the February
Debenture and the October Debenture, there were intrinsic values associated with
the beneficial conversion feature of $413,793 and $1,350,000, respectively.
These amounts have been fully amortized to interest expense with a corresponding
credit to additional paid-in capital.

         In February 1998, the Company entered into that certain Concurrent
Agreement with DCT, an Argentine corporation, whereby the Company agreed to
provide DCT or its assignees up to $412,960 to cover the costs of a study on 65
patients to compare the results of treatment of AIDS patients using a three-drug
cocktail and RETICULOSE versus AIDS patients taking a three-drug cocktail and a
placebo. As of September 30, 1998, the Company has advanced approximately
$50,000 for this study, which has been accounted for as research and development
expense.

         In May 1998, the Company entered into the Rheumatoid Arthritis
Agreement with DCT whereby the Company agreed to provide DCT or its assignees up
to $94,950 to cover the costs of a controlled study in 30 patients to determine
the efficacy of RETICULOSE for the treatment of rheumatoid arthritis in humans.
In connection with this study, as of September 30, 1998, the Company has
advanced approximately $79,200 which has been accounted for as research and
development expenses.

         In July 1998, the Company authorized the expenditure of up to $135,000
to study the effects of RETICULOSE in inhibiting the mutation of the AIDS virus
on patients in Argentina and Barbados. As of September 30, 1998, the Company had
advanced approximately $55,000 for such studies, which have been accounted for
as research and development expense.

         As described in "Prospectus Summary--Recent Developments," in November
1998 the Company sold $1,500,000 principal amount of its ten-year 7% Convertible
Debenture due October 31, 2008 to RBB, as agent for the accounts of certain
persons, in an offshore transaction pursuant to Regulation S under the
Securities Act of 1933, as amended. Accrued interest under the Debenture is
payable semiannually, computed at the rate of 7% per annum on the unpaid
principal balance from the date of issuance until the date of interest payment.
The Debenture is convertible, at the option of the holder, into shares of Common
Stock pursuant to a specified formula. The actual number of shares of Common
Stock issued or issuable upon conversion of the Debenture is subject to
adjustment and could be materially less or more than the above estimated amount,
depending upon factors that cannot be predicted by the Company at this time,
including, among others, the future market price of the Common Stock.

         In connection with the issuance of the Debenture, the Company issued to
RBB two warrants to purchase Common Stock (the "Debenture Warrants"), each
Debenture Warrant entitling the holder to purchase, until October 31, 2008,
375,000 shares of the Common Stock. The exercise prices of the two Debenture
Warrants are $.20 and $.24 per warrant share, respectively. Each Debenture
Warrant provides that the holder may elect to receive a reduced number of shares
of Common Stock on the basis of a cashless exercise; that number of shares bears
the same proportion to the total number shares issuable under that Debenture
Warrant as the excess of the market value of shares of


                                       24

<PAGE>


Common Stock over the warrant exercise price bears to that market value. Each
Debenture Warrant contains anti-dilution provisions which provide for the
adjustment of warrant price and warrant shares as more particularly set forth
therein.

         Also as described in "Prospectus Summary--Recent Developments," in
December 1998 the Company sold 4,917,276 shares of Common Stock, and warrants to
purchase an aggregate of 2,366,788 shares of Common Stock, including (x) two
warrants to purchase an aggregate of 1,966,788 shares of Common Stock and (y) a
finder's fee paid to Harborview Group consisting of two warrants to purchase an
aggregate 400,000 shares of Common Stock (collectively, the "Purchase Warrants")
for an aggregate purchase price of $802,500.

         Two of the Purchase Warrants entitle the holders thereof to purchase
983,394 and 983,394 shares of Common Stock at exercise prices of $.2040 and
$.2448 per share, respectively. The other two Purchase Warrants entitle the
holders thereof to purchase 200,000 and 200,000 shares of Common Stock at
exercise prices of $.2040 and $.2448 per share, respectively. All four Purchase
Warrants are exercisable at any time and from time to time until December 31,
2003. Each Purchase Warrant provides that the holder may elect to receive a
reduced number of shares of Common Stock on the basis of a cashless exercise;
that number of shares bears the same proportion to the total number shares
issuable under that Purchase Warrant as the excess of the market value of shares
of Common Stock over the warrant exercise price bears to that market value. Each
Purchase Warrant contains anti-dilution provisions which provide for the
adjustment of warrant price and warrant shares as more particularly set forth
therein.

         If the FDA or other approvals are obtained, of which there can be no
assurance, funds must be budgeted by the Company from the exercise of options
and warrants, potential grants and/or additional equity, the availability of
which funds there can be no assurance.

         The Company is currently expending approximately $300,000 per month,
which expenses include salaries, rent, professional fees, license fees and
taxes, research and development, and travel, principally between the Company's
two offices and its Bahamian facility, and anticipates that it can continue
operations for at least ten months with its current liquid assets, including the
proceeds from the recent sale of the Debenture and other securities if no Common
Stock purchase options or warrants are exercised. If all of the outstanding
Debenture Warrants, the Purchase Warrants, the 1997 Warrants and Options are
exercised, the Company will receive net proceeds of approximately $8.4 million.
Those proceeds will contribute to general and administrative and working capital
and will permit the Company to substantially increase its budget for research
and development and clinical trials and testing and to operate at significantly
increased levels of operation, assuming RETICULOSE receives approvals and
prospects for sales increase to justify such increased levels of operation, of
which there can be no assurance. However, there can be no assurance that any
additional warrants or options will be exercised. The recent prevailing market
price for shares of Common Stock has from time to time been above the exercise
prices of certain of the outstanding options and warrants. However, there can be
no assurance that the recent trading levels will be sustained or that any
additional options or warrants will be exercised. In the event that less than
25% or none of the outstanding options and warrants are exercised, and no other
additional financing is obtained by the Company, in order for the Company to
achieve the level of operations contemplated by management, management
anticipates that it will have to limit intentions to expand operations


                                       25

<PAGE>


beyond current levels which involve expenditures of $300,000 per month. The
Company is currently seeking debt financing, licensing agreements, joint
ventures and other sources of financing. There can be no assurance that such
additional sources of financing will be found. There can be no assurance that
any of the Company's distributors will ever obtain regulatory approvals to test
or market RETICULOSE in any territory. In the event that financing is not
available, in order to continue operations, management anticipates that they
will have to defer their salaries. Management does not believe that, at present,
debt or equity financing will be readily obtainable on favorable terms unless
and until FDA approval for Phase I clinical testing is granted or comparable
approval is obtained from another developed or developing country. Because of
the uncertainties involved in the process of gaining approval for commercial
drug use on humans, no assurance can be given that the Company will be able to
sell RETICULOSE.

         The Company does not have a patent for RETICULOSE, although the Company
has two patents for the use of RETICULOSE as a treatment. In addition, the
Company has filed 32 patent applications with the United States Patent Office.
There can be no assurance that other companies, having greater economic
resources, will not be successful in developing a similar product using
processes similar to those of the Company. There can be no assurance that the
Company will obtain such a patent or, if obtained, that it will be enforceable.
The Company has retained patent counsel for the purpose of pursuing additional
patent protection for RETICULOSE. However, there is no certainty that patents
will be granted, or if granted, that the patents will be sustained if judicially
attacked, and, if declared valid, that the patents, in fact, will operate to
protect the Company from others copying RETICULOSE. The Company has relied upon
laws protecting proprietary information and trade secrets and upon
confidentiality agreements to protect its rights to RETICULOSE and the processes
for its manufacture, but there can be no assurance that such efforts and
procedures will continue to be successful and protect the Company from any
competition in the future.

Year 2000 Compliance

         The Securities and Exchange Commission has issued Staff Legal Bulletin
No. 5 (CF/IM) stating that public operating companies should consider whether
they will suffer any anticipated costs, problems or uncertainties as a result of
the "Year 2000" issue, which affects existing computer programs that use only
two digits to identify a year in the date field. The Company anticipates that
its business operations will electronically interact with third parties very
minimally, and the issues raised by Staff Legal Bulletin No. 5 are not
applicable in any material way to its contemplated business or operations.
Additionally, the Company intends that any computer systems that it will
purchase or lease will have already addressed the "Year 2000" issue.


                                    BUSINESS

Overview

         Advanced Viral Research Corp. (the "Company") was incorporated under
the laws of the State of Delaware on July 31, 1985, to engage in the production
and marketing, promotion and sale of an anti-viral peptide-nucleic acid complex
preparation with the trade name RETICULOSE.


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RETICULOSE has not been approved for sale or use, nor are applications pending
for approval for sale or use by the Food and Drug Administration of the United
States Department of Health and Human Services ("FDA") or anywhere in the world.
The Company is in the developmental stage, and has not as yet commenced any
commercial operations. The Company is dependent on registration and/or approval
by applicable regulatory authorities of RETICULOSE in a developed or developing
country, of which there can be no assurance, in order to commence commercial
operations, which shall include the marketing, promotion and sale of RETICULOSE
in each jurisdiction where the product becomes registered.

         The Company's operations over the last five years have been limited to
engaging others to perform testing and analysis of RETICULOSE. In connection
with these engagements, the Company has also granted distribution rights for
RETICULOSE in certain foreign countries. In 1995, the Company retained Shalom
Hirschman, M.D. as its President. Since becoming President of the Company, Dr.
Hirschman has monitored the testing of RETICULOSE and intends to perform certain
analyses of RETICULOSE with Company personnel, which analyses the Company
believes may be used in connection with the FDA approval process.

Background of RETICULOSE

         RETICULOSE had been marketed in the United States during the 1940's
through the early 1960's. Under the Federal Food, Drug, and Cosmetic Act, as
amended in 1962 (the "1962 Act"), RETICULOSE, among other drugs, was classified
by the FDA as a "new drug" requiring FDA approval prior to any sale in the
United States. Management of the Company believes that, since the 1962 Act,
RETICULOSE has not been marketed for commercial sale. See "Government
Regulation" and "-the Investigational New Drug Application Process." Although
the AIDS Clinical Trial has been the only controlled clinical trial of
RETICULOSE, the published data for the years 1951 through 1962, largely
anecdotal, indicates that RETICULOSE is an anti-viral pharmaceutical product
which is safe and effective in treating a number of interferon related viruses
such as Influenza-A, Viral Pneumonia, Virus Infectious Hepatitis, Mumps,
Encephalitis, Herpes Simplex and Herpes Zoster. There is no published data that
confirms that any double blind testing has been completed which demonstrates
that RETICULOSE is safe and effective against the treatment of any disease.

         Open label clinical trials of RETICULOSE on Human Papilloma Virus (HPV)
on patients who tested positive for the Human Immunodeficiency Virus ("HIV") are
being conducted at two separate hospitals located in Buenos Aires, Argentina
(the "HPV-HIV Study") for the purpose of attempting to satisfy the
investigational new drug application process in Argentina.

         The Company received information from Shalom Z. Hirschman, M.D., then
Professor of Medicine and Director of the Division of Infectious Diseases of the
Mount Sinai School of Medicine, New York, New York, which information resulted
from the Hirschman Study, which demonstrates that RETICULOSE stimulates the
production of a unique set of chemokines, including Interleukin 1 (IL-1),
Interleukin 6 (IL-6), Gamma Interferon and Tumor Narcosis Factor, and inhibits
the replication of HIV in cell cultures. Dr. Hirschman currently is President,
Chief Executive Officer, Chief Scientific Officer and a director of the Company.


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         The first stage of a double-blind, randomized, placebo-controlled
clinical trial using RETICULOSE in the treatment of AIDS conducted at the Queen
Elizabeth Hospital, Bridgetown, Barbados was completed in late November 1996
(the "Barbados Study"). The Company received a letter, dated November 26, 1996,
(the "Written Summary") from one of the scientists conducting the Barbados
Study, reporting the results of the first stage of a double-blind, randomized,
placebo-controlled clinical trial using RETICULOSE in the treatment of patients
with AIDS, and confirming that the study protocol received ethical approval from
the Chief Medical Officer's committee. In this first stage of the clinical
trial, forty-three patients who had never previously received any
anti-retroviral therapy were enrolled into the study, twenty-one of which
received RETICULOSE and twenty-two of which received placebo, over a sixty day
period. The patients were observed for a further sixty days after the cessation
of therapy. At the end of the sixty day treatment period, the key results of
this first preliminary stage of the clinical trial included a 37% increase in
the mean CD(4)-positive T-cell lymphocytes in the group of patients that
received RETICULOSE, as compared to a 7% decrease in the group of patients that
received placebo, and a 21% average decrease in HIV viral load, as measured by
quantitative RNA PCR, in the RETICULOSE-treated group of patients, in contrast
to a 33% increase in HIV viral load in the group of patients that received
placebo. In addition, the letter reported, among other things, that at the end
of the sixty-day observation period following cessation of treatment, a majority
of RETICULOSE-treated group showed a greater rise in blood hemoglobin, and
maintained or increased their body weight in contrast to only a minority of the
placebo-treated patients. Finally, there were no toxic side effects observed by
physicians or reported by patients receiving RETICULOSE therapy in the first
stage of the clinical trial. An abstract entitled "Controlled Clinical Trial of
RETICULOSE, a Peptide Nucleic Acid with Immunomodulator Activity in Patients
with HIV Infection" (the "Barbados Abstract") which describes the results of the
first stage of the Barbados Study, has been accepted for publication by The
American Society for Microbiology and will be presented in May 1998 at a
conference in Atlanta, Georgia.

         The Company is dependent upon the success of studies and tests of
RETICULOSE, of which there can be no assurance, if it is ever to receive
regulatory approval in the United States or developed or developing countries to
market RETICULOSE and generate material operating revenues. See "- Testing
Agreements."

         The concept of an anti-viral agent composed of peptones, peptides,
lipoproteins and nucleic acid was an original idea of Vincent M. LaPenta, M.D.
In 1934, Dr. LaPenta produced a product utilizing horse serum albumen, peptones
and ribonucleic acid which had anti-viral properties and evidenced no toxicity.
The product was later modified to substitute bovine serum albumen for horse
serum albumen and was named RETICULOSE. From 1951 through 1962, data was
collected and reported concerning the safety and scope of the use of RETICULOSE.
Much of the data was anecdotal in nature, such as reports by physicians and
pharmacists of results from the use of RETICULOSE, some of which were published
in recognized medical journals. No controlled "double blind" studies were
undertaken during this period. A study of Robert H. Anderson, M.D. and Ralph M.
Thompson, M.D. published in the VIRGINIA MEDICAL MONTHLY in July 1957, reported
that the exact method of action of RETICULOSE on the virus was not fully
understood, but, since its therapeutic response was so rapid, its action may be
considered a direct one. The study further found that RETICULOSE either altered
the action of the virus or inhibited the host cells to prevent virus


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duplication, or it may have done both. In addition, the antigenic properties of
the lipo-protein-nucleic acid complex definitely initiated and promoted antibody
formation and phagocytosis.

         In the early 1940's, Chemico Laboratories, Inc. ("Chemico"), a Florida
corporation controlled by Biagio E. LaPenta, the son of Vincent M. LaPenta,
M.D., was established to manufacture RETICULOSE. The Company has been advised
that Chemico, directly and through a distributor, distributed the product for
the treatment of viral diseases in the midwestern and southern United States
until the early 1960's.

         Two reports in recognized medical journals questioned the efficacy of
RETICULOSE, in tests, respectively, IN VITRO (i.e., eggs) and in mice by
intracerebral and intraperitoneal injection. The two reports are A.C. Kempe,
"Failure to Demonstrate Antiviral Activity of RETICULOSE," AMERICAN JOURNAL OF
DISEASES OF CHILDREN, Vol. 103, May 1962, and Behbehani, "The Effect of
RETICULOSE on Viral Infections of Experimental Animals," SOUTHERN MEDICAL
JOURNAL, Vol. 55, February 1962.

         Under the 1962 Act RETICULOSE, among other drugs, was classified as a
"new drug" requiring FDA approval prior to any sale in the United States. A
forfeiture action was instituted in 1962 by the FDA against RETICULOSE. The FDA
was successful in its litigation and RETICULOSE was withdrawn from the United
States market. The injunction obtained by the FDA prohibits, among other things,
any shipment of RETICULOSE until a New Drug Application ("NDA") for RETICULOSE
is approved by the FDA.

         In August 1965, the rights to manufacture and market RETICULOSE were
sold, under a royalty agreement (the "Chemico Agreement"), by Chemico and Biagio
E. LaPenta to Key Pharmaceuticals Inc. ("Key Inc.") through its subsidiary, Key
Pharmaceuticals Limited ("Key"), which, on June 1, 1968, obtained a license to
produce ethical pharmaceutical products, including RETICULOSE, for export and
sale from the Grand Bahama Port Authority, Limited (the "Port Authority"). Key
Inc. entered into an employment agreement with Biagio E. LaPenta in August 1968.
Key proceeded to construct a manufacturing facility in Freeport, Bahamas, and
produce RETICULOSE strictly for sale in certain foreign markets. An NDA for
RETICULOSE was filed with the FDA by Key in May 1967. After review by the FDA,
the NDA was withdrawn without prejudice when the FDA advised Key that the NDA
would not be approved. Key then filed a Notice of Claimed Investigational
Exemption for a New Drug ("IND") in November 1968 with the FDA, which IND was
pending for more than four years without favorable action by the FDA and was
withdrawn in 1972 without prejudice.

         On February 8, 1973, Key Inc. sold all of the shares of Key, its
Bahamian manufacturing facilities, its interest under the Chemico Agreement and
the trademark RETICULOSE, as well as rights to the services of Biagio E.
LaPenta, to Mr. Cepher Chen Yan-Sun. Mr. Chen distributed the existing inventory
of RETICULOSE for a number of years but the product was not manufactured after
Biagio E. LaPenta died in 1976. Mr. Chen was then declared bankrupt.

         In 1984, Bernard Friedland and William Bregman purchased from the Hong
Kong Bankruptcy Court Receiver all of the outstanding shares of Key, all rights
to RETICULOSE, including existing inventory of the product, and the license from
the Port Authority. Messrs. Friedland and Bregman


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<PAGE>


then changed the name of Key to Advance Viral Research Limited ("LTD"), and
assigned all the rights which they had acquired individually to LTD.

         In 1985, Messrs. Friedland and Bregman organized the Company for the
purpose of producing RETICULOSE, seeking approvals for marketing it world-wide,
and causing rights to RETICULOSE to be assigned in May 1986 from LTD to the
Company as part of the Exclusive Rights and Production Agreement, dated January
3, 1986, between the Company and LTD. For a discussion of the ownership of
rights of RETICULOSE, see "-Exclusive Rights of the Company to RETICULOSE And
Production Arrangements."

         Laboratory analysis of RETICULOSE by the University of Wisconsin
Biotechnology Center, based on the Wisconsin Study conducted exclusively for the
Company from December 1987 to September 1988, indicated that RETICULOSE contains
both medium and short chain length amino acid link peptides. Mr. Friedland
opined that in the Wisconsin Study, the peptide analyses of four RETICULOSE
samples, two of which were 16 years old and manufactured by Key, and two of
which were one year old and manufactured by LTD, indicated that all four product
samples were essentially the same product as demonstrated by reverse phase high
performance liquid chromatography. Additional analyses conducted by gel cell
electrophoresis demonstrated that all four samples were essentially of the same
composition, and that these analyses validate both stability and identical
structure of the RETICULOSE product represented by aged and new samples.

         The IND was submitted to the FDA on September 20, 1984. Under FDA
regulations, the Company is not permitted to engage in or authorize human
studies regarding RETICULOSE if the FDA notifies the Company of "serious
deficiencies that require correction before human studies can begin or that
would require restriction of human studies until correction," until the Company
is notified that the material that it has submitted to correct the deficiencies
is "satisfactory." Since October 9, 1984, the date of receipt by the FDA of the
IND, the FDA has issued four letters of deficiency with regard to the IND. In a
letter dated November 29, 1984, the FDA indicated, among other deficiencies
noted, that the publications submitted with the IND and relating to the
effectiveness of RETICULOSE on virus related diseases will not be accepted in
support of the safety of RETICULOSE unless the Company can establish that the
proposed formulation of RETICULOSE is the same as the formulation of RETICULOSE
referenced in those publications. In addition, the FDA required, among other
things, that an IND application include relevant information on the chemistry,
laboratory and animal controls to assure the integrity of the dosage from and
that safety information be provided for the initial study proposed to be
conducted on humans. The FDA also required that the information assure the
proper identification, quality, purity and strength of the investigational drug
and a description of the drug substance, including its physical, chemical and
microbiological characteristics. On September 11, 1987, the Company received a
further deficiency letter from the FDA, stating that no data had been submitted
supporting IN VITRO (i.e., eggs) anti-HIV activity or any criterion for a
biological response modifier. See "-The Investigational New Drug Application
Process."

         In response to these two deficiency letters from the FDA, the Company,
on March 6, 1992, submitted to the FDA additional information, including
findings from independent research laboratories, intending, among other things,
to procure the FDA's approval to conduct human clinical trials for RETICULOSE
(the "March 1992 FDA Submission"). The purpose of the March 1992 FDA


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<PAGE>


Submission was to obtain FDA approval of the IND to conduct human clinical
trials regarding the effectiveness of RETICULOSE on AIDS. However, no assurance
can be given as to the time required for the completion of such tests or the
time required for FDA approval, if ever, for commencement of human clinical
trials.

         In response to the March 1992 FDA Submission, the Company received a
third deficiency letter from the FDA, dated July 27, 1992 (the "July 1992
Deficiency Letter"), which provided detailed comments with respect to chemistry,
toxicology, microbiology and clinical areas requiring further studies and action
on the part of the Company. Following receipt of the July 1992 Deficiency
Letter, the Company has made no further submission or response to the FDA, nor
does the Company have any present intention to respond to the FDA. BEFORE
SEPTEMBER 1995, THE COMPANY RECEIVED FURTHER CORRESPONDENCE FROM THE FDA, WHICH
STATED, AMONG OTHER COMMENTS, THAT THE COMPANY'S PRIOR SUBMISSIONS TO THE FDA
DID NOT PROVIDE AN ADEQUATE RESPONSE TO THE FDA'S EARLIER REQUEST FOR
PRECLINICAL INFORMATION AND ACCORDINGLY THE COMPANY'S IND WAS "INACTIVATED."

         No assurance can be given that any new IND for clinical tests on humans
will be approved by the FDA for human clinical trials on AIDS or other diseases,
or that the results of such human clinical trials will prove that RETICULOSE is
safe or effective in the treatment of AIDS, or other diseases, or that the FDA
would approve the sale of RETICULOSE in the United States if any application
were to be made by the Company. See "-The Investigational New Drug Application
Process."

         Because the FDA has not approved human clinical trials for RETICULOSE
in the United States, the Company may be required, in the absence of grants or
other subsidies, to bear the expenses of the Phase I human clinical trials. The
Company does not know what the actual cost of such trials would be. If the
Company needs additional financing to fund such Phase I human clinical trials,
there can be no assurance that additional financing will be available to the
Company.

Exclusive Rights of the Company to RETICULOSE and Production Arrangements 

         On January 3, 1986, the Company and LTD entered into the Exclusive
Rights and Production Agreement pursuant to which the Company purchased the
rights to manufacture and market RETICULOSE worldwide, except the right of LTD
to manufacture, produce and sell for its own account to physicians, clinics and
distribution within the Bahamas, effective upon payment to LTD of $50,000. That
payment was made shortly after consummation of the Company's initial public
offering of securities on May 14, 1986.

         The agreement further provided that LTD would produce and sell
RETICULOSE to the Company until the Company's purchase of rights was effective.
In addition, pursuant to this agreement, the Company purchased from LTD at $3.00
per ampule, approximately 15,000 ampules of RETICULOSE for $45,000. The Company
has used these 15,000 ampules for testing and promotional inventory. The Company
also was obligated under the agreement to pay LTD $3.00 per ampule of RETICULOSE
for the initial 100,000 ampules (including these 15,000 ampules) purchased the
first year and $2.00 per ampule purchased thereafter. The Company purchased
15,000 ampules,


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<PAGE>


all of which were purchased by the Company for testing and promotional activity.
None of these 100,000 ampules remain in inventory.

         LTD (then known as Key) received a license from the Port Authority to
manufacture pharmaceutical products for export and leased the former Key plant
in Freeport, Grand Bahama Island, consisting of an approximately 29,100 square
foot site containing a one-story concrete block building of approximately 7,100
square feet, which facility is equipped for the testing, production, processing
and packaging of chemical products in tablet and ampule form, including
RETICULOSE.

         Historically, this plant had a production capacity of 40,000 ampules
per week and management believes such capacity should support the Company's
requirements for the foreseeable future. Due to the lack of demand for the
Company's product, the production facility was not operating continuously over
the last year. Accordingly, the approximate weekly average production of
RETICULOSE over the last year has been 1,500 ampules per week. The facility is
not used for any purpose other than the production of RETICULOSE. However, if
RETICULOSE should be approved for sale in the United States or any other market
with material demand for its products, of which there can be no assurance, there
can be no assurance that this facility will be sufficient to produce adequate
quantities of RETICULOSE. If and when the Company's business requires a higher
level of production of RETICULOSE that such level of sales will generate
sufficient revenues to permit construction of another production facility.

         The lease on the Grand Bahama facility expired by its terms in July
1987. Prior to such time, the landlord advised LTD that he would sell to LTD the
then 80-year residue of the 99-year land lease by the Port Authority, dated June
10, 1968, of the property in the Bahamas for a purchase price of $250,000.
Management secured an appraisal from a real estate appraiser in the Bahamas
which indicated that the total value (based upon a depreciated replacement cost
approach) of the property (described in that appraisal as a single-story CBS
building on 29,242.20 square feet of land) and the incorporation of LTD and its
licenses and right to manufacture RETICULOSE (separately valued at B$40,000)
was, as at June 17, 1986, US$580,170. Management secured a later appraisal from
another Bahamian Registered Appraiser which stated that, as of July 24, 1987,
the "property," which consists of the land-lease from the Port Authority (which
has a residue of 80 years to run), the 7,300 sq. feet one-story building thereon
and the plant and equipment contained therein was valued at B$450,000 or US$
459,000.

         In November 1987, the Company's shareholders approved the acquisition
by the Company of LTD, the purchase by LTD of the Bahamian manufacturing
facility and the advance by the Company to LTD of the $250,000 purchase price
for that facility, and LTD purchased the facility. On December 16, 1987,
management of the Company, through a Declaration of Trust satisfactory to the
Bahamian Government, completed the acquisition of LTD, as a 99.6% owned
subsidiary of the Company, and paid approximately $29,000 of closing costs. The
acquisition was followed by termination of the Exclusive Rights and Production
Agreement.

         Management is aware that Bahamian legal restrictions relating to the
purchase of real property interests in the Bahamas by persons not Bahamian
citizens and not owned or controlled by Bahamian citizens might have impacted
the Company's ability to acquire real property. Inasmuch as LTD was a
pre-existing Bahamian corporation, had secured and maintained the appropriate
licenses and had


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<PAGE>


Bahamian citizens owning 0.4% of the outstanding capital stock of LTD (the
"Ordinary Shares" as that term is used in the Bahamas), and Messrs. Friedland
and Bregman, the Company's principals, had been approved by the Central Bank of
the Bahamas, the Company was advised by its Bahamian legal counsel, Nottage,
Miller & Co., that LTD's purchase of the property was lawful.

         The acquisition of LTD by the Company involved an immediate transfer to
the Company of approximately $46,000 in cash, and of all of Messrs. Friedland's,
and Bregman's beneficial interest in all of the 996 shares of the Ordinary
Shares, B$1.00 par value per share, registered in their names, representing
99.6% of all of the outstanding Ordinary Shares of LTD. Messrs. Friedland and
Bregman agreed to make a contribution to the capital of LTD of approximately
$86,000 by forgiveness of indebtedness of LTD to them. Messrs. Friedland and
Bregman also agreed that payment to them for their shares in LTD would be made
from refund of the security deposit by the landlord of the property, which
security deposit was originally paid by Messrs. Friedland and Bregman.

         The Company has not taken any action since August 1988 to seek to cause
the Bahamian Government to approve the formal transfer of the 996 Ordinary
Shares of LTD to the Company. Messrs. Friedland and Bregman have agreed, by
virtue of their execution and delivery of the 996 Ordinary Declaration of Trust,
that they shall, without remuneration, hold their shares "in trust" for the
Company, delineated in such Declaration of Trust as the owner of the beneficial
interest in such shares, and will vote all such shares and transfer the record
ownership thereof as directed by the Company. The Bahamian Government has not
acted to permit the transfer of the shares to the Company.

         Management of the Company does not believe that it will be adversely
effected by such lack of formal approval and believes it can operate
indefinitely under its present arrangement. Messrs. Friedland and Bregman
continue to hold the Company's shares of LTD as trustees for the Company and no
royalties or other payments are or shall become due to LTD under this
arrangement.

         By letter dated February 13, 1996, LTD was notified that the National
Economic Council of the Bahamas had refused LTD's request for a Free Sales
Certificate for RETICULOSE. As a result of this refusal, the Company has
commenced discussions with the Bahamian governmental authorities for the purpose
of obtaining a Free Sales Certificate, of which there can be no assurance. If
the Company does not obtain a Free Sales Certificate, it is possible that the
Company will not be able to meet registration requirements in other British
Commonwealth and Southeast Asian countries, since such countries require that a
pharmaceutical product be at least registered and certified for free sale in the
country in which it is manufactured.

         Although a number of applications for United States patents have been
filed on behalf of the Company and others are contemplated to be filed, there
can be no assurance that other companies, having greater economic resources,
will not be successful in developing a similar product using processes similar
to those of the Company. There can be no assurance that the Company will obtain
such a patent or, if obtained, that it will be enforceable.


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<PAGE>


Government Regulation

         The FDA and regulatory agencies in foreign countries impose substantial
requirements upon and conditions precedent to the introduction of therapeutic
drug products through lengthy and detailed laboratory and clinical testing
procedures, sampling activities and other costly and time consuming procedures.
There is no assurance that FDA approval for the sale of RETICULOSE in the United
States will be obtained. If human clinical trials of RETICULOSE are successful,
of which there can be no assurance, the Company will endeavor to raise the
required capital for the purpose of furthering the FDA process. There can be no
assurance that the Company will ever have available sufficient funds nor is
there any assurance that the Company could satisfy FDA regulatory protocol to
gain approval for RETICULOSE in the United States.

         The effect of government regulation in certain countries may be to
delay marketing of RETICULOSE for a considerable period of time to impose costly
procedures upon the Company's activities and to furnish a competitive advantage
to the larger companies which compete with the Company in the field of
anti-viral drugs. The extent of potentially adverse government regulations which
might arise from future legislation or administrative action cannot be
predicted.

         Third World countries have become increasingly more thorough in the
registration and licensing of pharmaceutical products and require new products
to prove their non toxicity, stability, safety, efficacy and to maintain records
concerning same in many of the Third World countries. Accordingly, until
registration is granted, if ever, in the United States or another developed or
developing country, it is not expected that the Company will be able to generate
material sales revenues. See "-Marketing And Sales" and "-Exclusive Distribution
Agreements."

         The Company received from the Port Authority a copy of a grant of
authority, issued on October 15, 1992, confirming the right of LTD to carry on
the manufacture and export sale of ethical pharmaceutical products.

The Investigational New Drug Application Process

         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. Under FDA regulations,
the Company is not permitted to engage in or authorize human studies regarding
RETICULOSE in the United States if the FDA notifies the Company of "serious
deficiencies that require correction before human studies can begin or that
would require restriction of human studies until correction" until the Company
is notified that the material that it has submitted to correct the deficiencies
is "satisfactory." The Company's understanding is that it is rare for a new drug
sponsor to obtain approval of an IND on the basis of an initial submission, as
the FDA almost always requests additional information. The focal point of


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<PAGE>


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 I, in which the pharmacological effects and possible
toxicity are evaluated in a small number of volunteers or patients; Phase II, in
which the drug is carefully evaluated in a small population of patients for the
effectiveness of the drug and short-term side effects in controlled clinical
trials; and Phase III, in which greater numbers of patients are employed and
broader information is gathered to provide the basis for the drug's proper use
by physicians. The initial IND may cover only Phase I.

         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. 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 in place of some other pre-clinical work.

         After the FDA approves the IND or allows it to become effective, 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 the clinical testing has been completed and analyzed, final
manufacturing processes and procedures are in place, and other information
required to be in an NDA 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.


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<PAGE>


         Another section of the NDA describes the human pharmacokinetic data and
human bioavailability data (or information supporting a waiver of the submission
of in vivo bioavailability 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 bioavailability 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.

         It is not known at this time how extensive the Phase II and Phase III
clinical trials will be, if they are conducted. There can be no assurances that
the data generated will show that the drug RETICULOSE is safe and effective as
described above and even if the data shows that RETICULOSE, is safe and
effective, obtaining approval of the NDA could take years and require financing
of amounts not presently available to the Company.

         Management of the Company believed that there was sufficient data
available on RETICULOSE to file an IND with the FDA to investigate the possible
effects of the drug for the treatment of patients with AIDS as well as other
interferon related viruses. This belief was based upon the belief of management
of the Company that RETICULOSE was distributed in the United States and used
regionally from the late 1940's through the 1960's, and upon recent studies. See
"- Background of RETICULOSE."

         Nevertheless, the FDA, in a letter dated November 29, 1984 to Bernard
Friedland, as the sponsor of the IND, stated:

         We have completed our review of your application and find that the
information presented is inadequate and does not allow us to conclude that it is
reasonably safe to initiate clinical trials. The deficiencies are summarized as
follows:

"Regarding manufacturing and controls:

"1.      You have not provided an acceptable definition of the drug moiety. If
         you propose a lipid-protein-nucleic acid complex, then the lipid,
         protein and nucleic acid must be characterized and their interactions
         defined.

"2.      After the moiety has been acceptably defined, its quantitative
         composition in the vehicle must be stated.


                                       36

<PAGE>


"3.      You should include appropriate chemical, physical and microbiological
         controls to assure the integrity of the dosage form as well as data
         from stability studies using these controls.

"4.      Please provide complete information on the composition, size and
         dimensions of the container-closure system to be used.

"5.      Please include a complete description of the manufacturing and
         packaging procedures and the name and address of the producing
         facility. An FDA inspection will be required.

"6.      Labeling is inadequate until the drug moiety is characterized and a
         quantitative composition is proposed. The drug must be labeled sterile.

"Regarding the clinical and preclinical portions of your submission:

"1.      Please provide data that show that your [RETICULOSE] formulation is the
         same as the [RETICULOSE] formulation that is the subject of the
         articles you have provided. The articles cannot be used in support of
         the safety of your product if the formulations are different. If the
         formulations are not the same, you must provide complete
         pharmacology/toxicology information for your formulation.

"2.      Please provide clinical and preclinical data to support the statement
         that [RETICULOSE] is either an anti-viral or a biological response
         modifier, or both.

"3.      We are reserving full comment on your clinical protocol until you have
         provided the necessary safety information. However, we have these
         preliminary comments.

         "a.  The study objectives are not stated clearly.

         "b.  [Some of the raw materials used in RETICULOSE] are animal antigens
              capable of inducing adverse reactions in humans. What precautions
              will be taken with regard to this possibility?

         "c.  You have not submitted a patient consent form."

         On March 27, 1987, the Company advised the FDA that the Freeport, Grand
Bahama manufacturing facility for RETICULOSE had been put into "good
manufacturing process" condition and requested an FDA inspection. The Company
advised the FDA that stability data and other requested information would be
forwarded by the Company as a separate submission in conjunction with this
inspection.

         On May 22, 1987, the Company submitted to the FDA what the Company
considered to be the requested information for the completion of the submission
of the IND for RETICULOSE.

         On September 11, 1987, the FDA responded to the Company's May 22, 1987
submission, stating the FDA finding that "essentially no new information has
been provided," and further that "they were unable to conclude that it is
sufficiently safe to initiate clinical trials."


                                       37

<PAGE>


         The deficiencies noted in the September 11, 1987 letter from the FDA
were as follows:

         "There is no scientific rationale provided for the use of [RETICULOSE]
in patients with HIV infections. Please submit data which support in vitro
anti-HIV activity. There are no data submitted which support any criterion for a
biological response modifier. Without a scientific rationale and supporting in
vitro data there is no basis for allowing your study to proceed. Once a
rationale for use of the drug has been established, the following should be
addressed:

"1.      There are no data provided that show that the product you intend to
         manufacture is the same [RETICULOSE] formulation that is the subject of
         the articles cited in support of safety. As acknowledged in the
         application, the formulation of [RETICULOSE] has changed over the
         years. It appears from our records that there have been at least three
         formulations. We are unable to determine from the submission exactly
         when the formulation changes took place or specifically which
         formulation was used in each of the various animal and human studies.

         "The assertion that 'the sponsor was trained by the original
manufacturer of RETICULOSE and is utilizing the same formulation with identical
raw materials, in the same facility with the same equipment as was utilized for
the RETICULOSE described in the animal safety studies submitted with this
application, and in the published human clinical data' is not sufficient. Please
provide data that characterize the present formulation and its relationship to
previous formulations. If possible, please submit a letter of authorization from
the original manufacturer to allow us to refer to their data in order to make
the comparison. We may not refer to another manufacturer's data on file with us
on your behalf without specific written authorization.

"2.      We have concerns regarding the allergenic potential of [RETICULOSE].
         Please refer to the referenced study reported in 1968 by Kozima et al.
         of Nikken Chemicals Co. Ltd. In that study, [RETICULOSE] was
         administered intraperitoneally to guinea pigs and the animals were
         subsequently rechallenged 3 weeks later. 'Shock symptoms' were observed
         in 7 of the 10 animals. These studies should be repeated with the
         currently proposed formulation and a detailed report on all animals,
         including necropsy findings, should be submitted.

"3.      The manufacturing and controls information requested in our November
         29, 1984 letter have not been adequately addressed:

         "a.      Please provide a complete characterization of the raw
                  materials used for the drug substance.

         "b.      Provide a complete characterization of the nucleic
                  acid/lipoprotein complex.

         "c.      After the above characterizations have been completed, set
                  specifications for the final drug substance and for stability
                  profiles.

         "d.      Provide comparative stability data for all formulations.

         "e.      Specifications and methods must be submitted for the dosage
                  form which assure reproducible chemical, physical, and
                  microbiological attributes.


                                       38

<PAGE>


         "f.      Complete manufacturing details for the drug substance and
                  dosage form must be submitted with clear descriptions of
                  conditions, in-process controls and facilities.

         "g.      Labeling must define quantities of each ingredient and state
                  that the product is sterile.

"4.      We will not conduct an inspection of the manufacturing facility until
         the application is complete in other respects.

"5.      Comments on the clinical protocol will not be made until the necessary
         safety information has been submitted."

         On February 28, 1992, the Company submitted an amendment to the IND,
including the following:

"1.      Scientific Rationale for use of RETICULOSE in patients with HIV
         infection.

"2.      Additional data to support the antiviral activity of [RETICULOSE] with
         in vitro and in vivo studies against the Influenza A virus, and the
         Hepatitis A and B viruses.

"3.      Product [reproductibility] comparison with earlier formula, and
         comparative stability.

"4.      Current toxicity/safety data and discussion concerning allergenic
         potential plus earlier toxicity studies.

"5.      Manufacturing and controls information, including facility description,
         the Master Formula and product specifications for release, and clinical
         research labeling.

"6.      Revised Clinical Protocol and Patient forms.

"7.      Clinical Reports from 1988-1989 and prior to 1984."

         The March 1992 FDA Submission included, among other things, findings
from certain independent research laboratories. The purpose of the March 1992
FDA Submission was to obtain FDA approval of the IND to conduct human clinical
trials regarding the efficacy of RETICULOSE on AIDS.

         On July 31, 1992, the Company received from the FDA the July 1992
Deficiency Letter stating, among other things, that the Company's resubmitted
IND application, dated February 28, 1992, "does not adequately respond to the
concerns listed in [the FDA's] letter of Company dated September 11, 1987." The
July 1992 Deficiency Letter further states that the following deficiencies must
be addressed prior to initiation of clinical studies:

"Chemistry

"1.      Please provide the supplier, biological source and method of
         preparation for. ... either directly or by cross-reference to the
         appropriate Drug Master Files(s). Also, please submit a


                                       39

<PAGE>


         certificate of analysis and acceptance specifications for each of these
         substances as well as for the inactive ingredients.

"2       Please revise the manufacturing process to use one of the
         USP-recommended waters. ...

"3.      Please submit documentation concerning the controls and verification of
         sterility along the entire aseptic processing pathway, including
         sampling points. Also, please state the final temperature obtained in
         the autoclave during the reaction step of the manufacturing process and
         during sterilization of the ampules.

"4.      Please describe the chemical tests used to determine the dilution
         factor during manufacturing. Also, please provide sample calculations.

"5.      Please describe in detail the analytical methods, including sterility
         and LAL test, used for drug product release specifications.

"6.      Please submit batch analyses on all available preclinical and clinical
         lots of the drug product.

"7.      Please establish a complete stability protocol describing test
         parameters, testing stations and storage conditions, which include room
         temperature, elevated temperature, elevated humidity and light
         exposure.

"8.      Please revise the labeling on individual ampules and ampule shipping
         cartons to be in accordance with FDA Guideline, "Compilation of
         Regulatory Labeling Requirements for Human Drug Products," pages 40-44
         (copy enclosed). Please include the following information on the label:
         a) "RETICULOSE For Injection; b) "CAUTION: New Drug. Limited by Federal
         law to investigational use" in accordance with 21 CFR 312.6 (copy
         enclosed); c) the potency, i.e. mg/ml of the active ingredient(s) in
         the drug product; d) an identifying lot or control number from which
         the manufacturing history can be determined; e) the name or code number
         of the patient; f) the name and address of the investigator; g) the
         expiration date of the drug; and h) the study and/or protocol
         designation.

"Toxicology

"9.      Please perform 4-week repeat dose toxicity studies in two species, one
         being a non-rodent, with the proposed investigational article in a
         manner consistent with Good Laboratory Practices. Studies should
         include hematologic and clinical chemistry measurements and complete
         histopathologic evaluation of all animals. Doses selected should
         include some clearly toxic doses, if feasible.

"Microbiology

"10.     Please perform in vitro studies to determine what effect, if any,
         [RETICULOSE] has on HIV replication in models of both acute and chronic
         (i.e., low persistent) infections. Studies have indicated that agents
         which modulate macrophage and T-cell functions such as IL-2 and
         TNF-(oc), may modulate viral expression and/or release of HIV from
         infected cells. The


                                       40

<PAGE>


         potential for drug-associated up-regulation of virus production is an
         important consideration in the analysis of risk/benefit. At a minimum,
         activation potential should be evaluated in the following human cell
         types:

         "(a)     Freshly isolated peripheral blood mononuclear cells;

         "(b)     At least one established T-cell line (e.g., H9, MT4, MT2 or
                  MOLT4); and

         "(c)     One line representative of the monocyte/macrophage lineage
                  (e.g., U937, U1 or OM10.1).

         "Studies employing a variety of different human cell cultures and HIV
strains are encouraged.

"Clinical

"11.     Please submit the name and address and a statement of the
         qualifications (curriculum vitae or other statement of qualifications)
         of the principal investigator.

"12.     Please define inclusion and exclusion criteria according to current
         standard terminology and practice. For example, the confirmatory test
         for HIV infection is the Western Blot, not the ELISA test for HIV
         antibody.

"13.     Please provide an initial proposed dosage based on preclinical safety
         information. Please also refer to the comment under 'Toxicology' in
         developing preclinical safety data.

"14.     Please provide a rationale for the proposed study parameters, for
         laboratory monitoring, and for toxicity evaluation. In addition, please
         define endpoints which are measurable and can be quantified and which
         may be subject to statistical analysis. For example, please specify
         what constitutes a "significant and consistent increase" in CD4
         lymphocyte count. Please provide safety monitoring which is appropriate
         for the preclinical safety data. In particular, please provide
         monitoring for the potential for anaphylaxis, as seen in the
         preclinical repeat dose study in guinea pigs.

"15.     Please revise the informed consent document to reflect the preclinical
         safety and effectiveness data.

"16.     Please provide a concise rationale for the proposed sample size and
         define the proposed statistical methodology. In general, interim
         analyses are not appropriate for a 12 week phase 1 study.

"Until you have submitted the above required information for items 1-16, and we
notify you that if it is safe to initiate the studies, you may not proceed with
the proposed study.

"We also have the following advice which we believe would improve your IND:


                                       41

<PAGE>

"Chemistry

"The following chemistry issues must be addressed prior to studies beyond
initial phase [1 and 2] studies:

"17.     Please establish the identity(ies) and structure(s) of the active
         component(s).

"18.     Please identify the impurities contained in the drug substance(s) and
         drug product and establish individual limits for the impurities.

"19.     Please incorporate into the drug product specifications and
         identification test(s) and an assay for the active ingredient(s) using
         properly validated analytical methods.

"20.     Please identify the supplier and composition of the ampules.

"Microbiology

"21.     Please clarify the following with respect to the data submitted in the
         submission:

         "(a)     Please specify whether the peptide nucleic acid solution and
                  the [RETICULOSE] preparation used by Dr. Lionel Resnick are
                  the same or a different preparation.

         "(b)     Please provide the units of p24 and RT activity and explain
                  whether the results represent percent inhibition or activity.
                  In addition, please clarify the discrepancy in the numbers
                  shown in the submission and in the published report (table 3).

         "The following microbiology issues should be addressed concurrent with
phase [1 and 2] studies:

"22.     Please use pre-clinical studies in appropriate animal models of
         retrovirus infection to define and characterize the activity of
         [RETICULOSE].

"23.     Please perform studies to investigate whether [RETICULOSE] can induce
         an antibody response which might inhibit its activity against HIV.

"24.     We encourage you to investigate the mechanism by which [RETICULOSE]
         inhibits HIV."

         Before September 1995, the Company received further deficiency
correspondence from the FDA, dated June 1, 1995, which stated, in addition to
the comments stated below, that the Company's prior submissions to the FDA did
not provide an adequate response to the FDA's earlier request for preclinical
information and accordingly the Company's IND was "inactivated":

"1.      The protocol lacks sufficient description of many basic clinical trial
         elements, such as randomization, blinding and a well defined control
         group.

"2.      A rationale for the proposed sample size of "two to ten" patients is
         not provided.


                                       42

<PAGE>


"3.      The rationale for the dose, dosing frequency and duration of therapy is
         not provided.

"4.      The eligible patient population is inadequately defined. In particular,
         the CD4 count range for patient eligibility should be specified.

"5.      The primary efficacy assessment of the study (reduction in viral load)
         is not consistent with the following statement in section F.O.
         Biostatistical Considerations:

                  'The estimated number of patients eligible for entry into this
                  trial who will experience an adverse event as defined as an
                  opportunistic infection or development of another neoplasm at
                  90 days is 2% or less. We wish to detect such a patient in the
                  group of up to 5 and provide him/her with whatever alternative
                  therapy is deemed advisable.'

         This statement suggests that there is confusion around the objective of
         this study and how a sample size can be estimated based on the desired
         objective.

"6.      The statement "Patients experiencing an adverse event within the first
         7 days of treatment will be considered evaluable for toxicity but not
         for efficacy" is unacceptable because all enrolled patients should be
         evaluated for both safety and efficacy.

"7.      The protocol indicates (section M.2.1) that "elimination of culturable
         virus, based on Viral Load assays" is one of two laboratory parameters
         of interest, however, nowhere else are viral cultures discussed.
         Similarly, "restoration of immune function by tests of delayed
         hypersensitivity and optional functional assays" is mentioned in
         section M.3.2.2 as an additional laboratory endpoint, however it is not
         further described.

"8.      The principle [sic.] investigator is not identified.

"9.      An informed consent document is not provided."

         No assurances can be given that the Company's IND will ever be approved
by the FDA or that results of any testing will demonstrate that RETICULOSE is
safe or effective in the treatment of disease. The Company has not formally
responded to the July 1992 Deficiency Letter or the 1995 deficiency letter, nor
have any of the studies cited in those letters been undertaken. The Company
currently contemplates that it may file with the FDA an amendment to the IND or
seek to reactivate the IND. There can be no assurances as to the costs or the
timing of the refiling of the IND or whether the Company has the resources to
complete the FDA approval process. The Company may allocate certain funds from
the sale of the Debenture and the exercise of options and warrants for the
purpose of filing a new IND with the FDA. No assurance can be given, however,
that any the options or warrants will be exercised, that a new IND will be
accepted by the FDA or that any tests previously conducted or to be conducted
will satisfy FDA requirements.


                                       43

<PAGE>

Testing Agreements

         For the period from inception (February 20, 1984) through September 30,
1998 the Company expended approximately $2.5 million on testing and research and
development activities.

         Testing in the United States. On September 20, 1984, the IND was
submitted for a Phase I type study to determine if there was any pharmacological
activity in humans against HIV. See "-The Investigational New Drug Application
Process." In response to the FDA deficiency letters in 1984 and 1987 regarding
the IND, the Company undertook the Wisconsin Study, a series of protein tests
for product control and protein fragment identification which were conducted by
the University of Wisconsin's Biotechnology Center. See "-Background of
RETICULOSE." Prior to the completion phase of the Hirschman Study, the rationale
for trial of RETICULOSE in humans was based upon IN VITRO studies which the
Company believed had demonstrated at least partial activity against HIV. In
October 1989 and December 1989, respectively, Southern Research Institute,
Birmingham, Alabama and Vironc Laboratories, North Miami Beach, Florida
conducted IN VITRO screenings of RETICULOSE against the HIV virus in two
separately conducted independent laboratory screenings. In these screenings,
RETICULOSE was shown to be either partially or significantly active against HIV
at specific dilutions and was non-cytotoxic. In addition, a historical search is
being conducted and the time line is being developed to connect the current
RETICULOSE product and its manufacturer with the original product and its
manufacturer. This search is being documented for eventual submission to the FDA
to further substantiate the identity of the current product which is the subject
of the IND. In October 1989, International Diagnostics Ltd. Inc., Dania,
Florida, an independent testing laboratory, undertook standard mouse toxicity
assays to demonstrate toxicity of RETICULOSE. Results indicated no apparent
signs of toxicity in RETICULOSE treated animals at specific doses. Management of
the Company originally believed that due to the early safety record and
published reports of human use that the FDA would permit the initial Phase I
trials in humans after approximately six months. If sufficient funds are
available from the sale or exercise of securities or other sources, the Company
will consider taking the requisite scientific steps to satisfy the FDA that the
formulation of RETICULOSE is identical to the formulation reported in the prior
anecdotal history and studies. The time and costs required for IND approval as a
result of the FDA not accepting the prior history of the drug is currently not
known to the Company but could be considerable. Certain of the foregoing
studies, excluding the HPV Clinical Trial, the Hirschman Study and the Barbados
Study, were submitted to the FDA as part of the March 1992 FDA Submission, but
were not deemed sufficient by the FDA.

         Canadian Contract. The Company, during the period from 1992 to 1995,
had been seeking approval in Canada for controlled distribution of RETICULOSE.
It submitted an application for a limited study on 24 patients with Kaposi's
Sarcoma, a condition associated with AIDS, the approval of which application was
pending in 1995. However, due to delay in obtaining the approval for this study
and after receiving deficiency letters from the Health Protection Branch of the
Health and Welfare Department of Canada, the Company had withdrawn the
application to have that study commence.

         TRM Management Corp. Pursuant to an agreement dated August 20, 1991
between the Company and TRM Management Corp. ("TRM"), a Florida corporation
unaffiliated with the Company (the "TRM Agreement"), TRM performed, at the
Company's expense, a controlled open


                                       44

<PAGE>


clinical trial test in Haiti during a period of 30 days, on 53 patients with
early onset Hepatitis "A" or Hepatitis "B", approximately one-half of whom were
treated with RETICULOSE and approximately one quarter of whom were untreated for
each of these two diseases, to assess the effectiveness of RETICULOSE against
the Hepatitis "A" virus and Hepatitis "B" virus in accordance and in compliance
with the Hepatitis Open Label Clinical Trial Protocol developed by TRM, which
involved diagnosis otherwise than by the positive method of liver biopsy (the
"Haiti Tests").

         In accordance with the TRM Agreement, Matthew Cohen prepared a paper
which describes the methods and results of the Haiti Tests (the "Results
Paper"). On January 3, 1992, TRM delivered to the Company the Results Paper. The
Results Paper was published in the Journal of the Royal Society of Health,
December 1992 issue (the "Journal"). Matthew Cohen is not affiliated with or
related to Leonard Cohen, who acted as a consultant to the Company.

         The Results Paper states, among other things, that the Haiti Tests
resulted in certain positive clinical and laboratory effects regarding the use
of RETICULOSE against the Hepatitis "A" virus and Hepatitis "B" virus,
especially against Hepatitis "B." The Company believes, however, that the Haiti
Tests may have been limited in terms of their methodology and results. The
Company is considering such factors relative to future testing.

         In accordance with the terms of the TRM Agreement, the Company has
authorized the issuance to the shareholders and certain associated persons of
TRM (1) an aggregate amount of 10,000,000 shares (the "TRM Shares") of the
Company's common stock, par value $.00001 per share (the "Common Stock"); and
(2) an option to acquire, at any time, for a period of five years from the date
of issuance of the option, 10,000,000 shares of the Company's Common Stock at a
purchase price of $.05 and $.08 per share (the "TRM Options"). As of September
30, 1998, 10,000,000 shares of Common Stock were issued pursuant to the exercise
of the TRM Options for an aggregate exercise price of $600,000 by David Sass, as
an assignee of Troy Posner, Richard Waldman, and Matthew Cohen.

         Plata Partners Limited Partnership. On March 20, 1992, the Company
entered into an agreement with Plata Partners Limited Partnership ("Plata"), a
Michigan limited partnership unaffiliated with the company (the "Plata
Agreement"), pursuant to which Plata agreed at its expense, to perform a
demonstration on ten patients of both sexes from 18 to 45 years of age for 45
days, without control group, at Campus #1 University C.B.E.P., University of
Santo Domingo, Santo Domingo, Dominican Republic in accordance with a certain
agreed upon protocol (the "Protocol") to assess the efficacy of a treatment
using RETICULOSE incorporated in the Protocol against AIDS (the
"Demonstration"). The Protocol provides, among other things, that the treatment
consists of RETICULOSE along with vitamin and protein supplements.

         The preliminary and final results of the Demonstration were previously
reported by the Company in its Reports on Form 8-K filed with the Commission on
July 10, 1992 and November 6, 1992.

         The Demonstration was conducted on the patients from May 1992 through
July 1992. The Demonstration was supervised by Angelo A. Chinnici, M.D., and
administered by medical doctors certified to practice in the Dominican Republic.
A videotape has been produced by Plata


                                       45

<PAGE>


memorializing the Demonstration, which videotape was delivered to the Company in
August 1992. On August 12, 1992 the Company received from Plata a translated
written transcript of a press conference (the "Press Conference") called and
conducted by Plata in Santo Domingo, Dominican Republic on August 7, 1992 (the
"Transcript"). The Press Conference was held by Plata following the completion
and the release of preliminary results of the Demonstration.

         The Transcript, a copy of which has been filed with the Company's
Report on Form 8-K with the Commission on August 14, 1992, provides, among other
things, statements from Dr. Joaquin Perez-Mendez, the Director of the Program
for Control of Sexually Transmitted Diseases (Procets) a governmental
organization in the Dominican Republic, who participated in the administration
of the Demonstration, Dr. Charles Dunlop, the Surgeon General of the Dominican
Republic, Dr. Norman de Castro and Dr. Rafael Alcantara, who is associated with
the Center for Sexually Transmitted Diseases in the Dominican Republic
(collectively, the "Doctors").

         In the Transcript, the Doctors generally expressed their optimism and
hopefulness regarding RETICULOSE and they encouraged further testing of the
efficacy of RETICULOSE against AIDS and efforts to register RETICULOSE. As of
the date hereof, the Company has not independently verified or otherwise
substantiated the accuracy or completeness of the Transcript or the Press
Articles. The Demonstration conducted by Plata was not a double-blind study.
However, as of the date of this Prospectus, no registration certificate has been
granted by the Dominican Republic, and there can be no assurance that such
certificate will be issued. Further, the Company is currently not pursuing the
registration certificate in the Dominican Republic.

         The Company has also been made aware that certain newspaper articles
appeared in Spanish language newspapers (published in the Dominican Republic)
regarding the Press Conference (the "Press Articles") and interviews with Drs.
Perez-Mendez and Alcantara, which reported that the preliminary results of the
Demonstration were "very encouraging" and that the "laboratory results
subsequent to the treatment, reveal a more than 50 percent reconversion of the
cell immunological system in almost all of the patients being maintained with
relatively little favorable change in the only patient who did not complete the
treatment." According to certain of the Press Articles, certain of the doctors
attending the Demonstration stated: "Although it [(the Demonstration)] does not
have the representativeness which a study of this caliber requires, precisely
due to the small number of patients involved in the same, and above all due to
the fact that it did not rely on a control group which permits us to make some
significant comparisons, basically it is a good job of research and the results
[are] clearly excellent."

         The Company received from Plata certain written information, certain
copies of which are incorporated by reference into the Company's Reports on Form
8-K delivered for filing to the Commission on July 10, and July 23, 1992 (the
"Plata Statement"). The Plata Statement reports, among other things, certain
positive preliminary results of the Demonstration (the "Results"), including the
fact that all patients showed weight gain, as well as resolution of malaise,
joint pain, and diarrhea and that those patients initially presented with
herpetic lesions showed clearing and well healed vesicles, there was a decrease
in lymphotenopathy in the majority of patients, and their oral thrush was
greatly improved.


                                       46

<PAGE>


         In August 1992, the Company received from Lionel Resnick, M.D.,
F.A.A.D., F.A.C.P., Chief, Retrovirology Laboratories, Departments of
Dermatology and Pathology, Mount Sinai Medical Center of Greater Miami, in
Miami, Florida, written correspondence relating to the Demonstration generally
stating that, based upon his review of the results of the Demonstration, a
"dramatic" clinical improvement was documented over the forty-five day period of
the study and there were significant changes in laboratory surrogate markers
consistent with beneficial drug effects, although he noted that enthusiasm
regarding the Demonstration should be tempered by the lack of a homogeneous
study population and defined clinical endpoints.

         In October 1992, the Company received from Anthony J. Mangia, M.D.,
certified by Plata to be an expert in the area of AIDS research, further written
correspondence relating to the Demonstration (the "Mangia Correspondence"). As
an independent observer, Dr. Mangia visited the Demonstration site, reviewed
scientific data regarding the IN VITRO activity of RETICULOSE against various
viruses, interviewed the study physicians, examined some of the patients, and
reviewed the written results of the Demonstration. The Mangia Correspondence
basically stated that RETICULOSE may be an effective alternative treatment for
AIDS patients, based on a review of the data provided, that the results of the
Demonstration appear to indicate that RETICULOSE is tolerated well, with no
significant adverse reactions. The Mangia Correspondence also indicated that the
patients Dr. Mangia examined had experienced an improvement in symptoms and a
sense of well being by the time the Demonstration had concluded.

         The Mangia Correspondence does, however, contain several criticisms of
the Demonstration, including, among other things, the brevity of the
Demonstration, the lack of stratification according to CD 4 count, the small
number of subjects, the inclusion of nutritional supplements along with the
RETICULOSE, and the lack of pre- and post-treatment weights and performance
status evaluation of the subjects. The Mangia Correspondence concluded that the
results of the Demonstration appear to indicate that further studies in animals
and humans appear to be warranted, and suggested that such further studies need
to be better controlled and performed on a larger scale with more sophisticated
methods than the Demonstration.

         The Company received from Plata a copy of a report dated September 30,
1992, from Angelo A. Chinnici, M.D. regarding the Demonstration (the "Chinnici
Report"), with respect to the hypothesis, objectives, methodology, clinical
tracking and procedures involved in the Demonstration. Among other things, the
Chinnici Report noted that the majority of the subjects involved experienced a
dramatic clinical improvement, such as reduction in oral thrush, reduction in
herpetic lesions, and improvement in certain dermatological conditions such as
seborrheic dermatitis and eczema. The most dramatic change was observed in the
number of CD 4 and CD 8 lymphocytes, as well as in the CD 4 and CD 8 ratio,
where nine of the ten patients experienced an increase in the CD 4 cells. The
Chinnici Report further noted that the administration of RETICULOSE, among other
things, produced no adverse side affects, significant anemia, nor any decrease
in the subjects' white blood cell count, may cause a halt to viral replication
and may produce endogenous interferon, which improves a patient's condition.
However, The Chinnici Report also indicated, among other things, that the
Demonstration was limited in that the subjects were treated for a short period
of time and there was no control group. The Company has not independently
verified any of the statements contained in either the Mangia Correspondence or
the Chinnici Correspondence.


                                       47

<PAGE>


         The Company believes the Demonstration will not significantly impact
the FDA's decision to (i) approve the pending IND filed with the FDA or (ii)
approve of the marketing, sales or distribution of RETICULOSE within the United
States. Further, the Company believes the Demonstration will not significantly
impact the Company's ability to obtain approval for the marketing, sales or
distribution of RETICULOSE anywhere in the world.

         Pursuant to the Plata Agreement, the Company authorized the issuance to
Plata of 5,000,000 shares of common stock and options to purchase an additional
5,000,000 shares at $.08 per share through July 9, 1994 (the "Plata Options")
and 5,000,000 shares at $.10 per share through July 9, 1994 (the "Additional
Plata Options"). Pursuant to several amendments, the Plata Options and the
Additional Plata Options are exercisable through April 30, 1999 at an exercise
price of $.14 and $.16, respectively. As of September 30, 1998, there are
outstanding Plata Options to acquire 683,300 shares at $.14 per share and
Additional Plata Options to acquire 108,100 shares at an exercise price of $.16
per share. Through September 30, 1998, the Company has received approximately
$1,332,000 pursuant to the issuance of approximately 9.2 million shares in
connection with the exercise of the Plata Options and the Additional Plata
Options.

         Argentina Agreements. On December 27, 1993, the Company entered into an
agreement with Juan Carlos Flichman, M.D., Permanent Advisor to the Argentine
Association Against Sexually Transmitted Diseases, whereby Dr. Flichman agreed
to conduct a double blind study of RETICULOSE in Argentina of (i) 40 patients
who have been diagnosed with acute Hepatitis "B" and (ii) 20 patients diagnosed
with Hepatitis "C" (the "Argentina Study"). The treatment of acute Hepatitis "B"
patients was expected to last for approximately 20 days, followed by a 60/90 day
observation period and of Hepatitis "C" patients was expected to last for 180
days, also followed by a 60/90 day observation period. Dr. Flichman, however,
indicated to the Company that the Argentina Study was delayed because of the
Argentina Health Ministry.

         In April, 1996, the Company entered into a new agreement (the "1996
Argentina Agreement") with DCT S.R.L., an Argentine corporation ("DCT"),
pursuant to which DCT and Dr. Flichman each agreed to conduct the HPV Clinical
Trial. In June, 1994, the Company entered into an exclusive distribution
agreement with DCT, whereby the Company granted to DCT, subject to certain
conditions precedent, the exclusive right to market and sell RETICULOSE in
certain South American countries, including Argentina and other MERCOSUR States;
this agreement was superseded by another exclusive distribution agreement as of
April 1, 1996. Pursuant to the 1996 Argentina Agreement, the HPV Clinical Trial
commenced and is being conducted pursuant to a protocol developed by Dr.
Flichman. The purpose of the HPV Clinical Trial is to assess the efficacy of
RETICULOSE on HPV. The protocol calls for, among other things, a study to be
performed with clinical and laboratory follow-up on 20 patients between the ages
of 18 and 50 years of age. The HPV Clinical Trial is not a double-blind study
and will not include a placebo control group or reference to any other
anti-viral drug.

         Pursuant to the 1996 Argentina Agreement, the Company paid
approximately $34,000 to DCT to cover out of pocket expenses associated with the
HPV Clinical Trial. The 1996 Argentina Agreement further provides that, at the
conclusion of the HPV Clinical Trial, DCT shall cause Dr. Flichman to prepare
and deliver a written report to the Company regarding the methodology and
results of the HPV Clinical Trial (the "HPV Written Report"). On April 22, 1996,
the Company was


                                       48

<PAGE>


informed by DCT that the HPV Clinical Trial had commenced on April 15, 1996. In
September 1996, the Company received from Dr. Flichman the HPV Written Report.
The HPV Written Report stated that, when RETICULOSE was applied topically to 20
patients (six males and 14 females) diagnosed to be infected with HPV, two of
the 20 patients had total remissions and eight of the 20 patients experienced
clinical improvement ranging from a reduction in color intensity, size and
texture. Further, the HPV Written Report provides that no adverse side effects
were observed in any of the 20 patients and only one patient experienced redness
of the skin that disappeared spontaneously within 24 hours.

         Upon delivery of the HPV Written Report to the Company, the Company
delivered to the principals of DCT Common Stock purchase options (the "DCT
Options") to acquire 2,000,000 shares of the Common Stock for a period of one
year from the date of the delivery of the HPV Written Report, at an exercise
price of $.20 per share. Pursuant to several amendments, the DCT options are now
exercisable through April 30, 1999 at an exercise price of $.21 per share. As of
September 30, 1998, 464,000 shares of common stock were issued pursuant to the
exercise of these options for an aggregate exercise price of approximately
$93,000. Additionally, in April 1998, 10,000 shares were issued in connection
with the exercise of options at $.20 per share.

         In June 1994, DCT S.R.L. and the Company entered into an exclusive
distribution agreement whereby the Company granted to DCT, subject to certain
conditions, the exclusive right to market and sell RETICULOSE in Argentina,
Bolivia, Paraguay, Uruguay, Brazil, and Chile (the "DCT Exclusive Distribution
Agreement").

         During the quarter ended June 30, 1997, the Company entered into an
agreement with DCT (the "HIV-HPV Agreement") whereby the Company agreed to
provide to DCT or its assignees up to $600,000 to cover the costs of a double
blind placebo controlled study in approximately 150 patients to assess the
efficacy of RETICULOSE for the treatment of persons diagnosed with the HIV virus
(AIDS) and HPV (the "HIV-HPV Study").

             In connection with the HIV-HPV Agreement, as of September 30, 1998,
the Company has advanced approximately $665,000 which is accounted for as a
research and development expense. The amounts have been used to cover expenses
associated with clinical activities of the HIV-HPV Study.

         The HIV-HPV Agreement provides that (i) in the event the data from the
HIV-HPV Study is used in connection with RETICULOSE being approved for
commercial sale anywhere within the territory granted under the DCT Exclusive
Distribution Agreement or (ii) DCT receives financing to cover the costs of the
HIV-HPV Study, then DCT is obligated to reimburse the Company for all amounts
expended in connection with the HIV-HPV Study.

         In October 1997, the Company entered into two agreements with DCT,
whereby the Company agreed to provide DCT or its assignees, up to $220,000 and
$341,000 to cover the costs of double blind placebo controlled studies in
approximately 360 and 240 patients, respectively to assess the efficacy of the
topical application of RETICULOSE for the treatment of persons diagnosed with
Herpes Labialis/Genital Infections (the "Herpes Study") and HPV (the "HPV
Topical Study").


                                       49

<PAGE>


         In connection with the Herpes Study and the HPV Topical Study
(collectively, the "Studies"), as of September 30, 1998, the Company has
advanced approximately $58,000 and $132,500, respectively, and such expenses are
accounted for as research and development expenses. The amounts expended have
been used to cover expenses associated with pre-clinical activities. Neither the
Herpes Study nor the HPV Topical Study has commenced.

         Both agreements with DCT provide that (i) in the event the data from
the Studies are used in connection with RETICULOSE being approved for commercial
sale anywhere within the territory granted under the DCT Exclusive Distribution
Agreement or (ii) DCT receives financing to cover the costs of the Studies, then
DCT is obligated to reimburse the Company for all amounts respectively expended
in connection with the Studies.

         In February 1998, the Company entered into an agreement with DCT (the
"Concurrent Agreement") whereby the Company agreed to provide DCT or its
assignees, up to $412,960 to cover the costs of a study in 65 patients to
compare the results of treatment of patients with AIDS taking a three drug
cocktail and RETICULOSE with those taking a three drug cocktail and a placebo.
As of September 30, 1998, the Company has advanced approximately $50,000 for
such study which has been accounted for as research and development expense.

         In May 1998, the Company entered into an agreement with DCT (the
"Rheumatoid Arthritis Agreement") whereby the Company agreed to provide DCT or
its assignees, up to $94,950 to cover the costs of a controlled study in 30
patients to determine the efficacy of RETICULOSE for the treatment of rheumatoid
arthritis in humans. In connection with this study, as of September 30, 1998,
the Company has advanced approximately $79,200 which has been accounted for as
research and development expenses.

         In July 1998, the Company authorized expenditures of up to $90,000 to
Dr. Flichman to study the effects of RETICULOSE in inhibiting the mutation of
the AIDS virus. As of September 30, 1998, the Company has advanced approximately
$50,000 to Dr. Flichman for such study which has been accounted for as research
and development expense.

         Hirschman Study. The Company in late 1995 issued a grant of $30,188 to
The Mount Sinai School of Medicine, New York City, New York, for the purpose of
studying the mechanism, if any, by which RETICULOSE inhibits replication of HIV.
The study was conducted by Shalom Z. Hirschman, M.D., then Professor of Medicine
and Director of the Division of Infectious Diseases of The Mount Sinai School of
Medicine. The results of this research were presented by Dr. Hirschman at
Biomedicine '96, the annual meeting (sponsored by SCIENCE, a journal of the
American Association for the Advancement of Science) of the Association of
American Physicians, American Society for Clinical Investigation, and American
Federation for Clinical Research (associations of medical honor societies), held
May 4-6, 1996, in Washington, D.C. The manuscript of Drs. Hirschman and Chey Wei
Chen, entitled "Peptide Nucleic Acids Stimulate Gamma Interferon and Inhibit the
Replication of the Human Immunodeficiency Virus," was published in Clinical
Research (the official compendium of the proceedings of the meeting) in the
August 1996 issue of Journal of Investigative Medicine, a publication of the
American Federation for Clinical Research. Dr. Hirschman's report of the result
of the Hirschman Study is set forth under "-Background of RETICULOSE."


                                       50

<PAGE>


         Barbados Study. The first stage of the Barbados Study, conducted at the
Queen Elizabeth Hospital, Bridgetown, Barbados, was completed in late November
1996. In December 1996, the Company received from the coordinators of the
Barbados Study, the Written Summary reporting the result of that stage, as set
forth under "-Background of RETICULOSE." As of September 30, 1998, the Company
has expended approximately $365,000 to cover the costs of the Barbados Study.
Based on information received from the coordinators of the Barbados Study, the
Company is uncertain as to the costs to be incurred in connection with the
Barbados Study and has not been informed as to when results from the Barbados
Study will be forthcoming. The Barbados Abstract, which describes the results of
the first stage of the Barbados Study, was accepted for publication by The
American Society for Microbiology.

         In connection with the Barbados Study, in July 1998, the Company
authorized expenditures of up to $45,000 to Queen Elizabeth Hospital,
Bridgetown, Barbados to study the effects of RETICULOSE in inhibiting the
mutation of the AIDS virus. As of September 30, 1998, the Company has advanced
approximately $5,000 for such study which has been accounted for as research and
development expense.

         National Cancer Institute Study. In March 1997, the Company entered
into a Material Transfer Agreement - Cooperative Research and Development
Agreement (the "NCI Agreement") with certain governmental agencies (including
the FDA) represented by The National Cancer Institute (collectively, the
"Government Agencies"). The purpose of the NCI Agreement is for Dr. Howard
Young, Section Chief, Laboratory of Experimental Immunology, Division of Basic
Sciences, The National Cancer Institute, to determine the molecular mechanism by
which RETICULOSE may specifically enhance transcription of the gamma interferon
gene. The Company intends to supply RETICULOSE to the Government Agencies for
the purpose of research by the Government Agencies in accordance with a research
plan attached to the NCI Agreement, subject to the conditions stated in the NCI
Agreement. The NCI Agreement provides for non-disclosure by the Government
Agencies and an understanding that the Company and the Government Agencies will
enter into licenses to one another on terms to be negotiated in the future, in
the event the research produces an invention. Either the Company or the
Government Agencies may terminate the NCI Agreement upon 30 days prior written
notice to the other. The NCI Agreement states that the Government Agencies "[do]
not directly or indirectly endorse any product or service provided, or to be
provided, whether directly or indirectly related to either this [agreement] or
to any patent or other intellectual property license or agreement which
implements this [agreement] by its successors, assignees, or licensees. The
[Company] shall not in any way state or imply that this [agreement] is an
endorsement of any such product or service by the U.S. Government or any of its
organizational units or employees." Pursuant to an agreement dated March 19,
1998, the NCI Agreement has been extended for an additional one year period and
provides for the continued study of the basic mechanisms of immune responses,
the investigation of anti-tumor activity of RETICULOSE and its effect on
rheumatoid arthritis.

         Topical Safety Study. In October 1997, the Company contracted with an
unaffiliated third party laboratory to conduct testing to determine the safety
of the topical use of RETICULOSE for the treatment of HPV and Herpes (the
"Topical Safety Study"). As of September 30, 1998, the Company advanced
approximately $170,000 for a topical safety study to be conducted in the United
States for the topical use of RETICULOSE for the treatment of HPV and herpes.


                                       51

<PAGE>


Marketing And Sales

         RETICULOSE is not being sold commercially anywhere in the world. As of
the date hereof, the efforts of the Company or any of its representatives have
produced no material benefits to the Company regarding the Company's ability to
have RETICULOSE sold commercially anywhere in the world. The Company has entered
into Exclusive Distribution Agreements with five separate entities whereby the
Company has granted exclusive rights to distribute RETICULOSE in the countries
of China, Japan, Hong Kong, Macao, Taiwan, Mexico, Channel Islands, Isle of Man,
British West Indies, Jamaica, Haiti, Bermuda, Belize, Saudi Arabia, Argentina,
Bolivia, Paraguay, Uruguay, Brazil and Chile. Pursuant these agreements, the
distributors are obligated to cause RETICULOSE to be approved for commercial
sale in such countries and upon such approval, to purchase from the Company
certain minimum quantities of RETICULOSE 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. See "-Exclusive
Distribution Agreements." The marketing plans of the Company for RETICULOSE are
still dependent upon registration of RETICULOSE for sale in the various
jurisdictions where its distributors are seeking approvals.

         There can be no assurance that the Company or any distributor will ever
secure registration of RETICULOSE and the Company to date has received no
information that would lead it to believe that it will be positioned to sell
RETICULOSE commercially anywhere in the world in the immediate future. To date,
the only application for registration of RETICULOSE which has been filed is an
application requesting that RETICULOSE be available for sale in Argentina.
Notwithstanding the filing of this application, no material progress has been
made to secure approval to sell RETICULOSE in Argentina. The Company initially
targeted its 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, Virus Infectious
Hepatitis, Mumps, Encephalitis, Herpes Simplex and Herpes Zoster. Those
countries included Singapore, Hong Kong, Malaysia, Taiwan, the Philippines and
Malta. Registration of RETICULOSE 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 RETICULOSE for sale in these
countries has been frustrated due to the Company's inability to obtain the
registration and approval to sell RETICULOSE in the Bahamas, the country of
origin, and a general lack of published data on the efficacy of RETICULOSE.
Until RETICULOSE is registered and approved for sale in the United States, in
another developed country or in the other countries included in the
distributors' territories, there can be no assurance that the Company will
generate significant sales of RETICULOSE. For the nine months ended September
30, 1998 and for the years ended December 31, 1997, 1996 and 1995, the Company
reported no commercial sales except limited sales for testing purposes ($656,
$2,278, $24,111 and $27,328, respectively). RETICULOSE is not legally available
for use anywhere in the world, except for testing purposes. See "-Testing
Agreements."

Competition

         There are inherent difficulties for any development stage company
seeking to enter an established field, particularly in a field so capital
intensive as the manufacture and sale of pharmaceuticals. The Company, if it is
ever successful in securing FDA and other regulatory approvals, will encounter
intense competition engaged in the development and marketing of drug


                                       52

<PAGE>


products, all of which are substantially larger, possess far greater capital
assets, have substantial operating histories and records of successful
operations, greater financial and other resources, more employees and far more
extensive facilities than the Company now has or will have in the foreseeable
future. Accordingly, such companies are in a far better position to compete than
the Company. Moreover, such companies may succeed in discovering, developing and
marketing anti-viral products that are more effective than RETICULOSE. The
Company at present is not, and there can be no assurances that the Company will
become in the foreseeable future, a significant factor in the field in which it
proposes to engage. Additionally, small "start-up" firms, such as the Company,
with very limited resources, are at a very serious competitive disadvantage
against established companies. The Company hopes to compete, however, based on
cost and the effectiveness of RETICULOSE.

Employees

         The Company has 24 full-time employees, including its three executive
officers, 17 employees involved in research, and four administrative employees.
Shalom Z. Hirschman, M.D., President and Chief Executive Officer and a Director
of the Company, Bernard Friedland, Chairman of the Board and a Director of the
Company, and William Bregman, Secretary-Treasurer and a Director of the Company,
each devote all of their business time to the day-to-day business operations of
the Company.

         Additionally, the Company 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."

Consulting Agreements

         Leonard Cohen. In September 1992, the Company entered into a consulting
agreement with Leonard Cohen (the "September 1992 Cohen Agreement") for a
one-year term commencing on that date. Prior to the execution of the September
1992 Cohen Agreement, Mr. Cohen had no relationship with the Company other than
as a former holder of the Company's Class C Warrants which had been redeemed.
Mr. Leonard Cohen has no relationship to Matthew Cohen, who was one of the
principals of TRM. The September 1992 Cohen Agreement required that Leonard
Cohen provide the Company certain consulting services including, among others:
(i) the identification of pharmaceutical companies which may have an interest in
engaging in joint ventures or other agreements to advance the testing and study
of RETICULOSE; (ii) services related to achieving approval of RETICULOSE for
commercial sale in the United States and in foreign countries; (iii) the
location of investment banking firms and venture capital firms, the purpose of
which is to raise capital for the Company through securities offerings and/or
debt financing; (iv) the dissemination of public information about the Company
to persons who may have an interest in RETICULOSE; and (v) making contacts with
persons in the investment and financial communities.

         The September 1992 Cohen Agreement required that Mr. Cohen provide said
consulting services to the Company in exchange for the Company's issuing to Mr.
Cohen 1,000,000 shares of Common Stock (the "September 1992 Cohen Shares"),
500,000 of which were issuable upon execution of the September 1992 Cohen
Agreement and the remaining 500,000 shares of which were issuable upon Mr. Cohen
completing 50 hours of consulting service to the Company. The Company


                                       53

<PAGE>


issued the first 500,000 shares to Mr. Cohen in October 1992 and the remaining
500,000 shares to Mr. Cohen in February 1993. Further, pursuant to the September
1992 Cohen Agreement, the Company granted to Mr. Cohen the option to acquire, at
any time and from time to time through September 10, 1993 (which date has been
extended through April 30, 1999), the option to acquire 3,000,000 shares of
Common Stock of the Company at an exercise price of $.09 per share (which
exercise price has been increased to $.13 per share) (the "September 1992 Cohen
Options"). As of September 30, 1998, 1,300,000 of the September 1992 Cohen
Options have been exercised for cash consideration of $156,000.

         In February 1993, the Company entered into a second consulting
agreement with Mr. Cohen (the "February 1993 Cohen Agreement") for a three year
term commencing on March 1, 1993. The February 1993 Cohen Agreement was entered
into because the Company believed that it provided incentive to Mr. Cohen to
provide greater services to the Company and because Mr. Cohen's hourly
obligations under the September 1992 Cohen Agreement had been satisfied during
the last quarter of 1992 and the first quarter of 1993. The February 1993 Cohen
Agreement provides that Mr. Cohen provide financing business consulting services
concerning the operations of the business of the Company and possible strategic
transactions in exchange for the Company issuing to Mr. Cohen 3,500,000 shares
of Common Stock (the "February 1993 Cohen Shares"), 1,500,000 shares of which
Mr. Cohen has informed the Company he has assigned to certain other persons not
affiliated with the Company or any of its officers or directors. The February
1993 Cohen Agreement also granted to Mr. Cohen and his designees a one-time
piggyback registration right with respect to those shares.

         In July 1994, in consideration for the additional services provided by
Mr. Cohen in connection with the introduction and negotiation of the Exclusive
Distribution Agreement with C.U.R.E. Pharmaceutical Corp. ("C.U.R.E."), a
Delaware corporation, which agreement was terminated as discussed below and
superseded by an agreement with Avix International Pharmaceutical Corp.
("AVIX"), the Company issued: (i) to Mr. Cohen, an additional 2,500,000 shares
(the "April 1994 Cohen Shares") and (ii) to each of Elliot Bauer and Lee
Rizzuto, 625,000 shares (the "Bauer and Rizzuto Shares") as well as options to
acquire an additional 5,000,000 shares each at $.10 per share exercisable
through May 1, 1996 (the "Bauer and Rizzuto Options"). The Company has been
informed that Messrs. Cohen and Bauer are principals of AVIX. Through September
30, 1998, 2,855,000 shares were issued pursuant to the exercise of the Bauer and
Rizzuto Options for an aggregate exercise price of $285,500. Mr. Rizzuto sold
all of his shares and all shares underlying his options. Pursuant to several
amendments, the remaining Bauer options are exercisable through April 30, 1999
at an option price of $.13. The Company agreed to issue to Cohen an additional
300,000 shares in 1995 at a time when the shares were valued at $.14 per share,
in consideration for expenditures incurred by Mr. Cohen in connection with
securing for the benefit of the Company and the affiliated distributor, the
continued services of a doctor.

         By letter of September 15, 1993, Leonard Cohen requested registration
of the shares of Common Stock and shares covered by Common Stock purchase
options issued to Mr. Cohen and his designees pursuant to the September 1992
Cohen Agreement and the February 1993 Cohen Agreement. Such additional shares
were included in the Company's July 1, 1994 and July 27, 1995 Registration
Statements under the Securities Act to permit the public sale of those shares by
Mr. Cohen.


                                       54

<PAGE>


         C.U.R.E. The Company's Exclusive Distribution Agreements with C.U.R.E.
and its affiliate were terminated according to their terms on May 31, 1995
because of C.U.R.E.'s inability to obtain Approvals in a timely manner and its
inability to obtain the requisite funding to pursue such Approvals. See
"-Exclusive Distribution Agreements--Termination of Agreements with C.U.R.E."

         Chinnici Agreement. In July 1998, the Company entered into a consulting
agreement with Angelo A. Chinnici, M.D. for a term extending to December 31,
2000 (the "Chinnici Consulting Agreement"). The Chinnici Consulting Agreement
provides for Dr. Chinnici to provide assistance to the Company in connection
with research, development, production, marketing and sale of RETICULOSE.
Additionally, pursuant to the Chinnici Consulting Agreement, Dr. Chinnici has
agreed to testify before the FDA on behalf of the Company in connection with the
Company's possible application for approval of the testing of RETICULOSE. The
Chinnici Consulting Agreement further provides that in consideration for Dr.
Chinnici's services, the Company shall grant to Dr. Chinnici options to purchase
300,000 shares of Common Stock at an exercise price of $.30 per share for a
period of three years in three equal installments commencing January 1, 1999 and
2000 and December 15, 2000, respectively.

         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 $.18 per share. In addition and in connection with entering into the
consulting agreement with Dr. Hirschman, the Company issued to a person
unaffiliated with the Company, 100,000 shares of the Company's common stock, and
an option to acquire for a period of one year, from June 1, 1995, an additional
500,000 shares at a purchase price of $.18 per share. As of September 30, 1998,
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 March 23, 1999 at an exercise price of $.19 per share, of
which options to acquire 500,000 shares were assigned by Dr. Hirschman to
Richard Rubin, consultant to Dr. Hirschman; (ii) options to purchase 5,000,000
shares exercisable at any time and from time to time commencing March 24, 1997
and ending March 23, 1999 at an exercise price of $.27 per share, of which
options to acquire 500,000 shares were assigned by Dr. Hirschman to Richard
Rubin, consultant to Dr. Hirschman; and (iii) options to purchase 5,000,000
shares exercisable at any time and from time to time commencing


                                       55

<PAGE>


March 24, 1998 and ending March 23, 1999 at an exercise price of $.36 per share,
of which options to acquire 500,000 shares were assigned by Dr. Hirschman to
Richard Rubin, consultant to Dr. Hirschman. 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. As of September 30, 1998, 500,000 shares of common
stock were issued pursuant to the exercise of stock options by Richard Rubin.
Mr. Rubin has, from time to time in the past, advised the Company on matters
unrelated to his consultation with Dr. Hirschman.

         In November 1997, Dr. Hirschman assigned to Henry Kamioner, a
consultant to Dr. Hirschman, options to acquire 1,500,000 shares (500,000 at
$.19, 500,000 at $.27 and 500,000 at $.36).

         In October 1996, the Consulting Agreement with Dr. Hirschman was
terminated and an Employment Agreement with Dr. Hirschman became effective. See
"Management -- Employment Contracts, Termination of Employment and
Change-in-Control Arrangements."

         Malcolm Santer. In exchange for the services provided by Malcolm
Santer, the Company's plant manager at the manufacturing facility in Freeport,
Bahamas, the Company issued to Mr. Santer: (i) 50,000 shares of Common Stock
valued at $.41 per share in February 1997, (ii) 100,000 shares of Common Stock
valued at $.24 cents per share in September 1997 and (iii) 100,000 shares of
Common Stock valued at $.21 per share in August 1998.

Exclusive Distribution Agreements

         Agreement with DCT S.R.L. Under an Exclusive Distribution Agreement,
dated in June 1994, superseded by another agreement, dated April 1, 1996,
between the Company and DCT, the Company granted to DCT subject to certain
conditions precedent, the exclusive right to market and sell RETICULOSE within
the territories of Argentina, Bolivia, Paraguay, Uruguay, Brazil and Chile (the
"DCT Agreement"). The term of the DCT Agreement was for a three-year period with
additional three-year renewal terms from the date DCT obtained all approvals,
licenses, permits and registrations (the "Approval") to import and distribute
RETICULOSE in Argentina, subject to DCT's right to extend the DCT Agreement so
long as DCT was diligently pursuing the Approval and meeting certain annual
minimum purchase requirements as set forth in the DCT Agreement, in the event
the Approval for Argentina was obtained. DCT was granted an option to purchase
for a period of one year from the date of Approval, 2,000,000 shares at a
purchase price of $.20 per Share (the "DCT Option"). The Approval has not been
obtained to date. The Company has not terminated the DCT Agreement because the
Company has not identified another source it believes will be more successful in
obtaining Approval.

         As a result of the 1996 Argentina Agreement, discussed under "-TESTING
AGREEMENTS-Argentina Agreements" and the Health Ministry's approval for and the
commencement of the test of RETICULOSE on the Human Papilloma Virus (HPV) on HIV
patients, the Company agreed that the DCT Option vested.


                                       56

<PAGE>

         Termination of Agreements with C.U.R.E. On April 25, 1994, the Company
entered into an Exclusive Distribution Agreement with C.U.R.E. pursuant to which
C.U.R.E. was granted exclusive rights to distribute RETICULOSE within the
countries of China, Japan, Thailand, Singapore, Hong Kong, Taiwan and Malaysia
the ("C.U.R.E. Territory").

         The Exclusive Distribution Agreement with C.U.R.E. was for an initial
term of five years, subject to certain automatic extensions if C.U.R.E.
satisfied its minimum purchase obligations and obtained Approval for one or more
countries constituting the C.U.R.E. Territory, within one year from the
Agreement. Because of its failure to obtain any Approval, the Company terminated
the rights of C.U.R.E. under this agreement.

         As of June 1, 1994, the Company had also entered into an Exclusive
Distribution Agreement with C.U.R.E. Pharmaceutica Central Americas Ltd., a
Delaware corporation and an affiliate of C.U.R.E. ("C.U.R.E. C/A Ltd.").
C.U.R.E. C/A Ltd. was required to purchase a minimum of 20,000 milliliters of
RETICULOSE during the first year following Approval and such Approval had to be
obtained within one year of this agreement. C.U.R.E. was unable to obtain such
Approval and the Company terminated C.U.R.E.'s exclusive distribution rights,
effective May 30, 1995, following acknowledgment by C.U.R.E. and C.U.R.E. C/A
Ltd. that neither had obtained Approvals and both lacked additional financing to
pursue the Approvals.

         Agreements with AVIX and Unistone. As the result of the termination of
agreements with C.U.R.E. and C.U.R.E. C/A Ltd., the Company entered into an
agreement, dated as of June 2, 1995, with AVIX, pursuant to which AVIX has been
granted the exclusive import and distribution rights during a period of five
years from the date that AVIX obtains Approval for any of the countries formerly
within the C.U.R.E. Territory (the "AVIX Far East Agreement"), and a separate
Exclusive Distribution Agreement with AVIX with respect to Mexico, which rights
previously belonged to C.U.R.E. C/A Ltd. AVIX has informed the Company that it
has commenced negotiations with parties in Mexico and China for the purpose of
seeking initial authorization for testing RETICULOSE, following which Approval
for those countries shall be sought. The Company has been informed by AVIX that
certain of the principals of AVIX (including Leonard Cohen who is an officer and
shareholder thereof) were formerly principals of C.U.R.E. The terms of the
agreement with AVIX are substantially similar to the agreements with C.U.R.E.
and C.U.R.E. C/A Ltd. except that the territory in the AVIX Agreement does not
include Thailand, Malaysia and Singapore but does include Macao. The Approval
has not been obtained to date.

         On December 28, 1995, the Company entered into a separate agreement
with AVIX and Beijing Unistone Pharmaceutical Co., Ltd. ("Unistone"), a company
organized under the laws of the People's Republic of China, with headquarters in
Beijing, China (the "Unistone-AVIX Agreement"). In connection with the
Unistone-AVIX Agreement, the Company and AVIX agreed to utilize the services of
Unistone for the purposes of securing approval to test RETICULOSE in China, with
the intent of gaining Approval for China. Under the Unistone-AVIX Agreement,
during a period of three years commencing on the date of Approval for China,
Unistone shall be the exclusive distributor and have a limited trademark license
for RETICULOSE in China. Unistone is obligated to purchase not more than 100,000
doses of 0.5 ml each in bulk form or 20,000 ampules of 0.5 ml doses for purposes
of seeking Approval for China, at least 1,000,000 doses by the first anniversary
of Approval for China, at least 3,000,000 doses during the next 12-month period,
and at least 10,000,000 doses during each subsequent 12-month period, all at a
purchase price of U.S. $1.00 per 0.5 ml dose shipped in bulk, or U.S. $1.26 per
dose if ordered in prepackaged, four-dose 2 ml ampules. This


                                       57

<PAGE>


purchase price is to be reduced by an aggregate of $100,000 on account of a fee
to Unistone for trials and testing of RETICULOSE for Approval for China. If
these annual minimum purchase requirements are satisfied, the period of the
agreement is automatically extended through the eighth anniversary of the date
of Approval. There are no minimum purchase requirements to be met by AVIX under
the AVIX-Unistone Agreement. In addition, AVIX is obligated to pay Unistone
$50,000 for its services in seeking Approval for China. As of December 31, 1997,
the Company had given Unistone, for testing purposes, 1,600 ampules of
RETICULOSE without charge. Unistone has not fulfilled its obligation under the
agreement to obtain Approval before April 1996. The Company has not terminated
the AVIX-Unistone Agreement because the Company has not identified another
source it believes will be more successful in obtaining Approval.

         Under a separate agreement between the Company and AVIX, AVIX shall
receive a royalty equal to 12.5% of the total sales of RETICULOSE in China,
Japan, Taiwan, Hong Kong and Macao so long as the Company owns any right to
RETICULOSE. AVIX also is entitled to certain payments by the Company in the
event that the Company sells manufacturing rights for RETICULOSE.

         In July, 1996, the AVIX Far East Agreement was amended to grant AVIX
the additional country of Macao and reflect AVIX's waiver of its rights with
respect to the countries of Singapore, Thailand and Malaysia, as well as AVIX's
penalty rights under the AVIX Far East Agreement that would have vested in the
event that the Company could not produce sufficient quantities of RETICULOSE
within certain periods of time. The penalty rights were waived, in part, because
AVIX has not yet generated a sufficient demand for RETICULOSE within its
distribution territory.

         The period of time during which AVIX must obtain Approval for any of
the countries in its territory under the AVIX Far East Agreement was extended to
June 1, 1997, subject to AVIX continuing to pay $8,000 per month to the Company.
The Company has not received the $8,000 monthly payment since November, 1996;
the Company has received a total of $40,000 in payments from AVIX. Pursuant to
recent discussions with AVIX regarding the AVIX Far East Agreement, the Company
and AVIX have agreed that, in lieu of the $8,000 monthly payment discussed
above, AVIX will fund studies assessing the efficacy of RETICULOSE that may be
performed in Mexico. If AVIX is complying with the AVIX Far East Agreement,
including certain annual minimum purchase requirements after Approval is
obtained (see below) of which there can be no assurance, the term is
automatically extended for five additional five year terms. The agreements with
AVIX further provide that the results of all studies, research data,
documentation and research publications regarding RETICULOSE in which AVIX has
an interest are owned by the Company.

         The separate agreement for Mexico requires Approval within one year and
has minimum annual purchase requirement commencing at 20,000 milliliters. The
Company has extended the period for AVIX to secure Approval from Mexico because
management of the Company believes that AVIX has been diligently seeking
Approval from the Ministry of Health of Mexico.

         AVIX shall be required, pursuant to the AVIX Far East Agreement, to
purchase RETICULOSE for $500,000 upon obtaining Approval and after one year
after Approval for China, AVIX is required to purchase RETICULOSE for an
additional $500,000 at $12 per 2 ml ampule.


                                       58

<PAGE>


         Agreement with Commonwealth. Under an Exclusive Distribution Agreement,
dated October 24, 1994, as supplemented on November 2, 1995 (collectively, the
"Commonwealth Agreement") with Commonwealth, the Company has granted to
Commonwealth Pharmaceuticals ("Commonwealth"), subject to certain conditions
precedent, the exclusive right to market and sell the Company's pharmaceutical
drug RETICULOSE within the territories of the Channel Islands, The Isle of Man,
the British West Indies, Jamaica, Haiti, Bermuda and Belize (collectively, the
"Commonwealth Territories"), and the right (not exclusive) to import, warehouse,
market, sell and distribute RETICULOSE within the territory of Saudi Arabia. The
term of the Commonwealth Agreement as to the Commonwealth Territories is for
successive three year periods (each extension period being with the prior mutual
consent of the parties) from the date Commonwealth obtains Approval for any one
of the Commonwealth Territories. The Approval has not been obtained to date.

         Pursuant to the Commonwealth Agreement, Commonwealth purchased from the
Company 1,500 ampules of RETICULOSE at a purchase price of $12.00 per ampule (2
milliliters per ampules) and delivered to the Company $5,000 as a signing
payment (for a total payment of $23,000). Commonwealth has advised the Company
that to date it has sold approximately $1,200 worth of RETICULOSE in the
Commonwealth Territories. Further, pursuant to the Commonwealth Agreement, in
the event Approval for any of the Commonwealth Territories is obtained,
Commonwealth is obligated to purchase from the Company (i) $225,000 worth of
RETICULOSE within one year from the date of Approval for any of the Commonwealth
Territories; (ii) $642,000 worth of RETICULOSE during the second year from the
date of Approval for any of the Commonwealth Territories; and (iii) $1,026,000
worth of RETICULOSE during the third year from the date of Approval for any of
the Commonwealth Territories. Commonwealth also is obligated to purchase from
the Company $225,000 worth, $822,000 worth and $1,914,000 worth of RETICULOSE,
respectively, during the first three years from the date of Approval. In
addition, pursuant to the Commonwealth Agreement, the Company has granted to
Commonwealth the right to acquire 3,000,000 shares of the Common Stock at a
purchase price of $.25 per share at any time and from time to time for a period
of one year from the date that certain tests are conducted and a paper is
published with respect to such test of RETICULOSE. The Company has been informed
by Commonwealth that certain of the affiliates of Commonwealth were formally
affiliated with Plata.

         Agreement with Dormer Laboratories Inc. On November 9, 1993, the
Company entered into an agreement by which it granted to Dormer Laboratories
Inc., a Canadian corporation ("Dormer"), the exclusive rights to import,
warehouse, market, sell and distribute RETICULOSE within Canada for a period of
five years from the grant of import approval for Canada, provided that Dormer
meets certain RETICULOSE purchase minimums. Because Approval for Canada was not
obtained by November 9, 1995, the Company had the right to terminate this
agreement on 90 days prior written notice to Dormer. Upon notice by the Company,
the agreement was terminated in August 1998.


                                       59

<PAGE>


                                   MANAGEMENT

Executive Officers and Directors

         The executive officers and directors of the Company, and further
information concerning them, are as follows:


           Name             Age   Position
           ----             ---   --------
Shalom Z. Hirschman, M.D.   63    President and Chief Executive Officer, Chief
                                  Scientific Officer
William Bregman             77    Vice President, Secretary, Treasurer, Director

Bernard Friedland           73    Chairman of the Board of Directors

Louis J. Silver             70    Director


         Shalom Z. Hirschman, M.D., President, Chief Executive Officer, Chief
Scientific Officer and a director of the Company since October 1996, 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.

         William Bregman, director of the Company since July 1985 and
Secretary-Treasurer of the Company since September 1985, was Vice President of
the Company from September 1985 until May 1987 and Vice President and Secretary
of LTD from August 1984 until July 1989, and has been a director of LTD since
August 1984.

         Bernard Friedland, Chairman of the Board of the Company since May 1987,
director of the Company since July 1985 and President and Chief Executive
Officer of the Company from September 1985 until October 1996, was employed by
Key, Inc. for 29 years, until March 1, 1986, in the Research and Development and
Quality Assurance Departments in Pharmaceuticals, Pharmacology, and
Canceantimetabolites. Has also has been President, Treasurer and a director of
LTD since August 1984.

         Louis J. Silver, director of the Company since May 1992, has been
self-employed as a free-lance bookkeeper and auditor since 1985. Mr. Silver
previously served as a member of the Board of Directors of the Company during
the periods from May 1987 to July 1987.

         Directors are elected to serve until the next annual meeting of
shareholders and until their successors have been elected and have qualified.
Officers are appointed to serve until the meeting of the Board of Directors
following the next annual meeting of shareholders and until their successors
have been elected and have qualified.


                                       60

<PAGE>


Director Compensation

         The arrangement for director compensation is $150 for each meeting of
the Board of Directors of the Company attended, which has not in fact been paid
within at least the last three years.

Executive Officer Compensation

         Other than as set forth below, no officer or director employed by the
Company received salary and bonus exceeding in the aggregate $100,000 in the
fiscal year 1997, 1996 or 1995. The following Summary Compensation Table sets
forth the information concerning compensation for services in all capacities
awarded to, earned by or paid to Shalom Z. Hirschman, President and Chief
Executive Officer, and Bernard Friedland, President during such period. No other
person employed by the Company earned in excess of $100,000 during the fiscal
years ended December 31, 1997, 1996 and 1995.

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                                   Long Term
                                               Annual Compensation                             Compensation Awards
                           ------------------------------------------------------        -------------------------------
                                                                                          Securities
Name and                                                           Other Annual           Underlying          All Other
Principal Position         Year        Salary         Bonus      Compensation(1)         Options/SARs       Compensation
------------------         ----        ------         -----      ----------------        -------------      ------------
<S>                      <C>       <C>             <C>         <C>                    <C>                 <C>
Shalom Z.                1997      $325,000        $43,000     $14,604(3)             0                   $3,956(4)
Hirschman, M.D.,
President and Chief
Executive Officer
of the Company since     1996      $68,750(2)      $0          $4,825                 15,000,000          $4,316
October 14, 1996 and
consultant to the
Company from May 24,     1995      --              --          --                     --                  --
1995 through October
13, 1996.

Bernard Friedland,       1997      --              --          --                     --                  --
President and Chief
Executive Officer of     1996      $35,000         --          $6,500                 --                  --
the Company
through October 13,
1996.                    1995      $35,000         --          $6,500                 --                  --
</TABLE>

----------------
(1)  Other Annual Compensation represents medical insurance premiums paid by the
     Company for executive officers, except as stated in note (3) below.
(2)  Under the Employment Agreement described under "- Employment Contracts,
     Termination of Employment and Change-in- Control Arrangements," Dr.
     Hirschman's annual salary as President and Chief Executive Officer (among
     other titles) is $325,000.
(3)  Other Annual Compensation for Dr. Hirschman includes $7,404 for medical
     insurance premiums paid by the Company for him, and $7,200 aggregate
     incremental cost to the Company of Dr. Hirschman's automobile lease, gas,
     oil, repairs and maintenance.
(4)  The dollar value of insurance premiums paid by, or on behalf of, the
     Company with respect to term life insurance for the benefit of Dr.
     Hirschman.


                                       61

<PAGE>


         No stock options were granted during 1997 to the executive officers of
the Company. Other than the 16,100,000 shares of Common Stock underlying Dr.
Hirschman's options, all of which options are currently exercisable, the Company
currently has outstanding (i) three 1997 Warrants which each entitle the holder
to purchase 178,378 shares of Common Stock at exercise prices of $.288, $.576
and $.864 per warrant share, respectively, (ii) three 1997 Warrants which each
entitle the holder to purchase 600,000 shares of Common Stock,$.20, $.23 and
$.27 per warrant share, respectively, (iii) two Debenture Warrants which entitle
the holder to purchase 375,000 and 375,000 shares of Common Stock at exercise
prices of $.20 and $.24 per warrant share, respectively, (iv) four Purchase
Warrants which entitle the holder to purchase 983,394, 983,394, 200,000 and
200,000 shares of Common Stock at exercise prices of $.2040, $.2448, $.2040, and
$.2448 per warrant share, respectively, and (iv) options to acquire 14,365,415
shares of the Common Stock, none of which are beneficially owned by directors,
officers or employees of the Company.

         The following table sets forth certain summary information concerning
exercised and unexercised options to purchase the Company's Common Stock as of
December 31, 1997 held by the executive officers named in the "Summary
Compensation Table." None of these executives exercised any options during the
year ended December 31, 1997.

                         AGGREGATED OPTION EXERCISES IN
                    1997 AND DECEMBER 31, 1997 OPTION VALUES


<TABLE>
<CAPTION>
                                                                Number of Securities
                                                                     Underlying            Value of Unexercised In-
                                  Shares                        Unexercised Options          the-Money Options at
                               Acquired on       Value           at Fiscal Year-End            Fiscal Year-End
            Name               Exercise (#)   Realized(1)    Exercisable/Unexercisable    Exercisable/Unexercisable
            ----               ------------   -----------    -------------------------    -------------------------
<S>                                 <C>            <C>             <C>                     <C>
Shalom Z. Hirschman, MD              0             $0              16,100,000 / 0          $20,500 / $20,500(2)(3)
</TABLE>

--------------
(1)  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)  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 December 31, 1997,
     $.185, and the exercise or base price.
(3)  As of December 31, 1997, Dr. Hirschman held options to purchase 4,100,000
     shares of Common Stock at $.18 per share, 4,000,000; shares of Common Stock
     at $.19 per share; 4,000,000 shares of Common Stock at $.27 per share; and
     4,000,000 shares of Common Stock at $.36 per share, all of which are
     currently exercisable.

Employment Contracts, Termination of Employment and Change-in-Control
Arrangements

         Pursuant to an Amended and Restated Employment Agreement dated as of
July 8, 1998 between the Company and Shalom Z. Hirschman, M.D. (the "Employment
Agreement"), the Company employs Dr. Hirschman, on a full business time basis as
its President, Chief Executive Officer, Chief Scientific Officer and Chairman of
its Scientific Advisory Board, with duties including supervising day-to-day
operations of the Company, including management of scientific, medical,
financial, regulatory and corporate matters, establishing appropriate
laboratory, executive and other facilities for the Company, and raising
additional capital for the Company. The Employment Agreement includes an
agreement by the Company that Dr. Hirschman will be nominated as a


                                       62

<PAGE>


Director of the Company for the duration of Dr. Hirschman's employment by the
Company under the Employment Agreement, and voting agreements by Bernard
Friedland, William Bregman and Dr. Hirschman.  See "Principal Shareholders."

         Pursuant to the Employment Agreement, the term of Dr. Hirschman's
employment continues until December 31, 2000 and will continue for one year
periods thereafter unless either the Company or Dr. Hirschman gives the other
notice at least two years in advance that such one year automatic extension
shall be vitiated. In the event the Employment Agreement is terminated by the
Company "for cause" (as defined therein), all unvested stock options, benefits
under stock bonus plans and stock appreciation rights ("SARs") (collectively,
"Stock Rights") granted to Dr. Hirchman may be canceled by the Company. In the
event the Employment Agreement is terminated by Dr. Hirschman "for cause" (as
defined therein), the Company is required to pay to Dr. Hirshman his annual
salary and employee benefits through the remainder of the then current term.

         Dr. Hirschman's compensation under the Employment Agreement is an
annual salary of $325,000, payable in equal biweekly installments. The
Employment Agreement also entitles Dr. Hirschman to (a) a major medical
insurance policy, disability policy and dental policy insurance to Dr. Hirschman
and his dependents that is reasonably acceptable to the parties, and (b) a term
life insurance policy at least in the amount of $1,000,000, with a beneficiary
to be designated by Dr. Hirschman. The Employment Agreement further provides
that the Company shall (a) 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 the Company, (b) 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, (c) 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 the Company in the reasonable determination of Dr. Hirschman, and all
other expenses that may be pre-approved by the Board of Directors of the
Company, and (d) provide not less than four weeks paid vacation annually and
such paid sick or other leave as the Company provides to all of its employees.
The Employment Agreement also provides for the payment of $100,000 to Dr.
Hirshman on the date an IND number is obtained by the Company from the FDA so
that RETICULOSE may be tested on humans, so long as such IND number is obtained
while Dr. Hirshman is employed by the Company.

         The Employment 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 the
Company or any of its other employees, to bind the Company, to release or
discharge any debt due the Company unless the Company has received payment in
full, or to dispose (as collateral or otherwise) of all or substantially all of
the Company's assets.

         Dr. Hirschman has agreed that he will assign to the Company all patents
developed by Dr. Hirschman or resulting from his knowledge acquired while
performing his duties under the Employment Agreement, and that, if his
employment under the Employment Agreement is terminated


                                       63

<PAGE>


by the Company "for cause" or by Dr. Hirschman otherwise than "for cause," as
specified in that agreement, he will not, directly or indirectly, compete with
the Company for three years after termination or solicit the Company's employees
to leave the service of the Company for one year after termination.

         Pursuant to the execution of the Employment Agreement, the Company
ratified a $100,000 bonus payment made to Dr. Hirschman in February 1998 and the
February 1998 grant to Dr. Hirshman of options to acquire 23,000,000 shares of
Common Stock exercisable at any time and from time to time through February 2008
at $.27 per share commencing upon (i) the day an IND number is obtained from and
approved by the FDA so that human research may be conducted using RETICULOSE;
(ii) the occurrence of a Change in Control (as defined therein); or (iii) 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
through February 2008.


                             PRINCIPAL SHAREHOLDERS

         The following table sets forth as at January 11, 1999, certain
information regarding the beneficial ownership of the Common Stock by (i) each
person who is known by the Company to own beneficially more than 5% of the
Company's outstanding voting securities; (ii) each of the Company's directors;
and (iii) all directors and officers of the Company as a group:


<TABLE>
<CAPTION>
                                                        Shares of Common Stock
Name and Address of Beneficial Owner                    Beneficially Owned (1)                     Percent Owned
------------------------------------                    ----------------------                     -------------
<S>                                                           <C>                       <C>            <C>
Shalom Z. Hirschman, M.D.                                     16,100,000                (2)(3)          5.08%
c/o Advanced Viral Research Corp.
1250 East Hallandale Beach Blvd.
Hallandale, FL 33009

Bernard Friedland                                             39,361,730                (3)(4)         13.08%
c/o Advanced Viral Research Corp.
1250 East Hallandale Beach Blvd.
Hallandale, FL 33009

William Bregman                                               35,708,403                (3)(5)         11.86%
c/o Advanced Viral Research Corp.
1250 East Hallandale Beach Blvd.

Hallandale, FL 33009
Louis J. Silver                                               501,000                                  0.17%
5110 S.W. 127th Place
Miami, FL 33175

All officers & directors (4 persons)                          91,671,133                (2)(3)         28.91%

RBB Bank                                                      42,416,667                 (6)           12.35%

</TABLE>

----------------------
(1)  The persons named in this table have sole voting power with respect to all
     shares shown as beneficially owned by them, except as indicated in other
     footnotes to this table. In computing the number of shares beneficially
     owned by a person and the percentage ownership of that person, shares of
     common stock subject to options or warrants held by that person that are
     currently exercisable or exercisable within 60 days after January 11, 1999,
     are deemed


                                       64

<PAGE>


     outstanding. According to American Stock Transfer & Trust Company, the
     transfer agent for the Common Stock, 301,340,183 shares of the Common Stock
     were outstanding as of the close of business on January 11, 1999.
(2)  Includes shares which may be acquired pursuant to options to purchase
     Common Stock held by Dr. Hirschman exercisable within 60 days after 
     January 11, 1999.
(3)  The Employment Agreement provides that Messrs. Friedland and Bregman,
     during the term of Dr. Hirschman's employment under that agreement, shall
     vote all shares of the Common Stock owned or voted by them in favor of Dr.
     Hirschman as a director of the Company. That agreement, however, does not
     restrict or otherwise limit their right to sell their shares to third
     parties without restriction. The Employment Agreement also provides that
     Dr. Hirschman, during that term, shall take no action which shall preclude
     Messrs. Friedland and Bregman from being nominees as directors of the
     Company and that Dr. Hirschman shall vote all shares of the Common Stock
     owned or voted by him in favor of Messrs. Friedland and Bregman as
     directors of the Company. See "- Employment Contracts, Termination of
     Employment and Change-in-Control Arrangements."
(4)  Includes (i) 1,000,000 shares of the Common Stock owned by Mr. Friedland
     and Beth Friedland, his daughter, as joint tenants, (ii) 20,000,000 shares
     owned by Mr. Friedland and Shirley Friedland, his spouse, as joint tenants,
     (iii) 15,000 shares(as to which Mr. Friedland disclaims beneficial
     ownership) owned by Shirley Friedland, and (iv) 600,000 shares owned the
     B&SD Friedland Foundation, a not-for-profit foundation controlled by Mr.
     Friedland.
(5)  Includes (i) 22,823,125 shares held in a trust for which Mr. Bregman is the
     sole trustee and sole beneficiary; (ii) 76,000 shares owned by Janet
     Berlin, his daughter,(iii) 70,000 shares owned by Forest Berlin, his
     grandson,(iv) 70,000 shares owned by Jessica Berlin, his granddaughter, and
     (v) 70,000 shares owned by Carol Berlin, his daughter.
(6)  Includes 42,416,667 shares issuable upon the conversion of the Debenture
     (which amount may fluctuate depending upon, among other things, the future
     market price of the Common Stock) and 750,000 shares of Common Stock which
     may be acquired pursuant to the Debenture Warrants which are exercisable
     within 60 days after January 11, 1999.




                      [This Space Intentionally Left Blank]


                                       65

<PAGE>



                              SELLING SHAREHOLDERS

     The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of January 11, 1999 by each of the Selling
Shareholders assuming the full conversion of the Debenture and an Average
Closing Price of $.05 per share, based on application of the formula for
computing the Applicable Conversion Price as provided in the Debenture (see
"Recent Developments"), and the full exercise of the Debenture Warrants and the
Purchase Warrants. Unless otherwise indicated below, to the knowledge of the
Company, all persons listed below have sole voting and investment power with
respect to the shares of Common Stock, except to the extent authority is shared
by spouses under applicable law. Based on the average of the closing bid and ask
prices of the Common Stock on January 11, 1999, as reported on the OTC
Electronic Bulletin Board ($.1925) and an Applicable Conversion Price of $.1386,
full conversion of the Debenture would yield 10,822,511 shares of Common
Stock.

     The information included below is based upon information provided by the
Selling Shareholders. Because the Selling Shareholders may offer all, some or
none of their Shares, no definitive estimate as to the number of Shares that
will be held by the Selling Shareholders after such offering can be provided and
the following table has been prepared on the assumption that all Shares offered
under this Prospectus will be sold.


<TABLE>
<CAPTION>
                                  Position with or      Shares Owned                                    Shares Owned
                                  Relationship to    Before Offering(1)(2)         Shares Being       After Offering(3)
Selling Shareholder               the Company              Number         %      Sold in Offering(2)        Number         % 
-------------------               -----------              ------        ---     -------------------        ------       ----
<S>                          <C>                           <C>           <C>            <C>                <C>           <C>
Joe Feshbach                 (4a)  Investor                 857,843       *                857,843               0         0%
Harborview Group, Inc.       (4b)  Investor               3,831,372      1.11%             3,831,372             0         0%
Russell Kuhn                 (4c)  Investor                 566,880       *                428,880         158,000         *
RBB Bank A.G.                (5)   Investor              42,416,667     12.25%          42,416,667               0         0%
Victor Sherman               (4d)  Investor                 528,880       *                428,880         100,000         *
Jennifer Brandenburg Smith   (4e)  Investor                 171,569       *                171,569               0         0%
Jo Sherrin Smith             (4f)  Investor                 171,569       *                171,569               0         0%
Robert Franklin Smith, Sr.   (4g)  Investor                 171,569       *                171,569               0         0%
Shelly Marion Smith          (4h)  Investor                 271,969       *                171,569          100,00         *
Myron Weiner                 (4i)  Investor                 438,880       *                428,880          10,000         *
John Zimmerman               (4j)  Investor                 641,151       *                536,151         105,000         *
Matt Zimmerman               (4k)  Investor                 105,782       *                 85,782          20,000         *

Selling Shareholders Total                                  493,000    14.50%           49,700,731         493,000       .14%
Shares                                                      =======     ====            ==========         =======       ====

TOTAL SHARES OUTSTANDING (6)                   346,123,638
</TABLE>

--------------------------
 *   Less than 1%
(1)  As required by regulations of the Commission, the number of shares shown as
     beneficially owned include shares which can be purchased within 60 days
     after January 11, 1999. The actual number of shares of Common Stock
     beneficially owned is subject to adjustment and could be materially more or
     less than the estimated amount indicated depending upon factors which
     cannot be predicted by the Company at this time, including, among others,
     the market price of the Common Stock.
(2)  Assumes the full conversion of the Debenture (based on an Average Closing
     Price of $.05 per share and a corresponding Applicable Conversion Price of
     $.036 per share) and the full exercise of the Debenture Warrants and the
     Purchase Warrants. Based on the average of the closing bid and ask prices
     of the Common Stock on January 11, 1999, as reported on the OTC


                                       66

<PAGE>



     Electronic Bulletin Board ($.1925) and an Applicable Conversion Price of
     $.1386, full conversion of the Debenture would yield 10,822,511 shares 
     of Common Stock.
(3)  Assumes that all of the Shares are sold by the Selling Shareholders and no
     additional shares of Common Stock are acquired.
(4)  Includes the following number of shares of Common Stock underlying the
     Purchase Warrants: (a) 245,098 shares; (b) 980,392 shares; (c) 122,508
     shares; (d) 122,508 shares; (e) 49,020 shares; (f) 49,020 shares; (g)
     49,020 shares; (h) 49,020 shares; (i) 122,508 shares; (j) 153,186 shares;
     and (k) 24,508 shares.
(5)  Represents 41,666,667 shares of Common Stock issued or issuable upon the
     full conversion of the Debentures (which amount may fluctuate depending on
     the future market price of the Company's Common Stock) and 750,000 shares
     underlying the Debenture Warrants..
(6)  Includes (i) 41,666,667 shares issuable upon full conversion of the
     Debenture, which amount may fluctuate depending upon, among other things,
     the future market price of the Company's Common Stock and (ii) 3,116,788
     shares of Common Stock issuable upon exercise of the 1998 Warrants.
     Excludes 32,800,549 shares issuable upon the exercise of certain stock
     options and warrants..


                 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     For the past three fiscal years, there were no material transactions
between the Company and any of its officers or directors which involved $60,000
or more.


                            DESCRIPTION OF SECURITIES

Common Stock

         The authorized capital stock of the Company consists of 1,000,000,000
shares of Common Stock, par value $.00001 per Share. The holders of Common Stock
(i) have equal ratable rights to dividends from funds legally available
therefore, when, as and if declared by the Board of Directors of the Company;
(ii) entitled to share ratably in all of the assets of the Company available for
distribution to holders of Common Stock upon liquidation, dissolution or winding
up of the affairs of the Company; (iii) do not have preemptive, subscription, or
conversion rights and there are no redemption or sinking fund provisions
applicable thereto; and (iv) are entitled to one noncumulative vote per share on
all matters which shareholders may vote on at all meetings of shareholders. All
shares of Common Stock now outstanding are fully paid for and non-assessable.


                              PLAN OF DISTRIBUTION

         The Shares acquired or to be acquired (i) upon the conversion of the
Debenture, (ii) upon exercise of the Debenture Warrants, (iii) in connection
with the Purchase Agreement and (iv) upon the exercise of the Purchase Warrants,
may be sold from time to time by the Selling Shareholders, or by pledgees,
donees, transferees or other successors-in-interest, subject to a current and
effective prospectus. The Shares may be sold directly to purchasers or through
underwriters, brokers, dealers or agents who may receive compensation in the
form of underwriting discounts, concessions or commissions from the Selling
Shareholders and/or the purchasers of the Shares for whom they may act as agent.
The Selling Shareholders and any such underwriters, brokers, dealers or agents
who participate in the distribution of the Shares may be deemed to be
"underwriters", and any profits on the sale of the Shares by them and any
discounts, commissions or concessions received by any such


                                       67

<PAGE>


underwriters, brokers, dealers or agents might be deemed to be underwriting
discounts and commissions under the Securities Act.

         The Shares offered hereby may be sold from time to time in one or more
transactions (which may involve block transactions) in the over-the-counter
market, in negotiated transactions, or in a combination of such methods of sale,
at fixed prices, at market prices prevailing at the time of sale, at prices
related to the prevailing market prices or at negotiated prices. The Shares may
be sold by one or more of the following methods, without limitation: (i) a block
trade in which the broker or dealer so engaged will attempt to sell the Shares
as agent but may position and resell a portion of the block as principal to
facilitate the transaction; (ii) purchases by a broker or dealer as principal
and resale by such broker or dealer for its account pursuant to this Prospectus;
(iii) ordinary brokerage transactions and transactions in which the broker
solicits purchasers; (iv) an exchange distribution in accordance with the rules
of such exchange; (v) face-to-face transactions between sellers and purchasers
without a broker-dealer; (vi) through the writing of options; (vii) to
underwriters who will acquire the Shares for their own account and resell them
in one or more transactions, including negotiated transactions, at a fixed
public offering price or at varying prices determined at the time of sale (any
public offering price and any discounts or concessions allowed or reallowed or
paid to dealers may change from time to time); and (viii) other.

         The Selling Shareholders may also pledge the Shares registered
hereunder to a broker-dealer and upon default under such pledge the
broker-dealer may effect sales of the Shares pledged pursuant to this
Prospectus. In addition, the Shares covered by this Prospectus may be sold in
private transactions or under Rule 144, rather than pursuant to this Prospectus.

         There is no assurance that any Selling Shareholder will sell any or all
of the Shares offered by it hereunder or that any such Selling Shareholder will
not transfer, devise or gift such Shares by other means not described herein.
Underwriters participating in any offering made pursuant to this Prospectus (as
amended or supplemented from time to time) may receive underwriting discounts
and commissions, and discounts or concessions may be allowed or reallowed or
paid to dealers, and brokers or agents participating in such transaction may
receive brokerage or agent's commissions or fees.

         In order to comply with the securities laws of certain states, if
applicable, the Shares will be sold in such jurisdictions, if required, only
through registered or licensed brokers or dealers.

         The Company has agreed to bear all expenses of registration of the
Shares other than legal fees and expenses, if any, of counsel or other advisors
of the Selling Shareholders. Any commissions, discounts, concessions or other
fees, if any, payable to broker-dealers in connection with any sale of the
Shares will be borne by the Selling Shareholders selling such Shares.


                                  LEGAL MATTERS

         The validity of the Shares offered in this Prospectus will be passed
upon for the Company by Berman Wolfe & Rennert, P.A., NationsBank Tower, 35th
Floor, 100 Southeast Second Street, Miami, Florida 33131.


                                       68

<PAGE>


                                     EXPERTS

         The Consolidated Financial Statements of the Company included in this
Prospectus and in the Registration Statement except as they pertain to periods
unaudited, have been audited by Rachlin Cohen & Holtz, independent certified
public accountants, for the periods indicated in their report appearing
elsewhere herein, and are included herein in reliance upon the report of such
firm given upon the authority of such firm as experts in accounting and
auditing.

                                GLOSSARY OF TERMS

         The following is a glossary of some of the scientific terms used in
this Prospectus. Except as otherwise noted, the information contained in the
glossary has been obtained from Stedman's Medical Dictionary Illustrated (The
Williams & Wilkins Company, Baltimore, 22nd Edition, c. 1972).

AIDS:                    Acquired Immune Deficiency Syndrome, a disease of no
                         known etiology in which the body's immunological system
                         is destroyed. (Source: Webster's II New Riverside
                         Dictionary)

Amino                    acid: An organic acid in which one of the CH hydrogen
                         atoms has been replaced by NH2.

Ampule:                  A hermetically sealed container, usually made of glass,
                         containing a sterile medicinal solution, or powder to
                         be made up in solution, to be used for subcutaneous,
                         intramuscular or intravenous injection.

Antibody:                Any body or substance, soluble or cellular, which is
                         evoked by the stimulus provided by the introduction of
                         antigen and which reacts specifically with antigen in
                         some demonstrable way.

Antigen:                 Any of various sorts of material that, as a result of
                         coming in contact with appropriate tissues of an animal
                         body, after a latent period, usually of from eight to
                         14 days, induces a state of sensitivity and/or
                         resistance to infection or toxic substances, and which
                         will react in a demonstrable way either with tissues or
                         with serum from the sensitized subject.

Anti-viral agent: An active force or substance capable of weakening or
abolishing the action of a virus.

Carboxyl:                The characteristic chemical group of certain organic
                         acids.

Cell:                    A minute structure, the living, active basis of all
                         plant and animal organization, composed of a mass of
                         protoplasm, enclosed in a delicate membrane and
                         containing a nucleus.

HIV:                     Human Immunodeficiency Virus.

HPV:                     Human Papilloma Virus (genital warts).


                                       69

<PAGE>


Immune system            Substance or substances which stimulate the human
 modulator:              body's immune system to more actively counter the
                         effects of viral infection and viral invasion.

Interferon:              Substances produced in cell cultures or host tissues in
                         response to infection with active or inactivated virus,
                         capable of inducing a state of resistance to
                         superinfection with related or unrelated virus.

Intramuscular:           Within the substance of a muscle.

Kaposi's Sarcoma:        A multiple, bleeding tumor denoting a disease of
                         unknown cause, involving primitive tissue in the
                         formation of blood or lymphatic vessels.

Lipoprotein:             Complexes or compounds containing lipid and protein.

Lymphocyte:              A type of white blood cell found in the fluid collected
                         from tissues throughout the body.

Neoplasm:                An abnormal tissue that grows by cellular proliferation
                         more rapidly than normal and continues to grow after
                         the stimuli that initiated the new growth cease, e.g.,
                         a tumor.

Nucleic acids:           Ribonucleic acid (RNA) or deoxyribonucleic (DNA)
                         protein molecules which determine genetic memory of
                         cells. These molecules are essential to life.

Papilloma Virus:         A circumscribed benign epithelial (nipple, or the thin
                         skin covering the nipple) tumor projecting from the 
                         surrounding surface; more precisely, a benign
                         epithelial neoplasm consisting of villous or
                         arborescent outgrowths of fibrovascular strands covered
                         by neoplastic cells.

Peptide:                 A compound of two or more amino acids in which the
                         carboxyl group of one is united with the amino group of
                         the other, with the elimination of a molecule of water,
                         thus forming a peptide bond.

Peptone:                 Intermediate polypeptide products generally water
                         soluble, diffusable and not coagulable by heat.

RETICULOSE:              An anti-viral peptide-nucleic acid complex preparation,
                         developed by Vincent M. LaPenta, M.D. specifically to
                         stimulate the reticulo-endothelial system. (Sources: E.
                         Podolsky, M.D., "The Reticulo-Endothelial System and
                         Its Activation by Non-Specific Protein Therapy," The
                         Journal of Medicine, October 1938; Physicians' Desk
                         Reference to Pharmaceutical Specialists and Biologicals
                         (Medical Economics, Inc., Oradell, N.J. c 1961))

Subcutaneous:            Beneath the skin; hypodermic.

Virus:                   A group of microbes which with few exceptions are
                         capable of passing through fine fibers that retain
                         bacteria and are incapable of growth or reproduction
                         apart from living cells.

Virus replication:       The duplication of a virus by itself within the body
                         cell by breaking down the RNA or DNA of the host cell 
                         and using it to make a replicate of itself, while 
                         killing the host cell.


                                       70

<PAGE>


                          INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S>                                                                                            <C>
Financial Information Year Ended December 31, 1996
     Report of Independent Certified Public Accountants........................................F-2
     Consolidated Balance Sheet, December 31, 1996.............................................F-3
     Consolidated Statements of Operations for the Years Ended December 31, 1996
         and 1995 and from Inception (February 20, 1984) to December 31, 1996..................F-4
     Consolidated Statements of Stockholders' Equity from Inception
         (February 20, 1984) to December 31, 1996..............................................F-5
     Consolidated Statements of Cash Flows for the Years Ended December 31,
         1996 and 1995 and from Inception (February 20, 1984) to December 31, 1996.............F-8
     Notes to Consolidated Financial Statements................................................F-9

Financial Information Year Ended December 31, 1997
     Report of Independent Certified Public Accountants........................................F-20
     Consolidated Balance Sheet, December 31, 1997.............................................F-21
     Consolidated Statements of Operations for the Years Ended December 31, 1997
         and 1996 and from Inception (February 20, 1984) to December 31, 1997..................F-22
     Consolidated Statements of Stockholders' Equity from Inception
         (February 20, 1984) to December 31, 1997..............................................F-23
     Consolidated Statements of Cash Flows for the Years Ended December 31,
         1997 and 1996 and from Inception (February 20, 1984) to December 31, 1997.............F-29
     Notes to Consolidated Financial Statements................................................F-30

Financial information (unaudited) Nine Months Ended September 30, 1998
     Consolidated Condensed Balance Sheet, September 30, 1998..................................F-45
     Consolidated Condensed Statements of Operations for the Nine Months Ended
         September 30, 1998 and 1997 and from Inception (February 20, 1984)
         to September 30, 1998.................................................................F-46
     Consolidated Condensed Statements of Stockholders' Equity from Inception
         (February 20, 1984) to September 30, 1998.............................................F-47
     Consolidated Condensed Statements of Cash Flows for the Nine Months Ended
         September 30, 1998 and 1997 and from Inception (February 20, 1984)
         to September 30, 1998.................................................................F-54
     Notes to Consolidated Financial Statements................................................F-55
</TABLE>



                                       F-1


<PAGE>   
 
               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
               --------------------------------------------------

To the Stockholders and Directors
Advanced Viral Research Corp.
  (A Development Stage Company)
Hallandale, Florida
 
     We have audited the accompanying consolidated balance sheet of Advanced
Viral Research Corp. (A Development Stage Company) as of December 31, 1996, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the two years in the period ended December 31, 1996 and for
the period from inception (February 20, 1984) to December 31, 1996. These
financial statements are the responsibility of the management of the Company.
Our responsibility is to express an opinion on these financial statements based
on our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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, 1996 and
the results of their operations and their cash flows for each of the two years
in the period ended December 31, 1996 and for the period from inception
(February 20, 1984) to December 31, 1996 in conformity with generally accepted
accounting principles.
 
     The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
2 to the consolidated financial statements, the Company has suffered recurring
losses from operations and is dependent upon the continued sale of its
securities or obtaining debt financing for funds to meet its cash requirements.
These factors raise substantial doubt about the Company's ability to continue as
a going concern. Management's plans with regard to these matters are 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
 
Miami, Florida
January 28, 1997
 
                                       F-2
<PAGE>   
 
                         ADVANCED VIRAL RESEARCH CORP.
                         (A DEVELOPMENT STAGE COMPANY)
 
                           CONSOLIDATED BALANCE SHEET
                               DECEMBER 31, 1996
 
<TABLE>
<S>                                                           <C>
                                 ASSETS
Current Assets:
  Cash and cash equivalents.................................  $    61,396
  Investments...............................................    1,378,841
  Inventory.................................................       19,729
  Other current assets......................................       16,081
                                                              -----------
          Total current assets..............................    1,476,047
Property and Equipment......................................      207,209
Other Assets................................................       33,544
                                                              -----------
          Total assets......................................  $ 1,716,800
                                                              ===========
                  LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
  Accounts payable and accrued liabilities..................  $    46,674
  Customer deposits.........................................        7,800
                                                              -----------
          Total current liabilities.........................       54,474
                                                              -----------
Commitments and Contingencies...............................           --
Stockholders' Equity:
  Common stock; 1,000,000,000 shares of $.00001 par value
     authorized, 267,031,058 shares issued and
     outstanding............................................        2,671
  Additional paid-in capital................................    7,003,351
  Subscription receivable...................................      (19,000)
  Deficit accumulated during the development stage..........   (4,851,537)
  Deferred compensation cost................................     (473,159)
                                                              -----------
          Total stockholders' equity........................    1,662,326
                                                              -----------
          Total liabilities and stockholders' equity........  $ 1,716,800
                                                              ===========
</TABLE>
 
                See notes to consolidated financial statements.
 
                                       F-3
<PAGE>   
 
                         ADVANCED VIRAL RESEARCH CORP.
                         (A DEVELOPMENT STAGE COMPANY)
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
 
<TABLE>
<CAPTION>
                                                                                        INCEPTION
                                                                                      (FEBRUARY 20,
                                                          YEAR ENDED DECEMBER 31,       1984) TO
                                                        ---------------------------   DECEMBER 31,
                                                            1996           1995           1996
                                                        ------------   ------------   -------------
<S>                                                     <C>            <C>            <C>
Revenues:
  Sales...............................................  $     24,111   $     27,328    $   192,041
  Interest............................................        46,796         16,155        345,409
  Other income........................................        32,000         25,000        112,000
                                                        ------------   ------------    -----------
                                                             102,907         68,483        649,450
                                                        ------------   ------------    -----------
Costs and Expenses:
  Research and development............................       255,660         34,931      1,106,408
  General and administrative..........................       695,915        420,757      3,926,133
  Depreciation and amortization.......................       306,072         14,679        466,236
  Interest............................................            --             --          2,210
                                                        ------------   ------------    -----------
                                                           1,257,647        470,367      5,500,987
                                                        ------------   ------------    -----------
Net Loss..............................................  $ (1,154,740)  $   (401,884)   $(4,851,537)
                                                        ============   ============    ===========
Net Loss Per Common Share.............................  $       (.00)  $       (.00)
                                                        ------------   ------------
Weighted Average Number of Common Shares
  Outstanding.........................................   257,645,815    248,022,608
                                                        ============   ============
</TABLE>
 
                See notes to consolidated financial statements.
 
                                       F-4
<PAGE>   
 
                         ADVANCED VIRAL RESEARCH CORP.
                         (A DEVELOPMENT STAGE COMPANY)
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
               INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 1996
 
<TABLE>
<CAPTION>
                                              COMMON STOCK                                 DEFICIT
                                          ---------------------                          ACCUMULATED
                                          AMOUNT                            ADDITIONAL   DURING THE
                                           PER                               PAID-IN     DEVELOPMENT
                                          SHARE       SHARES      AMOUNT     CAPITAL        STAGE
                                          ------   ------------   -------   ----------   -----------
<S>                                       <C>      <C>            <C>       <C>          <C>
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.....     .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...........................     .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.......................     .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)
                                                   ------------   -------   ----------   -----------
Balance, December 31, 1986..............            154,666,014     1,547      307,534      (203,942)
  Issuance of common stock, exercise of            
     "A" warrants.......................     .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, period 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 offer on "B"                    
     warrants...........................     .05      6,729,850        67      336,475            --
  Issuance of common stock, exercise of            
     "B" warrants.......................     .05        268,500         3       13,422            --
  Issuance of common stock, exercise of            
     "C" warrants.......................     .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)
                                                   ------------   -------   ----------   -----------
  Issuance of common stock, exercise of            
     "B" warrants.......................     .05         11,400        --          420            --
  Issuance of common stock, exercise of            
     "C" warrants.......................     .08          2,500        --          200            --
</TABLE>
 
                                       F-5
<PAGE>   
 
                         ADVANCED VIRAL RESEARCH CORP.
                         (A DEVELOPMENT STAGE COMPANY)
 
         CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY -- (CONTINUED)
 
<TABLE>
<CAPTION>
                                              COMMON STOCK                                 DEFICIT
                                          ---------------------                          ACCUMULATED
                                          AMOUNT                            ADDITIONAL   DURING THE
                                           PER                               PAID-IN     DEVELOPMENT
                                          SHARE       SHARES      AMOUNT     CAPITAL        STAGE
                                          ------   ------------   -------   ----------   -----------
<S>                                       <C>      <C>            <C>       <C>          <C>
  Issuance of common stock, exercise of
     underwriters warrants..............    .012      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............................   .0405     10,000,000       100      404,900            --
  Issuance of common stock, for
     consulting services................    .055        500,000         5       27,495            --
  Issuance of common stock, exercise of
     "B" warrants.......................     .05      7,458,989        75      372,875            --
  Issuance of common stock, exercise of
     "C" warrants.......................     .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................    .055        500,000         5       27,495            --
  Issuance of common stock, for
     consulting services................              3,500,000        35      104,965            --
  Issuance of common stock, for
     testing............................    .035      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)
                                                   ============   =======   ==========   ===========
</TABLE>
 
                See notes to consolidated financial statements.
 
                                       F-6
<PAGE>   
 
                         ADVANCED VIRAL RESEARCH CORP.
                         (A DEVELOPMENT STAGE COMPANY)
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
               INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 1996
 
<TABLE>
<CAPTION>
                                       COMMON STOCK                                              DEFICIT
                                   --------------------                                        ACCUMULATED
                                   AMOUNT                          ADDITIONAL                  DURING THE      DEFERRED
                                    PER                             PAID-IN     SUBSCRIPTION   DEVELOPMENT   COMPENSATION
                                   SHARE      SHARES      AMOUNT    CAPITAL      RECEIVABLE       STAGE          COST
                                   ------   -----------   ------   ----------   ------------   -----------   ------------
<S>                                <C>      <C>           <C>      <C>            <C>          <C>            <C>
Balance, December 31, 1993.......   $       236,276,991   $2,363   $3,416,070     $     --     $(2,854,076)   $     --
  Issuance of common stock, for
    consulting services..........    .05      4,750,000       47      237,453           --              --           --
  Issuance of common stock,                                     
    exercise of options..........    .08        400,000        4       31,996           --              --           --
  Issuance of common stock,                                     
    exercise of options..........    .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..........    .05      3,333,333       33      166,633           --              --           --
  Issuance of common stock,                                      
    exercise of options..........    .08      2,092,850       21      167,407           --              --           --
  Issuance of common stock,                                      
    exercise of options..........    .10      2,688,600       27      268,833           --              --           --
  Issuance of common stock, for                                  
    consulting services..........    .11      1,150,000       12      126,488           --              --           --
  Issuance of common stock, for                                  
    consulting services..........    .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)          --
                                            -----------   ------   ----------     --------     -----------    ---------
  Issuance of common stock,
    exercise of options..........    .05      3,333,334       33      166,634           --              --           --
  Issuance of common stock,                                      
    exercise of options..........    .08      1,158,850       12       92,696           --              --           --
  Issuance of common stock,                                      
    exercise of options..........    .10      7,163,600       72      716,288           --              --           --
  Issuance of common stock,                                      
    exercise of options..........    .11        170,000        2       18,698           --              --           --
  Issuance of common stock,                                      
    exercise of options..........    .12      1,300,000       13      155,987           --              --           --
  Issuance of common stock,                                      
    exercise of options..........    .18      1,400,000       14      251,986           --              --           --
  Issuance of common stock,                                      
    exercise of options..........    .19        500,000        5       94,995           --              --           --
  Issuance of common stock,                                      
    exercise of options..........    .20        473,500        5       94,695           --              --           --
  Issuance of common stock, for                                  
    services rendered............    .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   $2,671   $7,003,351     $(19,000)    $(4,851,537)   $(473,159)
                                            ===========   ======   ==========     ========     ===========    =========
</TABLE>
 
                See notes to consolidated financial statements.
 
                                       F-7
<PAGE>   
 
                         ADVANCED VIRAL RESEARCH CORP.
                         (A DEVELOPMENT STAGE COMPANY)
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                                                      INCEPTION
                                                                                 (FEBRUARY 20, 1984)
                                                       YEAR ENDED DECEMBER 31,           TO
                                                       -----------------------      DECEMBER 31,
                                                          1996         1995             1996
                                                       -----------   ---------   -------------------
<S>                                                    <C>           <C>         <C>
Cash Flows from Operating Activities:
  Net loss...........................................  $(1,154,740)  $(401,884)       $(4,851,537)
                                                       -----------   ---------        -----------
  Adjustments to reconcile net loss to net cash used
     in operating activities:
     Depreciation and amortization...................       18,731      14,679            178,895
     Amortization of deferred compensation cost......      287,341          --            287,341
     Issuance of common stock for services...........      175,000     168,500          1,372,000
     Increase in other current assets................       (3,114)     (2,804)           (16,081)
     Increase in inventory...........................       (1,638)    (18,091)           (19,729)
     Increase in other assets........................      (27,085)     (4,659)           (33,544)
     Increase (decrease) in accounts payable and
       accrued liabilities...........................       39,823     (25,594)            52,874
                                                       -----------   ---------        -----------
       Total adjustments.............................      489,058     132,031          1,821,756
                                                       -----------   ---------        -----------
       Net cash used in operating activities.........     (665,682)   (269,853)        (3,029,781)
                                                       -----------   ---------        -----------
Cash Flows from Investing Activities:
  Purchase of investments............................   (1,247,256)   (474,000)        (1,726,256)
  Proceeds from sale of investments..................      347,415          --            347,415
  Repayments on loan receivable -- stockholder.......           --       8,762                 --
  Expenditures for property and equipment............      (11,446)     (5,075)          (384,504)
                                                       -----------   ---------        -----------
     Net cash used in investing activities...........     (911,287)   (470,313)        (1,763,345)
                                                       -----------   ---------        -----------
Cash Flows from Financing Activities:
  Proceeds from sale of securities, net of issuance
     costs...........................................    1,573,135     602,955          4,854,522
                                                       -----------   ---------        -----------
     Net cash provided by financing activities.......    1,573,135     602,955          4,854,522
                                                       -----------   ---------        -----------
Net Increase (Decrease) in Cash and Cash
  Equivalents........................................       (3,834)   (137,211)            61,396
Cash and Cash Equivalents, Beginning.................       65,230     202,441                 --
                                                       -----------   ---------        -----------
Cash and Cash Equivalents, Ending....................  $    61,396   $  65,230        $    61,396
                                                       ===========   =========        ===========
Supplemental Disclosure of Non-Cash Financing
  Activities:
  Options granted accounted for as deferred
     compensation cost...............................  $   760,500
                                                       ===========
</TABLE>
 
                See notes to consolidated financial statements.
 
                                      F-8
<PAGE>   

                         ADVANCED VIRAL RESEARCH CORP.
                         (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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
            named RETICULOSE.  While the Company has had limited sales of this
            product, primarily for research purposes, the success of the
            Company will be dependent upon obtaining certain regulatory
            approval for its pharmaceutical product, RETICULOSE, to commence
            commercial operations.  The Company was in the development stage at
            December 31, 1996.

         PRINCIPLES OF CONSOLIDATION

            The consolidated financial statements include the accounts of the
            Company and its 99.6% owned subsidiary, Advance Viral Research
            (LTD), a Bahamian Corporation.  All significant intercompany
            accounts have been eliminated.

         CASH EQUIVALENTS

            Cash equivalents consist of highly liquid investments, with
            original maturities of three months or less.

         INVESTMENTS

            Investments consist of certificates of deposit with maturities
            greater than three months, carried at cost which is market value,
            and U.S. Government discount notes and U.S. Treasury Bills.  The
            notes and treasury bills are classified as "held to maturity" and
            are carried at amortized cost which approximates market value.

         PROPERTY AND EQUIPMENT

            Property and equipment are recorded at cost and depreciated 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.

         RECLASSIFICATION

            Certain amounts in the 1995 financial statements have been
            reclassified to conform to 1996 presentation.





                                     F-9
<PAGE>   
                         ADVANCED VIRAL RESEARCH CORP.
                         (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Continued)

NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         USE OF ESTIMATES

            The preparation of financial statements in conformity with
            generally accepted accounting principles 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.

NOTE 2.  BASIS OF PRESENTATION

         The accompanying consolidated financial statements have been prepared
         in conformity with generally accepted accounting principles which
         contemplate the continuance of the Company as a going concern.  The
         Company has suffered losses from operations during its operating
         history.  The Company is dependent upon registration of RETICULOSE for
         sale before it can begin commercial operations.  The Company's cash
         position may be inadequate to pay all the costs associated with the
         full range of testing and clinical trials required by the FDA.
         Management does not anticipate registration or other approval of
         RETICULOSE in the near future in the United States.  Unless and until
         RETICULOSE is approved for sale in the United States or another
         industrially developed country, the Company may be dependent upon the
         continued sale of its securities for funds to meet its cash
         requirements.  Management intends to continue to sell the Company's
         securities in an attempt to mitigate the effects of its cash position;
         however, no assurance can be given that such equity financing, if and
         when required, will be available.  In the event that such equity
         financing is not available, in order to continue operations,
         management anticipates that they will have to defer their salaries.
         In addition, the Company may seek debt financing, but no agreements
         have been entered with regard to such financing.  No assurance can be
         given that the Company will be able to sustain its operations until
         FDA approval is granted or that any approval will ever be granted.
         These factors raise substantial doubt about the Company's ability to
         continue as a going concern.  The consolidated financial statements do
         not include any adjustments relating to the recoverability and
         classification of recorded assets and classification of liabilities
         that might be necessary should the Company be unable to continue in
         existence.

NOTE 3.  ACQUISITION

         Two of the principal stockholders of the Company acquired LTD, a
         Bahamian Corporation with pharmaceutical manufacturing and warehousing
         facilities, on February 20, 1984.  The acquisition is a combination of
         two entities under common control and has been accounted for in a
         manner similar to a pooling of interests.  In 1986, the Company
         acquired from LTD exclusive rights to manufacture and market
         RETICULOSE worldwide, except within the Bahamas, for $50,000.  The
         Company also purchased inventory of RETICULOSE from LTD for $45,000
         and was obligated to pay $3 per ampule of RETICULOSE for the initial
         100,000 ampules purchased and $2 per ampule for purchases exceeding
         100,000 ampules.  On December 16, 1987, the Company acquired the
         controlling beneficial interest in 99.6% of the common stock of LTD
         through an appropriate trust agreement to satisfy the rules of the
         Bahamian Government, from two of the principal stockholders of the
         Company at a cost of $46,000.  Both stockholders concurrently canceled
         $86,565 of indebtedness due them from LTD.

                                     F-10
<PAGE>   

                         ADVANCED VIRAL RESEARCH CORP.
                         (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Continued)





NOTE 4.  PROPERTY AND EQUIPMENT

<TABLE>
<CAPTION>
                                                            Estimated
                                                           Useful Lives     December 31,      December 31,
                                                             (Years)            1996              1995
                                                             -------            ----              ----
          <S>                                             <C>                 <C>               <C>
          Land and improvements                           15                  $  34,550         $  34,550
          Building and improvements                       30                    239,434           239,434
          Machinery and equipment                         5                     110,520            99,074
                                                                                -------          --------
                                                                                384,504           373,058
          Less accumulated depreciation                                         177,295           158,564
                                                                                -------           -------
                                                                               $207,209          $214,494
                                                                                =======           =======
</TABLE>

         The Company maintains certain property and equipment in Freeport,
         Bahamas.  The property and equipment amounted to $369,358 as of
         December 31, 1996 including $17,623 expended in 1987 to purchase a
         land lease expiring in 2068.  These amounts are included above.

NOTE 5.  INVESTMENTS

     As of December 31, 1996, Investments consisted of the following:

     Certificates of Deposit...............................$  946,226

     Held to Maturity:
       U.S. Government Discount Notes -- mature 3/30/97....$  334,647
       U.S. Treasury Bills -- mature 5/31/97...............$   97,968
                                                           ----------
                   Total Investments.......................$1,378,841
                 

NOTE 6.  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 RETICULOSE in an amount equal to 5% of net
            sales in the United States and 4% of net sales in foreign
            countries.  The Company has not as yet received any notice of claim
            from such parties.

         POTENTIAL LOSS OF BAHAMIAN RIGHTS

            RETICULOSE is manufactured by Advance Viral Research, Limited (LTD)
            in facilities located in Freeport, Grand Bahama Island.  LTD has a
            license to manufacture pharmaceutical products for export from the
            Grand Bahama Port Authority.  LTD's counsel was advised in August
            1988 by the Ministry of Health of the Government of the Bahamas
            that a license from the Ministry of Health is required for the
            manufacture of pharmaceuticals in the Freeport area of Grand Bahama
            Island.  LTD has received an opinion of its counsel in the Bahamas
            that the license from the Grand Bahama Port Authority is valid for
            the manufacture for export by LTD's of ethical pharmaceutical
            products in the Freeport area of Grand Bahama Island.  No
            proceeding to prevent LTD's export of RETICULOSE has been
            instituted by the Government of the Bahamas.  If such proceedings
            are instituted, LTD intends to defend them vigorously.  No
            assurance can be given that LTD would successfully defend such
            claim.

                                     F-11
<PAGE>   

                         ADVANCED VIRAL RESEARCH CORP.
                         (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Continued)

NOTE 6.  COMMITMENTS AND CONTINGENCIES

         PRODUCT LIABILITY

            The Company could be subjected to claims for adverse reactions
            resulting from the use of RETICULOSE.  Although the Company is
            unaware of any such claims or threatened claims since RETICULOSE
            was initially marketed in the 1940's, one study noted adverse
            reactions from highly concentrated doses in guinea pigs.  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 RETICULOSE.  As of the date
            hereof, the Company does not have product liability insurance for
            RETICULOSE.  There can be no assurance that the Company will be
            able to secure such insurance in adequate amounts, at reasonable
            premiums.  Should the Company be unable to secure such product
            liability insurance, the risk of loss to the Company in the event
            of claims would be greatly increased.

         LACK OF PATENT PROTECTION

            The Company does not presently have a patent for RETICULOSE but the
            Company is currently applying for patents for RETICULOSE and
            certain other diseases.  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 the Company will obtain such patents or if obtained
            that they will be enforceable.

         OFFICE LEASE

            Management executed a non-cancelable lease for new office space on
            January 1, 1996, expiring on December 31, 1998 at approximately
            $14,000 annually.

            The Company leased an auto on October 26, 1996 for 36 months at
            $450 per month.  Lease expense for the years ended December 31,
            1996 and 1995 totaled $13,315 and $13,832, respectively.

            Future minimum lease payments are as follows:

<TABLE>
               <S>                                             <C>
               1997                                            $19,500
               1998                                             19,500
               1999                                              4,500
                                                               -------
                                                               $43,500
                                                                ======
</TABLE>

         TESTING AGREEMENTS

         PLATA PARTNERS LIMITED PARTNERSHIP

            On March 20, 1992, the Company entered into an agreement with Plata
            Partners Limited Partnership ("Plata") pursuant to which Plata
            agreed to perform a demonstration in the Domincan Republic in
            accordance with a certain agreed upon protocol (the "Protocol") to
            assess the efficacy of a treatment using RETICULOSE incorporated in
            the Protocol against AIDS (the "Plata Agreement").  Plata covered
            all costs and expenses associated with the demonstration.





                                     F-12
<PAGE>   

                         ADVANCED VIRAL RESEARCH CORP.
                         (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Continued)

NOTE 6.  COMMITMENTS AND CONTINGENCIES

         TESTING AGREEMENTS

            Pursuant to the Plata Agreement, the Company authorized the
            issuance to Plata of 5,000,000 shares of common stock and options
            to purchase an additional 5,000,000 shares at $.08 per share
            through July 9, 1994 (the "Plata Options") and 5,000,000 shares at
            $.10 per share through July 9, 1994.  Pursuant to several
            amendments, the Plata Options and the Additional Plata Options are
            exercisable through April 30, 1997 at an exercise price of $.12 and
            $.14, respectively.  As of December 31, 1996, there are outstanding
            Plata Options to acquire 813,000 shares at $.11 per share and
            Additional Plata Options to acquire 858,100 shares at $.13 per
            share.  Through December 31, 1996, the Company has received
            approximately $670,000 pursuant to the issuance of approximately
            7.7 million shares in connection with the exercise of the Plata
            Options and the Additional Plata Options.

         TRM MANAGEMENT CORP. ("TRM")

            In August 1991, the Company entered into an agreement with TRM,
            whereby TRM would perform certain open human clinical trial tests
            in Haiti using RETICULOSE (the "TRM Agreement").  According to the
            TRM Agreement, the purpose of the Haiti tests was to assess the
            effectiveness of RETICULOSE against the Hepatitis "A" virus and
            Hepatitis "B" virus in accordance with and in compliance with a
            certain Hepatitis Open Label Clinical Trial Protocol developed by
            TRM.  At the conclusion of the Haiti tests, TRM was required to
            prepare a paper describing the methods and results of testing, the
            form and substance of which shall be appropriate for publication by
            recognized scientific journals ("Results Paper").  The Results
            Paper was published in the December 1992 issue of the Journal of
            the Royal Society of Health.

            On January 3, 1992, TRM delivered to the Company the Results Paper.
            In accordance with the terms of the TRM Agreement, the Company has
            authorized the issuance to the shareholders and certain associated
            persons of TRM (1) an aggregate amount of 10,000,000 shares of the
            Company's common stock (the "TRM Shares") and (2) an option to
            acquire, at any time, for a period of five years from the date of
            issuance of the option, 10,000,000 shares of the Company's common
            stock at a purchase price of $.05 per share (the "TRM Options").
            As of December 31, 1996, 6,666,666 shares of common stock were
            issued pursuant to the exercise of the TRM Options for an aggregate
            exercise price of $333,333.  Pursuant to an amendment, the TRM
            Options are exercisable through March 15, 1997 at an exercise price
            of $.08.

                                      F-13
<PAGE>   

                         ADVANCED VIRAL RESEARCH CORP.
                         (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Continued)

NOTE 6.  COMMITMENTS AND CONTINGENCIES

         ARGENTINE AGREEMENT

            In April 1996, the Company entered into an agreement (the
            "Argentine Agreement") with DCT SRL, an Argentine corporation
            unaffiliated with the Company ("DCT") pursuant to which DCT was to
            cause a clinical trial to be conducted in two separate hospitals
            located in Buenos Aires, Argentina (the "Clinical Trials").
            Pursuant to the Argentine Agreement, the Clinical Trials were to be
            conducted pursuant to a protocol developed by Juan Carlos Flichman,
            M.D. and the purpose of the Clinical Trials was to assess the
            efficacy of the Company's drug RETICULOSE on the Human Papilloma
            Virus (HPV).  The protocol calls for, among other things, a study
            to be performed with clinical and laboratory follow-up on 20 male
            and female human patients between the ages of 18 and 50.  The
            Clinical Trials did not include a placebo control group or
            references to any other antiviral drug.

            Pursuant to the Argentine Agreement, the Company delivered $34,000
            to DCT to cover out-of-pocket expenses associated with the Clinical
            Trials.  The Argentine Agreement further provides that at the
            conclusion of the Clinical Trials, DCT shall cause Dr. Flichman to
            prepare and deliver a written report to the Company regarding the
            methodology and results of the Clinical Trials (the "Written
            Report").  In September 1996, the Written Report was delivered by
            Dr. Flichman to the Company.  Upon delivery of the Written Report
            to the Company, the Company delivered to the principals of DCT
            options to acquire 2,000,000 shares of the Company's common stock
            for a period of one year from the date of the delivery of the
            Written Report, at a purchase price of $.20 per share.  As of
            December 31, 1996, 473,500 shares of common stock were issued
            pursuant to the exercise of these options for an aggregate exercise
            price of approximately $95,000.

            In June 1994, DCT SRL and the Company entered into an exclusive
            distribution agreement whereby the Company granted to DCT SRL the
            exclusive right to distribute the Company's drug RETICULOSE in
            certain South American countries, including Argentina and the other
            MERCOSUR States.

         BARBADOS STUDY

            A double blind study assessing the efficacy of the Company's drug
            RETICULOSE in 43 human patients diagnosed with HIV (AIDS) is being
            conducted at the Queen Elizabeth Hospital, Bridgetown, Barbados
            (the "Barbados Study").  As of December 31, 1996, the Company has
            expended approximately $150,000 to cover the costs of the Barbados
            Study.  Based on information received from the coordinators of the
            Barbados Study, the Company is uncertain as to the costs to be
            incurred in connection with the Barbados Study and has not been
            informed as to when results from the Barbados Study will be
            forthcoming.  In December 1996, the Company received from the
            coordinators of the Barbados Study, a written summary of
            preliminary results of the Barbados Study (the "Written Summary").





                                     F-14
<PAGE>   

                         ADVANCED VIRAL RESEARCH CORP.
                         (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Continued)

NOTE 6.  COMMITMENTS AND CONTINGENCIES

         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
            pharmaceutical and biotechnology joint venture partners and
            assisting the Company with regulatory approvals and protocols.

            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 $.18 per
            share.  In addition and in connection with entering into the
            consulting agreement with Dr. Hirschman, the Company issued to a
            person unaffiliated with the Company, 100,000 shares of the
            Company's common stock, and an option to acquire for a period of
            one year, from June 1, 1995, an additional 500,000 shares at a
            purchase price of $.18 per share.  As of December 31, 1996, 900,000
            options have been exercised for cash consideration of $162,000
            under this Agreement.

            In March 1996, the Company entered into an Addendum to 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 the option to purchase 15,000,000 shares of the Company's
            common stock for a three year period pursuant to the following
            vesting schedule: (i) options to purchase 5,000,000 shares
            exercisable at any time and from time to time commencing March 24,
            1996 and ending March 23, 1999 at an exercise price of $.19 per
            share, of which options to acquire 500,000 shares were assigned by
            Dr. Hirschman to Richard Rubin, counsel to Dr. Hirschman; (ii)
            options to purchase 5,000,000 shares exercisable at any time and
            from time to time commencing March 24, 1997 and ending March 23,
            1999 at an exercise price of $.27 per share, of which options to
            acquire 500,000 shares were assigned by Dr. Hirschman to Richard
            Rubin, counsel to Dr. Hirschman; and (iii) options to purchase
            5,000,000 shares exercisable at any time and from time to time
            commencing March 23, 1998 and ending March 23, 1999 at an exercise
            price of $.36 per share, of which options to acquire 500,000 shares
            were assigned by Dr. Hirschman to Richard Rubin, counsel to Dr.
            Hirschman.  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.  As of December 31, 1996, 500,000 shares of
            common stock were issued pursuant to the exercise of stock options
            by Richard Rubin.  Mr. Rubin has, from time to time in the past,
            advised the Company on matters unrelated to his representation of
            Dr. Hirschman.

                                     F-15
<PAGE>   

                         ADVANCED VIRAL RESEARCH CORP.
                         (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Continued)

NOTE 6.  COMMITMENTS AND CONTINGENCIES

            On October 14, 1996, the Company and Dr. Hirschman entered into an
            agreement (the "Employment Agreement") whereby Dr. Hirschman has
            agreed to serve as the President and Chief Executive Officer of the
            Company for a period of three years, subject to earlier termination
            by either party if the Company does not receive on or prior to
            December 31, 1997, funding of $3,000,000 from sources other than
            traditional institutional/bank debt financing or proceeds from the
            purchase by Dr. Hirschman of the Company's securities, including,
            without limitation, the exercise of Dr. Hirschman of outstanding
            stock options.  Pursuant to the Employment Agreement, Dr. Hirschman
            is entitled to receive an annual base salary of $325,000,
            automobile and health, life, disability and dental insurance
            benefits for the term of his employment.  The Employment Agreement
            further provides that Dr. Hirschman shall be nominated by the
            Company to serve as a member of the Company's Board of Directors
            for the duration of his employment, and since October 17, 1996, Dr.
            Hirschman has served as a member of the Company's Board of
            Directors.

         CONSULTING AGREEMENTS

         COHEN AGREEMENTS

            In September 1992, the Company entered into a one year consulting
            agreement with Leonard Cohen (the "September 1992 Cohen
            Agreement").  The September 1992 Cohen Agreement required that Mr.
            Cohen provide certain consulting services to the Company in
            exchange for the Company issuing to Mr. Cohen 1,000,000 shares of
            common stock (the "September 1992 Cohen Shares"), 500,000 of which
            were issuable upon execution of the September 1992 Cohen Agreement
            and the remaining 500,000 shares of which were issuable upon Mr.
            Cohen completing 50 hours of consulting service to the Company.
            The Company issued the first 500,000 shares to Mr. Cohen in October
            1992 and the remaining 500,000 shares to Mr. Cohen in February
            1993.  Further pursuant to the September 1992 Cohen Agreement, the
            Company granted to Mr. Cohen the option to acquire, at any time and
            from time to time through September 11, 1993 (which date has been
            extended through December 31, 1996), the option to acquire
            3,000,000 shares of common stock of the Company at an exercise
            price of $.09 per share (which exercise price has been increased to
            $.12 per share) (the "September 1992 Cohen Options").  As of
            December 31, 1996, 1,300,000 of the September 1992 Cohen Options
            have been exercised for cash consideration of $156,000.  Pursuant
            to an amendment, the options were exercisable through April 30,
            1997 at a price of $.13.

            In February 1993, the Company entered into a second consulting
            agreement with Mr. Cohen (the "February 1993 Cohen Agreement").
            The February 1993 Cohen Agreement provides that Mr. Cohen provide
            financing consulting services concerning the business operations of
            the Company in exchange for the Company issuing to Mr. Cohen
            3,500,000 shares of common stock (the "February 1993 Cohen
            Shares"), 1,000,000 shares of which Mr. Cohen has informed the
            Company he has assigned to certain other persons non-affiliated
            with the Company.

                                     F-16
<PAGE>   

                         ADVANCED VIRAL RESEARCH CORP.
                         (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Continued)

NOTE 6.  COMMITMENTS AND CONTINGENCIES

            In July 1994, in consideration for services related to the
            introduction, negotiation and execution of a distribution agreement
            the Company issued: (i) to Mr. Cohen, an additional 2,500,000
            shares (the "April 1994 Cohen Shares") and (ii) to each of Elliot
            Bauer and Lee Rizzuto, 625,000 shares (the "Bauer and Rizzuto
            Shares") as well as options to acquire an additional 5,000,000
            shares at $.10 per share exercisable through May 1, 1996 (the
            "Bauer and Rizzuto Options").  The April 1994 Cohen Shares, the
            Bauer and Rizzuto Shares and the shares of common underlying the
            Bauer and Rizzuto Options have been registered.  The Company has
            been informed that Messrs. Cohen, Bauer and Rizzuto are principals
            of a firm which has been granted certain distribution rights.
            Through December 31, 1996, 2,855,000 shares were issued pursuant to
            the exercise of the Bauer and Rizzuto Options for an aggregate
            exercise price of $285,500.  During the year ended December 31,
            1996, approximately 3,000,000 shares of common stock were issued
            for cash consideration of $300,000 pursuant to the exercise of the
            Bauer and Rizzuto Options.  Pursuant to an amendment, the Rizzuto
            options are exercisable through April 30, 1997 at an option price
            of $.11.  The Company agreed to issue to Cohen an additional
            300,000 shares in 1995 at a time when the shares were valued at
            $.14 per share, in consideration for expenditures incurred by Mr.
            Cohen with securing for the benefit of the Company and the
            affiliated distributor, the continued services of a doctor.

            The issuance of the September 1992 Cohen Shares, the February 1993
            Cohen Shares, the April 1994 Cohen Shares and the Bauer and Rizzuto
            Shares have been accounted for as an administrative expense in the
            amount of the Company's valuation of such shares as of the issuance
            date.  During the year ended December 31, 1996, Mr.  Cohen was
            issued 300,000 shares for services rendered.  These shares were
            accounted for as an administrative expense in the amount of the
            Company's valuation of such shares as of the issuance date.

         DISTRIBUTION AGREEMENTS

         The Company has entered into separate agreements with five different
         entities (the "Entities"), whereby the Company has granted exclusive
         rights to distribute RETICULOSE in the countries of China, Japan,
         Macao, Hong Kong, Taiwan, Malaysia, Mexico, Saudi Arabia, Argentina,
         Bolivia, Paraguay, Uruguay, Brazil, Chile, Channel Islands, The Isle
         of Man, British West Indies, Jamaica, Haiti, Bermuda and Belize.
         Pursuant to these agreements, distributors are obligated to cause
         RETICULOSE to be approved for commercial sale in such countries and
         upon such approval, to purchase from the Company certain minimum
         quantities of RETICULOSE 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.

         CONTINGENCY

         The Company is involved in a lawsuit incidental to its operations.  In
         the opinion of legal counsel and management of the Company, any
         liabilities which may arise from this action would not have a material
         effect on the financial position or results of operations of the
         Company.

                                     F-17
<PAGE>   

                         ADVANCED VIRAL RESEARCH CORP.
                         (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Continued)

NOTE 7.  STOCKHOLDERS' EQUITY

         During 1996, the Company issued 15,849,284 shares of common stock for
         an aggregate consideration of $1,748,135.  These amounts were
         comprised of the issuance of common stock pursuant to the exercise of
         stock options of 15,499,284 shares for $1,573,135 and the issuance of
         common stock in exchange for consulting services of 350,000 shares for
         consideration of $175,000.


NOTE 8.  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, 1996, the Company had a net operating loss
         carryforward for Federal income tax reporting purposes amounting to
         approximately $4,300,000, which expires in 2011.

         The Company presently has no significant temporary differences between
         financial reporting and income tax reporting.  The components of the
         deferred tax asset as of December 31, 1996 were as follows:


<TABLE>
             <S>                                               <C>
             Benefit of net operating loss carryforwards       $1,462,000
             Less valuation allowance                           1,462,000
                                                               ----------
             Net deferred tax asset                            $        -
                                                               ==========
</TABLE>

         As of December 31, 1996, sufficient uncertainty exists regarding the
         realizability of these operating loss carryforwards and, accordingly,
         a valuation allowance of $1,462,000, which related to the net
         operating losses, has been established.


NOTE 9.  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, 1996.  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 December 31, 1996 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, U.S. government obligations 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-18
<PAGE>   

                         ADVANCED VIRAL RESEARCH CORP.
                         (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Continued)

NOTE 9.  ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS

         The fair value of non-current investments, primarily certificates of
         deposit and U.S. government obligations have been estimated using
         quoted market prices.  At December 31, 1996, the differences between
         the estimated fair value and the carrying value of non-current debt
         instruments were considered immaterial in relation to the Company's
         financial position.


NOTE 10. DEFERRED COMPENSATION COST

         As more fully described in Note 6 to these financial statements, the
         Company granted stock options in exchange for testing and consulting
         services.  In accordance with SFAS 123, Accounting for Stock-Based
         Compensation (effective for options granted after December 15, 1995),
         the Company recognized compensation cost based on the fair value at
         the grant dates.  The compensation cost is amortized over the life of
         the option period.  The fair value of the stock options used to
         compute deferred compensation cost is the estimated present value at
         grant date using the Black-Sholes option pricing model with the
         following assumptions for 1996: expected volatility of 20%; a
         risk-free interest rate of 6% and an expected holding period ranging
         from 1-3 years.  The deferred compensation cost is reported as a
         component of stockholders' equity.

NOTE 11. SUBSEQUENT EVENTS

         During January 1997, the Company entered into a five year
         non-cancelable operating lease for certain office and laboratory space
         in Yonkers, New York at an annual rental of $85,400 per year.

         In February 1997, the Company obtained financing of $1,000,000 in the
         form of 7% convertible debentures to finance research and development.


                                     F-19

<PAGE>   
               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS



To the Stockholders and Directors
Advanced Viral Research Corp.
  (A Development Stage Company)
Hallandale, Florida

We have audited the accompanying consolidated balance sheet of Advanced Viral
Research Corp. (A Development Stage Company) as of December 31, 1997, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the two years ended December 31, 1997 and for the period from
inception (February 20, 1984) to December 31, 1997. These financial statements
are the responsibility of the management of the Company. Our responsibility is
to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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, 1997 and the
results of their operations and their cash flows for each of the two years in
the period ended December 31, 1997 and for the period from inception (February
20, 1984) to December 31, 1997 in conformity with generally accepted accounting
principles.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and is dependent upon the continued sale of its securities or
obtaining debt financing for funds to meet its cash requirements. These factors
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans with regard to these matters are 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

Miami, Florida
February 10, 1998
(except for the last paragraph
of Note 6, as to which the date
is March 19, 1998)

                                       F-20


<PAGE>   

                          ADVANCED VIRAL RESEARCH CORP.
                         (A Development Stage Company)

                           CONSOLIDATED BALANCE SHEET

                                DECEMBER 31, 1997



<TABLE>
<S>                                                                    <C>         
                                     ASSETS
Current Assets:
   Cash and cash equivalents                                           $    236,059
   Investments                                                            2,984,902
   Inventory                                                                 19,729
   Other current assets                                                      20,240
                                                                       ------------
         Total current assets                                             3,260,930

Property and Equipment                                                      485,661
Other Assets                                                                443,251
                                                                       ------------
         Total assets                                                  $  4,189,842
                                                                       ============

                      LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
   Accounts payable and accrued liabilities                            $    375,606
                                                                       ------------
         Total current liabilities                                          375,606
                                                                       ------------

Convertible Debenture, Net                                                2,384,793
                                                                       ------------

Commitments and Contingencies                                                    --

Stockholders' Equity:
   Common stock; 1,000,000,000 shares of $.00001 par value
      authorized, 277,962,574 shares issued and outstanding                   2,779
   Additional paid-in capital                                            10,512,767
   Subscription receivable                                                  (19,000)
   Deficit accumulated during the development stage                      (8,993,266)
   Deferred compensation cost                                               (73,837)
                                                                       ------------
         Total stockholders' equity                                       1,429,443
                                                                       ------------
         Total liabilities and stockholders' equity                    $  4,189,842
                                                                       ============

</TABLE>


                See notes to consolidated financial statements.


                                      F-21




<PAGE>   
                          ADVANCED VIRAL RESEARCH CORP.
                         (A Development Stage Company)

                      CONSOLIDATED STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
                                                                                        
                                                 Year Ended December 31,                Inception
                                                                                   (February 20, 1984)   
                                           ---------------------------------               to
                                                1997                1996            December 31, 1997    
                                           -------------       -------------       ------------------- 
<S>                                        <C>                 <C>                 <C>          

Revenues:
   Sales                                   $       2,278       $      24,111       $     194,319
   Interest                                      111,845              46,796             457,254
   Other income                                    7,800              32,000             119,800
                                           -------------       -------------       ------------- 
                                                 121,923             102,907             771,373
                                           -------------       -------------       ------------- 

Costs and Expenses:
   Research and development                      817,603             255,660           1,924,011
   General and administrative                  1,681,436             983,256           5,894,910
   Depreciation and amortization                 138,245              18,731             317,140
   Interest                                    1,626,368                  --           1,628,578
                                           -------------       -------------       ------------- 
                                               4,263,652           1,257,647           9,764,639
                                           -------------       -------------       ------------- 
Net Loss                                   $  (4,141,729)      $  (1,154,740)      $  (8,993,266)
                                           =============       =============       ============= 

Net Loss Per Common Share                  $        (.00)      $        (.00)
                                           =============       =============        
Weighted Average Number of
   Common Shares Outstanding                 274,534,277         257,645,815
                                           =============       =============                     

</TABLE>

                See notes to consolidated financial statements.


                                      F-22


<PAGE>   
 

                          ADVANCED VIRAL RESEARCH CORP.
                         (A Development Stage Company)

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

               INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 1997

<TABLE>
<CAPTION>
                                                                            Common Stock                               Deficit
                                                               ------------------------------------                  Accumulated
                                                                Amount                                 Additional     during the
                                                                  Per                                   Paid-In       Development
                                                                 Share        Shares         Amount     Capital          Stage
                                                              ----------   -----------     --------    ----------     ------------
<S>                                                             <C>          <C>           <C>       <C>           <C>
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                            $  .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                      .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              .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)
                                                                           -----------     --------    ---------      --------- 


</TABLE>

                See notes to consolidated financial statements.


                                      F-23

<PAGE>   

                          ADVANCED VIRAL RESEARCH CORP.
                         (A Development Stage Company)

           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY-(Continued)

               INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 1997


<TABLE>
<CAPTION>
                                                                      Common Stock                                Deficit
                                                         ------------------------------------                    Accumulated
                                                           Amount                                 Additional      during the
                                                            Per                                     Paid-In       Development
                                                           Share        Shares        Amount        Capital         Stage
                                                         ---------    -----------   ---------    -----------    -------------
<S>                                                        <C>       <C>             <C>          <C>            <C>         
Balance, December 31, 1986                                            154,666,014   $  1,547     $   307,534    $  (203,942)

   Issuance of common stock, exercise of "A" warrants      $ .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, period 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
      offer on "B" warrants                                  .05        6,729,850         67         336,475             --
   Issuance of common stock, exercise of "B" warrants        .05          268,500          3          13,422             --
   Issuance of common stock, exercise of "C" warrants        .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)
                                                                      -----------      -----       ---------     ---------- 

</TABLE>


                See notes to consolidated financial statements.


                                      F-24


<PAGE>   

                          ADVANCED VIRAL RESEARCH CORP.
                         (A Development Stage Company)

           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY-(Continued)

               INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 1997


<TABLE>
<CAPTION>

                                                                     Common Stock                               Deficit
                                                         -----------------------------------                   Accumulated
                                                           Amount                               Additional      during the
                                                            Per                                   Paid-In       Development
                                                           Share       Shares        Amount       Capital         Stage
                                                         ---------   -----------   ---------   -----------    -------------
<S>                                                        <C>      <C>            <C>         <C>            <C>         
Balance, December 31, 1990                                           200,299,882   $  2,003     $  1,845,992    $ (1,200,915)

   Issuance of common stock, exercise of "B" warrants     $ .05           11,400         --              420              --
   Issuance of common stock, exercise of "C" warrants       .08            2,500         --              200              --
   Issuance of common stock, 
      exercise of underwriters warrants                     .012       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                    .0405     10,000,000        100          404,900              --
   Issuance of common stock, for consulting services        .055         500,000          5           27,495              --
   Issuance of common stock, exercise of "B" warrants       .05        7,458,989         75          372,875              --
   Issuance of common stock, exercise of "C" warrants       .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        .055         500,000          5           27,495              --
   Issuance of common stock, for consulting services        .03        3,500,000         35          104,965              --
   Issuance of common stock, for testing                    .035       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)
                                                                    ------------   --------     ------------    ------------ 

</TABLE>

                See notes to consolidated financial statements.


                                      F-25
<PAGE>   

                          ADVANCED VIRAL RESEARCH CORP.
                         (A Development Stage Company)

           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY-(Continued)

               INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 1997


<TABLE>
<CAPTION>
                                                 Common Stock                                            Deficit
                                  ----------------------------------                                  Accumulated
                                   Amount                                  Additional                  during the      Deferred
                                    Per                                     Paid-In    Subscription    Development  Compensation
                                   Share       Shares         Amount        Capital     Receivable       Stage          Cost
                                  -------   -----------      -------      -----------  ------------  ------------   -----------
<S>                               <C>       <C>              <C>          <C>              <C>        <C>           <C>     
Balance, December 31, 1993                  236,276,991      $ 2,363      $ 3,416,070      $  --      $ (2,854,076)     $   --

   Issuance of common stock,
     for consulting services      $   .05     4,750,000           47          237,453         --               --           --
   Issuance of common stock,
     exercise of options              .08       400,000            4           31,996         --               --           --
   Issuance of common stock,
     exercise of options              .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              .05     3,333,333           33          166,633         --               --           --
   Issuance of common stock,
     exercise of options              .08     2,092,850           21          167,407         --               --           --
   Issuance of common stock,
     exercise of options              .10     2,688,600           27          268,833         --               --           --
   Issuance of common stock,
     for consulting services          .11     1,150,000           12          126,488         --               --           --
   Issuance of common stock,
     for consulting services          .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)          -- 
                                            -----------      -------      -----------      -----       -----------      ------
                                                             
</TABLE>



                See notes to consolidated financial statements.


                                      F-26

<PAGE>   
                          ADVANCED VIRAL RESEARCH CORP.
                         (A Development Stage Company)

           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY~(Continued)

               INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 1997

<TABLE>
<CAPTION>
                                                            Common Stock                                 Deficit
                                  ------------------------------------------------------------------  Accumulated
                                   Amount                                  Additional                  during the      Deferred
                                    Per                                     Paid-In    Subscription    Development  Compensation
                                   Share       Shares         Amount        Capital     Receivable       Stage          Cost
                                  -------   -----------      -------      -----------  ------------  ------------   -----------
<S>                               <C>       <C>              <C>          <C>              <C>        <C>           <C>     

Balance, December 31, 1995                  251,181,774   $     2,512    $ 4,475,875   $        --     $ (3,696,797)   $      --
   Issuance of common stock,
     exercise of options              .05     3,333,334            33        166,634            --              --            --
   Issuance of common stock,
     exercise of options              .08     1,158,850            12         92,696            --              --            --
   Issuance of common stock,
     exercise of options              .10     7,163,600            72        716,288            --              --            --
   Issuance of common stock,
     exercise of options              .11       170,000             2         18,698            --              --            --
   Issuance of common stock,
     exercise of options              .12     1,300,000            13        155,987            --              --            --
   Issuance of common stock,
     exercise of options              .18     1,400,000            14        251,986            --              --            --
   Issuance of common stock,
     exercise of options              .19       500,000             5         94,995            --              --            --
   Issuance of common stock,
     exercise of options              .20       473,500             5         94,695            --              --            --
   Issuance of common stock,
     for services rendered            .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         2,671      7,003,351       (19,000)     (4,851,537)     (473,159)
                                            -----------   -----------    -----------   -----------     ------------    ---------

</TABLE>



                See notes to consolidated financial statements.


                                      F-27

<PAGE>   

                          ADVANCED VIRAL RESEARCH CORP.
                         (A Development Stage Company)

           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY~(Continued)

               INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 1997


<TABLE>
<CAPTION>
                                                            Common Stock                                 Deficit
                                  ------------------------------------------------------------------  Accumulated
                                   Amount                                  Additional                  during the      Deferred
                                    Per                                     Paid-In    Subscription    Development  Compensation
                                   Share       Shares         Amount        Capital     Receivable       Stage          Cost
                                  -------   -----------      -------      -----------  ------------  ------------   -----------
<S>                               <C>       <C>              <C>          <C>           <C>          <C>           <C>     

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               .08      3,333,333          33        247,633            --             --           --
   Issuance of common stock,
     conversion of debt                .20      1,648,352          16        329,984            --             --           --
   Issuance of common stock,
     conversion of debt                .15        894,526           9        133,991            --             --           --
   Issuance of common stock,
     conversion of debt                .12      2,323,580          23        269,977            --             --           --
   Issuance of common stock,
     conversion of debt                .15      1,809,524          18        265,982            --             --           --
   Issuance of common stock,
     conversion of debt                .16        772,201           8        119,992            --             --           --
   Issuance of common stock,
     for services rendered             .41         50,000          --         20,500            --             --           --
   Issuance of common stock,
     for services rendered             .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)
                                              ===========    ========    ===========   ===========    ===========   ==========

</TABLE>




                See notes to consolidated financial statements.


                                      F-28

<PAGE>   

                          ADVANCED VIRAL RESEARCH CORP.
                         (A Development Stage Company)

                      CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                                                         Inception
                                                                                                       (February 20,
                                                                       Year Ended December 31,            1984) to
                                                                    -----------------------------       December 31,
                                                                        1997             1996               1997
                                                                    -----------       -----------       -----------
<S>                                                                 <C>               <C>               <C>         
Cash Flows from Operating Activities:
   Net loss                                                         $(4,141,729)      $(1,154,740)      $(8,993,266)
                                                                    -----------       -----------       -----------
   Adjustments to reconcile net loss to
     net cash used in operating activities:
         Depreciation and amortization                                  138,245            18,731           317,140
         Amortization of deferred interest cost on beneficial
            conversion feature of convertible debenture               1,552,842                --         1,552,842
         Amortization of deferred compensation cost                     399,322           287,341           686,663
         Loss on sale of property and equipment                           1,425                --             1,425
         Issuance of common stock for services                           44,500           175,000         1,416,500
         Imputed interest on convertible debenture                        4,768                --             4,768
         Increase in other current assets                                (4,159)           (3,114)          (20,240)
         Increase in inventory                                               --            (1,638)          (19,729)
         Increase in other assets                                      (496,126)          (27,085)         (529,670)
         Increase in accounts payable and accrued liabilities           328,932            39,823           381,806
         Decrease in customer deposits                                   (7,800)               --            (7,800)
                                                                    -----------       -----------       -----------
               Total adjustments                                      1,961,949           489,058         3,783,705
                                                                    -----------       -----------       -----------
               Net cash used in operating activities                 (2,179,780)         (665,682)       (5,209,561)
                                                                    -----------       -----------       -----------

Cash Flows from Investing Activities:
   Purchase of investments                                           (3,651,676)       (1,247,256)       (5,377,932)
   Proceeds from sale of investments                                  2,045,615           347,415         2,393,030
   Expenditures for property and equipment                             (307,362)          (11,446)         (691,866)
   Proceeds from sale of property and equipment                           1,200                --             1,200
                                                                    -----------       -----------       -----------
               Net cash used in investing activities                 (1,912,223)         (911,287)       (3,675,568)
                                                                    -----------       -----------       -----------
Cash Flows from Financing Activities:
   Proceeds from issuance of convertible debt                         4,000,000                --         4,000,000
   Proceeds from sale of securities, net of issuance costs              266,666         1,573,135         5,121,188
                                                                    -----------       -----------       -----------
               Net cash provided by financing activities              4,266,666         1,573,135         9,121,188
                                                                    -----------       -----------       -----------

Net Increase (Decrease) in Cash and Cash Equivalents                    174,663            (3,834)          236,059

Cash and Cash Equivalents, Beginning                                     61,396            65,230                -- 
                                                                    -----------       -----------       -----------
Cash and Cash Equivalents, Ending                                   $   236,059       $    61,396       $   236,059
                                                                    ===========       ===========       ===========

Supplemental Disclosure of Non-Cash Financing Activities:
   Options granted accounted for as deferred compensation cost      $        --       $   760,500
                                                                    ===========       ===========


</TABLE>



               See notes to consolidated financial statements.


                                      F-29

<PAGE>   
                          ADVANCED VIRAL RESEARCH CORP.
                          (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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
             named RETICULOSE. While the Company has had limited sales of this
             product, primarily for research purposes, the success of the
             Company will be dependent upon obtaining certain regulatory
             approval for its pharmaceutical product, RETICULOSE, to commence
             commercial operations. The Company was in the development stage at
             December 31, 1997.

         PRINCIPLES OF CONSOLIDATION

             The consolidated financial statements include the accounts of the
             Company and its 99.6% owned subsidiary, Advance Viral Research
             (LTD), a Bahamian Corporation. All significant intercompany
             accounts have been eliminated.

         CASH AND CASH EQUIVALENTS

             Cash equivalents consist of highly liquid investments, with
             original maturities of three months or less.

         INVESTMENTS

             Investments consist of certificates of deposit with maturities
             greater than three months, carried at cost which is market value,
             U.S. Government securities and discount notes and U.S. Treasury
             Bills. The U.S. Government securities, notes and treasury bills are
             classified as "held to maturity" and are carried at amortized cost
             which approximates market value.

         PROPERTY AND EQUIPMENT

             Property and equipment are recorded at cost and depreciated 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.

         RESEARCH AND DEVELOPMENT

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

         DEFERRED COMPENSATION COST

             Deferred compensation costs are recognized based on the fair value
             for non-employee stock options. Compensation cost is amortized over
             the life of the option period which is either shorter than or
             essentially equivalent to the period for which the services are to
             be provided. Compensation expense is classified as general and
             administrative.

                                      F-30


<PAGE>   


                          ADVANCED VIRAL RESEARCH CORP.

                          (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)



NOTE 1.           SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

         REVENUE RECOGNITION

             The only sales generated by the Company have been sales of
             RETICULOSE for testing purposes. Sales are recorded by the Company
             when such test products are shipped to customers.

         RECLASSIFICATIONS

             Certain amounts in the 1996 financial statements have been
             reclassified to conform to 1997 presentation.

         USE OF ESTIMATES

             The preparation of financial statements in conformity with
             generally accepted accounting principles 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.

NOTE 2.           BASIS OF PRESENTATION

         The accompanying consolidated financial statements have been prepared
         in conformity with generally accepted accounting principles which
         contemplate the continuance of the Company as a going concern. The
         Company has suffered losses from operations during its operating
         history. The Company is dependent upon registration of RETICULOSE for
         sale before it can begin commercial operations. The Company's cash
         position may be inadequate to pay all the costs associated with the
         full range of testing and clinical trials required by the FDA.
         Management does not anticipate registration or other approval of
         RETICULOSE in the near future in the United States. Unless and until
         RETICULOSE is approved for sale in the United States or another
         industrially developed country, the Company may be dependent upon the
         continued sale of its securities for funds to meet its cash
         requirements. Management intends to continue to sell the Company's
         securities in an attempt to mitigate the effects of its cash position;
         however, no assurance can be given that such equity financing, if and
         when required, will be available. In the event that such equity
         financing is not available, in order to continue operations, management
         anticipates that they will have to defer their salaries. During 1997,
         the Company obtained debt financing and may seek additional debt
         financing if the need arises. No assurance can be given that the
         Company will be able to sustain its operations until FDA approval is
         granted or that any approval will ever be granted. These factors raise
         substantial doubt about the Company's ability to continue as a going
         concern. The consolidated financial statements do not include any
         adjustments relating to the recoverability and classification of
         recorded assets and classification of liabilities that might be
         necessary should the Company be unable to continue in existence.

                                      F-31


<PAGE>   


                          ADVANCED VIRAL RESEARCH CORP.

                          (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


NOTE 3.            ACQUISITION

         Two of the principal stockholders of the Company acquired LTD, a
         Bahamian Corporation with pharmaceutical manufacturing and warehousing
         facilities, on February 20, 1984. The acquisition is a combination of
         two entities under common control and has been accounted for in a
         manner similar to a pooling of interests. In 1986, the Company acquired
         from LTD exclusive rights to manufacture and market RETICULOSE
         worldwide, except within the Bahamas, for $50,000. The Company also
         purchased inventory of RETICULOSE from LTD for $45,000 and was
         obligated to pay $3 per ampule of RETICULOSE for the initial 100,000
         ampules purchased and $2 per ampule for purchases exceeding 100,000
         ampules. On December 16, 1987, the Company acquired the controlling
         beneficial interest in 99.6% of the common stock of LTD through an
         appropriate trust agreement to satisfy the rules of the Bahamian
         Government, from two of the principal stockholders of the Company at a
         cost of $46,000. Both stockholders concurrently canceled $86,565 of
         indebtedness due them from LTD.

NOTE 4.            INVESTMENTS
 
<TABLE>
<CAPTION>
                                                                       December 31,
                                                                          1997
                                                                       ------------
<S>                                                                    <C>       
            Certificates of deposit                                    $  758,000
            Held to maturity:
               U.S. Government securities (matures February 1998)       2,226,902
                                                                       ----------
                                                                       $2,984,902
                                                                       ==========

</TABLE>

NOTE 5.           PROPERTY AND EQUIPMENT

<TABLE>
<CAPTION>
                                                                  
                                                      Estimated        
                                                     Useful Lives      December 31,
                                                       (Years)              1997
                                                    -------------     --------------
<S>                                                       <C>          <C>          
          Land and improvements                           15           $      34,550
          Building and improvements                       30                 299,550
          Machinery and equipment                          5                 354,250
                                                                       -------------
                                                                             688,350
          Less accumulated depreciation                                      202,689
                                                                       -------------
                                                                       $     485,661
                                                                       =============

</TABLE>


         The Company maintains certain property and equipment in Freeport,
         Bahamas. This property and equipment amounted to $370,028 as of
         December 31, 1997 including $17,623 expended in 1987 to purchase a land
         lease expiring in 2068. These amounts are included above.

                                      F-32


<PAGE>   


                          ADVANCED VIRAL RESEARCH CORP.

                          (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

NOTE 6.           CONVERTIBLE DEBENTURES

         On February 21, 1997, in order to finance research and development, the
         Company sold $1,000,000 principal amount of its ten-year 7% Convertible
         Debenture (the "February Debenture") due February 28, 2007, to RBB Bank
         Aktiengesellschaft ("RBB"). Accrued interest under the February
         Debenture is payable semi-annually, computed at the rate of 7% per
         annum on the unpaid principal balance from February 21, 1997 until the
         date of interest payment. The February Debenture may be prepaid by the
         Company before maturity, in whole or in part, without premium or
         penalty, if the Company gives the holder of the Debenture notice not
         less than 30 days before the date fixed for prepayment in that notice.
         The February Debenture is convertible, at the option of the holder,
         into shares of common stock.

         The assured incremental yield on the February Debenture was measured
         based on the date of issuance of the security and amortized to interest
         expense over the conversion period which ended on May 29, 1997 which
         was the first date full conversion could occur. The interest expense
         relating to this measurement was $4,768.

         During the quarter ended June 30, 1997, RBB exercised its right to
         convert $330,000 of the principal amount of the February Debenture into
         1,648,352 shares of the Company's common stock at a conversion price of
         $.2002 per share and to convert $134,000 of the principal amount of the
         debenture into 894,526 shares of the Company's common stock at a
         conversion price of $.1498.

         During the quarter ended September 30, 1997, RBB exercised its right to
         convert $270,000 of the principal amount of the February Debenture into
         2,323,580 shares of the Company's common stock at a conversion price of
         $.1162 per share and to convert $266,000 of the principal amount of the
         debenture into 1,809,524 shares of the Company's common stock at a
         conversion price of $.1470 per share.

         In connection with the issuance of the February Debenture, the Company
         issued to RBB three warrants (the "February warrants") to purchase
         common stock, each such February warrant entitling the holder to
         purchase, from February 21, 1997 through February 28, 2007, 178,378
         shares of common stock. The exercise price of the three February
         warrants are $0.288, $0.576 and $0.864 per warrant share, respectively.
         The fair value of the February warrants was estimated to be $37,000
         ($.021 per warrant) based upon a financial analysis of the terms of the
         warrants using the Black Sholes Pricing Model. This amount has been
         reflected in the accompanying financial statements as interest expense
         related to the convertible debenture.

         Based on the terms for conversion associated with the February
         Debenture, there is an intrinsic value associated with the beneficial
         conversion feature of $413,793. This amount has been fully amortized to
         interest expense with a corresponding credit to additional paid-in
         capital.

                                      F-33


<PAGE>   


                          ADVANCED VIRAL RESEARCH CORP.

                          (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


NOTE 6.           CONVERTIBLE DEBENTURES (Continued)

         In October 1997, in order to finance further research and development,
         the Company sold $3,000,000 principal amount of its ten-year 7%
         Convertible Debenture (the "October Debenture") due August 30, 2007, to
         RBB. Accrued interest under the October Debenture is payable
         semi-annually, computed at the rate of 7% per annum on the unpaid
         principal balance from the date of the issuance of the October
         Debenture until the date of interest payment. The October Debenture may
         be prepaid by the Company before maturity, in whole or in part, without
         premium or penalty, if the Company gives the holder of the Debenture
         notice not less than 30 days before the date fixed for prepayment in
         that notice . The October Debenture is convertible, at the option of
         the holder, into shares of common stock.

         During the quarter ended December 31, 1997, RBB exercised its right to
         convert $120,000 of the principal amount of the October Debenture into
         772,201 shares of the Company's common stock at a conversion price of
         $.1554 per share.

         In connection with the issuance of the October Debenture, the Company
         issued to RBB three warrants (the "October warrants") to purchase
         Common Stock, each such October warrant entitling the holder to
         purchase, from the date of grant through August 30, 2007, 600,000
         shares of the Common Stock. The exercise price of the three October
         warrants are $0.20 , $0.23 and $0.27 per warrant share, respectively.
         The fair value of the three October warrants was established to be
         $106,571 ($.178 per warrant), $97,912 ($.163 per warrant) and $87,472
         ($.146 per warrant), respectively, based upon a financial analysis of
         the terms of the warrants using the Black Sholes Pricing Model. This
         amount has been reflected in the accompanying financial statements as a
         discount on the convertible debenture, with a corresponding credit to
         additional paid-in capital, and is being amortized to interest expense
         over the expected term of the notes which at December 31, 1997 was 120
         months.

         Based on the terms for conversion associated with the October
         Debenture, there is an intrinsic value associated with the beneficial
         conversion feature of $1,350,000. This amount has been treated as
         deferred interest expense and recorded as a reduction of the
         convertible debenture liability with a corresponding credit to
         additional paid-in capital and is being amortized to interest expense
         over the period from October 8, 1997 (date of debenture) to February
         24, 1998 (date the debenture is fully convertible). The interest
         expense relative to this item was $1,139,049 for 1997.

            Unpaid principal balance of October debenture        $2,880,000
            Less unamortized discount and deferred interest         495,207
                                                                 ----------
            Convertible debenture, net                           $2,384,793
                                                                 ==========

         During January 1998, RBB exercised its right to convert $133,000 and
         $341,250 of the principal amount of the October debenture into
         1,016,043 and 2,512,887 shares of the Company's common stock at a
         conversion price of $.1309 and $.1358 per share, respectively.

         On February 26, 1998 and March 19, 1998, RBB exercised its right to
         convert $750,000 and $335,750 of the principal amount of the October
         Debenture into 5,114,175 and 1,498,884 shares of the Company's common
         stock at a conversion price of $.14665 and $.224 per share,
         respectively.

                                      F-34


<PAGE>   


                          ADVANCED VIRAL RESEARCH CORP.

                          (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


NOTE 7.           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 RETICULOSE in an amount equal to 5% of net
             sales in the United States and 4% of net sales in foreign
             countries. The Company has not as yet received any notice of claim
             from such parties.

         PRODUCT LIABILITY

             The Company could be subjected to claims for adverse reactions
             resulting from the use of RETICULOSE. Although the Company is
             unaware of any such claims or threatened claims since RETICULOSE
             was initially marketed in the 1940's, one study noted adverse
             reactions from highly concentrated doses in guinea pigs. 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 RETICULOSE. As of the date
             hereof, the Company does not have product liability insurance for
             RETICULOSE. There can be no assurance that the Company will be able
             to secure such insurance in adequate amounts, at reasonable
             premiums. Should the Company be unable to secure such product
             liability insurance, the risk of loss to the Company in the event
             of claims would be greatly increased and could materially adversely
             affect the Company.

         LACK OF PATENT PROTECTION

             The Company does not presently have a patent for RETICULOSE but the
             Company is currently applying for patents for RETICULOSE as a
             treatment for certain diseases. 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 the Company will obtain such patents or if obtained
             that they will be enforceable.

         LEASE COMMITMENTS

             Management executed a non-cancelable lease for new office space in
             Florida on January 1, 1996, expiring on December 31, 1998 at
             approximately $14,000 annually.

             Management executed a non-cancelable lease for new office and
             laboratory space in Yonkers, New York on April 18, 1997, expiring
             on April 30, 2002 at approximately $85,500 annually.

             The Company leased an auto on October 26, 1996 for 36 months at
             $450 per month.

             Lease expense for the years ended December 31, 1997 and 1996
             totaled $76,351 and $13,315, respectively.



                                      F-35


<PAGE>   


                          ADVANCED VIRAL RESEARCH CORP.

                          (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)



NOTE 7.           COMMITMENTS AND CONTINGENCIES (Continued)

         GENERAL (Continued)

         LEASE COMMITMENTS (Continued)

             Future minimum lease payments are as follows:

             Year ending December 31:
                  1998                                    $104,400
                  1999                                      89,500
                  2000                                      85,000
                  2001                                      85,000
                  2002                                      28,000
                                                          -------- 
                                                          $391,900
                                                          ======== 

         TESTING AGREEMENTS

         PLATA PARTNERS LIMITED PARTNERSHIP

             On March 20, 1992, the Company entered into an agreement with Plata
             Partners Limited Partnership ("Plata") pursuant to which Plata
             agreed to perform a demonstration in the Domincan Republic in
             accordance with a certain agreed upon protocol (the "Protocol") to
             assess the efficacy of a treatment using RETICULOSE incorporated in
             the Protocol against AIDS (the "Plata Agreement"). Plata covered
             all costs and expenses associated with the demonstration.

             Pursuant to the Plata Agreement, the Company authorized the
             issuance to Plata of 5,000,000 shares of common stock and options
             to purchase an additional 5,000,000 shares at $.08 per share
             through July 9, 1994 (the "Plata Options") and 5,000,000 shares at
             $.10 per share through July 9, 1994 (the "Additional Plata
             Options"). Pursuant to several amendments, the Plata Options and
             the Additional Plata Options are exercisable through April 30, 1998
             at an exercise price of $.12 and $.14, respectively. As of December
             31, 1997, there are outstanding Plata Options to acquire 813,000
             shares at $.12 per share and Additional Plata Options to acquire
             858,100 shares at an exercise price of $.14 per share. Through
             December 31, 1997, the Company has received approximately $670,000
             pursuant to the issuance of approximately 7.7 million shares in
             connection with the exercise of the Plata Options and the
             Additional Plata Options.

         TESTING AGREEMENTS (Continued)

         TRM MANAGEMENT CORP. ("TRM")

             In August 1991, the Company entered into an agreement with TRM,
             whereby TRM would perform certain open human clinical trial tests
             in Haiti using RETICULOSE (the "TRM Agreement"). According to the
             TRM Agreement, the purpose of the Haiti tests was to assess the
             effectiveness of RETICULOSE against the Hepatitis "A" virus and
             Hepatitis "B" virus in accordance with and in compliance with a
             certain Hepatitis Open Label Clinical Trial Protocol developed by
             TRM. At the conclusion of the Haiti tests, TRM was required to
             prepare a paper


                                      F-36


<PAGE>   


                          ADVANCED VIRAL RESEARCH CORP.

                          (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


NOTE 7.           COMMITMENTS AND CONTINGENCIES (Continued)

         TESTING AGREEMENTS (Continued)

         TRM MANAGEMENT CORP. ("TRM") (Continued)

             describing the methods and results of testing, the form and
             substance of which shall be appropriate for publication by
             recognized scientific journals ("Results Paper"). The Results Paper
             was published in the December 1992 issue of the Journal of the
             Royal Society of Health.

             On January 3, 1992, TRM delivered to the Company the Results Paper.
             In accordance with the terms of the TRM Agreement, the Company has
             authorized the issuance to the shareholders and certain associated
             persons of TRM (1) an aggregate amount of 10,000,000 shares of the
             Company's common stock (the "TRM Shares") and (2) an option to
             acquire, at any time, for a period of five years from the date of
             issuance of the option, 10,000,000 shares of the Company's common
             stock at a purchase price of $.05 and $.08 per share (the "TRM
             Options"). As of December 31, 1997, 10,000,000 shares of common
             stock were issued pursuant to the exercise of the TRM Options for
             an aggregate exercise price of $600,000.

         ARGENTINE AGREEMENT

             In April 1996, the Company entered into an agreement (the
             "Argentine Agreement") with DCT SRL, an Argentine corporation
             unaffiliated with the Company ("DCT") pursuant to which DCT was to
             cause a clinical trial to be conducted in two separate hospitals
             located in Buenos Aires, Argentina (the "Clinical Trials").
             Pursuant to the Argentine Agreement, the Clinical Trials were to be
             conducted pursuant to a protocol developed by Juan Carlos Flichman,
             M.D. and the purpose of the Clinical Trials was to assess the
             efficacy of the Company's drug RETICULOSE on the Human Papilloma
             Virus (HPV). The protocol calls for, among other things, a study to
             be performed with clinical and laboratory follow-up on 12 male and
             female human patients between the ages of 18 and 50. The Clinical
             Trials did not include a placebo control group or references to any
             other antiviral drug.

             Pursuant to the Argentine Agreement, the Company delivered $34,000
             to DCT to cover out-of-pocket expenses associated with the Clinical
             Trials. The Argentine Agreement further provides that at the
             conclusion of the Clinical Trials, DCT shall cause Dr. Flichman to
             prepare and deliver a written report to the Company regarding the
             methodology and results of the Clinical Trials (the "Written
             Report"). In September 1996, the Written Report was delivered by
             Dr. Flichman to the Company. Upon delivery of the Written Report to
             the Company, the Company delivered to the principals of DCT options
             to acquire 2,000,000 shares of the Company's common stock for a
             period of one year from the date of the delivery of the Written
             Report, at a purchase price of $.20 per share. As of December 31,
             1997, 473,500 shares of common stock were issued pursuant to the
             exercise of these options for an aggregate exercise price of
             approximately $95,000.

                                      F-37


<PAGE>   



                          ADVANCED VIRAL RESEARCH CORP.

                          (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)



NOTE 7.           COMMITMENTS AND CONTINGENCIES (Continued)

         TESTING AGREEMENTS (Continued)

         ARGENTINE AGREEMENT (Continued)

             In April 1996, DCT SRL and the Company entered into an exclusive
             distribution agreement whereby the Company granted to DCT, subject
             to certain conditions, the exclusive right to market and sell
             RETICULOSE in Argentina, Bolivia, Paraguay, Uruguay, Brazil, and
             Chile (the "DCT Exclusive Distribution Agreement").

             In June 1997, the Company entered into an agreement with DCT (the
             HIV-HPV Agreement") whereby the Company agreed to provide to DCT or
             its assignees, up to $600,000 to cover the costs of a double blind
             placebo controlled study in approximately 150 patients to assess
             the efficacy of RETICULOSE for the treatment of persons diagnosed
             with the HIV virus (AIDS) and HPV (the "HIV-HPV Study").

             In connection with the HIV-HPV Agreement, the Company has advanced
             approximately $410,000 which is accounted for as a research and
             development expense. The amounts have been used to cover expenses
             associated with clinical activities of the HIV-HPV Study.

             The HIV-HPV Agreement provides that (i) in the event the date from
             the HIV-HPV Study is used in connection with RETICULOSE being
             approved for commercial sale anywhere within the territory granted
             under the DCT Exclusive Distribution Agreement or (ii) DCT receives
             financing to cover the costs of the HIV-HPV Study, then DCT is
             obligated to reimburse the Company for all amounts expended in
             connection with the HIV-HPV Study.

             In October 1997, the Company entered into two agreements with DCT,
             whereby the Company agreed to provide DCT or its assignees, up to
             $220,000 and $341,000 to cover the costs of double blind placebo
             controlled studies in approximately 360 and 240 patients,
             respectively to assess the efficacy of the topical application of
             RETICULOSE for the treatment of persons diagnosed with Herpes
             Labialis/Genital Infections (the "Herpes Study") and HPV (the "HPV
             Topical Study").

             In connection with the Herpes Study and the HPV Topical Study
             (collectively, the "Studies"), the Company has advanced
             approximately $49,000 and $88,000, respectively such expenses are
             accounted for a research and development expenses. The amounts
             expended have been used to cover expenses associated with
             pre-clinical activities. Neither the Herpes Study nor the HPV
             Topical Study has commenced.

             Both Agreements with DCT provide that (i) in the event the data
             from the Studies are used in connection with RETICULOSE being
             approved for commercial sale anywhere within the territory granted
             under the DCT Exclusive Distribution Agreement or (ii), DCT
             receives financing to cover the costs of the Studies, then DCT is
             obligated to reimburse the Company for all amounts respectively
             expended in connection with the Studies.

                                      F-38


<PAGE>   


                          ADVANCED VIRAL RESEARCH CORP.

                          (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)



NOTE 7.           COMMITMENTS AND CONTINGENCIES (Continued)

         TESTING AGREEMENTS (Continued)

         BARBADOS STUDY

             A double blind study assessing the efficacy of the Company's drug
             RETICULOSE in 43 human patients diagnosed with HIV (AIDS) is being
             conducted at the Queen Elizabeth Hospital, Bridgetown, Barbados
             (the "Barbados Study"). As of December 31, 1997, the Company has
             expended approximately $345,000 to cover the costs of the Barbados
             Study. Based on information received from the coordinators of the
             Barbados Study, the Company is uncertain as to the costs to be
             incurred in connection with the Barbados Study and has not been
             informed as to when results from the Barbados Study will be
             forthcoming. In December 1996, the Company received from the
             coordinators of the Barbados Study, a written summary of
             preliminary results of the Barbados Study (the "Written Summary").

         NATIONAL CANCER INSTITUTE AGREEMENT

             In March 1997, the Company entered into a Material Transfer
             Agreement - Cooperative Research and Development Agreement with the
             National Cancer Institute ("NCI") of the National Institutes of
             Health. Under the terms of the Agreement, NCI researchers and the
             Company will collaborate to elucidate the molecular mechanism by
             which RETICULOSE affects the transcription of the gamma interferon
             gene.

         TOPICAL SAFETY STUDY

             In October 1997, the Company advanced $75,000 towards a total of
             $150,000 for a topical safety study to be conducted in the United
             States for the topical use of RETICULOSE for the treatment of HPV
             and Herpes.

         CONSULTING 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.

                                      F-39


<PAGE>   


                          ADVANCED VIRAL RESEARCH CORP.

                          (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


NOTE 7.           COMMITMENTS AND CONTINGENCIES (Continued)

         CONSULTING AGREEMENTS (Continued)

         HIRSCHMAN AGREEMENT (Continued)

             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 $.18 per
             share. In addition and in connection with entering into the
             consulting agreement with Dr. Hirschman, the Company issued to a
             person unaffiliated with the Company, 100,000 shares of the
             Company's common stock, and an option to acquire for a period of
             one year, from June 1, 1995, an additional 500,000 shares at a
             purchase price of $.18 per share. As of December 31, 1997, 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 March 23, 1999 at an
             exercise price of $.19 per share, of which options to acquire
             500,000 shares were assigned by Dr. Hirschman to Richard Rubin,
             consultant to Dr. Hirschman; (ii) options to purchase 5,000,000
             shares exercisable at any time and from time to time commencing
             March 24, 1997 and ending March 23, 1999 at an exercise price of
             $.27 per share, of which options to acquire 500,000 shares were
             assigned by Dr. Hirschman to Richard Rubin, consultant to Dr.
             Hirschman; and (iii) options to purchase 5,000,000 shares
             exercisable at any time and from time to time commencing March 24,
             1998 and ending March 23, 1999 at an exercise price of $.36 per
             share, of which options to acquire 500,000 shares were assigned by
             Dr. Hirschman to Richard Rubin, consultant to Dr. Hirschman. 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. As of December 31, 1997, 500,000 shares of common stock
             were issued pursuant to the exercise of stock options by Richard
             Rubin. Mr. Rubin has, from time to time in the past, advised the
             Company on matters unrelated to his consultation with Dr.
             Hirschman.

             In November 1997, Dr. Hirschman assigned to Henry Kamioner, a
             consultant to Dr. Hirschman, options to acquire 1,500,000 shares
             (500,000 at $.19, 500,000 at $.27 and 500,000 at $.36).

                                      F-40


<PAGE>   


                          ADVANCED VIRAL RESEARCH CORP.

                          (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)



NOTE 7.           COMMITMENTS AND CONTINGENCIES (Continued)

         CONSULTING AGREEMENTS (Continued)

         HIRSCHMAN AGREEMENT (Continued)

             On October 14, 1996, the Company and Dr. Hirschman entered into an
             agreement (the "Employment Agreement") whereby Dr. Hirschman has
             agreed to serve as the President and Chief Executive Officer of the
             Company for a period of three years, subject to earlier termination
             by either party, either for cause as defined in and in accordance
             with the provisions of the Employment Agreement, or if the Company
             does not receive on or prior to December 31, 1997, funding of
             $3,000,000 from sources other than traditional institutional/bank
             debt financing or proceeds from the purchase by Dr. Hirschman of
             the Company's securities, including, without limitation, the
             exercise of Dr. Hirschman of outstanding stock options. Pursuant to
             the Employment Agreement, Dr. Hirschman is entitled to receive an
             annual base salary of $325,000, use of an automobile, major
             medical, term life, disability and dental insurance benefits for
             the term of his employment. The Employment Agreement further
             provides that Dr. Hirschman shall be nominated by the Company to
             serve as a member of the Company's Board of Directors and that
             Bernard Friedland and William Bregman will vote in favor of Dr.
             Hirschman as a director of the Company, for the duration of Dr.
             Hirschman's employment, and since October 1996, Dr. Hirschman has
             served as a member of the Company's Board of Directors.

             On February 18, 1998, the Board of Directors authorized a $100,000
             bonus and granted options to acquire 23,000,000 shares of common
             stock at $.27 per option share provided that the Company is granted
             FDA approval for testing RETICULOSE in the United States.

         COHEN AGREEMENTS

             In September 1992, the Company entered into a one year consulting
             agreement with Leonard Cohen (the "September 1992 Cohen
             Agreement"). The September 1992 Cohen Agreement required that Mr.
             Cohen provide certain consulting services to the Company in
             exchange for the Company's issuing to Mr. Cohen 1,000,000 shares of
             common stock (the "September 1992 Cohen Shares"), 500,000 of which
             were issuable upon execution of the September 1992 Cohen Agreement
             and the remaining 500,000 shares of which were issuable upon Mr.
             Cohen completing 50 hours of consulting service to the Company. The
             Company issued the first 500,000 shares to Mr. Cohen in October
             1992 and the remaining 500,000 shares to Mr. Cohen in February
             1993. Further pursuant to the September 1992 Cohen Agreement, the
             Company granted to Mr. Cohen the option to acquire, at any time and
             from time to time through September 10, 1993 (which date has been
             extended through April 30, 1998), the option to acquire 3,000,000
             shares of common stock of the Company at an exercise price of $.09
             per share (which exercise price has been increased to $.13 per
             share) (the "September 1992 Cohen Options"). As of December 31,
             1997, 1,300,000 of the September 1992 Cohen Options have been
             exercised for cash consideration of $156,000.

                                      F-41


<PAGE>   


                          ADVANCED VIRAL RESEARCH CORP.

                          (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)



NOTE 7.           COMMITMENTS AND CONTINGENCIES (Continued)

         CONSULTING AGREEMENTS (Continued)

         COHEN AGREEMENTS (Continued)

             In February 1993, the Company entered into a second consulting
             agreement with Mr. Cohen (the "February 1993 Cohen Agreement") for
             a three year term commencing on March 1, 1993. The February 1993
             Cohen Agreement provides that Mr. Cohen provide financing business
             consulting services concerning the operations of the business of
             the Company and possible strategic transactions in exchange for the
             Company issuing to Mr. Cohen 3,500,000 shares of common stock (the
             "February 1993 Cohen Shares"), 1,500,000 shares of which Mr. Cohen
             has informed the Company he has assigned to certain other persons
             not affiliated with the Company or any of its officers or
             directors.

             In July 1994, in consideration for services related to the
             introduction, negotiation and execution of a distribution agreement
             the Company issued: (i) to Mr. Cohen, an additional 2,500,000
             shares (the "April 1994 Cohen Shares") and (ii) to each of Elliot
             Bauer and Lee Rizzuto, 625,000 shares (the "Bauer and Rizzuto
             Shares") as well as options to acquire an additional 5,000,000
             shares each at $.10 per share exercisable through May 1, 1996 (the
             "Bauer and Rizzuto Options"). The Company has been informed that
             Messrs. Cohen, Bauer and Rizzuto are principals of a firm which has
             been granted certain distribution rights, which were terminated on
             May 31, 1995. Through December 31, 1997, 2,855,000 shares were
             issued pursuant to the exercise of the Bauer and Rizzuto Options
             for an aggregate exercise price of $285,500. Mr. Rizzuto sold all
             of his shares and all shares underlying his options. Pursuant to
             several amendments, the remaining Bauer options are exercisable
             through April 30, 1998 at an option price of $.11. The Company
             agreed to issue to Cohen an additional 300,000 shares in 1995 at a
             time when the shares were valued at $.14 per share, in
             consideration for expenditures incurred by Mr. Cohen in connection
             with securing for the benefit of the Company and the affiliated
             distributor, the continued services of a doctor.

             The issuance of the September 1992 Cohen Shares, the February 1993
             Cohen Shares, the April 1994 Cohen Shares and the Bauer and Rizzuto
             Shares have been accounted for as an administrative expense in the
             amount of the Company's valuation of such shares as of the issuance
             date. During the year ended December 31, 1996, Mr. Cohen was issued
             300,000 shares for services rendered. These shares were accounted
             for as an administrative expense in the amount of the Company's
             valuation of such shares as of the issuance date.

                                      F-42


<PAGE>   


                          ADVANCED VIRAL RESEARCH CORP.

                          (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)



NOTE 7.           COMMITMENTS AND CONTINGENCIES (Continued)

         DISTRIBUTION AGREEMENTS

         The Company currently is a party to separate agreements with five
         different entities (the "Entities"), whereby the Company has granted
         exclusive rights to distribute RETICULOSE in the countries of China,
         Japan, Macao, Hong Kong, Taiwan, Mexico, Argentina, Bolivia, Paraguay,
         Uruguay, Brazil, Chile, Channel Islands, The Isle of Man, British West
         Indies, Jamaica, Haiti, Bermuda, Belize and Saudi Arabia. Pursuant to
         these agreements, distributors are obligated to cause RETICULOSE to be
         approved for commercial sale in such countries and upon such approval,
         to purchase from the Company certain minimum quantities of RETICULOSE
         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. No sales have been made by the
         Company under the distribution agreements other than for testing
         purposes.

NOTE 8.           STOCKHOLDERS' EQUITY

         During 1997, the Company issued 10,931,516 shares of common stock for
         an aggregate consideration of $1,412,166. These amounts were comprised
         of the issuance of common stock pursuant to the exercise of stock
         options of 3,333,333 shares for $247,666 and the issuance of common
         stock in exchange for consulting services of 150,000 shares for
         consideration of $44,500 and the issuance of common stock upon
         conversion of debt of 7,448,183 shares for $1,120,000.

NOTE 9.           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, 1997, the Company had a net operating loss
         carryforward for Federal income tax reporting purposes amounting to
         approximately $9,000,000, which expires in varying amounts to 2017.

         The Company presently has no significant temporary differences between
         financial reporting and income tax reporting. The components of the
         deferred tax asset as of December 31, 1997 were as follows:

               Benefit of net operating loss carryforwards        $3,058,000
               Less valuation allowance                            3,058,000
                                                                  ----------
               Net deferred tax asset                             $       --
                                                                  ==========



                                      F-43


<PAGE>   


                          ADVANCED VIRAL RESEARCH CORP.

                          (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)



NOTE 9.           INCOME TAXES (Continued)

         As of December 31, 1997, sufficient uncertainty exists regarding the
         realizability of these operating loss carryforwards and, accordingly, a
         valuation allowance of $3,058,000, which related to the net operating
         losses, has been established.

NOTE 10.          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, 1997. 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 December 31, 1997 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, U.S. government obligations, accounts payable and the
         convertible debentures. 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.

         The fair value of non-current investments, primarily U.S. government
         obligations, have been estimated using quoted market prices. At
         December 31, 1997, the differences between the estimated fair value and
         the carrying value of non-current and current debt instruments were
         considered immaterial in relation to the Company's financial position.

NOTE 11.          DEFERRED COMPENSATION COST

         As more fully described in Note 7 to these financial statements, the
         Company granted stock options in exchange for testing and consulting
         services. In accordance with SFAS 123, Accounting for Stock- Based
         Compensation (effective for options granted after December 15, 1995),
         the Company recognized compensation cost based on the fair value at the
         grant dates. The compensation cost is amortized over the life of the
         option period. The fair value of the stock options used to compute
         deferred compensation cost is the estimated present value at grant date
         using the Black-Sholes option pricing model with the following
         assumptions for 1996 and 1997: expected volatility of 20%; a risk-free
         interest rate of 6% and an expected holding period ranging from 1-3
         years. The deferred compensation cost is reported as a component of
         stockholders' equity. At December 31, 1997 and 1996, there were
         7,000,000 option shares outstanding with a weighted average exercise
         price of $0.195 per share.

                                      F-44

<PAGE>
                          ADVANCED VIRAL RESEARCH CORP.
                          (A Development Stage Company)

                      CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
                                                                                                             Condensed
                                                                                                                from
                                                                                                               Audited
                                                                                                              Financial
                                                                                           September 30,     Statements
                                                                                               1998          December 31,
                                                                                            (Unaudited)          1997
                                                                                            -----------          ----
<S>                                                                                        <C>               <C>      
                                      ASSETS
                                      ------
Current Assets:
   Cash and cash equivalents                                                               $   485,041       $   236,059
   Investments                                                                                 188,000         2,984,902
   Inventory                                                                                    19,729            19,729
   Other current assets                                                                         23,837            20,240
                                                                                           -----------       -----------
         Total current assets                                                                  716,607         3,260,930

Property and Equipment                                                                         734,477           485,661

Other Assets                                                                                   328,683           443,251
                                                                                           -----------       -----------

         Total assets                                                                      $ 1,779,767       $ 4,189,842
                                                                                           ===========       ===========


                       LIABILITIES AND STOCKHOLDERS' EQUITY
                       ------------------------------------
Current Liabilities:
   Accounts payable and accrued liabilities                                                $   266,447       $   375,606
                                                                                           -----------       -----------
         Total current liabilities                                                             266,447           375,606
                                                                                           -----------       -----------

Convertible Debenture, Net                                                                           -         2,384,793
                                                                                           -----------       -----------

Commitments and Contingencies                                                                        -                 -

Stockholders' Equity:
   Common stock; 1,000,000,000 shares of $.00001 par value authorized,
      296,422,907 and 277,962,574 shares issued and outstanding                                  2,964             2,779
   Additional paid-in capital                                                               13,651,982        10,512,767
   Subscription receivable                                                                           -           (19,000)
   Deficit accumulated during the development stage                                        (12,112,090)       (8,993,266)
   Deferred compensation cost                                                                  (29,536)          (73,837)
                                                                                           -----------       -----------
         Total stockholders' equity                                                          1,513,320         1,429,443
                                                                                           -----------       -----------

         Total liabilities and stockholders' equity                                        $ 1,779,767       $ 4,189,842
                                                                                           ===========       ===========

</TABLE>
                 See notes to consolidated financial statements.

                                       F-45
<PAGE>

                          ADVANCED VIRAL RESEARCH CORP.
                          (A Development Stage Company)

                 CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
                                                                                                               Inception
                                                                                                             (February 20,
                                                  Three Months Ended               Nine Months Ended            1984) to
                                                     September 30,                    September 30,           September 30,
                                                     -------------                    -------------           -------------
                                                 1998             1997             1998            1997           1998
                                                 ----             ----             ----            ----           ----
<S>                                          <C>             <C>             <C>             <C>               <C>         
Revenues:
   Sales                                     $      656      $         -     $        656    $      2,278      $    194,975
   Interest                                      22,310           28,900           79,533          63,879           536,787
   Other income                                       -                -              100               -           119,900
                                           ------------      -----------     ------------    ------------      ------------
                                                 22,966           28,900           80,289          66,157           851,662
                                           ------------      -----------     ------------    ------------      ------------

Costs and Expenses:
   Research and development                     230,326          166,108          611,090         360,781         2,535,101
   General and administrative                   633,273          547,736        1,711,532       1,299,897         7,606,442
   Depreciation and amortization                 28,437           62,605          570,260         124,116           880,102
   Interest                                           -           63,400          306,231         478,434         1,942,107
                                           ------------      -----------     ------------    ------------      ------------
                                                892,036          839,849        3,199,113       2,263,228        12,963,752
                                           ------------      -----------     ------------    ------------      ------------

Net Loss                                     $ (869,070)      $ (810,949)    $ (3,118,824)   $ (2,197,071)     $(12,112,090)
                                           ============      ===========     ============    ============      ============ 

Net Loss Per Share of Common
   Stock - Basic and Diluted                $      (.00)      $     (.00)    $       (.00)   $       (.00)     $       (.00)
                                           ============      ===========     ============    ============      ============ 

Weighted Average Number of
   Common Shares Outstanding                290,194,958      271,801,398      290,194,958     271,801,398
                                           ============      ===========     ============    ============                   

</TABLE>
                See notes to consolidated financial statements.

                                       F-46
<PAGE>

                          ADVANCED VIRAL RESEARCH CORP.
                          (A Development Stage Company)

            CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY

               INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 1998

<TABLE>
<CAPTION>
                                                                                                                         Deficit
                                                                               Common Stock                            Accumulated
                                                                  Amount       ------------              Additional    during the
                                                                    Per                                  Paid-In       Development
                                                                   Share          Shares       Amount     Capital         Stage
                                                                   -----          ------       ------     -------         -----
<S>                                                                                            <C>              <C>        <C>      
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                                 $.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                         .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                 .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)
                                                                                -----------   --------     --------     -----------
</TABLE>

                See notes to consolidated financial statements.
 
                                        F-47

<PAGE>
                          ADVANCED VIRAL RESEARCH CORP.
                          (A Development Stage Company)

            CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
                                   (Continued)

               INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
                                                                                                                          Deficit
                                                                               Common Stock                             Accumulated
                                                                   Amount      ------------              Additional     during the
                                                                    Per                                   Paid-In       Development
                                                                   Share        Shares        Amount      Capital          Stage
                                                                   -----        ------        ------      -------          -----
<S>                                                                           <C>            <C>          <C>            <C>        
Balance, December 31, 1986                                                    154,666,014    $ 1,547      $ 307,534      $ (203,942)

   Issuance of common stock, exercise of "A" warrants             $.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, period 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               .05         6,729,850         67        336,475               -
      offer on "B" warrants
   Issuance of common stock, exercise of "B" warrants               .05           268,500          3         13,422               -
   Issuance of common stock, exercise of "C" warrants               .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)
                                                                             ------------   --------     ----------     ------------
</TABLE>
                 See notes to consolidated financial statements.

                                       F-48
<PAGE>

                          ADVANCED VIRAL RESEARCH CORP.
                          (A Development Stage Company)

            CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
                                   (Continued)

               INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 1998

<TABLE>
<CAPTION>
                                                                                                                           Deficit
                                                                                Common Stock                             Accumulated
                                                                  Amount        ------------              Additional     during the
                                                                    Per                                    Paid-In       Development
                                                                   Share        Shares         Amount      Capital          Stage
                                                                   -----        ------         ------      -------          -----
<S>                                                                           <C>            <C>        <C>            <C>          
Balance, December 31, 1990                                                    200,299,882    $ 2,003    $ 1,845,992    $ (1,200,915)

   Issuance of common stock, exercise of "B" warrants           $  .05             11,400          -            420               -
   Issuance of common stock, exercise of "C" warrants              .08              2,500          -            200               -
   Issuance of common stock, exercise of underwriters warrants    .012          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                         .0405         10,000,000        100        404,900               -
   Issuance of common stock, for consulting services              .055            500,000          5         27,495               -
   Issuance of common stock, exercise of "B" warrants              .05          7,458,989         75        372,875               -
   Issuance of common stock, exercise of "C" warrants              .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              .055            500,000          5         27,495               -
   Issuance of common stock, for consulting services               .03          3,500,000         35        104,965               -
   Issuance of common stock, for testing                          .035          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)
                                                                            -------------  ---------    -----------    ------------ 

</TABLE>
                 See notes to consolidated financial statements.

                                       F-49
<PAGE>
                          ADVANCED VIRAL RESEARCH CORP.
                          (A Development Stage Company)

            CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
                                   (Continued)

               INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 1998

<TABLE>
<CAPTION>

                                                                                                                                    
                                                                             Common Stock                                           
                                                                Amount       ------------              Additional                   
                                                                 Per                                    Paid-In      Subscription   
                                                                Share         Shares        Amount      Capital       Receivable    
                                                                -----         ------        ------      -------       ----------    
<S>                                                                            <C>           <C>        <C>                 <C>   
Balance, December 31, 1993                                                     236,276,991   $ 2,363    $ 3,416,070         $ -   

   Issuance of common stock, for consulting services            $   .05          4,750,000        47        237,453           -   
   Issuance of common stock, exercise of options                    .08            400,000         4         31,996           -   
   Issuance of common stock, exercise of options                    .10            190,000         2         18,998           -   
   Net loss, year ended December 31, 1994                                                -         -              -           -   
                                                                              ------------   -------   ------------        ----   

Balance, December 31, 1994                                                     241,616,991     2,416      3,704,517           -   
                                                                                                                              -
   Issuance of common stock, exercise of options                    .05          3,333,333        33        166,633           -   
   Issuance of common stock, exercise of options                    .08          2,092,850        21        167,407           -   
   Issuance of common stock, exercise of options                    .10          2,688,600        27        268,833           -   
   Issuance of common stock, for consulting services                .11          1,150,000        12        126,488           -   
   Issuance of common stock, for consulting services                .14            300,000         3         41,997           -   
   Net loss, year ended December 31, 1995                                                -         -              -           -   
                                                                                        --        --             --          --   

Balance, December 31, 1995                                                     251,181,774     2,512      4,475,875           -   
                                                                               ------------    ------     ----------         --   

(RESTUBBED TABLE)
                                                                                  Deficit                                           
                                                                                Accumulated                   
                                                                                during the        Deferred         
                                                                                Development     Compensation  
                                                                                   Stage            Cost      
                                                                                   -----            ----      
                                                                                
Balance, December 31, 1993                                                       $ (2,854,076)        $ -   
                                                                                                            
   Issuance of common stock, for consulting services                                        -           -   
   Issuance of common stock, exercise of options                                            -           -   
   Issuance of common stock, exercise of options                                            -           -   
   Net loss, year ended December 31, 1994                                            (440,837)          -   
                                                                                 -------------       ----   
                                                                                                            
Balance, December 31, 1994                                                         (3,294,913)          -   
                                                                                                            
   Issuance of common stock, exercise of options                                            -           -   
   Issuance of common stock, exercise of options                                            -           -   
   Issuance of common stock, exercise of options                                            -           -   
   Issuance of common stock, for consulting services                                        -           -   
   Issuance of common stock, for consulting services                                        -           -   
   Net loss, year ended December 31, 1995                                            (401,884)          -   
                                                                                 -------------       ----   
                                                                                                            
Balance, December 31, 1995                                                         (3,696,797)          -   
                                                                                 -------------       ----   
</TABLE>

                See notes to consolidated financial statements.

                                       F-50

<PAGE>
                          ADVANCED VIRAL RESEARCH CORP.
                          (A Development Stage Company)

            CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
                                   (Continued)

               INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 1998

<TABLE>
<CAPTION>
                                                                              Common Stock                                          
                                                                   Amount     ------------               Additional                 
                                                                     Per                                  Paid-In      Subscription 
                                                                    Share        Shares       Amount      Capital       Receivable  
                                                                    -----        ------       ------      -------       ----------  
<S>                                                                           <C>           <C>        <C>               <C>        
Balance, December 31, 1995                                                    251,181,774   $ 2,512    $ 4,475,875       $      -   

   Issuance of common stock, exercise of options                     .05        3,333,334        33        166,634              -   
   Issuance of common stock, exercise of options                     .08        1,158,850        12         92,696              -   
   Issuance of common stock, exercise of options                     .10        7,163,600        72        716,288              -   
   Issuance of common stock, exercise of options                     .11          170,000         2         18,698              -   
   Issuance of common stock, exercise of options                     .12        1,300,000        13        155,987              -   
   Issuance of common stock, exercise of options                     .18        1,400,000        14        251,986              -   
   Issuance of common stock, exercise of options                     .19          500,000         5         94,995              -   
   Issuance of common stock, exercise of options                     .20          473,500         5         94,695              -   
   Issuance of common stock, for services rendered                   .50          350,000         3        174,997              -   
   Options granted                                                                      -         -        760,500              -   
   Subscription receivable                                                              -         -              -        (19,000)  
   Net loss, year ended December 31, 1996                                               -         -              -              -   
                                                                             ------------    ------     ----------       --------   

Balance, December 31, 1996                                                    267,031,058     2,671      7,003,351        (19,000)  
                                                                             ------------    ------     ----------       --------   


(RESTUBBED TABLE)
                                                                             Deficit                      
                                                                           Accumulated                    
                                                                            during the        Deferred    
                                                                           Development      Compensation  
                                                                              Stage             Cost      
                                                                              -----             ----      
                                                                         
Balance, December 31, 1995                                                $ (3,696,797)      $       -    
                                                                                                          
   Issuance of common stock, exercise of options                                     -               -    
   Issuance of common stock, exercise of options                                     -               -    
   Issuance of common stock, exercise of options                                     -               -    
   Issuance of common stock, exercise of options                                     -               -    
   Issuance of common stock, exercise of options                                     -               -    
   Issuance of common stock, exercise of options                                     -               -    
   Issuance of common stock, exercise of options                                     -               -    
   Issuance of common stock, exercise of options                                     -               -    
   Issuance of common stock, for services rendered                                   -               -    
   Options granted                                                                   -        (473,159)   
   Subscription receivable                                                           -               -    
   Net loss, year ended December 31, 1996                                   (1,154,740)              -    
                                                                          -------------      ---------    
                                                                                                          
Balance, December 31, 1996                                                  (4,851,537)       (473,159)   
                                                                          -------------      ---------    
</TABLE>

                See notes to consolidated financial statements.

                                       F-51
<PAGE>

                          ADVANCED VIRAL RESEARCH CORP.
                          (A Development Stage Company)

            CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
                                   (Continued)

               INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 1998

<TABLE>
<CAPTION>
                                                                           Common Stock                                             
                                                                 Amount    ------------                Additional                   
                                                                  Per                                    Paid-In      Subscription  
                                                                 Share        Shares        Amount       Capital       Receivable   
                                                                 -----        ------        ------       -------       ----------   
<S>                                                                           <C>            <C>         <C>             <C>        
Balance, December 31, 1996                                                    267,031,058    $ 2,671     $ 7,003,351     $ (19,000) 

   Issuance of common stock, exercise of options                  .08           3,333,333         33         247,633             -  
   Issuance of common stock, conversion of debt                   .20           1,648,352         16         329,984             -  
   Issuance of common stock, conversion of debt                   .15             894,526          9         133,991             -  
   Issuance of common stock, conversion of debt                   .12           2,323,580         23         269,977             -  
   Issuance of common stock, conversion of debt                   .15           1,809,524         18         265,982             -  
   Issuance of common stock, conversion of debt                   .16             772,201          8         119,992             -  
   Issuance of common stock, for services rendered                .41              50,000          -          20,500             -  
   Issuance of common stock, for services rendered                .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                                           -          -               -             -  
   Imputed interest on convertible debenture                                            -          -           4,768             -  
   Net loss, year ended December 31, 1997                                               -          -               -             -  
                                                                              -----------     ------     -----------     ---------  

Balance, December 31, 1997                                                    277,962,574      2,779      10,512,767       (19,000) 
                                                                              -----------     ------     -----------     ---------  


(RESTUBBED TABLE)
                                                                                  Deficit                     
                                                                                Accumulated                   
                                                                                 during the        Deferred   
                                                                                Development      Compensation 
                                                                                   Stage             Cost     
                                                                                   -----             ----     

Balance, December 31, 1996                                                   $ (4,851,537)      $ (473,159)   
                                                                                                              
   Issuance of common stock, exercise of options                                        -                -    
   Issuance of common stock, conversion of debt                                         -                -    
   Issuance of common stock, conversion of debt                                         -                -    
   Issuance of common stock, conversion of debt                                         -                -    
   Issuance of common stock, conversion of debt                                         -                -    
   Issuance of common stock, conversion of debt                                         -                -    
   Issuance of common stock, for services rendered                                      -                -    
   Issuance of common stock, for services rendered                                      -                -    
   Beneficial conversion feature, February debenture                                    -                -    
   Beneficial conversion feature, October debenture                                     -                -    
   Warrant costs, February debenture                                                    -                -    
   Warrant costs, October debenture                                                     -                -    
   Amortization of deferred compensation cost                                           -          399,322    
   Imputed interest on convertible debenture                                            -                -    
   Net loss, year ended December 31, 1997                                       (4,141,729)              -    
                                                                               -----------     -----------    
                                                                                                              
Balance, December 31, 1997                                                     (8,993,266)         (73,837)   
                                                                               -----------     -----------    
                                                                                                              
</TABLE>
                 See notes to consolidated financial statements.

                                       F-52
<PAGE>
                          ADVANCED VIRAL RESEARCH CORP.
                          (A Development Stage Company)

            CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
                                   (Continued)

               INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 1998

<TABLE>
<CAPTION>
                                                                            Common Stock                                            
                                                                 Amount     ------------                Additional                  
                                                                   Per                                   Paid-In       Subscription 
                                                                  Share        Shares       Amount       Capital        Receivable  
                                                                  -----        ------       ------       -------        ----------  
<S>                                                                            <C>           <C>         <C>               <C>      
Balance, December 31, 1997                                                     277,962,574   $ 2,779     $ 10,512,767     $ (19,000)

   Issuance of common stock, exercise of options                   .12             295,000         3           35,397             - 
   Issuance of common stock, exercise of options                   .14             500,000         5           69,995             - 
   Issuance of common stock, exercise of options                   .16             450,000         5           71,995             - 
   Issuance of common stock, exercise of options                   .20              10,000         -            2,000             - 
   Issuance of common stock, exercise of options                   .26             300,000         3           77,997             - 
   Issuance of common stock, conversion of debt                    .13           1,017,011        10          132,990             - 
   Issuance of common stock, conversion of debt                    .14           2,512,887        25          341,225             - 
   Issuance of common stock, conversion of debt                    .15           5,114,218        51          749,949             - 
   Issuance of common stock, conversion of debt                    .18           1,491,485        15          274,985             - 
   Issuance of common stock, conversion of debt                    .19           3,299,979        33          619,967             - 
   Issuance of common stock, conversion of debt                    .22           1,498,884        15          335,735             - 
   Issuance of common stock, conversion of debt                    .23           1,870,869        19          424,981             - 
   Issuance of common stock, for services rendered                 .21             100,000         1           20,999             - 
   Amortization of deferred compensation cost                                            -         -                -             - 
   Write off of subscription receivable                                                  -         -          (19,000)       19,000 
   Net loss, nine months ended September 30, 1998                                        -         -                -             - 
                                                                              ------------   -------     ------------     --------- 

Balance, September 30, 1998                                                    296,422,907   $ 2,964     $ 13,651,982     $       - 
                                                                              ============   =======     ============     ========= 


(RESTUBBED TABLE)
                                                                                  Deficit                       
                                                                                Accumulated                     
                                                                                 during the        Deferred     
                                                                                Development      Compensation   
                                                                                   Stage             Cost       
                                                                                   -----             ----       
                                                                              
Balance, December 31, 1997                                                    $  (8,993,266)     $ (73,837)     
                                                                                                                
   Issuance of common stock, exercise of options                                          -              -      
   Issuance of common stock, exercise of options                                          -              -      
   Issuance of common stock, exercise of options                                          -              -      
   Issuance of common stock, exercise of options                                          -              -      
   Issuance of common stock, exercise of options                                          -              -      
   Issuance of common stock, conversion of debt                                           -              -      
   Issuance of common stock, conversion of debt                                           -              -      
   Issuance of common stock, conversion of debt                                           -              -      
   Issuance of common stock, conversion of debt                                           -              -      
   Issuance of common stock, conversion of debt                                           -              -      
   Issuance of common stock, conversion of debt                                           -              -      
   Issuance of common stock, conversion of debt                                           -              -      
   Issuance of common stock, for services rendered                                        -              -      
   Amortization of deferred compensation cost                                             -         44,301      
   Write off of subscription receivable                                                   -              -      
   Net loss, nine months ended September 30, 1998                                (3,118,824)             -      
                                                                              -------------     ----------      
                                                                                                                
Balance, September 30, 1998                                                   $ (12,112,090)     $ (29,536)     
                                                                              =============     ==========      
                                                                            
</TABLE>
                 See notes to consolidated financial statements.

                                       F-53
<PAGE>
                          ADVANCED VIRAL RESEARCH CORP.
                          (A Development Stage Company)

                 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                                                              Inception
                                                                              Nine Months Ended             (February 20,
                                                                                September 30,                  1984) to
                                                                                                            September 30,
                                                                           1998              1997                1998
                                                                           ----              ----                ----
<S>                                                                       <C>               <C>                <C>          
Cash Flows from Operating Activities:
   Net loss                                                               $(3,118,824)      $(2,197,071)       $(12,112,090)
                                                                          -----------       -----------        ------------
   Adjustments to reconcile net loss to
      net cash used by operating activities:
         Depreciation and amortization                                        570,260           161,358             887,400
         Amortization of deferred interest cost on beneficial
            conversion feature of convertible debenture                       210,951           413,793           1,763,793
         Amortization of deferred compensation cost                            44,301           384,555             730,964
         Loss on sale of property and equipment                                     -             1,425               1,425
         Issuance of common stock for services                                 21,000            44,500           1,437,500
         Imputed interest on convertible debenture                                  -             4,768               4,768
         Changes in Operating Assets and Liabilities:
            Increase in other current assets                                   (3,597)          (11,741)            (23,837)
            Increase in inventory                                                   -                 -             (19,729)
            Increase in other assets                                         (106,658)         (225,151)           (636,328)
            Increase (decrease) in accounts
               payable and accrued liabilities                               (109,159)           20,860             272,647
            Decrease in customers deposits                                          -                 -              (7,800)
                                                                          -----------       -----------        ------------
              Total adjustments                                               627,098           794,367           4,410,803
                                                                          -----------       -----------        ------------
               Net cash used by operating activities                       (2,491,726)       (1,402,704)         (7,701,287)
                                                                          -----------       -----------        ------------

Cash Flows from Investing Activities:
   Purchase of investments                                                    (94,000)         (857,000)         (5,471,932)
   Proceeds from sale of investments                                        2,890,902         1,280,841           5,283,932
   Expenditures for property and equipment                                   (313,594)         (118,884)         (1,005,460)
   Proceeds from sale of property and equipment                                     -             1,200               1,200
                                                                          -----------       -----------        ------------
               Net cash provided (used) by investing activities             2,483,308           306,157          (1,192,260)
                                                                          -----------       -----------        ------------

Cash Flows from Financing Activities:
   Proceeds from issuance of convertible debt                                       -         1,000,000           4,000,000
   Proceeds from sale of securities, net of issuance costs                    257,400           266,666           5,378,588
                                                                          -----------       -----------        ------------
               Net cash provided by financing activities                      257,400         1,266,666           9,378,588
                                                                          -----------       -----------        ------------

Net Increase in Cash and Cash Equivalents                                     248,982           170,119             485,041

Cash and Cash Equivalents, Beginning                                          236,059            61,396                   -
                                                                          -----------       -----------        ------------

Cash and Cash Equivalents, Ending                                           $ 485,041         $ 231,515           $ 485,041
                                                                          ===========       ===========        ============
</TABLE>
                 See notes to consolidated financial statements.

                                       F-54
<PAGE>

                          ADVANCED VIRAL RESEARCH CORP.
                          (A Development Stage Company)

              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS


NOTE 1.  BASIS OF PRESENTATION

             The accompanying unaudited consolidated condensed financial
             statements at September 30, 1998 have been prepared in accordance
             with generally accepted accounting principles for interim financial
             information and with the instructions to Form 10-Q and reflect all
             adjustments which, in the opinion of management, are necessary for
             a fair presentation of financial position as of September 30, 1998
             and results of operations for the three months and the nine months
             ended September 30, 1998 and 1997 and cash flows for the nine
             months ended September 30, 1998 and 1997. 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 consolidated financial statements and
             footnotes thereto included in the Company's Annual Report on Form
             10-KSB for the year ended December 31, 1997.


NOTE 2.  COMMITMENTS AND CONTINGENCIES

         Going Concern

             The accompanying unaudited consolidated condensed financial
             statements at September 30, 1998 have been prepared in conformity
             with generally accepted accounting principles which contemplate the
             continuance of the Company as a going concern. The Company, which
             is still in its development stage, has suffered losses from
             operations during its operating history. The Company is dependent
             upon registration of RETICULOSE for sale before it can begin
             commercial operations. The Company's cash position may be
             inadequate to pay all the costs associated with the full range of
             testing and clinical trials required by the FDA. Management does
             not anticipate registration or other approval of RETICULOSE in the
             near future in the United States. Unless and until RETICULOSE is
             approved for sale in the United States or another industrially
             developed country, the Company may be dependent upon the continued
             sale of its securities and debt financing for funds to meet its
             cash requirements. Management intends to continue to sell the
             Company's securities in an attempt to mitigate the effects of its
             cash position; however, no assurance can be given that equity or
             debt financing, if and when required, will be available. In the
             event that such equity or debt financing is not available, in order
             to continue operations, management anticipates that they will have
             to defer their salaries. During 1997, the Company obtained debt
             financing and may seek additional debt financing if the need
             arises. Additional debt financing is expected during November 1998.
             No assurance can be given that the Company will be able to sustain
             its operations until FDA approval is granted or that any approval
             will ever be granted. These factors raise substantial doubt about
             the Company's ability to continue as a going concern. The
             consolidated condensed financial statements do not include any
             adjustments relating to the recoverability and classification of
             recorded assets and classification of liabilities that might be
             necessary should the Company be unable to continue in existence.

         Potential Claim for Royalties

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

                                       F-55
<PAGE>
                          ADVANCED VIRAL RESEARCH CORP.
                          (A Development Stage Company)

              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                                   (Continued)



NOTE 2.  COMMITMENTS AND CONTINGENCIES (Continued)

         Product Liability

             The Company could be subjected to claims for adverse reactions
             resulting from the use of RETICULOSE. Although the Company is
             unaware of any such claims or threatened claims since RETICULOSE
             was initially marketed in the 1940's, one study noted adverse
             reactions from highly concentrated doses in guinea pigs. 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 RETICULOSE. As of the date
             hereof, the Company does not have product liability insurance for
             RETICULOSE. There can be no assurance that the Company will be able
             to secure such insurance in adequate amounts, at reasonable
             premiums if it determined to do so. Should the Company be unable to
             secure such product liability insurance, the risk of loss to the
             Company in the event of claims would be greatly increased and could
             materially adversely affect the Company.

         Lack of Patent Protection

             The Company does not presently have a patent for RETICULOSE but the
             Company has two patents for the use of RETICULOSE as a treatment.
             The Company currently has 32 patent applications pending with the
             U.S. Patent Office. 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.

         TESTING AGREEMENTS

         Plata Partners Limited Partnership

             On March 20, 1992, the Company entered into an agreement with Plata
             Partners Limited Partnership ("Plata") pursuant to which Plata
             agreed to perform a demonstration in the Domincan Republic in
             accordance with a certain agreed upon protocol (the "Protocol") to
             assess the efficacy of a treatment using RETICULOSE incorporated in
             the Protocol against AIDS (the "Plata Agreement"). Plata covered
             all costs and expenses associated with the demonstration.

             Pursuant to the Plata Agreement, the Company authorized the
             issuance to Plata of 5,000,000 shares of common stock and options
             to purchase an additional 5,000,000 shares at $.08 per share
             through July 9, 1994 (the "Plata Options") and 5,000,000 shares at
             $.10 per share through July 9, 1994 (the "Additional Plata
             Options"). Pursuant to several amendments, the Plata Options and
             the Additional Plata Options are exercisable through April 30, 1999
             at an exercise price of $.14 and $.16, respectively. As of
             September 30, 1998, there are outstanding Plata Options to acquire
             683,300 shares at $.14 per share and Additional Plata Options to
             acquire 108,100 shares at an exercise price of $.16 per share.
             Through September 30, 1998, the Company has received approximately
             $1,332,000 pursuant to the issuance of approximately 9.2 million
             shares in connection with the exercise of the Plata Options and the
             Additional Plata Options.

                                       F-56
<PAGE>
                          ADVANCED VIRAL RESEARCH CORP.
                          (A Development Stage Company)

              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                                   (Continued)



NOTE 2.  COMMITMENTS AND CONTINGENCIES (Continued)

         TESTING AGREEMENTS (Continued)

         Argentine Agreement

             In April 1996, the Company entered into an agreement (the
             "Argentine Agreement") with DCT SRL, an Argentine corporation
             unaffiliated with the Company ("DCT") pursuant to which DCT was to
             cause a clinical trial to be conducted in two separate hospitals
             located in Buenos Aires, Argentina (the "Clinical Trials").
             Pursuant to the Argentine Agreement, the Clinical Trials were to be
             conducted pursuant to a protocol developed by Juan Carlos Flichman,
             M.D. and the purpose of the Clinical Trials was to assess the
             efficacy of the Company's drug RETICULOSE on the Human Papilloma
             Virus (HPV). The protocol calls for, among other things, a study to
             be performed with clinical and laboratory follow-up on 12 male and
             female human patients between the ages of 18 and 50. The Clinical
             Trials did not include a placebo control group or references to any
             other antiviral drug.

             Pursuant to the Argentine Agreement, the Company delivered $34,000
             to DCT to cover out-of-pocket expenses associated with the Clinical
             Trials. The Argentine Agreement further provides that at the
             conclusion of the Clinical Trials, DCT shall cause Dr. Flichman to
             prepare and deliver a written report to the Company regarding the
             methodology and results of the Clinical Trials (the "Written
             Report"). In September 1996, the Written Report was delivered by
             Dr. Flichman to the Company. Upon delivery of the Written Report to
             the Company, the Company delivered to the principals of DCT options
             to acquire 2,000,000 shares of the Company's common stock for a
             period of one year from the date of the delivery of the Written
             Report, at a purchase price of $.20 per share. Pursuant to several
             amendments, the DCT options are exercisable through April 30, 1999
             at an exercise price of $.21 per share. As of September 30, 1998,
             464,000 shares of common stock were issued pursuant to the exercise
             of these options for an aggregate exercise price of approximately
             $93,000.

             Additionally, in April 1998, 10,000 shares were issued in
             connection with the exercise of options at $.20 per share.

             In June 1994, DCT SRL and the Company entered into an exclusive
             distribution agreement whereby the Company granted to DCT, subject
             to certain conditions, the exclusive right to market and sell
             RETICULOSE in Argentina, Bolivia, Paraguay, Uruguay, Brazil, and
             Chile (the "DCT Exclusive Distribution Agreement").

             In April 1996, the Company entered into an agreement with DCT (the
             HIV-HPV Agreement") whereby the Company agreed to provide to DCT or
             its assignees, up to $600,000 to cover the costs of a double blind
             placebo controlled study in approximately 150 patients to assess
             the efficacy of RETICULOSE for the treatment of persons diagnosed
             with the HIV virus (AIDS) and HPV (the "HIV-HPV Study").
             Subsequently, the Company has agreed to advance additional funds
             towards such study.


                                       F-57
<PAGE>
                          ADVANCED VIRAL RESEARCH CORP.
                          (A Development Stage Company)

              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                                   (Continued)


NOTE 2.  COMMITMENTS AND CONTINGENCIES (Continued)

         TESTING AGREEMENTS (Continued)

         Argentine Agreement (Continued)

             In connection with the HIV-HPV Agreement, the Company has advanced
             approximately $665,000 which is accounted for as a research and
             development expense. The amounts have been used to cover expenses
             associated with clinical activities of the HIV-HPV Study.

             The HIV-HPV Agreement provides that (i) in the event the data from
             the HIV-HPV Study is used in connection with RETICULOSE being
             approved for commercial sale anywhere within the territory granted
             under the DCT Exclusive Distribution Agreement or (ii) DCT receives
             financing to cover the costs of the HIV-HPV Study, then DCT is
             obligated to reimburse the Company for all amounts expended in
             connection with the HIV-HPV Study.

             In October 1997, the Company entered into two agreements with DCT,
             whereby the Company agreed to provide DCT or its assignees, up to
             $220,000 and $341,000 to cover the costs of double blind placebo
             controlled studies in approximately 360 and 240 patients,
             respectively to assess the efficacy of the topical application of
             RETICULOSE for the treatment of persons diagnosed with Herpes
             Labialis/Genital Infections (the "Herpes Study") and HPV (the "HPV
             Topical Study").

             In connection with the Herpes Study and the HPV Topical Study
             (collectively, the "Studies"), the Company has advanced
             approximately $58,000 and $132,500, respectively such expenses are
             accounted for as research and development expenses. The amounts
             expended have been used to cover expenses associated with
             pre-clinical activities. Neither the Herpes Study nor the HPV
             Topical Study has commenced.

             Both Agreements with DCT provide that (i) in the event the data
             from the Studies are used in connection with RETICULOSE being
             approved for commercial sale anywhere within the territory granted
             under the DCT Exclusive Distribution Agreement or (ii), DCT
             receives financing to cover the costs of the Studies, then DCT is
             obligated to reimburse the Company for all amounts respectively
             expended in connection with the Studies.

             In February 1995, the Company entered into an agreement with DCT
             (the "Concurrent Agreement") whereby the Company agreed to provide
             DCT or its assignees, up to $412,960 to cover the costs of a study
             in 65 patients to compare the results of treatment of patients with
             AIDS taking a three drug cocktail and RETICULOSE with those taking
             a three drug cocktail and a placebo. As of September 30, 1998, the
             Company has advanced approximately $50,000 for such study which has
             been accounted for as research and development expense.

             In May 1998, the Company entered into an agreement with DCT (the
             "Rheumatoid Arthritis Agreement") whereby the Company agreed to
             provide DCT or its assignees, up to $94,950 to cover the costs of a
             controlled study in 30 patients to determine the efficacy of
             RETICULOSE for the treatment of rheumatoid arthritis in humans. In
             connection with this study, the Company has advanced approximately
             $79,200 which has been accounted for as research and development
             expenses.

                                       F-58
<PAGE>
                          ADVANCED VIRAL RESEARCH CORP.
                          (A Development Stage Company)

              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                                   (Continued)


NOTE 2.  COMMITMENTS AND CONTINGENCIES (Continued)

         TESTING AGREEMENTS (Continued)

         Argentine Agreement (Continued)

             In July 1998, the Company authorized expenditures of up to $90,000
             to study the effects of RETICULOSE in inhibiting the mutation of
             the AIDS virus. As of September 30, 1998, the Company has advanced
             approximately $50,000 for such study which has been accounted for
             as research and development expense.

         Barbados Study

             A double blind study assessing the efficacy of the Company's drug
             RETICULOSE in 43 human patients diagnosed with HIV (AIDS) is being
             conducted at the Queen Elizabeth Hospital, Bridgetown, Barbados
             (the "Barbados Study"). As of September 30, 1998, the Company has
             expended approximately $365,000 to cover the costs of the Barbados
             Study. Based on information received from the coordinators of the
             Barbados Study, the Company is uncertain as to the costs to be
             incurred in connection with the Barbados Study and has not been
             informed as to when results from the Barbados Study will be
             forthcoming. In December 1996, the Company received from the
             coordinators of the Barbados Study, a written summary of
             preliminary results of the Barbados Study (the "Written Summary").

             In July 1998, the Company authorized expenditures of up to $45,000
             to study the effects of RETICULOSE in inhibiting the mutation of
             the AIDS virus. As of September 30, 1998, the Company has advanced
             approximately $5,000 for such study which has been accounted for as
             research and development expense.

         National Cancer Institute Agreement

             In March 1997, the Company entered into a Material Transfer
             Agreement - Cooperative Research and Development Agreement with the
             National Cancer Institute ("NCI") of the National Institutes of
             Health. Under the terms of the Agreement, NCI researchers and the
             Company will collaborate to elucidate the molecular mechanism by
             which RETICULOSE affects the transcription of the gamma interferon
             gene. This agreement was extended for an additional one year term
             through March 3, 1999 to investigate the anti-tumor activity of
             RETICULOSE using kidney tumor model systems. In addition, NCI will
             study the effects of RETICULOSE on inflammation associated with
             rheumatoid arthritis.

         Topical Safety Study

             As of September 30, 1998, the Company advanced approximately
             $170,000 for a topical safety study to be conducted in the United
             States for the topical use of RETICULOSE for the treatment of HPV
             and herpes.

                                       F-59
<PAGE>
                          ADVANCED VIRAL RESEARCH CORP.
                          (A Development Stage Company)

              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                                   (Continued)


NOTE 2.  COMMITMENTS AND CONTINGENCIES (Continued)

         CONSULTING 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 $.18 per
             share. In addition and in connection with entering into the
             consulting agreement with Dr. Hirschman, the Company issued to a
             person unaffiliated with the Company, 100,000 shares of the
             Company's common stock, and an option to acquire for a period of
             one year, from June 1, 1995, an additional 500,000 shares at a
             purchase price of $.18 per share. As of September 30, 1998, 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 March 23, 1999 at an
             exercise price of $.19 per share, of which options to acquire
             500,000 shares were assigned by Dr. Hirschman to Richard Rubin,
             consultant to Dr. Hirschman; (ii) options to purchase 5,000,000
             shares exercisable at any time and from time to time commencing
             March 24, 1997 and ending March 23, 1999 at an exercise price of
             $.27 per share, of which options to acquire 500,000 shares were
             assigned by Dr. Hirschman to Richard Rubin, consultant to Dr.
             Hirschman; and (iii) options to purchase 5,000,000 shares
             exercisable at any time and from time to time commencing March 24,
             1998 and ending March 23, 1999 at an exercise price of $.36 per
             share, of which options to acquire 500,000 shares were assigned by
             Dr. Hirschman to Richard Rubin, consultant to Dr. Hirschman. 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. As of September 30, 1998, 500,000 shares of common stock
             were issued pursuant to the exercise of stock options by Richard
             Rubin. Mr. Rubin has, from time to time in the past, advised the
             Company on matters unrelated to his consultation with Dr.
             Hirschman.

                                       F-60
<PAGE>
                          ADVANCED VIRAL RESEARCH CORP.
                          (A Development Stage Company)

              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                                   (Continued)


NOTE 2.  COMMITMENTS AND CONTINGENCIES (Continued)

         CONSULTING AGREEMENTS (Continued)

         Hirschman Agreement (Continued)

             In November 1997, Dr. Hirschman assigned to Henry Kamioner, a
             consultant to Dr. Hirschman, options to acquire 1,500,000 shares
             (500,000 at $19,500,000 at $.27 and 500,000 at $.36).

             On October 14, 1996, the Company and Dr. Hirschman entered into an
             agreement (the "Employment Agreement") whereby Dr. Hirschman has
             agreed to serve as the President and Chief Executive Officer of the
             Company for a period of three years, subject to earlier termination
             by either party, either for cause as defined in and in accordance
             with the provisions of the Employment Agreement, or if the Company
             do not receive on or prior to December 31, 1997, funding of
             $3,000,000 from sources other than traditional institutional/bank
             debt financing or proceeds from the purchase by Dr. Hirschman of
             the Company's securities, including, without limitation, the
             exercise of Dr. Hirschman of outstanding stock options. Pursuant to
             the Employment Agreement, Dr. Hirschman is entitled to receive an
             annual base salary of $325,000, use of an automobile, major
             medical, term life, disability and dental insurance benefits for
             the term of his employment. The Employment Agreement further
             provides that Dr. Hirschman shall be nominated by the Company to
             serve as a member of the Company's Board of Directors and that
             Bernard Friedland and William Bregman will vote in favor of Dr.
             Hirschman as a director of the Company, for the duration of Dr.
             Hirschman's employment, and since October 1996, Dr. Hirschman has
             served as a member of the Company's Board of Directors.

             On February 18, 1998, the Board of Directors authorized a $100,000
             bonus to Dr. Hirschman and granted options to acquire 23,000,000
             shares of stock at $0.27 per option share provided that the Company
             is granted FDA approval for testing in the United States.

             In July 1998, the Company and Dr. Hirschman entered into an amended
             and restated employment agreement which supersedes in its entirety
             the original employment agreement of October 1996. Such amendment
             and restatement extends the term of the employment agreement to
             December 31, 2000. Additionally, the February 1998 Board of
             Directors action regarding the $100,000 bonus and the granting of
             23,000,000 options (contingent upon the occurrence of certain
             events) is included in this employment agreement.


                                       F-61
<PAGE>
                          ADVANCED VIRAL RESEARCH CORP.
                          (A Development Stage Company)

              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                                   (Continued)


NOTE 2.  COMMITMENTS AND CONTINGENCIES (Continued)

         CONSULTING AGREEMENTS (Continued)

         Cohen Agreements

             In September 1992, the Company entered into a one year consulting
             agreement with Leonard Cohen (the "September 1992 Cohen
             Agreement"). The September 1992 Cohen Agreement required that Mr.
             Cohen provide certain consulting services to the Company in
             exchange for the Company's issuing to Mr. Cohen 1,000,000 shares of
             common stock (the "September 1992 Cohen Shares"), 500,000 of which
             were issuable upon execution of the September 1992 Cohen Agreement
             and the remaining 500,000 shares of which were issuable upon Mr.
             Cohen completing 50 hours of consulting service to the Company. The
             Company issued the first 500,000 shares to Mr. Cohen in October
             1992 and the remaining 500,000 shares to Mr. Cohen in February
             1993. Further pursuant to the September 1992 Cohen Agreement, the
             Company granted to Mr. Cohen the option to acquire, at any time and
             from time to time through September 10, 1993 (which date has been
             extended through April 30, 1999), the option to acquire 3,000,000
             shares of common stock of the Company at an exercise price of $.09
             per share (which exercise price has been increased to $.15 per
             share) (the "September 1992 Cohen Options"). As of September 30,
             1998, 1,300,000 of the September 1992 Cohen Options have been
             exercised for cash consideration of $156,000.

             In February 1993, the Company entered into a second consulting
             agreement with Mr. Cohen (the "February 1993 Cohen Agreement") for
             a three year term commencing on March 1, 1993. The February 1993
             Cohen Agreement provides that Mr. Cohen provide financing business
             consulting services concerning the operations of the business of
             the Company and possible strategic transactions in exchange for the
             Company issuing to Mr. Cohen 3,500,000 shares of common stock (the
             "February 1993 Cohen Shares"), 1,500,000 shares of which Mr. Cohen
             has informed the Company he has assigned to certain other persons
             not affiliated with the Company or any of its officers or
             directors.

             In July 1994, in consideration for services related to the
             introduction, negotiation and execution of a distribution agreement
             the Company issued: (i) to Mr. Cohen, an additional 2,500,000
             shares (the "April 1994 Cohen Shares") and (ii) to each of Elliot
             Bauer and Lee Rizzuto, 625,000 shares (the "Bauer and Rizzuto
             Shares") as well as options to acquire an additional 5,000,000
             shares each at $.10 per share exercisable through May 1, 1996 (the
             "Bauer and Rizzuto Options"). The Company has been informed that
             Messrs. Cohen, Bauer and Rizzuto are principals of a firm which has
             been granted certain distribution rights, which were terminated on
             May 31, 1995. Through September 30, 1998, 2,855,000 shares were
             issued pursuant to the exercise of the Bauer and Rizzuto Options
             for an aggregate exercise price of $285,500. Mr. Rizzuto sold all
             of his shares and all shares underlying his options. Pursuant to
             several amendments, the remaining Bauer options are exercisable
             through April 30, 1999 at an option price of $.13. The Company
             agreed to issue to Cohen an additional 300,000 shares in 1995 at a
             time when the shares were valued at $.14 per share, in
             consideration for expenditures incurred by Mr. Cohen in connection
             with securing for the benefit of the Company and the affiliated
             distributor, the continued services of a doctor.

                                       F-62
<PAGE>
                          ADVANCED VIRAL RESEARCH CORP.
                          (A Development Stage Company)

              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                                   (Continued)


NOTE 2.  COMMITMENTS AND CONTINGENCIES (Continued)

         CONSULTING AGREEMENTS (Continued)

         Cohen Agreements (Continued)

             The issuance of the September 1992 Cohen Shares, the February 1993
             Cohen Shares, the April 1994 Cohen Shares and the Bauer and Rizzuto
             Shares have been accounted for as an administrative expense in the
             amount of the Company's valuation of such shares as of the issuance
             date. During the year ended December 31, 1996, Mr. Cohen was issued
             300,000 shares for services rendered. These shares were accounted
             for as an administrative expense in the amount of the Company's
             valuation of such shares as of the issuance date.

         Chinnici Agreement

             In July 1998, the Company entered into a consulting agreement with
             Dr. Angelo A. Chinnici for a term extending to December 31, 2000.
             Such agreement calls for Dr. Chinnici to provide assistance in
             connection with research, development, production, marketing and
             sale of RETICULOSE. Additionally, Dr. Chinnici will testify before
             the FDA in connection with an application for approval of
             RETICULOSE and will provide detailed clinical reports regarding
             patients observed by him. Dr. Chinnici will receive options to
             purchase 300,000 shares at an exercise price of $.30 per share. The
             options will be exercisable in equal installments on January 1,
             1999 and 2000 and December 15, 2000.

         DISTRIBUTION AGREEMENTS

         The Company currently is a party to separate agreements with four
         different entities (the "Entities"), whereby the Company has granted
         exclusive rights to distribute RETICULOSE in the countries of China,
         Japan, Macao, Hong Kong, Taiwan, Mexico, Argentina, Bolivia, Paraguay,
         Uruguay, Brazil, Chile, Channel Islands, The Isle of Man, British West
         Indies, Jamaica, Haiti, Bermuda, Belize and Saudi Arabia. Pursuant to
         these agreements, distributors are obligated to cause RETICULOSE to be
         approved for commercial sale in such countries and upon such approval,
         to purchase from the Company certain minimum quantities of RETICULOSE
         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. No sales have been made by the
         Company under the distribution agreements other than for testing
         purposes.

         Additionally, pursuant to one of the distributions agreements, the
         Company granted the distributor the right to acquire 3,000,000 shares
         of the Company's common stock at a purchase price of $.25 (which has
         been increased to $.26) upon the completion of certain tests and the
         publication of a paper with respect to such tests. During May 1998,
         300,000 shares of common stock were issued pursuant to exercise of
         these options for an aggregate exercise price of $78,000.

                                       F-63
<PAGE>
                          ADVANCED VIRAL RESEARCH CORP.
                          (A Development Stage Company)

              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                                   (Continued)


NOTE 3.  CONVERTIBLE DEBENTURES

         In February 1997 and October 1997, in order to finance research and
         development, the Company sold $1,000,000 and $3,000,000, respectively,
         principal amount of its ten-year 7% Convertible Debentures (the
         "February Debenture" and the "October Debenture", collectively, the
         "Debentures") due February 28, 2007 and August 30, 2007, respectively,
         to RBB Bank Aktiengesellschaft ("RBB") in offshore transactions
         pursuant to Regulation S under the Securities Act of 1933, as amended.
         Accrued interest under the Debentures was payable semi-annually,
         computed at the rate of 7% per annum on the unpaid principal balance
         from the date of issuance until the date of interest payment. The
         Debentures were convertible, at the option of the holder, into shares
         of Common Stock pursuant to specified formulas. On April 22, 1997, June
         6, 1997, July 3, 1997 and August 20, 1997, pursuant to notice by the
         holder, RBB, to the Company under the February Debenture, $330,000,
         $134,000, $270,000 and $266,000, respectively, of the principal amount
         of the February Debenture was converted into 1,648,352, 894,526,
         2,323,580 and 1,809,524 shares of the Common Stock, respectively. As of
         August 20, 1997, the February Debenture was fully converted. On
         December 9, 1997, January 7, 1998, January 14, 1998, February 19, 1998,
         February 23, 1998, March 31, 1998, May 4, 1998 and May 5, 1998,
         pursuant to notice by the holder, RBB, to the Company, $120,000,
         $133,000, $341,250, $750,000, $335,750, $425,000, $275,000 and
         $620,000, respectively, of the October Debenture was converted into
         772,201, 1,017,011, 2,512,887, 5,114,218, 1,498,884, 1,870,869,
         1,491,485 and 3,299,979 Common Stock, respectively. As of May 5, 1998,
         the October Debenture was fully converted.

         In connection with the issuance of the February Debenture, the Company
         issued to RBB three warrants (the "February Warrants") to purchase
         common stock, each such February Warrant entitling the holder to
         purchase, from February 21, 1997 through February 28, 2007, 178,378
         shares of common stock. The exercise price of the three February
         Warrants are $0.288, $0.576 and $0.864 per warrant share, respectively.
         The fair value of the February Warrants was estimated to be $37,000
         ($.021 per warrant) based upon a financial analysis of the terms of the
         warrants using the Black Sholes Pricing Model. This amount has been
         reflected in the accompanying financial statements as interest expense
         related to the convertible February Debenture.

         Based on the terms for conversion associated with the February
         Debenture, there is an intrinsic value associated with the beneficial
         conversion feature of $413,793. This amount has been fully amortized to
         interest expense with a corresponding credit to additional paid-in
         capital.

         In connection with the issuance of the October Debenture, the Company
         issued to RBB three warrants (the "October Warrants") to purchase
         Common Stock, each such October Warrant entitling the holder to
         purchase, from the date of grant through August 30, 2007, 600,000
         shares of the Common Stock. The exercise price of the three October
         Warrants are $0.20, $0.23 and $0.27 per warrant share, respectively.
         The fair value of the three October Warrants was established to be
         $106,571 ($.178 per warrant), $97,912 ($.163 per warrant) and $87,472
         ($.146 per warrant), respectively, based upon a financial analysis of
         the terms of the warrants using the Black Sholes Pricing Model. This
         amount has been reflected in the accompanying financial statements as a
         discount on the convertible debenture, with a corresponding credit to
         additional paid-in capital, and is being amortized over the expected
         term of the notes which at December 31, 1997 was 120 months. In May
         1998, the remaining unamortized discount of $276,957 was amortized upon
         full conversion of the October Debenture.

                                       F-64
<PAGE>
                          ADVANCED VIRAL RESEARCH CORP.
                          (A Development Stage Company)

              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                                   (Continued)


NOTE 3.  CONVERTIBLE DEBENTURES (Continued)

         Based on the terms for conversion associated with the October
         Debenture, there is an intrinsic value associated with the beneficial
         conversion feature of $1,350,000. This amount has been treated as
         deferred interest expense and recorded as a reduction of the
         convertible debenture liability with a corresponding credit to
         additional paid-in capital and has been amortized to interest expense
         over the period from October 8, 1997 (date of debenture) to February
         24, 1998 (date the debenture is fully convertible). The interest
         expense relative to this item was $1,139,049 for 1997 and $210,951
         during the quarter ended March 31,1998.




                                       F-65
<PAGE>



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

                          ADVANCED VIRAL RESEARCH CORP.



                              --------------------
                                   PROSPECTUS
                              --------------------


                        49,700,731 SHARES OF COMMON STOCK




























                               _____________, 1999


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


<PAGE>


                                     PART II
                   INFORMATION NOT REQUIRED IN THE PROSPECTUS

Item 13.  Other Expenses of Issuance and Distribution.

         The following table sets forth the various expenses in connection with
the sale and distribution of the securities being registered, which will be paid
solely by the Company. All amounts shown are estimates, except the Commission
registration fee:

         Commission registration fee.................................... $ 2,700
         Printing and mailing expenses....................................$5,000
         Legal fees and expenses.........................................$25,000
         Accounting fees and expenses....................................$10,000
                                                                        --------
                  Total................................................  $42,700
                                                                        ========

Item 14.  Indemnification of Directors and Officers

         Article Ninth of the Company's Certificate of Incorporation contains
the following provision with respect to indemnification of Directors and
Officers:

         Ninth: 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.

         Section 145 of the General Corporate Law of the State of Delaware (the
"DGCL") contains provisions regarding indemnification, among others, of officers
and directors. Section 145 of the DGCL provides in relevant part:

                  (a) A corporation shall have power to indemnify any person who
         was or is a party or is threatened to be made a party to any
         threatened, pending or completed action, suit or proceeding, whether
         civil, criminal, administrative or investigative (other than an action
         by or in the right of the corporation) by reason of the fact that the
         person is or was a director, officer, employee or agent of the
         corporation, or is or was serving at the request of the corporation as
         a director, officer, employee or agent of another corporation,
         partnership, joint venture, trust or other enterprise, against expenses
         (including attorneys' fees), judgments, fines and amounts paid in
         settlement actually and reasonably incurred by the person in connection
         with such action, suit or proceeding if the person acted in good faith
         and in a manner the person reasonably


                                      II-1

<PAGE>


         believed to be in or not opposed to the best interests of the
         corporation, and, with respect to any criminal action or proceeding,
         had no reasonable cause to believe the person's conduct was unlawful.
         The termination of any action, suit or proceeding by judgment, order,
         settlement, conviction, or upon a plea of nolo contendere or its
         equivalent, shall not, of itself, create a presumption that the person
         did not act in good faith and in a manner which the person reasonably
         believed to be in or not opposed to the best interests of the
         corporation, and, with respect to any criminal action or proceeding,
         had reasonable cause to believe that the person's conduct was unlawful.

                  (b) A corporation shall have power to indemnify any person who
         was or is a party or is threatened to be made a party to any
         threatened, pending or completed action or suit by or in the right of
         the corporation to procure a judgment in its favor by reason of the
         fact that the person is or was a director, officer, employee or agent
         of the corporation, or is or was serving at the request of the
         corporation as a director, officer, employee or agent of another
         corporation, partnership, joint venture, trust or other enterprise
         against expenses (including attorneys' fees) actually and reasonably
         incurred by the person in connection with the defense or settlement of
         such action or suit if the person acted in good faith and in a manner
         the person reasonably believed to be in or not opposed to the best
         interests of the corporation and except that no indemnification shall
         be made in respect of any claim, issue or matter as to which such
         person shall have been adjudged to be liable to the corporation unless
         and only to the extent that the Court of Chancery or the court in which
         such action or suit was brought shall determine upon application that,
         despite the adjudication of liability but in view of all the
         circumstances of the case, such person is fairly and reasonably
         entitled to indemnity for such expenses which the Court of Chancery or
         such other court shall deem proper.

                  (c) To the extent that a present or former director or officer
         of a corporation has been successful on the merits or otherwise in
         defense of any action, suit or proceeding referred to in subsections
         (a) and (b) of this section, or in defense of any claim, issue or
         matter therein, such person shall be indemnified against expenses
         (including attorneys' fees) actually and reasonably incurred by such
         person in connection therewith.

                  (d) Any indemnification under subsections (a) and (b) of this
         section (unless ordered by a court) shall be made by the corporation
         only as authorized in the specific case upon a determination that
         indemnification of the present or former director, officer, employee or
         agent is proper in the circumstances because the person has met the
         applicable standard of conduct set forth in subsections (a) and (b) of
         this section. Such determination shall be made , with respect to a
         person who is a director or officer at the time of such determination,
         (1) by a majority vote of the directors who are not parties to such
         action, suit or proceeding, even though less than a quorum, or (2) by a
         committee of such directors designated by majority vote of such
         directors, even though less than a quorum, or (3) if there are no such
         directors, or if such directors so direct, by independent legal counsel
         in a written opinion, or (4) by the stockholders.


                                      II-2

<PAGE>


         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 DGCL.

         The Company's Certificate of Incorporation was amended on December 30,
1987, to limit or eliminate director liability by incorporating new Article
Eleventh, 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 the Company's Certificate of Incorporation is
not intended to be exhaustive and is respectively qualified in its entirety by
such document.

Item 15.  Recent Sales of Unregistered Securities

         The following table sets forth the Company's sales of unregistered
securities for past three years. All transactions listed below involved the
issuance of Common Stock and options to acquire Shares of Common Stock prior to
commencement of the offering described in the foregoing Prospectus. No
underwriters were employed with respect to the sale of any of the securities
listed below. All shares were issued in reliance upon Section 4(2) and/or 3(b)
of the Securities Act.

<TABLE>
<CAPTION>
Securities Issued                Purchaser                        Date Acquired       Consideration
-----------------                ---------                        -------------       -------------
<S>                              <C>                              <C>                 <C>
5,000,000 options                Shalom Z. Hirschman, M.D.        4-1-96              Services (Consulting)(1)
   exercisable at each of
   $.18, $.19, $.27 and $.36
   per share
500,000 options                  Deborah Silver                   4-1-96              Services (Consulting)(1)
   exercisable at $.18 per
   share
1,000,000 options                Freddie Velez                    4-1-96              Services (Consulting)(1)
   exercisable at $.20 per
   share
500,000 options                  Gary Hussian                     4-1-96              Services (Consulting)(1)
   exercisable at $.20 per
   share
500,000 options                  Cesar Blumtritt, M.D.            4-1-96              Services (Consulting)(1)
   exercisable at $.20 per
   share
50,000 shares                    Malcolm Santer                   9-4-96              Services (Consulting)(2)
50,000 shares                    Malcolm Santer                   2-26-97             Services (Consulting)(2)
750,000 shares                   David Sass                       3-21-97             .08
375,000 shares                   Norman Schwartz                  3-21-97             .08
</TABLE>


                                      II-3

<PAGE>


<TABLE>
<CAPTION>
Securities Issued                Purchaser                        Date Acquired       Consideration
-----------------                ---------                        -------------       -------------
<S>                              <C>                              <C>                 <C>
375,000 shares                   Mel Mendelson                    3-21-97             .08
1,833,333 shares                 Matthew Cohen                    3-21-97             .08
1,648,352 shares                 RBB Bank                         4-22-97             .20(3)
894,526 shares                   RBB Bank                         6-6-97              .15(3)
2,323,580 shares                 RBB Bank                         7-3-97              .12(3)
1,809,524 shares                 RBB Bank                         8-20-97             .15(3)
100,000 shares                   Malcolm Santer                   9-8-97              Services (Consulting)(4)
722,701 shares                   RBB Bank                         12-9-97             .16(5)
1,017,011 shares                 RBB Bank                         1-7-98              .13(5)
2,512,887 shares                 RBB Bank                         1-14-98             .14(5)
23,000,000 options               Shalom Z. Hirschman, M.D.        2-18-98             (6)
   exercisable at $.27
   per share
5,114,218 shares                 RBB Bank                         2-23-98             .15(5)
190,000 shares                   Plata                            3-5-98              .12 per share
1,498,884 shares                 RBB Bank                         3-19-98             .22(5)
105,000 shares                   Plata                            3-27-98             .12 per share
1,870,869 shares                 RBB Bank                         3-31-98             .23(5)
10,000 shares                    Velez                            4-3-98              .20 per share
200,000 shares                   Charles                          4-3-98              .14 per share
1,491,485 shares                 RBB Bank                         5-4-98              .18(5)
3,299,979 shares                 RBB Bank                         5-5-98              .19(5)
50,000 shares                    Charles Miller                   5-13-98             .16 per share
200,000 shares                   Duffy                            5-13-98             .14 per share
100,000 shares                   Charles Miller                   5-13-98             .14 per share
100,000 shares                   Charles Miller                   5-18-98             .16 per share
200,000 shares                   Commonwealth                     5-18-98             .26 per share
100,000 shares                   Commonwealth                     5-22-98             .26 per share
100,000 shares                   Charles Miller                   6-22-98             .16 per share
85,000 shares                    Charles Miller                   7-15-98             .16 per share
15,000 shares                    Charles Miller                   7-17-98             .16 per share
25,000 shares                    Charles Miller                   7-22-98             .16 per share
75,000 shares                    Charles Miller                   7-24-98             .16 per share
100,000 shares                   Malcolm Santer                   8-12-98             Services (Consulting)(7)
</TABLE>

------------------------
(1) The 1,700,000 shares issued for consulting services on 5-24-95 and 6-23-95
    have been valued at $.11 per share.
(2) The 50,000 shares issued for consulting services on 9-4-96 and 2-26-97 have
    been valued at $.50 per share and $.41 per share, respectively.
(3) The conversions were made pursuant to the February 21, 1997 issuance of
    convertible debentures.
(4) The 100,000 shares issued for consulting services on 9-8-97 have been valued
    at $.24 per share.
(5) The conversions were made pursuant to the October 1997 issuance of
    convertible debentures.
(6) Granted pursuant to Dr. Hirshman's Restated Employment Agreement.
(7) The 100,000 shares issued for consulting services on 8-12-98 have been
    valued at $.21 per share.


                      [This Space Intentionally Left Blank]



                                      II-4

<PAGE>


Item 16.  Exhibits and Financial Statement Schedules

         (a)  Exhibits

 Exhibit No.      Description
 -----------      -----------
     3.1          Articles of Incorporation of Advanced Viral Research Corp.(2)
     3.2          Bylaws of Advanced Viral Research Corp., as amended(1)
     3.3          Amendment to Articles of Incorporation of Advanced Viral
                  Research Corp.(2)
     4.1          Specimen Certificate of Common Stock(1)
     4.2          Specimen Warrant Certificate(1)
     4.3          Warrant Agreement between the Company and American Stock
                  Transfer and Trust Company(1)
     4.4          Forms of Common Stock Options and Agreements granted by the
                  Company to TRM Management Corp.(5)
     4.5          Form of Common Stock Option and Agreement granted by the
                  Company to Plata Partners Limited Partnership(12)
     4.6          Consulting Agreement, dated September 11, 1992, and Form of
                  Common Stock granted by the Company to Leonard Cohen(6)
     4.7          Addendum to Agreement granted by the Company to Shalom Z.
                  Hirschman, M.D. dated March 24, 1996(10)
     4.8          Securities Purchase Agreement dated November 16, 1998, by and
                  between the Company 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 $.20 per share.(11)(o)
     4.11         Warrant dated November 16, 1998 to purchase 375,000 shares of
                  common stock at $.24 per share.(11)(o)
     4.12         Securities Purchase Agreement dated December 22, 1998, by and
                  between the Company and various purchasers.*
     4.12         Form of Warrant dated December 22, 1998 to purchase shares of
                  common stock of the Company at $.2040 per share.*
     4.14         Form of Warrant dated December 22, 1998 to purchase shares of
                  common stock of the Company at $.2448 per share.*
     5.1          Opinion and Consent of the law firm of Berman Wolfe & Rennert,
                  P.A. **
     10.1         Declaration of Trust by Bernard Friedland and William Bregman
                  in favor of the Company dated November 16, 1987(12)
     10.2         Clinical Trials Agreement, dated September 19, 1990, between
                  Clinique Medical Actuel and the Company(3)
     10.3         Letter, dated March 15, 1991 to the Company from Health
                  Protection Branch(3)
     10.4         Agreement dated August 20, 1991 between TRM Management Corp.
                  and the Company(11)(a
     10.5         Lease dated December 18, 1991 between Bayview Associates, Inc.
                  and the Company(4)
     10.6         Lease Agreement, dated February 16, 1993 between Stortford
                  Brickell Inc. and the Company(7)
     10.7         Consulting Agreement dated February 28, 1993 between Leonard
                  Cohen and the Company(8)
     10.8         Medical Advisor Agreement, dated as of September 14, 1993,
                  between Lionel Resnick, M.D. and the Company(11)(b)
     10.9         Agreement, dated November 9, 1993, between Dormer Laboratories
                  Inc. and the Company(12)
     10.10        Exclusive Distribution Agreement, dated April 25, 1994,
                  between C.U.R.E. Pharmaceutical Corp. and the Company(11)(c)
     10.11        Exclusive Distribution Agreement, dated as of June 1, 1994,
                  between C.U.R.E. Pharmaceutica Central Americas Ltd. and the
                  Company(11)(d
     10.12        Exclusive Distribution Agreement dated as of June 17, 1994
                  between DCT S.R.L. and the Company, as amended(11)(e)
     10.13        Contract, dated as of October 25, 1994 between Commonwealth
                  Pharmaceuticals of the Channel Islands and the Company(11)(f)
     10.14        Agreement dated May 24, 1995 between the Company and Deborah
                  Silver(9)
     10.15        Agreement dated May 29, 1995 between the Company and Shalom Z.
                  Hirschman, M.D.(9)
     10.16        Exclusive Distribution Agreement, dated as of June 2, 1995,
                  between AVIX International Pharmaceutical Corp. and the
                  Company(12)
     10.17        Supplement to Exclusive Distribution Agreement, dated November
                  2, 1995 with Commonwealth Pharmaceuticals(12)


                                      II-5

<PAGE>


     10.18        Exclusive Distributorship & Limited License Agreement, dated
                  December 28, 1995, between AVIX International Pharmaceutical
                  Corp., Beijing Unistone Pharmaceutical Co., Ltd. and the
                  Company(11)(g)
     10.19        Modification Agreement, dated December 28, 1995, between AVIX
                  International Pharmaceutical Corp. and the Company(11)(g)
     10.20        Agreement dated April 1, 1996, between DCT S.R.L. and the
                  Company(11)(h)
     10.21        Addendum, dated as of March 24, 1996, to Consulting Agreement
                  between the Company and Shalom Z. Hirschman, M.D.(10)
     10.22        Addendum to Agreement, dated July 11, 1996, between AVIX
                  International Pharmaceutical Corp. and the Company(11)(i)
     10.23        Employment Agreement, dated October 17, 1996, between the
                  Company and Shalom Z. Hirschman, M.D.(11)(j)
     10.24        Lease, dated February 7, 1997 between Robert Martin Company,
                  LLC and the Company(12) 10.25 Copy of Purchase and Sale
                  Agreement, dated February 21, 1997 between the Company 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 the Company 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 the Company and Shalom Z. Hirschman, M.D.(11)(n)
     10.30        Agreement between the Company and Angelo Chinnici, M.D.**
     21.1         Subsidiaries of Registrant -- Advance Viral Research Limited,
                  a Bahamian corporation.
     23.1         Consent of Rachlin Cohen & Holtz, Independent Certified Public
                  Accountants*
     23.2         Consent of the law firm of Berman Wolfe & Rennert, P.A. (See
                  Exhibit 5.1).
     23.3         Consent of the law firm of Nottage, Miller & Co.*
     27.1         Financial Data Schedule for the Company as of and for the Nine
                  Months Ended September 30, 1997*

---------------
*    Filed herewith.
**   To be filed by amendment.


                                      II-6

<PAGE>

1.   Documents incorporated by reference herein to certain exhibits the
     Company's 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 the
     Company's 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 the
     Company's Annual Report on Form 10-K for the fiscal year ended December 31,
     1990.
4.   Documents incorporated by reference herein to certain exhibits to the
     Company's Annual Report on Form 10-K for period ended March 31, 1991.
5.   Documents incorporated by reference herein to certain exhibits to the
     Company's Annual Report on Form 10-K for the fiscal year ended December 31,
     1991.
6.   Documents incorporated by reference herein to certain exhibits to the
     Company's report on Form 10-Q for the period ended September 30, 1992.
7.   Documents incorporated by reference herein to certain exhibits to the
     Company's Annual Report on Form 10-KSB for the fiscal year ended December
     31, 1992.
8.   Documents incorporated by reference herein to certain exhibits to the
     Company's report on Form 10-QSB for the period ended March 31, 1993.
9.   Documents incorporated by reference herein to certain exhibits to the
     Company's report on Form 10-QSB for the period ended June 30, 1995.
10.  Documents incorporated by reference herein to certain exhibits to the
     Company's report on Form 10-QSB for the period ended March 31, 1996.
11.  Incorporated by reference herein to the Company's 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.
12.  Documents incorporated by reference herein to certain exhibits to the
     Company's Annual Report on Form 10-KSB for the fiscal year ended December
     31, 1996.
13.  Documents incorporated by reference herein to certain exhibits to the
     Company's Annual Report on Form 10-KSB for the fiscal year ended December
     31, 1997.

     (b) Financial Statement Schedules

     All schedules have been omitted because they are not applicable or not
required or the required information is included in the financial statements or
notes thereto.


                                      II-7

<PAGE>

Item 17.  Undertakings

       The undersigned registrant hereby undertakes:


       (1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:

                  (i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;

                  (ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.

                  (iii) To include any material with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;

         (2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.

         (3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.

         Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provision described under Item 20 or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.



                                      II-8

<PAGE>


                                   SIGNATURES

         Pursuant to the requirements of the Securities Act of 1933, the Company
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Yonkers, State of New York, on January 12, 1999.


                                      ADVANCED VIRAL RESEARCH CORP.

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


         In accordance with the requirements of the Securities Act of 1933, as
amended, this Registration Statement on Form S-1 has been signed herein below by
the following persons in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
Signature                                      Title                                    Date
---------                                      -----                                    ----
<S>                                            <C>                                      <C>
/s/ Shalom Z. Hirschman, M.D                   President and Chief                      January 12, 1999
-----------------------------------            Executive Officer and director
Shalom Z. Hirschman, M.D.


/s/ Bernard Friedland                          Chairman of the Board and                January 12, 1999
-----------------------------------            director
Bernard Friedland


/s/ William Bregman                            Secretary-Treasurer,                     January 12, 1999
-----------------------------------            Principal Financial and
William Bregman                                Accounting Officer, director


/s/ Louis J. Silver                            director                                 January 12, 1999
-----------------------------------
Louis J. Silver
</TABLE>


                                      II-9

<PAGE>


                                INDEX TO EXHIBITS


         Exhibit
         Number            Description
         ------            -----------
         4.12              Securities Purchase Agreement dated December 22,
                           1998, by and between the Company and various
                           purchasers
         4.13              Form of Warrant dated December 22, 1998 to purchase
                           shares of common stock of the Company at $.2040 per
                           share
         4.14              Form of Warrant dated December 22, 1998 to purchase
                           shares of common stock of the Company at $.2448 per
                           share
         23.1              Consent of Rachlin Cohen & Holtz, Independent
                           Certified Public Accountants
         23.3              Consent of the law firm of Nottage, Miller & Co.
         27.1              Financial Data Schedule for the Company as of and for
                           the Nine Months Ended September 30, 1998
[{"type": "S-1", "sequence": "1", "description": "FORM S-1", "secsgml_size_bytes": 552950}]
{"company-data": {"conformed-name": "ADVANCED VIRAL RESEARCH CORP", "cik": "0000786623", "assigned-sic": "2834", "irs-number": "592646820", "state-of-incorporation": "DE", "fiscal-year-end": "1231"}, "filing-values": {"form-type": "S-1", "act": "33", "file-number": "333-70523", "film-number": "99505504"}, "business-address": {"street1": "1250 E HALLANDALE BEACH BLVD", "street2": "STE 501", "city": "HALLANDALE", "state": "FL", "zip": "33009", "phone": "9544587636"}, "mail-address": {"street1": "1250 EAST HALLANDALE BEACH BOULEVARD", "street2": "SUITE 501", "city": "HALLANDALE", "state": "FL", "zip": "33009"}}
As filed with the Securities and Exchange Commission on January 13, 1999.

                                                   Registration No. 333-________
================================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM S-1
             REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

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

                                    Delaware
         --------------------------------------------------------------
         (State or other jurisdiction of incorporation or organization)

                                      5129
            --------------------------------------------------------
            (Primary Standard Industrial Classification Code Number)

                                   59-2646820
                      ------------------------------------
                      (I.R.S. Employer Identification No.)

                  1250 East Hallandale Beach Blvd., Suite 501,
                       Hallandale, Fl 33009 (954) 458-7636
   --------------------------------------------------------------------------
   (Address and telephone number of Registrant's principal executive offices)

                      Shalom Z. Hirschman, M.D., President
                  1250 East Hallandale Beach Blvd., Suite 501,
                       Hallandale, Fl 33009 (954) 458-7636
           ---------------------------------------------------------
            (Name, address and telephone number of agent for service)
                                 ---------------
                                   Copies to:
                            CHARLES J. RENNERT, ESQ.
                          Berman Wolfe & Rennert, P.A.
                          NationsBank Tower, Suite 3500
                            Miami, Florida 33131-2130
                     (305) 577-4177 Phone (305) 373-6036 Fax
                                 ---------------
Approximate date of commencement of proposed sale of the securities to the
public: As soon as practicable after the effectiveness of this Registration
Statement.

If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]

If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] _________

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] _________

If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [ ]
CALCULATION OF REGISTRATION FEE
Proposed maximum         Proposed maximum
   Title of each class of         Amount to        offering price per       aggregate offering           Amount of
securities to be registered     be registered           share(1)                 price(1)             registration fee
---------------------------     -------------           --------                 --------             ----------------
Common Stock par                 49,700,731              $.1925                  $9,567,391                 $2,700
value $.00001 per share                                                                                    --------
Total Fee                                                                                                   $2,700
                                                                                                           ========
-----------------------
(1)   Estimated solely for the purpose of calculating the registration fee on
      the basis of the average of the closing bid and ask prices of the Common
      Stock on January 11, 1999, as reported on the OTC Electronic Bulletin
      Board.

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

         THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.

                      [This Space Intentionally Left Blank]
Prospectus subject to completion, dated January 13, 1999.

                          ADVANCED VIRAL RESEARCH CORP.
                        49,700,731 SHARES OF COMMON STOCK

         This Prospectus relates to the sale of up to 49,700,731 shares of
common stock, par value $.00001 per share (the "Common Stock"), of Advanced
Viral Research Corp. (the "Company") offered for the account of certain
shareholders of the Company (the "Selling Shareholders"). These 49,700,731
shares (the "Shares") include (i) 41,666,667 shares of Common Stock issued or
reserved for issuance upon the conversion of a 7% Convertible Debenture due
October 31, 2008 issued by the Company (the "Debenture"); (ii) 750,000 shares of
Common Stock reserved for issuance upon the exercise of warrants issued in
connection with the Debenture (the "Debenture Warrants"); (iii) 4,917,276 shares
of Common Stock held by certain shareholders; and (iv) 2,366,788 shares of
Common Stock reserved for issuance upon the exercise of warrants (the "Purchase
Warrants"). The actual number of shares of Common Stock issued or issuable upon
conversion of the Debenture is subject to adjustment and could be materially
less or more than the above estimated amount, depending upon factors that cannot
be predicted by the Company at this time, including, among others, the future
market price of the Common Stock.

         The Selling Shareholders may offer and sell the Shares through public
or private transactions and may sell the Shares at market prices prevailing at
the time of sale, at prices related to such prevailing prices, at negotiated
prices or at fixed prices. The Selling Shareholders may also transfer the Shares
in other ways. The Selling Shareholders and any brokers and dealers involved in
sales of the Shares offered under this Prospectus may be deemed to be
"underwriters" within the meaning of the Securities Act of 1933, as amended (the
"Securities Act"), and the commissions or discounts and other compensation paid
to those brokers and dealers may be regarded as underwriters' compensation. See
"Selling Shareholders" and "Plan of Distribution."

         The Company will not receive any of the proceeds from the sale of the
Shares by the Selling Shareholders. The Company will receive proceeds upon the
exercise of the Debenture Warrants and the Purchase Warrants (collectively, the
"1998 Warrants"), and has agreed to bear substantially all expenses of
registration of the Shares under federal and state securities laws, other than
commissions, fees and discounts of underwriters, brokers, dealers and agents,
and to indemnify the Selling Shareholders against certain liabilities, including
liabilities under the Securities Act.

         The Common Stock is listed for trading on the National Association of
Securities Dealers, Inc.'s OTC Bulletin Board (the "Bulletin Board") under the
symbol "ADVR." On January 11, 1999 the low and high bid prices for the Common
Stock on the Bulletin Board were $.19 and $.198, respectively.

         Investing in the Common Stock involves certain risks. See "High Risk
Factors" beginning on page 7.

         Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this Prospectus. Any representation to the contrary is a
criminal offense.

                The date of this Prospectus is __________, 1999.

++++++The information in this prospectus is not complete and may be changed. The
Selling Shareholders may not sell these securities until the registration
statement filed with the Securities Exchange Commission is effective. This
Prospectus is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.++++++
TABLE OF CONTENTS

PROSPECTUS SUMMARY...........................................................1
   The Company...............................................................1
   Recent Developments.......................................................4
   The Offering..............................................................5

SUMMARY FINANCIAL DATA.......................................................6
   Summary Statement of Operations Data......................................6
   Summary Balance Sheet Data................................................6

WHERE YOU CAN FIND MORE INFORMATION..........................................7

FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE  ............................7

HIGH RISK FACTORS............................................................8

USE OF PROCEEDS.............................................................17

MARKET PRICE OF AND DIVIDENDS ON THE .......................................17

COMMON STOCK AND RELATED SHAREHOLDER MATTERS................................17
   Market Information.......................................................17
   Shareholders.............................................................17
   Dividend Policy..........................................................18

CAPITALIZATION..............................................................18

SELECTED CONSOLIDATED FINANCIAL DATA........................................19
   Selected Statement of Operations Data....................................19
   Selected Balance Sheet Data..............................................20

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.......................................................21
   Results of Operations....................................................21
   Liquidity................................................................22
   Capital Resources........................................................23
   Year 2000 Compliance.....................................................26

BUSINESS....................................................................26
   Overview ................................................................26
   Background of RETICULOSE.................................................27
   Exclusive Rights of the Company to RETICULOSE and Production
      Arrangements .........................................................31
   Government Regulation....................................................34
   The Investigational New Drug Application Process.........................34

                                        i
Testing Agreements.......................................................44
   Marketing And Sales......................................................52
   Competition..............................................................52
   Employees................................................................53
   Consulting Agreements....................................................53
   Exclusive Distribution Agreements........................................56

MANAGEMENT..................................................................60
   Executive Officers and Directors.........................................60
   Director Compensation....................................................61
   Executive Officer Compensation...........................................61
   Employment Contracts, Termination of Employment and
      Change-in-Control Arrangements........................................62

PRINCIPAL SHAREHOLDERS......................................................64

SELLING SHAREHOLDERS........................................................66

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............................67

DESCRIPTION OF SECURITIES...................................................67
   Common Stock.............................................................67

PLAN OF DISTRIBUTION........................................................67

LEGAL MATTERS...............................................................68

EXPERTS.....................................................................69

GLOSSARY OF TERMS...........................................................69

INDEX TO FINANCIAL STATEMENTS..............................................F-1

                                       ii
PROSPECTUS SUMMARY

         This summary highlights information contained elsewhere in this
Prospectus. It is not complete and does not contain all of the information that
you should consider before investing in the Common Stock. You should read the
entire Prospectus carefully, including"High Risk Factors," the financial
statements, and "Where You Can Find More Information," before making any
decision to invest in the Common Stock.

The Company

         Advanced Viral Research Corp. (the "Company") was incorporated on July
31, 1985, under the laws of the State of Delaware, to engage in the production
and marketing, promotion and sale of the pharmaceutical product with the trade
name RETICULOSE, an anti-viral peptide-nucleic acid complex preparation.
RETICULOSE has not been approved for sale or use. See "Business -- Government
Regulation," "-- Marketing and Sales," and "-- Exclusive Distribution
Agreements." Accordingly, unless and until such approval is granted in the
United States or another "developed or developing country," sales of RETICULOSE
will not be significant, and there can be no assurance that they will be
significant even if approval is granted. The Company is in the developmental
stage, and has not yet commenced any commercial operations.

         History of RETICULOSE. RETICULOSE, the rights to which were acquired by
the Company in 1986, was marketed and used in the United States and elsewhere in
the world during the 1940's through the early 1960's. See "Business --
Background of RETICULOSE," and "-- Exclusive Rights of the Company to RETICULOSE
and Production Arrangements." In 1962 RETICULOSE was classified as a "new drug"
by the Food and Drug Administration of the United States Department of Health
and Human Services ("FDA"), requiring FDA approval for sale in the United
States. Legal action by the FDA resulted in RETICULOSE being withdrawn from the
United States market. See "Business -- Background of RETICULOSE." In 1967 and
1968, two applications for approval of RETICULOSE, one for sale and the other
for human clinical research in the United States, were filed and withdrawn
without prejudice on indications from the FDA that the applications would not be
approved. See "Business -- Background of RETICULOSE" and "The Investigational
New Drug Application Process." See generally, "Glossary" and "High Risk
Factors." Other than a report published in August 1996 by Shalom Hirschman, then
consultant, now President, Chief Executive Officer and a director of the
Company, none of the reports summarized in this Prospectus is more recent than
1969 because of a general lack of research interest in RETICULOSE. THE FDA HAS
REQUESTED THAT THE COMPANY DEMONSTRATE THAT THE COMPANY'S CURRENT FORMULATION OF
RETICULOSE IS IDENTICAL TO THE FORMULATION REPORTED IN THE REPORTS.

         Bernard Friedland, former President and current Chairman of the Board
of the Company, as sponsor, submitted to the FDA on September 20, 1984 an
application for a study, on human subjects, of the efficacy of RETICULOSE upon
AIDS: the Notice of Claimed Investigational Exemption for a New Drug ("IND").
Under FDA regulations, the Company is not permitted to engage in or authorize
human studies regarding RETICULOSE if the FDA notifies the Company of "serious
deficiencies that require correction before human studies can begin or that
would require restriction

                                        1
of human studies until correction," until the Company is notified that the
material that it has submitted to correct the deficiencies is "satisfactory."

         In response to two deficiency letters from the FDA, the Company, on
March 6, 1992, submitted to the FDA additional information, including findings
from independent research laboratories, intending, among other things, to
procure the FDA's approval to conduct human clinical trials for RETICULOSE (the
"March 1992 FDA Submission"). On July 31, 1992, the Company received a third
deficiency letter from the FDA, dated July 27, 1992 (the "July 1992 Deficiency
Letter"), which provided detailed comments with respect to chemistry,
toxicology, microbiology and clinical areas requiring further studies and
actions on the part of the Company. BEFORE SEPTEMBER 1995, THE COMPANY RECEIVED
FURTHER CORRESPONDENCE FROM THE FDA, WHICH STATED, AMONG OTHER COMMENTS, THAT
THE COMPANY'S PRIOR SUBMISSIONS TO THE FDA DID NOT PROVIDE AN ADEQUATE RESPONSE
TO THE FDA'S EARLIER REQUEST FOR PRECLINICAL INFORMATION AND ACCORDINGLY THE
COMPANY'S IND WAS "INACTIVATED." The Company believes that the use of the term
"inactivated" indicates the FDA's position that the Company did not comply with
the FDA's written requests articulated in several deficiency letters within a
reasonable time. Accordingly, the Company believes it must refile or amend the
IND in order for the IND to be continued to be reviewed by the FDA. The Company
has not formally responded to the July 1992 Deficiency Letter or the 1995
deficiency letter. No assurances can be given that the Company's IND will ever
be approved by the FDA or that results of any testing will demonstrate that
RETICULOSE is safe or effective in the treatment of disease. The Company is
currently in the preliminary stage of preparing a new IND for filing with the
FDA (the "New IND"), although there can be no assurances as to the costs or the
timing of the filing of the New IND, if at all. Even if the New IND is filed,
the Company currently does not believe it has the resources to complete the FDA
approval process. The Company intends to allocate certain funds from the sale of
the Debenture and the exercise of certain stock options and warrants, for the
purpose of filing the New IND with the FDA. No assurance can be given, however,
that any options or warrants will be exercised, that the New IND will be
accepted by the FDA or that any tests previously conducted or to be conducted
will satisfy FDA requirements. See "Business -- The Investigational New Drug
Application Process" and "-- Testing Agreements -- Testing in the United States
of America."

         Testing of RETICULOSE. Open label clinical trials of RETICULOSE on
Human Papilloma Virus (HPV) at two separate hospitals located in Buenos Aires,
Argentina (the "HPV Clinical Trial") indicated clinical improvement in half, and
adverse side effects in none, of the 20 patients tested. See "Business --
Testing Agreements -- Argentina Agreements."

         Laboratory tests of RETICULOSE (the "Hirschman Study") at the Mount
Sinai School of Medicine, New York, New York under the supervision of Shalom Z.
Hirschman, M.D., then Professor of Medicine and Director of the Division of
Infectious Diseases of the Mount Sinai School of Medicine, currently the
Company's President and Chief Executive Officer, demonstrate that RETICULOSE
stimulates the production of a unique set of chemokines, including Interleukin 1
(IL-1), Interleukin 6 (IL-6) and Gamma Interferon, and inhibits the replication
of HIV in cell cultures.

                                       2
The first stage of a double-blind, randomized, placebo-controlled
clinical trial using RETICULOSE in the treatment of AIDS was completed in late
November 1996 (the "AIDS Clinical Trial"). The AIDS Clinical Trial is being
conducted at the Queen Elizabeth Hospital, Bridgetown, Barbados. Other than the
AIDS Clinical Trial, no controlled double-blind clinical trials of RETICULOSE
have commenced. The Company believes, however, based on certain prior history
and the published data for the years 1951 until 1962, largely anecdotal, that
RETICULOSE is an anti-viral pharmaceutical product which is safe and effective
in treating a number of interferon related viruses such as Asian Influenza,
Viral Pneumonia, Virus Infectious Hepatitis, Mumps, Encephalitis, Herpes Simplex
and Herpes Zoster. However, two articles published in 1962 in recognized medical
journals questioned the efficacy of RETICULOSE on certain viral diseases in
laboratory tests. There can be no assurance of the success of such testing or
whether such testing or any other potential testing that may be commenced will
result in FDA approval. See "High Risk Factors -- RETICULOSE -- Limited Medical
Acceptance and No Assurance of Effectiveness" and "Business -- Background of
RETICULOSE."

         In March 1997, the Company entered into a Material Transfer Agreement
-- Cooperative Research and Development Agreement (the "NCI Agreement") with
certain governmental agencies (including the FDA) represented by The National
Cancer Institute (collectively, the "Government Agencies"). The purpose of the
NCI Agreement is for Dr. Howard Young, Section Chief, Laboratory of Experimental
Immunology, Division of Basic Sciences, the National Cancer Institute, to
determine the molecular mechanism by which RETICULOSE may specifically enhance
transcription of the gamma interferon gene. The Company intends to supply
RETICULOSE to the Government Agencies for the purpose of research by the
Government Agencies in accordance with a research plan attached to the NCI
Agreement, subject to the conditions stated in the NCI Agreement. The NCI
Agreement provides for non-disclosure by the Government Agencies and an
understanding that the Company and the Government Agencies will enter into
licenses to one another on terms to be negotiated in the future, in the event
the research produces an invention. Either the Company or the Government
Agencies may terminate the NCI Agreement upon 30 days prior written notice to
the other. Pursuant to an agreement dated March 19, 1998, the NCI Agreement has
been extended for an additional one year period and provides for the continued
study of the basic mechanisms of immune responses, the investigation of
anti-tumor activity of RETICULOSE and its effect on rheumatoid arthritis. See
"Business -- Testing Agreements -- National Cancer Institute Study."

         In February 1998, the Company entered into a Concurrent Agreement with
DCT S.R.L., an Argentine corporation ("DCT"), whereby the Company agreed to
provide DCT or its assignees up to $412,960 to cover the costs of a study on 65
patients to compare the results of treatment of AIDS patients using a three-drug
cocktail and RETICULOSE versus AIDS patients taking a three-drug cocktail and a
placebo. See "Business -- Testing Agreements -- Argentina Agreement."

         In May 1998, the Company entered into an agreement with DCT (the
"Rheumatoid Arthritis Agreement") whereby the Company agreed to provide DCT or
its assignees up to $94,950 to cover the costs of a controlled study in 30
patients to determine the efficacy of RETICULOSE for the treatment of rheumatoid
arthritis in humans.

                                       3
In July 1998, the Company authorized the expenditure of up to $135,000
to study the effects of RETICULOSE in inhibiting the mutation of the AIDS virus
on patients in Argentina and Barbados. See"Business -- Testing Agreements --
Argentina Agreement" and "-- Barbados Study."

Recent Developments

         RBB Convertible Debenture and Warrants. On November 16, 1998, pursuant
to a Securities Purchase Agreement, the Company sold to RBB Bank
Aktiengesellschaft ("RBB") as agent for the accounts of certain persons
(collectively, the "Investors"): (i) a 7% Convertible Debenture due October 31,
2008 in the principal amount of $1,500,000 (the "Debenture"), and (ii) two
warrants to purchase a total of 750,000 shares of Common Stock (the "Debenture
Warrants"), for an aggregate purchase price of $1,500,000 (the "RBB Agreement").
The sale of the Debenture and the Debenture Warrants was made pursuant to
Regulation S promulgated by the Securities and Exchange Commission (the
"Commission") under the Securities Act. The Company relied on the
representations, warranties and covenants made by RBB in the RBB Agreement
relating to the sale of the Debenture and the Debenture Warrants for all the
facts necessary to make the Regulation S exemption to the registration
requirements under the Securities Act available.

         In connection with the sale of the Debenture and the Debenture
Warrants, the Company paid RBB a placement fee equal to 7% of the aggregate
purchase price. All or a portion of the Debenture may be converted into shares
of Common Stock equal to the principal amount and accrued and unpaid interest
outstanding under the Debenture on the conversion date divided by the Applicable
Conversion Price. "Applicable Conversion Price,"as provided in the RBB
Agreement, means the lesser of: (i) $.20 and (ii) the product obtained by
multiplying (a) the Average Closing Price times (b) 0.72. "Average Closing
Price" with respect to any conversion elected to be made by the holder will be
the average of the daily closing prices on the Bulletin Board for the three
consecutive trading days, as selected by the holder, out of ten trading days
immediately preceding the date on which the holder gives the Company a written
notice of the holder's election to convert outstanding principal of the
Debenture. Accrued interest under the Debenture is payable semiannually on
January 1 and July 1 of each year at the rate of 7% per annum on the unpaid
principal balance from the date of issuance until the date of the interest
payment. The Debenture will mature on October 31, 2008.

         At its option, the Company may prepay the Debenture at any time prior
to maturity without premium or penalty at a price equal to the principal amount
of the Debenture plus accrued and unpaid interest thereon. The Debentures may
not be converted by the holder after the third day preceding the specified
prepayment date contained in the Company's notice of its intent to prepay
pursuant to the RBB Agreement.

         One of the Debenture Warrants entitles the holder thereof to purchase
in the aggregate 375,000 shares of Common Stock at an exercise price of $.20 per
share. The other Debenture Warrant entitles the holder thereof to purchase in
the aggregate 375,000 shares of Common Stock at an exercise price of $.24 per
share. Both Debenture Warrants are exercisable at any time and from time to time
until October 31, 2008.

         Under the terms of the RBB Agreement, the Company is required to file
with the Commission this Registration Statement to register the Common Stock
issuable upon conversion of the Debenture and upon exercise of the Debenture
Warrants to allow the Investors to resell such Common Stock to the public. In
the event this Registration Statement is not declared effective by the
Commission on or before April 13, 1999 (the "Effective Deadline"), the Company
is obligated under the RBB Agreement to pay RBB a penalty equal to the sum of
(x) $30,000 and (y) $1,500 for each day lapsed

                                        4
after the Effective Deadline, until this Registration Statement is declared
effective by the Commission, provided, however, that total penalties shall not
exceed $100,000 in the aggregate.

         Purchase Agreement and Warrants. On December 22, 1998, pursuant to a
Securities Purchase Agreement (the "Purchase Agreement"), the Company issued to
certain purchasers (collectively, the "Purchasers") (i) 4,917,276 shares of
Common Stock, and (ii) four warrants to purchase a total of 2,366,788 shares of
Common Stock, including (x) two warrants to purchase 1,966,788 shares of Common
Stock and (y) a finder's fee paid to Harborview Group consisting of two warrants
to purchase 400,000 shares of Common Stock (collectively, the "Purchase
Warrants") for an aggregate purchase price of $802,500.

         Two of the Purchase Warrants entitle the holders thereof to purchase
983,394 and 983,394 shares of Common Stock at exercise prices of $.2040 and
$.2448 per share, respectively. The other two Purchase Warrants which relate to
the finder's fee entitle the holders thereof to purchase 200,000 and 200,000
shares of Common Stock at exercise prices of $.2040 and $.2448 per share,
respectively. All four Purchase Warrants are exercisable at any time and from
time to time until December 31, 2003.

         Under the terms of the Purchase Agreement, the Company is required to
file with the Commission this Registration Statement to register the Common
Stock issued thereunder and upon exercise of the Purchase Warrants to allow the
Purchasers to resell such Common Stock to the public. The Purchase Agreement
further provides that, in the event this Registration Statement is not declared
effective by the Commission on or before May 21, 1999 (the "Effective
Deadline"), the Company is required to pay to the Purchasers a penalty of
$30,000 (allocated pro rata to each Purchaser as set forth in the Purchase
Agreement) for each full calendar month or portion thereof lapsed after the
Effective Deadline, until this Registration Statement is declared effective,
provided, however, that total penalties shall not exceed $100,000 in the
aggregate.

         The Company currently maintains offices at 1250 East Hallandale Beach
Boulevard, Suite 501, Hallandale, Florida 33009 and 200 Corporate Boulevard
South, Yonkers, New York 10701. Its telephone number in Hallandale, Florida is
(954) 458-7636 and its telephone number in Yonkers, New York is (914) 376-7383.
See "Business -- Property."

The Offering
Common Stock being offered.......................... 49,700,731 shares(1)
         Common Stock outstanding............................ 346,123,638 shares(1)

         Use of Proceeds..................................... The Company will not receive any of the
                                                              proceeds from the sale of  the Shares offered
                                                              hereunder by the Selling Shareholders.  The
                                                              offering  is made to fulfill the Company's
                                                              contractual obligations to the Selling
                                                              Shareholders to register the Shares held by the
                                                              Selling Shareholders.  See "Use of Proceeds."
5
High Risk Factors................................... Prospective purchasers should consider
                                                              carefully certain risks concerning the Company
                                                              and its business, including those described
                                                              under "High Risk Factors -- Limited
                                                              Operations; No Present Source of Revenues;
                                                              No Record of Earnings and Accumulated
                                                              Deficit"; "Qualification Regarding Going
                                                              Concern"; "Risks Associated with Outstanding
                                                              Convertible Debenture"; Elimination of
                                                              Liability for Directors"; Failure of
                                                              RETICULOSE to be Approved for Sale by the
                                                              FDA"; "Single Product -- Very Limited Sales";
                                                              and "RETICULOSE -- Limited Medical
                                                              Acceptance and No Assurance of
                                                              Effectiveness," among other factors.
----------------
(1) This amount includes (i) 41,666,667 shares issuable upon full conversion of
    the Debenture, which amount may fluctuate depending upon, among other 
    things, the future market price of the Company's Common Stock and (ii) 
    3,116,788 shares of Common Stock issuable upon exercise of the 1998 
    Warrants. Excludes 32,800,549 shares issuable upon the exercise of certain
    stock options and warrants.

                             SUMMARY FINANCIAL DATA

Summary Statement of Operations Data
(Unaudited)
                                                      Years Ended December 31                            9 Mos. Ended
                             --------------------------------------------------------------------------  September 30
                                       1993          1994           1995           1996           1997          1998
                                      ------        ------         ------         ------         ------        -----
Net revenues                         $23,892       $84,852        $68,483       $102,907       $121,923       $80,289
Net income (loss)                  ($563,309)    ($440,837)     ($401,884)   ($1,154,740)   ($4,141,729)  ($3,118,824)
Net income (loss) per common           ($.00)        ($.00)         ($.00)         ($.00)         ($.00)        ($.00)
share
Weighted average # of shares     232,151,991   238,354,491    248,002,608    257,645,815    274,534,277   290,194,958
Summary Balance Sheet Data
December 31                                (Unaudited)
                             --------------------------------------------------------------------------  September 30
                                       1993          1994           1995           1996           1997          1998
                                      ------        ------         ------         ------         ------        -----
Total Assets                        $572,507      $452,264       $796,241     $1,716,800     $4,189,842    $1,779,767
Long-term debt                             -             -              -              -     $2,384,793             -
Stockholders' equity per                $.00          $.00           $.00           $.01           $.00          $.01
common share
Shares outstanding at year end   236,276,991   241,616,991    251,181,774    247,031,058    277,962,574   296,422,907
6
WHERE YOU CAN FIND MORE INFORMATION

         The Company files annual, quarterly and current reports, proxy
statements and other information with the Commission. You may read and copy any
reports, statements or other information filed by either company at the
Commission's public reference rooms in Washington, D.C., New York City and
Chicago. Please call the Commission at 1-800-SEC-0330 for further information on
the public reference rooms. The Company's filings are also available to the
public from commercial document retrieval services and at the Internet web site
maintained by the Commission at http://www.sec.gov.

         The Company filed a Registration Statement on Form S-1 (the
"Registration Statement") to register with the Commission the resale of the
Shares issued or issuable to the Selling Shareholders as provided herein. This
Prospectus is a part of that Registration Statement and constitutes a prospectus
of the Company. As permitted by the Commission's rules, this Prospectus does not
contain all of the information you can find in the Registration Statement or the
exhibits to the Registration Statement. This Prospectus summarizes some of the
documents that are exhibits to the Registration Statement, and you should refer
to the exhibits for a more complete description of the matters covered by those
documents.

         The Company has not authorized anyone to give any information regarding
the offering of the Shares that is different from what is contained in this
Prospectus. This Prospectus is not an offer to sell or a solicitation of anyone
to whom it would be unlawful to make an offer of solicitation. You should not
assume that the information contained in this Prospectus is accurate as of any
time after the date of this Prospectus, and neither the mailing of this
Prospectus to the Company's shareholders nor the issuance of the Shares should
create any implication to the contrary.

                 FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE

         This document contains "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. These statements relate
to expectations concerning matters that are not historical facts. Although the
Company believes that the expectations reflected in such forward-looking
statements are reasonable, it can give any assurance that such expectations will
prove to have been correct. Important factors that could cause actual results to
differ materially from such expectations ("Cautionary Statements") are disclosed
herein and therein, including, without limitation in conjunction with the
forward-looking statements included under "High Risk Factors." All
forward-looking statements attributable to the Company are expressly qualified
in their entirety by the Cautionary Statements described herein.

         The Company makes no express or implied representation or warranty as
to the attainability of the projected or estimated financial information set
forth herein or as to the accuracy or completeness of the assumptions from which
such projected or estimated information is derived. Projections or estimations
of the Company's future performance are necessarily subject to a high degree of
uncertainty and may vary materially from actual results. Reference is made to
the particular discussions set forth under "High Risk Factors," and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

                                        7
HIGH RISK FACTORS

         THE SECURITIES OFFERED HEREBY ARE HIGHLY SPECULATIVE IN NATURE AND
INVOLVE A HIGH DEGREE OF RISK. THEY SHOULD BE PURCHASED ONLY BY PERSONS WHO CAN
AFFORD TO LOSE THEIR ENTIRE INVESTMENT. THEREFORE, EACH PROSPECTIVE PURCHASER
SHOULD, PRIOR TO PURCHASE, CONSIDER VERY CAREFULLY THE FOLLOWING RISK FACTORS,
AS WELL AS ALL OTHER INFORMATION SET FORTH ELSEWHERE IN THIS PROSPECTUS,
PARTICULARLY THE INFORMATION CONTAINED IN THE CONSOLIDATED FINANCIAL STATEMENTS
HEREIN.

         Limited Operations; No Present Source of Revenues; No Record of
Earnings and Accumulated Deficit. The Company was incorporated under the laws of
the State of Delaware on July 31, 1985, has a very limited operating history,
has only insignificant operating revenues and must be considered promotional and
still in its early developmental stage. From inception through September 30,
1998, the Company had an accumulated deficit of $12,112,090. The Company is
dependent upon approval of RETICULOSE for sale before it can begin any
significant commercial operations.

         No applications for approval have been filed in any country, except for
the IND submitted to the FDA on September 20, 1984 by Bernard Friedland, former
President and current Chairman of the Board of the Company, as sponsor. Under
FDA regulations, the Company is not permitted to engage in or authorize human
studies regarding RETICULOSE if the FDA notifies the Company of "serious
deficiencies that require correction before human studies can begin or that
would require restriction of human studies until correction" until the Company
is notified that the material that it has submitted to correct the deficiencies
is "satisfactory." The Company has received and responded to two deficiency
letters from the FDA, which responses were not deemed adequate. BEFORE SEPTEMBER
1995, THE COMPANY RECEIVED FURTHER CORRESPONDENCE FROM THE FDA, WHICH STATED,
AMONG OTHER COMMENTS, THAT THE COMPANY'S PRIOR SUBMISSIONS TO THE FDA DID NOT
PROVIDE AN ADEQUATE RESPONSE TO THE FDA'S EARLIER REQUEST FOR PRECLINICAL
INFORMATION AND ACCORDINGLY THE COMPANY'S IND WAS "INACTIVATED." The Company has
not formally responded to a third deficiency letter (i.e., the July 1992
Deficiency Letter) or the 1995 deficiency letter. See "Business -- the
Investigational New Drug Application Process." No assurances can be given that
the Company's IND will ever be approved by the FDA or that results of any future
testing will demonstrate that RETICULOSE is safe or effective in the treatment
of disease. See "Business -- Testing Agreements -- Argentina Agreements," "--
Government Regulation," "-- Marketing and Sales," and "-- Exclusive Distribution
Agreements." See also the discussion of the Hirschman Study and the AIDS
Clinical Trial under "Business -- Background of RETICULOSE." There can be no
assurance, however, that the HPV Clinical Trial, the AIDS Clinical Trial or any
other potential testing that may be commenced will prove successful.

                                       8
The Company's cash position, from time to time, has been the result of
the proceeds from the Company's initial public offering on May 16, 1986, the
exercise of warrants issued in connection with the initial public offering, the
exercise of certain stock options, the sale of convertible debentures in 1997
and 1998, fees paid for distribution rights by the Company's exclusive
distributors which fees also included deposits on purchases of RETICULOSE by a
distributor, and limited sales of RETICULOSE for testing purposes. See
"Management's Discussion and Analysis and Results of Operations -- Capital
Resources." Although the Company's cash position has recently improved due to
the Company's recent sale of securities, the Company's cash position of
approximately $673,041 as of September 30, 1998 is largely due to stock options
being exercised and the proceeds of convertible debentures sold in 1997. Such
funds will not be adequate to pay all the costs associated with the full range
of continued research and development and testing, as well as the clinical
trials that may be required by the FDA, in order to obtain approval for the IND
to test RETICULOSE in the United States, which is a prerequisite for being able
to market and sell RETICULOSE in the United States. However, the Company's cash
position is sufficient to fund the ongoing AIDS Clinical Trial, which costs not
yet expended are estimated at $75,000. Unless and until RETICULOSE is approved
for sale in the United States or in another developed or developing country, or
one or more of the Company's distributors obtains approval for the sale of
RETICULOSE in any of their respective territories, the Company will be dependent
upon the continued sale of its securities and/or the exercise of options and
warrants for funds to meet its continued cash requirements. In such event, the
Company may be dependent on the willingness of third parties to accept shares of
the Common Stock, options or warrants to acquire shares of the Common Stock as
compensation to conduct tests or provide other services to the Company. No
assurance can be given that such financing or services, if and when required,
will be available, or if available, will be at terms acceptable to the Company.
Any issuance of a substantial number of additional shares of Common Stock would
also dilute the ownership of present shareholders.

         Potential investors should be made aware of the difficulties
encountered by any business enterprise in its development stage, especially in
view of the intense competition from existing and more established businesses in
the medical/pharmaceutical fields, most of which have substantial capital assets
and income to fund any research, development, promotional and marketing programs
and regulatory protocols that are necessary in connection with
medical/pharmaceutical products. See "Business -- Competition." There is nothing
at this time upon which to base any assumption that the Company will either
generate operating revenues or will ever be able to operate on a profitable
basis. If the Company's plans prove to be unsuccessful, its shareholders and
holders of options and warrants may lose all or a substantial portion of their
investment. See "Business -- Testing Agreements" and "-- Exclusive Distribution
Agreements."

         Qualification Regarding Going Concern. The Company's independent
accountants' report on the Company's consolidated financial statements for the
fiscal year ended December 31, 1997, includes an explanatory paragraph in Note 2
to the Consolidated Financial Statements stating that the Company's ability to
continue operations is dependent upon its continued sale of its securities for
funds to meet its cash requirements, which factors raise substantial doubt about
the Company's ability to continue as a going concern. Further, the accountant's
report does not include any adjustments that might result from the outcome of
this uncertainty. The Company has no immediate plan to issue any securities,
otherwise than upon the possible exercise of options or warrants or the
conversion of the Debenture. The Company has suffered material losses from
operations during its limited operating history.

                                        9
The Company is dependent upon registration of RETICULOSE for sale in
the United States or in another developed or developing country before it can
begin commercial operations. The Company's cash position may be inadequate to
pay all the costs associated with the full range of testing and clinical trials
required by the FDA. Management does not anticipate registration or other
approval of RETICULOSE in an industrially developed or developing country in the
immediate future. Unless and until RETICULOSE is approved for sale in the United
States or another such country or unless RETICULOSE is approved for sale in one
or more of its distributors' territories with both a material population and
healthy profile, the Company may be dependent upon the continued sale of its
securities or the exercise of its options or warrants for funds to meet its cash
requirements. In addition, the Company may seek debt financing, but no
agreements have been entered into or identified with regard to any financing
except the Debenture described under "Management's Discussion and Analysis and
Results of Operations -- Capital Resources." In the event that financing is not
available, in order to continue operations, management anticipates that they
will have to defer their salaries. No assurances can be given that other debt
financing will be readily obtainable on favorable terms, that the Company will
be able to sustain its operations until approval for sale of RETICULOSE is
granted or that any such approval will be granted. The Consolidated Financial
Statements do not include any adjustments relating to the recoverability and
classification of recorded assets and classification of liabilities that might
be necessary should the Company be unable to continue in existence. See
"Management's Discussion and Analysis and Results of Operations" and "Notes to
Consolidated Financial Statements."

         Elimination of Liability for Directors. The Company's Certificate of
Incorporation was amended on December 30, 1987, to limit or eliminate director
liability by incorporating new Article Eleventh, which provides: "A director of
the Corporation shall not be personally liable to the Corporation or its
shareholders 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 shareholders, (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."

         Failure of RETICULOSE to be Approved for Sale by the FDA. Management of
the Company believes that the United States constitutes one of the major and
most profitable pharmaceutical markets in the world. Since 1962, when
RETICULOSE, among many other drugs, was reclassified as a "new drug" by the FDA,
the Company has not been able to market RETICULOSE in the United States. This
has been the direct result of its inability to satisfy the regulatory protocols
and the substantial preapproval requirements imposed by the FDA upon the
introduction of any new or unapproved drug product, which include lengthy and
detailed laboratory and clinical testing procedures, sampling activities and
other costly and time consuming procedures. There is no assurance that FDA
approval for the sale of RETICULOSE in the United States will ever be obtained
or that the results of the current AIDS Clinical Trial or any other clinical
studies and tests will be sufficient to lead to FDA approval of an IND for
clinical testing of RETICULOSE on humans in the United States. Further, there
can be no assurance that RETICULOSE will ever be approved by any developed or
developing country, without which no significant revenues will ever be generated
by the Company from the sale of RETICULOSE.

                                       10
Single Product -- Very Limited Sales. There have been no sales by the
Company of RETICULOSE, except for insignificant revenues related to distribution
of the drug for testing purposes. RETICULOSE is not currently marketed or
approved for sale or use, and there can be no assurance that it will be approved
for sale or use in the future. The Company has currently in effect exclusive
distribution agreements with distributors to market and sell RETICULOSE, subject
to each distributor obtaining regulatory approval, in the following countries:
China, Japan, Hong Kong, Macao, and Taiwan (AVIX International Pharmaceutical
Corp., a New York corporation ("AVIX")); Mexico (AVIX); Channel Islands, Isle of
Man, British West Indies, Jamaica, Haiti, Bermuda, Belize and Saudi Arabia
(Commonwealth Pharmaceuticals, a corporation organized under the laws of Cayman
Islands, British West Indies ("Commonwealth")); and Argentina, Bolivia,
Paraguay, Uruguay, Brazil, and Chile (DCT). The Company is dependent upon
obtaining regulatory approval of RETICULOSE for sale and use in the United
States, in other developed countries, or alternatively in one or more of its
distributors' territories in order to have the potential for significant
distribution and sales of RETICULOSE. There can be no assurance that any
significant sales will be generated by the Company's distribution agreements,
and further, there can be no assurance that any such distributors will receive
timely, if ever, necessary approvals to market RETICULOSE in their respective
territories. See "Business -- Exclusive Distribution Agreements."

         RETICULOSE - Limited Medical Acceptance and No Assurance of
Effectiveness. RETICULOSE is neither widely known nor accepted by the medical
community nor approved for use in the United States for any purpose by the FDA.
Two articles published in 1962 in recognized medical journals have questioned
the anti-viral effect of RETICULOSE on Mumps, Encephalitis and Herpes Simplex
utilizing tissue culture; on Herpes Simplex in students; and on Lansing Polio
and mouse adapted and egg adapted Influenza: A. C. Kempe, "Failure to
Demonstrate Antiviral Activity of RETICULOSE," American Journal of Diseases of
Children, Vol. 103, May 1962, and Behbehani, "The Effect of RETICULOSE on Viral
Infections of Experimental Animals," Southern Medical Journal, Vol. 55, February
1962. The only "double blind" study of RETICULOSE completed by or for the
Company is the AIDS Clinical Trial.

         Although the Company has filed the IND with the FDA, it must first
satisfy the FDA that the current formulation of RETICULOSE is identical to the
formulation reported on in the prior anecdotal history and studies. In the
opinion of Mr. Friedland, former President and currently Chairman of the Board
of Directors of the Company, a peptide study conducted by the University of
Wisconsin Biotechnology Center in 1987 and 1988 exclusively for the Company (the
"Wisconsin Study") showed that the peptide analyses of four RETICULOSE samples,
two of which were 16 years old and manufactured by Key Pharmaceuticals Limited,
and two of which were one year old and manufactured by Advance Viral Research
Limited, indicated that all four product samples were essentially the same
product as demonstrated by reverse phase high performance liquid chromatography.
According to the Wisconsin Study, additional analyses conducted by gel cell
electrophoresis demonstrated that all four samples were essentially of the same
composition, which validate both stability and identical structure of the
RETICULOSE product represented by aged and new samples. It is uncertain whether
the FDA has accepted the Wisconsin Study as proof that the current formulation
of RETICULOSE is identical to the formulation reported in prior anecdotal
history and studies. Should the Wisconsin Study not satisfy the FDA, and should
the FDA not consider such prior anecdotal history, RETICULOSE will continue to
be considered as a new drug. In such event, the uncertain amount of time and
costs required for IND approval as a result of the

                                       11
FDA not accepting the prior history of the drug can be expected to be
financially burdensome and have a material adverse effect on the Company and its
likelihood of ever obtaining any requisite approval in the United States. The
Company is dependent on the AIDS Clinical Trial and other tests and trials that
may be commenced in the future, the results of which, if successful, may assist
the Company in receiving an IND for testing on humans in the United States.

         The March 1992 FDA Submission included, among other things, findings
from certain independent research laboratories, including the Wisconsin Study.
The purpose of the March 1992 FDA Submission was to obtain FDA approval for the
Company to conduct human clinical trials regarding the efficacy of RETICULOSE
upon AIDS. The FDA responded with the July 1992 Deficiency Letter and additional
correspondence in September 1995. The Company has not formally responded to the
FDA.

         There can be no assurance that the FDA will approve the sale or even
the testing on humans of RETICULOSE in the United States, or that RETICULOSE
will be effective in treating viruses of any variety on a wide scale or any
other basis. See "Management's Discussion and Analysis and Results of
Operations", "Business -- The Investigational New Drug Process" and "Testing
Agreements."

         Additional Financing Necessary. Management believes that its current
liquid assets after giving effect to the proceeds which have been derived from
the sale of the Debenture and other securities should be sufficient to enable
the Company to conduct its contemplated activities for at least 12 months and
conduct day to day operations at present levels, based upon monthly operating
expenses as of September 30, 1998 of approximately $300,000. See "Use of
Proceeds." In addition to the Debenture, the Company currently has outstanding:
(i) the Debenture Warrants and the Purchase Warrants (collectively, the "1998
Warrants"); (ii) six currently exercisable warrants (collectively, the "1997
Warrants"), three of which each entitle the holder to purchase 178,378 shares of
Common Stock, and three of which each entitle the holder to purchase 600,000
shares of Common Stock, at exercise prices of $.288, $.576, $.864, $.20, $.23
and $.27 per share, respectively, and (iv) stock options held by certain persons
to purchase approximately 30,465,415 shares of Common Stock at exercise prices
ranging from $.11 to $.36 per option share (collectively, the "Options"). The
exercise prices of certain of the Options are significantly below the prevailing
market price of the Company's Common Stock. See "Management's Discussion and
Analysis and Results of Operations."

         The Company may require additional equity and/or debt financing in the
future to meet the considerable costs of human clinical trials, should the FDA
grant permission for such trials. Such costs have not been ascertained by the
Company. If no options or warrants are exercised, management believes that the
Company will be able to continue its business, which remains in the development
stage, at current levels for approximately 12 months. There can be no assurance
that any additional financing will be available or, if available, that it can be
obtained on terms satisfactory to management. If the Company does not obtain
material proceeds from the exercise of options or warrants, the Company could be
dependent upon joint ventures with, or the sale of certain rights regarding
RETICULOSE to, third parties, the terms of which might not be advantageous to
the Company. See "Management's Discussion and Analysis and Results of
Operations" and "Business -- Exclusive Distribution Agreements." There can be no
assurance that the 1998 Warrants, the

                                       12
underlying shares of which are registered for sale under the Registration
Statement, the Options, or the 1997 Warrants will be exercised in their
entirety, if at all.

         Lack of Product Liability Insurance. The Company, like any
pharmaceutical manufacturer, could be subjected to claims for adverse reactions
resulting from the use of RETICULOSE. Although the Company is unaware of any
such claims or threatened claims since RETICULOSE was initially marketed in the
1940's, one study noted adverse reactions in guinea pigs. 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
RETICULOSE. As of the date hereof, the Company does not have product liability
insurance. The Company has not allocated any portion of the proceeds that it may
receive upon the exercise of any options or warrants, of which there can be no
assurance, to the cost of product liability insurance. There can be no assurance
that the Company would be able to secure such insurance in adequate amounts, at
reasonable premiums, if it determined to do so. Should the Company be unable to
secure product liability insurance, the risk of loss to the Company in the event
of claims would be greatly increased and could materially adversely affect the
Company.

         Lack of Patent Protection. The Company does not presently have a patent
for RETICULOSE, however, the Company has two patents for the use of RETICULOSE
as a treatment (the "Use Patents"). The Company currently has 32 patent
applications pending with the U.S. Patent Office. 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. The Company has retained patent
counsel for the purpose pursuing additional patent protection for RETICULOSE.
However, there is no certainty that patents will be granted, or if granted, that
the patents will be sustained if judicially attacked, and, if declared valid,
that the patents, in fact, will operate to protect the Company from others
copying RETICULOSE. The Company has relied upon laws protecting proprietary
information and trade secrets and upon confidentiality agreements to protect its
rights to RETICULOSE and the processes for its manufacture, but there can be no
assurance that such efforts and procedures will continue to be successful and
protect the Company from any competition in the future. See "Business -- Testing
Agreements -- National Cancer Institute Study."

         Potential Claim for Royalties. If the Company were successful in
selling RETICULOSE, the Company could be subject to claims from the heirs and
the Estate of Mr. Biagio E. LaPenta in connection with royalty payments on the
sale of RETICULOSE. Biagio LaPenta, the heir of Dr. Vincent LaPenta and then
owner of the rights to RETICULOSE transferred such rights in 1965 to Key Inc.,
subject to an alleged royalty arrangement ("Alleged Contract") whereby Key Inc.
was allegedly obligated to deliver royalties to Biagio LaPenta on sales of
RETICULOSE. The Company is aware of litigation commenced by Biagio LaPenta
against Key Inc., the purpose of which was to cause Key Inc., to pay to Biagio
LaPenta royalties as per the Alleged Contract (the "LaPenta Suit"). The Company
believes the LaPenta Suit was unsuccessful and dismissed with no liability on
the part of Key. In February 1973, Cepher Chen Yan-Sun purchased all of the
outstanding shares of Key Inc., among other things, thereby acquiring the rights
to RETICULOSE. Mr. Chen was declared bankrupt by a Hong Kong Bankruptcy Court.
In 1984, Messrs. William Bregman and Friedland purchased from the Hong Kong
Bankruptcy Court Receiver, among other things, the rights to RETICULOSE. The
Company's counsel in the Bahamas, Nottage, Miller & Co., has advised Messrs.
Bregman and Friedland that any royalty claims were barred as a result of the
purchase from the Hong Kong

                                       13
Bankruptcy Court. Biagio LaPenta died in 1976. The Company would vigorously
contest any royalty claim. See "Business -- Background of RETICULOSE."

         Limited Staff for Operations -- Reliance Upon Officers and Key
Personnel. The Company is currently wholly dependent upon the personal efforts
and abilities of its three full-time, executive officers, only one of whom,
Bernard Friedland, Chairman of the Board, has any experience in the
pharmaceutical industry. See "Management -- Executive Officers and Directors"
for further information concerning the extent, nature and scope of its officers'
business experience. The loss or unavailability to the Company of the services
of Bernard Friedland or Shalom Z. Hirschman, M.D., President and Chief Executive
Officer, could have a material adverse effect on the Company's business
prospects and any potential earning capacity, and, therefore, the Company has
obtained "key-man" insurance on the lives of Mr. Friedland and Dr. Hirschman in
the amounts of $400,000 and $1,000,000, respectively. See "Use of Proceeds." In
the event the Company's level of operations shall significantly increase, the
business may depend upon its abilities to attract and hire additional management
and staff employees. There can be no assurance that the Company will be able to
secure such additional management and staff, if necessary.

         Government Regulation. The FDA and comparable regulatory agencies in
foreign countries impose substantial requirements upon the introduction of
therapeutic drug products including lengthy and detailed laboratory and clinical
testing procedures, sampling activities and other costly and time consuming
procedures. There is no assurance that FDA approval for the sale of RETICULOSE
in the United States will ever be obtained or that the Company will have
adequate funds to finance the necessary clinical studies and related costs. A
New Drug Application ("NDA") was filed with the FDA for RETICULOSE by Key
Pharmaceuticals Limited ("Key"), a subsidiary of Key Pharmaceuticals Inc. ("Key
Inc.") in May 1967 and subsequently withdrawn without prejudice. Key filed an
IND in November 1968 and withdrew it without prejudice in 1972, shortly before
RETICULOSE was sold to Mr. Cepher Chen Yan-Sun of Singapore. Mr. Chen
subsequently was declared bankrupt. See "Business -- Background of RETICULOSE."
In 1984, Bernard Friedland filed an IND regarding which the FDA has issued four
letters of deficiency and which in 1995 was declared "inactivated". The effect
of the FDA and foreign government regulation will be to delay marketing of
RETICULOSE for a considerable period of time, to impose costly procedures upon
the Company's activities and to impede and/or prevent the Company's ability to
compete with larger companies in its industry. The extent of potentially adverse
government regulations which might arise from future legislation or
administrative action cannot be predicted. In recent years, developing "Third
World" countries have become increasingly thorough in the registration and
licensing of pharmaceutical products. Registration or approval of a
pharmaceutical product in one or more other countries is a prerequisite to
obtaining registration for sale in many Third World countries. In any event,
there can be no assurance that sales in Third World countries may produce
significant revenue for the Company.

         Intense Competition. There are inherent difficulties for any
development stage company, such as the Company, seeking to enter an established
field, particularly a field as capital intensive as the manufacture and sale of
pharmaceuticals. The Company can expect to encounter intense competition from
well known pharmaceutical companies and chemical companies engaged in the
development and marketing of therapeutic drug products. Almost all of such
companies are substantially larger, possessing far greater capital resources,
more substantial operating histories and

                                       14
records of successful operations, greater personnel and other resources, and
more extensive facilities than the Company now has or will have in the
foreseeable future. Accordingly, such companies are and probably will continue
to remain in a far better position to compete in this industry than the Company.
Such companies may succeed in discovering, developing and marketing products
that are either as effective or more effective than RETICULOSE, which has not
yet been established or proven to be effective as an anti-viral agent to the
FDA's or any other regulatory agency's standards. The Company is not currently,
and there can be no assurances that in the foreseeable future the Company will
be, a significant factor in the pharmaceutical field. Additionally, small
development stage entities, such as the Company, with very limited resources,
are at a very serious disadvantage in attempting to operate in a market against
established Competitors. See "Business -- Competition."

         Voting Control by Present Management. As of January 11, 1999, the
current officers and directors of the Company beneficially owned 91,671,133
shares of Common Stock of the Company or approximately 29% of the 301,340,183
shares of Common Stock deemed outstanding on that date for the purposes of the
percentage calculation, including certain shares underlying options held by
Shalom Z. Hirschman. As there are no cumulative voting rights, current members
of management, by virtue of their stock ownership, can be expected to influence
substantially the election of all of the directors of the Company and thereby
continue to impact substantially the Company's business, affairs and policies.
See "Principal Shareholders" and "Description of Securities."

         No Dividends and None Anticipated. The Company has not paid any
dividends upon its Common Stock since its inception and it does not currently
anticipate paying any dividends upon its Common Stock in the foreseeable future.
See "Dividend Policy", and "Description of Securities."

         Lack of Underwriter. The Shares offered hereby will be sold directly by
the Selling Shareholders, from time to time in the market, without an
underwriter. Because an underwriter is not involved in this offering, the
services that an underwriter typically would render will not be available to
purchasers of the Shares. Such services typically include, among others,
confirmation of the representations and warranties of the material facts
contained in the prospectus. There has been no independent confirmation or due
diligence investigation undertaken by any third party of any of the
representations made in this Prospectus, which is normally an obligation
undertaken by an underwriter.

         Benefit to Certain Officers and Directors. Upon completion of the
Company's initial public offering on May 16, 1986, the Company paid $50,000 to
its affiliate LTD in consideration for the acquisition of exclusive rights to
manufacture and market RETICULOSE. In addition, the Company purchased
approximately 15,000 ampules of RETICULOSE from LTD for $45,000 and was
obligated to pay LTD $3.00 per ampule of RETICULOSE for the initial 100,000
ampules (including these 15,000 ampules) purchased the first year and $2.00 per
ampule purchased thereafter. The Company, on December 16, 1987, acquired LTD.
See "Business -- Exclusive Rights of the Company to RETICULOSE and Production
Arrangements." Such $95,000 was used to prepare LTD's manufacturing facility
based upon what the Company believed was required for the production of
RETICULOSE. Bernard Friedland, then President and a director of the Company, and
William Bregman, Secretary-Treasurer and a director of the Company, were also
officers and directors and owner of 99.6% of the LTD. stock. Messrs. Friedland
and Bregman continue to hold such LTD Stock as trustees for the Company.

                                       15
Broker-Dealer Sales of the Company's Common Stock. The Common Stock is
subject to the Securities Enforcement and Penny Stock Reform Act of 1990, which
requires additional disclosure relating to the market for penny stocks in
connection with trades in any stock defined as a penny stock. Commission
regulations generally define a penny stock to be an equity security that has a
market price of less than $5.00 per share, subject to certain exceptions. Unless
an exception is available, the regulations require the delivery, prior to any
transaction involving a penny stock, of a disclosure schedule explaining the
penny stock market and the risks associated therewith.

         In addition, because the Company's securities do not meet the
exceptions to the penny stock regulations cited above, trading in the Company's
securities is covered by Rule 15g-9 promulgated under the Exchange Act for
securities that are not listed on The Nasdaq Stock Market or any national
securities exchange. Under such rule, broker/dealers who recommend such
securities to persons other than established customers and accredited investors
must make a special written suitability determination for the purchaser and
receive the purchaser's written agreement to a transaction prior to sale.
Securities also are exempt from this rule if the market price is at least $5.00
per share.

         Because the Company's securities are subject to the regulations
applicable to penny stocks, the market liquidity for the Company's securities
may be adversely affected. The regulations on penny stocks limit the ability of
broker/dealers to sell the Company's securities and thus the ability of
purchasers of the Company's securities to sell their securities in the secondary
market.

         In addition, certain states may have rules and regulations that impose
additional sales practice requirements on broker-dealers who sell the Common
Stock.

                      [This Space Intentionally Left Blank]

                                       16
USE OF PROCEEDS

         The Company will not receive any of the proceeds from the sale of the
Shares offered hereunder by the Selling Shareholders. The offering is made to
fulfill the Company's contractual obligations to the Selling Shareholders to
register the Shares held by the Selling Shareholders.

                      MARKET PRICE OF AND DIVIDENDS ON THE
                  COMMON STOCK AND RELATED SHAREHOLDER MATTERS

Market Information

         The principal United States market in which the Common Stock is traded
is the National Association of Securities Dealers Bulletin Board (the "Bulletin
Board"). The following table shows the range of reported low bid and high bid
quotations for the Common Stock for each full quarterly period during the
Company's two most recent fiscal years ended December 31, 1996 and 1997, and for
the first, second and third quarters of 1998, as reported on the Bulletin Board.
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 necessarily
represent actual transactions.

                                                   Low Bid         High Bid
                                                 (Per Share)      (Per Share)
-----------------------------------------------------------------------------
Quarter Ending March 31, 1996.......................$0.15            $0.19
Quarter Ending June 30, 1996.........................0.35             0.8125
Quarter Ending September 30, 1996....................0.44             0.75
Quarter Ending December 31, 1996.....................0.26             0.62

Quarter Ending March 31, 1997........................0.26             0.47
Quarter Ending June 30, 1997.........................0.16             0.31
Quarter Ending September 30, 1997....................0.15             0.33
Quarter Ending December 31, 1997.....................0.175            0.345

Quarter Ending March 31, 1998........................0.18             0.4375
Quarter Ending June 30, 1998.........................0.245            0.46
Quarter Ending September 30, 1998....................0.16             0.30

Shareholders

         As of January 11, 1999, the approximate number of holders of record of
the Common Stock was 2,769, inclusive of those brokerage firms and/or clearing
houses holding the shares of Common Stock for their clientele (with each such
brokerage house and/or clearing house being considered as one holder).

                                       17
Dividend Policy

         The Company has not declared or paid any dividends on its shares of
Common Stock. The Company intends to retain future earnings, if any, that may be
generated from the Company's operations to finance the operations and expansion
of the Company and, accordingly, does not plan, for the reasonably foreseeable
future, to pay dividends to holders of the Common Stock. Any decision as to the
future payment of dividends will depend on the results of operations and
financial position of the Company and such other factors as the Company's Board
of Directors, in its discretion, deems relevant.

                                 CAPITALIZATION

         The following table sets forth the capitalization of the Company at
September 30, 1998. This table should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements, including the notes thereto, included elsewhere in
this Prospectus.
Pro Forma
                                                                                      September 30, 1998        As Adjusted (1)
                                                                                      ------------------      ------------------
Long-term Debt:
   Convertible Debenture issued in November, 1997                                       $          -              $1,500,000
                                                                                        ============           =============
Stockholders' Equity:
   Common Stock, $.00001 par value; 1,000,000,000 shares authorized;
   296,422,907 shares outstanding as of September 30, 1998....................................$2,964                  $3,461
   Additional paid-in-capital............................................................$13,651,982             $16,650,092
   Deficit accumulated in the Development Stage.........................................($12,112,090)           ($12,112,090)
   Deferred Compensation Costs..............................................................($29,536)               ($29,536)
                                                                                        ------------           -------------
Total Stockholders' Equity................................................................$1,513,320              $4,511,927
                                                                                        ============           =============
------------------
(1) Assumes issuance of all shares being registered pursuant to this 
    Registration Statement.

                      [This Space Intentionally Left Blank]

                                       18
SELECTED CONSOLIDATED FINANCIAL DATA

         The following selected historical financial data of the Company as of
and for the years ended December 31, 1993, 1994, 1995, 1996, and 1997 have been
derived from the audited financial statements of the Company. The following
selected consolidated financial data of the Company as of September 30, 1998 and
for the nine months ended September 30, 1997 and 1998 have been derived from the
Company's unaudited financial statements included elsewhere in this Prospectus.
The selected consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements and notes thereto
included elsewhere in this Prospectus.

Selected Statement of Operations Data
(Unaudited)
                                                       Years Ended December 31                              9 Mos. Ended
                               ---------------------------------------------------------------------------- September 30
                                        1993          1994           1995          1996           1997          1998 
                                       ------        ------         ------        ------         ------        ------
Revenues:
   Sales                             $ 12,000      $ 22,402       $ 27,328    $   24,111     $    2,278    $      656
   Interest                            11,892         7,450         16,155        46,796        111,845        79,533
                                                                                                              
   Other income                           ---        55,000         25,000        32,000          7,800           100
                                          ---        ------         ------        ------         ------        ------
                                       23,892        84,852         68,483       102,907        121,923        80,289
Costs and Expenses:
   Research and development           204,110        30,040         34,931       255,660        817,603       611,090
   General and administrative         368,448       478,984        420,757       983,256      1,681,436     1,711,532
   Depreciation and                    14,643        16,665         14,679        18,731        138,245       570,260
     amortization
   Interest                               ---           ---            ---           ---      1,626,368       306,231
                                          ---           ---            ---           ---      ---------       -------
                                      587,201       525,689        470,367     1,257,647      4,263,652     3,199,113
                                     --------       -------        -------     ---------      ---------     ---------
Net Loss                            ($563,309)    ($440,837)     ($401,884)  ($1,154,740)   ($4,141,729)  ($3,118,824)
                                     =========     =========      =========   ===========    ===========   ===========

Net Loss Per Share of
Common Stock - Basic and 
Diluted                                ($0.00)       ($0.00)        ($0.00)       ($0.00)        ($0.00)       ($0.00)

Weighted Average Number of                                                                                            
Common Shares Outstanding         232,151,991   238,354,491    248,002,608   257,645,815    274,534,277   290,194,958
                                  ===========   ===========    ===========   ===========    ===========   ===========
[This Space Intentionally Left Blank]

                                       19
Selected Balance Sheet Data
December 31                             (Unaudited)
                               ---------------------------------------------------------------------------- September 30
                                        1993          1994           1995          1996           1997          1998
                                       ------        ------         ------        ------         ------        ------
Assets:
Current Assets:
    Cash and cash equivalents        $ 57,023     $ 211,203      $  65,230    $   61,396     $  236,059     $ 485,041
    Investments                       257,963         5,000        479,000     1,378,841      2,984,902       188,000
    Inventory                             ---           ---         18,091        19,729         19,729        19,729
    Other current assets               11,746        10,163         12,967        16,081         20,240        23,837
                                       ------        ------         ------        ------         ------        ------
Total current assets                  326,732       232,604        575,288     1,476,047      3,260,930       716,607

Property and Equipment                230,213       224,098        214,494       207,209        485,661       734,477
Other Assets                           15,562         1,800          6,459        33,544        443,251       328,683
                                       ------      --------          -----        ------      ---------     ---------
         Total assets                $572,507     $ 452,264      $ 796,241    $1,716,800     $4,189,842    $1,779,767
                                      =======      ========        =======     =========      =========     =========
                                                     

Liabilities and Stockholders' Equity
Current Liabilities:
   Accounts payable and other        $  8,150     $  40,244      $  14,651    $   54,474     $  375,606    $  266,447
                                        ------       ------         ------        ------        -------       -------
Total current liabilities               8,150        40,244         14,651        54,474        375,606       266,447
Convertible Debenture, Net                              ---            ---           ---      2,384,793           ---
Total Liabilities                       8,150        40,244         14,651        54,474      2,760,399       266,447
                                        -----        ------         ------        ------      ---------       -------

Stockholders' Equity:
  Common stock;                         2,363         2,416          2,512         2,671          2,779         2,964
1,000,000,000 shares, par
  value $.00001 authorized
  Additional paid-in capital        3,416,070     3,704,517      4,475,875     7,003,351     10,512,767    13,651,982
  Subscription receivable                 ---           ---            ---       (19,000)       (19,000)          ---
  Deficit accumulated during       (2,854,076)   (3,294,913)    (3,696,797)   (4,851,537)    (8,993,266)  (12,112,090)
  the development stage
   Deferred compensation cost             ---           ---            ---      (473,159)       (73,837)      (29,536)
                                      -------       -------        -------     ---------      ---------     ---------
Total stockholders' equity            564,357       412,020        781,590     1,662,326      1,429,443     1,513,320
                                      -------       -------        -------     ---------      ---------     ---------

Total liabilities and               $ 572,507     $ 452,264      $ 796,241    $1,716,800     $4,189,842   $ 1,779,767
  stockholders' equity                =======       =======        =======     =========      =========     =========

Shares outstanding at year end    236,276,991   241,616,991    251,181,774   247,031,058    277,962,574   296,422,907
                                  ===========   ===========    ===========   ===========    ===========   ===========
20
MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

         The following discussion of the results of operations and financial
condition of the Company should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto included elsewhere in this
Prospectus.

Results of Operations

         For the nine month periods ended September 30, 1998 and September 30,
1997, the Company incurred losses of $3,118,824 ($.01 per share) and $2,197,071
($.01 per share). The Company's increased losses during 1998 are principally due
to increased general and administrative expense ($1,711,532 for the nine months
ended September 30, 1998 vs. $1,299,897 for the nine months ended September 30,
1997) primarily resulting from the employment of additional research
professionals and rent and operating costs associated with the Yonkers, New York
office and laboratory; amortization of loan costs related to the February and
October Debentures (discussed below) included in depreciation and amortization
($221,228 for the nine months ended September 30, 1998 vs. $106,285 for the nine
months ended September 30, 1997); and increased research and development expense
($611,090 for the nine months ended September 30, 1998 vs. $360,781 for the nine
months ended September 30, 1997). Lack of sales revenues also contributed to the
Company's losses.

         There were sales of $656 and $2,278, respectively, during the nine
month periods ended September 30, 1998 and September 30, 1997. All sales during
these periods resulted from distributors purchasing RETICULOSE for testing
purposes. Interest income was $79,533 and $63,879 for the nine month periods
ended September 30, 1998 and September 30, 1997.

         During the years ended December 31, 1997, 1996, and 1995, the Company
incurred losses of $4,141,729 ($.00 per share), $1,154,740 ($.00 per share), and
$401,884 ($.00 per share), respectively. The Company's increased losses for the
year ended December 31, 1997 as compared with the years ended December 31, 1996
and 1995 were attributable primarily to the employment of Shalom Z. Hirschman,
M.D. as President and Chief Executive Officer of the Company ($325,000 for 1997
vs $68,750 for 1996 and $0 for 1995), interest charges as a result of the
beneficial conversion feature associated with the February Debenture and the
October Debenture ($1,626,368 for 1997 vs $0 for 1996 and 1995), increased
research and development expense ($817,603 for 1997 vs $255,600 for 1996 and
$34,931 for 1995), opening and maintenance costs of the Company's Yonkers, NY
office ($57,000 for 1997 vs $0 for 1996 and 1995), and the implementation of
Statement of Financial Accounting Standards Board (SFAS) No. 123, "Accounting
for Stock-Based Compensation," which accounted for stock options granted and
recorded as compensation expense ($399,322 for 1997 vs $287,341 for 1996 and $0
for 1995). Administrative expenses and the lack of sales revenues also
contributed to the Company's losses.

         There were $2,278, $24,111 and $27,328 in sales revenues for 1997, 1996
and 1995, respectively. All sales revenues resulted from distributors purchasing
RETICULOSE for testing purposes. Interest income was $111,845, $46,796 and
$16,155 in 1997, 1996 and 1995, respectively.

                                       21
In 1997, 1996 and 1995, the Company collected $0, $32,000 and $25,000 for the
sale of territorial rights.

         Although there can be no assurance of the amount of sales, if any, the
Company believes that it will generate sales revenue at least with respect to
testing of RETICULOSE pursuant to its agreements with exclusive distributors
from initial testing in their respective territories. However, there will be no
likelihood of significant sales of RETICULOSE unless and until requisite
approvals are obtained in such territories.

Liquidity

         As of September 30, 1998, and December 31, 1997 and 1996, the Company
had current liquid assets (cash and cash equivalents and investments) of
$673,041, $3,220,961 and $1,476,047, respectively. As of September 30, 1998, and
December 31, 1997 and 1996, the Company had total assets of $1,779,767,
$4,189,842 and $1,716,800, respectively. The decrease in liquid assets and total
assets from December 31, 1997 to September 30, 1998 was primarily attributable
to the increased expenditures for research and development and increased general
and administrative expenses (including rent and payroll). The increase in liquid
assets and total assets from December 31, 1996 to December 31, 1997 was
primarily attributable to the proceeds from the October Debenture. See "Capital
Resources."

         For the fiscal year ended December 31, 1997, the Company had non-cash
charges of (i) had amortization of deferred compensation cost of approximately
$400,000 with respect to stock options granted, pursuant to SFAS 123, and (ii)
amortization of deferred interest on beneficial conversion features of
approximately $1.6 million.

         The Company expended approximately $244,000 and $300,000 for leasehold
improvements and furniture and equipment at the Company's Yonkers, New York
office during the nine months ended September 30, 1998 and the fiscal year ended
December 31, 1997, respectively.

         Until RETICULOSE is registered for sale, sales of RETICULOSE are not
expected to generate significant revenues. There can be no assurances that
RETICULOSE will be available for sale or, even if available, that it would
generate significant revenues. FDA approval to begin human clinical trials will
require significant cash expenditures, the amount of which is not currently
determinable. BEFORE SEPTEMBER 1995, THE COMPANY RECEIVED CORRESPONDENCE FROM
THE FOOD AND DRUG ADMINISTRATION OF THE UNITED STATES DEPARTMENT OF HEALTH AND
HUMAN SERVICES (THE "FDA"), WHICH STATED, AMONG OTHER COMMENTS, THAT THE
COMPANY'S PRIOR SUBMISSIONS TO THE FDA DID NOT PROVIDE AN ADEQUATE RESPONSE TO
THE FDA'S EARLIER REQUEST FOR PRECLINICAL INFORMATION AND ACCORDINGLY THE
COMPANY'S NOTICE OF CLAIMED INVESTIGATIONAL EXEMPTION FOR A NEW DRUG SUBMITTED
TO THE FDA ON SEPTEMBER 20, 1984 WAS "INACTIVATED."

                                       22
If the Company does not begin to generate revenues from the sale of
RETICULOSE, and if the Company does not receive significant funds from the
exercise of additional stock options, it shall be dependent upon additional debt
and/or equity financing, of which there can be no assurance, or it must reduce
expenses or further limit operations.

Capital Resources

         The Company in the past has been dependent upon sales of shares of its
Common Stock, $.00001 par value (the "Common Stock"), and upon the exercise of
its warrants issued in the Company's initial public offering in 1986, all of
which have expired. Since the expiration of such warrants, the Company has been
dependent upon the proceeds from the continued sale of securities, including the
exercise of outstanding options for the funds required to continue operations at
present levels and to fund the planned Research and Development and Clinical
Trials and Testing of RETICULOSE.

         In February 1997 and October 1997, in order to finance research and
development, the Company sold $1,000,000 and $3,000,000, respectively, principal
amount of its ten-year 7% Convertible Debentures (the "February Debenture" and
the "October Debenture," collectively, the "1997 Debentures") due February 28,
2007 and August 30, 2007, respectively, to RBB in offshore transactions pursuant
to Regulation S under the Securities Act of 1933, as amended. Accrued interest
under the 1997 Debentures was payable semiannually, computed at the rate of 7%
per annum on the unpaid principal balance from the date of issuance until the
date of interest payment. The Debentures were convertible, at the option of the
holder, into shares of Common Stock pursuant to specified formulas. On April 22,
1997, June 6, 1997, July 3, 1997 and August 20, 1997, pursuant to notice by the
holder, RBB, to the Company under the February Debenture, $330,000, $134,000,
$270,000 and $266,000, respectively, of the principal amount of the February
Debenture was converted into 1,648,352, 894,526, 2,323,580 and 1,809,524 shares
of the Common Stock, respectively. As of August 20, 1997 the February Debenture
was fully converted. On December 9, 1997, January 7, 1998, January 14, 1998,
February 19, 1998, February 23, 1998, March 31, 1998, May 4, 1998 and May 5,
1998, pursuant to notice by the holder, RBB, to the Company, $120,000, $133,000,
$341,250, $750,000, $335,750, $425,000, $275,000 and $620,000, respectively, of
the October Debenture was converted into 772,201, 1,017,011, 2,512,887,
5,114,218, 1,498,884, 1,870,869, 1,491,485, and 3,299,979 shares of Common
Stock, respectively. As of May 5, 1998, the October Debenture was fully
converted.

         In connection with the issuance of the 1997 Debentures, the Company
issued to RBB six warrants (the "1997 Warrants") to purchase Common Stock, three
of such warrants entitling the holder to purchase, from the February 21, 1997
through February 28, 2007, 178,378 shares of the Common Stock, and three of such
warrants entitling the holder to purchase, from August 30, 1997 through August
30, 2007, 600,000 shares of the Common Stock. The exercise prices of the 1997
Warrants are $.288, $.576, $.864, $.20, $.23 and $.27 per warrant share,
respectively. Each 1997 Warrant provides that the holder may elect to receive a
reduced number of shares of Common Stock on the basis of a cashless exercise;
that number of shares bears the same proportion to the total number shares
issuable under that 1997 Warrant as the excess of the market value of shares of
Common Stock over the warrant exercise price bears to that market value. Each
1997 Warrant

                                       23
contains anti-dilution provisions which provide for the adjustment of warrant
price and warrant shares as more particularly set forth therein.

         Based on the terms for conversion associated with the February
Debenture and the October Debenture, there were intrinsic values associated with
the beneficial conversion feature of $413,793 and $1,350,000, respectively.
These amounts have been fully amortized to interest expense with a corresponding
credit to additional paid-in capital.

         In February 1998, the Company entered into that certain Concurrent
Agreement with DCT, an Argentine corporation, whereby the Company agreed to
provide DCT or its assignees up to $412,960 to cover the costs of a study on 65
patients to compare the results of treatment of AIDS patients using a three-drug
cocktail and RETICULOSE versus AIDS patients taking a three-drug cocktail and a
placebo. As of September 30, 1998, the Company has advanced approximately
$50,000 for this study, which has been accounted for as research and development
expense.

         In May 1998, the Company entered into the Rheumatoid Arthritis
Agreement with DCT whereby the Company agreed to provide DCT or its assignees up
to $94,950 to cover the costs of a controlled study in 30 patients to determine
the efficacy of RETICULOSE for the treatment of rheumatoid arthritis in humans.
In connection with this study, as of September 30, 1998, the Company has
advanced approximately $79,200 which has been accounted for as research and
development expenses.

         In July 1998, the Company authorized the expenditure of up to $135,000
to study the effects of RETICULOSE in inhibiting the mutation of the AIDS virus
on patients in Argentina and Barbados. As of September 30, 1998, the Company had
advanced approximately $55,000 for such studies, which have been accounted for
as research and development expense.

         As described in "Prospectus Summary--Recent Developments," in November
1998 the Company sold $1,500,000 principal amount of its ten-year 7% Convertible
Debenture due October 31, 2008 to RBB, as agent for the accounts of certain
persons, in an offshore transaction pursuant to Regulation S under the
Securities Act of 1933, as amended. Accrued interest under the Debenture is
payable semiannually, computed at the rate of 7% per annum on the unpaid
principal balance from the date of issuance until the date of interest payment.
The Debenture is convertible, at the option of the holder, into shares of Common
Stock pursuant to a specified formula. The actual number of shares of Common
Stock issued or issuable upon conversion of the Debenture is subject to
adjustment and could be materially less or more than the above estimated amount,
depending upon factors that cannot be predicted by the Company at this time,
including, among others, the future market price of the Common Stock.

         In connection with the issuance of the Debenture, the Company issued to
RBB two warrants to purchase Common Stock (the "Debenture Warrants"), each
Debenture Warrant entitling the holder to purchase, until October 31, 2008,
375,000 shares of the Common Stock. The exercise prices of the two Debenture
Warrants are $.20 and $.24 per warrant share, respectively. Each Debenture
Warrant provides that the holder may elect to receive a reduced number of shares
of Common Stock on the basis of a cashless exercise; that number of shares bears
the same proportion to the total number shares issuable under that Debenture
Warrant as the excess of the market value of shares of

                                       24
Common Stock over the warrant exercise price bears to that market value. Each
Debenture Warrant contains anti-dilution provisions which provide for the
adjustment of warrant price and warrant shares as more particularly set forth
therein.

         Also as described in "Prospectus Summary--Recent Developments," in
December 1998 the Company sold 4,917,276 shares of Common Stock, and warrants to
purchase an aggregate of 2,366,788 shares of Common Stock, including (x) two
warrants to purchase an aggregate of 1,966,788 shares of Common Stock and (y) a
finder's fee paid to Harborview Group consisting of two warrants to purchase an
aggregate 400,000 shares of Common Stock (collectively, the "Purchase Warrants")
for an aggregate purchase price of $802,500.

         Two of the Purchase Warrants entitle the holders thereof to purchase
983,394 and 983,394 shares of Common Stock at exercise prices of $.2040 and
$.2448 per share, respectively. The other two Purchase Warrants entitle the
holders thereof to purchase 200,000 and 200,000 shares of Common Stock at
exercise prices of $.2040 and $.2448 per share, respectively. All four Purchase
Warrants are exercisable at any time and from time to time until December 31,
2003. Each Purchase Warrant provides that the holder may elect to receive a
reduced number of shares of Common Stock on the basis of a cashless exercise;
that number of shares bears the same proportion to the total number shares
issuable under that Purchase Warrant as the excess of the market value of shares
of Common Stock over the warrant exercise price bears to that market value. Each
Purchase Warrant contains anti-dilution provisions which provide for the
adjustment of warrant price and warrant shares as more particularly set forth
therein.

         If the FDA or other approvals are obtained, of which there can be no
assurance, funds must be budgeted by the Company from the exercise of options
and warrants, potential grants and/or additional equity, the availability of
which funds there can be no assurance.

         The Company is currently expending approximately $300,000 per month,
which expenses include salaries, rent, professional fees, license fees and
taxes, research and development, and travel, principally between the Company's
two offices and its Bahamian facility, and anticipates that it can continue
operations for at least ten months with its current liquid assets, including the
proceeds from the recent sale of the Debenture and other securities if no Common
Stock purchase options or warrants are exercised. If all of the outstanding
Debenture Warrants, the Purchase Warrants, the 1997 Warrants and Options are
exercised, the Company will receive net proceeds of approximately $8.4 million.
Those proceeds will contribute to general and administrative and working capital
and will permit the Company to substantially increase its budget for research
and development and clinical trials and testing and to operate at significantly
increased levels of operation, assuming RETICULOSE receives approvals and
prospects for sales increase to justify such increased levels of operation, of
which there can be no assurance. However, there can be no assurance that any
additional warrants or options will be exercised. The recent prevailing market
price for shares of Common Stock has from time to time been above the exercise
prices of certain of the outstanding options and warrants. However, there can be
no assurance that the recent trading levels will be sustained or that any
additional options or warrants will be exercised. In the event that less than
25% or none of the outstanding options and warrants are exercised, and no other
additional financing is obtained by the Company, in order for the Company to
achieve the level of operations contemplated by management, management
anticipates that it will have to limit intentions to expand operations

                                       25
beyond current levels which involve expenditures of $300,000 per month. The
Company is currently seeking debt financing, licensing agreements, joint
ventures and other sources of financing. There can be no assurance that such
additional sources of financing will be found. There can be no assurance that
any of the Company's distributors will ever obtain regulatory approvals to test
or market RETICULOSE in any territory. In the event that financing is not
available, in order to continue operations, management anticipates that they
will have to defer their salaries. Management does not believe that, at present,
debt or equity financing will be readily obtainable on favorable terms unless
and until FDA approval for Phase I clinical testing is granted or comparable
approval is obtained from another developed or developing country. Because of
the uncertainties involved in the process of gaining approval for commercial
drug use on humans, no assurance can be given that the Company will be able to
sell RETICULOSE.

         The Company does not have a patent for RETICULOSE, although the Company
has two patents for the use of RETICULOSE as a treatment. In addition, the
Company has filed 32 patent applications with the United States Patent Office.
There can be no assurance that other companies, having greater economic
resources, will not be successful in developing a similar product using
processes similar to those of the Company. There can be no assurance that the
Company will obtain such a patent or, if obtained, that it will be enforceable.
The Company has retained patent counsel for the purpose of pursuing additional
patent protection for RETICULOSE. However, there is no certainty that patents
will be granted, or if granted, that the patents will be sustained if judicially
attacked, and, if declared valid, that the patents, in fact, will operate to
protect the Company from others copying RETICULOSE. The Company has relied upon
laws protecting proprietary information and trade secrets and upon
confidentiality agreements to protect its rights to RETICULOSE and the processes
for its manufacture, but there can be no assurance that such efforts and
procedures will continue to be successful and protect the Company from any
competition in the future.

Year 2000 Compliance

         The Securities and Exchange Commission has issued Staff Legal Bulletin
No. 5 (CF/IM) stating that public operating companies should consider whether
they will suffer any anticipated costs, problems or uncertainties as a result of
the "Year 2000" issue, which affects existing computer programs that use only
two digits to identify a year in the date field. The Company anticipates that
its business operations will electronically interact with third parties very
minimally, and the issues raised by Staff Legal Bulletin No. 5 are not
applicable in any material way to its contemplated business or operations.
Additionally, the Company intends that any computer systems that it will
purchase or lease will have already addressed the "Year 2000" issue.

                                    BUSINESS

Overview

         Advanced Viral Research Corp. (the "Company") was incorporated under
the laws of the State of Delaware on July 31, 1985, to engage in the production
and marketing, promotion and sale of an anti-viral peptide-nucleic acid complex
preparation with the trade name RETICULOSE.

                                       26
RETICULOSE has not been approved for sale or use, nor are applications pending
for approval for sale or use by the Food and Drug Administration of the United
States Department of Health and Human Services ("FDA") or anywhere in the world.
The Company is in the developmental stage, and has not as yet commenced any
commercial operations. The Company is dependent on registration and/or approval
by applicable regulatory authorities of RETICULOSE in a developed or developing
country, of which there can be no assurance, in order to commence commercial
operations, which shall include the marketing, promotion and sale of RETICULOSE
in each jurisdiction where the product becomes registered.

         The Company's operations over the last five years have been limited to
engaging others to perform testing and analysis of RETICULOSE. In connection
with these engagements, the Company has also granted distribution rights for
RETICULOSE in certain foreign countries. In 1995, the Company retained Shalom
Hirschman, M.D. as its President. Since becoming President of the Company, Dr.
Hirschman has monitored the testing of RETICULOSE and intends to perform certain
analyses of RETICULOSE with Company personnel, which analyses the Company
believes may be used in connection with the FDA approval process.

Background of RETICULOSE

         RETICULOSE had been marketed in the United States during the 1940's
through the early 1960's. Under the Federal Food, Drug, and Cosmetic Act, as
amended in 1962 (the "1962 Act"), RETICULOSE, among other drugs, was classified
by the FDA as a "new drug" requiring FDA approval prior to any sale in the
United States. Management of the Company believes that, since the 1962 Act,
RETICULOSE has not been marketed for commercial sale. See "Government
Regulation" and "-the Investigational New Drug Application Process." Although
the AIDS Clinical Trial has been the only controlled clinical trial of
RETICULOSE, the published data for the years 1951 through 1962, largely
anecdotal, indicates that RETICULOSE is an anti-viral pharmaceutical product
which is safe and effective in treating a number of interferon related viruses
such as Influenza-A, Viral Pneumonia, Virus Infectious Hepatitis, Mumps,
Encephalitis, Herpes Simplex and Herpes Zoster. There is no published data that
confirms that any double blind testing has been completed which demonstrates
that RETICULOSE is safe and effective against the treatment of any disease.

         Open label clinical trials of RETICULOSE on Human Papilloma Virus (HPV)
on patients who tested positive for the Human Immunodeficiency Virus ("HIV") are
being conducted at two separate hospitals located in Buenos Aires, Argentina
(the "HPV-HIV Study") for the purpose of attempting to satisfy the
investigational new drug application process in Argentina.

         The Company received information from Shalom Z. Hirschman, M.D., then
Professor of Medicine and Director of the Division of Infectious Diseases of the
Mount Sinai School of Medicine, New York, New York, which information resulted
from the Hirschman Study, which demonstrates that RETICULOSE stimulates the
production of a unique set of chemokines, including Interleukin 1 (IL-1),
Interleukin 6 (IL-6), Gamma Interferon and Tumor Narcosis Factor, and inhibits
the replication of HIV in cell cultures. Dr. Hirschman currently is President,
Chief Executive Officer, Chief Scientific Officer and a director of the Company.

                                       27
The first stage of a double-blind, randomized, placebo-controlled
clinical trial using RETICULOSE in the treatment of AIDS conducted at the Queen
Elizabeth Hospital, Bridgetown, Barbados was completed in late November 1996
(the "Barbados Study"). The Company received a letter, dated November 26, 1996,
(the "Written Summary") from one of the scientists conducting the Barbados
Study, reporting the results of the first stage of a double-blind, randomized,
placebo-controlled clinical trial using RETICULOSE in the treatment of patients
with AIDS, and confirming that the study protocol received ethical approval from
the Chief Medical Officer's committee. In this first stage of the clinical
trial, forty-three patients who had never previously received any
anti-retroviral therapy were enrolled into the study, twenty-one of which
received RETICULOSE and twenty-two of which received placebo, over a sixty day
period. The patients were observed for a further sixty days after the cessation
of therapy. At the end of the sixty day treatment period, the key results of
this first preliminary stage of the clinical trial included a 37% increase in
the mean CD(4)-positive T-cell lymphocytes in the group of patients that
received RETICULOSE, as compared to a 7% decrease in the group of patients that
received placebo, and a 21% average decrease in HIV viral load, as measured by
quantitative RNA PCR, in the RETICULOSE-treated group of patients, in contrast
to a 33% increase in HIV viral load in the group of patients that received
placebo. In addition, the letter reported, among other things, that at the end
of the sixty-day observation period following cessation of treatment, a majority
of RETICULOSE-treated group showed a greater rise in blood hemoglobin, and
maintained or increased their body weight in contrast to only a minority of the
placebo-treated patients. Finally, there were no toxic side effects observed by
physicians or reported by patients receiving RETICULOSE therapy in the first
stage of the clinical trial. An abstract entitled "Controlled Clinical Trial of
RETICULOSE, a Peptide Nucleic Acid with Immunomodulator Activity in Patients
with HIV Infection" (the "Barbados Abstract") which describes the results of the
first stage of the Barbados Study, has been accepted for publication by The
American Society for Microbiology and will be presented in May 1998 at a
conference in Atlanta, Georgia.

         The Company is dependent upon the success of studies and tests of
RETICULOSE, of which there can be no assurance, if it is ever to receive
regulatory approval in the United States or developed or developing countries to
market RETICULOSE and generate material operating revenues. See "- Testing
Agreements."

         The concept of an anti-viral agent composed of peptones, peptides,
lipoproteins and nucleic acid was an original idea of Vincent M. LaPenta, M.D.
In 1934, Dr. LaPenta produced a product utilizing horse serum albumen, peptones
and ribonucleic acid which had anti-viral properties and evidenced no toxicity.
The product was later modified to substitute bovine serum albumen for horse
serum albumen and was named RETICULOSE. From 1951 through 1962, data was
collected and reported concerning the safety and scope of the use of RETICULOSE.
Much of the data was anecdotal in nature, such as reports by physicians and
pharmacists of results from the use of RETICULOSE, some of which were published
in recognized medical journals. No controlled "double blind" studies were
undertaken during this period. A study of Robert H. Anderson, M.D. and Ralph M.
Thompson, M.D. published in the VIRGINIA MEDICAL MONTHLY in July 1957, reported
that the exact method of action of RETICULOSE on the virus was not fully
understood, but, since its therapeutic response was so rapid, its action may be
considered a direct one. The study further found that RETICULOSE either altered
the action of the virus or inhibited the host cells to prevent virus

                                       28
duplication, or it may have done both. In addition, the antigenic properties of
the lipo-protein-nucleic acid complex definitely initiated and promoted antibody
formation and phagocytosis.

         In the early 1940's, Chemico Laboratories, Inc. ("Chemico"), a Florida
corporation controlled by Biagio E. LaPenta, the son of Vincent M. LaPenta,
M.D., was established to manufacture RETICULOSE. The Company has been advised
that Chemico, directly and through a distributor, distributed the product for
the treatment of viral diseases in the midwestern and southern United States
until the early 1960's.

         Two reports in recognized medical journals questioned the efficacy of
RETICULOSE, in tests, respectively, IN VITRO (i.e., eggs) and in mice by
intracerebral and intraperitoneal injection. The two reports are A.C. Kempe,
"Failure to Demonstrate Antiviral Activity of RETICULOSE," AMERICAN JOURNAL OF
DISEASES OF CHILDREN, Vol. 103, May 1962, and Behbehani, "The Effect of
RETICULOSE on Viral Infections of Experimental Animals," SOUTHERN MEDICAL
JOURNAL, Vol. 55, February 1962.

         Under the 1962 Act RETICULOSE, among other drugs, was classified as a
"new drug" requiring FDA approval prior to any sale in the United States. A
forfeiture action was instituted in 1962 by the FDA against RETICULOSE. The FDA
was successful in its litigation and RETICULOSE was withdrawn from the United
States market. The injunction obtained by the FDA prohibits, among other things,
any shipment of RETICULOSE until a New Drug Application ("NDA") for RETICULOSE
is approved by the FDA.

         In August 1965, the rights to manufacture and market RETICULOSE were
sold, under a royalty agreement (the "Chemico Agreement"), by Chemico and Biagio
E. LaPenta to Key Pharmaceuticals Inc. ("Key Inc.") through its subsidiary, Key
Pharmaceuticals Limited ("Key"), which, on June 1, 1968, obtained a license to
produce ethical pharmaceutical products, including RETICULOSE, for export and
sale from the Grand Bahama Port Authority, Limited (the "Port Authority"). Key
Inc. entered into an employment agreement with Biagio E. LaPenta in August 1968.
Key proceeded to construct a manufacturing facility in Freeport, Bahamas, and
produce RETICULOSE strictly for sale in certain foreign markets. An NDA for
RETICULOSE was filed with the FDA by Key in May 1967. After review by the FDA,
the NDA was withdrawn without prejudice when the FDA advised Key that the NDA
would not be approved. Key then filed a Notice of Claimed Investigational
Exemption for a New Drug ("IND") in November 1968 with the FDA, which IND was
pending for more than four years without favorable action by the FDA and was
withdrawn in 1972 without prejudice.

         On February 8, 1973, Key Inc. sold all of the shares of Key, its
Bahamian manufacturing facilities, its interest under the Chemico Agreement and
the trademark RETICULOSE, as well as rights to the services of Biagio E.
LaPenta, to Mr. Cepher Chen Yan-Sun. Mr. Chen distributed the existing inventory
of RETICULOSE for a number of years but the product was not manufactured after
Biagio E. LaPenta died in 1976. Mr. Chen was then declared bankrupt.

         In 1984, Bernard Friedland and William Bregman purchased from the Hong
Kong Bankruptcy Court Receiver all of the outstanding shares of Key, all rights
to RETICULOSE, including existing inventory of the product, and the license from
the Port Authority. Messrs. Friedland and Bregman

                                       29
then changed the name of Key to Advance Viral Research Limited ("LTD"), and
assigned all the rights which they had acquired individually to LTD.

         In 1985, Messrs. Friedland and Bregman organized the Company for the
purpose of producing RETICULOSE, seeking approvals for marketing it world-wide,
and causing rights to RETICULOSE to be assigned in May 1986 from LTD to the
Company as part of the Exclusive Rights and Production Agreement, dated January
3, 1986, between the Company and LTD. For a discussion of the ownership of
rights of RETICULOSE, see "-Exclusive Rights of the Company to RETICULOSE And
Production Arrangements."

         Laboratory analysis of RETICULOSE by the University of Wisconsin
Biotechnology Center, based on the Wisconsin Study conducted exclusively for the
Company from December 1987 to September 1988, indicated that RETICULOSE contains
both medium and short chain length amino acid link peptides. Mr. Friedland
opined that in the Wisconsin Study, the peptide analyses of four RETICULOSE
samples, two of which were 16 years old and manufactured by Key, and two of
which were one year old and manufactured by LTD, indicated that all four product
samples were essentially the same product as demonstrated by reverse phase high
performance liquid chromatography. Additional analyses conducted by gel cell
electrophoresis demonstrated that all four samples were essentially of the same
composition, and that these analyses validate both stability and identical
structure of the RETICULOSE product represented by aged and new samples.

         The IND was submitted to the FDA on September 20, 1984. Under FDA
regulations, the Company is not permitted to engage in or authorize human
studies regarding RETICULOSE if the FDA notifies the Company of "serious
deficiencies that require correction before human studies can begin or that
would require restriction of human studies until correction," until the Company
is notified that the material that it has submitted to correct the deficiencies
is "satisfactory." Since October 9, 1984, the date of receipt by the FDA of the
IND, the FDA has issued four letters of deficiency with regard to the IND. In a
letter dated November 29, 1984, the FDA indicated, among other deficiencies
noted, that the publications submitted with the IND and relating to the
effectiveness of RETICULOSE on virus related diseases will not be accepted in
support of the safety of RETICULOSE unless the Company can establish that the
proposed formulation of RETICULOSE is the same as the formulation of RETICULOSE
referenced in those publications. In addition, the FDA required, among other
things, that an IND application include relevant information on the chemistry,
laboratory and animal controls to assure the integrity of the dosage from and
that safety information be provided for the initial study proposed to be
conducted on humans. The FDA also required that the information assure the
proper identification, quality, purity and strength of the investigational drug
and a description of the drug substance, including its physical, chemical and
microbiological characteristics. On September 11, 1987, the Company received a
further deficiency letter from the FDA, stating that no data had been submitted
supporting IN VITRO (i.e., eggs) anti-HIV activity or any criterion for a
biological response modifier. See "-The Investigational New Drug Application
Process."

         In response to these two deficiency letters from the FDA, the Company,
on March 6, 1992, submitted to the FDA additional information, including
findings from independent research laboratories, intending, among other things,
to procure the FDA's approval to conduct human clinical trials for RETICULOSE
(the "March 1992 FDA Submission"). The purpose of the March 1992 FDA

                                       30
Submission was to obtain FDA approval of the IND to conduct human clinical
trials regarding the effectiveness of RETICULOSE on AIDS. However, no assurance
can be given as to the time required for the completion of such tests or the
time required for FDA approval, if ever, for commencement of human clinical
trials.

         In response to the March 1992 FDA Submission, the Company received a
third deficiency letter from the FDA, dated July 27, 1992 (the "July 1992
Deficiency Letter"), which provided detailed comments with respect to chemistry,
toxicology, microbiology and clinical areas requiring further studies and action
on the part of the Company. Following receipt of the July 1992 Deficiency
Letter, the Company has made no further submission or response to the FDA, nor
does the Company have any present intention to respond to the FDA. BEFORE
SEPTEMBER 1995, THE COMPANY RECEIVED FURTHER CORRESPONDENCE FROM THE FDA, WHICH
STATED, AMONG OTHER COMMENTS, THAT THE COMPANY'S PRIOR SUBMISSIONS TO THE FDA
DID NOT PROVIDE AN ADEQUATE RESPONSE TO THE FDA'S EARLIER REQUEST FOR
PRECLINICAL INFORMATION AND ACCORDINGLY THE COMPANY'S IND WAS "INACTIVATED."

         No assurance can be given that any new IND for clinical tests on humans
will be approved by the FDA for human clinical trials on AIDS or other diseases,
or that the results of such human clinical trials will prove that RETICULOSE is
safe or effective in the treatment of AIDS, or other diseases, or that the FDA
would approve the sale of RETICULOSE in the United States if any application
were to be made by the Company. See "-The Investigational New Drug Application
Process."

         Because the FDA has not approved human clinical trials for RETICULOSE
in the United States, the Company may be required, in the absence of grants or
other subsidies, to bear the expenses of the Phase I human clinical trials. The
Company does not know what the actual cost of such trials would be. If the
Company needs additional financing to fund such Phase I human clinical trials,
there can be no assurance that additional financing will be available to the
Company.

Exclusive Rights of the Company to RETICULOSE and Production Arrangements 

         On January 3, 1986, the Company and LTD entered into the Exclusive
Rights and Production Agreement pursuant to which the Company purchased the
rights to manufacture and market RETICULOSE worldwide, except the right of LTD
to manufacture, produce and sell for its own account to physicians, clinics and
distribution within the Bahamas, effective upon payment to LTD of $50,000. That
payment was made shortly after consummation of the Company's initial public
offering of securities on May 14, 1986.

         The agreement further provided that LTD would produce and sell
RETICULOSE to the Company until the Company's purchase of rights was effective.
In addition, pursuant to this agreement, the Company purchased from LTD at $3.00
per ampule, approximately 15,000 ampules of RETICULOSE for $45,000. The Company
has used these 15,000 ampules for testing and promotional inventory. The Company
also was obligated under the agreement to pay LTD $3.00 per ampule of RETICULOSE
for the initial 100,000 ampules (including these 15,000 ampules) purchased the
first year and $2.00 per ampule purchased thereafter. The Company purchased
15,000 ampules,

                                       31
all of which were purchased by the Company for testing and promotional activity.
None of these 100,000 ampules remain in inventory.

         LTD (then known as Key) received a license from the Port Authority to
manufacture pharmaceutical products for export and leased the former Key plant
in Freeport, Grand Bahama Island, consisting of an approximately 29,100 square
foot site containing a one-story concrete block building of approximately 7,100
square feet, which facility is equipped for the testing, production, processing
and packaging of chemical products in tablet and ampule form, including
RETICULOSE.

         Historically, this plant had a production capacity of 40,000 ampules
per week and management believes such capacity should support the Company's
requirements for the foreseeable future. Due to the lack of demand for the
Company's product, the production facility was not operating continuously over
the last year. Accordingly, the approximate weekly average production of
RETICULOSE over the last year has been 1,500 ampules per week. The facility is
not used for any purpose other than the production of RETICULOSE. However, if
RETICULOSE should be approved for sale in the United States or any other market
with material demand for its products, of which there can be no assurance, there
can be no assurance that this facility will be sufficient to produce adequate
quantities of RETICULOSE. If and when the Company's business requires a higher
level of production of RETICULOSE that such level of sales will generate
sufficient revenues to permit construction of another production facility.

         The lease on the Grand Bahama facility expired by its terms in July
1987. Prior to such time, the landlord advised LTD that he would sell to LTD the
then 80-year residue of the 99-year land lease by the Port Authority, dated June
10, 1968, of the property in the Bahamas for a purchase price of $250,000.
Management secured an appraisal from a real estate appraiser in the Bahamas
which indicated that the total value (based upon a depreciated replacement cost
approach) of the property (described in that appraisal as a single-story CBS
building on 29,242.20 square feet of land) and the incorporation of LTD and its
licenses and right to manufacture RETICULOSE (separately valued at B$40,000)
was, as at June 17, 1986, US$580,170. Management secured a later appraisal from
another Bahamian Registered Appraiser which stated that, as of July 24, 1987,
the "property," which consists of the land-lease from the Port Authority (which
has a residue of 80 years to run), the 7,300 sq. feet one-story building thereon
and the plant and equipment contained therein was valued at B$450,000 or US$
459,000.

         In November 1987, the Company's shareholders approved the acquisition
by the Company of LTD, the purchase by LTD of the Bahamian manufacturing
facility and the advance by the Company to LTD of the $250,000 purchase price
for that facility, and LTD purchased the facility. On December 16, 1987,
management of the Company, through a Declaration of Trust satisfactory to the
Bahamian Government, completed the acquisition of LTD, as a 99.6% owned
subsidiary of the Company, and paid approximately $29,000 of closing costs. The
acquisition was followed by termination of the Exclusive Rights and Production
Agreement.

         Management is aware that Bahamian legal restrictions relating to the
purchase of real property interests in the Bahamas by persons not Bahamian
citizens and not owned or controlled by Bahamian citizens might have impacted
the Company's ability to acquire real property. Inasmuch as LTD was a
pre-existing Bahamian corporation, had secured and maintained the appropriate
licenses and had

                                       32
Bahamian citizens owning 0.4% of the outstanding capital stock of LTD (the
"Ordinary Shares" as that term is used in the Bahamas), and Messrs. Friedland
and Bregman, the Company's principals, had been approved by the Central Bank of
the Bahamas, the Company was advised by its Bahamian legal counsel, Nottage,
Miller & Co., that LTD's purchase of the property was lawful.

         The acquisition of LTD by the Company involved an immediate transfer to
the Company of approximately $46,000 in cash, and of all of Messrs. Friedland's,
and Bregman's beneficial interest in all of the 996 shares of the Ordinary
Shares, B$1.00 par value per share, registered in their names, representing
99.6% of all of the outstanding Ordinary Shares of LTD. Messrs. Friedland and
Bregman agreed to make a contribution to the capital of LTD of approximately
$86,000 by forgiveness of indebtedness of LTD to them. Messrs. Friedland and
Bregman also agreed that payment to them for their shares in LTD would be made
from refund of the security deposit by the landlord of the property, which
security deposit was originally paid by Messrs. Friedland and Bregman.

         The Company has not taken any action since August 1988 to seek to cause
the Bahamian Government to approve the formal transfer of the 996 Ordinary
Shares of LTD to the Company. Messrs. Friedland and Bregman have agreed, by
virtue of their execution and delivery of the 996 Ordinary Declaration of Trust,
that they shall, without remuneration, hold their shares "in trust" for the
Company, delineated in such Declaration of Trust as the owner of the beneficial
interest in such shares, and will vote all such shares and transfer the record
ownership thereof as directed by the Company. The Bahamian Government has not
acted to permit the transfer of the shares to the Company.

         Management of the Company does not believe that it will be adversely
effected by such lack of formal approval and believes it can operate
indefinitely under its present arrangement. Messrs. Friedland and Bregman
continue to hold the Company's shares of LTD as trustees for the Company and no
royalties or other payments are or shall become due to LTD under this
arrangement.

         By letter dated February 13, 1996, LTD was notified that the National
Economic Council of the Bahamas had refused LTD's request for a Free Sales
Certificate for RETICULOSE. As a result of this refusal, the Company has
commenced discussions with the Bahamian governmental authorities for the purpose
of obtaining a Free Sales Certificate, of which there can be no assurance. If
the Company does not obtain a Free Sales Certificate, it is possible that the
Company will not be able to meet registration requirements in other British
Commonwealth and Southeast Asian countries, since such countries require that a
pharmaceutical product be at least registered and certified for free sale in the
country in which it is manufactured.

         Although a number of applications for United States patents have been
filed on behalf of the Company and others are contemplated to be filed, there
can be no assurance that other companies, having greater economic resources,
will not be successful in developing a similar product using processes similar
to those of the Company. There can be no assurance that the Company will obtain
such a patent or, if obtained, that it will be enforceable.

                                       33
Government Regulation

         The FDA and regulatory agencies in foreign countries impose substantial
requirements upon and conditions precedent to the introduction of therapeutic
drug products through lengthy and detailed laboratory and clinical testing
procedures, sampling activities and other costly and time consuming procedures.
There is no assurance that FDA approval for the sale of RETICULOSE in the United
States will be obtained. If human clinical trials of RETICULOSE are successful,
of which there can be no assurance, the Company will endeavor to raise the
required capital for the purpose of furthering the FDA process. There can be no
assurance that the Company will ever have available sufficient funds nor is
there any assurance that the Company could satisfy FDA regulatory protocol to
gain approval for RETICULOSE in the United States.

         The effect of government regulation in certain countries may be to
delay marketing of RETICULOSE for a considerable period of time to impose costly
procedures upon the Company's activities and to furnish a competitive advantage
to the larger companies which compete with the Company in the field of
anti-viral drugs. The extent of potentially adverse government regulations which
might arise from future legislation or administrative action cannot be
predicted.

         Third World countries have become increasingly more thorough in the
registration and licensing of pharmaceutical products and require new products
to prove their non toxicity, stability, safety, efficacy and to maintain records
concerning same in many of the Third World countries. Accordingly, until
registration is granted, if ever, in the United States or another developed or
developing country, it is not expected that the Company will be able to generate
material sales revenues. See "-Marketing And Sales" and "-Exclusive Distribution
Agreements."

         The Company received from the Port Authority a copy of a grant of
authority, issued on October 15, 1992, confirming the right of LTD to carry on
the manufacture and export sale of ethical pharmaceutical products.

The Investigational New Drug Application Process

         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. Under FDA regulations,
the Company is not permitted to engage in or authorize human studies regarding
RETICULOSE in the United States if the FDA notifies the Company of "serious
deficiencies that require correction before human studies can begin or that
would require restriction of human studies until correction" until the Company
is notified that the material that it has submitted to correct the deficiencies
is "satisfactory." The Company's understanding is that it is rare for a new drug
sponsor to obtain approval of an IND on the basis of an initial submission, as
the FDA almost always requests additional information. The focal point of

                                       34
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 I, in which the pharmacological effects and possible
toxicity are evaluated in a small number of volunteers or patients; Phase II, in
which the drug is carefully evaluated in a small population of patients for the
effectiveness of the drug and short-term side effects in controlled clinical
trials; and Phase III, in which greater numbers of patients are employed and
broader information is gathered to provide the basis for the drug's proper use
by physicians. The initial IND may cover only Phase I.

         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. 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 in place of some other pre-clinical work.

         After the FDA approves the IND or allows it to become effective, 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 the clinical testing has been completed and analyzed, final
manufacturing processes and procedures are in place, and other information
required to be in an NDA 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.

                                       35
Another section of the NDA describes the human pharmacokinetic data and
human bioavailability data (or information supporting a waiver of the submission
of in vivo bioavailability 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 bioavailability 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.

         It is not known at this time how extensive the Phase II and Phase III
clinical trials will be, if they are conducted. There can be no assurances that
the data generated will show that the drug RETICULOSE is safe and effective as
described above and even if the data shows that RETICULOSE, is safe and
effective, obtaining approval of the NDA could take years and require financing
of amounts not presently available to the Company.

         Management of the Company believed that there was sufficient data
available on RETICULOSE to file an IND with the FDA to investigate the possible
effects of the drug for the treatment of patients with AIDS as well as other
interferon related viruses. This belief was based upon the belief of management
of the Company that RETICULOSE was distributed in the United States and used
regionally from the late 1940's through the 1960's, and upon recent studies. See
"- Background of RETICULOSE."

         Nevertheless, the FDA, in a letter dated November 29, 1984 to Bernard
Friedland, as the sponsor of the IND, stated:

         We have completed our review of your application and find that the
information presented is inadequate and does not allow us to conclude that it is
reasonably safe to initiate clinical trials. The deficiencies are summarized as
follows:

"Regarding manufacturing and controls:

"1.      You have not provided an acceptable definition of the drug moiety. If
         you propose a lipid-protein-nucleic acid complex, then the lipid,
         protein and nucleic acid must be characterized and their interactions
         defined.

"2.      After the moiety has been acceptably defined, its quantitative
         composition in the vehicle must be stated.

                                       36
"3.      You should include appropriate chemical, physical and microbiological
         controls to assure the integrity of the dosage form as well as data
         from stability studies using these controls.

"4.      Please provide complete information on the composition, size and
         dimensions of the container-closure system to be used.

"5.      Please include a complete description of the manufacturing and
         packaging procedures and the name and address of the producing
         facility. An FDA inspection will be required.

"6.      Labeling is inadequate until the drug moiety is characterized and a
         quantitative composition is proposed. The drug must be labeled sterile.

"Regarding the clinical and preclinical portions of your submission:

"1.      Please provide data that show that your [RETICULOSE] formulation is the
         same as the [RETICULOSE] formulation that is the subject of the
         articles you have provided. The articles cannot be used in support of
         the safety of your product if the formulations are different. If the
         formulations are not the same, you must provide complete
         pharmacology/toxicology information for your formulation.

"2.      Please provide clinical and preclinical data to support the statement
         that [RETICULOSE] is either an anti-viral or a biological response
         modifier, or both.

"3.      We are reserving full comment on your clinical protocol until you have
         provided the necessary safety information. However, we have these
         preliminary comments.

         "a.  The study objectives are not stated clearly.

         "b.  [Some of the raw materials used in RETICULOSE] are animal antigens
              capable of inducing adverse reactions in humans. What precautions
              will be taken with regard to this possibility?

         "c.  You have not submitted a patient consent form."

         On March 27, 1987, the Company advised the FDA that the Freeport, Grand
Bahama manufacturing facility for RETICULOSE had been put into "good
manufacturing process" condition and requested an FDA inspection. The Company
advised the FDA that stability data and other requested information would be
forwarded by the Company as a separate submission in conjunction with this
inspection.

         On May 22, 1987, the Company submitted to the FDA what the Company
considered to be the requested information for the completion of the submission
of the IND for RETICULOSE.

         On September 11, 1987, the FDA responded to the Company's May 22, 1987
submission, stating the FDA finding that "essentially no new information has
been provided," and further that "they were unable to conclude that it is
sufficiently safe to initiate clinical trials."

                                       37
The deficiencies noted in the September 11, 1987 letter from the FDA
were as follows:

         "There is no scientific rationale provided for the use of [RETICULOSE]
in patients with HIV infections. Please submit data which support in vitro
anti-HIV activity. There are no data submitted which support any criterion for a
biological response modifier. Without a scientific rationale and supporting in
vitro data there is no basis for allowing your study to proceed. Once a
rationale for use of the drug has been established, the following should be
addressed:

"1.      There are no data provided that show that the product you intend to
         manufacture is the same [RETICULOSE] formulation that is the subject of
         the articles cited in support of safety. As acknowledged in the
         application, the formulation of [RETICULOSE] has changed over the
         years. It appears from our records that there have been at least three
         formulations. We are unable to determine from the submission exactly
         when the formulation changes took place or specifically which
         formulation was used in each of the various animal and human studies.

         "The assertion that 'the sponsor was trained by the original
manufacturer of RETICULOSE and is utilizing the same formulation with identical
raw materials, in the same facility with the same equipment as was utilized for
the RETICULOSE described in the animal safety studies submitted with this
application, and in the published human clinical data' is not sufficient. Please
provide data that characterize the present formulation and its relationship to
previous formulations. If possible, please submit a letter of authorization from
the original manufacturer to allow us to refer to their data in order to make
the comparison. We may not refer to another manufacturer's data on file with us
on your behalf without specific written authorization.

"2.      We have concerns regarding the allergenic potential of [RETICULOSE].
         Please refer to the referenced study reported in 1968 by Kozima et al.
         of Nikken Chemicals Co. Ltd. In that study, [RETICULOSE] was
         administered intraperitoneally to guinea pigs and the animals were
         subsequently rechallenged 3 weeks later. 'Shock symptoms' were observed
         in 7 of the 10 animals. These studies should be repeated with the
         currently proposed formulation and a detailed report on all animals,
         including necropsy findings, should be submitted.

"3.      The manufacturing and controls information requested in our November
         29, 1984 letter have not been adequately addressed:

         "a.      Please provide a complete characterization of the raw
                  materials used for the drug substance.

         "b.      Provide a complete characterization of the nucleic
                  acid/lipoprotein complex.

         "c.      After the above characterizations have been completed, set
                  specifications for the final drug substance and for stability
                  profiles.

         "d.      Provide comparative stability data for all formulations.

         "e.      Specifications and methods must be submitted for the dosage
                  form which assure reproducible chemical, physical, and
                  microbiological attributes.

                                       38
"f.      Complete manufacturing details for the drug substance and
                  dosage form must be submitted with clear descriptions of
                  conditions, in-process controls and facilities.

         "g.      Labeling must define quantities of each ingredient and state
                  that the product is sterile.

"4.      We will not conduct an inspection of the manufacturing facility until
         the application is complete in other respects.

"5.      Comments on the clinical protocol will not be made until the necessary
         safety information has been submitted."

         On February 28, 1992, the Company submitted an amendment to the IND,
including the following:

"1.      Scientific Rationale for use of RETICULOSE in patients with HIV
         infection.

"2.      Additional data to support the antiviral activity of [RETICULOSE] with
         in vitro and in vivo studies against the Influenza A virus, and the
         Hepatitis A and B viruses.

"3.      Product [reproductibility] comparison with earlier formula, and
         comparative stability.

"4.      Current toxicity/safety data and discussion concerning allergenic
         potential plus earlier toxicity studies.

"5.      Manufacturing and controls information, including facility description,
         the Master Formula and product specifications for release, and clinical
         research labeling.

"6.      Revised Clinical Protocol and Patient forms.

"7.      Clinical Reports from 1988-1989 and prior to 1984."

         The March 1992 FDA Submission included, among other things, findings
from certain independent research laboratories. The purpose of the March 1992
FDA Submission was to obtain FDA approval of the IND to conduct human clinical
trials regarding the efficacy of RETICULOSE on AIDS.

         On July 31, 1992, the Company received from the FDA the July 1992
Deficiency Letter stating, among other things, that the Company's resubmitted
IND application, dated February 28, 1992, "does not adequately respond to the
concerns listed in [the FDA's] letter of Company dated September 11, 1987." The
July 1992 Deficiency Letter further states that the following deficiencies must
be addressed prior to initiation of clinical studies:

"Chemistry

"1.      Please provide the supplier, biological source and method of
         preparation for. ... either directly or by cross-reference to the
         appropriate Drug Master Files(s). Also, please submit a

                                       39
certificate of analysis and acceptance specifications for each of these
         substances as well as for the inactive ingredients.

"2       Please revise the manufacturing process to use one of the
         USP-recommended waters. ...

"3.      Please submit documentation concerning the controls and verification of
         sterility along the entire aseptic processing pathway, including
         sampling points. Also, please state the final temperature obtained in
         the autoclave during the reaction step of the manufacturing process and
         during sterilization of the ampules.

"4.      Please describe the chemical tests used to determine the dilution
         factor during manufacturing. Also, please provide sample calculations.

"5.      Please describe in detail the analytical methods, including sterility
         and LAL test, used for drug product release specifications.

"6.      Please submit batch analyses on all available preclinical and clinical
         lots of the drug product.

"7.      Please establish a complete stability protocol describing test
         parameters, testing stations and storage conditions, which include room
         temperature, elevated temperature, elevated humidity and light
         exposure.

"8.      Please revise the labeling on individual ampules and ampule shipping
         cartons to be in accordance with FDA Guideline, "Compilation of
         Regulatory Labeling Requirements for Human Drug Products," pages 40-44
         (copy enclosed). Please include the following information on the label:
         a) "RETICULOSE For Injection; b) "CAUTION: New Drug. Limited by Federal
         law to investigational use" in accordance with 21 CFR 312.6 (copy
         enclosed); c) the potency, i.e. mg/ml of the active ingredient(s) in
         the drug product; d) an identifying lot or control number from which
         the manufacturing history can be determined; e) the name or code number
         of the patient; f) the name and address of the investigator; g) the
         expiration date of the drug; and h) the study and/or protocol
         designation.

"Toxicology

"9.      Please perform 4-week repeat dose toxicity studies in two species, one
         being a non-rodent, with the proposed investigational article in a
         manner consistent with Good Laboratory Practices. Studies should
         include hematologic and clinical chemistry measurements and complete
         histopathologic evaluation of all animals. Doses selected should
         include some clearly toxic doses, if feasible.

"Microbiology

"10.     Please perform in vitro studies to determine what effect, if any,
         [RETICULOSE] has on HIV replication in models of both acute and chronic
         (i.e., low persistent) infections. Studies have indicated that agents
         which modulate macrophage and T-cell functions such as IL-2 and
         TNF-(oc), may modulate viral expression and/or release of HIV from
         infected cells. The

                                       40
potential for drug-associated up-regulation of virus production is an
         important consideration in the analysis of risk/benefit. At a minimum,
         activation potential should be evaluated in the following human cell
         types:

         "(a)     Freshly isolated peripheral blood mononuclear cells;

         "(b)     At least one established T-cell line (e.g., H9, MT4, MT2 or
                  MOLT4); and

         "(c)     One line representative of the monocyte/macrophage lineage
                  (e.g., U937, U1 or OM10.1).

         "Studies employing a variety of different human cell cultures and HIV
strains are encouraged.

"Clinical

"11.     Please submit the name and address and a statement of the
         qualifications (curriculum vitae or other statement of qualifications)
         of the principal investigator.

"12.     Please define inclusion and exclusion criteria according to current
         standard terminology and practice. For example, the confirmatory test
         for HIV infection is the Western Blot, not the ELISA test for HIV
         antibody.

"13.     Please provide an initial proposed dosage based on preclinical safety
         information. Please also refer to the comment under 'Toxicology' in
         developing preclinical safety data.

"14.     Please provide a rationale for the proposed study parameters, for
         laboratory monitoring, and for toxicity evaluation. In addition, please
         define endpoints which are measurable and can be quantified and which
         may be subject to statistical analysis. For example, please specify
         what constitutes a "significant and consistent increase" in CD4
         lymphocyte count. Please provide safety monitoring which is appropriate
         for the preclinical safety data. In particular, please provide
         monitoring for the potential for anaphylaxis, as seen in the
         preclinical repeat dose study in guinea pigs.

"15.     Please revise the informed consent document to reflect the preclinical
         safety and effectiveness data.

"16.     Please provide a concise rationale for the proposed sample size and
         define the proposed statistical methodology. In general, interim
         analyses are not appropriate for a 12 week phase 1 study.

"Until you have submitted the above required information for items 1-16, and we
notify you that if it is safe to initiate the studies, you may not proceed with
the proposed study.

"We also have the following advice which we believe would improve your IND:

                                       41
"Chemistry

"The following chemistry issues must be addressed prior to studies beyond
initial phase [1 and 2] studies:

"17.     Please establish the identity(ies) and structure(s) of the active
         component(s).

"18.     Please identify the impurities contained in the drug substance(s) and
         drug product and establish individual limits for the impurities.

"19.     Please incorporate into the drug product specifications and
         identification test(s) and an assay for the active ingredient(s) using
         properly validated analytical methods.

"20.     Please identify the supplier and composition of the ampules.

"Microbiology

"21.     Please clarify the following with respect to the data submitted in the
         submission:

         "(a)     Please specify whether the peptide nucleic acid solution and
                  the [RETICULOSE] preparation used by Dr. Lionel Resnick are
                  the same or a different preparation.

         "(b)     Please provide the units of p24 and RT activity and explain
                  whether the results represent percent inhibition or activity.
                  In addition, please clarify the discrepancy in the numbers
                  shown in the submission and in the published report (table 3).

         "The following microbiology issues should be addressed concurrent with
phase [1 and 2] studies:

"22.     Please use pre-clinical studies in appropriate animal models of
         retrovirus infection to define and characterize the activity of
         [RETICULOSE].

"23.     Please perform studies to investigate whether [RETICULOSE] can induce
         an antibody response which might inhibit its activity against HIV.

"24.     We encourage you to investigate the mechanism by which [RETICULOSE]
         inhibits HIV."

         Before September 1995, the Company received further deficiency
correspondence from the FDA, dated June 1, 1995, which stated, in addition to
the comments stated below, that the Company's prior submissions to the FDA did
not provide an adequate response to the FDA's earlier request for preclinical
information and accordingly the Company's IND was "inactivated":

"1.      The protocol lacks sufficient description of many basic clinical trial
         elements, such as randomization, blinding and a well defined control
         group.

"2.      A rationale for the proposed sample size of "two to ten" patients is
         not provided.

                                       42
"3.      The rationale for the dose, dosing frequency and duration of therapy is
         not provided.

"4.      The eligible patient population is inadequately defined. In particular,
         the CD4 count range for patient eligibility should be specified.

"5.      The primary efficacy assessment of the study (reduction in viral load)
         is not consistent with the following statement in section F.O.
         Biostatistical Considerations:

                  'The estimated number of patients eligible for entry into this
                  trial who will experience an adverse event as defined as an
                  opportunistic infection or development of another neoplasm at
                  90 days is 2% or less. We wish to detect such a patient in the
                  group of up to 5 and provide him/her with whatever alternative
                  therapy is deemed advisable.'

         This statement suggests that there is confusion around the objective of
         this study and how a sample size can be estimated based on the desired
         objective.

"6.      The statement "Patients experiencing an adverse event within the first
         7 days of treatment will be considered evaluable for toxicity but not
         for efficacy" is unacceptable because all enrolled patients should be
         evaluated for both safety and efficacy.

"7.      The protocol indicates (section M.2.1) that "elimination of culturable
         virus, based on Viral Load assays" is one of two laboratory parameters
         of interest, however, nowhere else are viral cultures discussed.
         Similarly, "restoration of immune function by tests of delayed
         hypersensitivity and optional functional assays" is mentioned in
         section M.3.2.2 as an additional laboratory endpoint, however it is not
         further described.

"8.      The principle [sic.] investigator is not identified.

"9.      An informed consent document is not provided."

         No assurances can be given that the Company's IND will ever be approved
by the FDA or that results of any testing will demonstrate that RETICULOSE is
safe or effective in the treatment of disease. The Company has not formally
responded to the July 1992 Deficiency Letter or the 1995 deficiency letter, nor
have any of the studies cited in those letters been undertaken. The Company
currently contemplates that it may file with the FDA an amendment to the IND or
seek to reactivate the IND. There can be no assurances as to the costs or the
timing of the refiling of the IND or whether the Company has the resources to
complete the FDA approval process. The Company may allocate certain funds from
the sale of the Debenture and the exercise of options and warrants for the
purpose of filing a new IND with the FDA. No assurance can be given, however,
that any the options or warrants will be exercised, that a new IND will be
accepted by the FDA or that any tests previously conducted or to be conducted
will satisfy FDA requirements.

                                       43
Testing Agreements

         For the period from inception (February 20, 1984) through September 30,
1998 the Company expended approximately $2.5 million on testing and research and
development activities.

         Testing in the United States. On September 20, 1984, the IND was
submitted for a Phase I type study to determine if there was any pharmacological
activity in humans against HIV. See "-The Investigational New Drug Application
Process." In response to the FDA deficiency letters in 1984 and 1987 regarding
the IND, the Company undertook the Wisconsin Study, a series of protein tests
for product control and protein fragment identification which were conducted by
the University of Wisconsin's Biotechnology Center. See "-Background of
RETICULOSE." Prior to the completion phase of the Hirschman Study, the rationale
for trial of RETICULOSE in humans was based upon IN VITRO studies which the
Company believed had demonstrated at least partial activity against HIV. In
October 1989 and December 1989, respectively, Southern Research Institute,
Birmingham, Alabama and Vironc Laboratories, North Miami Beach, Florida
conducted IN VITRO screenings of RETICULOSE against the HIV virus in two
separately conducted independent laboratory screenings. In these screenings,
RETICULOSE was shown to be either partially or significantly active against HIV
at specific dilutions and was non-cytotoxic. In addition, a historical search is
being conducted and the time line is being developed to connect the current
RETICULOSE product and its manufacturer with the original product and its
manufacturer. This search is being documented for eventual submission to the FDA
to further substantiate the identity of the current product which is the subject
of the IND. In October 1989, International Diagnostics Ltd. Inc., Dania,
Florida, an independent testing laboratory, undertook standard mouse toxicity
assays to demonstrate toxicity of RETICULOSE. Results indicated no apparent
signs of toxicity in RETICULOSE treated animals at specific doses. Management of
the Company originally believed that due to the early safety record and
published reports of human use that the FDA would permit the initial Phase I
trials in humans after approximately six months. If sufficient funds are
available from the sale or exercise of securities or other sources, the Company
will consider taking the requisite scientific steps to satisfy the FDA that the
formulation of RETICULOSE is identical to the formulation reported in the prior
anecdotal history and studies. The time and costs required for IND approval as a
result of the FDA not accepting the prior history of the drug is currently not
known to the Company but could be considerable. Certain of the foregoing
studies, excluding the HPV Clinical Trial, the Hirschman Study and the Barbados
Study, were submitted to the FDA as part of the March 1992 FDA Submission, but
were not deemed sufficient by the FDA.

         Canadian Contract. The Company, during the period from 1992 to 1995,
had been seeking approval in Canada for controlled distribution of RETICULOSE.
It submitted an application for a limited study on 24 patients with Kaposi's
Sarcoma, a condition associated with AIDS, the approval of which application was
pending in 1995. However, due to delay in obtaining the approval for this study
and after receiving deficiency letters from the Health Protection Branch of the
Health and Welfare Department of Canada, the Company had withdrawn the
application to have that study commence.

         TRM Management Corp. Pursuant to an agreement dated August 20, 1991
between the Company and TRM Management Corp. ("TRM"), a Florida corporation
unaffiliated with the Company (the "TRM Agreement"), TRM performed, at the
Company's expense, a controlled open

                                       44
clinical trial test in Haiti during a period of 30 days, on 53 patients with
early onset Hepatitis "A" or Hepatitis "B", approximately one-half of whom were
treated with RETICULOSE and approximately one quarter of whom were untreated for
each of these two diseases, to assess the effectiveness of RETICULOSE against
the Hepatitis "A" virus and Hepatitis "B" virus in accordance and in compliance
with the Hepatitis Open Label Clinical Trial Protocol developed by TRM, which
involved diagnosis otherwise than by the positive method of liver biopsy (the
"Haiti Tests").

         In accordance with the TRM Agreement, Matthew Cohen prepared a paper
which describes the methods and results of the Haiti Tests (the "Results
Paper"). On January 3, 1992, TRM delivered to the Company the Results Paper. The
Results Paper was published in the Journal of the Royal Society of Health,
December 1992 issue (the "Journal"). Matthew Cohen is not affiliated with or
related to Leonard Cohen, who acted as a consultant to the Company.

         The Results Paper states, among other things, that the Haiti Tests
resulted in certain positive clinical and laboratory effects regarding the use
of RETICULOSE against the Hepatitis "A" virus and Hepatitis "B" virus,
especially against Hepatitis "B." The Company believes, however, that the Haiti
Tests may have been limited in terms of their methodology and results. The
Company is considering such factors relative to future testing.

         In accordance with the terms of the TRM Agreement, the Company has
authorized the issuance to the shareholders and certain associated persons of
TRM (1) an aggregate amount of 10,000,000 shares (the "TRM Shares") of the
Company's common stock, par value $.00001 per share (the "Common Stock"); and
(2) an option to acquire, at any time, for a period of five years from the date
of issuance of the option, 10,000,000 shares of the Company's Common Stock at a
purchase price of $.05 and $.08 per share (the "TRM Options"). As of September
30, 1998, 10,000,000 shares of Common Stock were issued pursuant to the exercise
of the TRM Options for an aggregate exercise price of $600,000 by David Sass, as
an assignee of Troy Posner, Richard Waldman, and Matthew Cohen.

         Plata Partners Limited Partnership. On March 20, 1992, the Company
entered into an agreement with Plata Partners Limited Partnership ("Plata"), a
Michigan limited partnership unaffiliated with the company (the "Plata
Agreement"), pursuant to which Plata agreed at its expense, to perform a
demonstration on ten patients of both sexes from 18 to 45 years of age for 45
days, without control group, at Campus #1 University C.B.E.P., University of
Santo Domingo, Santo Domingo, Dominican Republic in accordance with a certain
agreed upon protocol (the "Protocol") to assess the efficacy of a treatment
using RETICULOSE incorporated in the Protocol against AIDS (the
"Demonstration"). The Protocol provides, among other things, that the treatment
consists of RETICULOSE along with vitamin and protein supplements.

         The preliminary and final results of the Demonstration were previously
reported by the Company in its Reports on Form 8-K filed with the Commission on
July 10, 1992 and November 6, 1992.

         The Demonstration was conducted on the patients from May 1992 through
July 1992. The Demonstration was supervised by Angelo A. Chinnici, M.D., and
administered by medical doctors certified to practice in the Dominican Republic.
A videotape has been produced by Plata

                                       45
memorializing the Demonstration, which videotape was delivered to the Company in
August 1992. On August 12, 1992 the Company received from Plata a translated
written transcript of a press conference (the "Press Conference") called and
conducted by Plata in Santo Domingo, Dominican Republic on August 7, 1992 (the
"Transcript"). The Press Conference was held by Plata following the completion
and the release of preliminary results of the Demonstration.

         The Transcript, a copy of which has been filed with the Company's
Report on Form 8-K with the Commission on August 14, 1992, provides, among other
things, statements from Dr. Joaquin Perez-Mendez, the Director of the Program
for Control of Sexually Transmitted Diseases (Procets) a governmental
organization in the Dominican Republic, who participated in the administration
of the Demonstration, Dr. Charles Dunlop, the Surgeon General of the Dominican
Republic, Dr. Norman de Castro and Dr. Rafael Alcantara, who is associated with
the Center for Sexually Transmitted Diseases in the Dominican Republic
(collectively, the "Doctors").

         In the Transcript, the Doctors generally expressed their optimism and
hopefulness regarding RETICULOSE and they encouraged further testing of the
efficacy of RETICULOSE against AIDS and efforts to register RETICULOSE. As of
the date hereof, the Company has not independently verified or otherwise
substantiated the accuracy or completeness of the Transcript or the Press
Articles. The Demonstration conducted by Plata was not a double-blind study.
However, as of the date of this Prospectus, no registration certificate has been
granted by the Dominican Republic, and there can be no assurance that such
certificate will be issued. Further, the Company is currently not pursuing the
registration certificate in the Dominican Republic.

         The Company has also been made aware that certain newspaper articles
appeared in Spanish language newspapers (published in the Dominican Republic)
regarding the Press Conference (the "Press Articles") and interviews with Drs.
Perez-Mendez and Alcantara, which reported that the preliminary results of the
Demonstration were "very encouraging" and that the "laboratory results
subsequent to the treatment, reveal a more than 50 percent reconversion of the
cell immunological system in almost all of the patients being maintained with
relatively little favorable change in the only patient who did not complete the
treatment." According to certain of the Press Articles, certain of the doctors
attending the Demonstration stated: "Although it [(the Demonstration)] does not
have the representativeness which a study of this caliber requires, precisely
due to the small number of patients involved in the same, and above all due to
the fact that it did not rely on a control group which permits us to make some
significant comparisons, basically it is a good job of research and the results
[are] clearly excellent."

         The Company received from Plata certain written information, certain
copies of which are incorporated by reference into the Company's Reports on Form
8-K delivered for filing to the Commission on July 10, and July 23, 1992 (the
"Plata Statement"). The Plata Statement reports, among other things, certain
positive preliminary results of the Demonstration (the "Results"), including the
fact that all patients showed weight gain, as well as resolution of malaise,
joint pain, and diarrhea and that those patients initially presented with
herpetic lesions showed clearing and well healed vesicles, there was a decrease
in lymphotenopathy in the majority of patients, and their oral thrush was
greatly improved.

                                       46
In August 1992, the Company received from Lionel Resnick, M.D.,
F.A.A.D., F.A.C.P., Chief, Retrovirology Laboratories, Departments of
Dermatology and Pathology, Mount Sinai Medical Center of Greater Miami, in
Miami, Florida, written correspondence relating to the Demonstration generally
stating that, based upon his review of the results of the Demonstration, a
"dramatic" clinical improvement was documented over the forty-five day period of
the study and there were significant changes in laboratory surrogate markers
consistent with beneficial drug effects, although he noted that enthusiasm
regarding the Demonstration should be tempered by the lack of a homogeneous
study population and defined clinical endpoints.

         In October 1992, the Company received from Anthony J. Mangia, M.D.,
certified by Plata to be an expert in the area of AIDS research, further written
correspondence relating to the Demonstration (the "Mangia Correspondence"). As
an independent observer, Dr. Mangia visited the Demonstration site, reviewed
scientific data regarding the IN VITRO activity of RETICULOSE against various
viruses, interviewed the study physicians, examined some of the patients, and
reviewed the written results of the Demonstration. The Mangia Correspondence
basically stated that RETICULOSE may be an effective alternative treatment for
AIDS patients, based on a review of the data provided, that the results of the
Demonstration appear to indicate that RETICULOSE is tolerated well, with no
significant adverse reactions. The Mangia Correspondence also indicated that the
patients Dr. Mangia examined had experienced an improvement in symptoms and a
sense of well being by the time the Demonstration had concluded.

         The Mangia Correspondence does, however, contain several criticisms of
the Demonstration, including, among other things, the brevity of the
Demonstration, the lack of stratification according to CD 4 count, the small
number of subjects, the inclusion of nutritional supplements along with the
RETICULOSE, and the lack of pre- and post-treatment weights and performance
status evaluation of the subjects. The Mangia Correspondence concluded that the
results of the Demonstration appear to indicate that further studies in animals
and humans appear to be warranted, and suggested that such further studies need
to be better controlled and performed on a larger scale with more sophisticated
methods than the Demonstration.

         The Company received from Plata a copy of a report dated September 30,
1992, from Angelo A. Chinnici, M.D. regarding the Demonstration (the "Chinnici
Report"), with respect to the hypothesis, objectives, methodology, clinical
tracking and procedures involved in the Demonstration. Among other things, the
Chinnici Report noted that the majority of the subjects involved experienced a
dramatic clinical improvement, such as reduction in oral thrush, reduction in
herpetic lesions, and improvement in certain dermatological conditions such as
seborrheic dermatitis and eczema. The most dramatic change was observed in the
number of CD 4 and CD 8 lymphocytes, as well as in the CD 4 and CD 8 ratio,
where nine of the ten patients experienced an increase in the CD 4 cells. The
Chinnici Report further noted that the administration of RETICULOSE, among other
things, produced no adverse side affects, significant anemia, nor any decrease
in the subjects' white blood cell count, may cause a halt to viral replication
and may produce endogenous interferon, which improves a patient's condition.
However, The Chinnici Report also indicated, among other things, that the
Demonstration was limited in that the subjects were treated for a short period
of time and there was no control group. The Company has not independently
verified any of the statements contained in either the Mangia Correspondence or
the Chinnici Correspondence.

                                       47
The Company believes the Demonstration will not significantly impact
the FDA's decision to (i) approve the pending IND filed with the FDA or (ii)
approve of the marketing, sales or distribution of RETICULOSE within the United
States. Further, the Company believes the Demonstration will not significantly
impact the Company's ability to obtain approval for the marketing, sales or
distribution of RETICULOSE anywhere in the world.

         Pursuant to the Plata Agreement, the Company authorized the issuance to
Plata of 5,000,000 shares of common stock and options to purchase an additional
5,000,000 shares at $.08 per share through July 9, 1994 (the "Plata Options")
and 5,000,000 shares at $.10 per share through July 9, 1994 (the "Additional
Plata Options"). Pursuant to several amendments, the Plata Options and the
Additional Plata Options are exercisable through April 30, 1999 at an exercise
price of $.14 and $.16, respectively. As of September 30, 1998, there are
outstanding Plata Options to acquire 683,300 shares at $.14 per share and
Additional Plata Options to acquire 108,100 shares at an exercise price of $.16
per share. Through September 30, 1998, the Company has received approximately
$1,332,000 pursuant to the issuance of approximately 9.2 million shares in
connection with the exercise of the Plata Options and the Additional Plata
Options.

         Argentina Agreements. On December 27, 1993, the Company entered into an
agreement with Juan Carlos Flichman, M.D., Permanent Advisor to the Argentine
Association Against Sexually Transmitted Diseases, whereby Dr. Flichman agreed
to conduct a double blind study of RETICULOSE in Argentina of (i) 40 patients
who have been diagnosed with acute Hepatitis "B" and (ii) 20 patients diagnosed
with Hepatitis "C" (the "Argentina Study"). The treatment of acute Hepatitis "B"
patients was expected to last for approximately 20 days, followed by a 60/90 day
observation period and of Hepatitis "C" patients was expected to last for 180
days, also followed by a 60/90 day observation period. Dr. Flichman, however,
indicated to the Company that the Argentina Study was delayed because of the
Argentina Health Ministry.

         In April, 1996, the Company entered into a new agreement (the "1996
Argentina Agreement") with DCT S.R.L., an Argentine corporation ("DCT"),
pursuant to which DCT and Dr. Flichman each agreed to conduct the HPV Clinical
Trial. In June, 1994, the Company entered into an exclusive distribution
agreement with DCT, whereby the Company granted to DCT, subject to certain
conditions precedent, the exclusive right to market and sell RETICULOSE in
certain South American countries, including Argentina and other MERCOSUR States;
this agreement was superseded by another exclusive distribution agreement as of
April 1, 1996. Pursuant to the 1996 Argentina Agreement, the HPV Clinical Trial
commenced and is being conducted pursuant to a protocol developed by Dr.
Flichman. The purpose of the HPV Clinical Trial is to assess the efficacy of
RETICULOSE on HPV. The protocol calls for, among other things, a study to be
performed with clinical and laboratory follow-up on 20 patients between the ages
of 18 and 50 years of age. The HPV Clinical Trial is not a double-blind study
and will not include a placebo control group or reference to any other
anti-viral drug.

         Pursuant to the 1996 Argentina Agreement, the Company paid
approximately $34,000 to DCT to cover out of pocket expenses associated with the
HPV Clinical Trial. The 1996 Argentina Agreement further provides that, at the
conclusion of the HPV Clinical Trial, DCT shall cause Dr. Flichman to prepare
and deliver a written report to the Company regarding the methodology and
results of the HPV Clinical Trial (the "HPV Written Report"). On April 22, 1996,
the Company was

                                       48
informed by DCT that the HPV Clinical Trial had commenced on April 15, 1996. In
September 1996, the Company received from Dr. Flichman the HPV Written Report.
The HPV Written Report stated that, when RETICULOSE was applied topically to 20
patients (six males and 14 females) diagnosed to be infected with HPV, two of
the 20 patients had total remissions and eight of the 20 patients experienced
clinical improvement ranging from a reduction in color intensity, size and
texture. Further, the HPV Written Report provides that no adverse side effects
were observed in any of the 20 patients and only one patient experienced redness
of the skin that disappeared spontaneously within 24 hours.

         Upon delivery of the HPV Written Report to the Company, the Company
delivered to the principals of DCT Common Stock purchase options (the "DCT
Options") to acquire 2,000,000 shares of the Common Stock for a period of one
year from the date of the delivery of the HPV Written Report, at an exercise
price of $.20 per share. Pursuant to several amendments, the DCT options are now
exercisable through April 30, 1999 at an exercise price of $.21 per share. As of
September 30, 1998, 464,000 shares of common stock were issued pursuant to the
exercise of these options for an aggregate exercise price of approximately
$93,000. Additionally, in April 1998, 10,000 shares were issued in connection
with the exercise of options at $.20 per share.

         In June 1994, DCT S.R.L. and the Company entered into an exclusive
distribution agreement whereby the Company granted to DCT, subject to certain
conditions, the exclusive right to market and sell RETICULOSE in Argentina,
Bolivia, Paraguay, Uruguay, Brazil, and Chile (the "DCT Exclusive Distribution
Agreement").

         During the quarter ended June 30, 1997, the Company entered into an
agreement with DCT (the "HIV-HPV Agreement") whereby the Company agreed to
provide to DCT or its assignees up to $600,000 to cover the costs of a double
blind placebo controlled study in approximately 150 patients to assess the
efficacy of RETICULOSE for the treatment of persons diagnosed with the HIV virus
(AIDS) and HPV (the "HIV-HPV Study").

             In connection with the HIV-HPV Agreement, as of September 30, 1998,
the Company has advanced approximately $665,000 which is accounted for as a
research and development expense. The amounts have been used to cover expenses
associated with clinical activities of the HIV-HPV Study.

         The HIV-HPV Agreement provides that (i) in the event the data from the
HIV-HPV Study is used in connection with RETICULOSE being approved for
commercial sale anywhere within the territory granted under the DCT Exclusive
Distribution Agreement or (ii) DCT receives financing to cover the costs of the
HIV-HPV Study, then DCT is obligated to reimburse the Company for all amounts
expended in connection with the HIV-HPV Study.

         In October 1997, the Company entered into two agreements with DCT,
whereby the Company agreed to provide DCT or its assignees, up to $220,000 and
$341,000 to cover the costs of double blind placebo controlled studies in
approximately 360 and 240 patients, respectively to assess the efficacy of the
topical application of RETICULOSE for the treatment of persons diagnosed with
Herpes Labialis/Genital Infections (the "Herpes Study") and HPV (the "HPV
Topical Study").

                                       49
In connection with the Herpes Study and the HPV Topical Study
(collectively, the "Studies"), as of September 30, 1998, the Company has
advanced approximately $58,000 and $132,500, respectively, and such expenses are
accounted for as research and development expenses. The amounts expended have
been used to cover expenses associated with pre-clinical activities. Neither the
Herpes Study nor the HPV Topical Study has commenced.

         Both agreements with DCT provide that (i) in the event the data from
the Studies are used in connection with RETICULOSE being approved for commercial
sale anywhere within the territory granted under the DCT Exclusive Distribution
Agreement or (ii) DCT receives financing to cover the costs of the Studies, then
DCT is obligated to reimburse the Company for all amounts respectively expended
in connection with the Studies.

         In February 1998, the Company entered into an agreement with DCT (the
"Concurrent Agreement") whereby the Company agreed to provide DCT or its
assignees, up to $412,960 to cover the costs of a study in 65 patients to
compare the results of treatment of patients with AIDS taking a three drug
cocktail and RETICULOSE with those taking a three drug cocktail and a placebo.
As of September 30, 1998, the Company has advanced approximately $50,000 for
such study which has been accounted for as research and development expense.

         In May 1998, the Company entered into an agreement with DCT (the
"Rheumatoid Arthritis Agreement") whereby the Company agreed to provide DCT or
its assignees, up to $94,950 to cover the costs of a controlled study in 30
patients to determine the efficacy of RETICULOSE for the treatment of rheumatoid
arthritis in humans. In connection with this study, as of September 30, 1998,
the Company has advanced approximately $79,200 which has been accounted for as
research and development expenses.

         In July 1998, the Company authorized expenditures of up to $90,000 to
Dr. Flichman to study the effects of RETICULOSE in inhibiting the mutation of
the AIDS virus. As of September 30, 1998, the Company has advanced approximately
$50,000 to Dr. Flichman for such study which has been accounted for as research
and development expense.

         Hirschman Study. The Company in late 1995 issued a grant of $30,188 to
The Mount Sinai School of Medicine, New York City, New York, for the purpose of
studying the mechanism, if any, by which RETICULOSE inhibits replication of HIV.
The study was conducted by Shalom Z. Hirschman, M.D., then Professor of Medicine
and Director of the Division of Infectious Diseases of The Mount Sinai School of
Medicine. The results of this research were presented by Dr. Hirschman at
Biomedicine '96, the annual meeting (sponsored by SCIENCE, a journal of the
American Association for the Advancement of Science) of the Association of
American Physicians, American Society for Clinical Investigation, and American
Federation for Clinical Research (associations of medical honor societies), held
May 4-6, 1996, in Washington, D.C. The manuscript of Drs. Hirschman and Chey Wei
Chen, entitled "Peptide Nucleic Acids Stimulate Gamma Interferon and Inhibit the
Replication of the Human Immunodeficiency Virus," was published in Clinical
Research (the official compendium of the proceedings of the meeting) in the
August 1996 issue of Journal of Investigative Medicine, a publication of the
American Federation for Clinical Research. Dr. Hirschman's report of the result
of the Hirschman Study is set forth under "-Background of RETICULOSE."

                                       50
Barbados Study. The first stage of the Barbados Study, conducted at the
Queen Elizabeth Hospital, Bridgetown, Barbados, was completed in late November
1996. In December 1996, the Company received from the coordinators of the
Barbados Study, the Written Summary reporting the result of that stage, as set
forth under "-Background of RETICULOSE." As of September 30, 1998, the Company
has expended approximately $365,000 to cover the costs of the Barbados Study.
Based on information received from the coordinators of the Barbados Study, the
Company is uncertain as to the costs to be incurred in connection with the
Barbados Study and has not been informed as to when results from the Barbados
Study will be forthcoming. The Barbados Abstract, which describes the results of
the first stage of the Barbados Study, was accepted for publication by The
American Society for Microbiology.

         In connection with the Barbados Study, in July 1998, the Company
authorized expenditures of up to $45,000 to Queen Elizabeth Hospital,
Bridgetown, Barbados to study the effects of RETICULOSE in inhibiting the
mutation of the AIDS virus. As of September 30, 1998, the Company has advanced
approximately $5,000 for such study which has been accounted for as research and
development expense.

         National Cancer Institute Study. In March 1997, the Company entered
into a Material Transfer Agreement - Cooperative Research and Development
Agreement (the "NCI Agreement") with certain governmental agencies (including
the FDA) represented by The National Cancer Institute (collectively, the
"Government Agencies"). The purpose of the NCI Agreement is for Dr. Howard
Young, Section Chief, Laboratory of Experimental Immunology, Division of Basic
Sciences, The National Cancer Institute, to determine the molecular mechanism by
which RETICULOSE may specifically enhance transcription of the gamma interferon
gene. The Company intends to supply RETICULOSE to the Government Agencies for
the purpose of research by the Government Agencies in accordance with a research
plan attached to the NCI Agreement, subject to the conditions stated in the NCI
Agreement. The NCI Agreement provides for non-disclosure by the Government
Agencies and an understanding that the Company and the Government Agencies will
enter into licenses to one another on terms to be negotiated in the future, in
the event the research produces an invention. Either the Company or the
Government Agencies may terminate the NCI Agreement upon 30 days prior written
notice to the other. The NCI Agreement states that the Government Agencies "[do]
not directly or indirectly endorse any product or service provided, or to be
provided, whether directly or indirectly related to either this [agreement] or
to any patent or other intellectual property license or agreement which
implements this [agreement] by its successors, assignees, or licensees. The
[Company] shall not in any way state or imply that this [agreement] is an
endorsement of any such product or service by the U.S. Government or any of its
organizational units or employees." Pursuant to an agreement dated March 19,
1998, the NCI Agreement has been extended for an additional one year period and
provides for the continued study of the basic mechanisms of immune responses,
the investigation of anti-tumor activity of RETICULOSE and its effect on
rheumatoid arthritis.

         Topical Safety Study. In October 1997, the Company contracted with an
unaffiliated third party laboratory to conduct testing to determine the safety
of the topical use of RETICULOSE for the treatment of HPV and Herpes (the
"Topical Safety Study"). As of September 30, 1998, the Company advanced
approximately $170,000 for a topical safety study to be conducted in the United
States for the topical use of RETICULOSE for the treatment of HPV and herpes.

                                       51
Marketing And Sales

         RETICULOSE is not being sold commercially anywhere in the world. As of
the date hereof, the efforts of the Company or any of its representatives have
produced no material benefits to the Company regarding the Company's ability to
have RETICULOSE sold commercially anywhere in the world. The Company has entered
into Exclusive Distribution Agreements with five separate entities whereby the
Company has granted exclusive rights to distribute RETICULOSE in the countries
of China, Japan, Hong Kong, Macao, Taiwan, Mexico, Channel Islands, Isle of Man,
British West Indies, Jamaica, Haiti, Bermuda, Belize, Saudi Arabia, Argentina,
Bolivia, Paraguay, Uruguay, Brazil and Chile. Pursuant these agreements, the
distributors are obligated to cause RETICULOSE to be approved for commercial
sale in such countries and upon such approval, to purchase from the Company
certain minimum quantities of RETICULOSE 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. See "-Exclusive
Distribution Agreements." The marketing plans of the Company for RETICULOSE are
still dependent upon registration of RETICULOSE for sale in the various
jurisdictions where its distributors are seeking approvals.

         There can be no assurance that the Company or any distributor will ever
secure registration of RETICULOSE and the Company to date has received no
information that would lead it to believe that it will be positioned to sell
RETICULOSE commercially anywhere in the world in the immediate future. To date,
the only application for registration of RETICULOSE which has been filed is an
application requesting that RETICULOSE be available for sale in Argentina.
Notwithstanding the filing of this application, no material progress has been
made to secure approval to sell RETICULOSE in Argentina. The Company initially
targeted its 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, Virus Infectious
Hepatitis, Mumps, Encephalitis, Herpes Simplex and Herpes Zoster. Those
countries included Singapore, Hong Kong, Malaysia, Taiwan, the Philippines and
Malta. Registration of RETICULOSE 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 RETICULOSE for sale in these
countries has been frustrated due to the Company's inability to obtain the
registration and approval to sell RETICULOSE in the Bahamas, the country of
origin, and a general lack of published data on the efficacy of RETICULOSE.
Until RETICULOSE is registered and approved for sale in the United States, in
another developed country or in the other countries included in the
distributors' territories, there can be no assurance that the Company will
generate significant sales of RETICULOSE. For the nine months ended September
30, 1998 and for the years ended December 31, 1997, 1996 and 1995, the Company
reported no commercial sales except limited sales for testing purposes ($656,
$2,278, $24,111 and $27,328, respectively). RETICULOSE is not legally available
for use anywhere in the world, except for testing purposes. See "-Testing
Agreements."

Competition

         There are inherent difficulties for any development stage company
seeking to enter an established field, particularly in a field so capital
intensive as the manufacture and sale of pharmaceuticals. The Company, if it is
ever successful in securing FDA and other regulatory approvals, will encounter
intense competition engaged in the development and marketing of drug

                                       52
products, all of which are substantially larger, possess far greater capital
assets, have substantial operating histories and records of successful
operations, greater financial and other resources, more employees and far more
extensive facilities than the Company now has or will have in the foreseeable
future. Accordingly, such companies are in a far better position to compete than
the Company. Moreover, such companies may succeed in discovering, developing and
marketing anti-viral products that are more effective than RETICULOSE. The
Company at present is not, and there can be no assurances that the Company will
become in the foreseeable future, a significant factor in the field in which it
proposes to engage. Additionally, small "start-up" firms, such as the Company,
with very limited resources, are at a very serious competitive disadvantage
against established companies. The Company hopes to compete, however, based on
cost and the effectiveness of RETICULOSE.

Employees

         The Company has 24 full-time employees, including its three executive
officers, 17 employees involved in research, and four administrative employees.
Shalom Z. Hirschman, M.D., President and Chief Executive Officer and a Director
of the Company, Bernard Friedland, Chairman of the Board and a Director of the
Company, and William Bregman, Secretary-Treasurer and a Director of the Company,
each devote all of their business time to the day-to-day business operations of
the Company.

         Additionally, the Company 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."

Consulting Agreements

         Leonard Cohen. In September 1992, the Company entered into a consulting
agreement with Leonard Cohen (the "September 1992 Cohen Agreement") for a
one-year term commencing on that date. Prior to the execution of the September
1992 Cohen Agreement, Mr. Cohen had no relationship with the Company other than
as a former holder of the Company's Class C Warrants which had been redeemed.
Mr. Leonard Cohen has no relationship to Matthew Cohen, who was one of the
principals of TRM. The September 1992 Cohen Agreement required that Leonard
Cohen provide the Company certain consulting services including, among others:
(i) the identification of pharmaceutical companies which may have an interest in
engaging in joint ventures or other agreements to advance the testing and study
of RETICULOSE; (ii) services related to achieving approval of RETICULOSE for
commercial sale in the United States and in foreign countries; (iii) the
location of investment banking firms and venture capital firms, the purpose of
which is to raise capital for the Company through securities offerings and/or
debt financing; (iv) the dissemination of public information about the Company
to persons who may have an interest in RETICULOSE; and (v) making contacts with
persons in the investment and financial communities.

         The September 1992 Cohen Agreement required that Mr. Cohen provide said
consulting services to the Company in exchange for the Company's issuing to Mr.
Cohen 1,000,000 shares of Common Stock (the "September 1992 Cohen Shares"),
500,000 of which were issuable upon execution of the September 1992 Cohen
Agreement and the remaining 500,000 shares of which were issuable upon Mr. Cohen
completing 50 hours of consulting service to the Company. The Company

                                       53
issued the first 500,000 shares to Mr. Cohen in October 1992 and the remaining
500,000 shares to Mr. Cohen in February 1993. Further, pursuant to the September
1992 Cohen Agreement, the Company granted to Mr. Cohen the option to acquire, at
any time and from time to time through September 10, 1993 (which date has been
extended through April 30, 1999), the option to acquire 3,000,000 shares of
Common Stock of the Company at an exercise price of $.09 per share (which
exercise price has been increased to $.13 per share) (the "September 1992 Cohen
Options"). As of September 30, 1998, 1,300,000 of the September 1992 Cohen
Options have been exercised for cash consideration of $156,000.

         In February 1993, the Company entered into a second consulting
agreement with Mr. Cohen (the "February 1993 Cohen Agreement") for a three year
term commencing on March 1, 1993. The February 1993 Cohen Agreement was entered
into because the Company believed that it provided incentive to Mr. Cohen to
provide greater services to the Company and because Mr. Cohen's hourly
obligations under the September 1992 Cohen Agreement had been satisfied during
the last quarter of 1992 and the first quarter of 1993. The February 1993 Cohen
Agreement provides that Mr. Cohen provide financing business consulting services
concerning the operations of the business of the Company and possible strategic
transactions in exchange for the Company issuing to Mr. Cohen 3,500,000 shares
of Common Stock (the "February 1993 Cohen Shares"), 1,500,000 shares of which
Mr. Cohen has informed the Company he has assigned to certain other persons not
affiliated with the Company or any of its officers or directors. The February
1993 Cohen Agreement also granted to Mr. Cohen and his designees a one-time
piggyback registration right with respect to those shares.

         In July 1994, in consideration for the additional services provided by
Mr. Cohen in connection with the introduction and negotiation of the Exclusive
Distribution Agreement with C.U.R.E. Pharmaceutical Corp. ("C.U.R.E."), a
Delaware corporation, which agreement was terminated as discussed below and
superseded by an agreement with Avix International Pharmaceutical Corp.
("AVIX"), the Company issued: (i) to Mr. Cohen, an additional 2,500,000 shares
(the "April 1994 Cohen Shares") and (ii) to each of Elliot Bauer and Lee
Rizzuto, 625,000 shares (the "Bauer and Rizzuto Shares") as well as options to
acquire an additional 5,000,000 shares each at $.10 per share exercisable
through May 1, 1996 (the "Bauer and Rizzuto Options"). The Company has been
informed that Messrs. Cohen and Bauer are principals of AVIX. Through September
30, 1998, 2,855,000 shares were issued pursuant to the exercise of the Bauer and
Rizzuto Options for an aggregate exercise price of $285,500. Mr. Rizzuto sold
all of his shares and all shares underlying his options. Pursuant to several
amendments, the remaining Bauer options are exercisable through April 30, 1999
at an option price of $.13. The Company agreed to issue to Cohen an additional
300,000 shares in 1995 at a time when the shares were valued at $.14 per share,
in consideration for expenditures incurred by Mr. Cohen in connection with
securing for the benefit of the Company and the affiliated distributor, the
continued services of a doctor.

         By letter of September 15, 1993, Leonard Cohen requested registration
of the shares of Common Stock and shares covered by Common Stock purchase
options issued to Mr. Cohen and his designees pursuant to the September 1992
Cohen Agreement and the February 1993 Cohen Agreement. Such additional shares
were included in the Company's July 1, 1994 and July 27, 1995 Registration
Statements under the Securities Act to permit the public sale of those shares by
Mr. Cohen.

                                       54
C.U.R.E. The Company's Exclusive Distribution Agreements with C.U.R.E.
and its affiliate were terminated according to their terms on May 31, 1995
because of C.U.R.E.'s inability to obtain Approvals in a timely manner and its
inability to obtain the requisite funding to pursue such Approvals. See
"-Exclusive Distribution Agreements--Termination of Agreements with C.U.R.E."

         Chinnici Agreement. In July 1998, the Company entered into a consulting
agreement with Angelo A. Chinnici, M.D. for a term extending to December 31,
2000 (the "Chinnici Consulting Agreement"). The Chinnici Consulting Agreement
provides for Dr. Chinnici to provide assistance to the Company in connection
with research, development, production, marketing and sale of RETICULOSE.
Additionally, pursuant to the Chinnici Consulting Agreement, Dr. Chinnici has
agreed to testify before the FDA on behalf of the Company in connection with the
Company's possible application for approval of the testing of RETICULOSE. The
Chinnici Consulting Agreement further provides that in consideration for Dr.
Chinnici's services, the Company shall grant to Dr. Chinnici options to purchase
300,000 shares of Common Stock at an exercise price of $.30 per share for a
period of three years in three equal installments commencing January 1, 1999 and
2000 and December 15, 2000, respectively.

         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 $.18 per share. In addition and in connection with entering into the
consulting agreement with Dr. Hirschman, the Company issued to a person
unaffiliated with the Company, 100,000 shares of the Company's common stock, and
an option to acquire for a period of one year, from June 1, 1995, an additional
500,000 shares at a purchase price of $.18 per share. As of September 30, 1998,
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 March 23, 1999 at an exercise price of $.19 per share, of
which options to acquire 500,000 shares were assigned by Dr. Hirschman to
Richard Rubin, consultant to Dr. Hirschman; (ii) options to purchase 5,000,000
shares exercisable at any time and from time to time commencing March 24, 1997
and ending March 23, 1999 at an exercise price of $.27 per share, of which
options to acquire 500,000 shares were assigned by Dr. Hirschman to Richard
Rubin, consultant to Dr. Hirschman; and (iii) options to purchase 5,000,000
shares exercisable at any time and from time to time commencing

                                       55
March 24, 1998 and ending March 23, 1999 at an exercise price of $.36 per share,
of which options to acquire 500,000 shares were assigned by Dr. Hirschman to
Richard Rubin, consultant to Dr. Hirschman. 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. As of September 30, 1998, 500,000 shares of common
stock were issued pursuant to the exercise of stock options by Richard Rubin.
Mr. Rubin has, from time to time in the past, advised the Company on matters
unrelated to his consultation with Dr. Hirschman.

         In November 1997, Dr. Hirschman assigned to Henry Kamioner, a
consultant to Dr. Hirschman, options to acquire 1,500,000 shares (500,000 at
$.19, 500,000 at $.27 and 500,000 at $.36).

         In October 1996, the Consulting Agreement with Dr. Hirschman was
terminated and an Employment Agreement with Dr. Hirschman became effective. See
"Management -- Employment Contracts, Termination of Employment and
Change-in-Control Arrangements."

         Malcolm Santer. In exchange for the services provided by Malcolm
Santer, the Company's plant manager at the manufacturing facility in Freeport,
Bahamas, the Company issued to Mr. Santer: (i) 50,000 shares of Common Stock
valued at $.41 per share in February 1997, (ii) 100,000 shares of Common Stock
valued at $.24 cents per share in September 1997 and (iii) 100,000 shares of
Common Stock valued at $.21 per share in August 1998.

Exclusive Distribution Agreements

         Agreement with DCT S.R.L. Under an Exclusive Distribution Agreement,
dated in June 1994, superseded by another agreement, dated April 1, 1996,
between the Company and DCT, the Company granted to DCT subject to certain
conditions precedent, the exclusive right to market and sell RETICULOSE within
the territories of Argentina, Bolivia, Paraguay, Uruguay, Brazil and Chile (the
"DCT Agreement"). The term of the DCT Agreement was for a three-year period with
additional three-year renewal terms from the date DCT obtained all approvals,
licenses, permits and registrations (the "Approval") to import and distribute
RETICULOSE in Argentina, subject to DCT's right to extend the DCT Agreement so
long as DCT was diligently pursuing the Approval and meeting certain annual
minimum purchase requirements as set forth in the DCT Agreement, in the event
the Approval for Argentina was obtained. DCT was granted an option to purchase
for a period of one year from the date of Approval, 2,000,000 shares at a
purchase price of $.20 per Share (the "DCT Option"). The Approval has not been
obtained to date. The Company has not terminated the DCT Agreement because the
Company has not identified another source it believes will be more successful in
obtaining Approval.

         As a result of the 1996 Argentina Agreement, discussed under "-TESTING
AGREEMENTS-Argentina Agreements" and the Health Ministry's approval for and the
commencement of the test of RETICULOSE on the Human Papilloma Virus (HPV) on HIV
patients, the Company agreed that the DCT Option vested.

                                       56
Termination of Agreements with C.U.R.E. On April 25, 1994, the Company
entered into an Exclusive Distribution Agreement with C.U.R.E. pursuant to which
C.U.R.E. was granted exclusive rights to distribute RETICULOSE within the
countries of China, Japan, Thailand, Singapore, Hong Kong, Taiwan and Malaysia
the ("C.U.R.E. Territory").

         The Exclusive Distribution Agreement with C.U.R.E. was for an initial
term of five years, subject to certain automatic extensions if C.U.R.E.
satisfied its minimum purchase obligations and obtained Approval for one or more
countries constituting the C.U.R.E. Territory, within one year from the
Agreement. Because of its failure to obtain any Approval, the Company terminated
the rights of C.U.R.E. under this agreement.

         As of June 1, 1994, the Company had also entered into an Exclusive
Distribution Agreement with C.U.R.E. Pharmaceutica Central Americas Ltd., a
Delaware corporation and an affiliate of C.U.R.E. ("C.U.R.E. C/A Ltd.").
C.U.R.E. C/A Ltd. was required to purchase a minimum of 20,000 milliliters of
RETICULOSE during the first year following Approval and such Approval had to be
obtained within one year of this agreement. C.U.R.E. was unable to obtain such
Approval and the Company terminated C.U.R.E.'s exclusive distribution rights,
effective May 30, 1995, following acknowledgment by C.U.R.E. and C.U.R.E. C/A
Ltd. that neither had obtained Approvals and both lacked additional financing to
pursue the Approvals.

         Agreements with AVIX and Unistone. As the result of the termination of
agreements with C.U.R.E. and C.U.R.E. C/A Ltd., the Company entered into an
agreement, dated as of June 2, 1995, with AVIX, pursuant to which AVIX has been
granted the exclusive import and distribution rights during a period of five
years from the date that AVIX obtains Approval for any of the countries formerly
within the C.U.R.E. Territory (the "AVIX Far East Agreement"), and a separate
Exclusive Distribution Agreement with AVIX with respect to Mexico, which rights
previously belonged to C.U.R.E. C/A Ltd. AVIX has informed the Company that it
has commenced negotiations with parties in Mexico and China for the purpose of
seeking initial authorization for testing RETICULOSE, following which Approval
for those countries shall be sought. The Company has been informed by AVIX that
certain of the principals of AVIX (including Leonard Cohen who is an officer and
shareholder thereof) were formerly principals of C.U.R.E. The terms of the
agreement with AVIX are substantially similar to the agreements with C.U.R.E.
and C.U.R.E. C/A Ltd. except that the territory in the AVIX Agreement does not
include Thailand, Malaysia and Singapore but does include Macao. The Approval
has not been obtained to date.

         On December 28, 1995, the Company entered into a separate agreement
with AVIX and Beijing Unistone Pharmaceutical Co., Ltd. ("Unistone"), a company
organized under the laws of the People's Republic of China, with headquarters in
Beijing, China (the "Unistone-AVIX Agreement"). In connection with the
Unistone-AVIX Agreement, the Company and AVIX agreed to utilize the services of
Unistone for the purposes of securing approval to test RETICULOSE in China, with
the intent of gaining Approval for China. Under the Unistone-AVIX Agreement,
during a period of three years commencing on the date of Approval for China,
Unistone shall be the exclusive distributor and have a limited trademark license
for RETICULOSE in China. Unistone is obligated to purchase not more than 100,000
doses of 0.5 ml each in bulk form or 20,000 ampules of 0.5 ml doses for purposes
of seeking Approval for China, at least 1,000,000 doses by the first anniversary
of Approval for China, at least 3,000,000 doses during the next 12-month period,
and at least 10,000,000 doses during each subsequent 12-month period, all at a
purchase price of U.S. $1.00 per 0.5 ml dose shipped in bulk, or U.S. $1.26 per
dose if ordered in prepackaged, four-dose 2 ml ampules. This

                                       57
purchase price is to be reduced by an aggregate of $100,000 on account of a fee
to Unistone for trials and testing of RETICULOSE for Approval for China. If
these annual minimum purchase requirements are satisfied, the period of the
agreement is automatically extended through the eighth anniversary of the date
of Approval. There are no minimum purchase requirements to be met by AVIX under
the AVIX-Unistone Agreement. In addition, AVIX is obligated to pay Unistone
$50,000 for its services in seeking Approval for China. As of December 31, 1997,
the Company had given Unistone, for testing purposes, 1,600 ampules of
RETICULOSE without charge. Unistone has not fulfilled its obligation under the
agreement to obtain Approval before April 1996. The Company has not terminated
the AVIX-Unistone Agreement because the Company has not identified another
source it believes will be more successful in obtaining Approval.

         Under a separate agreement between the Company and AVIX, AVIX shall
receive a royalty equal to 12.5% of the total sales of RETICULOSE in China,
Japan, Taiwan, Hong Kong and Macao so long as the Company owns any right to
RETICULOSE. AVIX also is entitled to certain payments by the Company in the
event that the Company sells manufacturing rights for RETICULOSE.

         In July, 1996, the AVIX Far East Agreement was amended to grant AVIX
the additional country of Macao and reflect AVIX's waiver of its rights with
respect to the countries of Singapore, Thailand and Malaysia, as well as AVIX's
penalty rights under the AVIX Far East Agreement that would have vested in the
event that the Company could not produce sufficient quantities of RETICULOSE
within certain periods of time. The penalty rights were waived, in part, because
AVIX has not yet generated a sufficient demand for RETICULOSE within its
distribution territory.

         The period of time during which AVIX must obtain Approval for any of
the countries in its territory under the AVIX Far East Agreement was extended to
June 1, 1997, subject to AVIX continuing to pay $8,000 per month to the Company.
The Company has not received the $8,000 monthly payment since November, 1996;
the Company has received a total of $40,000 in payments from AVIX. Pursuant to
recent discussions with AVIX regarding the AVIX Far East Agreement, the Company
and AVIX have agreed that, in lieu of the $8,000 monthly payment discussed
above, AVIX will fund studies assessing the efficacy of RETICULOSE that may be
performed in Mexico. If AVIX is complying with the AVIX Far East Agreement,
including certain annual minimum purchase requirements after Approval is
obtained (see below) of which there can be no assurance, the term is
automatically extended for five additional five year terms. The agreements with
AVIX further provide that the results of all studies, research data,
documentation and research publications regarding RETICULOSE in which AVIX has
an interest are owned by the Company.

         The separate agreement for Mexico requires Approval within one year and
has minimum annual purchase requirement commencing at 20,000 milliliters. The
Company has extended the period for AVIX to secure Approval from Mexico because
management of the Company believes that AVIX has been diligently seeking
Approval from the Ministry of Health of Mexico.

         AVIX shall be required, pursuant to the AVIX Far East Agreement, to
purchase RETICULOSE for $500,000 upon obtaining Approval and after one year
after Approval for China, AVIX is required to purchase RETICULOSE for an
additional $500,000 at $12 per 2 ml ampule.

                                       58
Agreement with Commonwealth. Under an Exclusive Distribution Agreement,
dated October 24, 1994, as supplemented on November 2, 1995 (collectively, the
"Commonwealth Agreement") with Commonwealth, the Company has granted to
Commonwealth Pharmaceuticals ("Commonwealth"), subject to certain conditions
precedent, the exclusive right to market and sell the Company's pharmaceutical
drug RETICULOSE within the territories of the Channel Islands, The Isle of Man,
the British West Indies, Jamaica, Haiti, Bermuda and Belize (collectively, the
"Commonwealth Territories"), and the right (not exclusive) to import, warehouse,
market, sell and distribute RETICULOSE within the territory of Saudi Arabia. The
term of the Commonwealth Agreement as to the Commonwealth Territories is for
successive three year periods (each extension period being with the prior mutual
consent of the parties) from the date Commonwealth obtains Approval for any one
of the Commonwealth Territories. The Approval has not been obtained to date.

         Pursuant to the Commonwealth Agreement, Commonwealth purchased from the
Company 1,500 ampules of RETICULOSE at a purchase price of $12.00 per ampule (2
milliliters per ampules) and delivered to the Company $5,000 as a signing
payment (for a total payment of $23,000). Commonwealth has advised the Company
that to date it has sold approximately $1,200 worth of RETICULOSE in the
Commonwealth Territories. Further, pursuant to the Commonwealth Agreement, in
the event Approval for any of the Commonwealth Territories is obtained,
Commonwealth is obligated to purchase from the Company (i) $225,000 worth of
RETICULOSE within one year from the date of Approval for any of the Commonwealth
Territories; (ii) $642,000 worth of RETICULOSE during the second year from the
date of Approval for any of the Commonwealth Territories; and (iii) $1,026,000
worth of RETICULOSE during the third year from the date of Approval for any of
the Commonwealth Territories. Commonwealth also is obligated to purchase from
the Company $225,000 worth, $822,000 worth and $1,914,000 worth of RETICULOSE,
respectively, during the first three years from the date of Approval. In
addition, pursuant to the Commonwealth Agreement, the Company has granted to
Commonwealth the right to acquire 3,000,000 shares of the Common Stock at a
purchase price of $.25 per share at any time and from time to time for a period
of one year from the date that certain tests are conducted and a paper is
published with respect to such test of RETICULOSE. The Company has been informed
by Commonwealth that certain of the affiliates of Commonwealth were formally
affiliated with Plata.

         Agreement with Dormer Laboratories Inc. On November 9, 1993, the
Company entered into an agreement by which it granted to Dormer Laboratories
Inc., a Canadian corporation ("Dormer"), the exclusive rights to import,
warehouse, market, sell and distribute RETICULOSE within Canada for a period of
five years from the grant of import approval for Canada, provided that Dormer
meets certain RETICULOSE purchase minimums. Because Approval for Canada was not
obtained by November 9, 1995, the Company had the right to terminate this
agreement on 90 days prior written notice to Dormer. Upon notice by the Company,
the agreement was terminated in August 1998.

                                       59
MANAGEMENT

Executive Officers and Directors

         The executive officers and directors of the Company, and further
information concerning them, are as follows:

           Name             Age   Position
           ----             ---   --------
Shalom Z. Hirschman, M.D.   63    President and Chief Executive Officer, Chief
                                  Scientific Officer
William Bregman             77    Vice President, Secretary, Treasurer, Director

Bernard Friedland           73    Chairman of the Board of Directors

Louis J. Silver             70    Director

         Shalom Z. Hirschman, M.D., President, Chief Executive Officer, Chief
Scientific Officer and a director of the Company since October 1996, 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.

         William Bregman, director of the Company since July 1985 and
Secretary-Treasurer of the Company since September 1985, was Vice President of
the Company from September 1985 until May 1987 and Vice President and Secretary
of LTD from August 1984 until July 1989, and has been a director of LTD since
August 1984.

         Bernard Friedland, Chairman of the Board of the Company since May 1987,
director of the Company since July 1985 and President and Chief Executive
Officer of the Company from September 1985 until October 1996, was employed by
Key, Inc. for 29 years, until March 1, 1986, in the Research and Development and
Quality Assurance Departments in Pharmaceuticals, Pharmacology, and
Canceantimetabolites. Has also has been President, Treasurer and a director of
LTD since August 1984.

         Louis J. Silver, director of the Company since May 1992, has been
self-employed as a free-lance bookkeeper and auditor since 1985. Mr. Silver
previously served as a member of the Board of Directors of the Company during
the periods from May 1987 to July 1987.

         Directors are elected to serve until the next annual meeting of
shareholders and until their successors have been elected and have qualified.
Officers are appointed to serve until the meeting of the Board of Directors
following the next annual meeting of shareholders and until their successors
have been elected and have qualified.

                                       60
Director Compensation

         The arrangement for director compensation is $150 for each meeting of
the Board of Directors of the Company attended, which has not in fact been paid
within at least the last three years.

Executive Officer Compensation

         Other than as set forth below, no officer or director employed by the
Company received salary and bonus exceeding in the aggregate $100,000 in the
fiscal year 1997, 1996 or 1995. The following Summary Compensation Table sets
forth the information concerning compensation for services in all capacities
awarded to, earned by or paid to Shalom Z. Hirschman, President and Chief
Executive Officer, and Bernard Friedland, President during such period. No other
person employed by the Company earned in excess of $100,000 during the fiscal
years ended December 31, 1997, 1996 and 1995.

                           SUMMARY COMPENSATION TABLE
Long Term
                                               Annual Compensation                             Compensation Awards
                           ------------------------------------------------------        -------------------------------
                                                                                          Securities
Name and                                                           Other Annual           Underlying          All Other
Principal Position         Year        Salary         Bonus      Compensation(1)         Options/SARs       Compensation
------------------         ----        ------         -----      ----------------        -------------      ------------
Shalom Z.                1997      $325,000        $43,000     $14,604(3)             0                   $3,956(4)
Hirschman, M.D.,
President and Chief
Executive Officer
of the Company since     1996      $68,750(2)      $0          $4,825                 15,000,000          $4,316
October 14, 1996 and
consultant to the
Company from May 24,     1995      --              --          --                     --                  --
1995 through October
13, 1996.

Bernard Friedland,       1997      --              --          --                     --                  --
President and Chief
Executive Officer of     1996      $35,000         --          $6,500                 --                  --
the Company
through October 13,
1996.                    1995      $35,000         --          $6,500                 --                  --
----------------
(1)  Other Annual Compensation represents medical insurance premiums paid by the
     Company for executive officers, except as stated in note (3) below.
(2)  Under the Employment Agreement described under "- Employment Contracts,
     Termination of Employment and Change-in- Control Arrangements," Dr.
     Hirschman's annual salary as President and Chief Executive Officer (among
     other titles) is $325,000.
(3)  Other Annual Compensation for Dr. Hirschman includes $7,404 for medical
     insurance premiums paid by the Company for him, and $7,200 aggregate
     incremental cost to the Company of Dr. Hirschman's automobile lease, gas,
     oil, repairs and maintenance.
(4)  The dollar value of insurance premiums paid by, or on behalf of, the
     Company with respect to term life insurance for the benefit of Dr.
     Hirschman.

                                       61
No stock options were granted during 1997 to the executive officers of
the Company. Other than the 16,100,000 shares of Common Stock underlying Dr.
Hirschman's options, all of which options are currently exercisable, the Company
currently has outstanding (i) three 1997 Warrants which each entitle the holder
to purchase 178,378 shares of Common Stock at exercise prices of $.288, $.576
and $.864 per warrant share, respectively, (ii) three 1997 Warrants which each
entitle the holder to purchase 600,000 shares of Common Stock,$.20, $.23 and
$.27 per warrant share, respectively, (iii) two Debenture Warrants which entitle
the holder to purchase 375,000 and 375,000 shares of Common Stock at exercise
prices of $.20 and $.24 per warrant share, respectively, (iv) four Purchase
Warrants which entitle the holder to purchase 983,394, 983,394, 200,000 and
200,000 shares of Common Stock at exercise prices of $.2040, $.2448, $.2040, and
$.2448 per warrant share, respectively, and (iv) options to acquire 14,365,415
shares of the Common Stock, none of which are beneficially owned by directors,
officers or employees of the Company.

         The following table sets forth certain summary information concerning
exercised and unexercised options to purchase the Company's Common Stock as of
December 31, 1997 held by the executive officers named in the "Summary
Compensation Table." None of these executives exercised any options during the
year ended December 31, 1997.

                         AGGREGATED OPTION EXERCISES IN
                    1997 AND DECEMBER 31, 1997 OPTION VALUES
Number of Securities
                                                                     Underlying            Value of Unexercised In-
                                  Shares                        Unexercised Options          the-Money Options at
                               Acquired on       Value           at Fiscal Year-End            Fiscal Year-End
            Name               Exercise (#)   Realized(1)    Exercisable/Unexercisable    Exercisable/Unexercisable
            ----               ------------   -----------    -------------------------    -------------------------
Shalom Z. Hirschman, MD              0             $0              16,100,000 / 0          $20,500 / $20,500(2)(3)
--------------
(1)  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)  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 December 31, 1997,
     $.185, and the exercise or base price.
(3)  As of December 31, 1997, Dr. Hirschman held options to purchase 4,100,000
     shares of Common Stock at $.18 per share, 4,000,000; shares of Common Stock
     at $.19 per share; 4,000,000 shares of Common Stock at $.27 per share; and
     4,000,000 shares of Common Stock at $.36 per share, all of which are
     currently exercisable.

Employment Contracts, Termination of Employment and Change-in-Control
Arrangements

         Pursuant to an Amended and Restated Employment Agreement dated as of
July 8, 1998 between the Company and Shalom Z. Hirschman, M.D. (the "Employment
Agreement"), the Company employs Dr. Hirschman, on a full business time basis as
its President, Chief Executive Officer, Chief Scientific Officer and Chairman of
its Scientific Advisory Board, with duties including supervising day-to-day
operations of the Company, including management of scientific, medical,
financial, regulatory and corporate matters, establishing appropriate
laboratory, executive and other facilities for the Company, and raising
additional capital for the Company. The Employment Agreement includes an
agreement by the Company that Dr. Hirschman will be nominated as a

                                       62
Director of the Company for the duration of Dr. Hirschman's employment by the
Company under the Employment Agreement, and voting agreements by Bernard
Friedland, William Bregman and Dr. Hirschman.  See "Principal Shareholders."

         Pursuant to the Employment Agreement, the term of Dr. Hirschman's
employment continues until December 31, 2000 and will continue for one year
periods thereafter unless either the Company or Dr. Hirschman gives the other
notice at least two years in advance that such one year automatic extension
shall be vitiated. In the event the Employment Agreement is terminated by the
Company "for cause" (as defined therein), all unvested stock options, benefits
under stock bonus plans and stock appreciation rights ("SARs") (collectively,
"Stock Rights") granted to Dr. Hirchman may be canceled by the Company. In the
event the Employment Agreement is terminated by Dr. Hirschman "for cause" (as
defined therein), the Company is required to pay to Dr. Hirshman his annual
salary and employee benefits through the remainder of the then current term.

         Dr. Hirschman's compensation under the Employment Agreement is an
annual salary of $325,000, payable in equal biweekly installments. The
Employment Agreement also entitles Dr. Hirschman to (a) a major medical
insurance policy, disability policy and dental policy insurance to Dr. Hirschman
and his dependents that is reasonably acceptable to the parties, and (b) a term
life insurance policy at least in the amount of $1,000,000, with a beneficiary
to be designated by Dr. Hirschman. The Employment Agreement further provides
that the Company shall (a) 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 the Company, (b) 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, (c) 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 the Company in the reasonable determination of Dr. Hirschman, and all
other expenses that may be pre-approved by the Board of Directors of the
Company, and (d) provide not less than four weeks paid vacation annually and
such paid sick or other leave as the Company provides to all of its employees.
The Employment Agreement also provides for the payment of $100,000 to Dr.
Hirshman on the date an IND number is obtained by the Company from the FDA so
that RETICULOSE may be tested on humans, so long as such IND number is obtained
while Dr. Hirshman is employed by the Company.

         The Employment 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 the
Company or any of its other employees, to bind the Company, to release or
discharge any debt due the Company unless the Company has received payment in
full, or to dispose (as collateral or otherwise) of all or substantially all of
the Company's assets.

         Dr. Hirschman has agreed that he will assign to the Company all patents
developed by Dr. Hirschman or resulting from his knowledge acquired while
performing his duties under the Employment Agreement, and that, if his
employment under the Employment Agreement is terminated

                                       63
by the Company "for cause" or by Dr. Hirschman otherwise than "for cause," as
specified in that agreement, he will not, directly or indirectly, compete with
the Company for three years after termination or solicit the Company's employees
to leave the service of the Company for one year after termination.

         Pursuant to the execution of the Employment Agreement, the Company
ratified a $100,000 bonus payment made to Dr. Hirschman in February 1998 and the
February 1998 grant to Dr. Hirshman of options to acquire 23,000,000 shares of
Common Stock exercisable at any time and from time to time through February 2008
at $.27 per share commencing upon (i) the day an IND number is obtained from and
approved by the FDA so that human research may be conducted using RETICULOSE;
(ii) the occurrence of a Change in Control (as defined therein); or (iii) 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
through February 2008.

                             PRINCIPAL SHAREHOLDERS

         The following table sets forth as at January 11, 1999, certain
information regarding the beneficial ownership of the Common Stock by (i) each
person who is known by the Company to own beneficially more than 5% of the
Company's outstanding voting securities; (ii) each of the Company's directors;
and (iii) all directors and officers of the Company as a group:
Shares of Common Stock
Name and Address of Beneficial Owner                    Beneficially Owned (1)                     Percent Owned
------------------------------------                    ----------------------                     -------------
Shalom Z. Hirschman, M.D.                                     16,100,000                (2)(3)          5.08%
c/o Advanced Viral Research Corp.
1250 East Hallandale Beach Blvd.
Hallandale, FL 33009

Bernard Friedland                                             39,361,730                (3)(4)         13.08%
c/o Advanced Viral Research Corp.
1250 East Hallandale Beach Blvd.
Hallandale, FL 33009

William Bregman                                               35,708,403                (3)(5)         11.86%
c/o Advanced Viral Research Corp.
1250 East Hallandale Beach Blvd.

Hallandale, FL 33009
Louis J. Silver                                               501,000                                  0.17%
5110 S.W. 127th Place
Miami, FL 33175

All officers & directors (4 persons)                          91,671,133                (2)(3)         28.91%

RBB Bank                                                      42,416,667                 (6)           12.35%
----------------------
(1)  The persons named in this table have sole voting power with respect to all
     shares shown as beneficially owned by them, except as indicated in other
     footnotes to this table. In computing the number of shares beneficially
     owned by a person and the percentage ownership of that person, shares of
     common stock subject to options or warrants held by that person that are
     currently exercisable or exercisable within 60 days after January 11, 1999,
     are deemed

                                       64
outstanding. According to American Stock Transfer & Trust Company, the
     transfer agent for the Common Stock, 301,340,183 shares of the Common Stock
     were outstanding as of the close of business on January 11, 1999.
(2)  Includes shares which may be acquired pursuant to options to purchase
     Common Stock held by Dr. Hirschman exercisable within 60 days after 
     January 11, 1999.
(3)  The Employment Agreement provides that Messrs. Friedland and Bregman,
     during the term of Dr. Hirschman's employment under that agreement, shall
     vote all shares of the Common Stock owned or voted by them in favor of Dr.
     Hirschman as a director of the Company. That agreement, however, does not
     restrict or otherwise limit their right to sell their shares to third
     parties without restriction. The Employment Agreement also provides that
     Dr. Hirschman, during that term, shall take no action which shall preclude
     Messrs. Friedland and Bregman from being nominees as directors of the
     Company and that Dr. Hirschman shall vote all shares of the Common Stock
     owned or voted by him in favor of Messrs. Friedland and Bregman as
     directors of the Company. See "- Employment Contracts, Termination of
     Employment and Change-in-Control Arrangements."
(4)  Includes (i) 1,000,000 shares of the Common Stock owned by Mr. Friedland
     and Beth Friedland, his daughter, as joint tenants, (ii) 20,000,000 shares
     owned by Mr. Friedland and Shirley Friedland, his spouse, as joint tenants,
     (iii) 15,000 shares(as to which Mr. Friedland disclaims beneficial
     ownership) owned by Shirley Friedland, and (iv) 600,000 shares owned the
     B&SD Friedland Foundation, a not-for-profit foundation controlled by Mr.
     Friedland.
(5)  Includes (i) 22,823,125 shares held in a trust for which Mr. Bregman is the
     sole trustee and sole beneficiary; (ii) 76,000 shares owned by Janet
     Berlin, his daughter,(iii) 70,000 shares owned by Forest Berlin, his
     grandson,(iv) 70,000 shares owned by Jessica Berlin, his granddaughter, and
     (v) 70,000 shares owned by Carol Berlin, his daughter.
(6)  Includes 42,416,667 shares issuable upon the conversion of the Debenture
     (which amount may fluctuate depending upon, among other things, the future
     market price of the Common Stock) and 750,000 shares of Common Stock which
     may be acquired pursuant to the Debenture Warrants which are exercisable
     within 60 days after January 11, 1999.

                      [This Space Intentionally Left Blank]

                                       65
SELLING SHAREHOLDERS

     The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of January 11, 1999 by each of the Selling
Shareholders assuming the full conversion of the Debenture and an Average
Closing Price of $.05 per share, based on application of the formula for
computing the Applicable Conversion Price as provided in the Debenture (see
"Recent Developments"), and the full exercise of the Debenture Warrants and the
Purchase Warrants. Unless otherwise indicated below, to the knowledge of the
Company, all persons listed below have sole voting and investment power with
respect to the shares of Common Stock, except to the extent authority is shared
by spouses under applicable law. Based on the average of the closing bid and ask
prices of the Common Stock on January 11, 1999, as reported on the OTC
Electronic Bulletin Board ($.1925) and an Applicable Conversion Price of $.1386,
full conversion of the Debenture would yield 10,822,511 shares of Common
Stock.

     The information included below is based upon information provided by the
Selling Shareholders. Because the Selling Shareholders may offer all, some or
none of their Shares, no definitive estimate as to the number of Shares that
will be held by the Selling Shareholders after such offering can be provided and
the following table has been prepared on the assumption that all Shares offered
under this Prospectus will be sold.
Position with or      Shares Owned                                    Shares Owned
                                  Relationship to    Before Offering(1)(2)         Shares Being       After Offering(3)
Selling Shareholder               the Company              Number         %      Sold in Offering(2)        Number         % 
-------------------               -----------              ------        ---     -------------------        ------       ----
Joe Feshbach                 (4a)  Investor                 857,843       *                857,843               0         0%
Harborview Group, Inc.       (4b)  Investor               3,831,372      1.11%             3,831,372             0         0%
Russell Kuhn                 (4c)  Investor                 566,880       *                428,880         158,000         *
RBB Bank A.G.                (5)   Investor              42,416,667     12.25%          42,416,667               0         0%
Victor Sherman               (4d)  Investor                 528,880       *                428,880         100,000         *
Jennifer Brandenburg Smith   (4e)  Investor                 171,569       *                171,569               0         0%
Jo Sherrin Smith             (4f)  Investor                 171,569       *                171,569               0         0%
Robert Franklin Smith, Sr.   (4g)  Investor                 171,569       *                171,569               0         0%
Shelly Marion Smith          (4h)  Investor                 271,969       *                171,569          100,00         *
Myron Weiner                 (4i)  Investor                 438,880       *                428,880          10,000         *
John Zimmerman               (4j)  Investor                 641,151       *                536,151         105,000         *
Matt Zimmerman               (4k)  Investor                 105,782       *                 85,782          20,000         *

Selling Shareholders Total                                  493,000    14.50%           49,700,731         493,000       .14%
Shares                                                      =======     ====            ==========         =======       ====

TOTAL SHARES OUTSTANDING (6)                   346,123,638
--------------------------
 *   Less than 1%
(1)  As required by regulations of the Commission, the number of shares shown as
     beneficially owned include shares which can be purchased within 60 days
     after January 11, 1999. The actual number of shares of Common Stock
     beneficially owned is subject to adjustment and could be materially more or
     less than the estimated amount indicated depending upon factors which
     cannot be predicted by the Company at this time, including, among others,
     the market price of the Common Stock.
(2)  Assumes the full conversion of the Debenture (based on an Average Closing
     Price of $.05 per share and a corresponding Applicable Conversion Price of
     $.036 per share) and the full exercise of the Debenture Warrants and the
     Purchase Warrants. Based on the average of the closing bid and ask prices
     of the Common Stock on January 11, 1999, as reported on the OTC

                                       66
Electronic Bulletin Board ($.1925) and an Applicable Conversion Price of
     $.1386, full conversion of the Debenture would yield 10,822,511 shares 
     of Common Stock.
(3)  Assumes that all of the Shares are sold by the Selling Shareholders and no
     additional shares of Common Stock are acquired.
(4)  Includes the following number of shares of Common Stock underlying the
     Purchase Warrants: (a) 245,098 shares; (b) 980,392 shares; (c) 122,508
     shares; (d) 122,508 shares; (e) 49,020 shares; (f) 49,020 shares; (g)
     49,020 shares; (h) 49,020 shares; (i) 122,508 shares; (j) 153,186 shares;
     and (k) 24,508 shares.
(5)  Represents 41,666,667 shares of Common Stock issued or issuable upon the
     full conversion of the Debentures (which amount may fluctuate depending on
     the future market price of the Company's Common Stock) and 750,000 shares
     underlying the Debenture Warrants..
(6)  Includes (i) 41,666,667 shares issuable upon full conversion of the
     Debenture, which amount may fluctuate depending upon, among other things,
     the future market price of the Company's Common Stock and (ii) 3,116,788
     shares of Common Stock issuable upon exercise of the 1998 Warrants.
     Excludes 32,800,549 shares issuable upon the exercise of certain stock
     options and warrants..

                 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     For the past three fiscal years, there were no material transactions
between the Company and any of its officers or directors which involved $60,000
or more.

                            DESCRIPTION OF SECURITIES

Common Stock

         The authorized capital stock of the Company consists of 1,000,000,000
shares of Common Stock, par value $.00001 per Share. The holders of Common Stock
(i) have equal ratable rights to dividends from funds legally available
therefore, when, as and if declared by the Board of Directors of the Company;
(ii) entitled to share ratably in all of the assets of the Company available for
distribution to holders of Common Stock upon liquidation, dissolution or winding
up of the affairs of the Company; (iii) do not have preemptive, subscription, or
conversion rights and there are no redemption or sinking fund provisions
applicable thereto; and (iv) are entitled to one noncumulative vote per share on
all matters which shareholders may vote on at all meetings of shareholders. All
shares of Common Stock now outstanding are fully paid for and non-assessable.

                              PLAN OF DISTRIBUTION

         The Shares acquired or to be acquired (i) upon the conversion of the
Debenture, (ii) upon exercise of the Debenture Warrants, (iii) in connection
with the Purchase Agreement and (iv) upon the exercise of the Purchase Warrants,
may be sold from time to time by the Selling Shareholders, or by pledgees,
donees, transferees or other successors-in-interest, subject to a current and
effective prospectus. The Shares may be sold directly to purchasers or through
underwriters, brokers, dealers or agents who may receive compensation in the
form of underwriting discounts, concessions or commissions from the Selling
Shareholders and/or the purchasers of the Shares for whom they may act as agent.
The Selling Shareholders and any such underwriters, brokers, dealers or agents
who participate in the distribution of the Shares may be deemed to be
"underwriters", and any profits on the sale of the Shares by them and any
discounts, commissions or concessions received by any such

                                       67
underwriters, brokers, dealers or agents might be deemed to be underwriting
discounts and commissions under the Securities Act.

         The Shares offered hereby may be sold from time to time in one or more
transactions (which may involve block transactions) in the over-the-counter
market, in negotiated transactions, or in a combination of such methods of sale,
at fixed prices, at market prices prevailing at the time of sale, at prices
related to the prevailing market prices or at negotiated prices. The Shares may
be sold by one or more of the following methods, without limitation: (i) a block
trade in which the broker or dealer so engaged will attempt to sell the Shares
as agent but may position and resell a portion of the block as principal to
facilitate the transaction; (ii) purchases by a broker or dealer as principal
and resale by such broker or dealer for its account pursuant to this Prospectus;
(iii) ordinary brokerage transactions and transactions in which the broker
solicits purchasers; (iv) an exchange distribution in accordance with the rules
of such exchange; (v) face-to-face transactions between sellers and purchasers
without a broker-dealer; (vi) through the writing of options; (vii) to
underwriters who will acquire the Shares for their own account and resell them
in one or more transactions, including negotiated transactions, at a fixed
public offering price or at varying prices determined at the time of sale (any
public offering price and any discounts or concessions allowed or reallowed or
paid to dealers may change from time to time); and (viii) other.

         The Selling Shareholders may also pledge the Shares registered
hereunder to a broker-dealer and upon default under such pledge the
broker-dealer may effect sales of the Shares pledged pursuant to this
Prospectus. In addition, the Shares covered by this Prospectus may be sold in
private transactions or under Rule 144, rather than pursuant to this Prospectus.

         There is no assurance that any Selling Shareholder will sell any or all
of the Shares offered by it hereunder or that any such Selling Shareholder will
not transfer, devise or gift such Shares by other means not described herein.
Underwriters participating in any offering made pursuant to this Prospectus (as
amended or supplemented from time to time) may receive underwriting discounts
and commissions, and discounts or concessions may be allowed or reallowed or
paid to dealers, and brokers or agents participating in such transaction may
receive brokerage or agent's commissions or fees.

         In order to comply with the securities laws of certain states, if
applicable, the Shares will be sold in such jurisdictions, if required, only
through registered or licensed brokers or dealers.

         The Company has agreed to bear all expenses of registration of the
Shares other than legal fees and expenses, if any, of counsel or other advisors
of the Selling Shareholders. Any commissions, discounts, concessions or other
fees, if any, payable to broker-dealers in connection with any sale of the
Shares will be borne by the Selling Shareholders selling such Shares.

                                  LEGAL MATTERS

         The validity of the Shares offered in this Prospectus will be passed
upon for the Company by Berman Wolfe & Rennert, P.A., NationsBank Tower, 35th
Floor, 100 Southeast Second Street, Miami, Florida 33131.

                                       68
EXPERTS

         The Consolidated Financial Statements of the Company included in this
Prospectus and in the Registration Statement except as they pertain to periods
unaudited, have been audited by Rachlin Cohen & Holtz, independent certified
public accountants, for the periods indicated in their report appearing
elsewhere herein, and are included herein in reliance upon the report of such
firm given upon the authority of such firm as experts in accounting and
auditing.

                                GLOSSARY OF TERMS

         The following is a glossary of some of the scientific terms used in
this Prospectus. Except as otherwise noted, the information contained in the
glossary has been obtained from Stedman's Medical Dictionary Illustrated (The
Williams & Wilkins Company, Baltimore, 22nd Edition, c. 1972).

AIDS:                    Acquired Immune Deficiency Syndrome, a disease of no
                         known etiology in which the body's immunological system
                         is destroyed. (Source: Webster's II New Riverside
                         Dictionary)

Amino                    acid: An organic acid in which one of the CH hydrogen
                         atoms has been replaced by NH2.

Ampule:                  A hermetically sealed container, usually made of glass,
                         containing a sterile medicinal solution, or powder to
                         be made up in solution, to be used for subcutaneous,
                         intramuscular or intravenous injection.

Antibody:                Any body or substance, soluble or cellular, which is
                         evoked by the stimulus provided by the introduction of
                         antigen and which reacts specifically with antigen in
                         some demonstrable way.

Antigen:                 Any of various sorts of material that, as a result of
                         coming in contact with appropriate tissues of an animal
                         body, after a latent period, usually of from eight to
                         14 days, induces a state of sensitivity and/or
                         resistance to infection or toxic substances, and which
                         will react in a demonstrable way either with tissues or
                         with serum from the sensitized subject.

Anti-viral agent: An active force or substance capable of weakening or
abolishing the action of a virus.

Carboxyl:                The characteristic chemical group of certain organic
                         acids.

Cell:                    A minute structure, the living, active basis of all
                         plant and animal organization, composed of a mass of
                         protoplasm, enclosed in a delicate membrane and
                         containing a nucleus.

HIV:                     Human Immunodeficiency Virus.

HPV:                     Human Papilloma Virus (genital warts).

                                       69
Immune system            Substance or substances which stimulate the human
 modulator:              body's immune system to more actively counter the
                         effects of viral infection and viral invasion.

Interferon:              Substances produced in cell cultures or host tissues in
                         response to infection with active or inactivated virus,
                         capable of inducing a state of resistance to
                         superinfection with related or unrelated virus.

Intramuscular:           Within the substance of a muscle.

Kaposi's Sarcoma:        A multiple, bleeding tumor denoting a disease of
                         unknown cause, involving primitive tissue in the
                         formation of blood or lymphatic vessels.

Lipoprotein:             Complexes or compounds containing lipid and protein.

Lymphocyte:              A type of white blood cell found in the fluid collected
                         from tissues throughout the body.

Neoplasm:                An abnormal tissue that grows by cellular proliferation
                         more rapidly than normal and continues to grow after
                         the stimuli that initiated the new growth cease, e.g.,
                         a tumor.

Nucleic acids:           Ribonucleic acid (RNA) or deoxyribonucleic (DNA)
                         protein molecules which determine genetic memory of
                         cells. These molecules are essential to life.

Papilloma Virus:         A circumscribed benign epithelial (nipple, or the thin
                         skin covering the nipple) tumor projecting from the 
                         surrounding surface; more precisely, a benign
                         epithelial neoplasm consisting of villous or
                         arborescent outgrowths of fibrovascular strands covered
                         by neoplastic cells.

Peptide:                 A compound of two or more amino acids in which the
                         carboxyl group of one is united with the amino group of
                         the other, with the elimination of a molecule of water,
                         thus forming a peptide bond.

Peptone:                 Intermediate polypeptide products generally water
                         soluble, diffusable and not coagulable by heat.

RETICULOSE:              An anti-viral peptide-nucleic acid complex preparation,
                         developed by Vincent M. LaPenta, M.D. specifically to
                         stimulate the reticulo-endothelial system. (Sources: E.
                         Podolsky, M.D., "The Reticulo-Endothelial System and
                         Its Activation by Non-Specific Protein Therapy," The
                         Journal of Medicine, October 1938; Physicians' Desk
                         Reference to Pharmaceutical Specialists and Biologicals
                         (Medical Economics, Inc., Oradell, N.J. c 1961))

Subcutaneous:            Beneath the skin; hypodermic.

Virus:                   A group of microbes which with few exceptions are
                         capable of passing through fine fibers that retain
                         bacteria and are incapable of growth or reproduction
                         apart from living cells.

Virus replication:       The duplication of a virus by itself within the body
                         cell by breaking down the RNA or DNA of the host cell 
                         and using it to make a replicate of itself, while 
                         killing the host cell.

                                       70
INDEX TO FINANCIAL STATEMENTS
Financial Information Year Ended December 31, 1996
     Report of Independent Certified Public Accountants........................................F-2
     Consolidated Balance Sheet, December 31, 1996.............................................F-3
     Consolidated Statements of Operations for the Years Ended December 31, 1996
         and 1995 and from Inception (February 20, 1984) to December 31, 1996..................F-4
     Consolidated Statements of Stockholders' Equity from Inception
         (February 20, 1984) to December 31, 1996..............................................F-5
     Consolidated Statements of Cash Flows for the Years Ended December 31,
         1996 and 1995 and from Inception (February 20, 1984) to December 31, 1996.............F-8
     Notes to Consolidated Financial Statements................................................F-9

Financial Information Year Ended December 31, 1997
     Report of Independent Certified Public Accountants........................................F-20
     Consolidated Balance Sheet, December 31, 1997.............................................F-21
     Consolidated Statements of Operations for the Years Ended December 31, 1997
         and 1996 and from Inception (February 20, 1984) to December 31, 1997..................F-22
     Consolidated Statements of Stockholders' Equity from Inception
         (February 20, 1984) to December 31, 1997..............................................F-23
     Consolidated Statements of Cash Flows for the Years Ended December 31,
         1997 and 1996 and from Inception (February 20, 1984) to December 31, 1997.............F-29
     Notes to Consolidated Financial Statements................................................F-30

Financial information (unaudited) Nine Months Ended September 30, 1998
     Consolidated Condensed Balance Sheet, September 30, 1998..................................F-45
     Consolidated Condensed Statements of Operations for the Nine Months Ended
         September 30, 1998 and 1997 and from Inception (February 20, 1984)
         to September 30, 1998.................................................................F-46
     Consolidated Condensed Statements of Stockholders' Equity from Inception
         (February 20, 1984) to September 30, 1998.............................................F-47
     Consolidated Condensed Statements of Cash Flows for the Nine Months Ended
         September 30, 1998 and 1997 and from Inception (February 20, 1984)
         to September 30, 1998.................................................................F-54
     Notes to Consolidated Financial Statements................................................F-55
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
               --------------------------------------------------

To the Stockholders and Directors
Advanced Viral Research Corp.
  (A Development Stage Company)
Hallandale, Florida
 
     We have audited the accompanying consolidated balance sheet of Advanced
Viral Research Corp. (A Development Stage Company) as of December 31, 1996, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the two years in the period ended December 31, 1996 and for
the period from inception (February 20, 1984) to December 31, 1996. These
financial statements are the responsibility of the management of the Company.
Our responsibility is to express an opinion on these financial statements based
on our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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, 1996 and
the results of their operations and their cash flows for each of the two years
in the period ended December 31, 1996 and for the period from inception
(February 20, 1984) to December 31, 1996 in conformity with generally accepted
accounting principles.
 
     The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
2 to the consolidated financial statements, the Company has suffered recurring
losses from operations and is dependent upon the continued sale of its
securities or obtaining debt financing for funds to meet its cash requirements.
These factors raise substantial doubt about the Company's ability to continue as
a going concern. Management's plans with regard to these matters are 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
 
Miami, Florida
January 28, 1997
 
                                       F-2
ADVANCED VIRAL RESEARCH CORP.
                         (A DEVELOPMENT STAGE COMPANY)
 
                           CONSOLIDATED BALANCE SHEET
                               DECEMBER 31, 1996
ASSETS
Current Assets:
  Cash and cash equivalents.................................  $    61,396
  Investments...............................................    1,378,841
  Inventory.................................................       19,729
  Other current assets......................................       16,081
                                                              -----------
          Total current assets..............................    1,476,047
Property and Equipment......................................      207,209
Other Assets................................................       33,544
                                                              -----------
          Total assets......................................  $ 1,716,800
                                                              ===========
                  LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
  Accounts payable and accrued liabilities..................  $    46,674
  Customer deposits.........................................        7,800
                                                              -----------
          Total current liabilities.........................       54,474
                                                              -----------
Commitments and Contingencies...............................           --
Stockholders' Equity:
  Common stock; 1,000,000,000 shares of $.00001 par value
     authorized, 267,031,058 shares issued and
     outstanding............................................        2,671
  Additional paid-in capital................................    7,003,351
  Subscription receivable...................................      (19,000)
  Deficit accumulated during the development stage..........   (4,851,537)
  Deferred compensation cost................................     (473,159)
                                                              -----------
          Total stockholders' equity........................    1,662,326
                                                              -----------
          Total liabilities and stockholders' equity........  $ 1,716,800
                                                              ===========
See notes to consolidated financial statements.
 
                                       F-3
ADVANCED VIRAL RESEARCH CORP.
                         (A DEVELOPMENT STAGE COMPANY)
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
INCEPTION
                                                                                      (FEBRUARY 20,
                                                          YEAR ENDED DECEMBER 31,       1984) TO
                                                        ---------------------------   DECEMBER 31,
                                                            1996           1995           1996
                                                        ------------   ------------   -------------
Revenues:
  Sales...............................................  $     24,111   $     27,328    $   192,041
  Interest............................................        46,796         16,155        345,409
  Other income........................................        32,000         25,000        112,000
                                                        ------------   ------------    -----------
                                                             102,907         68,483        649,450
                                                        ------------   ------------    -----------
Costs and Expenses:
  Research and development............................       255,660         34,931      1,106,408
  General and administrative..........................       695,915        420,757      3,926,133
  Depreciation and amortization.......................       306,072         14,679        466,236
  Interest............................................            --             --          2,210
                                                        ------------   ------------    -----------
                                                           1,257,647        470,367      5,500,987
                                                        ------------   ------------    -----------
Net Loss..............................................  $ (1,154,740)  $   (401,884)   $(4,851,537)
                                                        ============   ============    ===========
Net Loss Per Common Share.............................  $       (.00)  $       (.00)
                                                        ------------   ------------
Weighted Average Number of Common Shares
  Outstanding.........................................   257,645,815    248,022,608
                                                        ============   ============
See notes to consolidated financial statements.
 
                                       F-4
ADVANCED VIRAL RESEARCH CORP.
                         (A DEVELOPMENT STAGE COMPANY)
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
               INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 1996
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.....     .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...........................     .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.......................     .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)
                                                   ------------   -------   ----------   -----------
Balance, December 31, 1986..............            154,666,014     1,547      307,534      (203,942)
  Issuance of common stock, exercise of            
     "A" warrants.......................     .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, period 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 offer on "B"                    
     warrants...........................     .05      6,729,850        67      336,475            --
  Issuance of common stock, exercise of            
     "B" warrants.......................     .05        268,500         3       13,422            --
  Issuance of common stock, exercise of            
     "C" warrants.......................     .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)
                                                   ------------   -------   ----------   -----------
  Issuance of common stock, exercise of            
     "B" warrants.......................     .05         11,400        --          420            --
  Issuance of common stock, exercise of            
     "C" warrants.......................     .08          2,500        --          200            --
F-5
ADVANCED VIRAL RESEARCH CORP.
                         (A DEVELOPMENT STAGE COMPANY)
 
         CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY -- (CONTINUED)
COMMON STOCK                                 DEFICIT
                                          ---------------------                          ACCUMULATED
                                          AMOUNT                            ADDITIONAL   DURING THE
                                           PER                               PAID-IN     DEVELOPMENT
                                          SHARE       SHARES      AMOUNT     CAPITAL        STAGE
                                          ------   ------------   -------   ----------   -----------
Issuance of common stock, exercise of
     underwriters warrants..............    .012      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............................   .0405     10,000,000       100      404,900            --
  Issuance of common stock, for
     consulting services................    .055        500,000         5       27,495            --
  Issuance of common stock, exercise of
     "B" warrants.......................     .05      7,458,989        75      372,875            --
  Issuance of common stock, exercise of
     "C" warrants.......................     .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................    .055        500,000         5       27,495            --
  Issuance of common stock, for
     consulting services................              3,500,000        35      104,965            --
  Issuance of common stock, for
     testing............................    .035      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
               INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 1996
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.......   $       236,276,991   $2,363   $3,416,070     $     --     $(2,854,076)   $     --
  Issuance of common stock, for
    consulting services..........    .05      4,750,000       47      237,453           --              --           --
  Issuance of common stock,                                     
    exercise of options..........    .08        400,000        4       31,996           --              --           --
  Issuance of common stock,                                     
    exercise of options..........    .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..........    .05      3,333,333       33      166,633           --              --           --
  Issuance of common stock,                                      
    exercise of options..........    .08      2,092,850       21      167,407           --              --           --
  Issuance of common stock,                                      
    exercise of options..........    .10      2,688,600       27      268,833           --              --           --
  Issuance of common stock, for                                  
    consulting services..........    .11      1,150,000       12      126,488           --              --           --
  Issuance of common stock, for                                  
    consulting services..........    .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)          --
                                            -----------   ------   ----------     --------     -----------    ---------
  Issuance of common stock,
    exercise of options..........    .05      3,333,334       33      166,634           --              --           --
  Issuance of common stock,                                      
    exercise of options..........    .08      1,158,850       12       92,696           --              --           --
  Issuance of common stock,                                      
    exercise of options..........    .10      7,163,600       72      716,288           --              --           --
  Issuance of common stock,                                      
    exercise of options..........    .11        170,000        2       18,698           --              --           --
  Issuance of common stock,                                      
    exercise of options..........    .12      1,300,000       13      155,987           --              --           --
  Issuance of common stock,                                      
    exercise of options..........    .18      1,400,000       14      251,986           --              --           --
  Issuance of common stock,                                      
    exercise of options..........    .19        500,000        5       94,995           --              --           --
  Issuance of common stock,                                      
    exercise of options..........    .20        473,500        5       94,695           --              --           --
  Issuance of common stock, for                                  
    services rendered............    .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   $2,671   $7,003,351     $(19,000)    $(4,851,537)   $(473,159)
                                            ===========   ======   ==========     ========     ===========    =========
See notes to consolidated financial statements.
 
                                       F-7
ADVANCED VIRAL RESEARCH CORP.
                         (A DEVELOPMENT STAGE COMPANY)
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
INCEPTION
                                                                                 (FEBRUARY 20, 1984)
                                                       YEAR ENDED DECEMBER 31,           TO
                                                       -----------------------      DECEMBER 31,
                                                          1996         1995             1996
                                                       -----------   ---------   -------------------
Cash Flows from Operating Activities:
  Net loss...........................................  $(1,154,740)  $(401,884)       $(4,851,537)
                                                       -----------   ---------        -----------
  Adjustments to reconcile net loss to net cash used
     in operating activities:
     Depreciation and amortization...................       18,731      14,679            178,895
     Amortization of deferred compensation cost......      287,341          --            287,341
     Issuance of common stock for services...........      175,000     168,500          1,372,000
     Increase in other current assets................       (3,114)     (2,804)           (16,081)
     Increase in inventory...........................       (1,638)    (18,091)           (19,729)
     Increase in other assets........................      (27,085)     (4,659)           (33,544)
     Increase (decrease) in accounts payable and
       accrued liabilities...........................       39,823     (25,594)            52,874
                                                       -----------   ---------        -----------
       Total adjustments.............................      489,058     132,031          1,821,756
                                                       -----------   ---------        -----------
       Net cash used in operating activities.........     (665,682)   (269,853)        (3,029,781)
                                                       -----------   ---------        -----------
Cash Flows from Investing Activities:
  Purchase of investments............................   (1,247,256)   (474,000)        (1,726,256)
  Proceeds from sale of investments..................      347,415          --            347,415
  Repayments on loan receivable -- stockholder.......           --       8,762                 --
  Expenditures for property and equipment............      (11,446)     (5,075)          (384,504)
                                                       -----------   ---------        -----------
     Net cash used in investing activities...........     (911,287)   (470,313)        (1,763,345)
                                                       -----------   ---------        -----------
Cash Flows from Financing Activities:
  Proceeds from sale of securities, net of issuance
     costs...........................................    1,573,135     602,955          4,854,522
                                                       -----------   ---------        -----------
     Net cash provided by financing activities.......    1,573,135     602,955          4,854,522
                                                       -----------   ---------        -----------
Net Increase (Decrease) in Cash and Cash
  Equivalents........................................       (3,834)   (137,211)            61,396
Cash and Cash Equivalents, Beginning.................       65,230     202,441                 --
                                                       -----------   ---------        -----------
Cash and Cash Equivalents, Ending....................  $    61,396   $  65,230        $    61,396
                                                       ===========   =========        ===========
Supplemental Disclosure of Non-Cash Financing
  Activities:
  Options granted accounted for as deferred
     compensation cost...............................  $   760,500
                                                       ===========
See notes to consolidated financial statements.
 
                                      F-8
ADVANCED VIRAL RESEARCH CORP.
                         (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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
            named RETICULOSE.  While the Company has had limited sales of this
            product, primarily for research purposes, the success of the
            Company will be dependent upon obtaining certain regulatory
            approval for its pharmaceutical product, RETICULOSE, to commence
            commercial operations.  The Company was in the development stage at
            December 31, 1996.

         PRINCIPLES OF CONSOLIDATION

            The consolidated financial statements include the accounts of the
            Company and its 99.6% owned subsidiary, Advance Viral Research
            (LTD), a Bahamian Corporation.  All significant intercompany
            accounts have been eliminated.

         CASH EQUIVALENTS

            Cash equivalents consist of highly liquid investments, with
            original maturities of three months or less.

         INVESTMENTS

            Investments consist of certificates of deposit with maturities
            greater than three months, carried at cost which is market value,
            and U.S. Government discount notes and U.S. Treasury Bills.  The
            notes and treasury bills are classified as "held to maturity" and
            are carried at amortized cost which approximates market value.

         PROPERTY AND EQUIPMENT

            Property and equipment are recorded at cost and depreciated 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.

         RECLASSIFICATION

            Certain amounts in the 1995 financial statements have been
            reclassified to conform to 1996 presentation.

                                     F-9
ADVANCED VIRAL RESEARCH CORP.
                         (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Continued)

NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         USE OF ESTIMATES

            The preparation of financial statements in conformity with
            generally accepted accounting principles 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.

NOTE 2.  BASIS OF PRESENTATION

         The accompanying consolidated financial statements have been prepared
         in conformity with generally accepted accounting principles which
         contemplate the continuance of the Company as a going concern.  The
         Company has suffered losses from operations during its operating
         history.  The Company is dependent upon registration of RETICULOSE for
         sale before it can begin commercial operations.  The Company's cash
         position may be inadequate to pay all the costs associated with the
         full range of testing and clinical trials required by the FDA.
         Management does not anticipate registration or other approval of
         RETICULOSE in the near future in the United States.  Unless and until
         RETICULOSE is approved for sale in the United States or another
         industrially developed country, the Company may be dependent upon the
         continued sale of its securities for funds to meet its cash
         requirements.  Management intends to continue to sell the Company's
         securities in an attempt to mitigate the effects of its cash position;
         however, no assurance can be given that such equity financing, if and
         when required, will be available.  In the event that such equity
         financing is not available, in order to continue operations,
         management anticipates that they will have to defer their salaries.
         In addition, the Company may seek debt financing, but no agreements
         have been entered with regard to such financing.  No assurance can be
         given that the Company will be able to sustain its operations until
         FDA approval is granted or that any approval will ever be granted.
         These factors raise substantial doubt about the Company's ability to
         continue as a going concern.  The consolidated financial statements do
         not include any adjustments relating to the recoverability and
         classification of recorded assets and classification of liabilities
         that might be necessary should the Company be unable to continue in
         existence.

NOTE 3.  ACQUISITION

         Two of the principal stockholders of the Company acquired LTD, a
         Bahamian Corporation with pharmaceutical manufacturing and warehousing
         facilities, on February 20, 1984.  The acquisition is a combination of
         two entities under common control and has been accounted for in a
         manner similar to a pooling of interests.  In 1986, the Company
         acquired from LTD exclusive rights to manufacture and market
         RETICULOSE worldwide, except within the Bahamas, for $50,000.  The
         Company also purchased inventory of RETICULOSE from LTD for $45,000
         and was obligated to pay $3 per ampule of RETICULOSE for the initial
         100,000 ampules purchased and $2 per ampule for purchases exceeding
         100,000 ampules.  On December 16, 1987, the Company acquired the
         controlling beneficial interest in 99.6% of the common stock of LTD
         through an appropriate trust agreement to satisfy the rules of the
         Bahamian Government, from two of the principal stockholders of the
         Company at a cost of $46,000.  Both stockholders concurrently canceled
         $86,565 of indebtedness due them from LTD.

                                     F-10
ADVANCED VIRAL RESEARCH CORP.
                         (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Continued)

NOTE 4.  PROPERTY AND EQUIPMENT
Estimated
                                                           Useful Lives     December 31,      December 31,
                                                             (Years)            1996              1995
                                                             -------            ----              ----
Land and improvements                           15                  $  34,550         $  34,550
          Building and improvements                       30                    239,434           239,434
          Machinery and equipment                         5                     110,520            99,074
                                                                                -------          --------
                                                                                384,504           373,058
          Less accumulated depreciation                                         177,295           158,564
                                                                                -------           -------
                                                                               $207,209          $214,494
                                                                                =======           =======
The Company maintains certain property and equipment in Freeport,
         Bahamas.  The property and equipment amounted to $369,358 as of
         December 31, 1996 including $17,623 expended in 1987 to purchase a
         land lease expiring in 2068.  These amounts are included above.

NOTE 5.  INVESTMENTS

     As of December 31, 1996, Investments consisted of the following:

     Certificates of Deposit...............................$  946,226

     Held to Maturity:
       U.S. Government Discount Notes -- mature 3/30/97....$  334,647
       U.S. Treasury Bills -- mature 5/31/97...............$   97,968
                                                           ----------
                   Total Investments.......................$1,378,841
                 

NOTE 6.  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 RETICULOSE in an amount equal to 5% of net
            sales in the United States and 4% of net sales in foreign
            countries.  The Company has not as yet received any notice of claim
            from such parties.

         POTENTIAL LOSS OF BAHAMIAN RIGHTS

            RETICULOSE is manufactured by Advance Viral Research, Limited (LTD)
            in facilities located in Freeport, Grand Bahama Island.  LTD has a
            license to manufacture pharmaceutical products for export from the
            Grand Bahama Port Authority.  LTD's counsel was advised in August
            1988 by the Ministry of Health of the Government of the Bahamas
            that a license from the Ministry of Health is required for the
            manufacture of pharmaceuticals in the Freeport area of Grand Bahama
            Island.  LTD has received an opinion of its counsel in the Bahamas
            that the license from the Grand Bahama Port Authority is valid for
            the manufacture for export by LTD's of ethical pharmaceutical
            products in the Freeport area of Grand Bahama Island.  No
            proceeding to prevent LTD's export of RETICULOSE has been
            instituted by the Government of the Bahamas.  If such proceedings
            are instituted, LTD intends to defend them vigorously.  No
            assurance can be given that LTD would successfully defend such
            claim.

                                     F-11
ADVANCED VIRAL RESEARCH CORP.
                         (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Continued)

NOTE 6.  COMMITMENTS AND CONTINGENCIES

         PRODUCT LIABILITY

            The Company could be subjected to claims for adverse reactions
            resulting from the use of RETICULOSE.  Although the Company is
            unaware of any such claims or threatened claims since RETICULOSE
            was initially marketed in the 1940's, one study noted adverse
            reactions from highly concentrated doses in guinea pigs.  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 RETICULOSE.  As of the date
            hereof, the Company does not have product liability insurance for
            RETICULOSE.  There can be no assurance that the Company will be
            able to secure such insurance in adequate amounts, at reasonable
            premiums.  Should the Company be unable to secure such product
            liability insurance, the risk of loss to the Company in the event
            of claims would be greatly increased.

         LACK OF PATENT PROTECTION

            The Company does not presently have a patent for RETICULOSE but the
            Company is currently applying for patents for RETICULOSE and
            certain other diseases.  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 the Company will obtain such patents or if obtained
            that they will be enforceable.

         OFFICE LEASE

            Management executed a non-cancelable lease for new office space on
            January 1, 1996, expiring on December 31, 1998 at approximately
            $14,000 annually.

            The Company leased an auto on October 26, 1996 for 36 months at
            $450 per month.  Lease expense for the years ended December 31,
            1996 and 1995 totaled $13,315 and $13,832, respectively.

            Future minimum lease payments are as follows:
1997                                            $19,500
               1998                                             19,500
               1999                                              4,500
                                                               -------
                                                               $43,500
                                                                ======
TESTING AGREEMENTS

         PLATA PARTNERS LIMITED PARTNERSHIP

            On March 20, 1992, the Company entered into an agreement with Plata
            Partners Limited Partnership ("Plata") pursuant to which Plata
            agreed to perform a demonstration in the Domincan Republic in
            accordance with a certain agreed upon protocol (the "Protocol") to
            assess the efficacy of a treatment using RETICULOSE incorporated in
            the Protocol against AIDS (the "Plata Agreement").  Plata covered
            all costs and expenses associated with the demonstration.

                                     F-12
ADVANCED VIRAL RESEARCH CORP.
                         (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Continued)

NOTE 6.  COMMITMENTS AND CONTINGENCIES

         TESTING AGREEMENTS

            Pursuant to the Plata Agreement, the Company authorized the
            issuance to Plata of 5,000,000 shares of common stock and options
            to purchase an additional 5,000,000 shares at $.08 per share
            through July 9, 1994 (the "Plata Options") and 5,000,000 shares at
            $.10 per share through July 9, 1994.  Pursuant to several
            amendments, the Plata Options and the Additional Plata Options are
            exercisable through April 30, 1997 at an exercise price of $.12 and
            $.14, respectively.  As of December 31, 1996, there are outstanding
            Plata Options to acquire 813,000 shares at $.11 per share and
            Additional Plata Options to acquire 858,100 shares at $.13 per
            share.  Through December 31, 1996, the Company has received
            approximately $670,000 pursuant to the issuance of approximately
            7.7 million shares in connection with the exercise of the Plata
            Options and the Additional Plata Options.

         TRM MANAGEMENT CORP. ("TRM")

            In August 1991, the Company entered into an agreement with TRM,
            whereby TRM would perform certain open human clinical trial tests
            in Haiti using RETICULOSE (the "TRM Agreement").  According to the
            TRM Agreement, the purpose of the Haiti tests was to assess the
            effectiveness of RETICULOSE against the Hepatitis "A" virus and
            Hepatitis "B" virus in accordance with and in compliance with a
            certain Hepatitis Open Label Clinical Trial Protocol developed by
            TRM.  At the conclusion of the Haiti tests, TRM was required to
            prepare a paper describing the methods and results of testing, the
            form and substance of which shall be appropriate for publication by
            recognized scientific journals ("Results Paper").  The Results
            Paper was published in the December 1992 issue of the Journal of
            the Royal Society of Health.

            On January 3, 1992, TRM delivered to the Company the Results Paper.
            In accordance with the terms of the TRM Agreement, the Company has
            authorized the issuance to the shareholders and certain associated
            persons of TRM (1) an aggregate amount of 10,000,000 shares of the
            Company's common stock (the "TRM Shares") and (2) an option to
            acquire, at any time, for a period of five years from the date of
            issuance of the option, 10,000,000 shares of the Company's common
            stock at a purchase price of $.05 per share (the "TRM Options").
            As of December 31, 1996, 6,666,666 shares of common stock were
            issued pursuant to the exercise of the TRM Options for an aggregate
            exercise price of $333,333.  Pursuant to an amendment, the TRM
            Options are exercisable through March 15, 1997 at an exercise price
            of $.08.

                                      F-13
ADVANCED VIRAL RESEARCH CORP.
                         (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Continued)

NOTE 6.  COMMITMENTS AND CONTINGENCIES

         ARGENTINE AGREEMENT

            In April 1996, the Company entered into an agreement (the
            "Argentine Agreement") with DCT SRL, an Argentine corporation
            unaffiliated with the Company ("DCT") pursuant to which DCT was to
            cause a clinical trial to be conducted in two separate hospitals
            located in Buenos Aires, Argentina (the "Clinical Trials").
            Pursuant to the Argentine Agreement, the Clinical Trials were to be
            conducted pursuant to a protocol developed by Juan Carlos Flichman,
            M.D. and the purpose of the Clinical Trials was to assess the
            efficacy of the Company's drug RETICULOSE on the Human Papilloma
            Virus (HPV).  The protocol calls for, among other things, a study
            to be performed with clinical and laboratory follow-up on 20 male
            and female human patients between the ages of 18 and 50.  The
            Clinical Trials did not include a placebo control group or
            references to any other antiviral drug.

            Pursuant to the Argentine Agreement, the Company delivered $34,000
            to DCT to cover out-of-pocket expenses associated with the Clinical
            Trials.  The Argentine Agreement further provides that at the
            conclusion of the Clinical Trials, DCT shall cause Dr. Flichman to
            prepare and deliver a written report to the Company regarding the
            methodology and results of the Clinical Trials (the "Written
            Report").  In September 1996, the Written Report was delivered by
            Dr. Flichman to the Company.  Upon delivery of the Written Report
            to the Company, the Company delivered to the principals of DCT
            options to acquire 2,000,000 shares of the Company's common stock
            for a period of one year from the date of the delivery of the
            Written Report, at a purchase price of $.20 per share.  As of
            December 31, 1996, 473,500 shares of common stock were issued
            pursuant to the exercise of these options for an aggregate exercise
            price of approximately $95,000.

            In June 1994, DCT SRL and the Company entered into an exclusive
            distribution agreement whereby the Company granted to DCT SRL the
            exclusive right to distribute the Company's drug RETICULOSE in
            certain South American countries, including Argentina and the other
            MERCOSUR States.

         BARBADOS STUDY

            A double blind study assessing the efficacy of the Company's drug
            RETICULOSE in 43 human patients diagnosed with HIV (AIDS) is being
            conducted at the Queen Elizabeth Hospital, Bridgetown, Barbados
            (the "Barbados Study").  As of December 31, 1996, the Company has
            expended approximately $150,000 to cover the costs of the Barbados
            Study.  Based on information received from the coordinators of the
            Barbados Study, the Company is uncertain as to the costs to be
            incurred in connection with the Barbados Study and has not been
            informed as to when results from the Barbados Study will be
            forthcoming.  In December 1996, the Company received from the
            coordinators of the Barbados Study, a written summary of
            preliminary results of the Barbados Study (the "Written Summary").

                                     F-14
ADVANCED VIRAL RESEARCH CORP.
                         (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Continued)

NOTE 6.  COMMITMENTS AND CONTINGENCIES

         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
            pharmaceutical and biotechnology joint venture partners and
            assisting the Company with regulatory approvals and protocols.

            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 $.18 per
            share.  In addition and in connection with entering into the
            consulting agreement with Dr. Hirschman, the Company issued to a
            person unaffiliated with the Company, 100,000 shares of the
            Company's common stock, and an option to acquire for a period of
            one year, from June 1, 1995, an additional 500,000 shares at a
            purchase price of $.18 per share.  As of December 31, 1996, 900,000
            options have been exercised for cash consideration of $162,000
            under this Agreement.

            In March 1996, the Company entered into an Addendum to 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 the option to purchase 15,000,000 shares of the Company's
            common stock for a three year period pursuant to the following
            vesting schedule: (i) options to purchase 5,000,000 shares
            exercisable at any time and from time to time commencing March 24,
            1996 and ending March 23, 1999 at an exercise price of $.19 per
            share, of which options to acquire 500,000 shares were assigned by
            Dr. Hirschman to Richard Rubin, counsel to Dr. Hirschman; (ii)
            options to purchase 5,000,000 shares exercisable at any time and
            from time to time commencing March 24, 1997 and ending March 23,
            1999 at an exercise price of $.27 per share, of which options to
            acquire 500,000 shares were assigned by Dr. Hirschman to Richard
            Rubin, counsel to Dr. Hirschman; and (iii) options to purchase
            5,000,000 shares exercisable at any time and from time to time
            commencing March 23, 1998 and ending March 23, 1999 at an exercise
            price of $.36 per share, of which options to acquire 500,000 shares
            were assigned by Dr. Hirschman to Richard Rubin, counsel to Dr.
            Hirschman.  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.  As of December 31, 1996, 500,000 shares of
            common stock were issued pursuant to the exercise of stock options
            by Richard Rubin.  Mr. Rubin has, from time to time in the past,
            advised the Company on matters unrelated to his representation of
            Dr. Hirschman.

                                     F-15
ADVANCED VIRAL RESEARCH CORP.
                         (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Continued)

NOTE 6.  COMMITMENTS AND CONTINGENCIES

            On October 14, 1996, the Company and Dr. Hirschman entered into an
            agreement (the "Employment Agreement") whereby Dr. Hirschman has
            agreed to serve as the President and Chief Executive Officer of the
            Company for a period of three years, subject to earlier termination
            by either party if the Company does not receive on or prior to
            December 31, 1997, funding of $3,000,000 from sources other than
            traditional institutional/bank debt financing or proceeds from the
            purchase by Dr. Hirschman of the Company's securities, including,
            without limitation, the exercise of Dr. Hirschman of outstanding
            stock options.  Pursuant to the Employment Agreement, Dr. Hirschman
            is entitled to receive an annual base salary of $325,000,
            automobile and health, life, disability and dental insurance
            benefits for the term of his employment.  The Employment Agreement
            further provides that Dr. Hirschman shall be nominated by the
            Company to serve as a member of the Company's Board of Directors
            for the duration of his employment, and since October 17, 1996, Dr.
            Hirschman has served as a member of the Company's Board of
            Directors.

         CONSULTING AGREEMENTS

         COHEN AGREEMENTS

            In September 1992, the Company entered into a one year consulting
            agreement with Leonard Cohen (the "September 1992 Cohen
            Agreement").  The September 1992 Cohen Agreement required that Mr.
            Cohen provide certain consulting services to the Company in
            exchange for the Company issuing to Mr. Cohen 1,000,000 shares of
            common stock (the "September 1992 Cohen Shares"), 500,000 of which
            were issuable upon execution of the September 1992 Cohen Agreement
            and the remaining 500,000 shares of which were issuable upon Mr.
            Cohen completing 50 hours of consulting service to the Company.
            The Company issued the first 500,000 shares to Mr. Cohen in October
            1992 and the remaining 500,000 shares to Mr. Cohen in February
            1993.  Further pursuant to the September 1992 Cohen Agreement, the
            Company granted to Mr. Cohen the option to acquire, at any time and
            from time to time through September 11, 1993 (which date has been
            extended through December 31, 1996), the option to acquire
            3,000,000 shares of common stock of the Company at an exercise
            price of $.09 per share (which exercise price has been increased to
            $.12 per share) (the "September 1992 Cohen Options").  As of
            December 31, 1996, 1,300,000 of the September 1992 Cohen Options
            have been exercised for cash consideration of $156,000.  Pursuant
            to an amendment, the options were exercisable through April 30,
            1997 at a price of $.13.

            In February 1993, the Company entered into a second consulting
            agreement with Mr. Cohen (the "February 1993 Cohen Agreement").
            The February 1993 Cohen Agreement provides that Mr. Cohen provide
            financing consulting services concerning the business operations of
            the Company in exchange for the Company issuing to Mr. Cohen
            3,500,000 shares of common stock (the "February 1993 Cohen
            Shares"), 1,000,000 shares of which Mr. Cohen has informed the
            Company he has assigned to certain other persons non-affiliated
            with the Company.

                                     F-16
ADVANCED VIRAL RESEARCH CORP.
                         (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Continued)

NOTE 6.  COMMITMENTS AND CONTINGENCIES

            In July 1994, in consideration for services related to the
            introduction, negotiation and execution of a distribution agreement
            the Company issued: (i) to Mr. Cohen, an additional 2,500,000
            shares (the "April 1994 Cohen Shares") and (ii) to each of Elliot
            Bauer and Lee Rizzuto, 625,000 shares (the "Bauer and Rizzuto
            Shares") as well as options to acquire an additional 5,000,000
            shares at $.10 per share exercisable through May 1, 1996 (the
            "Bauer and Rizzuto Options").  The April 1994 Cohen Shares, the
            Bauer and Rizzuto Shares and the shares of common underlying the
            Bauer and Rizzuto Options have been registered.  The Company has
            been informed that Messrs. Cohen, Bauer and Rizzuto are principals
            of a firm which has been granted certain distribution rights.
            Through December 31, 1996, 2,855,000 shares were issued pursuant to
            the exercise of the Bauer and Rizzuto Options for an aggregate
            exercise price of $285,500.  During the year ended December 31,
            1996, approximately 3,000,000 shares of common stock were issued
            for cash consideration of $300,000 pursuant to the exercise of the
            Bauer and Rizzuto Options.  Pursuant to an amendment, the Rizzuto
            options are exercisable through April 30, 1997 at an option price
            of $.11.  The Company agreed to issue to Cohen an additional
            300,000 shares in 1995 at a time when the shares were valued at
            $.14 per share, in consideration for expenditures incurred by Mr.
            Cohen with securing for the benefit of the Company and the
            affiliated distributor, the continued services of a doctor.

            The issuance of the September 1992 Cohen Shares, the February 1993
            Cohen Shares, the April 1994 Cohen Shares and the Bauer and Rizzuto
            Shares have been accounted for as an administrative expense in the
            amount of the Company's valuation of such shares as of the issuance
            date.  During the year ended December 31, 1996, Mr.  Cohen was
            issued 300,000 shares for services rendered.  These shares were
            accounted for as an administrative expense in the amount of the
            Company's valuation of such shares as of the issuance date.

         DISTRIBUTION AGREEMENTS

         The Company has entered into separate agreements with five different
         entities (the "Entities"), whereby the Company has granted exclusive
         rights to distribute RETICULOSE in the countries of China, Japan,
         Macao, Hong Kong, Taiwan, Malaysia, Mexico, Saudi Arabia, Argentina,
         Bolivia, Paraguay, Uruguay, Brazil, Chile, Channel Islands, The Isle
         of Man, British West Indies, Jamaica, Haiti, Bermuda and Belize.
         Pursuant to these agreements, distributors are obligated to cause
         RETICULOSE to be approved for commercial sale in such countries and
         upon such approval, to purchase from the Company certain minimum
         quantities of RETICULOSE 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.

         CONTINGENCY

         The Company is involved in a lawsuit incidental to its operations.  In
         the opinion of legal counsel and management of the Company, any
         liabilities which may arise from this action would not have a material
         effect on the financial position or results of operations of the
         Company.

                                     F-17
ADVANCED VIRAL RESEARCH CORP.
                         (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Continued)

NOTE 7.  STOCKHOLDERS' EQUITY

         During 1996, the Company issued 15,849,284 shares of common stock for
         an aggregate consideration of $1,748,135.  These amounts were
         comprised of the issuance of common stock pursuant to the exercise of
         stock options of 15,499,284 shares for $1,573,135 and the issuance of
         common stock in exchange for consulting services of 350,000 shares for
         consideration of $175,000.

NOTE 8.  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, 1996, the Company had a net operating loss
         carryforward for Federal income tax reporting purposes amounting to
         approximately $4,300,000, which expires in 2011.

         The Company presently has no significant temporary differences between
         financial reporting and income tax reporting.  The components of the
         deferred tax asset as of December 31, 1996 were as follows:
Benefit of net operating loss carryforwards       $1,462,000
             Less valuation allowance                           1,462,000
                                                               ----------
             Net deferred tax asset                            $        -
                                                               ==========
As of December 31, 1996, sufficient uncertainty exists regarding the
         realizability of these operating loss carryforwards and, accordingly,
         a valuation allowance of $1,462,000, which related to the net
         operating losses, has been established.

NOTE 9.  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, 1996.  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 December 31, 1996 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, U.S. government obligations 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-18
ADVANCED VIRAL RESEARCH CORP.
                         (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Continued)

NOTE 9.  ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS

         The fair value of non-current investments, primarily certificates of
         deposit and U.S. government obligations have been estimated using
         quoted market prices.  At December 31, 1996, the differences between
         the estimated fair value and the carrying value of non-current debt
         instruments were considered immaterial in relation to the Company's
         financial position.

NOTE 10. DEFERRED COMPENSATION COST

         As more fully described in Note 6 to these financial statements, the
         Company granted stock options in exchange for testing and consulting
         services.  In accordance with SFAS 123, Accounting for Stock-Based
         Compensation (effective for options granted after December 15, 1995),
         the Company recognized compensation cost based on the fair value at
         the grant dates.  The compensation cost is amortized over the life of
         the option period.  The fair value of the stock options used to
         compute deferred compensation cost is the estimated present value at
         grant date using the Black-Sholes option pricing model with the
         following assumptions for 1996: expected volatility of 20%; a
         risk-free interest rate of 6% and an expected holding period ranging
         from 1-3 years.  The deferred compensation cost is reported as a
         component of stockholders' equity.

NOTE 11. SUBSEQUENT EVENTS

         During January 1997, the Company entered into a five year
         non-cancelable operating lease for certain office and laboratory space
         in Yonkers, New York at an annual rental of $85,400 per year.

         In February 1997, the Company obtained financing of $1,000,000 in the
         form of 7% convertible debentures to finance research and development.

                                     F-19
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Stockholders and Directors
Advanced Viral Research Corp.
  (A Development Stage Company)
Hallandale, Florida

We have audited the accompanying consolidated balance sheet of Advanced Viral
Research Corp. (A Development Stage Company) as of December 31, 1997, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the two years ended December 31, 1997 and for the period from
inception (February 20, 1984) to December 31, 1997. These financial statements
are the responsibility of the management of the Company. Our responsibility is
to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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, 1997 and the
results of their operations and their cash flows for each of the two years in
the period ended December 31, 1997 and for the period from inception (February
20, 1984) to December 31, 1997 in conformity with generally accepted accounting
principles.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and is dependent upon the continued sale of its securities or
obtaining debt financing for funds to meet its cash requirements. These factors
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans with regard to these matters are 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

Miami, Florida
February 10, 1998
(except for the last paragraph
of Note 6, as to which the date
is March 19, 1998)

                                       F-20
ADVANCED VIRAL RESEARCH CORP.
                         (A Development Stage Company)

                           CONSOLIDATED BALANCE SHEET

                                DECEMBER 31, 1997
ASSETS
Current Assets:
   Cash and cash equivalents                                           $    236,059
   Investments                                                            2,984,902
   Inventory                                                                 19,729
   Other current assets                                                      20,240
                                                                       ------------
         Total current assets                                             3,260,930

Property and Equipment                                                      485,661
Other Assets                                                                443,251
                                                                       ------------
         Total assets                                                  $  4,189,842
                                                                       ============

                      LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
   Accounts payable and accrued liabilities                            $    375,606
                                                                       ------------
         Total current liabilities                                          375,606
                                                                       ------------

Convertible Debenture, Net                                                2,384,793
                                                                       ------------

Commitments and Contingencies                                                    --

Stockholders' Equity:
   Common stock; 1,000,000,000 shares of $.00001 par value
      authorized, 277,962,574 shares issued and outstanding                   2,779
   Additional paid-in capital                                            10,512,767
   Subscription receivable                                                  (19,000)
   Deficit accumulated during the development stage                      (8,993,266)
   Deferred compensation cost                                               (73,837)
                                                                       ------------
         Total stockholders' equity                                       1,429,443
                                                                       ------------
         Total liabilities and stockholders' equity                    $  4,189,842
                                                                       ============
See notes to consolidated financial statements.

                                      F-21
ADVANCED VIRAL RESEARCH CORP.
                         (A Development Stage Company)

                      CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,                Inception
                                                                                   (February 20, 1984)   
                                           ---------------------------------               to
                                                1997                1996            December 31, 1997    
                                           -------------       -------------       -------------------
Revenues:
   Sales                                   $       2,278       $      24,111       $     194,319
   Interest                                      111,845              46,796             457,254
   Other income                                    7,800              32,000             119,800
                                           -------------       -------------       ------------- 
                                                 121,923             102,907             771,373
                                           -------------       -------------       ------------- 

Costs and Expenses:
   Research and development                      817,603             255,660           1,924,011
   General and administrative                  1,681,436             983,256           5,894,910
   Depreciation and amortization                 138,245              18,731             317,140
   Interest                                    1,626,368                  --           1,628,578
                                           -------------       -------------       ------------- 
                                               4,263,652           1,257,647           9,764,639
                                           -------------       -------------       ------------- 
Net Loss                                   $  (4,141,729)      $  (1,154,740)      $  (8,993,266)
                                           =============       =============       ============= 

Net Loss Per Common Share                  $        (.00)      $        (.00)
                                           =============       =============        
Weighted Average Number of
   Common Shares Outstanding                 274,534,277         257,645,815
                                           =============       =============
See notes to consolidated financial statements.

                                      F-22
ADVANCED VIRAL RESEARCH CORP.
                         (A Development Stage Company)

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

               INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 1997
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                            $  .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                      .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              .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-23
ADVANCED VIRAL RESEARCH CORP.
                         (A Development Stage Company)

           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY-(Continued)

               INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 1997
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      $ .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, period 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
      offer on "B" warrants                                  .05        6,729,850         67         336,475             --
   Issuance of common stock, exercise of "B" warrants        .05          268,500          3          13,422             --
   Issuance of common stock, exercise of "C" warrants        .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-24
ADVANCED VIRAL RESEARCH CORP.
                         (A Development Stage Company)

           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY-(Continued)

               INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 1997
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     $ .05           11,400         --              420              --
   Issuance of common stock, exercise of "C" warrants       .08            2,500         --              200              --
   Issuance of common stock, 
      exercise of underwriters warrants                     .012       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                    .0405     10,000,000        100          404,900              --
   Issuance of common stock, for consulting services        .055         500,000          5           27,495              --
   Issuance of common stock, exercise of "B" warrants       .05        7,458,989         75          372,875              --
   Issuance of common stock, exercise of "C" warrants       .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        .055         500,000          5           27,495              --
   Issuance of common stock, for consulting services        .03        3,500,000         35          104,965              --
   Issuance of common stock, for testing                    .035       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-25
ADVANCED VIRAL RESEARCH CORP.
                         (A Development Stage Company)

           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY-(Continued)

               INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 1997
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                  236,276,991      $ 2,363      $ 3,416,070      $  --      $ (2,854,076)     $   --

   Issuance of common stock,
     for consulting services      $   .05     4,750,000           47          237,453         --               --           --
   Issuance of common stock,
     exercise of options              .08       400,000            4           31,996         --               --           --
   Issuance of common stock,
     exercise of options              .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              .05     3,333,333           33          166,633         --               --           --
   Issuance of common stock,
     exercise of options              .08     2,092,850           21          167,407         --               --           --
   Issuance of common stock,
     exercise of options              .10     2,688,600           27          268,833         --               --           --
   Issuance of common stock,
     for consulting services          .11     1,150,000           12          126,488         --               --           --
   Issuance of common stock,
     for consulting services          .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-26
ADVANCED VIRAL RESEARCH CORP.
                         (A Development Stage Company)

           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY~(Continued)

               INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 1997
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              .05     3,333,334            33        166,634            --              --            --
   Issuance of common stock,
     exercise of options              .08     1,158,850            12         92,696            --              --            --
   Issuance of common stock,
     exercise of options              .10     7,163,600            72        716,288            --              --            --
   Issuance of common stock,
     exercise of options              .11       170,000             2         18,698            --              --            --
   Issuance of common stock,
     exercise of options              .12     1,300,000            13        155,987            --              --            --
   Issuance of common stock,
     exercise of options              .18     1,400,000            14        251,986            --              --            --
   Issuance of common stock,
     exercise of options              .19       500,000             5         94,995            --              --            --
   Issuance of common stock,
     exercise of options              .20       473,500             5         94,695            --              --            --
   Issuance of common stock,
     for services rendered            .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         2,671      7,003,351       (19,000)     (4,851,537)     (473,159)
                                            -----------   -----------    -----------   -----------     ------------    ---------
See notes to consolidated financial statements.

                                      F-27
ADVANCED VIRAL RESEARCH CORP.
                         (A Development Stage Company)

           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY~(Continued)

               INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 1997
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               .08      3,333,333          33        247,633            --             --           --
   Issuance of common stock,
     conversion of debt                .20      1,648,352          16        329,984            --             --           --
   Issuance of common stock,
     conversion of debt                .15        894,526           9        133,991            --             --           --
   Issuance of common stock,
     conversion of debt                .12      2,323,580          23        269,977            --             --           --
   Issuance of common stock,
     conversion of debt                .15      1,809,524          18        265,982            --             --           --
   Issuance of common stock,
     conversion of debt                .16        772,201           8        119,992            --             --           --
   Issuance of common stock,
     for services rendered             .41         50,000          --         20,500            --             --           --
   Issuance of common stock,
     for services rendered             .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-28
ADVANCED VIRAL RESEARCH CORP.
                         (A Development Stage Company)

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
Inception
                                                                                                       (February 20,
                                                                       Year Ended December 31,            1984) to
                                                                    -----------------------------       December 31,
                                                                        1997             1996               1997
                                                                    -----------       -----------       -----------
Cash Flows from Operating Activities:
   Net loss                                                         $(4,141,729)      $(1,154,740)      $(8,993,266)
                                                                    -----------       -----------       -----------
   Adjustments to reconcile net loss to
     net cash used in operating activities:
         Depreciation and amortization                                  138,245            18,731           317,140
         Amortization of deferred interest cost on beneficial
            conversion feature of convertible debenture               1,552,842                --         1,552,842
         Amortization of deferred compensation cost                     399,322           287,341           686,663
         Loss on sale of property and equipment                           1,425                --             1,425
         Issuance of common stock for services                           44,500           175,000         1,416,500
         Imputed interest on convertible debenture                        4,768                --             4,768
         Increase in other current assets                                (4,159)           (3,114)          (20,240)
         Increase in inventory                                               --            (1,638)          (19,729)
         Increase in other assets                                      (496,126)          (27,085)         (529,670)
         Increase in accounts payable and accrued liabilities           328,932            39,823           381,806
         Decrease in customer deposits                                   (7,800)               --            (7,800)
                                                                    -----------       -----------       -----------
               Total adjustments                                      1,961,949           489,058         3,783,705
                                                                    -----------       -----------       -----------
               Net cash used in operating activities                 (2,179,780)         (665,682)       (5,209,561)
                                                                    -----------       -----------       -----------

Cash Flows from Investing Activities:
   Purchase of investments                                           (3,651,676)       (1,247,256)       (5,377,932)
   Proceeds from sale of investments                                  2,045,615           347,415         2,393,030
   Expenditures for property and equipment                             (307,362)          (11,446)         (691,866)
   Proceeds from sale of property and equipment                           1,200                --             1,200
                                                                    -----------       -----------       -----------
               Net cash used in investing activities                 (1,912,223)         (911,287)       (3,675,568)
                                                                    -----------       -----------       -----------
Cash Flows from Financing Activities:
   Proceeds from issuance of convertible debt                         4,000,000                --         4,000,000
   Proceeds from sale of securities, net of issuance costs              266,666         1,573,135         5,121,188
                                                                    -----------       -----------       -----------
               Net cash provided by financing activities              4,266,666         1,573,135         9,121,188
                                                                    -----------       -----------       -----------

Net Increase (Decrease) in Cash and Cash Equivalents                    174,663            (3,834)          236,059

Cash and Cash Equivalents, Beginning                                     61,396            65,230                -- 
                                                                    -----------       -----------       -----------
Cash and Cash Equivalents, Ending                                   $   236,059       $    61,396       $   236,059
                                                                    ===========       ===========       ===========

Supplemental Disclosure of Non-Cash Financing Activities:
   Options granted accounted for as deferred compensation cost      $        --       $   760,500
                                                                    ===========       ===========
See notes to consolidated financial statements.

                                      F-29
ADVANCED VIRAL RESEARCH CORP.
                          (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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
             named RETICULOSE. While the Company has had limited sales of this
             product, primarily for research purposes, the success of the
             Company will be dependent upon obtaining certain regulatory
             approval for its pharmaceutical product, RETICULOSE, to commence
             commercial operations. The Company was in the development stage at
             December 31, 1997.

         PRINCIPLES OF CONSOLIDATION

             The consolidated financial statements include the accounts of the
             Company and its 99.6% owned subsidiary, Advance Viral Research
             (LTD), a Bahamian Corporation. All significant intercompany
             accounts have been eliminated.

         CASH AND CASH EQUIVALENTS

             Cash equivalents consist of highly liquid investments, with
             original maturities of three months or less.

         INVESTMENTS

             Investments consist of certificates of deposit with maturities
             greater than three months, carried at cost which is market value,
             U.S. Government securities and discount notes and U.S. Treasury
             Bills. The U.S. Government securities, notes and treasury bills are
             classified as "held to maturity" and are carried at amortized cost
             which approximates market value.

         PROPERTY AND EQUIPMENT

             Property and equipment are recorded at cost and depreciated 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.

         RESEARCH AND DEVELOPMENT

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

         DEFERRED COMPENSATION COST

             Deferred compensation costs are recognized based on the fair value
             for non-employee stock options. Compensation cost is amortized over
             the life of the option period which is either shorter than or
             essentially equivalent to the period for which the services are to
             be provided. Compensation expense is classified as general and
             administrative.

                                      F-30
ADVANCED VIRAL RESEARCH CORP.

                          (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

NOTE 1.           SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

         REVENUE RECOGNITION

             The only sales generated by the Company have been sales of
             RETICULOSE for testing purposes. Sales are recorded by the Company
             when such test products are shipped to customers.

         RECLASSIFICATIONS

             Certain amounts in the 1996 financial statements have been
             reclassified to conform to 1997 presentation.

         USE OF ESTIMATES

             The preparation of financial statements in conformity with
             generally accepted accounting principles 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.

NOTE 2.           BASIS OF PRESENTATION

         The accompanying consolidated financial statements have been prepared
         in conformity with generally accepted accounting principles which
         contemplate the continuance of the Company as a going concern. The
         Company has suffered losses from operations during its operating
         history. The Company is dependent upon registration of RETICULOSE for
         sale before it can begin commercial operations. The Company's cash
         position may be inadequate to pay all the costs associated with the
         full range of testing and clinical trials required by the FDA.
         Management does not anticipate registration or other approval of
         RETICULOSE in the near future in the United States. Unless and until
         RETICULOSE is approved for sale in the United States or another
         industrially developed country, the Company may be dependent upon the
         continued sale of its securities for funds to meet its cash
         requirements. Management intends to continue to sell the Company's
         securities in an attempt to mitigate the effects of its cash position;
         however, no assurance can be given that such equity financing, if and
         when required, will be available. In the event that such equity
         financing is not available, in order to continue operations, management
         anticipates that they will have to defer their salaries. During 1997,
         the Company obtained debt financing and may seek additional debt
         financing if the need arises. No assurance can be given that the
         Company will be able to sustain its operations until FDA approval is
         granted or that any approval will ever be granted. These factors raise
         substantial doubt about the Company's ability to continue as a going
         concern. The consolidated financial statements do not include any
         adjustments relating to the recoverability and classification of
         recorded assets and classification of liabilities that might be
         necessary should the Company be unable to continue in existence.

                                      F-31
ADVANCED VIRAL RESEARCH CORP.

                          (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

NOTE 3.            ACQUISITION

         Two of the principal stockholders of the Company acquired LTD, a
         Bahamian Corporation with pharmaceutical manufacturing and warehousing
         facilities, on February 20, 1984. The acquisition is a combination of
         two entities under common control and has been accounted for in a
         manner similar to a pooling of interests. In 1986, the Company acquired
         from LTD exclusive rights to manufacture and market RETICULOSE
         worldwide, except within the Bahamas, for $50,000. The Company also
         purchased inventory of RETICULOSE from LTD for $45,000 and was
         obligated to pay $3 per ampule of RETICULOSE for the initial 100,000
         ampules purchased and $2 per ampule for purchases exceeding 100,000
         ampules. On December 16, 1987, the Company acquired the controlling
         beneficial interest in 99.6% of the common stock of LTD through an
         appropriate trust agreement to satisfy the rules of the Bahamian
         Government, from two of the principal stockholders of the Company at a
         cost of $46,000. Both stockholders concurrently canceled $86,565 of
         indebtedness due them from LTD.

NOTE 4.            INVESTMENTS
December 31,
                                                                          1997
                                                                       ------------
Certificates of deposit                                    $  758,000
            Held to maturity:
               U.S. Government securities (matures February 1998)       2,226,902
                                                                       ----------
                                                                       $2,984,902
                                                                       ==========
NOTE 5.           PROPERTY AND EQUIPMENT
Estimated        
                                                     Useful Lives      December 31,
                                                       (Years)              1997
                                                    -------------     --------------
Land and improvements                           15           $      34,550
          Building and improvements                       30                 299,550
          Machinery and equipment                          5                 354,250
                                                                       -------------
                                                                             688,350
          Less accumulated depreciation                                      202,689
                                                                       -------------
                                                                       $     485,661
                                                                       =============
The Company maintains certain property and equipment in Freeport,
         Bahamas. This property and equipment amounted to $370,028 as of
         December 31, 1997 including $17,623 expended in 1987 to purchase a land
         lease expiring in 2068. These amounts are included above.

                                      F-32
ADVANCED VIRAL RESEARCH CORP.

                          (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

NOTE 6.           CONVERTIBLE DEBENTURES

         On February 21, 1997, in order to finance research and development, the
         Company sold $1,000,000 principal amount of its ten-year 7% Convertible
         Debenture (the "February Debenture") due February 28, 2007, to RBB Bank
         Aktiengesellschaft ("RBB"). Accrued interest under the February
         Debenture is payable semi-annually, computed at the rate of 7% per
         annum on the unpaid principal balance from February 21, 1997 until the
         date of interest payment. The February Debenture may be prepaid by the
         Company before maturity, in whole or in part, without premium or
         penalty, if the Company gives the holder of the Debenture notice not
         less than 30 days before the date fixed for prepayment in that notice.
         The February Debenture is convertible, at the option of the holder,
         into shares of common stock.

         The assured incremental yield on the February Debenture was measured
         based on the date of issuance of the security and amortized to interest
         expense over the conversion period which ended on May 29, 1997 which
         was the first date full conversion could occur. The interest expense
         relating to this measurement was $4,768.

         During the quarter ended June 30, 1997, RBB exercised its right to
         convert $330,000 of the principal amount of the February Debenture into
         1,648,352 shares of the Company's common stock at a conversion price of
         $.2002 per share and to convert $134,000 of the principal amount of the
         debenture into 894,526 shares of the Company's common stock at a
         conversion price of $.1498.

         During the quarter ended September 30, 1997, RBB exercised its right to
         convert $270,000 of the principal amount of the February Debenture into
         2,323,580 shares of the Company's common stock at a conversion price of
         $.1162 per share and to convert $266,000 of the principal amount of the
         debenture into 1,809,524 shares of the Company's common stock at a
         conversion price of $.1470 per share.

         In connection with the issuance of the February Debenture, the Company
         issued to RBB three warrants (the "February warrants") to purchase
         common stock, each such February warrant entitling the holder to
         purchase, from February 21, 1997 through February 28, 2007, 178,378
         shares of common stock. The exercise price of the three February
         warrants are $0.288, $0.576 and $0.864 per warrant share, respectively.
         The fair value of the February warrants was estimated to be $37,000
         ($.021 per warrant) based upon a financial analysis of the terms of the
         warrants using the Black Sholes Pricing Model. This amount has been
         reflected in the accompanying financial statements as interest expense
         related to the convertible debenture.

         Based on the terms for conversion associated with the February
         Debenture, there is an intrinsic value associated with the beneficial
         conversion feature of $413,793. This amount has been fully amortized to
         interest expense with a corresponding credit to additional paid-in
         capital.

                                      F-33
ADVANCED VIRAL RESEARCH CORP.

                          (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

NOTE 6.           CONVERTIBLE DEBENTURES (Continued)

         In October 1997, in order to finance further research and development,
         the Company sold $3,000,000 principal amount of its ten-year 7%
         Convertible Debenture (the "October Debenture") due August 30, 2007, to
         RBB. Accrued interest under the October Debenture is payable
         semi-annually, computed at the rate of 7% per annum on the unpaid
         principal balance from the date of the issuance of the October
         Debenture until the date of interest payment. The October Debenture may
         be prepaid by the Company before maturity, in whole or in part, without
         premium or penalty, if the Company gives the holder of the Debenture
         notice not less than 30 days before the date fixed for prepayment in
         that notice . The October Debenture is convertible, at the option of
         the holder, into shares of common stock.

         During the quarter ended December 31, 1997, RBB exercised its right to
         convert $120,000 of the principal amount of the October Debenture into
         772,201 shares of the Company's common stock at a conversion price of
         $.1554 per share.

         In connection with the issuance of the October Debenture, the Company
         issued to RBB three warrants (the "October warrants") to purchase
         Common Stock, each such October warrant entitling the holder to
         purchase, from the date of grant through August 30, 2007, 600,000
         shares of the Common Stock. The exercise price of the three October
         warrants are $0.20 , $0.23 and $0.27 per warrant share, respectively.
         The fair value of the three October warrants was established to be
         $106,571 ($.178 per warrant), $97,912 ($.163 per warrant) and $87,472
         ($.146 per warrant), respectively, based upon a financial analysis of
         the terms of the warrants using the Black Sholes Pricing Model. This
         amount has been reflected in the accompanying financial statements as a
         discount on the convertible debenture, with a corresponding credit to
         additional paid-in capital, and is being amortized to interest expense
         over the expected term of the notes which at December 31, 1997 was 120
         months.

         Based on the terms for conversion associated with the October
         Debenture, there is an intrinsic value associated with the beneficial
         conversion feature of $1,350,000. This amount has been treated as
         deferred interest expense and recorded as a reduction of the
         convertible debenture liability with a corresponding credit to
         additional paid-in capital and is being amortized to interest expense
         over the period from October 8, 1997 (date of debenture) to February
         24, 1998 (date the debenture is fully convertible). The interest
         expense relative to this item was $1,139,049 for 1997.

            Unpaid principal balance of October debenture        $2,880,000
            Less unamortized discount and deferred interest         495,207
                                                                 ----------
            Convertible debenture, net                           $2,384,793
                                                                 ==========

         During January 1998, RBB exercised its right to convert $133,000 and
         $341,250 of the principal amount of the October debenture into
         1,016,043 and 2,512,887 shares of the Company's common stock at a
         conversion price of $.1309 and $.1358 per share, respectively.

         On February 26, 1998 and March 19, 1998, RBB exercised its right to
         convert $750,000 and $335,750 of the principal amount of the October
         Debenture into 5,114,175 and 1,498,884 shares of the Company's common
         stock at a conversion price of $.14665 and $.224 per share,
         respectively.

                                      F-34
ADVANCED VIRAL RESEARCH CORP.

                          (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

NOTE 7.           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 RETICULOSE in an amount equal to 5% of net
             sales in the United States and 4% of net sales in foreign
             countries. The Company has not as yet received any notice of claim
             from such parties.

         PRODUCT LIABILITY

             The Company could be subjected to claims for adverse reactions
             resulting from the use of RETICULOSE. Although the Company is
             unaware of any such claims or threatened claims since RETICULOSE
             was initially marketed in the 1940's, one study noted adverse
             reactions from highly concentrated doses in guinea pigs. 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 RETICULOSE. As of the date
             hereof, the Company does not have product liability insurance for
             RETICULOSE. There can be no assurance that the Company will be able
             to secure such insurance in adequate amounts, at reasonable
             premiums. Should the Company be unable to secure such product
             liability insurance, the risk of loss to the Company in the event
             of claims would be greatly increased and could materially adversely
             affect the Company.

         LACK OF PATENT PROTECTION

             The Company does not presently have a patent for RETICULOSE but the
             Company is currently applying for patents for RETICULOSE as a
             treatment for certain diseases. 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 the Company will obtain such patents or if obtained
             that they will be enforceable.

         LEASE COMMITMENTS

             Management executed a non-cancelable lease for new office space in
             Florida on January 1, 1996, expiring on December 31, 1998 at
             approximately $14,000 annually.

             Management executed a non-cancelable lease for new office and
             laboratory space in Yonkers, New York on April 18, 1997, expiring
             on April 30, 2002 at approximately $85,500 annually.

             The Company leased an auto on October 26, 1996 for 36 months at
             $450 per month.

             Lease expense for the years ended December 31, 1997 and 1996
             totaled $76,351 and $13,315, respectively.

                                      F-35
ADVANCED VIRAL RESEARCH CORP.

                          (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

NOTE 7.           COMMITMENTS AND CONTINGENCIES (Continued)

         GENERAL (Continued)

         LEASE COMMITMENTS (Continued)

             Future minimum lease payments are as follows:

             Year ending December 31:
                  1998                                    $104,400
                  1999                                      89,500
                  2000                                      85,000
                  2001                                      85,000
                  2002                                      28,000
                                                          -------- 
                                                          $391,900
                                                          ======== 

         TESTING AGREEMENTS

         PLATA PARTNERS LIMITED PARTNERSHIP

             On March 20, 1992, the Company entered into an agreement with Plata
             Partners Limited Partnership ("Plata") pursuant to which Plata
             agreed to perform a demonstration in the Domincan Republic in
             accordance with a certain agreed upon protocol (the "Protocol") to
             assess the efficacy of a treatment using RETICULOSE incorporated in
             the Protocol against AIDS (the "Plata Agreement"). Plata covered
             all costs and expenses associated with the demonstration.

             Pursuant to the Plata Agreement, the Company authorized the
             issuance to Plata of 5,000,000 shares of common stock and options
             to purchase an additional 5,000,000 shares at $.08 per share
             through July 9, 1994 (the "Plata Options") and 5,000,000 shares at
             $.10 per share through July 9, 1994 (the "Additional Plata
             Options"). Pursuant to several amendments, the Plata Options and
             the Additional Plata Options are exercisable through April 30, 1998
             at an exercise price of $.12 and $.14, respectively. As of December
             31, 1997, there are outstanding Plata Options to acquire 813,000
             shares at $.12 per share and Additional Plata Options to acquire
             858,100 shares at an exercise price of $.14 per share. Through
             December 31, 1997, the Company has received approximately $670,000
             pursuant to the issuance of approximately 7.7 million shares in
             connection with the exercise of the Plata Options and the
             Additional Plata Options.

         TESTING AGREEMENTS (Continued)

         TRM MANAGEMENT CORP. ("TRM")

             In August 1991, the Company entered into an agreement with TRM,
             whereby TRM would perform certain open human clinical trial tests
             in Haiti using RETICULOSE (the "TRM Agreement"). According to the
             TRM Agreement, the purpose of the Haiti tests was to assess the
             effectiveness of RETICULOSE against the Hepatitis "A" virus and
             Hepatitis "B" virus in accordance with and in compliance with a
             certain Hepatitis Open Label Clinical Trial Protocol developed by
             TRM. At the conclusion of the Haiti tests, TRM was required to
             prepare a paper

                                      F-36
ADVANCED VIRAL RESEARCH CORP.

                          (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

NOTE 7.           COMMITMENTS AND CONTINGENCIES (Continued)

         TESTING AGREEMENTS (Continued)

         TRM MANAGEMENT CORP. ("TRM") (Continued)

             describing the methods and results of testing, the form and
             substance of which shall be appropriate for publication by
             recognized scientific journals ("Results Paper"). The Results Paper
             was published in the December 1992 issue of the Journal of the
             Royal Society of Health.

             On January 3, 1992, TRM delivered to the Company the Results Paper.
             In accordance with the terms of the TRM Agreement, the Company has
             authorized the issuance to the shareholders and certain associated
             persons of TRM (1) an aggregate amount of 10,000,000 shares of the
             Company's common stock (the "TRM Shares") and (2) an option to
             acquire, at any time, for a period of five years from the date of
             issuance of the option, 10,000,000 shares of the Company's common
             stock at a purchase price of $.05 and $.08 per share (the "TRM
             Options"). As of December 31, 1997, 10,000,000 shares of common
             stock were issued pursuant to the exercise of the TRM Options for
             an aggregate exercise price of $600,000.

         ARGENTINE AGREEMENT

             In April 1996, the Company entered into an agreement (the
             "Argentine Agreement") with DCT SRL, an Argentine corporation
             unaffiliated with the Company ("DCT") pursuant to which DCT was to
             cause a clinical trial to be conducted in two separate hospitals
             located in Buenos Aires, Argentina (the "Clinical Trials").
             Pursuant to the Argentine Agreement, the Clinical Trials were to be
             conducted pursuant to a protocol developed by Juan Carlos Flichman,
             M.D. and the purpose of the Clinical Trials was to assess the
             efficacy of the Company's drug RETICULOSE on the Human Papilloma
             Virus (HPV). The protocol calls for, among other things, a study to
             be performed with clinical and laboratory follow-up on 12 male and
             female human patients between the ages of 18 and 50. The Clinical
             Trials did not include a placebo control group or references to any
             other antiviral drug.

             Pursuant to the Argentine Agreement, the Company delivered $34,000
             to DCT to cover out-of-pocket expenses associated with the Clinical
             Trials. The Argentine Agreement further provides that at the
             conclusion of the Clinical Trials, DCT shall cause Dr. Flichman to
             prepare and deliver a written report to the Company regarding the
             methodology and results of the Clinical Trials (the "Written
             Report"). In September 1996, the Written Report was delivered by
             Dr. Flichman to the Company. Upon delivery of the Written Report to
             the Company, the Company delivered to the principals of DCT options
             to acquire 2,000,000 shares of the Company's common stock for a
             period of one year from the date of the delivery of the Written
             Report, at a purchase price of $.20 per share. As of December 31,
             1997, 473,500 shares of common stock were issued pursuant to the
             exercise of these options for an aggregate exercise price of
             approximately $95,000.

                                      F-37
ADVANCED VIRAL RESEARCH CORP.

                          (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

NOTE 7.           COMMITMENTS AND CONTINGENCIES (Continued)

         TESTING AGREEMENTS (Continued)

         ARGENTINE AGREEMENT (Continued)

             In April 1996, DCT SRL and the Company entered into an exclusive
             distribution agreement whereby the Company granted to DCT, subject
             to certain conditions, the exclusive right to market and sell
             RETICULOSE in Argentina, Bolivia, Paraguay, Uruguay, Brazil, and
             Chile (the "DCT Exclusive Distribution Agreement").

             In June 1997, the Company entered into an agreement with DCT (the
             HIV-HPV Agreement") whereby the Company agreed to provide to DCT or
             its assignees, up to $600,000 to cover the costs of a double blind
             placebo controlled study in approximately 150 patients to assess
             the efficacy of RETICULOSE for the treatment of persons diagnosed
             with the HIV virus (AIDS) and HPV (the "HIV-HPV Study").

             In connection with the HIV-HPV Agreement, the Company has advanced
             approximately $410,000 which is accounted for as a research and
             development expense. The amounts have been used to cover expenses
             associated with clinical activities of the HIV-HPV Study.

             The HIV-HPV Agreement provides that (i) in the event the date from
             the HIV-HPV Study is used in connection with RETICULOSE being
             approved for commercial sale anywhere within the territory granted
             under the DCT Exclusive Distribution Agreement or (ii) DCT receives
             financing to cover the costs of the HIV-HPV Study, then DCT is
             obligated to reimburse the Company for all amounts expended in
             connection with the HIV-HPV Study.

             In October 1997, the Company entered into two agreements with DCT,
             whereby the Company agreed to provide DCT or its assignees, up to
             $220,000 and $341,000 to cover the costs of double blind placebo
             controlled studies in approximately 360 and 240 patients,
             respectively to assess the efficacy of the topical application of
             RETICULOSE for the treatment of persons diagnosed with Herpes
             Labialis/Genital Infections (the "Herpes Study") and HPV (the "HPV
             Topical Study").

             In connection with the Herpes Study and the HPV Topical Study
             (collectively, the "Studies"), the Company has advanced
             approximately $49,000 and $88,000, respectively such expenses are
             accounted for a research and development expenses. The amounts
             expended have been used to cover expenses associated with
             pre-clinical activities. Neither the Herpes Study nor the HPV
             Topical Study has commenced.

             Both Agreements with DCT provide that (i) in the event the data
             from the Studies are used in connection with RETICULOSE being
             approved for commercial sale anywhere within the territory granted
             under the DCT Exclusive Distribution Agreement or (ii), DCT
             receives financing to cover the costs of the Studies, then DCT is
             obligated to reimburse the Company for all amounts respectively
             expended in connection with the Studies.

                                      F-38
ADVANCED VIRAL RESEARCH CORP.

                          (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

NOTE 7.           COMMITMENTS AND CONTINGENCIES (Continued)

         TESTING AGREEMENTS (Continued)

         BARBADOS STUDY

             A double blind study assessing the efficacy of the Company's drug
             RETICULOSE in 43 human patients diagnosed with HIV (AIDS) is being
             conducted at the Queen Elizabeth Hospital, Bridgetown, Barbados
             (the "Barbados Study"). As of December 31, 1997, the Company has
             expended approximately $345,000 to cover the costs of the Barbados
             Study. Based on information received from the coordinators of the
             Barbados Study, the Company is uncertain as to the costs to be
             incurred in connection with the Barbados Study and has not been
             informed as to when results from the Barbados Study will be
             forthcoming. In December 1996, the Company received from the
             coordinators of the Barbados Study, a written summary of
             preliminary results of the Barbados Study (the "Written Summary").

         NATIONAL CANCER INSTITUTE AGREEMENT

             In March 1997, the Company entered into a Material Transfer
             Agreement - Cooperative Research and Development Agreement with the
             National Cancer Institute ("NCI") of the National Institutes of
             Health. Under the terms of the Agreement, NCI researchers and the
             Company will collaborate to elucidate the molecular mechanism by
             which RETICULOSE affects the transcription of the gamma interferon
             gene.

         TOPICAL SAFETY STUDY

             In October 1997, the Company advanced $75,000 towards a total of
             $150,000 for a topical safety study to be conducted in the United
             States for the topical use of RETICULOSE for the treatment of HPV
             and Herpes.

         CONSULTING 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.

                                      F-39
ADVANCED VIRAL RESEARCH CORP.

                          (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

NOTE 7.           COMMITMENTS AND CONTINGENCIES (Continued)

         CONSULTING AGREEMENTS (Continued)

         HIRSCHMAN AGREEMENT (Continued)

             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 $.18 per
             share. In addition and in connection with entering into the
             consulting agreement with Dr. Hirschman, the Company issued to a
             person unaffiliated with the Company, 100,000 shares of the
             Company's common stock, and an option to acquire for a period of
             one year, from June 1, 1995, an additional 500,000 shares at a
             purchase price of $.18 per share. As of December 31, 1997, 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 March 23, 1999 at an
             exercise price of $.19 per share, of which options to acquire
             500,000 shares were assigned by Dr. Hirschman to Richard Rubin,
             consultant to Dr. Hirschman; (ii) options to purchase 5,000,000
             shares exercisable at any time and from time to time commencing
             March 24, 1997 and ending March 23, 1999 at an exercise price of
             $.27 per share, of which options to acquire 500,000 shares were
             assigned by Dr. Hirschman to Richard Rubin, consultant to Dr.
             Hirschman; and (iii) options to purchase 5,000,000 shares
             exercisable at any time and from time to time commencing March 24,
             1998 and ending March 23, 1999 at an exercise price of $.36 per
             share, of which options to acquire 500,000 shares were assigned by
             Dr. Hirschman to Richard Rubin, consultant to Dr. Hirschman. 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. As of December 31, 1997, 500,000 shares of common stock
             were issued pursuant to the exercise of stock options by Richard
             Rubin. Mr. Rubin has, from time to time in the past, advised the
             Company on matters unrelated to his consultation with Dr.
             Hirschman.

             In November 1997, Dr. Hirschman assigned to Henry Kamioner, a
             consultant to Dr. Hirschman, options to acquire 1,500,000 shares
             (500,000 at $.19, 500,000 at $.27 and 500,000 at $.36).

                                      F-40
ADVANCED VIRAL RESEARCH CORP.

                          (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

NOTE 7.           COMMITMENTS AND CONTINGENCIES (Continued)

         CONSULTING AGREEMENTS (Continued)

         HIRSCHMAN AGREEMENT (Continued)

             On October 14, 1996, the Company and Dr. Hirschman entered into an
             agreement (the "Employment Agreement") whereby Dr. Hirschman has
             agreed to serve as the President and Chief Executive Officer of the
             Company for a period of three years, subject to earlier termination
             by either party, either for cause as defined in and in accordance
             with the provisions of the Employment Agreement, or if the Company
             does not receive on or prior to December 31, 1997, funding of
             $3,000,000 from sources other than traditional institutional/bank
             debt financing or proceeds from the purchase by Dr. Hirschman of
             the Company's securities, including, without limitation, the
             exercise of Dr. Hirschman of outstanding stock options. Pursuant to
             the Employment Agreement, Dr. Hirschman is entitled to receive an
             annual base salary of $325,000, use of an automobile, major
             medical, term life, disability and dental insurance benefits for
             the term of his employment. The Employment Agreement further
             provides that Dr. Hirschman shall be nominated by the Company to
             serve as a member of the Company's Board of Directors and that
             Bernard Friedland and William Bregman will vote in favor of Dr.
             Hirschman as a director of the Company, for the duration of Dr.
             Hirschman's employment, and since October 1996, Dr. Hirschman has
             served as a member of the Company's Board of Directors.

             On February 18, 1998, the Board of Directors authorized a $100,000
             bonus and granted options to acquire 23,000,000 shares of common
             stock at $.27 per option share provided that the Company is granted
             FDA approval for testing RETICULOSE in the United States.

         COHEN AGREEMENTS

             In September 1992, the Company entered into a one year consulting
             agreement with Leonard Cohen (the "September 1992 Cohen
             Agreement"). The September 1992 Cohen Agreement required that Mr.
             Cohen provide certain consulting services to the Company in
             exchange for the Company's issuing to Mr. Cohen 1,000,000 shares of
             common stock (the "September 1992 Cohen Shares"), 500,000 of which
             were issuable upon execution of the September 1992 Cohen Agreement
             and the remaining 500,000 shares of which were issuable upon Mr.
             Cohen completing 50 hours of consulting service to the Company. The
             Company issued the first 500,000 shares to Mr. Cohen in October
             1992 and the remaining 500,000 shares to Mr. Cohen in February
             1993. Further pursuant to the September 1992 Cohen Agreement, the
             Company granted to Mr. Cohen the option to acquire, at any time and
             from time to time through September 10, 1993 (which date has been
             extended through April 30, 1998), the option to acquire 3,000,000
             shares of common stock of the Company at an exercise price of $.09
             per share (which exercise price has been increased to $.13 per
             share) (the "September 1992 Cohen Options"). As of December 31,
             1997, 1,300,000 of the September 1992 Cohen Options have been
             exercised for cash consideration of $156,000.

                                      F-41
ADVANCED VIRAL RESEARCH CORP.

                          (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

NOTE 7.           COMMITMENTS AND CONTINGENCIES (Continued)

         CONSULTING AGREEMENTS (Continued)

         COHEN AGREEMENTS (Continued)

             In February 1993, the Company entered into a second consulting
             agreement with Mr. Cohen (the "February 1993 Cohen Agreement") for
             a three year term commencing on March 1, 1993. The February 1993
             Cohen Agreement provides that Mr. Cohen provide financing business
             consulting services concerning the operations of the business of
             the Company and possible strategic transactions in exchange for the
             Company issuing to Mr. Cohen 3,500,000 shares of common stock (the
             "February 1993 Cohen Shares"), 1,500,000 shares of which Mr. Cohen
             has informed the Company he has assigned to certain other persons
             not affiliated with the Company or any of its officers or
             directors.

             In July 1994, in consideration for services related to the
             introduction, negotiation and execution of a distribution agreement
             the Company issued: (i) to Mr. Cohen, an additional 2,500,000
             shares (the "April 1994 Cohen Shares") and (ii) to each of Elliot
             Bauer and Lee Rizzuto, 625,000 shares (the "Bauer and Rizzuto
             Shares") as well as options to acquire an additional 5,000,000
             shares each at $.10 per share exercisable through May 1, 1996 (the
             "Bauer and Rizzuto Options"). The Company has been informed that
             Messrs. Cohen, Bauer and Rizzuto are principals of a firm which has
             been granted certain distribution rights, which were terminated on
             May 31, 1995. Through December 31, 1997, 2,855,000 shares were
             issued pursuant to the exercise of the Bauer and Rizzuto Options
             for an aggregate exercise price of $285,500. Mr. Rizzuto sold all
             of his shares and all shares underlying his options. Pursuant to
             several amendments, the remaining Bauer options are exercisable
             through April 30, 1998 at an option price of $.11. The Company
             agreed to issue to Cohen an additional 300,000 shares in 1995 at a
             time when the shares were valued at $.14 per share, in
             consideration for expenditures incurred by Mr. Cohen in connection
             with securing for the benefit of the Company and the affiliated
             distributor, the continued services of a doctor.

             The issuance of the September 1992 Cohen Shares, the February 1993
             Cohen Shares, the April 1994 Cohen Shares and the Bauer and Rizzuto
             Shares have been accounted for as an administrative expense in the
             amount of the Company's valuation of such shares as of the issuance
             date. During the year ended December 31, 1996, Mr. Cohen was issued
             300,000 shares for services rendered. These shares were accounted
             for as an administrative expense in the amount of the Company's
             valuation of such shares as of the issuance date.

                                      F-42
ADVANCED VIRAL RESEARCH CORP.

                          (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

NOTE 7.           COMMITMENTS AND CONTINGENCIES (Continued)

         DISTRIBUTION AGREEMENTS

         The Company currently is a party to separate agreements with five
         different entities (the "Entities"), whereby the Company has granted
         exclusive rights to distribute RETICULOSE in the countries of China,
         Japan, Macao, Hong Kong, Taiwan, Mexico, Argentina, Bolivia, Paraguay,
         Uruguay, Brazil, Chile, Channel Islands, The Isle of Man, British West
         Indies, Jamaica, Haiti, Bermuda, Belize and Saudi Arabia. Pursuant to
         these agreements, distributors are obligated to cause RETICULOSE to be
         approved for commercial sale in such countries and upon such approval,
         to purchase from the Company certain minimum quantities of RETICULOSE
         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. No sales have been made by the
         Company under the distribution agreements other than for testing
         purposes.

NOTE 8.           STOCKHOLDERS' EQUITY

         During 1997, the Company issued 10,931,516 shares of common stock for
         an aggregate consideration of $1,412,166. These amounts were comprised
         of the issuance of common stock pursuant to the exercise of stock
         options of 3,333,333 shares for $247,666 and the issuance of common
         stock in exchange for consulting services of 150,000 shares for
         consideration of $44,500 and the issuance of common stock upon
         conversion of debt of 7,448,183 shares for $1,120,000.

NOTE 9.           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, 1997, the Company had a net operating loss
         carryforward for Federal income tax reporting purposes amounting to
         approximately $9,000,000, which expires in varying amounts to 2017.

         The Company presently has no significant temporary differences between
         financial reporting and income tax reporting. The components of the
         deferred tax asset as of December 31, 1997 were as follows:

               Benefit of net operating loss carryforwards        $3,058,000
               Less valuation allowance                            3,058,000
                                                                  ----------
               Net deferred tax asset                             $       --
                                                                  ==========

                                      F-43
ADVANCED VIRAL RESEARCH CORP.

                          (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

NOTE 9.           INCOME TAXES (Continued)

         As of December 31, 1997, sufficient uncertainty exists regarding the
         realizability of these operating loss carryforwards and, accordingly, a
         valuation allowance of $3,058,000, which related to the net operating
         losses, has been established.

NOTE 10.          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, 1997. 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 December 31, 1997 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, U.S. government obligations, accounts payable and the
         convertible debentures. 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.

         The fair value of non-current investments, primarily U.S. government
         obligations, have been estimated using quoted market prices. At
         December 31, 1997, the differences between the estimated fair value and
         the carrying value of non-current and current debt instruments were
         considered immaterial in relation to the Company's financial position.

NOTE 11.          DEFERRED COMPENSATION COST

         As more fully described in Note 7 to these financial statements, the
         Company granted stock options in exchange for testing and consulting
         services. In accordance with SFAS 123, Accounting for Stock- Based
         Compensation (effective for options granted after December 15, 1995),
         the Company recognized compensation cost based on the fair value at the
         grant dates. The compensation cost is amortized over the life of the
         option period. The fair value of the stock options used to compute
         deferred compensation cost is the estimated present value at grant date
         using the Black-Sholes option pricing model with the following
         assumptions for 1996 and 1997: expected volatility of 20%; a risk-free
         interest rate of 6% and an expected holding period ranging from 1-3
         years. The deferred compensation cost is reported as a component of
         stockholders' equity. At December 31, 1997 and 1996, there were
         7,000,000 option shares outstanding with a weighted average exercise
         price of $0.195 per share.

                                      F-44
ADVANCED VIRAL RESEARCH CORP.
                          (A Development Stage Company)

                      CONSOLIDATED CONDENSED BALANCE SHEETS
Condensed
                                                                                                                from
                                                                                                               Audited
                                                                                                              Financial
                                                                                           September 30,     Statements
                                                                                               1998          December 31,
                                                                                            (Unaudited)          1997
                                                                                            -----------          ----
ASSETS
                                      ------
Current Assets:
   Cash and cash equivalents                                                               $   485,041       $   236,059
   Investments                                                                                 188,000         2,984,902
   Inventory                                                                                    19,729            19,729
   Other current assets                                                                         23,837            20,240
                                                                                           -----------       -----------
         Total current assets                                                                  716,607         3,260,930

Property and Equipment                                                                         734,477           485,661

Other Assets                                                                                   328,683           443,251
                                                                                           -----------       -----------

         Total assets                                                                      $ 1,779,767       $ 4,189,842
                                                                                           ===========       ===========

                       LIABILITIES AND STOCKHOLDERS' EQUITY
                       ------------------------------------
Current Liabilities:
   Accounts payable and accrued liabilities                                                $   266,447       $   375,606
                                                                                           -----------       -----------
         Total current liabilities                                                             266,447           375,606
                                                                                           -----------       -----------

Convertible Debenture, Net                                                                           -         2,384,793
                                                                                           -----------       -----------

Commitments and Contingencies                                                                        -                 -

Stockholders' Equity:
   Common stock; 1,000,000,000 shares of $.00001 par value authorized,
      296,422,907 and 277,962,574 shares issued and outstanding                                  2,964             2,779
   Additional paid-in capital                                                               13,651,982        10,512,767
   Subscription receivable                                                                           -           (19,000)
   Deficit accumulated during the development stage                                        (12,112,090)       (8,993,266)
   Deferred compensation cost                                                                  (29,536)          (73,837)
                                                                                           -----------       -----------
         Total stockholders' equity                                                          1,513,320         1,429,443
                                                                                           -----------       -----------

         Total liabilities and stockholders' equity                                        $ 1,779,767       $ 4,189,842
                                                                                           ===========       ===========
See notes to consolidated financial statements.

                                       F-45
ADVANCED VIRAL RESEARCH CORP.
                          (A Development Stage Company)

                 CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
Inception
                                                                                                             (February 20,
                                                  Three Months Ended               Nine Months Ended            1984) to
                                                     September 30,                    September 30,           September 30,
                                                     -------------                    -------------           -------------
                                                 1998             1997             1998            1997           1998
                                                 ----             ----             ----            ----           ----
Revenues:
   Sales                                     $      656      $         -     $        656    $      2,278      $    194,975
   Interest                                      22,310           28,900           79,533          63,879           536,787
   Other income                                       -                -              100               -           119,900
                                           ------------      -----------     ------------    ------------      ------------
                                                 22,966           28,900           80,289          66,157           851,662
                                           ------------      -----------     ------------    ------------      ------------

Costs and Expenses:
   Research and development                     230,326          166,108          611,090         360,781         2,535,101
   General and administrative                   633,273          547,736        1,711,532       1,299,897         7,606,442
   Depreciation and amortization                 28,437           62,605          570,260         124,116           880,102
   Interest                                           -           63,400          306,231         478,434         1,942,107
                                           ------------      -----------     ------------    ------------      ------------
                                                892,036          839,849        3,199,113       2,263,228        12,963,752
                                           ------------      -----------     ------------    ------------      ------------

Net Loss                                     $ (869,070)      $ (810,949)    $ (3,118,824)   $ (2,197,071)     $(12,112,090)
                                           ============      ===========     ============    ============      ============ 

Net Loss Per Share of Common
   Stock - Basic and Diluted                $      (.00)      $     (.00)    $       (.00)   $       (.00)     $       (.00)
                                           ============      ===========     ============    ============      ============ 

Weighted Average Number of
   Common Shares Outstanding                290,194,958      271,801,398      290,194,958     271,801,398
                                           ============      ===========     ============    ============
See notes to consolidated financial statements.

                                       F-46
ADVANCED VIRAL RESEARCH CORP.
                          (A Development Stage Company)

            CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY

               INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 1998
Deficit
                                                                               Common Stock                            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                                 $.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                         .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                 .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-47
ADVANCED VIRAL RESEARCH CORP.
                          (A Development Stage Company)

            CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
                                   (Continued)

               INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 1998
Deficit
                                                                               Common Stock                             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             $.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, period 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               .05         6,729,850         67        336,475               -
      offer on "B" warrants
   Issuance of common stock, exercise of "B" warrants               .05           268,500          3         13,422               -
   Issuance of common stock, exercise of "C" warrants               .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-48
ADVANCED VIRAL RESEARCH CORP.
                          (A Development Stage Company)

            CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
                                   (Continued)

               INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 1998
Deficit
                                                                                Common Stock                             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           $  .05             11,400          -            420               -
   Issuance of common stock, exercise of "C" warrants              .08              2,500          -            200               -
   Issuance of common stock, exercise of underwriters warrants    .012          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                         .0405         10,000,000        100        404,900               -
   Issuance of common stock, for consulting services              .055            500,000          5         27,495               -
   Issuance of common stock, exercise of "B" warrants              .05          7,458,989         75        372,875               -
   Issuance of common stock, exercise of "C" warrants              .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              .055            500,000          5         27,495               -
   Issuance of common stock, for consulting services               .03          3,500,000         35        104,965               -
   Issuance of common stock, for testing                          .035          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-49
ADVANCED VIRAL RESEARCH CORP.
                          (A Development Stage Company)

            CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
                                   (Continued)

               INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 1998
Common Stock                                           
                                                                Amount       ------------              Additional                   
                                                                 Per                                    Paid-In      Subscription   
                                                                Share         Shares        Amount      Capital       Receivable    
                                                                -----         ------        ------      -------       ----------
Balance, December 31, 1993                                                     236,276,991   $ 2,363    $ 3,416,070         $ -   

   Issuance of common stock, for consulting services            $   .05          4,750,000        47        237,453           -   
   Issuance of common stock, exercise of options                    .08            400,000         4         31,996           -   
   Issuance of common stock, exercise of options                    .10            190,000         2         18,998           -   
   Net loss, year ended December 31, 1994                                                -         -              -           -   
                                                                              ------------   -------   ------------        ----   

Balance, December 31, 1994                                                     241,616,991     2,416      3,704,517           -   
                                                                                                                              -
   Issuance of common stock, exercise of options                    .05          3,333,333        33        166,633           -   
   Issuance of common stock, exercise of options                    .08          2,092,850        21        167,407           -   
   Issuance of common stock, exercise of options                    .10          2,688,600        27        268,833           -   
   Issuance of common stock, for consulting services                .11          1,150,000        12        126,488           -   
   Issuance of common stock, for consulting services                .14            300,000         3         41,997           -   
   Net loss, year ended December 31, 1995                                                -         -              -           -   
                                                                                        --        --             --          --   

Balance, December 31, 1995                                                     251,181,774     2,512      4,475,875           -   
                                                                               ------------    ------     ----------         --   

(RESTUBBED TABLE)
                                                                                  Deficit                                           
                                                                                Accumulated                   
                                                                                during the        Deferred         
                                                                                Development     Compensation  
                                                                                   Stage            Cost      
                                                                                   -----            ----      
                                                                                
Balance, December 31, 1993                                                       $ (2,854,076)        $ -   
                                                                                                            
   Issuance of common stock, for consulting services                                        -           -   
   Issuance of common stock, exercise of options                                            -           -   
   Issuance of common stock, exercise of options                                            -           -   
   Net loss, year ended December 31, 1994                                            (440,837)          -   
                                                                                 -------------       ----   
                                                                                                            
Balance, December 31, 1994                                                         (3,294,913)          -   
                                                                                                            
   Issuance of common stock, exercise of options                                            -           -   
   Issuance of common stock, exercise of options                                            -           -   
   Issuance of common stock, exercise of options                                            -           -   
   Issuance of common stock, for consulting services                                        -           -   
   Issuance of common stock, for consulting services                                        -           -   
   Net loss, year ended December 31, 1995                                            (401,884)          -   
                                                                                 -------------       ----   
                                                                                                            
Balance, December 31, 1995                                                         (3,696,797)          -   
                                                                                 -------------       ----
See notes to consolidated financial statements.

                                       F-50
ADVANCED VIRAL RESEARCH CORP.
                          (A Development Stage Company)

            CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
                                   (Continued)

               INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 1998
Common Stock                                          
                                                                   Amount     ------------               Additional                 
                                                                     Per                                  Paid-In      Subscription 
                                                                    Share        Shares       Amount      Capital       Receivable  
                                                                    -----        ------       ------      -------       ----------
Balance, December 31, 1995                                                    251,181,774   $ 2,512    $ 4,475,875       $      -   

   Issuance of common stock, exercise of options                     .05        3,333,334        33        166,634              -   
   Issuance of common stock, exercise of options                     .08        1,158,850        12         92,696              -   
   Issuance of common stock, exercise of options                     .10        7,163,600        72        716,288              -   
   Issuance of common stock, exercise of options                     .11          170,000         2         18,698              -   
   Issuance of common stock, exercise of options                     .12        1,300,000        13        155,987              -   
   Issuance of common stock, exercise of options                     .18        1,400,000        14        251,986              -   
   Issuance of common stock, exercise of options                     .19          500,000         5         94,995              -   
   Issuance of common stock, exercise of options                     .20          473,500         5         94,695              -   
   Issuance of common stock, for services rendered                   .50          350,000         3        174,997              -   
   Options granted                                                                      -         -        760,500              -   
   Subscription receivable                                                              -         -              -        (19,000)  
   Net loss, year ended December 31, 1996                                               -         -              -              -   
                                                                             ------------    ------     ----------       --------   

Balance, December 31, 1996                                                    267,031,058     2,671      7,003,351        (19,000)  
                                                                             ------------    ------     ----------       --------   

(RESTUBBED TABLE)
                                                                             Deficit                      
                                                                           Accumulated                    
                                                                            during the        Deferred    
                                                                           Development      Compensation  
                                                                              Stage             Cost      
                                                                              -----             ----      
                                                                         
Balance, December 31, 1995                                                $ (3,696,797)      $       -    
                                                                                                          
   Issuance of common stock, exercise of options                                     -               -    
   Issuance of common stock, exercise of options                                     -               -    
   Issuance of common stock, exercise of options                                     -               -    
   Issuance of common stock, exercise of options                                     -               -    
   Issuance of common stock, exercise of options                                     -               -    
   Issuance of common stock, exercise of options                                     -               -    
   Issuance of common stock, exercise of options                                     -               -    
   Issuance of common stock, exercise of options                                     -               -    
   Issuance of common stock, for services rendered                                   -               -    
   Options granted                                                                   -        (473,159)   
   Subscription receivable                                                           -               -    
   Net loss, year ended December 31, 1996                                   (1,154,740)              -    
                                                                          -------------      ---------    
                                                                                                          
Balance, December 31, 1996                                                  (4,851,537)       (473,159)   
                                                                          -------------      ---------
See notes to consolidated financial statements.

                                       F-51
ADVANCED VIRAL RESEARCH CORP.
                          (A Development Stage Company)

            CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
                                   (Continued)

               INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 1998
Common Stock                                             
                                                                 Amount    ------------                Additional                   
                                                                  Per                                    Paid-In      Subscription  
                                                                 Share        Shares        Amount       Capital       Receivable   
                                                                 -----        ------        ------       -------       ----------
Balance, December 31, 1996                                                    267,031,058    $ 2,671     $ 7,003,351     $ (19,000) 

   Issuance of common stock, exercise of options                  .08           3,333,333         33         247,633             -  
   Issuance of common stock, conversion of debt                   .20           1,648,352         16         329,984             -  
   Issuance of common stock, conversion of debt                   .15             894,526          9         133,991             -  
   Issuance of common stock, conversion of debt                   .12           2,323,580         23         269,977             -  
   Issuance of common stock, conversion of debt                   .15           1,809,524         18         265,982             -  
   Issuance of common stock, conversion of debt                   .16             772,201          8         119,992             -  
   Issuance of common stock, for services rendered                .41              50,000          -          20,500             -  
   Issuance of common stock, for services rendered                .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                                           -          -               -             -  
   Imputed interest on convertible debenture                                            -          -           4,768             -  
   Net loss, year ended December 31, 1997                                               -          -               -             -  
                                                                              -----------     ------     -----------     ---------  

Balance, December 31, 1997                                                    277,962,574      2,779      10,512,767       (19,000) 
                                                                              -----------     ------     -----------     ---------  

(RESTUBBED TABLE)
                                                                                  Deficit                     
                                                                                Accumulated                   
                                                                                 during the        Deferred   
                                                                                Development      Compensation 
                                                                                   Stage             Cost     
                                                                                   -----             ----     

Balance, December 31, 1996                                                   $ (4,851,537)      $ (473,159)   
                                                                                                              
   Issuance of common stock, exercise of options                                        -                -    
   Issuance of common stock, conversion of debt                                         -                -    
   Issuance of common stock, conversion of debt                                         -                -    
   Issuance of common stock, conversion of debt                                         -                -    
   Issuance of common stock, conversion of debt                                         -                -    
   Issuance of common stock, conversion of debt                                         -                -    
   Issuance of common stock, for services rendered                                      -                -    
   Issuance of common stock, for services rendered                                      -                -    
   Beneficial conversion feature, February debenture                                    -                -    
   Beneficial conversion feature, October debenture                                     -                -    
   Warrant costs, February debenture                                                    -                -    
   Warrant costs, October debenture                                                     -                -    
   Amortization of deferred compensation cost                                           -          399,322    
   Imputed interest on convertible debenture                                            -                -    
   Net loss, year ended December 31, 1997                                       (4,141,729)              -    
                                                                               -----------     -----------    
                                                                                                              
Balance, December 31, 1997                                                     (8,993,266)         (73,837)   
                                                                               -----------     -----------
See notes to consolidated financial statements.

                                       F-52
ADVANCED VIRAL RESEARCH CORP.
                          (A Development Stage Company)

            CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
                                   (Continued)

               INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 1998
Common Stock                                            
                                                                 Amount     ------------                Additional                  
                                                                   Per                                   Paid-In       Subscription 
                                                                  Share        Shares       Amount       Capital        Receivable  
                                                                  -----        ------       ------       -------        ----------
Balance, December 31, 1997                                                     277,962,574   $ 2,779     $ 10,512,767     $ (19,000)

   Issuance of common stock, exercise of options                   .12             295,000         3           35,397             - 
   Issuance of common stock, exercise of options                   .14             500,000         5           69,995             - 
   Issuance of common stock, exercise of options                   .16             450,000         5           71,995             - 
   Issuance of common stock, exercise of options                   .20              10,000         -            2,000             - 
   Issuance of common stock, exercise of options                   .26             300,000         3           77,997             - 
   Issuance of common stock, conversion of debt                    .13           1,017,011        10          132,990             - 
   Issuance of common stock, conversion of debt                    .14           2,512,887        25          341,225             - 
   Issuance of common stock, conversion of debt                    .15           5,114,218        51          749,949             - 
   Issuance of common stock, conversion of debt                    .18           1,491,485        15          274,985             - 
   Issuance of common stock, conversion of debt                    .19           3,299,979        33          619,967             - 
   Issuance of common stock, conversion of debt                    .22           1,498,884        15          335,735             - 
   Issuance of common stock, conversion of debt                    .23           1,870,869        19          424,981             - 
   Issuance of common stock, for services rendered                 .21             100,000         1           20,999             - 
   Amortization of deferred compensation cost                                            -         -                -             - 
   Write off of subscription receivable                                                  -         -          (19,000)       19,000 
   Net loss, nine months ended September 30, 1998                                        -         -                -             - 
                                                                              ------------   -------     ------------     --------- 

Balance, September 30, 1998                                                    296,422,907   $ 2,964     $ 13,651,982     $       - 
                                                                              ============   =======     ============     ========= 

(RESTUBBED TABLE)
                                                                                  Deficit                       
                                                                                Accumulated                     
                                                                                 during the        Deferred     
                                                                                Development      Compensation   
                                                                                   Stage             Cost       
                                                                                   -----             ----       
                                                                              
Balance, December 31, 1997                                                    $  (8,993,266)     $ (73,837)     
                                                                                                                
   Issuance of common stock, exercise of options                                          -              -      
   Issuance of common stock, exercise of options                                          -              -      
   Issuance of common stock, exercise of options                                          -              -      
   Issuance of common stock, exercise of options                                          -              -      
   Issuance of common stock, exercise of options                                          -              -      
   Issuance of common stock, conversion of debt                                           -              -      
   Issuance of common stock, conversion of debt                                           -              -      
   Issuance of common stock, conversion of debt                                           -              -      
   Issuance of common stock, conversion of debt                                           -              -      
   Issuance of common stock, conversion of debt                                           -              -      
   Issuance of common stock, conversion of debt                                           -              -      
   Issuance of common stock, conversion of debt                                           -              -      
   Issuance of common stock, for services rendered                                        -              -      
   Amortization of deferred compensation cost                                             -         44,301      
   Write off of subscription receivable                                                   -              -      
   Net loss, nine months ended September 30, 1998                                (3,118,824)             -      
                                                                              -------------     ----------      
                                                                                                                
Balance, September 30, 1998                                                   $ (12,112,090)     $ (29,536)     
                                                                              =============     ==========
See notes to consolidated financial statements.

                                       F-53
ADVANCED VIRAL RESEARCH CORP.
                          (A Development Stage Company)

                 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Inception
                                                                              Nine Months Ended             (February 20,
                                                                                September 30,                  1984) to
                                                                                                            September 30,
                                                                           1998              1997                1998
                                                                           ----              ----                ----
Cash Flows from Operating Activities:
   Net loss                                                               $(3,118,824)      $(2,197,071)       $(12,112,090)
                                                                          -----------       -----------        ------------
   Adjustments to reconcile net loss to
      net cash used by operating activities:
         Depreciation and amortization                                        570,260           161,358             887,400
         Amortization of deferred interest cost on beneficial
            conversion feature of convertible debenture                       210,951           413,793           1,763,793
         Amortization of deferred compensation cost                            44,301           384,555             730,964
         Loss on sale of property and equipment                                     -             1,425               1,425
         Issuance of common stock for services                                 21,000            44,500           1,437,500
         Imputed interest on convertible debenture                                  -             4,768               4,768
         Changes in Operating Assets and Liabilities:
            Increase in other current assets                                   (3,597)          (11,741)            (23,837)
            Increase in inventory                                                   -                 -             (19,729)
            Increase in other assets                                         (106,658)         (225,151)           (636,328)
            Increase (decrease) in accounts
               payable and accrued liabilities                               (109,159)           20,860             272,647
            Decrease in customers deposits                                          -                 -              (7,800)
                                                                          -----------       -----------        ------------
              Total adjustments                                               627,098           794,367           4,410,803
                                                                          -----------       -----------        ------------
               Net cash used by operating activities                       (2,491,726)       (1,402,704)         (7,701,287)
                                                                          -----------       -----------        ------------

Cash Flows from Investing Activities:
   Purchase of investments                                                    (94,000)         (857,000)         (5,471,932)
   Proceeds from sale of investments                                        2,890,902         1,280,841           5,283,932
   Expenditures for property and equipment                                   (313,594)         (118,884)         (1,005,460)
   Proceeds from sale of property and equipment                                     -             1,200               1,200
                                                                          -----------       -----------        ------------
               Net cash provided (used) by investing activities             2,483,308           306,157          (1,192,260)
                                                                          -----------       -----------        ------------

Cash Flows from Financing Activities:
   Proceeds from issuance of convertible debt                                       -         1,000,000           4,000,000
   Proceeds from sale of securities, net of issuance costs                    257,400           266,666           5,378,588
                                                                          -----------       -----------        ------------
               Net cash provided by financing activities                      257,400         1,266,666           9,378,588
                                                                          -----------       -----------        ------------

Net Increase in Cash and Cash Equivalents                                     248,982           170,119             485,041

Cash and Cash Equivalents, Beginning                                          236,059            61,396                   -
                                                                          -----------       -----------        ------------

Cash and Cash Equivalents, Ending                                           $ 485,041         $ 231,515           $ 485,041
                                                                          ===========       ===========        ============
See notes to consolidated financial statements.

                                       F-54
ADVANCED VIRAL RESEARCH CORP.
                          (A Development Stage Company)

              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

NOTE 1.  BASIS OF PRESENTATION

             The accompanying unaudited consolidated condensed financial
             statements at September 30, 1998 have been prepared in accordance
             with generally accepted accounting principles for interim financial
             information and with the instructions to Form 10-Q and reflect all
             adjustments which, in the opinion of management, are necessary for
             a fair presentation of financial position as of September 30, 1998
             and results of operations for the three months and the nine months
             ended September 30, 1998 and 1997 and cash flows for the nine
             months ended September 30, 1998 and 1997. 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 consolidated financial statements and
             footnotes thereto included in the Company's Annual Report on Form
             10-KSB for the year ended December 31, 1997.

NOTE 2.  COMMITMENTS AND CONTINGENCIES

         Going Concern

             The accompanying unaudited consolidated condensed financial
             statements at September 30, 1998 have been prepared in conformity
             with generally accepted accounting principles which contemplate the
             continuance of the Company as a going concern. The Company, which
             is still in its development stage, has suffered losses from
             operations during its operating history. The Company is dependent
             upon registration of RETICULOSE for sale before it can begin
             commercial operations. The Company's cash position may be
             inadequate to pay all the costs associated with the full range of
             testing and clinical trials required by the FDA. Management does
             not anticipate registration or other approval of RETICULOSE in the
             near future in the United States. Unless and until RETICULOSE is
             approved for sale in the United States or another industrially
             developed country, the Company may be dependent upon the continued
             sale of its securities and debt financing for funds to meet its
             cash requirements. Management intends to continue to sell the
             Company's securities in an attempt to mitigate the effects of its
             cash position; however, no assurance can be given that equity or
             debt financing, if and when required, will be available. In the
             event that such equity or debt financing is not available, in order
             to continue operations, management anticipates that they will have
             to defer their salaries. During 1997, the Company obtained debt
             financing and may seek additional debt financing if the need
             arises. Additional debt financing is expected during November 1998.
             No assurance can be given that the Company will be able to sustain
             its operations until FDA approval is granted or that any approval
             will ever be granted. These factors raise substantial doubt about
             the Company's ability to continue as a going concern. The
             consolidated condensed financial statements do not include any
             adjustments relating to the recoverability and classification of
             recorded assets and classification of liabilities that might be
             necessary should the Company be unable to continue in existence.

         Potential Claim for Royalties

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

                                       F-55
ADVANCED VIRAL RESEARCH CORP.
                          (A Development Stage Company)

              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                                   (Continued)

NOTE 2.  COMMITMENTS AND CONTINGENCIES (Continued)

         Product Liability

             The Company could be subjected to claims for adverse reactions
             resulting from the use of RETICULOSE. Although the Company is
             unaware of any such claims or threatened claims since RETICULOSE
             was initially marketed in the 1940's, one study noted adverse
             reactions from highly concentrated doses in guinea pigs. 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 RETICULOSE. As of the date
             hereof, the Company does not have product liability insurance for
             RETICULOSE. There can be no assurance that the Company will be able
             to secure such insurance in adequate amounts, at reasonable
             premiums if it determined to do so. Should the Company be unable to
             secure such product liability insurance, the risk of loss to the
             Company in the event of claims would be greatly increased and could
             materially adversely affect the Company.

         Lack of Patent Protection

             The Company does not presently have a patent for RETICULOSE but the
             Company has two patents for the use of RETICULOSE as a treatment.
             The Company currently has 32 patent applications pending with the
             U.S. Patent Office. 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.

         TESTING AGREEMENTS

         Plata Partners Limited Partnership

             On March 20, 1992, the Company entered into an agreement with Plata
             Partners Limited Partnership ("Plata") pursuant to which Plata
             agreed to perform a demonstration in the Domincan Republic in
             accordance with a certain agreed upon protocol (the "Protocol") to
             assess the efficacy of a treatment using RETICULOSE incorporated in
             the Protocol against AIDS (the "Plata Agreement"). Plata covered
             all costs and expenses associated with the demonstration.

             Pursuant to the Plata Agreement, the Company authorized the
             issuance to Plata of 5,000,000 shares of common stock and options
             to purchase an additional 5,000,000 shares at $.08 per share
             through July 9, 1994 (the "Plata Options") and 5,000,000 shares at
             $.10 per share through July 9, 1994 (the "Additional Plata
             Options"). Pursuant to several amendments, the Plata Options and
             the Additional Plata Options are exercisable through April 30, 1999
             at an exercise price of $.14 and $.16, respectively. As of
             September 30, 1998, there are outstanding Plata Options to acquire
             683,300 shares at $.14 per share and Additional Plata Options to
             acquire 108,100 shares at an exercise price of $.16 per share.
             Through September 30, 1998, the Company has received approximately
             $1,332,000 pursuant to the issuance of approximately 9.2 million
             shares in connection with the exercise of the Plata Options and the
             Additional Plata Options.

                                       F-56
ADVANCED VIRAL RESEARCH CORP.
                          (A Development Stage Company)

              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                                   (Continued)

NOTE 2.  COMMITMENTS AND CONTINGENCIES (Continued)

         TESTING AGREEMENTS (Continued)

         Argentine Agreement

             In April 1996, the Company entered into an agreement (the
             "Argentine Agreement") with DCT SRL, an Argentine corporation
             unaffiliated with the Company ("DCT") pursuant to which DCT was to
             cause a clinical trial to be conducted in two separate hospitals
             located in Buenos Aires, Argentina (the "Clinical Trials").
             Pursuant to the Argentine Agreement, the Clinical Trials were to be
             conducted pursuant to a protocol developed by Juan Carlos Flichman,
             M.D. and the purpose of the Clinical Trials was to assess the
             efficacy of the Company's drug RETICULOSE on the Human Papilloma
             Virus (HPV). The protocol calls for, among other things, a study to
             be performed with clinical and laboratory follow-up on 12 male and
             female human patients between the ages of 18 and 50. The Clinical
             Trials did not include a placebo control group or references to any
             other antiviral drug.

             Pursuant to the Argentine Agreement, the Company delivered $34,000
             to DCT to cover out-of-pocket expenses associated with the Clinical
             Trials. The Argentine Agreement further provides that at the
             conclusion of the Clinical Trials, DCT shall cause Dr. Flichman to
             prepare and deliver a written report to the Company regarding the
             methodology and results of the Clinical Trials (the "Written
             Report"). In September 1996, the Written Report was delivered by
             Dr. Flichman to the Company. Upon delivery of the Written Report to
             the Company, the Company delivered to the principals of DCT options
             to acquire 2,000,000 shares of the Company's common stock for a
             period of one year from the date of the delivery of the Written
             Report, at a purchase price of $.20 per share. Pursuant to several
             amendments, the DCT options are exercisable through April 30, 1999
             at an exercise price of $.21 per share. As of September 30, 1998,
             464,000 shares of common stock were issued pursuant to the exercise
             of these options for an aggregate exercise price of approximately
             $93,000.

             Additionally, in April 1998, 10,000 shares were issued in
             connection with the exercise of options at $.20 per share.

             In June 1994, DCT SRL and the Company entered into an exclusive
             distribution agreement whereby the Company granted to DCT, subject
             to certain conditions, the exclusive right to market and sell
             RETICULOSE in Argentina, Bolivia, Paraguay, Uruguay, Brazil, and
             Chile (the "DCT Exclusive Distribution Agreement").

             In April 1996, the Company entered into an agreement with DCT (the
             HIV-HPV Agreement") whereby the Company agreed to provide to DCT or
             its assignees, up to $600,000 to cover the costs of a double blind
             placebo controlled study in approximately 150 patients to assess
             the efficacy of RETICULOSE for the treatment of persons diagnosed
             with the HIV virus (AIDS) and HPV (the "HIV-HPV Study").
             Subsequently, the Company has agreed to advance additional funds
             towards such study.

                                       F-57
ADVANCED VIRAL RESEARCH CORP.
                          (A Development Stage Company)

              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                                   (Continued)

NOTE 2.  COMMITMENTS AND CONTINGENCIES (Continued)

         TESTING AGREEMENTS (Continued)

         Argentine Agreement (Continued)

             In connection with the HIV-HPV Agreement, the Company has advanced
             approximately $665,000 which is accounted for as a research and
             development expense. The amounts have been used to cover expenses
             associated with clinical activities of the HIV-HPV Study.

             The HIV-HPV Agreement provides that (i) in the event the data from
             the HIV-HPV Study is used in connection with RETICULOSE being
             approved for commercial sale anywhere within the territory granted
             under the DCT Exclusive Distribution Agreement or (ii) DCT receives
             financing to cover the costs of the HIV-HPV Study, then DCT is
             obligated to reimburse the Company for all amounts expended in
             connection with the HIV-HPV Study.

             In October 1997, the Company entered into two agreements with DCT,
             whereby the Company agreed to provide DCT or its assignees, up to
             $220,000 and $341,000 to cover the costs of double blind placebo
             controlled studies in approximately 360 and 240 patients,
             respectively to assess the efficacy of the topical application of
             RETICULOSE for the treatment of persons diagnosed with Herpes
             Labialis/Genital Infections (the "Herpes Study") and HPV (the "HPV
             Topical Study").

             In connection with the Herpes Study and the HPV Topical Study
             (collectively, the "Studies"), the Company has advanced
             approximately $58,000 and $132,500, respectively such expenses are
             accounted for as research and development expenses. The amounts
             expended have been used to cover expenses associated with
             pre-clinical activities. Neither the Herpes Study nor the HPV
             Topical Study has commenced.

             Both Agreements with DCT provide that (i) in the event the data
             from the Studies are used in connection with RETICULOSE being
             approved for commercial sale anywhere within the territory granted
             under the DCT Exclusive Distribution Agreement or (ii), DCT
             receives financing to cover the costs of the Studies, then DCT is
             obligated to reimburse the Company for all amounts respectively
             expended in connection with the Studies.

             In February 1995, the Company entered into an agreement with DCT
             (the "Concurrent Agreement") whereby the Company agreed to provide
             DCT or its assignees, up to $412,960 to cover the costs of a study
             in 65 patients to compare the results of treatment of patients with
             AIDS taking a three drug cocktail and RETICULOSE with those taking
             a three drug cocktail and a placebo. As of September 30, 1998, the
             Company has advanced approximately $50,000 for such study which has
             been accounted for as research and development expense.

             In May 1998, the Company entered into an agreement with DCT (the
             "Rheumatoid Arthritis Agreement") whereby the Company agreed to
             provide DCT or its assignees, up to $94,950 to cover the costs of a
             controlled study in 30 patients to determine the efficacy of
             RETICULOSE for the treatment of rheumatoid arthritis in humans. In
             connection with this study, the Company has advanced approximately
             $79,200 which has been accounted for as research and development
             expenses.

                                       F-58
ADVANCED VIRAL RESEARCH CORP.
                          (A Development Stage Company)

              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                                   (Continued)

NOTE 2.  COMMITMENTS AND CONTINGENCIES (Continued)

         TESTING AGREEMENTS (Continued)

         Argentine Agreement (Continued)

             In July 1998, the Company authorized expenditures of up to $90,000
             to study the effects of RETICULOSE in inhibiting the mutation of
             the AIDS virus. As of September 30, 1998, the Company has advanced
             approximately $50,000 for such study which has been accounted for
             as research and development expense.

         Barbados Study

             A double blind study assessing the efficacy of the Company's drug
             RETICULOSE in 43 human patients diagnosed with HIV (AIDS) is being
             conducted at the Queen Elizabeth Hospital, Bridgetown, Barbados
             (the "Barbados Study"). As of September 30, 1998, the Company has
             expended approximately $365,000 to cover the costs of the Barbados
             Study. Based on information received from the coordinators of the
             Barbados Study, the Company is uncertain as to the costs to be
             incurred in connection with the Barbados Study and has not been
             informed as to when results from the Barbados Study will be
             forthcoming. In December 1996, the Company received from the
             coordinators of the Barbados Study, a written summary of
             preliminary results of the Barbados Study (the "Written Summary").

             In July 1998, the Company authorized expenditures of up to $45,000
             to study the effects of RETICULOSE in inhibiting the mutation of
             the AIDS virus. As of September 30, 1998, the Company has advanced
             approximately $5,000 for such study which has been accounted for as
             research and development expense.

         National Cancer Institute Agreement

             In March 1997, the Company entered into a Material Transfer
             Agreement - Cooperative Research and Development Agreement with the
             National Cancer Institute ("NCI") of the National Institutes of
             Health. Under the terms of the Agreement, NCI researchers and the
             Company will collaborate to elucidate the molecular mechanism by
             which RETICULOSE affects the transcription of the gamma interferon
             gene. This agreement was extended for an additional one year term
             through March 3, 1999 to investigate the anti-tumor activity of
             RETICULOSE using kidney tumor model systems. In addition, NCI will
             study the effects of RETICULOSE on inflammation associated with
             rheumatoid arthritis.

         Topical Safety Study

             As of September 30, 1998, the Company advanced approximately
             $170,000 for a topical safety study to be conducted in the United
             States for the topical use of RETICULOSE for the treatment of HPV
             and herpes.

                                       F-59
ADVANCED VIRAL RESEARCH CORP.
                          (A Development Stage Company)

              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                                   (Continued)

NOTE 2.  COMMITMENTS AND CONTINGENCIES (Continued)

         CONSULTING 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 $.18 per
             share. In addition and in connection with entering into the
             consulting agreement with Dr. Hirschman, the Company issued to a
             person unaffiliated with the Company, 100,000 shares of the
             Company's common stock, and an option to acquire for a period of
             one year, from June 1, 1995, an additional 500,000 shares at a
             purchase price of $.18 per share. As of September 30, 1998, 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 March 23, 1999 at an
             exercise price of $.19 per share, of which options to acquire
             500,000 shares were assigned by Dr. Hirschman to Richard Rubin,
             consultant to Dr. Hirschman; (ii) options to purchase 5,000,000
             shares exercisable at any time and from time to time commencing
             March 24, 1997 and ending March 23, 1999 at an exercise price of
             $.27 per share, of which options to acquire 500,000 shares were
             assigned by Dr. Hirschman to Richard Rubin, consultant to Dr.
             Hirschman; and (iii) options to purchase 5,000,000 shares
             exercisable at any time and from time to time commencing March 24,
             1998 and ending March 23, 1999 at an exercise price of $.36 per
             share, of which options to acquire 500,000 shares were assigned by
             Dr. Hirschman to Richard Rubin, consultant to Dr. Hirschman. 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. As of September 30, 1998, 500,000 shares of common stock
             were issued pursuant to the exercise of stock options by Richard
             Rubin. Mr. Rubin has, from time to time in the past, advised the
             Company on matters unrelated to his consultation with Dr.
             Hirschman.

                                       F-60
ADVANCED VIRAL RESEARCH CORP.
                          (A Development Stage Company)

              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                                   (Continued)

NOTE 2.  COMMITMENTS AND CONTINGENCIES (Continued)

         CONSULTING AGREEMENTS (Continued)

         Hirschman Agreement (Continued)

             In November 1997, Dr. Hirschman assigned to Henry Kamioner, a
             consultant to Dr. Hirschman, options to acquire 1,500,000 shares
             (500,000 at $19,500,000 at $.27 and 500,000 at $.36).

             On October 14, 1996, the Company and Dr. Hirschman entered into an
             agreement (the "Employment Agreement") whereby Dr. Hirschman has
             agreed to serve as the President and Chief Executive Officer of the
             Company for a period of three years, subject to earlier termination
             by either party, either for cause as defined in and in accordance
             with the provisions of the Employment Agreement, or if the Company
             do not receive on or prior to December 31, 1997, funding of
             $3,000,000 from sources other than traditional institutional/bank
             debt financing or proceeds from the purchase by Dr. Hirschman of
             the Company's securities, including, without limitation, the
             exercise of Dr. Hirschman of outstanding stock options. Pursuant to
             the Employment Agreement, Dr. Hirschman is entitled to receive an
             annual base salary of $325,000, use of an automobile, major
             medical, term life, disability and dental insurance benefits for
             the term of his employment. The Employment Agreement further
             provides that Dr. Hirschman shall be nominated by the Company to
             serve as a member of the Company's Board of Directors and that
             Bernard Friedland and William Bregman will vote in favor of Dr.
             Hirschman as a director of the Company, for the duration of Dr.
             Hirschman's employment, and since October 1996, Dr. Hirschman has
             served as a member of the Company's Board of Directors.

             On February 18, 1998, the Board of Directors authorized a $100,000
             bonus to Dr. Hirschman and granted options to acquire 23,000,000
             shares of stock at $0.27 per option share provided that the Company
             is granted FDA approval for testing in the United States.

             In July 1998, the Company and Dr. Hirschman entered into an amended
             and restated employment agreement which supersedes in its entirety
             the original employment agreement of October 1996. Such amendment
             and restatement extends the term of the employment agreement to
             December 31, 2000. Additionally, the February 1998 Board of
             Directors action regarding the $100,000 bonus and the granting of
             23,000,000 options (contingent upon the occurrence of certain
             events) is included in this employment agreement.

                                       F-61
ADVANCED VIRAL RESEARCH CORP.
                          (A Development Stage Company)

              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                                   (Continued)

NOTE 2.  COMMITMENTS AND CONTINGENCIES (Continued)

         CONSULTING AGREEMENTS (Continued)

         Cohen Agreements

             In September 1992, the Company entered into a one year consulting
             agreement with Leonard Cohen (the "September 1992 Cohen
             Agreement"). The September 1992 Cohen Agreement required that Mr.
             Cohen provide certain consulting services to the Company in
             exchange for the Company's issuing to Mr. Cohen 1,000,000 shares of
             common stock (the "September 1992 Cohen Shares"), 500,000 of which
             were issuable upon execution of the September 1992 Cohen Agreement
             and the remaining 500,000 shares of which were issuable upon Mr.
             Cohen completing 50 hours of consulting service to the Company. The
             Company issued the first 500,000 shares to Mr. Cohen in October
             1992 and the remaining 500,000 shares to Mr. Cohen in February
             1993. Further pursuant to the September 1992 Cohen Agreement, the
             Company granted to Mr. Cohen the option to acquire, at any time and
             from time to time through September 10, 1993 (which date has been
             extended through April 30, 1999), the option to acquire 3,000,000
             shares of common stock of the Company at an exercise price of $.09
             per share (which exercise price has been increased to $.15 per
             share) (the "September 1992 Cohen Options"). As of September 30,
             1998, 1,300,000 of the September 1992 Cohen Options have been
             exercised for cash consideration of $156,000.

             In February 1993, the Company entered into a second consulting
             agreement with Mr. Cohen (the "February 1993 Cohen Agreement") for
             a three year term commencing on March 1, 1993. The February 1993
             Cohen Agreement provides that Mr. Cohen provide financing business
             consulting services concerning the operations of the business of
             the Company and possible strategic transactions in exchange for the
             Company issuing to Mr. Cohen 3,500,000 shares of common stock (the
             "February 1993 Cohen Shares"), 1,500,000 shares of which Mr. Cohen
             has informed the Company he has assigned to certain other persons
             not affiliated with the Company or any of its officers or
             directors.

             In July 1994, in consideration for services related to the
             introduction, negotiation and execution of a distribution agreement
             the Company issued: (i) to Mr. Cohen, an additional 2,500,000
             shares (the "April 1994 Cohen Shares") and (ii) to each of Elliot
             Bauer and Lee Rizzuto, 625,000 shares (the "Bauer and Rizzuto
             Shares") as well as options to acquire an additional 5,000,000
             shares each at $.10 per share exercisable through May 1, 1996 (the
             "Bauer and Rizzuto Options"). The Company has been informed that
             Messrs. Cohen, Bauer and Rizzuto are principals of a firm which has
             been granted certain distribution rights, which were terminated on
             May 31, 1995. Through September 30, 1998, 2,855,000 shares were
             issued pursuant to the exercise of the Bauer and Rizzuto Options
             for an aggregate exercise price of $285,500. Mr. Rizzuto sold all
             of his shares and all shares underlying his options. Pursuant to
             several amendments, the remaining Bauer options are exercisable
             through April 30, 1999 at an option price of $.13. The Company
             agreed to issue to Cohen an additional 300,000 shares in 1995 at a
             time when the shares were valued at $.14 per share, in
             consideration for expenditures incurred by Mr. Cohen in connection
             with securing for the benefit of the Company and the affiliated
             distributor, the continued services of a doctor.

                                       F-62
ADVANCED VIRAL RESEARCH CORP.
                          (A Development Stage Company)

              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                                   (Continued)

NOTE 2.  COMMITMENTS AND CONTINGENCIES (Continued)

         CONSULTING AGREEMENTS (Continued)

         Cohen Agreements (Continued)

             The issuance of the September 1992 Cohen Shares, the February 1993
             Cohen Shares, the April 1994 Cohen Shares and the Bauer and Rizzuto
             Shares have been accounted for as an administrative expense in the
             amount of the Company's valuation of such shares as of the issuance
             date. During the year ended December 31, 1996, Mr. Cohen was issued
             300,000 shares for services rendered. These shares were accounted
             for as an administrative expense in the amount of the Company's
             valuation of such shares as of the issuance date.

         Chinnici Agreement

             In July 1998, the Company entered into a consulting agreement with
             Dr. Angelo A. Chinnici for a term extending to December 31, 2000.
             Such agreement calls for Dr. Chinnici to provide assistance in
             connection with research, development, production, marketing and
             sale of RETICULOSE. Additionally, Dr. Chinnici will testify before
             the FDA in connection with an application for approval of
             RETICULOSE and will provide detailed clinical reports regarding
             patients observed by him. Dr. Chinnici will receive options to
             purchase 300,000 shares at an exercise price of $.30 per share. The
             options will be exercisable in equal installments on January 1,
             1999 and 2000 and December 15, 2000.

         DISTRIBUTION AGREEMENTS

         The Company currently is a party to separate agreements with four
         different entities (the "Entities"), whereby the Company has granted
         exclusive rights to distribute RETICULOSE in the countries of China,
         Japan, Macao, Hong Kong, Taiwan, Mexico, Argentina, Bolivia, Paraguay,
         Uruguay, Brazil, Chile, Channel Islands, The Isle of Man, British West
         Indies, Jamaica, Haiti, Bermuda, Belize and Saudi Arabia. Pursuant to
         these agreements, distributors are obligated to cause RETICULOSE to be
         approved for commercial sale in such countries and upon such approval,
         to purchase from the Company certain minimum quantities of RETICULOSE
         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. No sales have been made by the
         Company under the distribution agreements other than for testing
         purposes.

         Additionally, pursuant to one of the distributions agreements, the
         Company granted the distributor the right to acquire 3,000,000 shares
         of the Company's common stock at a purchase price of $.25 (which has
         been increased to $.26) upon the completion of certain tests and the
         publication of a paper with respect to such tests. During May 1998,
         300,000 shares of common stock were issued pursuant to exercise of
         these options for an aggregate exercise price of $78,000.

                                       F-63
ADVANCED VIRAL RESEARCH CORP.
                          (A Development Stage Company)

              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                                   (Continued)

NOTE 3.  CONVERTIBLE DEBENTURES

         In February 1997 and October 1997, in order to finance research and
         development, the Company sold $1,000,000 and $3,000,000, respectively,
         principal amount of its ten-year 7% Convertible Debentures (the
         "February Debenture" and the "October Debenture", collectively, the
         "Debentures") due February 28, 2007 and August 30, 2007, respectively,
         to RBB Bank Aktiengesellschaft ("RBB") in offshore transactions
         pursuant to Regulation S under the Securities Act of 1933, as amended.
         Accrued interest under the Debentures was payable semi-annually,
         computed at the rate of 7% per annum on the unpaid principal balance
         from the date of issuance until the date of interest payment. The
         Debentures were convertible, at the option of the holder, into shares
         of Common Stock pursuant to specified formulas. On April 22, 1997, June
         6, 1997, July 3, 1997 and August 20, 1997, pursuant to notice by the
         holder, RBB, to the Company under the February Debenture, $330,000,
         $134,000, $270,000 and $266,000, respectively, of the principal amount
         of the February Debenture was converted into 1,648,352, 894,526,
         2,323,580 and 1,809,524 shares of the Common Stock, respectively. As of
         August 20, 1997, the February Debenture was fully converted. On
         December 9, 1997, January 7, 1998, January 14, 1998, February 19, 1998,
         February 23, 1998, March 31, 1998, May 4, 1998 and May 5, 1998,
         pursuant to notice by the holder, RBB, to the Company, $120,000,
         $133,000, $341,250, $750,000, $335,750, $425,000, $275,000 and
         $620,000, respectively, of the October Debenture was converted into
         772,201, 1,017,011, 2,512,887, 5,114,218, 1,498,884, 1,870,869,
         1,491,485 and 3,299,979 Common Stock, respectively. As of May 5, 1998,
         the October Debenture was fully converted.

         In connection with the issuance of the February Debenture, the Company
         issued to RBB three warrants (the "February Warrants") to purchase
         common stock, each such February Warrant entitling the holder to
         purchase, from February 21, 1997 through February 28, 2007, 178,378
         shares of common stock. The exercise price of the three February
         Warrants are $0.288, $0.576 and $0.864 per warrant share, respectively.
         The fair value of the February Warrants was estimated to be $37,000
         ($.021 per warrant) based upon a financial analysis of the terms of the
         warrants using the Black Sholes Pricing Model. This amount has been
         reflected in the accompanying financial statements as interest expense
         related to the convertible February Debenture.

         Based on the terms for conversion associated with the February
         Debenture, there is an intrinsic value associated with the beneficial
         conversion feature of $413,793. This amount has been fully amortized to
         interest expense with a corresponding credit to additional paid-in
         capital.

         In connection with the issuance of the October Debenture, the Company
         issued to RBB three warrants (the "October Warrants") to purchase
         Common Stock, each such October Warrant entitling the holder to
         purchase, from the date of grant through August 30, 2007, 600,000
         shares of the Common Stock. The exercise price of the three October
         Warrants are $0.20, $0.23 and $0.27 per warrant share, respectively.
         The fair value of the three October Warrants was established to be
         $106,571 ($.178 per warrant), $97,912 ($.163 per warrant) and $87,472
         ($.146 per warrant), respectively, based upon a financial analysis of
         the terms of the warrants using the Black Sholes Pricing Model. This
         amount has been reflected in the accompanying financial statements as a
         discount on the convertible debenture, with a corresponding credit to
         additional paid-in capital, and is being amortized over the expected
         term of the notes which at December 31, 1997 was 120 months. In May
         1998, the remaining unamortized discount of $276,957 was amortized upon
         full conversion of the October Debenture.

                                       F-64
ADVANCED VIRAL RESEARCH CORP.
                          (A Development Stage Company)

              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                                   (Continued)

NOTE 3.  CONVERTIBLE DEBENTURES (Continued)

         Based on the terms for conversion associated with the October
         Debenture, there is an intrinsic value associated with the beneficial
         conversion feature of $1,350,000. This amount has been treated as
         deferred interest expense and recorded as a reduction of the
         convertible debenture liability with a corresponding credit to
         additional paid-in capital and has been amortized to interest expense
         over the period from October 8, 1997 (date of debenture) to February
         24, 1998 (date the debenture is fully convertible). The interest
         expense relative to this item was $1,139,049 for 1997 and $210,951
         during the quarter ended March 31,1998.

                                       F-65
=====================================================================

                          ADVANCED VIRAL RESEARCH CORP.

                              --------------------
                                   PROSPECTUS
                              --------------------

                        49,700,731 SHARES OF COMMON STOCK

                               _____________, 1999

     =====================================================================
PART II
                   INFORMATION NOT REQUIRED IN THE PROSPECTUS

Item 13.  Other Expenses of Issuance and Distribution.

         The following table sets forth the various expenses in connection with
the sale and distribution of the securities being registered, which will be paid
solely by the Company. All amounts shown are estimates, except the Commission
registration fee:

         Commission registration fee.................................... $ 2,700
         Printing and mailing expenses....................................$5,000
         Legal fees and expenses.........................................$25,000
         Accounting fees and expenses....................................$10,000
                                                                        --------
                  Total................................................  $42,700
                                                                        ========

Item 14.  Indemnification of Directors and Officers

         Article Ninth of the Company's Certificate of Incorporation contains
the following provision with respect to indemnification of Directors and
Officers:

         Ninth: 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.

         Section 145 of the General Corporate Law of the State of Delaware (the
"DGCL") contains provisions regarding indemnification, among others, of officers
and directors. Section 145 of the DGCL provides in relevant part:

                  (a) A corporation shall have power to indemnify any person who
         was or is a party or is threatened to be made a party to any
         threatened, pending or completed action, suit or proceeding, whether
         civil, criminal, administrative or investigative (other than an action
         by or in the right of the corporation) by reason of the fact that the
         person is or was a director, officer, employee or agent of the
         corporation, or is or was serving at the request of the corporation as
         a director, officer, employee or agent of another corporation,
         partnership, joint venture, trust or other enterprise, against expenses
         (including attorneys' fees), judgments, fines and amounts paid in
         settlement actually and reasonably incurred by the person in connection
         with such action, suit or proceeding if the person acted in good faith
         and in a manner the person reasonably

                                      II-1
believed to be in or not opposed to the best interests of the
         corporation, and, with respect to any criminal action or proceeding,
         had no reasonable cause to believe the person's conduct was unlawful.
         The termination of any action, suit or proceeding by judgment, order,
         settlement, conviction, or upon a plea of nolo contendere or its
         equivalent, shall not, of itself, create a presumption that the person
         did not act in good faith and in a manner which the person reasonably
         believed to be in or not opposed to the best interests of the
         corporation, and, with respect to any criminal action or proceeding,
         had reasonable cause to believe that the person's conduct was unlawful.

                  (b) A corporation shall have power to indemnify any person who
         was or is a party or is threatened to be made a party to any
         threatened, pending or completed action or suit by or in the right of
         the corporation to procure a judgment in its favor by reason of the
         fact that the person is or was a director, officer, employee or agent
         of the corporation, or is or was serving at the request of the
         corporation as a director, officer, employee or agent of another
         corporation, partnership, joint venture, trust or other enterprise
         against expenses (including attorneys' fees) actually and reasonably
         incurred by the person in connection with the defense or settlement of
         such action or suit if the person acted in good faith and in a manner
         the person reasonably believed to be in or not opposed to the best
         interests of the corporation and except that no indemnification shall
         be made in respect of any claim, issue or matter as to which such
         person shall have been adjudged to be liable to the corporation unless
         and only to the extent that the Court of Chancery or the court in which
         such action or suit was brought shall determine upon application that,
         despite the adjudication of liability but in view of all the
         circumstances of the case, such person is fairly and reasonably
         entitled to indemnity for such expenses which the Court of Chancery or
         such other court shall deem proper.

                  (c) To the extent that a present or former director or officer
         of a corporation has been successful on the merits or otherwise in
         defense of any action, suit or proceeding referred to in subsections
         (a) and (b) of this section, or in defense of any claim, issue or
         matter therein, such person shall be indemnified against expenses
         (including attorneys' fees) actually and reasonably incurred by such
         person in connection therewith.

                  (d) Any indemnification under subsections (a) and (b) of this
         section (unless ordered by a court) shall be made by the corporation
         only as authorized in the specific case upon a determination that
         indemnification of the present or former director, officer, employee or
         agent is proper in the circumstances because the person has met the
         applicable standard of conduct set forth in subsections (a) and (b) of
         this section. Such determination shall be made , with respect to a
         person who is a director or officer at the time of such determination,
         (1) by a majority vote of the directors who are not parties to such
         action, suit or proceeding, even though less than a quorum, or (2) by a
         committee of such directors designated by majority vote of such
         directors, even though less than a quorum, or (3) if there are no such
         directors, or if such directors so direct, by independent legal counsel
         in a written opinion, or (4) by the stockholders.

                                      II-2
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 DGCL.

         The Company's Certificate of Incorporation was amended on December 30,
1987, to limit or eliminate director liability by incorporating new Article
Eleventh, 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 the Company's Certificate of Incorporation is
not intended to be exhaustive and is respectively qualified in its entirety by
such document.

Item 15.  Recent Sales of Unregistered Securities

         The following table sets forth the Company's sales of unregistered
securities for past three years. All transactions listed below involved the
issuance of Common Stock and options to acquire Shares of Common Stock prior to
commencement of the offering described in the foregoing Prospectus. No
underwriters were employed with respect to the sale of any of the securities
listed below. All shares were issued in reliance upon Section 4(2) and/or 3(b)
of the Securities Act.
Securities Issued                Purchaser                        Date Acquired       Consideration
-----------------                ---------                        -------------       -------------
5,000,000 options                Shalom Z. Hirschman, M.D.        4-1-96              Services (Consulting)(1)
   exercisable at each of
   $.18, $.19, $.27 and $.36
   per share
500,000 options                  Deborah Silver                   4-1-96              Services (Consulting)(1)
   exercisable at $.18 per
   share
1,000,000 options                Freddie Velez                    4-1-96              Services (Consulting)(1)
   exercisable at $.20 per
   share
500,000 options                  Gary Hussian                     4-1-96              Services (Consulting)(1)
   exercisable at $.20 per
   share
500,000 options                  Cesar Blumtritt, M.D.            4-1-96              Services (Consulting)(1)
   exercisable at $.20 per
   share
50,000 shares                    Malcolm Santer                   9-4-96              Services (Consulting)(2)
50,000 shares                    Malcolm Santer                   2-26-97             Services (Consulting)(2)
750,000 shares                   David Sass                       3-21-97             .08
375,000 shares                   Norman Schwartz                  3-21-97             .08
II-3
Securities Issued                Purchaser                        Date Acquired       Consideration
-----------------                ---------                        -------------       -------------
375,000 shares                   Mel Mendelson                    3-21-97             .08
1,833,333 shares                 Matthew Cohen                    3-21-97             .08
1,648,352 shares                 RBB Bank                         4-22-97             .20(3)
894,526 shares                   RBB Bank                         6-6-97              .15(3)
2,323,580 shares                 RBB Bank                         7-3-97              .12(3)
1,809,524 shares                 RBB Bank                         8-20-97             .15(3)
100,000 shares                   Malcolm Santer                   9-8-97              Services (Consulting)(4)
722,701 shares                   RBB Bank                         12-9-97             .16(5)
1,017,011 shares                 RBB Bank                         1-7-98              .13(5)
2,512,887 shares                 RBB Bank                         1-14-98             .14(5)
23,000,000 options               Shalom Z. Hirschman, M.D.        2-18-98             (6)
   exercisable at $.27
   per share
5,114,218 shares                 RBB Bank                         2-23-98             .15(5)
190,000 shares                   Plata                            3-5-98              .12 per share
1,498,884 shares                 RBB Bank                         3-19-98             .22(5)
105,000 shares                   Plata                            3-27-98             .12 per share
1,870,869 shares                 RBB Bank                         3-31-98             .23(5)
10,000 shares                    Velez                            4-3-98              .20 per share
200,000 shares                   Charles                          4-3-98              .14 per share
1,491,485 shares                 RBB Bank                         5-4-98              .18(5)
3,299,979 shares                 RBB Bank                         5-5-98              .19(5)
50,000 shares                    Charles Miller                   5-13-98             .16 per share
200,000 shares                   Duffy                            5-13-98             .14 per share
100,000 shares                   Charles Miller                   5-13-98             .14 per share
100,000 shares                   Charles Miller                   5-18-98             .16 per share
200,000 shares                   Commonwealth                     5-18-98             .26 per share
100,000 shares                   Commonwealth                     5-22-98             .26 per share
100,000 shares                   Charles Miller                   6-22-98             .16 per share
85,000 shares                    Charles Miller                   7-15-98             .16 per share
15,000 shares                    Charles Miller                   7-17-98             .16 per share
25,000 shares                    Charles Miller                   7-22-98             .16 per share
75,000 shares                    Charles Miller                   7-24-98             .16 per share
100,000 shares                   Malcolm Santer                   8-12-98             Services (Consulting)(7)
------------------------
(1) The 1,700,000 shares issued for consulting services on 5-24-95 and 6-23-95
    have been valued at $.11 per share.
(2) The 50,000 shares issued for consulting services on 9-4-96 and 2-26-97 have
    been valued at $.50 per share and $.41 per share, respectively.
(3) The conversions were made pursuant to the February 21, 1997 issuance of
    convertible debentures.
(4) The 100,000 shares issued for consulting services on 9-8-97 have been valued
    at $.24 per share.
(5) The conversions were made pursuant to the October 1997 issuance of
    convertible debentures.
(6) Granted pursuant to Dr. Hirshman's Restated Employment Agreement.
(7) The 100,000 shares issued for consulting services on 8-12-98 have been
    valued at $.21 per share.

                      [This Space Intentionally Left Blank]

                                      II-4
Item 16.  Exhibits and Financial Statement Schedules

         (a)  Exhibits

 Exhibit No.      Description
 -----------      -----------
     3.1          Articles of Incorporation of Advanced Viral Research Corp.(2)
     3.2          Bylaws of Advanced Viral Research Corp., as amended(1)
     3.3          Amendment to Articles of Incorporation of Advanced Viral
                  Research Corp.(2)
     4.1          Specimen Certificate of Common Stock(1)
     4.2          Specimen Warrant Certificate(1)
     4.3          Warrant Agreement between the Company and American Stock
                  Transfer and Trust Company(1)
     4.4          Forms of Common Stock Options and Agreements granted by the
                  Company to TRM Management Corp.(5)
     4.5          Form of Common Stock Option and Agreement granted by the
                  Company to Plata Partners Limited Partnership(12)
     4.6          Consulting Agreement, dated September 11, 1992, and Form of
                  Common Stock granted by the Company to Leonard Cohen(6)
     4.7          Addendum to Agreement granted by the Company to Shalom Z.
                  Hirschman, M.D. dated March 24, 1996(10)
     4.8          Securities Purchase Agreement dated November 16, 1998, by and
                  between the Company 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 $.20 per share.(11)(o)
     4.11         Warrant dated November 16, 1998 to purchase 375,000 shares of
                  common stock at $.24 per share.(11)(o)
     4.12         Securities Purchase Agreement dated December 22, 1998, by and
                  between the Company and various purchasers.*
     4.12         Form of Warrant dated December 22, 1998 to purchase shares of
                  common stock of the Company at $.2040 per share.*
     4.14         Form of Warrant dated December 22, 1998 to purchase shares of
                  common stock of the Company at $.2448 per share.*
     5.1          Opinion and Consent of the law firm of Berman Wolfe & Rennert,
                  P.A. **
     10.1         Declaration of Trust by Bernard Friedland and William Bregman
                  in favor of the Company dated November 16, 1987(12)
     10.2         Clinical Trials Agreement, dated September 19, 1990, between
                  Clinique Medical Actuel and the Company(3)
     10.3         Letter, dated March 15, 1991 to the Company from Health
                  Protection Branch(3)
     10.4         Agreement dated August 20, 1991 between TRM Management Corp.
                  and the Company(11)(a
     10.5         Lease dated December 18, 1991 between Bayview Associates, Inc.
                  and the Company(4)
     10.6         Lease Agreement, dated February 16, 1993 between Stortford
                  Brickell Inc. and the Company(7)
     10.7         Consulting Agreement dated February 28, 1993 between Leonard
                  Cohen and the Company(8)
     10.8         Medical Advisor Agreement, dated as of September 14, 1993,
                  between Lionel Resnick, M.D. and the Company(11)(b)
     10.9         Agreement, dated November 9, 1993, between Dormer Laboratories
                  Inc. and the Company(12)
     10.10        Exclusive Distribution Agreement, dated April 25, 1994,
                  between C.U.R.E. Pharmaceutical Corp. and the Company(11)(c)
     10.11        Exclusive Distribution Agreement, dated as of June 1, 1994,
                  between C.U.R.E. Pharmaceutica Central Americas Ltd. and the
                  Company(11)(d
     10.12        Exclusive Distribution Agreement dated as of June 17, 1994
                  between DCT S.R.L. and the Company, as amended(11)(e)
     10.13        Contract, dated as of October 25, 1994 between Commonwealth
                  Pharmaceuticals of the Channel Islands and the Company(11)(f)
     10.14        Agreement dated May 24, 1995 between the Company and Deborah
                  Silver(9)
     10.15        Agreement dated May 29, 1995 between the Company and Shalom Z.
                  Hirschman, M.D.(9)
     10.16        Exclusive Distribution Agreement, dated as of June 2, 1995,
                  between AVIX International Pharmaceutical Corp. and the
                  Company(12)
     10.17        Supplement to Exclusive Distribution Agreement, dated November
                  2, 1995 with Commonwealth Pharmaceuticals(12)

                                      II-5
10.18        Exclusive Distributorship & Limited License Agreement, dated
                  December 28, 1995, between AVIX International Pharmaceutical
                  Corp., Beijing Unistone Pharmaceutical Co., Ltd. and the
                  Company(11)(g)
     10.19        Modification Agreement, dated December 28, 1995, between AVIX
                  International Pharmaceutical Corp. and the Company(11)(g)
     10.20        Agreement dated April 1, 1996, between DCT S.R.L. and the
                  Company(11)(h)
     10.21        Addendum, dated as of March 24, 1996, to Consulting Agreement
                  between the Company and Shalom Z. Hirschman, M.D.(10)
     10.22        Addendum to Agreement, dated July 11, 1996, between AVIX
                  International Pharmaceutical Corp. and the Company(11)(i)
     10.23        Employment Agreement, dated October 17, 1996, between the
                  Company and Shalom Z. Hirschman, M.D.(11)(j)
     10.24        Lease, dated February 7, 1997 between Robert Martin Company,
                  LLC and the Company(12) 10.25 Copy of Purchase and Sale
                  Agreement, dated February 21, 1997 between the Company 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 the Company 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 the Company and Shalom Z. Hirschman, M.D.(11)(n)
     10.30        Agreement between the Company and Angelo Chinnici, M.D.**
     21.1         Subsidiaries of Registrant -- Advance Viral Research Limited,
                  a Bahamian corporation.
     23.1         Consent of Rachlin Cohen & Holtz, Independent Certified Public
                  Accountants*
     23.2         Consent of the law firm of Berman Wolfe & Rennert, P.A. (See
                  Exhibit 5.1).
     23.3         Consent of the law firm of Nottage, Miller & Co.*
     27.1         Financial Data Schedule for the Company as of and for the Nine
                  Months Ended September 30, 1997*

---------------
*    Filed herewith.
**   To be filed by amendment.

                                      II-6
1.   Documents incorporated by reference herein to certain exhibits the
     Company's 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 the
     Company's 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 the
     Company's Annual Report on Form 10-K for the fiscal year ended December 31,
     1990.
4.   Documents incorporated by reference herein to certain exhibits to the
     Company's Annual Report on Form 10-K for period ended March 31, 1991.
5.   Documents incorporated by reference herein to certain exhibits to the
     Company's Annual Report on Form 10-K for the fiscal year ended December 31,
     1991.
6.   Documents incorporated by reference herein to certain exhibits to the
     Company's report on Form 10-Q for the period ended September 30, 1992.
7.   Documents incorporated by reference herein to certain exhibits to the
     Company's Annual Report on Form 10-KSB for the fiscal year ended December
     31, 1992.
8.   Documents incorporated by reference herein to certain exhibits to the
     Company's report on Form 10-QSB for the period ended March 31, 1993.
9.   Documents incorporated by reference herein to certain exhibits to the
     Company's report on Form 10-QSB for the period ended June 30, 1995.
10.  Documents incorporated by reference herein to certain exhibits to the
     Company's report on Form 10-QSB for the period ended March 31, 1996.
11.  Incorporated by reference herein to the Company's 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.
12.  Documents incorporated by reference herein to certain exhibits to the
     Company's Annual Report on Form 10-KSB for the fiscal year ended December
     31, 1996.
13.  Documents incorporated by reference herein to certain exhibits to the
     Company's Annual Report on Form 10-KSB for the fiscal year ended December
     31, 1997.

     (b) Financial Statement Schedules

     All schedules have been omitted because they are not applicable or not
required or the required information is included in the financial statements or
notes thereto.

                                      II-7
Item 17.  Undertakings

       The undersigned registrant hereby undertakes:

       (1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:

                  (i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;

                  (ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.

                  (iii) To include any material with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;

         (2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.

         (3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.

         Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provision described under Item 20 or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.

                                      II-8
SIGNATURES

         Pursuant to the requirements of the Securities Act of 1933, the Company
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Yonkers, State of New York, on January 12, 1999.

                                      ADVANCED VIRAL RESEARCH CORP.

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

         In accordance with the requirements of the Securities Act of 1933, as
amended, this Registration Statement on Form S-1 has been signed herein below by
the following persons in the capacities and on the dates indicated.
Signature                                      Title                                    Date
---------                                      -----                                    ----
/s/ Shalom Z. Hirschman, M.D                   President and Chief                      January 12, 1999
-----------------------------------            Executive Officer and director
Shalom Z. Hirschman, M.D.

/s/ Bernard Friedland                          Chairman of the Board and                January 12, 1999
-----------------------------------            director
Bernard Friedland

/s/ William Bregman                            Secretary-Treasurer,                     January 12, 1999
-----------------------------------            Principal Financial and
William Bregman                                Accounting Officer, director

/s/ Louis J. Silver                            director                                 January 12, 1999
-----------------------------------
Louis J. Silver
II-9
INDEX TO EXHIBITS

         Exhibit
         Number            Description
         ------            -----------
         4.12              Securities Purchase Agreement dated December 22,
                           1998, by and between the Company and various
                           purchasers
         4.13              Form of Warrant dated December 22, 1998 to purchase
                           shares of common stock of the Company at $.2040 per
                           share
         4.14              Form of Warrant dated December 22, 1998 to purchase
                           shares of common stock of the Company at $.2448 per
                           share
         23.1              Consent of Rachlin Cohen & Holtz, Independent
                           Certified Public Accountants
         23.3              Consent of the law firm of Nottage, Miller & Co.
         27.1              Financial Data Schedule for the Company as of and for
                           the Nine Months Ended September 30, 1998