VIRAGEN INC, 10-K, 1997-10-02

VIRAGEN INC
10-K, 1997-10-02
BIOLOGICAL PRODUCTS, (NO DIAGNOSTIC SUBSTANCES)

Previous: COMTEX SCIENTIFIC CORP, S-8, 1997-10-02

Next: ICO INC, 8-K/A, 1997-10-02

<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K
(MARK ONE)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

FOR THE FISCAL YEAR ENDED JUNE 30, 1997

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

For the transition period from ______________ to ___________
Commission file number 0-10252

VIRAGEN, INC.
(Exact name of registrant as specified in its charter)

DELAWARE 59-2101668
(State or other jurisdiction of (I.R.S. Employer
incorporated or organization) Identification No.)

865 SW 78TH AVENUE, SUITE 100, PLANTATION, FLORIDA 33324
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (954) 233-8746
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

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

The aggregate market value of the voting stock held by non-affiliates
of the registrant based upon the closing price of the common stock on September
18, 1997 was approximately $108,955,000

As of September 18, 1997, the Company had outstanding 48,441,127 shares
of common stock.

DOCUMENTS INCORPORATED BY REFERENCE

Registration Statement on form S-3, File No. 333-25187, dated April 21,
1997 - Part IV, Exhibits.

<PAGE> 2
VIRAGEN, INC. AND SUBSIDIARIES

INDEX TO ANNUAL REPORT ON FORM 10-K
YEAR ENDED JUNE 30, 1997

PART I
<TABLE>
<CAPTION>

PAGE
<S> <C>

Item 1. Business.......................................................... 1

Item 2. Properties........................................................ 10

Item 3. Legal Proceedings................................................. 11

Item 4. Submission of Matters to a Vote of Security Holders............... 11

PART II

Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters....................................... 11

Item 6. Selected Financial Data........................................... 13

Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................... 13

Item 8. Financial Statements and Supplementary Data....................... 19

Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures......................................... 19

PART III

Item 10. Directors and Executive Officers of the Registrant............... 19

Item 11. Executive Compensation and Employment Agreements................. 22

Item 12. Security Ownership of Certain Beneficial Owners and Management... 27

Item 13. Certain Relationships and Related Transactions................... 29

PART IV

Item 14. Exhibits and Reports on Form 8-K...................................31

</TABLE>
<PAGE> 3
PART I
ITEM 1. BUSINESS

INTRODUCTION

Viragen, Inc., (the "Company" or "Viragen") was organized in December
1980 to engage in the research, development and manufacture of certain
immunological products for commercial application, particularly human leukocyte
interferon, for antiviral and therapeutic applications.

Viragen, Inc. has five subsidiaries: Viragen (Europe), Ltd. ("VEL"),
Vira-Tech, Inc. ("Vira-Tech"), Viragen Technology, Inc. ("Viragen Technology"),
Viragen, U.S.A., Inc. ("VUSA") and Viragen Reagents, Inc. ("Viragen Reagents").
VEL is a majority-owned publicly-traded subsidiary of which Viragen holds 70.3%
of the outstanding Common Stock. VEL (NASDAQ Small Cap: "VERP"), owns all of the
Common Stock of Viragen (Scotland) Limited, a Scottish private company ("VSL").
Viragen, VEL, Vira-Tech, Viragen Technology, VUSA, VSL and Viragen Reagents are
hereinafter referred to collectively as the "Company," unless the context
otherwise requires.

The Company's product is multi-species, natural, human
leukocyte-derived alpha interferon ("Natural Interferon"). Natural Interferon is
a protein substance that stimulates and modulates the human immune system
inhibiting malignant cell growth without materially interfering with normal
cells. In addition, Natural Interferon impedes the growth and propagation of
various viruses. The Company has developed two variations of its Natural
Interferon. Alpha Leukoferon(TM), its original product, and Omniferon(TM),
currently under development, are the trade names of the Company's products in
injectable form (referred to hereafter as a "Product" or collectively as the
"Products"). Neither of the Company's Products have been approved by the United
States Food and Drug Administration ("FDA") nor the European Union ("EU")
regulatory authorities and there can be no assurance that such approvals will be
obtained at any time in the future.

The Company intends to obtain FDA and EU approvals for various uses of
its Omniferon product in the future. Such approvals are expected to require
several years of clinical trials and substantial additional funding. To date,
Viragen has not distributed either Product other than Alpha Leukoferon for
research purposes pursuant to a limited Florida investigatory license and
protocol which was discontinued in March 1996 (with the exception of certain
limited enrollments approved by the Florida HRS for humanitarian purposes under
an HIV/AIDS study protocol conducted at no charge to patients). Viragen expects
to concentrate its efforts in preparing, filing and processing its applications
and obtaining approvals for Omniferon from the FDA and the EU. The Company has
assembled an advisory committee consisting of scientists, medical researchers
and clinicians to assist the Company in its applications to the FDA and the EU.

The Company's majority-owned subsidiary, Viragen (Europe) Ltd., acting
through its wholly-owned subsidiary Viragen (Scotland) Ltd., entered into a
License and Manufacturing Agreement with The Common Services Agency of Scotland
(the "Agency") an agency acting on behalf of the Scottish National Blood
Transfusion Service ("SNBTS"). Pursuant to such Licensing and Manufacturing
Agreement, SNBTS on behalf of VSL, will assist in the manufacture of VSL's
Omniferon product for exclusive distribution within the EU and non-exclusively
worldwide in return for certain royalties and preferential access to the Product
for Scottish Agency patients at preferential prices. The Agency has committed to
assist in the manufacture of Omniferon in sufficient scale to accommodate the EU
clinical trials and, subsequently, for commercial sales in amounts to be agreed
upon by the parties. The Agency will also work with the Company in conducting
studies relevant to Omniferon and cooperate with the Company to enable it to
comply with the laws and regulations of the EU in connection with production,
clinical trials and distribution of Omniferon.

1
<PAGE> 4
RECENT DEVELOPMENTS

Between June 1996 and February 1997, the Company raised gross proceeds
of $40 million through a series of four private placements to institutional
investors under the provisions of Regulation D. The funds were raised through
the issuance of: 5% Series B - $15 million; Series C - $5 million; 6% Series D -
$15 million and 5% Series E - $5 million, cumulative preferred convertible stock
issuances. Each preferred stock series provided for the conversion of the
outstanding principal into common stock of the Company at a discount (except
Series C) from the prevailing market price of the Company's common stock.

During July and August of 1997, the terms of the four series of
preferred stock were modified in order to eliminate or otherwise restrict the
timing or number of conversions of the preferred stock into common stock over a
given period. This restructuring was initiated in order to mitigate concerns
regarding the "overhang" of the Company's common stock represented by the
potential conversion of the outstanding series of preferred stock under their
original terms.

In July 1997, the unconverted Series B Preferred Stock was exchanged
for a Promissory Note in the amount of $9,720,240. The Note bears interest at
10% per annum with principal and interest payable over nine monthly installments
commencing in October 1997. The Note may be prepaid without penalty and is not
convertible into common stock of the Company.

Also in July 1997, the holders of the Series C Preferred Stock agreed
to modify their conversion price and limit conversions of their remaining 974
shares ($1,000 stated value per share) over a two month period. The modified
conversion price was the lower of (i) $2.20 per share or (ii) the average
closing price of the Company's Common Stock over the five day period ending
the day prior to the notice of conversion. This agreement also contains a
"floor" provision which provides that if the fair market value of the Company's
common stock is below $3.46 per share at the date of conversion, the Company
will convert at $3.46 and pay the difference between the floor ($3.46 per share)
and the conversion price in cash to the holders of the Series C Preferred
Stock. As part of the July 1997 modification, the conversion price can not
exceed $2.20 per share despite the trading value of the Common Stock at
conversion.

In September 1997, the Company concluded two Exchange Agreements
whereby the terms of the Series D Preferred Stock and Series E Preferred Stock
were modified with the remaining unconverted shares of Series D (7,950 Preferred
Shares with a stated value of $1,000 per share) and Series E (4,000 Preferred
Shares with a stated value of $1,000 per share) being exchanged for a like
number of Series F and Series G Preferred Shares, respectively.

The Series F Preferred Stock provides for a limitation on the holder
limiting conversion during any two week period to 800 shares ($800,000). The
terms also provide the Company with a cash-out option at the face amount being
converted plus 12%. In consideration for the holder of the Series D Preferred
Stock agreeing to a limitation on future conversions, the Company agreed to
increase the dividend rate from 6% for the Series D Preferred Stock to 10% for
the Series F Preferred Stock.

Terms of the Series G Preferred Stock provide that commencing in
September 1997, the holder is limited to converting 667 shares ($667,000) per
month over a 6 month period. The provisions further provide that the Company
will be required to redeem 667 shares ($667,000) per month less the number of
Series G Preferred Stock converted during the preceding calendar month. In
addition, the holder is restricted from converting into common stock if the
market price of the Company's common stock is less than $2.50, subject to
adjustment, at the date of the conversion notice. In consideration for the
restrictions on conversion, the Company agreed to increase the dividend rate
from 5% for the Series E Preferred Stock to 10% for the Series G Preferred
Stock. No other material changes have been made in the substantive terms from
the previously issued Series E Preferred Stock.

In June 1996, the Company entered into a Letter of Intent with the
American Red Cross - Biomedical Services Division. The Company is currently
negotiating the terms of the agreement, establishing the scope of the
relationship and respective obligations of the parties.

In June 1995, the Company organized a wholly-owned subsidiary, Viragen
Technology in order to facilitate the Company's marketing and technology
transfers in support of the contemplated distribution of Omniferon on a
worldwide basis. In July 1995, the Company and its existing wholly-owned
subsidiary, Vira-Tech, Inc., assigned all of its proprietary rights, products
and technologies relating to the manufacture of human leukocyte interferon to
Viragen Technology. Concurrent with this transaction, Viragen Technology
licensed to VSL the right

2
<PAGE> 5
to manufacture and distribute Omniferon in those countries comprising the
European Union on an exclusive basis and on a non-exclusive basis for other
parts of the world except the United States and its territories. Pursuant to
the terms of the Agreement, VSL is obligated to pay an annual royalty payment
equal to the greater of (i) $2,000,000 or (ii) 10% of VSL's gross revenues
until such time as total royalty payments of $18 million has been paid to VTI.
Once the $18 million royalty amount has been paid, VSL is obligated to pay VTI
an amount equal to 8% of VSL's gross revenues until such time as total royalty
payment of $25 million has been paid to VTI. Once the $25 million royalty amount
has been paid, VSL is obligated to pay VTI an amount equal to 5% of VSL's gross
revenues thereafter. The initial term of the license agreement is for fifteen
years and automatically renews for 2 successive fifteen year periods. In
September 1997, VTI and VSL mutually agreed to extend the technology transfer
completion dates. Accordingly, the Agreement was modified such that the
$2,000,000 Initial Royalty Prepayment paid to Viragen in June 1997 would
represent the contractual prepayment for the one year period commencing
November 1, 1997. The Agreement was further modified to provide that in the
event the proprietary technology was not transferred pursuant to the provisions
of the Agreement, which is not anticipated, the Initial Royalty Prepayment
would be refunded to VSL.

In July 1995, the Company and VSL entered into a License and
Manufacturing Agreement with the Common Services Agency on behalf of the
National Blood Service in Scotland. The Agency owns and operates a blood
fractionation facility in Edinburgh, Scotland, and has the physical and
technical capacity and expertise to participate in the manufacture the Company's
Omniferon product, as well as providing a reliable source of human leukocytes, a
critical component in the manufacture of Omniferon. The Agency is also providing
the Company, on a fee basis, with certain administrative and regulatory support
in connection with the Company's various regulatory filings associated with
planned EU clinical trials.

OPERATIONS

Viragen initially obtained approval for use of Alpha Leukoferon through
approved investigational protocols in 1983 under Florida Statute 402.36 (Cancer
Therapeutic Act), the predecessor to Florida Statute 499. In 1984, Florida
Statute 499.018 (the "499 Program"), was amended to include the Company's
protocols and Florida Statute 402.36 was repealed. In 1986, the Company received
approval from the Florida HRS under the 499 Program, to distribute Alpha
Leukoferon under specific investigative clinical study protocols through
hospitals, pharmacies and Florida licensed physicians for the treatment of
patients within the State of Florida. The Company subsequently received State of
Florida regulatory approval for the investigational use of Alpha Leukoferon in
the treatment of Multiple Sclerosis ("MS"), HIV/AIDS, AIDS Related Complex,
AIDS/Kaposi Sarcoma, 32 types of cancers, hepatitis and certain other viral
diseases. During fiscal 1997, the Company provided Alpha Leukoferon under the
499 Program on a no-charge basis for the treatment of HIV/AIDS. In December
1994, the Company discontinued enrollment of new patients in its Multiple
Sclerosis Study 499 Program. In August 1995, the Company negotiated an agreement
with the Florida Department of Health and Rehabilitative Services ("HRS") which
provided for the elimination of the enrollment of new patients in its existing
499 Program (with the exception of certain limited enrollments approved by the
Florida HRS for humanitarian purposes including the Company's HIV/AIDS study
conducted at no charge to patients), the continued participation by previously
enrolled patients in the 499 Program and resolution of other issues. The Company
believes, while there can be no assurance as to future regulatory approvals, if
any, the discontinuation of the Company 499 Program could facilitate efforts in
obtaining FDA and EU approvals based on management's concern that the
continuation of the 499 Program, which involved the ongoing distribution of the
Alpha Leukoferon and receipt of limited revenues, was an impediment to obtaining
such approvals. All other previously approved indications and protocols for the
use of Alpha Leukoferon are inactive.

The Company will require additional financing to engage in and complete
clinical trials for the purpose of obtaining FDA and EU approvals for Omniferon.
Clinical testing toward FDA and EU approval is an expensive process which is
expected to take several years to accomplish with no assurance such approvals
will eventually be obtained.

3
<PAGE> 6
THE PRODUCT

The Company derives its Omniferon from human white cells (leukocytes).
Natural Interferon is one of the body's natural defensive responses to foreign
substances such as viruses, and is so named because it "interfers" with viral
growth. Natural Interferon consists of protein molecules that induce antiviral,
antitumor and immunomodulatory responses within the body. Medical studies have
indicated that interferons may inhibit malignant cell and tumor growth without
affecting normal cell activity.

There are two basic types of interferon, differentiated primarily by
their method of manufacture and resultant composition. The first, as produced by
the Company, is multi-species, natural, human leukocyte-derived alpha interferon
produced by cultivated human white blood cells, which are stimulated by the
introduction of a harmless agent. This process induces the cells to produce
natural interferon. Natural interferon is then separated from other natural
proteins and purified to produce a highly concentrated product for clinical use.
The second, recombinant interferon (alpha or beta), is a genetically engineered
synthetic interferon generally produced from a single human gene in bacterial
cells by recombinant DNA techniques ("Synthetic Interferon").

Clinical studies suggest that there may be significant therapeutic
differences between the use of Natural Interferon and synthetic interferon. The
Company is advised that studies have found that treatment with synthetic
interferon in certain cases may cause an immunological response ("the production
by the human immune system of neutralizing and/or binding antibodies") that
reduces the effectiveness of the treatment or which may cause adverse side
effects. The Company believes that the production of neutralizing and/or binding
antibodies is virtually non-existent in patients treated with Natural
Interferon. Furthermore, primarily due to biological differences, the side
effects of treatment with Natural Interferon, in certain instances, may be less
severe than with Synthetic Interferon.

THE INDUSTRY

Prior to 1985, natural interferon was the only type of interferon
available. Research institutions and other biomedical companies like the Company
were working to solve the problem of high cost related to the industrial-scale
production of natural interferon. In 1985, Hoffman-LaRoche, Inc. and
Schering-Plough Corporation, two major pharmaceutical companies, successfully
developed synthetic interferon using DNA technology and subsequently received
FDA approval to produce and market their respective recombinant alpha interferon
products for the treatment of hairy-cell leukemia, hepatitis and Kaposi's
Sarcoma, an AIDS-related skin cancer. See "Regulation" and "Competition" below.

After the emergence of recombinant alpha interferon, the medical community's
interest in Natural Interferon diminished due primarily to the high cost of
production, and most clinical studies thereafter utilized the synthetic product.

Hoffman-LaRoche, Inc., and Schering-Plough Corporation continue to
actively market their products and promote the therapeutic benefits of their
respective Synthetic Interferon products. In 1993 Chiron Corp. received FDA
approval of BetaSeron(TM), its recombinant beta interferon for the treatment of
relapsing/remitting MS. In 1996, Biogen, Inc. received FDA approval for
Avonex(TM) its recombinant beta interferon for relapsing/remitting MS. In 1997,
Teva Pharmaceuticals received FDA approval of its peptide chemical compound,
Copaxne(TM), for relapsing/remitting MS. In addition to the manufacturers of
synthetic interferon, a domestic manufacturer of natural interferon-alpha,
Interferon Sciences, Inc., received FDA approval in 1989 to sell, in injectable
form, Alferon(TM) their natural interferon product for genital warts. They
continue to conduct FDA sanctioned clinical trials and attempt to market their
product for the approved indication.

4
<PAGE> 7
APPLICATIONS OF INTERFERON

Multiple Sclerosis

In 1988, following regulatory approval for use of the Company's product
by HRS for the treatment of multiple sclerosis, the Company, entered into a
research agreement with the University of Miami School of Medicine, Department
of Neurology Multiple Sclerosis Center. Pursuant to the 499 Program this study
was a patient funded, multi-phase clinical trial for the treatment of multiple
sclerosis with Alpha Leukoferon. The study was conducted on a double-blind basis
with certain patients receiving different dosage levels of the Product and
certain patients receiving a placebo. The study terminated in mid-1992.
Published information on these trials indicated that, in many cases, the
Company's interferon product provided favorable results in the treatment of
patients afflicted with relapsing/remitting, relapsing progressive and chronic
progressive MS.

The Principal Investigator for this study authored, together with other
investigators, an abstract of the favorable results achieved in many cases with
the use of the Company's Alpha Leukoferon product in the treatment of various
types of multiple sclerosis. The abstract was published in the Annuals of
Neurology, the official journal of the American Neurological Association in
1994. An additional article was published by the investigators and the Company
appearing in the Journal of International Medical Research in 1996.

HIV/AIDS

In July 1990, the Company received approval from the Florida HRS for an
HIV/AIDS treatment protocol using Alpha Leukoferon in injectable form. This
Product had been previously approved for treatment of patients, who were
eligible Florida residents, with HIV/AIDS, AIDS Related Complex and AIDS/Kaposi
Sarcoma. In September 1993, the Company initiated distribution on a limited
basis of its Product under this protocol. However, in December 1994, HRS
informed the Company that no new patients may be enrolled under the 499 Program,
including those patients with HIV/AIDS, ARC and Kaposi's Sarcoma, until the
Company has satisfied HRS regarding compliance with FDA promulgated current Good
Manufacturing Practice ("GMP") requirements. In July 1995, the Company
discontinued enrollment of new patients in its 499 Program and in August 1995,
reached a settlement agreement with the Florida HRS which provided for the
elimination of the enrollment of new patients in its 499 Program (with the
possible exception of certain limited enrollments approved by the Florida HRS
for humanitarian purposes), the continued participation by previously enrolled
patients in the 499 Program and the resolution of other issues.

In March 1996, the Company in collaboration with Biodoron, a
Hollywood, Florida based clinic, received approval from HRS under Florida's
Investigational Drug Program to conduct an investigational study in Florida, of
Viragen's natural human alpha interferon product, Alpha Leukoferon for the
treatment of HIV/AIDS in hemophiliacs. The Company entered into an agreement
with Quantum Health Resources, Inc., ("Quantum") which provided to the Company
$330,000 toward to the cost of the study. Quantum, a subsidiary of Olsten
Services Corp., is a national provider of alternate site therapies and support
services for people affected by chronic disorders, including hemophilia. The
study commenced in March 1996, pursuant to which 35 patients enrolled to receive
Alpha Leukoferon for a minimum of six months in combination with a comprehensive
HIV/AIDS treatment program. As yet the Company has not yet received the results
of the study including the patient follow-up period.

MANUFACTURE OF INTERFERON

Human white blood cells (leukocytes) and a stimulating agent, raw
materials which are readily available to the Company, are needed to produce
human interferon. An FDA approved stimulating agent, which is harmless to
humans, is introduced into the white blood cell which induces the cell to
produce interferon. The interferon is then separated from other proteins,
extracted and purified. The Company's Natural Interferon was distributed in
Florida under the 499 Program under the name Alpha Leukoferon. The Company
discontinued its production of Alpha Leukoferon in January 1995. The Company's
new Natural Interferon product, Omniferon, is currently at its final development
stage and the Company intends to submit animal safety and preclinical studies
to the EU regulatory authorities to begin human clinical testing.

5
<PAGE> 8
Production methods developed by Company, as well as enhanced methods
currently under development (see "Research and Development", below) could serve
to reduce the Company's costs of production and, therefore, the market price.
There can be no assurances that such new manufacturing technology will enable
the Company to achieve the level of manufacturing proficiency and product
improvement anticipated by management.

The Company discontinued production of Alpha Leukoferon in January
1995. Subsequently, the Company received notice from the HRS concerning cGMP
deficiencies as noted by the FDA in its Form 483 report relating to the
production of Alpha Leukoferon. In July 1995, the Company discontinued
enrollment of new patients in the 499 Program. In August 1995, the Company
reached an agreement with the Florida HRS which provided for the elimination of
the enrollment of new patients in its 499 Program (with the exception of certain
limited enrollments approved by the Florida HRS for humanitarian purposes,
including the Company HIV/AIDS study), and resolution of all other issues.

RESEARCH DEVELOPMENT

The entire process of research, development and FDA and/or EU approvals
(if obtained), of a new pharmaceutical takes several years and requires
substantial funding. The Company is not currently engaged in any FDA or EU
clinical trials and, while proposed for the future, completion of such studies
is dependent upon obtaining significant additional funding. The Company's
present focus is the continued research and development of Omniferon for the
treatment of Hepatitis B and C, Multiple Sclerosis, herpes and HIV/AIDS.

In 1991, the Company, due to its then absence of available funds,
suspended its research and development activities. In 1993, following receipt of
new equity financing and the election of new management, the Company personnel
recommenced limited research efforts focusing on improving production
techniques. Following receipt of additional funding from private placement
offerings which were completed in August and December 1994, respectively,
research efforts and related costs increased and can be expected to continue to
increase as the Company continues its development of Omniferon. Research and
development costs totaled $2,168,914, $1,503,434 and $605,025 for fiscal years
ended June 30, 1997, 1996 and 1995, respectively.

PURIFICATION SYSTEM

The Company has expended a substantial amount of time and resources
towards the research and development of improved cell stimulation and
purification techniques. These processes are believed to enhance the purity of
the product while increasing production yields. It is believed that increased
production yields will significantly lower related costs of production allowing
a lower more competitive sales price of the Product.

ROYALTY AGREEMENT

In November 1991, in consideration of the Company's former parent,
Medicore, Inc., having financed the Company and deferring payment of certain
indebtedness (which was subsequently exchanged for an equity interest in the
Company), the Company modified its Royalty Agreement with Medicore pursuant to
which it was to pay Medicore a royalty of 12% of its net sales up to
$20,000,000, of interferon, transfer factor and products using such substances,
and a royalty of 7% for sales in excess of $20,000,000. The royalty agreement
was to expire on November 6, 2001.

6
<PAGE> 9
The Company and Medicore have further amended the Royalty Agreement to
provide for a maximum cap on royalties to be paid to Medicore of $2,400,000,
with a schedule of royalty payments of 5% of the first $7,000,000 of sales of
interferon and related products, 4% of the next $10,000,000 of sales and 3% of
the next $55,000,000 of sales until the total of $2,400,000 royalty is paid. The
amendment further provided that royalties of approximately $108,000 previously
accrued as payable to Medicore will be the final payment due under the
agreement.

The Company recognized royalties expense of $11,901 and $28,826 for the
years ended June 30, 1996 and 1995, respectively.

PATENTS

The Company believes its production techniques are unique and are
capable of yielding a superior quality product while reducing production costs
which may enable the Company to ultimately lower the price of its Omniferon
product. The Company intends to file patent applications relative to certain
production techniques currently under development. The Company has also
submitted several foreign patent applications relating to the Product for
topical use several of which have been granted.

United States patents have been issued to others with respect to
genetically engineered and human-derived interferon. Subject to the extent of
such existing patent claims, the Company may have to negotiate license
agreements with such patent holders to use such processes and products. The
Company believes that it does not infringe upon any current patent.

The validity and enforceability of a patent can be challenged by
litigation after its issuance and if the outcome of such litigation is adverse
to the owner of the patent, other parties may be free to use the subject matter
covered by the patent. The degree of protection afforded by foreign patents may
be different than in the United States. There can be no assurance that patents
obtained in the future will be of substantial protection or commercial benefit
to the Company. (See "Competition" below).

REGULATION

Federal and European

The Company's activities and the Products and processes resulting from
such activities are subject to substantial government regulation, both state and
federal. The interstate manufacturing, advertising and sale of biologic
substances and pharmaceutical products are regulated by, and require approval
of, the FDA, EU, state and local agencies. The Company, under State of Florida
HRS guidelines relating to its limited distribution of the Product, followed
strict production and distribution procedures. The FDA has established mandatory
procedures and standards which apply to the clinical testing, marketing and
manufacture of the Products. Obtaining FDA and/or EU approval for
commercialization of a new product can take significant time and capital since
it involves extensive testing procedures and often lengthy clinical trials
including the measurement of product safety, toxicity, and efficacy, if any,
under specific protocols. The process of obtaining FDA and EU regulatory
approval initially includes extensive animal testing to demonstrate product
safety and preferred dosages. Subsequent human tests are undertaken to show the
same and to document such findings as effectiveness, toxicity and side effects.
Biostatistical analysis of data is then gathered in such studies, followed by
the submission of all information and data to the regulatory authorities.

At the present time, the Company has no pending application relative to
Omniferon before the EU regulatory authorities or the FDA for the treatment of
any disease indications, although the Company intends to commence clinical
trials in the EU during 1998 and eventually submit an Investigative New Drug
Application to the FDA. For these purposes, the Company has assembled a Clinical
Advisory Committee comprised of scientists, medical researchers and clinicians
who will act in an advisory capacity in order to assist the Company in
developing the medical, scientific and clinical aspects in support of the
Company's anticipated applications to be

7
<PAGE> 10
filed initially with the EU and eventually FDA regulatory authorities.

In the United States and Europe, human clinical trial programs
generally involve a three phase process. Typically, Phase I trials are conducted
in healthy volunteers to determine the early side effect profile and the pattern
of drug distribution and metabolism. Phase II trials are conducted in groups of
patients afflicted with the target disease to provide sufficient data for the
statistical proof of efficacy and safety required by federal regulatory
agencies. If Phase II evaluations indicate that a product has shown indications
of potential effectiveness and has an acceptable safety profile, Phase III
trials are undertaken to conclusively demonstrate clinical efficacy and safety
within an expanded patient population from multiple clinical study sites.
Regulatory authorities may also require Phase IV studies to track patients after
a product is approved for commercial sale.

Regulatory approval of a new pharmaceutical product often take five
years or more (unless accelerated in certain instances for life-threatening
diseases) and involves the utilization and expenditure of substantial resources.
Approval depends on a number of factors, including the severity of the disease
in question, the availability of alternative treatments and the risks and
benefits demonstrated in clinical trials.

American pharmaceutical manufacturers who sell outside of the United
States are also subject to FDA jurisdiction. Semi-finished drugs may be shipped
under certain controlled circumstances for further processing, packaging,
labeling and distribution to third parties residing in approved foreign
countries, subject to such laws as apply in those countries. The Company must
comply with all FDA rules and regulations as well as those of the country to
which the Company intends to ship the Product before it would be permitted to
export crude or finished interferon products outside the United States.

The Scottish Agreement

In certain instances, EU regulations, may require less stringent
preclinical studies for naturally occurring substances such as the Company's
Omniferon product than for genetically engineered products. Accordingly, while
there can be no assurance, the Company expects to possibly receive a more
expeditious review of the various EU processes and clinical trials prerequisite
to market approval in the EU.

In July 1995, Viragen (Scotland) Limited ("VSL"), a company
incorporated under the laws of Scotland, entered into a License and
Manufacturing Agreement with the Common Services Agency of Scotland ("Agency").
To secure a sufficient source of needed raw materials as well as expertise in
the area of blood-derived products and the regulatory approval process. The
Agency is an adjunct of the Scottish Government which acts on behalf of the
National Health Service in Scotland and the Scottish National Blood Transfusion
Service ("SNBTS"). The Agency owns and operates a blood fractionation facility
in Edinburgh, Scotland, and has the physical and technical capacity to
manufacture alpha interferon from human leukocytes employing the Company's
processes. Securing a sufficient qualified source of blood-derived raw materials
within the EU was considered critical to enable the Company to conduct EU
clinical trials as well as providing a sufficient source of raw materials
necessary for subsequent commercial manufacturing.

Prior to the commencement of clinical trials, the Company's Scottish
manufacturing facility must be licensed by EU regulatory authorities to conduct
such trials. The Company has engaged professionally recognized consultants
familiar with the EU regulatory process to assist in the manufacturing and
product submissions prerequisite to EU approvals. In addition, the SNBTS has a
full-time regulatory department that has obtained approval in the EU of numerous
EU blood-derived products. The SNBTS will provide its best efforts, working in
conjunction with the Company, to obtain a manufacturing license and subsequent
product approvals at the conclusion of the EU clinical studies. At such time as
the SNBTS obtains a manufacturing license for Omniferon, Viragen intends to seek
FDA manufacturing approval of the Scottish manufacturing facility. There can be
no assurance that the EU regulatory authorities will approve the manufacturing
or permit clinical testing and distribution of Omniferon within the EU, or that
the FDA will license or approve the Scottish manufacturing facility or the
Company's Product for clinical trials and subsequent distribution in the United
States.

8
<PAGE> 11
VSL has been organized by the Company to manufacture and distribute Omniferon
and related products in the EU and other countries outside the United States.
Through Viragen Technology, Viragen has transferred patent and proprietary
rights associated with the production of its Product and related technology to
VSL. Under the grant of license, VSL has provided the Agency with an exclusive
license to use the proprietary rights covered by the License and Manufacturing
Agreement for the manufacture and distribution of Omniferon within the EU. The
Agency has committed to participate with the Company in the manufacture of
Omniferon in sufficient scale to accommodate the EU clinical trials. VSL may
engage in commercial sale in amounts to be agreed upon by the parties and the
European regulatory authorities. The Agency is also expected to conduct certain
studies relevant to the Product and cooperate with VSL and the Company in
complying with the laws and regulations of the EU in connection with the
production of Omniferon.

Pursuant to the License and Manufacturing Agreement, VSL, VEL and the
Company are providing the Agency with full access to the proprietary technology
and specialized equipment, providing suitable training as needed to the Agency's
personnel and defraying all costs associated with securing permits and
regulatory approvals, augmenting the Agency's facilities, if necessary, to
participate in the manufacture of Omniferon and securing documentation
substantiating compliance with EU regulatory requirements. The Agency will
receive compensation for Product manufactured for use in clinical trials in the
EU, for Product manufactured for sales prior to obtaining new drug application
approval, and for sales following such approval, at varying percentages in
relation to costs. Products manufactured and utilized for humanitarian purposes
or for medical use by patients of the Scottish National Health Services or the
United Kingdom National Health Services will involve either no payments to the
Agency or payments at substantially discounted prices.

The term of the License and Manufacturing Agreement is for a five-year
period with two additional five-year extension terms at the option of VSL. The
Agreement also contains provisions protecting proprietary rights to VSL, the
Company and the preclusion of certain competitive activities by the Agency.

As a result of the completion of the private placements undertaken in
March 1996, VEL received net proceeds of $5,102,000 which is being used for (i)
the leasing and improvement of production facilities in Edinburgh, Scotland, for
the manufacture of Omniferon; (ii) the purchase of equipment for use of VSL's
Scottish facilities; (iii) the payment of royalties to Viragen Technology
commenced in calendar 1997 and (iv) for working capital purposes. VSL will
require additional financing to engage in and complete clinical trials for the
purpose of obtaining EU approval for the Product. Clinical testing toward EU
approval is an expensive process which is expected to take several years to
accomplish with no assurance that such approval will eventually be obtained.

COMPETITION

Competition in the research, development and production of interferon,
and other immunological products is intense and involves major, well-established
and abundantly financed pharmaceutical and commercial entities as well as major
educational and scientific institutions. Many researchers, some of whom have
substantial private and government funding, are involved with interferon
production, including production of interferon through recombinant DNA
technology. A number of large companies including Hoffman-LaRoche, Inc.,
Schering Plough Corporation, Glaxo-Wellcome, Biogen, Inc., Chiron Corp., and
Berlex Laboratories are producing, selling and conducting clinical trials with
recombinant interferons (alpha and beta) and other immunological products for
the treatment of cancer and viruses, including MS, HIV/AIDS, KS and Hepatitis.

In addition to the manufacturers of synthetic interferons, Interferon
Sciences, Inc., a domestic manufacturer of Natural Interferon, received FDA
approval in 1989 to sell, in injectable form, their natural interferon product
for genital warts. They continue to conduct FDA sanctioned clinical trials and
to market their product for their approved indication.

9
<PAGE> 12
The Company believes that competition is also based on production
ability, technological superiority and administrative and regulatory expertise
in obtaining governmental approvals for testing, manufacturing and marketing of
the product.

The timing of the entry of a new pharmaceutical product into the market
is an important factor in determining that product's eventual success. Early
marketing has advantages in gaining product acceptance and market share. The
Company's ability to develop products, complete clinical studies and obtain
governmental approval in the past had been hampered by a lack of adequate
capital. The Company is not presently a competitive factor in revenue
participation in the biopharmaceutical industry.

EMPLOYEES

As of September 18, 1997, the Company has 33 employees, of which 20 are
Research and Development and Quality Assurance/Quality Control personnel. The
remaining 13 employees are management, regulatory and/or administrative.

ITEM 2. PROPERTIES

In November 1996, the Company entered into a ten year lease for 14,800
square feet in Plantation, Florida. This location houses the Company's
administrative and executive offices as well as potential laboratory expansion
space. The lease contains an option for up to two additional five year terms.
Lease payments on the facility total $15,700 per month.

The Company owns a 14,000 square foot building in Hialeah, Florida.
This facility includes a laboratory for biomedical research and development
activities. The Company refinanced its building through a $600,000 borrowing
with a Florida bank under a five year note and mortgage in August 1991. The loan
was reduced in equal monthly principal payments of $2,500 with interest at 2% in
excess of the prime rate. The mortgage was on the land, building and
improvements, equipment and fixtures used in connection with the realty. A
balloon payment of $450,000, due in August 1996, was paid-in-full at maturity.

In November 1996, the Company, through VSL, entered into a five year
lease agreement in a biotechnology park in the Edinburgh area of Scotland. This
facility, comprised of approximately 10,000 sq. ft., contains the Company's
European laboratory and production facilities. This location will augment other
productive assets located with the SNBTS facility which are available to the
Company under the Scottish Agreement. The monthly rental for the facility is
7,109 UK pounds or approximately US$11,400 subject to adjustment for
common area maintenance charges. The Company has the right to renew the lease
for four additional five year terms.

10
<PAGE> 13
The Company considers that its properties are generally in good
condition, well-maintained and generally suitable and adequate to carry on the
Company's business. The Company further believes that it maintains sufficient
insurance coverage on the Company's real and personal property.

ITEM 3. LEGAL PROCEEDINGS

In May 1997, the Company, through its majority owned subsidiary
Viragen (Europe) Ltd. (formerly Sector Associates, Ltd - "Sector"), was named
as a defendant in an action brought in the United States Bankruptcy Court,
Southern District of Florida by the bankruptcy trustee. The suit alleges that
during the period from December 1993 to May 1994, prior to the Company's
reverse acquisition of Sector, Sector received preferential transfers of
approximately $2.1 million. The Company denies that such transfers were
preferential and will vigorously defend the claims. However, the Company
cannot predict the ultimate outcome of this matter.

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

On June 27, 1997, a Special Meeting of Shareholders was held in Davie,
Florida to vote on: (1) ratification and confirmation of the issuance of the
Company's Series D Preferred Stock and related Common Stock Purchase Warrants
and Series E Preferred Stock for purposes of complying with Rule 4460 (i)(1)(D)
of the NASDAQ Stock Market; and (2) to consider and approve Amendments to the
Certificate of Incorporation (i) to provide that actions by stockholders may be
taken only at a duly called annual or special meeting and not by written consent
and (ii) to provide that the stockholders of the Company would have the right to
make, adopt, alter, amend, change or repeal the By-Laws only upon the
affirmative vote of not less than 66 2/3% of the outstanding capital stock of
the Company entitled to vote thereon (the "By-Law Amendment Provision"). With a
majority of the outstanding shares voting either by proxy or in person, the
proposals past with the following votes:

<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
--- ------- -------
<S> <C> <C> <C>
Proposal One
Preferred Stock Issuance's 19,090,735 1,783,181 99,718
Proposal Two
By-Law Amendment Provision 20,529,539 2,026,920 113,410
</TABLE>

PART II

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

The Company's Common Stock has been traded on the NASDAQ SmallCap
Market since June 4, 1996 and on the NASDAQ National Market since December 29,
1996 under the symbol "VRGN". Prior thereto, the Company's Common Stock was
traded on the OTC Bulletin Board. The following table sets forth the high and
low bid quotations for the Common Stock for the two years ended June 30, 1997.

<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
1995-1996
First Quarter ended 09/30/95 $ 1 1/16 $ 1/4
Second Quarter ended 12/31/95 15/16 1/8
Third Quarter ended 03/31/96 4 9/16 1/8
Fourth Quarter ended 06/30/96 9 5/8 3 3/4

1996-1997
First Quarter ended 09/30/96 5 7/8 3 1/2
Second Quarter ended 12/31/96 6 15/16 3 5/8
Third Quarter ended 03/31/97 5 9/16 2 1/4
Fourth Quarter ended 06/30/97 3 3/8 1 3/8
</TABLE>

The above quotations represent prices between dealers, and do not
include retail mark-ups, mark-downs or commissions, and may not necessarily
represent actual transactions.

As of September 18, 1997 there were approximately 2,800 stockholders of
record.

11
<PAGE> 14
The Company has not paid any dividends on its common stock since its
incorporation in December 1980. Since the company had been in the development
stage, has experienced losses since inception (see Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations"), has
significant capital requirements in the future, and presently intends to retain
future earnings, if any, to finance the expansion of its business, it is not
anticipated that any cash dividends will be paid in the foreseeable future.
Future dividend policy will depend on the Company's earnings, if any, capital
requirements, expansion plans, financial condition and other relevant factors.

12
<PAGE> 15

ITEM 6. SELECTED FINANCIAL DATA

CONSOLIDATED STATEMENT OF OPERATIONS DATA

Net loss .............. (4,775) (4,672) (3,952) (1,083) (311) (563)
Loss attributable to
common stock ...... (14,674) (5,570) (3,955) (1,087) (313) (573)
Loss per average common
share ............. ( .37) (.15) (.12) (.06) (.02) (.05)
Weighted average shares
outstanding ....... 39,134,631 36,198,302 32,137,693 18,686,751 14,463,038 11,478,914
</TABLE>

CONSOLIDATED BALANCE SHEET DATA

<TABLE>
<CAPTION>
FOR THE
PERIOD BETWEEN
JANUARY 1,
YEAR ENDED JUNE 30, AND JUNE 30, YEAR ENDED
----------------------------------------------------------------- -------------- DECEMBER 31,
1997 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Working capital
(deficit) $ 29,331 $ 18,266 $ 1,614 $ 795 $ 250 $ (942)
Total assets .......... 37,462 20,617 3,330 2,744 1,462 983
Long-term debt ........ 239 116 857 976 1,034 529
Stockholder's equity
(deficit) ......... 32,144 17,275 1,698 546 101 (588)

</TABLE>

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

The statements contained in this report on Form 10-K that are not
purely historical are forward looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange
Act of 1934, including statements regarding the Company's expectations, hopes,
intentions, beliefs, or strategies regarding the future. Forward looking
statements include the Company's statements regarding liquidity, anticipated
cash needs and availability, and anticipated expense levels in "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
including expected product clinical trial commencement dates, product
introductions, expected research and development expenditures and related
anticipated costs. All forward looking statements included in this document are
based on information available to the Company on the date hereof, and the
Company assumes no obligation to update any such forward looking statement. It
is important to note the Company's actual results could differ materially from
those in such forward looking statements. Among the factors that could cause
actual results to differ materially are the factors detailed below and the risks
discussed in the "Risk Factors" section included in the Company's Registration
Statement Form SB-2, as filed with the Securities and Exchange Commission
(effective on August 14, 1995 with related Post-Effective Amendment effective
May 30, 1996). You should also consult the risk factors listed from time to time
in the Company's Reports on Forms 10-Q, 8-K, S-3, 10-K and Annual Reports to the
Stockholders.

13
<PAGE> 16
The biopharmaceutical industry is highly competitive and subject to
rapid technological change. Significant competitive factors in the
pharmaceutical and biopharmaceutical markets include product efficacy, price and
timing of new product introductions. Increased competition from existing
biopharmaceutical companies as well as the entry into the market of new
competitors could adversely affect the Company's financial condition or results
of operations.

The Company's future success depends in part upon its intellectual
property, including patents, trade secrets, know-how and continuing
technological innovation. There can be no assurance that the steps taken by the
Company to protect its intellectual property will be adequate to prevent
misappropriation or that others will not develop competitive technologies or
products. There can be no assurance that any current of future patent, if any,
owned by the Company will not be invalidated, circumvented or challenged, that
the rights granted thereunder will provide competitive advantages to the Company
or that any of the Company's future patent applications will be issued with the
scope of the claims sought by the Company, if at all. Furthermore, there can be
no assurance that others will not develop technologies that are similar or
superior to the Company's technology, duplicate the Company's technology or
design around the patents, if any, owned by the Company.

The Company has incurred operational losses and operated with a
negative cash flows since its inception in December 1980. Losses have totaled
$4,775,245, $4,672,271 and $3,951,839 for the years ended June 30, 1997, 1996
and 1995, respectively.

LIQUIDITY AND CAPITAL RESOURCES

Working capital totaled approximately $29,331,000 at June 30, 1997, an
increase of $11,065,000 from the prior year end balance. This increase was due
to various Convertible Preferred Stock issuances as follows: 5,000 shares of
Cumulative Convertible Preferred Stock, Series C, for $5,000,000 in December
1996; 15,000 shares and 5,000 shares of Cumulative Preferred Stock, Series D and
Series E, for $15,000,000 and $5,000,000, respectively in February 1997, and the
exercise of Common Stock Purchase Warrants of the Company and its majority owned
subsidiary, Viragen (Europe) Ltd. with such increases being offset by cash
redemption payments to various Convertible Preferred Stock holders totaling
$2,815,000, operational losses of approximately $4,775,000 and increases in
leasehold improvements, plant and equipment of approximately $4,482,000 during
the period.

In June 1996, the Company entered into a Securities Purchase Agreement
(the "Series B Agreement") with GFL Performance Ltd., GFL Advantage Fund Ltd.
and Proton Global Asset Management, LDC (collectively the "Series B Purchaser")
pursuant to which the Series B Purchaser acquired 15,000 shares of the Company's
then newly established 5% Cumulative Convertible Preferred Stock, Series B (the
"Series B Preferred Stock") for $15,000,000.

Under the terms of the Series B Preferred Stock, the Purchaser was
entitled to receive a cash dividend equal to 5% of the stated value of the
Series B Preferred Stock payable quarterly commencing September 7, 1996,
although the Company had the option to utilize shares of its Common Stock, under
certain conditions, to satisfy the dividend requirement. The Purchaser had the
right to convert the Series B Preferred Stock commencing August 21, 1996 into
shares of Common Stock of the Company at a conversion price equal to the lesser
of 85% of the average market price (reduced by an additional 2% per month
commencing the 90th day following the closing date, until the related
Registration Statement was declared effective by the SEC) for the Company's
Common Stock, as described in the Agreement, prior to the conversion date or
$8.74. The final conversion rate was set at 76.8% of the average market price.
The Company also had the right to require the Purchaser, under certain terms and
conditions, to convert the Series B Preferred Stock commencing 180 days
following the effective date of a Registration Statement registering the resale
of the shares of Common Stock of the Company underlying the Series B Preferred
Stock. The Series B Preferred Stock did not carry any voting rights except as
required under the Delaware General Corporation Law. Loss attributable to common
stock reflects adjustments for cumulative preferred dividends, and in 1996, was
restated to reflect embedded dividends arising from discounted conversion terms
on the Convertible Preferred Stock, Series B.

14
<PAGE> 17
In July 1997, the unconverted Series B Preferred Stock was exchanged
for a Promissory Note in the amount of $9,720,240. The Note bears interest at
10% per annum with principal and interest payable over nine monthly installments
commencing in October 1997. The Note may be prepaid without penalty and is not
convertible into common stock of the Company.

In December 1996, the Company issued 5,000 shares of its Series C
Convertible Preferred Stock (the "Series C Preferred Stock") in consideration
for $5,000,000. The purchases were made by Strome Hedgecap Limited, Strome
Offshore Limited, Strome Partners, L.P. and Strome Susskind Hedgecap, L.P.
(collectively the "Series C Purchasers"), pursuant to separate Securities
Purchase Agreements. In addition, warrants to purchase an aggregate of 214,593
shares of Common Stock, exercisable at $2.00 per share on or prior to December
9, 1999, were issued to the Series C Purchasers.

The Series C Purchases may convert up to 25% of the Series C Preferred
Stock into Common Stock of the Company on or after 10 days from the date the
registration statement registering the underlying shares is deemed effective by
the Securities and Exchange Commission thereafter 25% may be converted on or
after the 30th, 60th and 90th day on a cumulative basis. The Preferred Stock is
convertible into a number of Common Shares determined by dividing the stated
value of the Preferred Stock ($1,000 per share) by the closing price of the
Company's Common Stock over the five day period preceding notice of conversion
("conversion price"). The conversion price may not be less than $3.46 nor more
than $7.00. In the event the conversion price falls below $3.46, the difference
between $3.46 and the conversion price will be paid to the holder in cash. Any
shares of Series C Preferred Stock which are outstanding on December 5, 1997
will be automatically converted into shares of Common Stock based on the
conversion price at such time completed in accordance with the above procedures.

In February 1997, the Company issued 15,000 shares of its 6% Series D
Convertible Preferred Stock (the "Series D Preferred Stock") to P.R.I.F., L.P.
in consideration for $15,000,000. The funds and the certificates representing
the Series D Preferred Stock were placed in escrow pending approval by the
stockholders of the Company at the Annual Meeting of Stockholders on February
28, 1997, of the proposed Amendment to the Company's Certificate of
Incorporation to increase the authorized number of Common Stock shares from
fifty million to seventy five million shares. The shareholders approved the
Proposal. The Company had also placed in escrow a commitment fee of $300,000
which would be paid to P.R.I.F., L.P. in the event authorization is not obtained
by the specified date. Following shareholder approval the commitment fee was
returned to the Company.

The Series D Preferred Stock was convertible into a number of shares of
Common Stock of the Company determined by dividing the five day trading average
price of the Company's Common Stock prior to conversion, discounted by 18%, into
the stated value of the Preferred Shares being converted.

In connection with the issuance of the Series D Preferred Stock, the
Company also issued 375,000 Common Stock Purchase warrants, exercisable at $6.00
per share.

In February 1997, the Company also issued 5,000 shares of its 5% Series
E Convertible Preferred Stock (the "Series E Preferred Stock") in consideration
for $5,000,000. Dividends on the Series E Preferred accrued from the date of
issuance and were payable quarterly commencing April 1, 1997 and may have been
paid in cash or, at the Company's option and certain other conditions, in shares
of Common Stock of the Company. Upon liquidation, dissolution or winding-up of
the Company, no distribution may have been made to the holder of shares of
capital stock ranking junior to the Series E Preferred Stock unless, prior
thereto, the holder of the Series E Preferred Stock had received $1,000 per
share plus accrued dividends.

The Series E Preferred Stock was convertible into shares of Common
Stock of the Company commencing May 11, 1997 at a conversion price of the lesser
of (i) the Average Market Price for the five trading days prior to the Notice of
Conversion multiplied by 85%, subject to adjustment, or (ii) $7.00, subject to
adjustment.

In September 1997, the Company concluded two Exchange Agreements
whereby the terms of the Series D Preferred Stock and Series E Preferred Stock
were modified the remaining unconverted shares of Series D (7,950 Preferred
Shares) and Series E (4,000 Preferred Shares) being exchanged for a like number
of Series F and Series G Preferred Shares, respectively.

The Series F Preferred Stock provides for a limitation on the holder
limiting conversion during any two week period to 800 shares ($800,000). The
terms also provides the Company with a cash-out option at the face amount being
converted plus 12%. In consideration for the holder of the Series D Preferred
Stock agreeing to a limitation on future conversions, the Company agreed to
increase the dividend rate from 6% for the Series D Preferred Stock to 10% for
the Series F Preferred Stock.

Terms of the Series G Preferred Stock provide that commencing in
September 1997, the holder is limited to converting 667 shares ($667,000) per
month over a 6 month period. The provisions further prove that the Company will
be required to redeem 667 shares ($667,000) per month less the number of Series
G Preferred Stock converted during the proceeding calendar month. In addition,
the holder is restricted from converting into common stock if the market price
of the Company's common stock is less on $2.50, subject to adjustment, at the
date of the conversion notice. In consideration for the restrictions on
conversion, the Company agreed to increase the dividend rate from 5% for the
Series E Preferred Stock to 10% for the Series G Preferred Stock. No other
material changes have been made in the substantive terms from the previously
issued Series E Preferred Stock.

During July and August of 1997, the terms of the four series of
preferred stock were modified in order to limit or otherwise restrict the timing
or number of conversions of the preferred stock into common stock over a given
period. This restructuring was initiated in order to mitigate concerns of the
Company and the investment community concerning the "overhang" of the Company's
common stock represented by the potential conversion of these outstanding series
of preferred stock under their original terms.

15
<PAGE> 18
In September 1995, the Company entered into an Agreement and Plan
Reorganization ("Agreement") with Sector Associates, Ltd. ("Sector"). Under the
terms of the Agreement, the Company acquired a 94% interest in Sector in a
reverse acquisition transaction. Sector was a publicly traded corporation which
contained net cash assets of $800,000 at the transaction closing date. This
transaction closed in December 6, 1995.

In December 1995, Sector completed a Private Placement, raising
approximately $750,000 through the sale of 336,000 units for a purchase price
of $2.23 per Unit. Each unit consists of 0.71 shares of common stock and 2.5
common stock purchase warrants having an exercise price of $6.00 per share,
representing a total of 240,000 common shares and 840,000 warrants. In March
1996, Sector completed two additional Private Placement Offerings,
issuing 768,000 shares of its Common Stock and 216,500 Common Stock purchase
Warrants having an exercise price of $12.00 per share. These two Offerings
yielded net proceeds of approximately $5,102,000 after related expenses of
$317,500. The company is using these proceeds to undertake European research and
clinical trial activities including the establishment of a laboratory and
manufacturing facility in Edinburgh, Scotland, now completed, the purchase of
laboratory equipment and related working capital. On May 2, 1996, Sector changed
its name to Viragen (Europe) Ltd.

In December 1994, the Company completed a private placement, solely to
accredited investors, of Common Stock at $.60 per share, realizing gross
proceeds of $2,056,000 in consideration for the issuance of 3,426,667 shares.
The proceeds were utilized for implementation of the initial phase of the
Company's European market strategy, which includes the establishment of a
research and manufacturing facility in Europe and working capital. In August
1994, the Company completed a $3.5 million private placement offering of its
Common Stock to accredited investors at $.40 per share, resulting in the
issuance of 8,919,000 shares. The net proceeds of the offering of approximately
$3,185,000 were utilized for the continued development of Omniferon, acquisition
of laboratory equipment, the purchase of a Company-wide computer system,
development of clinical study protocols, employment of additional operating and
administrative personnel and working capital.

16
<PAGE> 19
It is the Company's policy to invest its temporarily idle cash
exclusively in U.S. Treasury and Agency Securities which are relatively liquid,
providing market rates of return and are not intended to speculate in interest
rate movements. Depending upon short-term capital requirements, a portion of the
portfolio is held in a Money-Market Fund which invests exclusively in U.S.
Government obligations.

While subject to significant limitation, the Company at June 30, 1997
has available approximately $27.8 million in net tax operating loss
carryforwards expiring between 1999 and 2012, which may be used to offset
taxable income, if any, during those periods. The Company's ability to generate
revenues during future periods is dependent upon obtaining regulatory approvals
of the Product. As the Company cannot be assured as to its ultimate success in
obtaining the necessary regulatory approvals, the Company is unable to conclude
that realization of benefits from its deferred tax assets is more likely than
not, as prescribed by SFAS 109. Accordingly, the Company has recognized a
valuation allowance of offset 100% of the deferred tax assets related to these
carryforwards.

Management believes that the Company's Omniferon product currently
under development can be manufactured in sufficient quantity and will be priced
at a level to offer patients an attractive alternative treatment to the
Synthetic Interferons currently being marketed. Management further believes that
working capital currently on hand will provide the Company with the funds
necessary for the foreseeable future to continue its current level of
operations, focused on current research and development projects, the
establishment of a laboratory and manufacturing facility in Scotland an the
commencement of EU clinical trials. Additional funding would be required to
complete the clinical trial process both in the EU and domestically prior to
receiving regulatory approval to market the Product. Anticipated funding
requirements in the EU include: pre-clinical Phase I and Phase II trials --
$1.5-$2.0 million and Phase III studies -- $12-$14 million. In addition,
anticipated funding requirements for U.S. operations include: the establishment
of domestic manufacturing capacity -- $6 million; joint research and development
projects -- $4 million and commencement of domestic preclinical Phase I and
Phase II studies -- $1.5-2.0 million. Funding will also be utilized for
continued product development research, general working capital purposes
including administrative support functions and the possible acquisition of
businesses complementary to the Company's operations.

RESULTS OF OPERATIONS

No sales revenue or related cost of sales were recognized for the
fiscal year ended June 30, 1997. The termination of sales revenues was due to
patients previously enrolled under the Company's State of Florida HRS 499
Program completing their course of treatments in fiscal 1996. The Company
discontinued enrollment of new patients in its 499 Program (with the exception
of certain limited enrollments approved by HRS for humanitarian purposes
including an HIV/AIDS study conducted at no charge to patients) and all revenues
under this program ceased in March 1996. The Company has no other source of
revenues from the sale of its Products until it receives the necessary
regulatory approval from the U.S. Food and Drug Administration and/or comparable
European authorities. At the present time, the Company has no pending
application relative to Omniferon before the EU regulatory authorities or the
FDA for the treatment of any disease indications, although the Company intends
to commence clinical trials in the EU during calendar 1998 and eventually submit
an Investigational New Drug Application to the FDA. Such approvals cannot be
assured and are subject to the successful completion of clinical trials and the
Company's ability to raise significant additional investment capital to fund the
completion of such trials.

Interest and other income which totaled $1,404,000 for fiscal 1997
reflected a sharp increase over the prior year. This increase was attributable
to interest income earned on the net proceeds of a series of Convertible
Preferred Stock Offerings made during June 1996 and fiscal 1997. See "Liquidity
and Capital Resources" above.

Research and development costs totaled $2,168,914 during the year
compared to $1,503,434 for fiscal 1996. This increase of $665,480 (44%) reflects
an overall increase in research activities and was primarily attributable to
an increase in laboratory supplies expenses of approximately $326,000, an
increase in fees paid to SNBTS relating to contractual reimbursements of
$71,000, increased travel expenses associated with the transfer of technology
and process development between the Company's Florida and Scottish facilities
of $120,000, an increase in research related consulting fees and increased
salaries and related taxes for laboratory personnel.

17
<PAGE> 20
Selling general and administrative expenses totaled $3,938,323 in
fiscal 1997, an overall increase of approximately $438,000 from the prior year.
This increase reflects the net of changes in numerous components in general and
administrative expense items. Fiscal 1997 includes an increase in administrative
salaries and related taxes of approximately $351,500 due to the addition of
administrative staff in the Company's Scottish laboratory and manufacturing
facility, increased administrative staff in the Company's Miami facility and
domestic salary increases. During fiscal 1997, the Company also recognized
compensation expense of $450,000 associated with options granted during the
period compared to $426,000 in the previous year and recognized $288,000 in
expenses associated with the settlement, for treasury stock, of a potential
litigation claim. The Company also recognized increases in insurances expenses
associated with employee related insurances and increased liability coverages of
$128,000, increased travel related costs of $109,000, primarily attributable to
administrative support related to the establishment of the Company's Scottish
facility, increased building and equipment leasing costs of $105,000 and
additional fees associated with the Company's listing on the NASDAQ National
Market of approximately $73,000. These increases were offset by the reduction in
officer loans forgiven in the prior year of $282,000 and a loss recognized on
the valuation of the Company's Florida laboratory facilities of $316,000
pursuant to FAS 121 in fiscal 1996.

1996 COMPARED TO 1995

Losses from operations have been incurred since inception and totaled
$4,785,015 and $3,951,839 for the years ended June 30, 1996 and 1995,
respectively.

Sales revenues for the year ended June 30, 1996 totaled $230,000
compared to $574,000 for the previous year, and were derived from distribution
of the Company's Alpha Leukoferon product for the clinical study treatment of
multiple sclerosis. The decline in revenues was due to patients previously
enrolled under the 499 Program completing their course of treatment coupled with
the discontinuance of new enrollments as discussed above.

In March 1996, the Company received approval from the HRS under the 499
Program to conduct an investigational study in Florida, in collaboration with
Biodoron, of the Company's Alpha Leukoferon product for the treatment of
HIV/AIDS in hemophiliacs on a no charge basis. The Company subsequently entered
into an agreement with Quantum Health Resources, Inc., whereby they provided
$330,000 to the Company for the conduct of the study. Quantum Health Resources,
Inc., a subsidiary of Olsten Services Corp., is a national provider of alternate
site therapies and support services for patients afflicted by chronic disorders,
including hemophilia.

Costs of sales expense as a percentage of sales revenues totaled 78%
for the year ended June 30, 1996 compared to 61% for the preceding year. This
increase was due to a significant (44%) drop in the selling price of the
Company's Alpha Leukoferon product for patients enrolling during and subsequent
to fiscal 1994. A portion of the sales revenues recorded in fiscal 1995,
reflected shipments to patients enrolled prior to the reduction in sales price.
This sharp price reduction reflected the Company's efforts to make the Product
more price competitive with the synthetic interferons, and accordingly, a more
viable alternative patient treatment.

Research and development costs totaled $1,503,000 for fiscal 1996
compared to $605,000 for 1995. This sharp increase was attributable to
significantly expanded research efforts associated with the Company's
newly-developed Natural Interferon (alpha) product Omniferon. These costs can be
expected to continue to increase as the Company continues its process
development refinement efforts working towards regulatory submissions in the EU
relating to the commencement of clinical trials of Omniferon. The expanded
research efforts are focused on improved methods of manufacturing aimed at
maintaining or improving product quality, production yields and manufacturing
efficiencies. Components of the increases include the hiring of additional
research personnel with salaries and related taxed and benefits totaling
approximately $404,000 and an increase in research laboratory supplies expense
of approximately $256,000 representing 45% and 29%, respectively, of the overall
increase. Additionally, fiscal 1996 expenses reflected increases in travel,
equipment rentals and support functions associated with the overall increases in
the level of research and development activities.

Selling and general administrative expenses totaled $3,501,000 for
fiscal 1996 compared to $2,029,000 for the preceding year. Components of this
overall increase of approximately $1,472,000 including $298,000 in consulting
expense reflecting the issuance of 336,000 common stock purchase options,
$316,000 resulting from the write-down of the Company's South Florida laboratory
facility pursuant to Financial Accounting Standards Board Statement No. 121 and
an increase in administrative salaries with related taxes and benefits of
approximately

18
<PAGE> 21
$262,000. In addition, the Company recognized $243,000 in compensation expense
reflecting the issuance of 400,000 shares of Viragen (Europe) Ltd. to the
officer/directors of Viragen (Europe) Ltd. and one employee of the Company. The
increase also reflects the overall level of administrative activity including
European travel associated with the establishment of the European production
facility located in Edinburgh, Scotland and related corporate development
efforts.

In September 1995, the Board of Directors granted 2,935,000
non-statutory options to directors, officers and key employees of the Company
under the provisions of the 1995 Stock Option Plan. The options granted have an
exercise price of $.50 per share and are exercisable for a period of five years.
The Company recognized compensation expense of $183,144 as a result of these
options which has been included in general and administrative expenses.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The response to this item is submitted as a separate section to this
report.

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

Not applicable.
PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

SERVED AS
OFFICER AND/OR
NAME AGE POSITION WITH THE COMPANY DIRECTOR SINCE
- ---- --- ------------------------- --------------
Gerald Smith .......... 67 Chairman of the Board and 1993
President 1995
Robert Zeiger ......... 53 Chief Executive Officer, and 1995
Director 1995
Dennis W. Healey ...... 49 Executive Vice President 1993
Chief Financial Officer, 1994
Treasurer 1980
Secretary and Director 1984
Charles F. Fistel ..... 36 Executive Vice President and 1994
Director 1996
Dr. Joseph P. Morris... 44 Vice President-Research
and Development 1995
Dr. Jay Sawardeker..... 59 Chief Operating Officer and
Executive Vice President-Technical
Affairs 1996
Robert C. Rech......... 33 Vice President 1997
Jose I. Ortega......... 25 Controller 1996
Peter D. Fischbein .... 57 Director 1981
Sidney Dworkin, Ph.D .. 76 Director 1994
Jay M. Haft ........... 61 Director 1994
William B. Saeger ..... 45 Director 1994
Fred D. Hirt .......... 54 Director 1996
Carl N. Singer ........ 79 Director 1997

GERALD SMITH, in accordance with February 1993 Stock Agreement, became
a Director on February 5, 1993, the date of the Initial Purchase by Cytoferon.
On May 12, 1993, Mr. Smith became President of the Company. In June 1994, Mr.
Healey relinquished his position as Chairman of the Board of Directors in favor
of Mr. Smith. Mr. Smith remains as Chairman of the Board and President of the
Company. Since 1982, he was a principal stockholder, President, Chief Executive
Officer and director of Business Development Corp. ("BDC"), which has served as
a managing entity and consultant to several high technology ventures including
Compupix Technology Joint Venture. From August 1991 to December 1991, Mr. Smith
was the Chief Executive Officer of Electronic Imagery, Inc., a company engaged
in the development of imaging software. Mr. Smith is also the President, Chief
Executive Officer and a director of Cinescopic Corporation and International
Database Service, Inc., computer-oriented companies which developed database
technology using the personal computer for audio, video, animation and real time
communication. Mr. Smith has discontinued BDC's operations in order to devote

19
<PAGE> 22
all of his time to the Company. Mr. Smith is also Chairman of the Board and
President of VEL and VUSA.

ROBERT H. ZEIGER was appointed Chief Executive Officer and Chief
Operating Officer and was elected as a Director in May 1995. Mr. Zeiger is a
pharmaceutical executive. From 1985 to 1994, Mr. Zeiger was employed by Glaxo,
Inc., Research Triangle Park, North Carolina, serving as Vice President and
General Manager of their Dermatological Division from 1985 to 1988 and Vice
President and General Manager of Glaxo Pharmaceuticals from 1991 to 1994. Mr.
Zeiger also served as Vice President, Marketing and Sales with Stiefel
Laboratories, Inc., Coral Gables, Florida, from 1979 to 1985, and as National
Sales Manager to Knoll Pharmaceutical Company, Whipping, New Jersey from 1971
to 1979. Mr. Zeiger is also Chief Executive Officer and Director of VEL.

DENNIS W. HEALEY is a Certified Public Accountant and was appointed
Chairman of the Board and Chief Executive Officer on April 13, 1993. In June
1994, Mr. Healey relinquished that position as Chairman of the Board to Mr.
Smith and in July 1994, relinquished the position of Chief Executive Officer
upon the employment of Mr. Fistel. Upon Gerald Smith becoming President on May
12, 1993, Mr. Healey became Executive Vice President and has served as Chief
Financial Officer and Treasurer of the Company since 1980. Mr. Healey was
appointed Secretary in 1994. Until his resignation in July 1996, Mr. Healy
served as Senior Vice President, Principal Financial Officer and Treasurer of
Medicore, Inc. ("Medicore") and Executive Vice President of its Techdyne
affiliate. He also served as Treasurer of most of Medicore's subsidiaries and as
a Vice President of Dialysis Corporation of America ("DCA"), a subsidiary of
Medicore and Secretary, Treasurer and director of other DCA subsidiaries. Mr.
Healey joined Medicore in 1976 as its Controller. Mr. Healey is also Executive
Vice President, Treasurer, Secretary and a Director of VEL and VUSA.

CHARLES F. FISTEL was appointed Chief Executive Officer of the Company
upon his employment in July 1994, which position he relinquished to Mr. Robert
H. Zeiger in May 1995, becoming an Executive Vice President of the Company. Mr.
Fistel was elected a Director of the Company in June 1996. Mr. Fistel, prior to
joining the Company, served for two years as an independent financial advisor to
publicly-traded and privately held emerging growth companies. Prior thereto,
between 1986 to 1992, he served as Executive Vice President, Chief Financial
Officer and a director of Tiger Direct, Inc., a Miami, Florida-based
publicly-traded computer technology development, marketing and distribution
company. From 1981 to 1986, Mr. Fistel who is also a Certified Public
Accountant, actively practiced public accounting. Mr. Fistel is also Executive
Vice President and a Director of VUSA.

PETER D. FISCHBEIN is an attorney who has been practicing law for
approximately 32 years. Mr. Fischbein served as the Company's Secretary between
May and December 1994. His former firm on occasion represented the Company,
Medicore and the Viragen Research Associates Limited Partnership ("Limited
Partnership") which has certain contracts with the Company. Mr. Fischbein is
also a director of Medicore (since 1984) and Techdyne (since 1985). Mr.
Fischbein has been general partner of several limited partnerships engaged in
oil exploration and real estate development.

SIDNEY DWORKIN, PH.D., elected a Director in August 1994, was a
founder, former President, Chief Executive Officer and Chairman of Revco, Inc.
Between 1987 and the present, Dr. Dworkin has also served as Chief Executive
Officer of Stonegate Trading, Inc., an importer and exporter of various health,
beauty aids, groceries and sundries. Between 1988 and the present, Dr.Dworkin
has served as Chairman of the Board of Advanced Modular Systems, which is
engaged in the sale of modular buildings. Between June 1993 and the present, Dr.
Dworkin has also served as Chairman of Global International, Inc., which is
engaged in development and sale of programmable cash registers. Dr. Dworkin also
serves on the Board of Directors of CCA Industries, Inc., Interactive
Technologies, Inc. and Northern Technologies International Corporation, all of
which are publicly-traded companies.

JAY M. HAFT, elected a Director in August 1994, is an attorney and of
counsel to Parker Duryee Rosoff & Haft, New York, NY has been a practicing
lawyer since 1959. Mr. Haft has specialized in the representation of emerging
growth companies, and has participated in fund raising for a number of
leading-edge medical technology companies and is Managing General Partner of
Venture Capital Associates. Ltd. and GenAm "1" Venture Fund, a

20
<PAGE> 23
domestic and international venture capital fund, respectively. Mr. Haft is also
a Director of numerous public and private corporations.

WILLIAM B. SAEGER, elected a Director in August 1994, is a Certified
Public Accountant with eighteen years experience in corporate strategic
planning, financial and tax planning, acquisitions, corporate capitalizations,
analysis and management of financial assets. Mr. Saeger has served as a
portfolio manager and analyst for a number of funds and is a director of Telemac
Cellular Corp. Mr. Saeger has also written for financial publications on federal
taxation and investment portfolio management.

FRED D. HIRT, elected as Director in June 1996, is a health care
executive and serves as the President and Chief Executive Officer of Mount Sinai
Medical Center in Miami Beach, Florida. Mr. Hirt is active in numerous community
healthcare and charitable organizations and serves on many of their Board of
Directors.

CARL N. SINGER, elected as director in August 1997, is the Chairman of
Fundamental Management Corporation, a Florida-based institutional investment
fund. Mr. Singer has served as a director, President and CEO of Sealy, Inc.,
Scripto, Inc. and the BVD Company.

There is no family relationship between any of the officers and
directors.

The Company has constituted Audit, Executive and Compensation
Committees. The audit committee consists of Messrs. Healey, Dworkin, Saeger and
Singer. The Executive Committee consists of Messrs. Smith, Zeiger, Healey and
Fistel. The Compensation Committee consists of Messrs. Haft and Dworkin.

The Audit Committee oversees the Company's audit activities to protect
against improper and unsound practices and to furnish adequate protection to all
assets and records. The Audit Committee also acts as liaison to the Company's
independent certified public accountants, and conducts such work as is necessary
and receives written reports, supplemented by such oral reports as it deems
necessary, from the audit firm. The Executive Committee is empowered to act for
the full Board in intervals between Board meetings, with the exception of
certain matters which by law may not be delegated. The Executive Committee will
meet as necessary, and all actions by the Committee are to be reported at the
next Board of Directors meeting. The Compensation Committee provides overall
guidance for officer compensation programs, including salaries and other forms
of compensation. While the audit committee and the compensation committee has
met periodically on an informal basis, the Board of Directors has chosen to meet
as a full Board to evaluate audit and compensation matters.

As approved at a 1997 Special Meeting of Shareholders in June 1997, the
Board of Directors will be divided into three classes. At each Annual Meeting
commencing with the 1997 Annual Meeting, one class of directors will be elected
to succeed those whose terms expired, with each newly-elected director to serve
a three-year term. Prior thereto, the term of office for the Company's Directors
has been one year and they served until the following annual meeting of
stockholders. The Company anticipates holding its next annual meeting during the
fourth calendar quarter of 1997.

21
<PAGE> 24
ITEM 11. EXECUTIVE COMPENSATION AND EMPLOYMENT AGREEMENTS

The following table sets forth information concerning the compensation
and employment agreements of the Chief Executive Officers of the Company and two
other most highly compensated executive officers as of June 30, 1997.

<TABLE>
<CAPTION>
OTHER ALL
NAME AND ANNUAL RESTRICTED OTHER
PRINCIPAL COMPEN- STOCK OPTIONS/ LTIP COMPEN-
POSITION YEAR SALARY BONUS SATION AWARDS SARS (#) PAYOUTS SATION
-------- ---- ------ ----- ------ -------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gerald Smith 1997 $175,885 1,050,000
Chairman of 1996 154,615 $7,500 $14,000 1,600,000
Board and 1995 70,000 9,317 50,000
President (1)

Robert H. Zeiger 1997 65,250 ----- 5,000 50,000
CEO, Director (2) 1996 66,653 100,000
1995 11,538 1,000,000

Dennis W. Healey 1997 163,345 350,000
Exec. V.P., 1996 78,653 1,250 8,500 500,000
Treas., CFO and 1995 75,000 0 10,167 50,000
Director (3)

Charles F. Fistel, 1997 138,886 300,000
Exec. V.P, 1996 110,000 6,000 110,000
Director (4) 1995 106,615 ----- 19,208 300,000
</TABLE>

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

(1) Mr. Smith is Chairman of the Board, Chief Executive Officer and President
of Cytoferon, a former affiliate of the Company. Cytoferon previously had a
consulting and marketing agreement with the Company pursuant to which
Cytoferon was entitled to receive consulting fees, commissions, fees for
certain foreign transactions and foreign royalties.

In November 1993, as modified on December 15, 1994, Mr. Smith entered into
a two-year employment agreement expiring November 18, 1995, with the
Company at no salary. The agreement provided for the sale of 750,000 shares
of common stock at $.30 per share payable through the issuance of a
promissory note with the shares being issued into escrow pending cash
payments further providing the shares may be released from escrow in
increments of no less than $3,000. These shares were purchased through the
issuance of a note in the principal amount of $217,500 in April 1994 with
Mr. Smith receiving a bonus equal to the par value ($7,500) of shares
purchases. On May 15, 1995, the Company forgave Mr. Smith's note in lieu of
bonus for the 1995 fiscal year, following unanimous approval of the
independent members of the Board of Directors. The agreement also provided
for the issuance of 750,000 options to purchase common stock subject to
meeting certain production related or capital raising criteria. The
criteria were successfully met with the closing of the Company's $3.5
million Private Placement in August 1994 and, accordingly, these options
became exercisable.

Mr. Smith had an employment agreement with Cytoferon effective June 2,
1992, for a term ending June 30, 1995. He was provided with an annual
salary of $120,000 the first year, $130,000 the second year and $140,000
the third year. The salary for the period prior to May 12, 1993, the
completion of the Stock Agreement, was accrued and was payable from
available cash. Mr. Smith was entitled to participate in any Cytoferon
benefit plans of which there were none. The Cytoferon employment agreement
further provided Mr. Smith with certain severance arrangements if there was
a change in control of Cytoferon or the Company. In August 1994, the Board
of Directors of the Company voted to terminate the Management and Marketing

22
<PAGE> 25
Services Agreement with Cytoferon, terminating all fees payable thereunder,
concurrent with the issuance of the 1,750,000 contingently issuable shares
subject to receipt of a fairness opinion which was subsequently received.
In connection with this transaction, the Company agreed to assume the
obligations of Mr. Smith's employment agreement with Cytoferon through
November 8, 1995. The Company entered into a two-year employment agreement
with Mr. Smith, effective October 6, 1995, under terms similar to his
previous employment agreement, modified to increase his salary by $20,000
and $10,000 for the first and second years, respectively. In January 1996,
Mr. Smith exercised options to purchase 750,000 shares of common stock
through the issuance of a note in the principal amount of $217,500 with the
shares being issued into escrow pending cash payments further providing the
shares may be released from escrow in increments of no less than $3,000.
Mr. Smith received a bonus equal to the par value ($7,500) of the shares
purchased. On June 6, 1996, the Company forgave Mr. Smith's note in lieu of
bonus for the 1996 fiscal year, following unanimous approval of the
independent members of the Board of Directors. On March 1, 1997 Mr. Smith
entered into a two-year employment agreement, superceding all previous
agreements, under terms similar to his previous employment agreement. The
agreement provided for a salary of $190,000 and $200,000 for the first and
second years, respectively, and further provided for options to purchase
1,000,000 shares of common stock at $3.22 per share, exercisable over five
years. See Item 13, "Certain Relationships and Related Transactions."

(2) On May 9, 1995, the Company entered into a two-year employment agreement
expiring May 1, 1997, with Robert H. Zeiger to serve as Chief Executive
Officer and Chief Operating Officer of the Company at an annual salary of
$120,000. The agreement provided for health, life and similar employee
benefits generally made available to other employees of the Company, use of
an automobile and related maintenance expenses and reimbursement for
expenses incurred in fulfilling his normal responsibilities to the Company.
The agreement provided for the issuance of options to purchase the
aggregate of 1,000,000 shares of Common Stock of the Company at an exercise
price of $.96 per share, exercisable with respect to 500,000 shares
commencing May 8, 1996 through May 8, 2000 and exercisable for the
remaining 500,000 shares commencing May 8, 1997 through May 8, 2001. The
right to exercise such options may be accelerated upon the occurrence of
certain material corporate transactions. The options are terminable prior
to the lapse of their respective terms only if Mr. Zeiger's employment
should be terminated for cause, and, in that event, the options must be
exercised to the extent that they have vested within 90 days of such
termination. On August 1, 1997 Mr. Zeiger entered into a one year
employment agreement under terms similar to his previous agreement except
for certain notice of termination provisions. This agreement provides for a
salary of $120,000 per year with an additional $5,000 per month, payable
monthly, for the first six months of the contract term.

(3) In April 1994, as modified on December 15, 1994, Mr. Healey entered into an
employment agreement expiring November 18, 1995, with the Company at an
annual salary of $75,000. The agreement provided for health, life and
similar employee benefits generally made available to other employees of
the Company, an automobile and related expenses. The agreement further
provided for the sale of 125,000 shares of common stock at $.30 per share
payable through the issuance of a promissory note with the shares being
issued into escrow pending cash payments further providing the shares may
be released from escrow in increments of no less than $3,000. These shares
were purchased in June 1994 through the issuance of a note in the principal
amount of $36,250, with Mr. Healey receiving a bonus equal to the par value
($1,250) of the shares purchased. On May 15, 1995, the Company forgave Mr.
Healey's note in lieu of bonus for the 1995 fiscal year, following
unanimous approval of the independent members of the Board of Directors.
The agreement also provided for the issuance of 125,000 options to purchase
common shares at $.30 per share subject to the Company reaching certain
production levels or raising certain minimums in capital during the
employment contract period, consistent with similar provisions contained in
Mr. Smith's November 1993 employment agreement. These criteria were met in
August 1994 and, accordingly, these options became exercisable. The Company
entered into a two-year employment agreement with Mr. Healey, effective
October 6, 1995, under terms similar to his previous employment agreement,
modified to increase his salary by $5,000 and $5,000 for the first and
second years, respectively. In July 1996, Mr. Healey resigned all positions
he held with Medicore and its subsidiaries and entered into an employment
agreement with Viragen (Europe) Ltd. This agreement provided for a salary
of $85,000 per year and expire in September 1997. In January 1996, Mr.
Healey exercised options to purchase 125,000 shares of common stock though
the issuance of a note in the principal amount of $36,250 with the

23
<PAGE> 26
shares being issued into escrow pending cash payments reelecting the
shares to be released from escrow in increments of no less than $3,000.
Mr. Healey received a bonus equal to the par value ($1,250) of the
shares purchased. On June 6, 1996, the Company forgave Mr. Healey's
note in lieu of bonus for the 1996 fiscal year, following unanimous
approval of the independent members of the Board of Directors. On March
1, 1997 Mr. Healey entered into two-year employment agreement,
superceding all previous agreements, under terms similar to his
previous employment agreements. The agreement as amended July 1, 1997,
provided for a salary $190,000 and $195,000 for the first and second
years, respectively, and further provided for options to purchase
300,000 shares of common stock at $3.22 per share, exercisable over
five years.

(4) On July 1, 1994, as modified on December 15, 1994, the Company entered
into a two-year employment agreement expiring July 1, 1996, with
Charles Fistel to serve as Chief Executive Officer (which position he
relinquished to Mr. Zeiger in May 1995, assuming the position of
Executive Vice President) at an annual salary of $110,000. The
agreement provided for health, life, and similar employee benefits
generally made available to other employees of the Company, use of an
automobile and related expenses. The agreement provided for the
issuance of options to purchase the aggregate of 300,000 shares of
common stock at an exercise price of $.30 per share, exercisable with
respect to 150,000 shares commencing June 30, 1995, through July 1,
1999, and exercisable for the remaining 150,000 shares commencing June
30, 1996, through July 1, 2000. The right to exercise such options was
accelerated based on the Company having raised certain minimums in
capital. On July 1, 1996, upon the expiration of Mr. Fistel's 1994
employment agreement, Mr. Fistel entered into a two-year employment
under terms similar to his previous employment agreement modified to
increase his salary $30,000 and $10,000 in the first and second years,
respectively.

In November 1995, VSL, a wholly-owned subsidiary of VEL issued an
aggregate of 7.144 shares of VSL common stock at $56.00 per share to
individuals serving as officers and directors of VEL and one employee of the
Company. Pursuant to the Agreement and Plan of Reorganization, these shares
were exchangeable into an aggregate of 400,000 shares of VEL. Of these options,
100,000 were granted each to (i) Mr. Gerald Smith, (ii) Mr. Robert H. Zeiger,
and (iii) Mr. Dennis W. Healey, all serving as officers and directors of VEL.
All options on VSL were exercised and the related shares exchanged for VEL
common stock.

The Company recognized $243,000 in compensation expense as a result of
the issuance of these shares.

OPTION GRANTS IN LAST FISCAL YEAR

The following table sets forth information with respect to the grant of
options to purchase shares of Common Stock during the fiscal year ended June 30,
1997 to each person named in the Summary Compensation Table.

<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED (#) FISCAL YEAR ($/SHARES) DATE
- ---- ----------- ----------- ---------- ----
<S> <C> <C> <C> <C>
Gerald Smith ........ 1,050,000 35.5% $ 3.22 02-27-02
Robert H. Zeiger .... 50,000 1.7 3.22 02-27-02
Dennis W. Healey .... 350,000 11.8 3.22 02-27-02
Charles F. Fistel ... 300,000 10.1 3.22 02-27-02
</TABLE>

OPTION EXERCISES AND HOLDINGS

The following table sets forth information with respect to the exercise
of options to purchase shares of Common Stock during the fiscal year ended June
30, 1997 to each person named in the Summary Compensation Table and the
unexercised options held as of the end of the 1997 fiscal year.

24
<PAGE> 27

AGGREGATED OPTION EXERCISED IN LAST FISCAL YEAR
AND 1997 FISCAL YEAR END OPTION VALUES

<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
VALUE REALIZED IN THE MONEY OPTIONS AT
MARKET PRICE NUMBER OF UNEXERCISED FY-END (BASED ON FY-
SHARES AT EXERCISE OPTIONS AT FY-END PRICE OF $2.69 END/SHARE)
ACQUIRED LESS PRICE ------------------------- -------------------------
NAME ON EXERCISE EXERCISABLE EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Gerald Smith ...... -- $ -- 2,700,000 $3,588,500
Robert H. Zeiger .. 25,000 90,625 1,050,000 1,730,000
Dennis W. Healey .. -- -- 900,000 1,179,500
Charles F. Fistel . -- -- 710,000 957,900
</TABLE>

1997 STOCK OPTION PLAN AND 1995 AMENDED STOCK OPTION PLAN

On May 15, 1995 the Board of Directors adopted, subject to approval by
the stockholders, a stock option plan called the "1995 Stock Option Plan." On
September 22, 1995, the Board of Directors amended the 1995 Stock Option Plan
(collectively the "95 Plan") to define certain terms and clarify the minimum
exercise price of the Non-Qualified Options, described herein, as not less than
55% of the fair market value. The 95 Plan was submitted to the stockholders of
the Company at the Annual Meeting of Stockholders held on December 15, 1995, and
the Stockholders ratified the Plan at that time.

On January 27, 1997 the Board of Directors adopted, subject to approval
by the stockholders, a stock option plan called the "1997 Stock Option Plan"
(the "97 Plan"), containing terms and provisions similar to the 95 Plan. The 97
Plan was submitted to the Stockholders for approval at the Annual Meeting of
Stockholders held on February 28, 1997 at which time the Plan was ratified.

Under both the 95 Plan and the 97 Plan (collectively the "Plans"), the
Company has reserved 7,000 shares (4,000,000 shares - 95 Plan and 3,000,000
shares - 97 Plan) of Common Stock for issuance pursuant to options granted under
the Plans ("Plan Options"). The full Board of Directors or the Compensation
Committee of the Board of Directors (the "Committee") administers the Plans
including, without limitation, the selection of the persons who will be granted
Plan Options under the Plans, the type of Plan Options to be granted, the number
of shares subject to each Plan Options and the Plan Options price.

Plan Options granted under the Plans may either be options qualifying
as incentive stock options ("Incentive Options") under Section 422 of the
Internal Revenue Code of 1986, as amended, or options that do not so qualify
("Non-Qualified Options"). In addition, the Plans also allow for the inclusion
of a reload option provision ("Reload Option"), which permits an eligible person
to pay the exercise price of the plan Option with shares of Common Stock owned
by the eligible person and receive a new Plan Option to purchase shares of
Common Stock equal in number to the tendered shares. Any Incentive Option
granted under the Plan must provide for an exercise price of not less than 100%
of the fair market value of the underlying shares on the date of such grant, but
the exercise price of any Incentive Option granted to an eligible employee
owning more than 10% of the Company's Common Stock must be at least 110% of such
fair market value as determined on the date of the grant. The term of each Plan
Option and the manner in which it may be exercised is determined by the Board of
Directors or the Committee, provided that no Plan Option may be exercisable more
than 10 years after the date of its grant and, in the case of an Incentive
Option granted to an eligible employee owning more than 10% of the Company's
Common Stock, nor more than five years after the date of the grant.

The exercise price of Non-Qualified Options shall be determined by the
Board of Directors or the Compensation Committee.

25
<PAGE> 28
The per share purchase price of shares subject to Plan Options granted
under the Plans may be adjusted in the event of certain changes in the Company's
capitalization, but any such adjustment shall not change the total purchase
price payable upon the exercise in full of Plan Options granted under the Plans.

Officers, directors, key employees and consultants of the Company and
its subsidiaries are eligible to receive Non-Qualified Options under the Plans.
Only officers, directors and employees of the Company who are employed by the
Company or by any subsidiary thereof are eligible to receive Incentive Options.

All Plan Options are nonassignable and nontransferable, except by will
or by the laws of descent and distribution, and during the lifetime of the
optionee, may be exercised only by such optionee. If an optionee's employment is
terminated for any reason, other than his death or disability or termination for
cause, or if an optionee is not an employee of the Company but is a member of
the Company's Board of Directors and his service as a director is terminated for
any reason, other then death or disability, the Plan Option granted to him shall
lapse to the extent unexercised on the earlier of the expiration date or 30 days
following the date of termination. If the optionee dies during the term of his
employment, the Plan Option granted to him shall lapse to the extent unexercised
on the earlier of the expiration date of the Plan Option or the date one year
following the date of the optionee's death. If the optionee is permanently and
totally disabled within the meaning of Section 22(c) (3) of the Internal Revenue
Code of 1986, the Plan Option granted to him lapses to the extent unexercised on
the earlier of the expiration date of the option or one year following the date
of such disability.

The Board of Directors or Committee may amend, suspend or terminate the
Plans at any time, except that no amendment shall be made which (i) increases
the total number of shares subject to the Plan or changes the minimum purchase
price therefor (except in either case in the event of adjustments due to changes
in the Company's capitalization), (ii) affects outstanding Plan Options or any
exercise right thereunder, (iii) extends the term of any Plan Option beyond ten
years, or (iv) extends the termination date of the Plans. Unless the Plans shall
theretofore have been suspended or terminated by the Board of Directors, the 95
Plan shall terminate on May 15, 2005 and the 97 Plan shall terminate on January
27, 2007. Any such termination of either Plan shall not affect the validity of
any Plan Options previously granted thereunder.

As of September 18, 1997, 3,996,500 options have been issued under the
1995 Amended Stock Option Plan and 2,614,500 options have been issued under the
1997 Stock Option Plan.

ADDITIONAL STOCK OPTIONS

In February 1997, the Board of Directors awarded options to purchase
1,750,000 shares of Common Stock to officers and directors of the Company
exercisable over five years at an exercise price of $3.22 per share. The options
were granted to the following individuals: Gerald Smith (1,050,000), Robert H.
Zeiger (50,000), Dennis W. Healey (350,000), Charles F. Fistel (50,000), Peter
D. Fischbein (50,000), Sidney Dworkin (50,000), Jay Haft (50,000), William B.
Saeger (50,000) and Fred D. Hirt (50,000). In addition, between August 1996 and
June 1997, the Company awarded options to purchase up to 459,500 shares of
Common Stock to other employees of the Company (inclusive of 250,000 of Charles
F. Fistel), which options are exercisable at prices ranging from $1.97 to $3.69
per share during the five year term of the options.

In October 1995, the Board of Directors awarded options to purchase
2,935,000 shares of Common Stock to the officers, directors and key employees of
the Company exercisable of $0.50 per share at any time on or prior to October 6,
2000. The options were granted to the following individuals: Gerald Smith
(1,600,000), Robert H. Zeiger (100,000), Dennis W. Healey (500,000), Charles F.
Fistel (110,000), Peter D. Fischbein (225,000), Sidney Dworkin (100,000), Jay W.
Haft (100,000), William B. Saeger (100,000) and to key employees (100,000). In
addition, between October 1995 and June 1996, the Company awarded options to
purchase up to 500,500 shares of Common Stock to other employees of the Company,
which options are exercisable at prices ranging from $0.50 to $5.90 per share
during the five-year term of the options.

26
<PAGE> 29
In June 1995, the Company issued 33,000 Incentive Stock Options to
non-executive employees under the 95 Plan. The options granted vest over
different periods not exceeding two years.

In May 1995, the Company issued 1,000,000 Common Stock purchase options
to Mr. Robert H. Zeiger, Chief Executive Officer, Chief Operating Officer and a
director, pursuant to an Employment Agreement. Under the terms of the Agreement,
500,000 options became exercisable in May 1996 and 500,000 options became
exercisable in May 1997. The options carry a five year term and are exercisable
at $.96 per share.

In August 1994, the Company issued five-year options to purchase an
aggregate of 350,000 shares exercisable at $1.00 per share which were divided
equally among the seven directors of the Company (one of whom subsequently
resigned). In addition, between May 1994 and March 1995, the Company issued
five-year options to purchase an aggregate of 570,000 shares of Common Stock at
exercise prices ranging from $.62 to $1.00 per share to six key employees.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information regarding the
Company's Common Stock beneficially owned at September 18, 1997, (i) by each
person who is known by the Company to own beneficially or exercise voting or
dispositive control over 5% or more of the Company's Common Stock, (ii) by each
of the Company's directors, and (iii) by all officers and directors as a group.
A person is deemed to be a beneficial owner of any securities of which the
person has the right to acquire beneficial ownership within 60 days. At
September 18, 1997, there were 48,441,127 shares of Common Stock of the Company
outstanding.

<TABLE>
<CAPTION>
BENEFICIAL PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP (1) CLASS (2)
- ------------------------------------ ------------- ---------
<S> <C> <C>
Gerald Smith ............................... 3,050,000(3) 6.3%
Robert H. Zeiger ........................... 1,050,000(4) 2.2
Dennis W. Healey ........................... 1,025,000(5) 2.1
Charles F. Fistel .......................... 925,455(6) 1.9
Peter D. Fischbein ......................... 450,000(7) 0.9
Sidney Dworkin, Ph.D ....................... 375,244(8) 0.8
Jay M. Haft ................................ 247,744(9) 0.5
William B. Saeger .......................... 739,089(10) 1.5
Fred D. Hirt ............................... 75,000(11) .2
Carl N. Singer ............................. 1,465,766 3.0
Officers & Directors (as a Group 14 persons) 10,468,298 21.8%
</TABLE>

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

(1) Based upon information furnished to the Company by the principal security
holders or obtained from the stock transfer books of the Company. Other
than indicated in the notes, the Company has been informed that such
persons have sole voting and dispositive power with respect to their
shares.

(2) Based on 48,441,127 shares of Common Stock outstanding as of September 18,
1997. Exclusive of (i) 11,289 shares of Common Stock reserved for issuance
pursuant to conversion of 2,650 outstanding shares of Preferred Stock each
convertible into 4.26 shares of Common Stock; and (ii) 9,337,138 shares of
Common Stock reserved for issuance pursuant to exercise of options and
warrants of the Company.

(3) Mr. Smith is Chairman of the Board of Directors and President of the
Company. Includes (i) 350,000 shares owned directly by Mr. Smith; (ii)
50,000 options exercisable at $1.00 per share granted to all Directors in
August 1994; (iii) 1,600,000 options exercisable at $.50 per share granted
in October 1995; (iv) 1,000,000 options exercisable at $3.22 per share
granted pursuant to Mr. Smith's March 1, 1997 Employment Agreement and (v)
50,000 options exercisable at $3.22 granted to all Directors in February
1997.

(4) Mr. Zeiger is Chief Executive Officer, Chief Operating Officer and a
Director of the Company. Includes (i) 1,000,000 Common Stock purchase
options exercisable at $.96 per share pursuant to Mr. Zeiger's 1995

27
<PAGE> 30
Employment Agreement and (ii) 50,000 options exercisable at $3.22 granted
to all Directors in February 1997.

(5) Mr. Healey is Executive Vice President, Treasurer, Chief Financial
Officer, Secretary and a Director of the Company. Includes (i) 125,000
shares held in Mr. Healey's name; (ii) 50,000 options exercisable at $1.00
per share granted at all Directors in August 1994; (iii) 500,000 options
exercisable at $.50 per share granted in October 1995; (iv) 300,000
options exercisable at $3.22 per share granted pursuant to Mr. Healey's
March 1, 1997 Employment Agreement and (v) 50,000 options exercisable at
$3.22 granted to all Directors in February 1997.

(6) Mr. Fistel is an Executive Vice President and was elected a Director of
the Company in June 1996. Includes (i) 215,455 shares owned by Mr. Fistel
and his wife; (ii) 300,000 options exercisable at $.30 per share; (iii)
110,000 options exercisable at $.50 per share; (iv) 250,000 options
exercisable at $2.75 per share granted pursuant to Mr. Fistel's July 1,
1996 Employment Agreement and (v) 50,000 options exercisable at $3.22
granted to all Directors in February 1997.

(7) Mr. Fischbein is a Director of the Company. Includes (i) 125,000 shares
held in Mr. Fischbein's name; (ii) 50,000 options exercisable at $1.00 per
share granted to all Directors in August 1994; (iii) 225,000 options
exercisable at $.50 per share granted in October 1995; (iv) and 50,000
options exercisable at $3.22 granted to all Directors in February 1997.

(8) Mr. Dworkin is a Director of the Company. Includes (i) 175,244 shares
owned directly by Mr. Dworkin and his wife; (ii) 50,000 options
exercisable at $1.00 per share granted to all Directors in August 1994;
(iii) 100,000 options exercisable at $.50 per share granted in October
1995; and (iv) 50,000 options exercisable at $3.22 granted to all
Directors in February 1997.

(9) Mr. Haft is a Director of the Company. Includes (i) 47,744 shares owned
directly to Mr. Haft; (ii) 50,000 options exercisable at $1.00 per share
granted to all Directors in August 1994; (iii) 100,000 options exercisable
at $.50 per share granted in October 1995; and (iv) 50,000 options
exercisable at $3.22 granted to all Directors in February 1997.

(10) Mr. Saeger is a Director of the Company. Includes (i) 89,500 shares owned
directly by Mr. Saeger; (ii) 449,589 shares held by Hedge Fund Management.
Mr. Saeger holds a controlling position as Fund Manager of Hedge Fund
Management, holder of these shares and is considered a beneficial owner;
(iii) 50,000 options exercisable at $1.00 per share granted to all
Directors in August 1994; (iv) 100,000 options exercisable at $.50 per
share granted in October 1995 and (v) 50,000 options exercisable at $3.22
granted to all Directors in February 1997.

(11) Mr. Hirt was elected a Director of the Company in June 1996. Includes (i)
25,000 options exercisable at $3.96 per share granted in June 1996
pursuant to the provisions of the Plan and (ii) 50,000 options exercisable
at $3.22 granted to all Directors in February 1997.

On October 6, 1995, the Board of Directors awarded options to purchase
2,835,000 shares of Common Stock to the officers and directors of the Company
exercisable of $0.50 per share at any time on or prior to October 6, 2000. The
options were granted to the following individuals: Gerald Smith (1,600,000),
Robert H. Zeiger (100,000), Dennis W. Healey (500,000), Charles F. Fistel
(110,000), Peter D. Fischbein (225,000), Sidney Dworkin (100,000), Jay M. Haft
(100,000) and William B. Saeger (100,000). In addition, between October 1995 and
June 1996, the Company awarded options to purchase up to 500,500 shares of
Common Stock to other employees of the Company, which options are exercisable at
prices ranging from $0.50 to $5.90 per share during the five-year term of the
options.

28
<PAGE> 31
BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Exchange Act requires the Company's directors and
executive officers, and persons who own more than ten percent (10%) of a
registered class of the Company's equity securities, to file with the Commission
initial reports of ownership and reports of changes in ownership of Common Stock
and other equity securities of the Company. Officers, directors and greater than
ten percent (10%) stockholders are required by Commission regulation to furnish
the Company with copies of all Section 16(a) forms they file.

To the Company's knowledge, based solely on a review of the copies of
such reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended June 30, 1997, all Section
16(a) filing requirements applicable to its officers, directors and greater than
ten percent (10%) beneficial owners were completed except that Dr. Jay
Sawardeker, a Vice President, did not file one report, covering one options
grant transaction, in a timely manner.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Gerald Smith, Chairman of the Board of Directors, President and
Director of the Company, is the sole stockholder of Cytoferon, a former active
affiliate of the Company.

Peter D. Fischbein is a Director of the Company, and a directors of
Medicore and Techdyne, was a member of a law firm, now dissolved, which firm
acted as counsel to the Company, and Medicore from time to time. Mr. Fischbein's
firm also handled the legal work for the Limited Partnership which has licensing
agreements with the Company. In December 1994, Mr. Fischbein resigned as
Secretary of the Company. In July 1994, Mr. Fischbein, in recognition for
several years of service as a Director of the Company, was provided the right to
purchase 125,000 shares of Common Stock at $.30 per share (market price at that
time was approximately $.53 per share), payable through the issuance of a note
in the principal amount of $36,250, with Mr. Fischbein receiving a bonus equal
to the par value ($1,250) of the shares purchased. On May 15, 1995, the Company
forgave Mr. Fischbein's note in lieu of a bonus for the 1995 fiscal year,
following unanimous approval of the independent members of the Board of
Directors.

On February 5, 1993, the Stock Agreement with Cytoferon was executed,
the initial $100,000 investment was made by Cytoferon and Gerald Smith, Chief
Executive Officer, director and principal of Cytoferon became a Director of the
Company. Upon Cytoferon's additional investment in May 1993, pursuant to which
Cytoferon has invested $1,000,000 for 6,000,000 shares of Common Stock of the
Company, Seymour Friend resigned as director. Mr. Friend is an officer and
director of Medicore. In May 1993, Cytoferon moved its offices to the Company's
facilities in Hialeah, Florida. In November 1993, the Company entered into the
Additional Stock Purchase Agreement with Cytoferon and thereafter, issued
1,333,333 shares of common stock to Cytoferon for an additional investment of
$400,000.

In connection with Cytoferon's investments, the Company entered into a
Marketing and Management Services Agreement ("MMS Agreement") with Cytoferon
pursuant to which agreement Cytoferon became consultant to and exclusive
distributor of products of the Company not approved by the U.S. Food and Drug
Administration ("FDA") for national distribution in exchange for certain fees
and commissions. The MMS Agreement provided for a management consulting fee of
$240,000 per year subject to Cytoferon meeting certain per year and aggregate
initial term and renewal term sales requirements. In addition, the MMS Agreement
provided that Cytoferon was to have been the exclusive worldwide distributor,
subject to maintaining certain sales minimums for all of the Company's non-FDA
approved products for three years, a 4% sales commission on such sales, 50% of
all fees received by the Company from the sale of any foreign franchises,
licenses, technology transfer or joint ventures agreements and 20% of any
ongoing foreign royalty payments.

29
<PAGE> 32
Cytoferon had obtained funds for such investments through sale of
$2,181,500 principal amount of its Debentures between February 1993 and March
1994 (net of $849,250 of Debentures which were retired as a result of the
settlement of the Cytoferon Debentures holders' suit against Cytoferon, Viragen
and certain other parties). Each of the series of Debentures issued by Cytoferon
carried an identical interest rate of 8.5%, were convertible into Common Stock
of Viragen at $.30 per share and were secured by Common Stock of Viragen
acquired through Cytoferon's investment in Viragen. The Cytoferon's Debentures
were converted into 7,271,666 shares of Common Stock of Viragen in December
1994, at which time accrued interest of $133,364 was converted into 444,547
shares of Common Stock of Viragen also at a conversion ratio of $.30 per share.

The Company's management believed it was in the long-term best interest
of the Company to unify and consolidate management functions and efforts and
eliminate conflicts that could arise by virtue of minimum sales requirements
imposed on Cytoferon that could be inconsistent with the Company's plans to
introduce new production technologies and refinement of related protocols.
Accordingly, the Company executed the Subsequent Agreement, subject to receipt
of a fairness opinion received in December 1994, which terminated the MMS
Agreement, the Stock Purchase Agreement and Additional Stock Purchase Agreement
and accelerated the issuance of the 1,750,000 shares previously contingently
issuable under the Additional Stock Agreement concurrent with the cancellation
of the aforementioned agreements.

Messrs. Sidney Dworkin, Jay M. Haft and William B. Saeger, Directors of
the Company, Mr. Jerome E. Treisman, a former director, and Charles F. Fistel,
an Executive Vice President of the Company, purchased Cytoferon 8-1/2%
Convertible Debentures in the respective principal amounts of $40,000, $62,500,
$150,000, $22,500 and $50,000 which were convertible into common stock of the
Company. The principal amount of such Debentures together with accrued interests
were converted, effective September 30, 1994, at $.30 per share and accrued
interest into 175,244 shares, 220,744 share, 533,766 shares, 78,668 and 177,922
shares of common stock of the Company.

In November 1993, the Company issued $200,000 in 8-1/2%, three-year
convertible debentures. These debentures were converted at $.30 per share in
666,668 shares of common stock on October 31, 1994. These shares are held by
Fundamental Management Corp. and Hedge Fund Management, which are investment
funds then managed by William B. Saeger, a Director of the Company. Mr Saeger
remains the manager of Hedge Fund Management.

On December 8, 1995, the Company consummated an Agreement and Plan of
Reorganization with Sector Associates, Ltd. (the former name for Viragen
(Europe), Ltd.) ("VEL") pursuant to which VEL acquired 100% of the outstanding
capital stock of Viragen (Scotland) Ltd. in exchange for which Viragen received
newly issued shares of convertible securities of VEL which represented
approximately 94% of the then issued and outstanding capital of VEL. Prior
thereto, on July 12, 1995, Viragen Technology, Inc., a wholly-owned subsidiary
of the Company, entered into a License Agreement with VSL pursuant to which VSL
obtained certain exclusive rights applicable to the EU countries and
none-exclusive rights throughout the world (except within the United States and
its territories) to engage in the manufacture and distribution of certain
proprietary products and technologies relating to the therapeutic application of
human leukocyte interferon. The term of the license is for 15 years, which is
automatically renewed for successive 15-year periods. At the present time, the
Company maintains at 70.3% capital stock interest in VEL, which in turn owns all
of the capital stock of VSL.

Messrs. Gerald Smith, Robert H. Zeiger and Dennis W. Healey, who are
principal executive officers with the Company, also serve as the principal
executive officers of VEL. Messrs. Smith, Healey and Fistel also serve as
principal executive officers of the Company's majority-owned subsidiary Viragen
U.S.A., Inc. Commencing in July 1996, following his resignation from Medicore
and subsidiaries, Mr. Healey who is serving as VEL's Executive Vice President,
Treasurer and Secretary, began receiving an annual salary of $85,000 per year.
On March 1, 1997, Messrs. Smith and Healey entered into two year employment
agreements, subsequently amended with VEL until terms similar to their
employment agreement with the Company. The Agreements provide for annual
salaries of $72,000 and $52,000, respectively. In November 1995, VSL issued
options to purchase 100,000 share of each of its Common Stock to Messrs. Smith,
Zeiger and Healey, which following the consummation of the Sector reorganization
agreement were converted into options to purchase and aggregate of 300,000
shares of Common

30
<PAGE> 33
Stock of VEL exercised at $.001 per share. All of such options were exercised at
January 1996.

PART IV

ITEM 14. EXHIBIT AND REPORTS ON FORM 8-K

(a) THE FOLLOWING IS A LIST OF DOCUMENTS FILED AS PART OF THIS
ANNUAL REPORT.

1. All financial statements
See Index to Consolidated Financial Statements

2. Exhibits

(2) Plan of acquisition, reorganization, arrangement, liquidation
or succession

(i) Plan of Merger between Florida Immunological
Institute, Inc. and Vira-Tech, Inc., dated September
30, 1986 (incorporated by reference to the Company's
registration statement on Form S-2, dated October 24,
1986, as amended File No. 33-9714 ("1986 Form S-2"),
Part II, Item 16, 2.1)

(ii) Articles of Merger of Florida Immunological Institute
into Vira-Tech, Inc., dated September 30, 1986
(incorporated by reference to 1986 Form S-2, Part II,
Item 16, 2.2)
(3)
(i) Articles of Incorporation and By-Laws (incorporated
by reference to the Company's
(ii) Amended Certificate of Incorporation (incorporated by
reference to 1986 Form S-2, Part II, Item 16, 4.2)

(4) Instruments defining the rights of security holders, including
indentures

(i) Certificate of Designation for Series A Preferred
Stock, as amended (incorporated by reference to 1986
Form S-2, Part II, Item 16, 4.4)

(ii) Specimen Certificate for Unit (Series A Preferred
Stock and Class A Warrant) (incorporated by reference
to 1986 Form S-2, Part II, Item 15, 4.5)

(iii) Omitted

(iv) Omitted

(v) Omitted

(vi) Omitted

(vii) Omitted

(viii) Form of three years 8.5% Convertible Subordinated
Debenture (incorporated by reference to the Company's
Current Report on Form 8-K dated November 17, 1993)

(ix) Form of Stock Option Agreement dated November 19,
1993, issued to Messrs. Dennis W. Healey and Peter D.
Fischbein (incorporated by reference to the Company's
Current Report on Form 8-K dated November 17, 1993)

(x) 1995 Stock Option Plan

(xi) Certificate of Designation of Series B Preferred
Stock (incorporated by reference to the Company's
Current Report on Form 8-K dated June 7, 1996)

(10) Material contracts

(i) Research Agreement between the Registrant and Viragen
Research Associates Limited Partnership dated
December 29, 1983 (incorporated by reference to
Medicore's S-1, File No. 2-89390, dated February 10,
1984 ("Medicore's S-1"), Part II, Item 16(a) (10)
(xxxiii))

(ii) License Agreement between the Registrant and Viragen
Research Associates Limited Partnership dated
December 29, 1983 (incorporated by reference to
Medicore's S-1, Part II, Item 16 (a) (10) (xxxiv))

(iii) Omitted

(iv) Royalty Agreement between the Company and Medicore,
Inc. dated November 7, 1986

31
<PAGE> 34

(incorporated by reference to the November 1986 Form
8-K, Item 7(c) (i))

(v) Amendment to Royalty Agreement between the Company
and Medicore, Inc. dated November 21, 1989
(incorporated by reference to the Company's Current
Report on Form 8-K dated December 6, 1989, Item 7(c)
(i))

(vi) Promissory Note from the Company to Medicore, Inc.
dated August 6, 1991 (incorporated by reference to
the Company's 1991 Form 10-K, Part IV, Item 10(a)
(10) (xx))

(vii) Loan Agreement between the Company and Medicore, Inc.
dated January 31, 1991 (incorporated by reference to
the Company's Current Report of Form 8-K dated
February 26, 1991, Item 79c) (ii))

(viii) Amendment to Loan Agreement between the Company and
Medicore, Inc. dated August 6, 1991 (incorporated by
reference to the Company's 1991 Form 10-K, Part IV,
Item 14(a) (10) (xxi))

(ix) Florida Real Estate Mortgage and Security Agreement
from the Company to Medicore, Inc. dated August 6,
1991 (incorporated by reference to the Company's 1991
Form 10-K, Part IV, Item 14(a) (10) (xxii))

(x) Omitted

(xi) Omitted

(xii) Promissory Note to Equitable Bank dated August 2,
1991 (incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the second quarter
ended June 30, 1991 ("June, 1991 Form 10-Q"), Part
II, Item 6(a) (28) (i))

(xiii) Mortgage and Security Agreement issued to the
Equitable Bank dated August 2, 1991 (incorporated by
reference to the Company's June, 1991 Form 10-Q, Part
II, Item 6(a) (28) (ii))

(xiv) Acquisition Agreement between the Company and
Medicore, Inc. dated August 2, 1991 (incorporated by
reference to the Company's 1991 Form 10-K, Part II,
Item 14(a) (10) (xxiii))

(xv) Lease between the Company and Medicore, Inc. dated
December 8, 1992 (incorporated by reference to the
Company's Current Report on Form 8-K, dated January
21, 1993 ("January 1993 Form 8-K"), Item 7(c) (10)
(i))

(xvi) Addendum to Lease between the Company and Medicore,
Inc. dated January 15, 1993 (incorporated by
reference to the Company's January 1993 Form 8-K,
Item 7(c) (10) (ii))

(xvii) Agreement for Sale of Stock between the Company and
Cytoferon Corp. dated February 5, 1993 (incorporated
by reference to the Company's Current Report on Form
8-K dated February 11, 1993 Item 7(c) (28))

(xviii) Addendum to Agreement for Sale of Stock between the
Company and Cytoferon Corp. dated May 4, 1993
(incorporated by reference to the Company's Current
Report on Form 8-K dated May 5, 1993, Item 7(c) (28)
(i))

(xix) Amendment No. 2 to the Royalty Agreement between the
Company and Medicore, Inc. dated May 11, 1993
(incorporated by reference to the Company's June 30,
1993 Form 10-K, Part IV, Item 14(a) (10) (xix))

(xx) Note and Mortgage Modification Agreement between the
Company and Medicore, Inc. dated August 18, 1993
(incorporated by reference to the Company's June 30,
1993 Form 10-K, Part IV, Item 14(a) (10) (xx))

(xxi) Amendment No. 2 to the Loan Agreement between the
Company and Medicore, Inc. dated August 18, 1993
(incorporated by reference to the Company's June 30,
1993 Form 10-K, Part IV, Item 14(a) (10) (xxi))

(xxii) Amendment to Acquisition Agreement between the
Company and Medicore, Inc. dated August 18, 1993
(incorporated by reference to the Company's June 30,
1993 Form 10-K, Part IV, Item 14(a) (10) (xxii))

(xxiii) Marketing and Management Services Agreement between
the Company and Cytoferon Corp. dated August 18, 1993
(incorporated by reference to the Company's June 30,
1993 Form 10-K, Part IV, Item 14(a) (10) (xxiii))

(xxiv) Agreement for Sale of Stock between Cytoferon and the
Company dated November 19,

32
<PAGE> 35

1993 (incorporated by reference to the Company's
June 30, 1994 Form 10-K, Part IV, Item 14(a)
(10) (xxiv))

(xxv) Employment Agreement between Gerald Smith and the
Company dated November 19, 1993 (incorporated by
reference to the Company's June 30, 1994 Form 10-K,
Part IV, Item 14(a) (10) (xxv)) as amended by
modified Employment Agreement dated December 15,
1994 (incorporated by reference to the Company's
1995 Form SB-2, Part II, Item 27(10) (xxv))

(xxvi) Common Stock Purchase Warrant Agreement between
Northlea Partners Ltd. and the Company dated January
6, 1994 (incorporated by reference to the Company's
June 30, 1994 Form 10-K, Part IV, Item 14(a) (10)
(xxvi))

(xxvii) Management Consulting Agreement between the Company,
Medvest, Inc. and Dr. John Abeles dated January 6,
1994 (incorporated by reference to the Company's
Current Report on Form 8-K, dated November 17, 1993)

(xxviii) Employment Agreement between Dennis W. Healey and
the Company dated April 8, 1994 (incorporated by
reference to the Company's June 30, 1994 Form 10-K,
Part IV, Item 14(a) (10) (xxvii) as amended by
Modified Employment Agreement dated December 15,
1994 (incorporated by reference to the Company's
1995 SB-2, Part II, Item 27 (10) (xxvii))

(xxix) Promissory Note between the Company and Gerald Smith
dated April 18, 1994 (incorporated by reference to
the Company's June 30, 1994 Form 10-K, Part IV, Item
14(a) (10) (xxviii))

(xxx) Employment Agreement between Charles F. Fistel and
the Company dated July 1, 1994 (incorporated by
reference to the Company's June 30, 1994 Form 10-K,
Part V, Item 14(a) (10) (xxix)) as amended by
Modified Employment Agreement dated December 15,
1994 (incorporated by reference to the Company's
1995 Form SB-2, Part II, Item 27 (10) (xxix))

(xxxi) Placement Agent Agreement and Common Stock Purchase
Warrant issued to Laidlaw Equities, Inc. and
designees (incorporated by reference to the
Company's 1995 Form SB-2, Part II, Item 27 (10)
(xxxi))

(xxxii) Amendment No. 1 to Agreement for Sale of Stock with
Cytoferon (incorporated by reference to the
Company's 1995 Form SB-2, Part II, Item 27 (10)
(xxxii))

(xxxiii) Modified Sale of Stock and Stock Option Agreement
with Peter D. Fischbein (incorporated by reference
to the Company's 1995 Form SB-2, Part II, Item 27
(10) (xxxiii)),

(xxxiv) Agreement with Moty Hermon (incorporated by
reference to the Company's 1995 Form SB-2, Part II,
Item 27 (10) (xxxiv))

(xxxv) Agreement with University of Nebraska-Medical Center
(incorporated by reference to the Company's 1995
Form SB-2, Part II, Item 27 (10) (xxxv))

(xxxvi) License and Manufacturing Agreement with Common
Services Agency (incorporated by reference to the
Company's 1995 Form SB-2, Part II, Item 27 (10)
(xxxvi))

(xxxvii) Agreed Motion for Consent Final Order and Settlement
Agreement dated August 29, 1995 (incorporated by
reference to the Company's June 30, 1995 Form
10-KSB)

(xxxviii) Agreement and Plan of Reorganization dated November
8, 1995 and Amendment thereto (incorporated by
reference to the Company's Post-Effective Amendment
No. 1 to Registration Statement on Form SB-2)

(xxxix) Securities Purchase Agreement dated June 7, 1996
(incorporated by references to the Company's current
report on Form 8-K dated June 7, 1996).

(xxxx) Employment Agreement between Charles F. Fistel and
the Company dated July 1, 1996 (incorporated by
reference to the Company's Annual Report on Form
10-K for the year ended June 30, 1996)

(xxxxi) Stock Option Agreement between the Company and Fred
D. Hirt dated August 2, 1996 (incorporated by
reference to the Company's Annual Report on Form
10-K for the year ended June 30, 1996)

(xxxxii) Form of Private Securities Subscription Agreement
dated November 27, 1996 and related Registration
Rights Agreement and Common Stock Purchase Warrant
(incorporated by reference to the Company's Current
Report on Form 8-K dated February 14, 1997)

(xxxxiii) Private Securities Subscription Agreement dated
February 3, 1997 and related Regulation Rights
Agreement, Common Stock Purchase Warrant and related
agreements (incorporated by reference to the
Company's Current Report on Form 8-K dated February
14, 1997)

(xxxxiv) Securities Purchase Agreement dated as of December
31, 1996 and related Registration Rights Agreement
(incorporated by reference to the Company's Current
Report on Form 8-K dated March 6, 1997)

(xxxxv) Employment Agreement between Gerald Smith and the
Company dated March 1, 1997.

(xxxxvi) Employment Agreement between Dennis W. Healey and
the Company dated March 1, 1997.

(xxxxvii) Employment Agreement between Robert C. Rech and the
Company dated May 19, 1997.

(xxxxviii) 11 month 10% Promissory Note dated July 1, 1997
(incorporated by reference to the Company's Current
Report on Form 8-K dated August 28, 1997).

(xxxxix) Employment Agreement between Robert H. Zeiger and
the Company dated August 1, 1997.

(L) Certificate of Designations, Preferences and Rights
of the Series F Convertible Preferred Shares
(incorporated by reference to the Company's Current
Report on Form 8-K dated August 28, 1997)

(Li) Certificate of Designations, Preferences and Rights
of 10% Cumulative Convertible Preferred Stock,
Series G (incorporated by reference to the Company's
Current Report on Form 8-K dated August 28, 1997)

(Lii) Series F Convertible Preferred Stock Exchange
Agreement, dated July 23, 1997 (incorporated by
reference to the Company's Current Report on Form
8-K dated August 28, 1997)

(Liii) Series G Convertible Preferred Stock Exchange
Agreement, dated August 27, 1997 (incorporated by
reference to the Company's Current Report on Form
8-K dated August 28, 1997)

(11) Statement re computation of loss per share

(21) Subsidiaries of the registrant

(23) Consent of Independent Auditors

(27) Financial Data Schedule (for SEC use only).

33
<PAGE> 36

(b) Reports on Form 8-K filed during the fourth quarter

(i) Item 5 - Other Events and Item 7 - Financial
Statements, Proforma Financial Information and
Exhibits filed June 25, 1996.

(ii) Item 7 - Financial Statements, Proforma Financial
Information and Exhibits filed July 11, 1996.

34
<PAGE> 37

SIGNATURES

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

VIRAGEN INC.

By /s/ DENNIS W. HEALEY
-----------------------------------------
Dennis W. Healey
Executive Vice President, Treasurer
Principal Financial Officer

Dated: September 25, 1997

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

Name Title Date

/s/ GERALD SMITH Chairman of the Board of September 25, 1997
- ------------------------- Directors, Principal
Gerald Smith Executive Officer and
President

/s/ ROBERT H. ZEIGER Chief Executive Officer and September 27, 1997
- ------------------------- Director
Robert H. Zeiger

/s/ DENNIS W. HEALEY Executive Vice President, September 25, 1997
- ------------------------- Treasurer, Principal
Dennis W. Healey Financial Officer and Director

/s/ CHARLES F. FISTEL Executive Vice President, September 26, 1997
- ------------------------- Director
Charles F. Fistel

/s/ JOSE I. ORTEGA Controller and September 25, 1997
- ------------------------- Principal Accounting
Jose I. Ortega Officer

/s/ PETER D. FISCHBEIN Director September 26, 1997
- -------------------------
Peter D. Fischbein

/s/ Director
- -------------------------
Sidney Dworkin

/s/ Director
- -------------------------
Jay M. Haft

/s/ WILLIAM B. SAEGER Director September 29, 1997
- -------------------------
William B. Saeger

/s/ Director
- -------------------------
Fred D. Hirt

/s/ CARL N. SINGER Director September 29, 1997
- -------------------------
Carl N. Singer

35
<PAGE> 38
VIRAGEN, INC. AND SUBSIDIARIES

LIST OF FINANCIAL STATEMENTS

The following consolidated financial statements of Viragen, Inc. and
subsidiaries are included:

<TABLE>
<CAPTION>
<S> <C>
Report of Independent Certified Public Accountants................................... F2

Consolidated balance sheets - June 30, 1997 and 1996................................. F3

Consolidated statements of operations - Years ended June 30, 1997, 1996 and 1995..... F5

Consolidated statements of stockholders' equity - Years ended June 30, 1997, 1996
and 1995.......................................................................... F6

Consolidated statements of cash flows - Years ended June 30, 1997, 1996 and 1995..... F13

Notes to consolidated financial statements........................................... F15
</TABLE>

All schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.

F1
<PAGE> 39

REPORT OF INDEPENDENT CERTIFED PUBLIC ACCOUNTANTS

Shareholders and Board of Directors
Viragen, Inc.

We have audited the accompanying consolidated balance sheets of
Viragen, Inc. and subsidiaries as of June 30, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years ended June 30, 1997. These financial statements are the
responsibility of the Company's management. 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 financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall 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 consolidated financial position of
Viragen, Inc. and subsidiaries at June 30, 1997 and 1996, and the consolidated
results of their operations and their cash flows for each of the three years
ended June 30, 1997, in conformity with generally accepted accounting
principles.

ERNST & YOUNG LLP

Miami, Florida
September 25, 1997

F2
<PAGE> 40

VIRAGEN, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

ASSETS

JUNE 30,
----------------------
1997 1996
---- ----
<S> <C> <C>
Current Assets
Cash and cash equivalents ........................................... $ 12,873,301 $ 19,449,059
Marketable securities, available-for-sale ........................... 18,541,616 --
Prepaid expenses .................................................... 237,569 87,765
Due from employees .................................................. 53,980 97,340
Other current assets ................................................ 674,992 130,355
------------ ------------
TOTAL CURRENT ASSETS .................................... 32,381,458 19,764,519

PROPERTY, PLANT AND EQUIPMENT
Land, building and improvements ..................................... 3,011,044 1,195,209
Equipment and furniture ............................................. 3,909,182 1,647,762
Construction in progress ............................................ 370,364 21,811
------------ ------------
7,290,590 2,864,782
Less accumulated depreciation ....................................... (2,252,392) (2,026,830)
------------ ------------
5,038,198 837,952
DEPOSITS AND OTHER ASSETS .............................................. 41,887 14,955
------------ ------------
$ 37,461,543 $ 20,617,426
============ ============
</TABLE>

See notes to consolidated financial statements.

<PAGE> 41

VIRAGEN, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY

JUNE 30,
---------------------
1997 1996
---- ----
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable............................................................. $ 1,431,211 $ 310,039
Accrued expenses and other liabilities....................................... 1,573,464 503,340
Current portion of long-term debt............................................ 45,703 685,211
----------- -----------
TOTAL CURRENT LIABILITIES......................................... 3,050,378 1,498,590

ROYALTIES PAYABLE............................................................... 107,866 107,866
LONG-TERM DEBT, less current portion............................................ 238,895 115,563
MINORITY INTEREST............................................................... 1,920,100 1,620,222

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY
Convertible 10% Series A cumulative preferred stock, $1.00 par value.
Authorized 375,000 shares; issued and outstanding 2,650 shares.
Liquidation preference value: $10 per share, aggregating $26,500......... 2,650 2,650
Convertible 5% Series B cumulative preferred stock, $1.00 par value.
Authorized 15,000 shares; issued and outstanding 7,445 and 15,000
shares at June 30, 1997 and 1996, respectively........................... 7,445 15,000
Convertible Series C preferred stock, $1.00 par value. Authorized 5,000
shares; issued and outstanding 974 shares at June 30, 1997............... 974 -
Convertible 6% Series D cumulative preferred stock, $1.00 par value.
Authorized 15,000 shares; issued and outstanding 10,200 shares at
June 30, 1997............................................................ 10,200 -
Convertible 5% Series E cumulative preferred stock, $1.00 par value.
Authorized, issued and outstanding 5,000 shares at June 30, 1997......... 5,000 -
Common stock, $.01 par value. Authorized 75,000,000 and 50,000,000 shares at
June 30, 1997 and 1996, respectively; issued 46,260,360 and 37,896,072
shares at June 30, 1997 and 1996, respectively, of which 386,777 shares
are held as treasury stock at June 30, 1997 ............................. 462,601 378,959
Capital in excess of par value .............................................. 59,995,768 38,618,391
Treasury stock .............................................................. (699,150) -
Retained deficit ............................................................ (27,802,624) (21,782,872)
Foreign currency translation adjustment ..................................... 273,469 43,057
Notes due from officers/directors............................................ (101,417) -
Unrealized loss on marketable securities, available-for-sale ................ (10,612) -
------------ ------------
TOTAL STOCKHOLDERS' EQUITY ....................................... 32,144,304 17,275,185
------------ ------------
$ 37,461,543 $ 20,617,426
============ ============
</TABLE>

See notes to consolidated financial statements.

<PAGE> 42

VIRAGEN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>

YEAR ENDED JUNE 30,
---------------------------------------
1997 1996 1995
---------------------------------------
<S> <C> <C> <C>
Income
Revenues ........................................................ $ - $ 229,967 $ 573,677
Research subsidy ................................................ - 330,000 -
Interest and other income ....................................... 1,403,610 179,069 148,219
----------- ----------- -----------
1,403,610 739,036 721,896
Cost and Expenses
Cost of goods sold .............................................. - 178,368 348,642
Inventory valuation ............................................. - - 788,052
Research and development costs .................................. 2,168,914 1,503,434 605,025
Selling, general and administrative expenses .................... 3,938,323 3,500,494 2,028,747
Contract termination fee ........................................ - - 525,000
Depreciation and amortization ................................... 281,920 200,209 97,329
Bad debt expense ................................................ 20,345 48,970 186,220
Interest expense ................................................ 30,713 92,576 94,720
----------- ----------- -----------
6,440,215 5,524,051 4,673,735
----------- ----------- -----------
Loss before minority interest ...................................... (5,036,605) (4,785,015) (3,951,839)
Minority interest in loss of consolidated subsidiaries ............. 261,360 112,744 -
----------- ----------- -----------
NET LOSS ........................................................... (4,775,245) (4,672,271) (3,951,839)

Deduct required dividends on convertible preferred stock,
Series A 20,760 2,650 3,450
Deduct required dividends on convertible preferred stock,
Series B 4,441,676 894,976 -
Deduct required dividends on convertible preferred stock,
Series C 844,960 - -
Deduct required dividends on convertible preferred stock,
Series D 3,619,407 - -
Deduct required dividends on convertible preferred stock,
Series E 971,936 - -
------------ ----------- -----------
LOSS ATTRIBUTABLE TO COMMON STOCK $(14,673,984) $(5,569,897) $(3,955,289)
============ =========== ===========
LOSS PER COMMON SHARE, after deduction for required
dividends on convertible preferred stock ...................... $ (0.37) $ (0.15) $ (0.12)
============ =========== ===========
Weighted average common shares outstanding ......................... 39,134,631 36,198,302 32,137,693
============ =========== ===========

</TABLE>

See notes to consolidated financial statements.

F5
<PAGE> 43

VIRAGEN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED CAPITAL IN COMMON
STOCK, STOCK, STOCK, STOCK, STOCK, COMMON EXCESS OF STOCK TREASURY
SERIES A SERIES B SERIES C SERIES D SERIES E STOCK PAR VALUE SUBSCRIBED STOCK
-------- -------- -------- --------- --------- ----- --------- ---------- --------
<S> <C>
Balance at July 1,
1994 .............. $3,450 $ -- $ -- $ -- $ -- $202,182 $12,698,723 $1,126,250 $ --
Conversion of
Convertible
Debentures
(666,668 shares)... 6,666 193,334
Shares of Cytoferon
from modification
of Agreement....... 17,500 507,500
Private placement of
Common Stock
(8,919,000 shares). 89,190 3,478,410 (1,013,750)
Issuance costs ..... (382,633)
Private placement of
Common Stock
(3,426,667 shares). 34,267 2,021,733
Issuance costs...... (77,096)
Repurchase of
Warrants (584,160
shares) ........... (14,604)
Purchase of stock
by Officers and
affiliates (375,000
shares)............ 3,750 108,750 (112,500)
Registration costs
for form S-B2 ..... (128,031)
Stock subscribed by
Financial
Consultants........ 45,296
Officers' notes
forgiven on stock
purchases .........
Net Loss.......
------ -------- -------- --------- --------- -------- ----------- ---------- ---------
Balance at
June 30, 1995 ..... $3,450 $ -- $ -- $ -- $ -- $353,555 $18,406,086 $ 45,296 $ --

<CAPTION>
FOREIGN NOTES DUE
CURRENCY FROM
RETAINED TRANSLATION OFFICERS/
DEFICIT ADJUSTMENT DIRECTORS
------- ---------- ---------
<S> <C>
Balance at July 1,
1994 .............. $(13,158,762) $ -- $(326,250)
Conversion of
Convertible
Debentures
(666,668 shares)...
Shares of Cytoferon
from modification
of Agreement.......
Private placement of
Common Stock
(8,919,000 shares).
Issuance costs .....
Repurchase of
Warrants (584,160
shares) ...........
Purchase of stock
by Officers and
affiliates (375,000
shares)............
Private placement of
Common Stock
(3,42,667 shares)..
Issuance costs......
Registration costs
for form S-B2 .....
Stock subscribed by
Financial
Consultants........
Officers' notes
forgiven on stock
purchases ......... 326,250
Net Loss....... (3,951,839)
------------- -------- ---------
Balance at
June 30, 1995 ..... $ (17,110,601) $ -- $ --

</TABLE>

See notes to consolidated financial statements.

F6
<PAGE> 44

VIRAGEN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - (Continued)

PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED CAPITAL IN COMMON
STOCK, STOCK, STOCK, STOCK, STOCK, COMMON EXCESS OF STOCK TREASURY
SERIES A SERIES B SERIES C SERIES D SERIES E STOCK PAR VALUE SUBSCRIBED STOCK
--------- -------- --------- --------- --------- ----- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30,
1995 ................ $ 3,450 $ -- $ -- $ -- $ -- $353,555 $18,406,086 $ 45,296 $ --
Issuance of Common
Stock to Consultants
(59,600 shares) ..... 596 44,700 (45,296)
Exercise of Warrants
by Consultants
(772,028 shares) .... 7,719 451,945
Compensation expense
on directors,
officers, and
employees options ... 183,144
Exercise of warrants
from private
placement (358,912
shares) ............. 3,589 183,212
Exercise of warrants
by Directors (50,000
shares) ............. 500 14,500
Exercise of warrants
by management,
officers and
employees
(1,293,500 shares)... 12,935 445,437
Compensation expense
on consultants'
options ............. 316,300
Proceeds from
subsidiary offering.. 3,511,061
Proceeds from initial
investment in Sector
Associates Ltd....... 774,206
Issuance of Viragen
(Europe) Ltd. stock
to Directors and
Affiliate of
subsidiary .......... 243,000
Officers' notes
forgiven on stock
purchase ............
Conversion of Series
A Preferred Stock.... (800) 65 735
Sale of Series B
Preferred Stock, net
of issuance costs of
$940,935............. 15,000 14,044,065
Foreign currency
translation
adjustment ..........
Net Loss.........
------- ------- -------- -------- --------- -------- ----------- ------ ------
Balance at June 30,

1996 ................ $ 2,650 $15,000 $ -- $ -- $ -- $378,959 $38,618,391 $ -- $ --

</TABLE>

See notes to consolidated financial statements.

F7
<PAGE> 45
<TABLE>
<CAPTION>

VIRAGEN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - (Continued)

FOREIGN NOTES DUE
CURRENCY FROM
RETAINED TRANSLATION OFFICERS/
DEFICIT ADJUSTMENT DIRECTORS
------- ---------- ---------
<S> <C> <C> <C>
Balance at June 30,
1995 ................ $(17,110,601) $ -- $ --
Issuance of Common
Stock to Consultants
(59,600 shares) .....
Exercise of Warrants
by Consultants
(772,028 shares) ....
Compensation expense
on directors,
officers, and
employees options ...
Exercise of warrants
from private
placement (358,912
shares) .............
Exercise of warrants
by Directors (50,000
shares) .............
Exercise of warrants
by management,
officers and
employees
(1,293,500 shares)... (290,000)
Compensation expense
on consultants'
options .............
Proceeds from
subsidiary offering..
Proceeds from initial
investment in Sector
Associates Ltd.......
Issuance of Viragen
(Europe) Ltd. stock
to Directors and
Affiliate of
subsidiary ..........
Officers' notes
forgiven on stock
purchase ............ 290,000
Conversion of Series
A Preferred Stock....
Sale of Series B
Preferred Stock, net
of issuance costs of
$940,935.............
Foreign currency
translation 43,057
adjustment ..........
Net Loss......... (4,672,271)
------------ ------- ---------
Balance at June 30,
1996 ................ $(21,782,872) $43,057 $ --

</TABLE>

See notes to consolidated financial statements.

F8
<PAGE> 46

VIRAGEN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - (Continued)

Exercise of
Options by
Employees 1,990 85,470

Exercise of
Warrants 3,193 293,184

Exercise of
Viragen
(Europe)
Ltd.
Warrants 697,464

Exercise of
Viragen
U.S.A.,
Inc. Options (4,128)

Additional
issuance
costs for
Series B
convertible
preferred
stock (24,996)

Sale of
Series C
convertible
preferred
stock, net
of issuance
costs 5,000 4,735,923

Sale of
Series D
convertible
preferred
stock, net
of issuance
costs 15,000 14,035,349

Sale of
Series E
convertible
preferred
stock, net
of issuance
costs 5,000 4,676,744

Conversion
of Series D
convertible
preferred
stock (3,800) 24,425 (20,625)

Dividends on
Series B
convertible
preferred
stock, paid
in common
stock 2 860

Dividends on
Series D
convertible
preferred
stock, paid
in common
stock 233 34,179

Forgiveness
of Officer
Note

Loan to
Director

Interest
income on
Director
Loan
------- ------- ------- ------- ------ -------- ----------- ----- -----
Subtotal $ 2,650 $15,000 $ 5,000 $11,200 $5,000 $408,802 $63,127,815 $ -- $ --

</TABLE>

See notes to consolidated financial statements.

F9
<PAGE> 47
VIRAGEN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - (Continued)

FOREIGN NOTES DUE
CURRENCY FROM
RETAINED TRANSLATION OFFICERS/
DEFICIT ADJUSTMENT DIRECTORS
------- ---------- --------
<S> <C> <C> <C>
Balance at
June 30,
1996 $(21,782,872) $43,057 $ --

Exercise of
Options by
Employees (12,500)

Exercise of
Warrants

Exercise of
Viragen
(Europe)
Ltd.
Warrants

Exercise of
Viragen
U.S.A.,
Inc. Options

Additional
issuance
costs for
Series B
convertible
preferred
stock

Sale of
Series C
convertible
preferred
stock, net
of issuance
costs

Sale of
Series D
convertible
preferred
stock, net
of issuance
costs

Sale of
Series E
convertible
preferred
stock, net
of issuance
costs

Conversion
of Series D
convertible
preferred
stock

Dividends on
Series B
convertible
preferred
stock, paid
in common
stock (862)

Dividends on
Series D
convertible
preferred
stock, paid
in common
stock (36,224)

Forgiveness
of Officer
Note 12,500

Loan to
Director (100,000)

Interest
income on
Director
Loan (1,417)
------------ ------- ---------
Subtotal $(21,819,958) $43,057 $(101,417)

</TABLE>

See notes to consolidated financial statements.

F10

<PAGE> 48
VIRAGEN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - (Continued)

Dividends on
Series A
convertible
preferred
stock

Dividends on
Series B
convertible
preferred
stock

Dividends on
Series D
convertible
preferred
stock

Dividends on
Series E
convertible
preferred
stock

Conversion of
Series B
convertible
preferred
stock (7,555) 42,163 (34,608)

Conversion of
Series C
convertible
preferred
stock (4,026) 11,636 (2,548,739)

Purchase of
Treasury
stock (987,395)

Issuance of
Treasury stock for
Settlement
of Litigation 288,245

Exercise of
Cash-out
Option on
Conversion of
Series D
convertible
preferred
stock (1,000) (999,000)

Compensation
expense on
Options
granted to
Officers 287,550

Compensation
expense on
Options
granted to
Employee 162,750

Foreign
currency
translation
adjustment

Net loss
------- ------- ------- ------- ------ -------- ----------- --------- ---------
Balance at
June 30,
1997 $ 2,650 $ 7,445 $ 974 $10,200 $5,000 $462,601 $59,995,768 $ -- $(699,150)
======= ======= ======= ======= ====== ======== =========== ========= =========

</TABLE>

See notes to consolidated financial statements.

F11

<PAGE> 49
VIRAGEN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - (Continued)
<TABLE>
<CAPTION>
FOREIGN NOTES DUE
CURRENCY FROM
RETAINED TRANSLATION OFFICERS/
DEFICIT ADJUSTMENT DIRECTORS
------- ---------- ---------
<S> <C> <C> <C>
Balance
Forward $(21,819,958) $43,057 $(101,417)

Dividends on
Series A
convertible
preferred
stock (20,591)

Dividends on
Series B
convertible
preferred
stock (757,083)

Dividends on
Series D
convertible
preferred
stock (290,500)

Dividends on
Series E
convertible
preferred
stock (27,083)

Conversion of
Series B
convertible
preferred
stock

Conversion of
Series C
convertible
preferred
stock

Purchase of
Treasury
stock

Issuance of
Treasury stock for
Settlement
of Litigation

Exercise of
Cash-out
Option on
Conversion of
Series D
convertible
preferred
stock (112,164)

Compensation
expense on
Options
granted to
Officers

Compensation
expense on
Options
granted to
Employee

Foreign
currency
translation
adjustment 230,412

Net loss (4,775,245)
------------ -------- ---------
Balance at
June 30,
1997 $(27,802,624) $273,469 $(101,417)
============ ======== =========
</TABLE>
See notes to consolidated financial statements.

F12
<PAGE> 50

VIRAGEN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

YEAR ENDED JUNE 30,
-------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net Loss .............................................................. $ (4,775,245) $(4,672,271) $(3,951,839)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization ...................................... 281,920 200,209 97,329
Issuance of treasury stock for settlement of litigation............. 288,245 -- --
Issuance of common stock to officers, employees and others ......... -- -- --
Consulting fees paid in stock warrants ............................. -- 316,300 45,296
Compensation expense on stock options .............................. 450,300 183,144 --
Officers and directors notes forgiven on stock purchases ........... 12,500 294,652 326,250
Gain on sale of equipment .......................................... -- -- (6,000)
Minority interest in loss of subsidiary ............................ (261,360) (112,744) --
Provision for bad debt expense ..................................... 20,345 48,970 186,220
Loss due to write-down of inventory ................................ -- -- 788,052
Contract termination fee paid in common stock ...................... -- -- 525,000
Loss due to write-down of land, building and improvements .......... -- 316,267 --
Issuance of Viragen (Europe) Ltd. stock to Directors and
affiliate of subsidiary .......................................... -- 243,000 --
Accrued interest income on Director Note............................ (1,417) -- --
Increase (decrease) relating to operating activities from:
Accounts and notes receivable ...................................... -- (22,172) (142,130)
Inventory .......................................................... -- 211,200 (232,781)
Prepaid expenses ................................................... (149,804) 16,760 (68,336)
Other current assets ............................................... (521,622) 94,007 1,725
Deposit and other assets ........................................... (26,932) 1,345 (5,993)
Accounts payable ................................................... 1,121,172 57,155 (214,506)
Accrued expenses and other liabilities ............................. 49,053 104,150 (152,215)
------------ ----------- -----------
Net cash used in operating activities ......................... (3,512,845) (2,720,028) (2,803,928)

INVESTING ACTIVITIES
Purchase of marketable securities, available-for-sale .............. (18,552,228) -- --
Proceeds from sale of equipment .................................... -- 6,000
Additions to property, plant and equipment, net .................... (4,482,166) (163,316) (232,838)
------------ ----------- -----------
Net cash used in investing activities .............................. (23,034,394) (163,316) (226,838)

FINANCING ACTIVITIES
Payments on long-term debt ......................................... (682,176) (277,477) (54,459)
Proceeds (additional issuance costs) from sale of preferred
stock Series B, net .............................................. (24,996) 14,059,065 --
Proceeds from subsidiary's sale of common stock, net ............... -- 5,101,752 --
Proceeds from long-term debt ....................................... 166,000 -- --
Proceeds from exercise of subsidiaries' options and warrants........ 1,254,574 -- --
Proceeds from sale of preferred
stock Series C, D and E, net...................................... 23,473,016 -- --
Repurchase of warrants ............................................. -- -- (14,604)
Preferred dividends paid to preferred stock
Series A, B, D and E.............................................. (914,764) -- --
Proceeds from exercise of options and warrants ..................... 371,337 732,496 --
Refund of capital investment to preferred stock Series C investors . (1,702,971) -- --
Exercise of cash-out option on conversion of preferred stock
Series D ......................................................... (1,111,556) -- --
Purchase of treasury stock ......................................... (987,395) -- --
Loan to Director ................................................... (100,000) -- --
Proceeds from sale of common stock, net ............................ -- -- 4,252,621
Cash acquired through reverse acquisition of Sector Associates, Ltd. -- 768,823 --
Expense payments on SB-2 registration .............................. -- -- (128,031)
------------ ----------- -----------
Net cash provided by financing activities ..................... 19,741,069 20,384,659 4,055,527
Effect of exchange rate fluctuations on cash .......................... 230,412 43,057 --
------------ ----------- -----------
(Decrease) increase in cash ........................................... (6,575,758) 17,544,372 1,024,761
Cash and cash equivalents at beginning of period ...................... 19,449,059 1,904,687 879,926
------------ ----------- -----------
Cash and cash equivalents at end of period ............................ $ 12,873,301 $19,449,059 $ 1,904,687
============ =========== ===========
</TABLE>

See notes to consolidated financial statements.

F13

<PAGE> 51

VIRAGEN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
<TABLE>
<CAPTION>

YEAR ENDED JUNE 30,
-------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest Paid ......................................................... $ 31,172 $ 91,194 $ 87,297
</TABLE>

During the years ended June 30, 1997, 1996 and 1995, the Company had the
following non-cash investing and financing activities:

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Issuance of notes for purchase of common stock......................... $ -- $ 290,000 $ --
Issuance of common stock for convertible debentures.................... -- -- 200,000
Issuance of common stock to officers and affiliates.................... -- -- 112,500
Contract termination fee paid in common stock.......................... -- -- 525,000
Equipment acquired through capital leases.............................. -- 158,930 54,200
Issuance of Viragen (Europe) Ltd. stock to directors and affiliate..... -- 243,000 --
Other receivables acquired through reverse acquisition
of Sector Associates, Ltd............................................ -- 195,000 --
Liabilities assumed through reverse acquisition
of Sector Associates, Ltd............................................ -- 47,341 --
Preferred dividends paid in common stock............................... 35,274 -- --
Conversion of preferred stock into common shares....................... 78,224 -- --
Issurance of treasury stock for settlement of litigation............... 288,245 -- --
</TABLE>

See notes to consolidated financial statements.

F14

<PAGE> 52
VIRAGEN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1996

NOTES A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION AND CONSOLIDATION: Viragen, Inc. and its subsidiaries are
engaged in the research, development and manufacture of certain immunological
products for commercial application. The consolidated financial statements
include the accounts of Viragen, Inc. and its wholly-owned subsidiaries,
Vira-Tech, Inc., Viragen Reagents, Inc. and Viragen Technology, Inc. ("VTI"),
and its majority owned subsidiaries, Viragen USA, Inc. ("VUSA") and Viragen
(Europe) Ltd. ("VEL"), including its wholly-owned subsidiaries, Viragen
(Scotland) Ltd. ("VSL"), collectively known as the Company. All material
intercompany accounts and transactions have been eliminated in consolidation.

CASH AND CASH EQUIVALENTS: The Company considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents.

INVENTORY: During the year ended June 30, 1995 as part of an agreement
reached with the Florida Department of Health and Rehabilitation Services and
determination by management to focus efforts on obtaining regulatory approvals,
the Company discontinued new patient enrollments under the State of Florida 499
Program. Accordingly, the Company recorded a write-down of its interferon
inventory, effective December 1994, of $788,052.

PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment is stated
at the lower of cost or net realizable value. Depreciation was computed by using
the straight-line method over the estimated useful life for financial reporting
purposes and using accelerated methods for income tax purposes.

The Company adopted the provisions of FAS 121 - Accounting for the
Impairment of Long-Lived Assets, as of July 1, 1995. FAS 121 requires impairment
losses to be recorded on long-lived assets when indicators of impairment are
present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. The Company believes no
impairment indicators exist at June 30, 1997.

SALE OF STOCK BY SUBSIDIARIES: The Company accounts for sales of stock
by its subsidiaries as capital transactions for financial reporting purposes.

LOSS PER COMMON SHARE: Loss per common share has been computed based on
the weighted average number of shares outstanding during each period. The effect
of warrants and stock options (common stock equivalents) are antidilutive. Fully
diluted loss per share data, which includes the assumed conversion of the
convertible preferred stock, has not been presented because it is not dilutive.
Loss attributable to common stock reflects adjustments for cumulative preferred
dividends, as well as, embedded dividends arising from discounted conversion
terms on the Company's Convertible Preferred Stocks and related Warrants.

FINANCIAL INSTRUMENTS: The carrying amount of financial instruments,
including cash and cash equivalents, marketable securities, and accounts
payable approximate fair value as of June 30, 1997. The Company's long-term
unsecured note with the Scottish Regional Development Authority approximates
fair value since it was recently negotiated.

MARKETABLE SECURITIES, AVAILABLE-FOR-SALE: The Company has invested in
debt securities issued by the U.S. Treasury and other U.S. government agencies.
These investments are classified as current assets, in accordance with ARB No.
43. Amortized cost of the Company's investment in marketable securities,
available-for-sale totalled $18,559,013 at June 30, 1997.

RECLASSIFICATION: Certain reclassifications have been made to June 30,
1996 and 1995 financial statement amounts to conform to the presentation for the
June 30, 1997 financial statements.

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. Actual results could differ from those estimates.

INCOME TAXES: Deferred income taxes at the end of each period are
determined by applying enacted tax rates applicable to future periods in which
the taxes are expected to be paid or recovered to differences between financial
accounting and tax basis of assets and liabilities.

FOREIGN CURRENCY TRANSLATION: The financial statements of VSL have been
translated into U.S. dollars in accordance with Statement of Financial
Accounting Standards No. 52. All balance sheet accounts have been translated
using the current exchange rates at the balance sheet date. Income statement
amounts have been translated using the average exchange rate for the reporting
period. The translation adjustments resulting from the change in exchange rates
from year to year have been reported separately as a component of stockholders'
equity. Foreign currency transaction gains and losses, which are not material,
are included in results of operations. These

F15
<PAGE> 53
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

gains and losses result from exchange rate changes between the time transactions
are recorded and settled and, for unsettled transactions, exchange rate changes
between the time transactions are recorded and the balance sheet date.

STOCK BASED COMPENSATION: Effective July 1, 1996, the Company adopted
the provisions of FAS 123 - Accounting for Stock-Based Compensation. The Company
continues to account for stock-based compensation plans under the provisions of
APB 25-Accounting for Stock Issued to Employees and, accordingly, recognizes no
compensation expense for stock option grants where the exercise price equals or
exceeds fair market value at date of grant.

RECENT PRONOUNCEMENTS: In February 1997, the Financial Accounting
Standards Board issued Statement No. 128, Earnings per Common Share, which is
required to be adopted on December 31, 1997. At that time, the Company will be
required to change the method currently used to compute earnings per share and
to restate all prior periods. Under the new requirements for calculating primary
earnings per share, the dilutive effect of stock options will be excluded. The
impact of Statement No. 128 on the calculation of primary loss per common share
for the years ended June 30, 1997 and 1996, will be immaterial.

NOTE B - CAPITAL STOCK

COMMON STOCK

As further described in Note H, in August 1994, Cytoferon Corp.
("Cytoferon") was issued 1,750,000 shares of the Company's common stock upon
termination of its Management and Marketing Services Agreement with the Company.

In October 1994, $200,000 of Convertible Debentures were converted into
666,668 shares of common stock.

In fiscal 1994, the Company commenced a Private Placement of its common
stock which concluded subsequent to June 30, 1994 with the issuance of 8,919,000
shares at $.40 per share. In connection with this offering, the Company issued
765,650 common stock purchase warrants entitling the holder to purchase one
share of common stock at $0.52 per share for a period of five years from date of
issuance.

In November 1994, the Company commenced a second Private Placement
solely to accredited investors to raise, through the sale of Common Stock at
$.60 per share, a maximum of $3,000,000. This offering was completed on December
31, 1994 with the Company having realized gross proceeds of $2,056,000 upon the
issuance of 3,426,667 shares. The net proceeds of this offering of approximately
$1,980,000 were utilized for general working capital purposes.

OPTIONS AND WARRANTS

In August, 1994, the Company issued five-year options to purchase an
aggregate of 350,000 shares exercisable at $1.00 per share which were divided
equally among the seven directors of the Company (one of whom subsequently
resigned). Also during fiscal 1994, the Company entered into stock purchase and
option agreements with officers and directors totaling 2,250,000 shares
obtainable at $.30 per share, of which 1,125,000 shares were immediately
exercisable and 1,125,000 shares were subject to certain performance criteria.
During fiscal 1995, the option related performance criteria were met and the
remaining 1,125,000 options became exercisable.

In addition, between May 1994 and March 1995, the Company issued
five-year options to purchase an aggregate of 570,000 shares of Common Stock at
exercise prices ranging from $.62 to $1.00 per share to six key employees.

F16

<PAGE> 54
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

On May 15, 1995, as amended in September 1995, the Company adopted its
1995 Stock Option plan under which 4,000,000 shares of Common Stock have been
reserved for issuance to officers, directors, employees and consultants of the
Company for stock options designated as "incentive stock options" within the
meaning of Section 422 of the Internal Revenue Code. Options granted under the
plan have various vest dates and all options granted have five-year terms from
the vesting date. At June 30, 1997, 3,500 shares remain available under the
Plan.

In September 1995, the Board of Directors granted 2,935,000
non-statutory options to directors, officers and key employees of the Company
under the provisions of the 1995 Stock Option Plan. The options granted have an
exercise price of $.50 per share and are exercisable for a period of five
years. The Company recognized compensation expense of $183,144 as a result of
these grants.

During September 1995, 75,000 warrants issued to a financial consultant
having an exercise price of $.30 per share and 6,250 warrants issued in
connection with the Company's August 1994 Private Placement offering with an
exercise price of $.52 per share were exercised into common stock of the
Company. In December 1995, a Director of the Company exercised 50,000 options
with an exercise price of $.30 per share.

In March 1996, the Company issued 636,000 Common Stock Purchase
Warrants, 300,000 of which were associated with the Company's Florida HIV Study
with the balance issued for financial consulting services. The Company
recognized expense during fiscal 1996 resulting from this issuance of $316,300.

During the third quarter of fiscal 1996, officers and directors
exercised 1,000,000 options granted in June 1994, at $.30 per share through the
issuance of promissory notes totaling $290,000 secured by the related stock
which was held in escrow pending payment of the related promissory notes. The
notes and related interest due were forgiven by the Company during the fourth
quarter of fiscal 1996.

In June 1996, a new Director was elected into the Board of Directors.
The Director was granted 25,000 common stock options upon election to the Board.
The options are exercisable at $3.96 per share for a period of five years.

The Company's 1997 Incentive Stock Option Plan, adopted February 1997,
authorizes the grant of options to management personnel, directors and employees
for up to 3,000,000 shares of the Company's common stock of which 385,500 remain
available at June 30, 1997. Options granted under the plan have various vest
dates and all options granted have 5 year terms from the vesting date.

During fiscal 1997, the Company granted a total of 2,941,500 options
to purchase common stock of the Company. Of these, 1,750,000 were granted to
the directors of the Company. The options vested immediately and are exercisable
for a period of five years. The exercise price on these options is $3.22, which
was market price at the date of grant.

During 1997, the Company also granted options to an officer and an
employee, with exercise prices below market price. The total options granted
were for 400,000 shares. The Company recognized an expense of $381,500 related
to the granting of these options.

The Company issued 518,229 shares of common stock upon the conversion
and exercise of stock options and warrants during fiscal 1997. Proceeds from
these issuances totaled $371,337.

During fiscal year 1997, the Company issued 120,000 options that were
not part of the above plans to an employee. The options vested immediately
and have a 5 year term from that date.

During the fiscal years ended 1996 and 1997, the Company issued
warrants to various consultants. For the year ended June 30, 1997, warrants
granted in this manner, require the recognition of compensation expense in
accordance with Statement 123. For the year ended 1997 the Company recognized
$3,710 in compensation expense on warrants granted to consultants.

F17
<PAGE> 55

VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

PREFERRED STOCK

The Series A Preferred Stock provides for a 10% cumulative dividend,
payable at the option of the Company, in either cash or common stock and each
share is convertible into 4.26 shares of common stock. The holders of the Series
A Preferred Stock are not entitled to vote unless dividends are in arrears for
five annual dividend periods. The Company has the right to call the preferred
stock for redemption, in whole or in part, if the closing bid for common stock
is $6.00 per share or higher for a period of ten consecutive business days
("Redemption Trigger Date"). The preferred stock is redeemable at $11.00 per
share for a period of five years from the Redemption Trigger Date, and
thereafter at $10.00 per share.

In fiscal 1996, 800 shares of Series A Preferred Stock were converted
into 6,500 shares of Common Stock.

On June 7, 1996, the Company entered into a Securities Purchase
Agreement (the "Agreement") with GFL Performance Ltd., GFL Advantage Fund Ltd.
and Proton Global Asset Management, LDC (collectively the "Purchaser") pursuant
to which the Purchaser acquired 15,000 shares of the Company's 5% Cumulative
Convertible Preferred Stock, Series B (the "Series B Preferred Stock") for $15
million.

In connection with the sale and issuance of the Series B Preferred
Stock, the Company issued warrants to purchase 225,000 shares of Common Stock of
the Company at $10.59 per share for a period of 3 years from date of issuance
along with approximately $900,000 in cash fees to certain finders and in
investor representative who participated in the transaction plus certain
additional expenses. These costs have been netted against the proceeds of the
sale.

The Series B Preferred Stock provides for a cash dividend equal to 5%
of the stated value of the Series B Preferred Stock, payable quarterly
commencing September 7, 1996, although the Company has the option to utilize
shares of its Common Stock, under certain conditions, to satisfy the dividend
requirement. The Purchaser had the right to convert the Series B Preferred Stock
commencing August 21,

F18
<PAGE> 56
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

1996 into shares of Common Stock of the Company at a conversion price equal to
the lesser of 85% of the average market price (reduced by an additional 2% per
month commencing the 90th day following the closing date, until the related
Registration Statement was declared effective by the SEC) for the Company's
Common Stock, as described in the Agreement, prior to the conversion date or
$8.74. The final conversion rate was set at 76.8% of the average market price.
In July 1997, the unconverted Series B Preferred Stock was exchanged for a
Promissory Note in the amount of $9,720,241. The Note bears interest at 10% per
annum with principal and interest payable over nine monthly installments
commencing in October 1997. The Note may be prepaid without penalty and is not
convertible into common stock of the Company. The principal value of the Note is
comprised of the following components: 1) face value of Series B preferred
stock outstanding at July 1, 1997; 2) preferred dividends earned through
the date of the Note; and 3) an amount reflecting the preferential conversion
terms.

In December 1996, the Company issued 5,000 shares of its Series C
Convertible Preferred Stock (the "Series C Preferred Stock") in consideration
for $4,740,923 (net of issuance costs totalling $259,077). The purchases were
made by Strome Hedgecap Limited, Strome Offshore Limited, Strome Partners, L.P.
and Strome Susskind Hedgecap, L.P. (collectively the "Series C Purchasers"),
pursuant to separate Securities Purchase Agreements. In addition, warrants to
purchase an aggregate of 214,593 shares of Common Stock, exercisable at $2.00
per share on or prior to December 9, 1999, were issued to the Series C
Purchasers.

The terms of the Series C Preferred Stock provide that up to 25% may
be converted into Common Stock of the Company on or after 10 days from the date
the registration statement registering the underlying shares is deemed
effective by the Securities and Exchange Commission. Thereafter 25% may be
converted on or after the 30th, 60th and 90th day on a cumulative basis. The
Preferred Stock is convertible into a number of Common Shares determined by
dividing the stated value of the Preferred Stock ($1,000 per share) by the
closing price of the Company's Common Stock over the five day period preceding
notice of conversion ("conversion price"). The conversion price may not be less
than $3.46 nor more than $7.00. In the event the conversion price falls below
$3.46, the difference between $3.46 and the conversion price will be paid to
the holder in cash. Any shares of Series C Preferred Stock which are
outstanding on December 5, 1997 will be automatically converted into shares of
Common Stock based on the conversion price at such time completed in accordance
with the above procedures.

In July 1997, the holders of the Series C Preferred Stock agreed to
modify their conversion price and limit conversions of their remaining 974
shares ($1,000 face value per share) over a two month period. The modified
conversion price was the lower of (i) $2.20 per share or (ii) the average
closing price of the Company's Common Stock over the five day period ending the
day prior to the notice of conversion. The terms addressing conversions below
$3.46 contained in the original agreement were not modified. As a result, the
Company has committed to refund a minimum of $354,694 to the Series C
Purchasers upon conversion of the remaining Series C Preferred Stock. The
refund amount may increase if conversions occur below $2.20.

F19
<PAGE> 57
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

In February 1997, the Company issued 15,000 shares of its 6% Series D
Convertible Preferred Stock (the "Series D Preferred Stock") to P.R.I.F., L.P.
in consideration for $14,050,349 (net of issuance costs totalling $949,651). The
Series D Preferred Stock was convertible into a number of shares of Common Stock
of the Company determined by dividing the five day trading average price of the
Company's Common Stock prior to conversion, discounted by 18%, into the stated
value of the Preferred Shares being converted. In connection with the issuance
of the Series D Preferred Stock, the Company also issued 375,000 Common Stock
Purchase warrants, exercisable at $6.00 per share.

In September 1997, the Company concluded an Exchange agreement whereby
the Series D Preferred Stock were exchanged for Series F Preferred Shares. The
Series F Preferred Stock provides for a limitation on the holder limiting
conversion during any two week period to 800 preferred shares ($800,000). The
terms also provide the Company with a cash-out option at the face amount being
converted plus 12%. In consideration for the holder of the Series D Preferred
Stock agreeing to a limitation on future conversions, the Company agreed to
increase the dividend rate from 6% for the Series D Preferred Stock to 10% for
the Series F Preferred Stock.

In February 1997, the Company also issued 5,000 shares of its 5% Series
E Convertible Preferred Stock (the "Series E Preferred Stock") in consideration
for $4,681,744 (net of issuance costs totalling $318,256). Dividends on the
Series E Preferred accrued from the date of issuance and were payable quarterly
commencing April 1, 1997 and may be paid in cash or, at the Company's option and
certain other conditions, in shares of Common Stock of the Company.

In September 1997, the Company concluded an Exchange Agreement whereby
4,000 of the outstanding shares of Series E Preferred Stock were exchanged for a
like number of Series G Preferred Shares. The terms of the Series G Preferred
Stock provide that commencing in August 1997, the holder is limited to
converting 667 preferred shares ($667,000) per month over a 6 month period. The
provisions further provide that the Company will be required to redeem 667
shares ($667,000) per month less the number of Series G Preferred Stock
converted during the proceeding calendar month. In addition, the holder is
restricted from converting into common stock if the market price of the
Company's common stock is less than $2.50, subject to adjustment, at the date
of the conversion notice. In consideration for the restrictions on conversion,
the Company agreed to increase the dividend rate from 5% for the Series E
Preferred Stock to 10% for the Series G Preferred Stock.

The monthly redemption amount is calculated by dividing the number of
shares to be redeemed by the preferential conversion rate of 85%. As a result,
the maximum aggregate redemption would total $4,705,882, if all 4,000 shares of
Series G Preferred Stock were redeemed by the holder. The cash redemption amount
will be reduced to account for conversions of the preferred shares during the
redemption period.

F20
<PAGE> 58
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, the Company recognized compensation expense in the
amount of $381,500 and $499,444 in 1997 and 1996, respectively, as a result of
the exercise price of a portion of the Company's employee stock options and
warrants being less than the market price of the underlying stock on the date
of grant.

Pro form information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions; volatility factor of the expected market price of the Company's
common stock of .64 for 1997 and .60 for 1996; risk-free interest rate of 6% and
a weighted-average expected life of the option of 3 years.

The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.

For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The effect of
applying Statement 123 for providing pro forma disclosure are not indicative of
future amounts until the new rules are applied to all nonvested awards. The
Company's pro forma information follows:

<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Pro forma net loss................................. $( 8,267,089) $(7,420,592)
Pro forma net loss attributable to common stock.... (18,165,828) $(8,318,218)
Pro forma loss per share........................... (.46) (.23)
</TABLE>

F21
<PAGE> 59
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

A summary of the Company's stock option activity, and related
information for the years ended June 30 follows:
<TABLE>
<CAPTION>
Number of Weighted Average Weighted Average
Options Option Price Exercise Price Remaining Life
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at July 1, 1995 3,213,000 $ .30-$1.80
Granted 3,315,500 $ .50-$7.13
Exercised (1,343,500) $ .30-$ .94
Canceled (50,000) $1.00
----------

Outstanding at June 30, 1996 5,135,000 $ .30-$7.13
Options granted with exercise
prices equal to market 2,559,500 $1.59-$4.13 $3.02
Options granted with exercise
prices less than market 400,000 $2.75-$2.79 $2.07
Exercised (199,000) $ .30-$1.00 $ .50
Canceled --
----------
Outstanding at June 30, 1997 7,895,500
==========
Range of exercise prices of options
outstanding at June 30, 1997:
3,060,000 $ .30-$ .50 $ .48 3.9 years
2,364,000 $ .81-$2.06 $1.26 4.0 years
2,459,500 $2.79-$4.13 $3.29 4.7 years
12,000 $7.13 $7.13 4.0 years
----------
7,895,500
==========
Range of exercise prices of options
exercisable at June 30, 1997:
3,060,000 $ .30-$ .50 $ .48
1,040,500 $ .81-$1.00 $ .96
199,167 $1.69-$1.97 $1.82
2,137,500 $2.79-$3.96 $3.20
6,000 $7.13 $7.13
----------
6,443,167
==========

Exercisable at June 30, 1996 4,313,333
==========
Weighted average fair value of
options granted during the year
with exercise prices equal to
market $ 1.43
==========
Weighted average fair value of
options granted during the year
with exercise prices less than
market $ 2.07
==========
</TABLE>

A summary of the Company's warrant activity, excluding warrants issued
in conjunction with the Series C and D Preferred Stock offering, and related
information for the years ended June 30 follows:

<TABLE>
<CAPTION>
Number of Weighted Average Weighted Average
Warrants Warrant Price Exercise Price Remaining Life
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at July 1, 1995 1,245,990 $ .30-$ .60
Granted 1,193,500 $ .50-$10.59
Exercised (1,130,940) $ .30-$ 1.25
Canceled (30,000) $ 1.00
----------

Outstanding at June 30, 1996 1,278,550 $ .52-$10.59
Granted 12,000 $ 2.22 $ 2.22
Exercised (319,229) $ .52-$ 1.00 $ .93
Canceled -- -- --
----------
Outstanding at June 30, 1997 971,321
==========

Range of exercise prices of options
outstanding at June 30, 1997:
434,321 $ .52-$ .80 $ .54 2.1 years
312,000 $1.18-$ 2.22 $ 1.32 1.7 years
225,000 $10.59 $10.59 1.9 years
----------
971,321
==========

Range of exercise prices of options
exercisable at June 30, 1997:
434,321 $ .52-$ .80 $ .54
300,000 $1.18-$ 1.81 $ 1.29
225,000 $10.59 $10.59
----------
971,321
==========

Exercisable at June 30, 1996 1,195,217 -- --
==========

Weighted average fair value of
warrants granted during the year $ 1.05
==========
</TABLE>

F22
<PAGE> 60
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The fair value of VEL options was estimated at the date of grant using
a Black-Scholes option pricing model with the following weighted-average
assumptions for options granted in 1996: risk-free interest rate of 6%;
volatility factor of the expected market price of the Company's common stock of
.60 and a weighted-average expected life of the option of 3 years.

A summary of VEL's stock option activity, and related information for
the years ended June 30 follows:

<TABLE>
<CAPTION>
Number of Weighted Average
Options Option Price Exercise Price
------------------------------------------------
<S> <C> <C>
Outstanding at July 1, 1995 -- $ --
Granted at less than market price 400,000 .001
Granted above market price 50,000 7.00
Exercised (400,000) .001
Forfeited -- --
----------
Outstanding at June 30, 1996 50,000 $ 7.00

Granted --
Exercised --
Forfeited --
----------

Outstanding at June 30, 1997 50,000 $ 7.00
==========

Exercisable at June 30, 1997 50,000
==========

Exercisable at June 30, 1996 25,000
==========
</TABLE>

The weighted average remaining contractual life of those options is
4.25 years.

The fair value of VUSA options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for options granted in 1997: risk-free interest rate of 6%;
volatility factor of .64 and a weighted-average expected life of the option of
.01 year.

A summary of VUSA's stock option activity, and related information for
the years ended June 30 follows:

<TABLE>
<CAPTION>
Number of Weighted Average
Options Option Price Exercise Price
------------------------------------------------
<S> <C> <C> <C>
Outstanding at June 30, 1996 -- $ -- $ --
Granted at less than market price 320,000 .01 .01
Exercised (320,000) .01 .01
Canceled -- -- --
----------
Outstanding at June 30, 1997 --
==========

Weighted average fair value of
options granted during the year $ .22
==========

</TABLE>

F23
<PAGE> 61
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Shares of the Company's common stock reserved at June 30, 1997 for
possible future issuance are as follows:

<TABLE>
<CAPTION>
1997
----
<S> <C>
Convertible preferred stock, series A................................. 11,289
Convertible preferred stock, series B................................. 1,833,425
Convertible preferred stock, series C................................. 281,511
Convertible preferred stock, series D................................. 5,057,473
Convertible preferred stock, series E................................. 3,000,000

Warrants - consultant (exercisable through
November 2002)............................ 339,500
Employee option plans (exercisable through June
2004)..................................... 395,500
Officers and directors options (exercisable
through June 2004)........................ 7,500,000
Warrants - private placements (exercisable
through December 1999).................... 1,221,414
</TABLE>

F24
<PAGE> 62
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

NOTE C - LONG TERM DEBT

Long-term debt at June 30, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
JUNE 30,
---------------------
1997 1996
---- ----
<S> <C> <C>
First mortgage note-repaid in August 1996....................................... $ -- $453,439
Second mortgage-repaid in August 1996........................................... -- 196,048
Unsecured loan from Scotland Regional Development Authority. Payable quarterly
over 20 years, with an effective interest rate of 8.68%. Note matures on
August 28, 2017............................................................. 163,911 --
Capital lease obligations resulting from acquisition of equipment, with a cost
totaling $213,130 capitalized from three to five years...................... 120,687 151,287
---------- --------
284,598 800,774
Less current portion ........................................................... (45,703) (685,211)
---------- --------
$ 238,895 $115,563
========== ========
</TABLE>

Scheduled maturities of Long-term debt at June 30, 1997 are 1998 --
$45,703; 1999 -- $51,378; 2000 -- $40,650; 2001 -- $14,081; and 2002 and
thereafter - $132,786.

NOTE D - CORPORATE REORGANIZATION

On September 20, 1995, the Company entered into an agreement and Plan of
Reorganization ("Agreement") with Sector Associates, Ltd. ("Sector"), a Delaware
corporation. Under the terms of the Agreement, the Company acquired a 94%
interest in Sector, a publicly-traded corporation, in consideration for a 100%
interest in VSL. VSL was organized during April 1995, by Viragen, Inc. to
manufacture and distribute Viragen's natural leukocyte-derived alpha interferon
and related products in the EU and other countries outside the United States.
Viragen retained an 84% ownership interest in Sector, as shares in Sector were
disbursed to the new Directors and to an affiliate. Shares were also disbursed
as finders' fees.

F25
<PAGE> 63
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

On November 7, 1995, the Agreement was amended to provide for an
interim loan of $500,000 by Sector to VSL, the filing of certain financial
reports by Sector prior to closing, an additional capital contribution of
$300,000 into Sector within thirty days, and the modification of a related
investment banking agreement. The $500,000 loan was funded November 9, 1995,
bearing interest at 4% per annum, secured by a 3.77% equity interest in VSL, and
was guaranteed by Viragen, Inc. Upon the closing of the Agreement on December 8,
1995, the principal amount of the note was deemed contributed capital to Sector.

The Agreement was finalized and became effective on December 8, 1995.

In March 1996, Sector completed two Private Placement Offerings,
issuing 768,000 shares of Common Stock and 216,500 Common Stock Purchase
Warrants having an exercise price of $12.00 per share. These two Offerings
yielded net proceeds of approximately $5,102,000 after related cash expenses of
$371,500. The Company is using these proceeds to undertake European research and
clinical trials activities including the construction of its laboratory and
manufacturing facility in Scotland.

Effective May 2, 1996, Sector's name was changed to Viragen (Europe)
Ltd.

NOTE E - INCOME TAXES

Viragen, Inc. and its majority-owned subsidiaries, as defined by the
Internal Revenue Code, file consolidated federal and state income tax returns.
VEL (formerly Sector) was included in the Company's consolidated federal and
state income tax returns for the period December 8, 1995 through March 15, 1996,
as Viragen, Inc.'s percentage ownership of VEL exceeded 80% only during this
period. VSL files separate income tax returns in the United Kingdom.

Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amount of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax liabilities and assets as of June 30,
1997 and 1996 are as follows:
<TABLE>
<CAPTION>
June 30,
-----------------------
1997 1996
---- ----
<S> <C> <C>
Deferred tax liabilities
Tax over book depreciation............................... $ 59,000 $ 33,000
Other.................................................... 21,000 20,000
----------- ----------
Total deferred tax liabilities ................. 80,000 53,000
Deferred tax assets
Net operating loss carryforwards......................... 10,470,000 6,426,000
Research and development credit.......................... 145,000 145,000
Investment tax credit.................................... -- 11,000
Other.................................................... 579,000 635,000
----------- ----------
Total deferred tax assets ...................... 11,194,000 7,217,000
Valuation allowance for deferred tax assets ............. 11,114,000 7,164,000
----------- ----------
80,000 53,000
----------- ----------
Net deferred taxes ............................. $ -- $ --
=========== ==========
</TABLE>
The change in the valuation allowance was a net increase of $3,950,000
for the year ended June 30, 1997; $1,938,000 for the year ended June 30, 1996;
and $1,585,000 for the year ended June 30, 1995. The valuation allowance was
$5,226,000 at June 30, 1995.

Approximately $2,570,000 of the valuation allowance is attributable to
stock options, the benefit of which will be credited to additional
paid-in-capital when realized.

In addition, tax credits of $145,000 and $156,000 for income tax
purposes are being carried forward that expire in years 1997 through 2012, at
June 30, 1997 and 1996, respectively. For financial reporting purposes, a
valuation allowance has been recognized to offset the deferred tax assets
related to these carryforwards.

The Company has undergone two ownership changes as defined by
Internal Revenue Code Section 382 which will cause the utilization of the net
operating losses and tax credits to be limited. The effects of these
limitations have not been calculated at this time.

The Company has net operating loss carryforwards, with expiration
dates, as follows:

Amount Expiration
------ ----------
$ 780,000 1999
270,000 2000
2,870,000 2001 - 2003
3,120,000 2004 - 2006
20,780,000 2007 - 2012
-----------
$27,820,000
===========

For financial reporting purposes, net loss before income taxes includes
the following components:

Year Ended June 30,
-----------------------------
1997 1996
----------- -----------
U.S. .................... $(4,192,302) $(4,568,059)

FOREIGN ................. (582,943) (104,212)
----------- -----------
$(4,775,245) $(4,672,271)
=========== ===========

F26
<PAGE> 64
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

NOTE F - TRANSACTIONS WITH RELATED PARITIES

In November 1993, the Company issued $200,000 in 8 1/2%, three year
convertible debentures. The debentures, at the holder's option, were immediately
convertible into common stock of the Company at $.30 per share. These debentures
were held by a fund managed by a director of the Company. In October 1994, these
debentures were converted into 666,668 shares of common stock. These shares are
held by Fundamental Growth Partners, Ltd., Fundamental Associates, Ltd., Hedge
Fund Partners, Ltd. and Fundamental Resources, Ltd., which were investment funds
then managed by William B. Saeger, a director of the Company. Mr. Saeger no
longer manages these funds except for Hedge Fund Partners.

In May 1995, the Board of Directors forgave notes receivable and
related interest due to the Company totalling $326,250. The notes were
originally issued during fical 1994 in conjunction with the purchase of common
stock of the Company by officers and an affiliate.

In June 1996, the Company loaned $50,000 to an employee. The promissory
note is for a term of five years with an annual interest rate of 6.48% (the
Mid-Term Applicable Federal Rate in effect at that time). Interest is to be paid
semi-annually with the principal balance and unpaid interest payable on the
fifth anniversary of the note.

In November 1996, the Company forgave a $12,500 balance due to the
Company by Robert Zeiger, its Chief Executive Officer.

In April 1997, the Company loaned $100,000 to William B. Saeger, a
Director of the Company. The secured promissory note is for a term of one year
with the principal and interest payable upon maturity. The note bears interest
at 8.50% per annum (the Prime Interest Rate in effect at that time).

NOTE G - IMPAIRMENT OF LONG-LIVED ASSETS

During fiscal 1997, the Company entered into negotiations with Medicore
for the sale of its land, building and related improvements located in Hialeah,
Florida. Preliminary negotiations established the fair value of the land,
building and improvements to be $400,000. At June 30, 1996, the land, building
and improvements had a net carrying value of $716,267. In accordance with FAS
121, the Company recorded an impairment loss of $316,267, which was included as
part of selling, general and administrative expenses for the year ended June 30,
1996.

The Company and Medicore terminated discussions relating to the sale of
the Company's Hialeah, Florida facilities during the year. The Company intends
to maintain this location as a research facility for the foreseeable future.

NOTE H - AGREEMENT FOR SALE OF STOCK

On February 5, 1993 the Company entered into a Stock Agreement with
Cytoferon to purchase up to 11,640,000 shares of the Company's common stock for
consideration of $1.5 million ("Maximum Investment"). By May 31, 1993, the
expiration of the investment period, the Company had received the Minimum
Purchase under the terms of the stock agreement, $1.0 million in exchange for
6.0 million shares of common stock at $.167 per share. This price reflects the
receipt, by Cytoferon, of a 20% bonus of common stock due upon having reached
the Minimum Purchase. On November 19, 1993, the Company entered into an
Additional Stock Purchase Agreement under which terms Cytoferon purchased an
additional 1,333,333 common shares at $.30 per share.

Under the terms of the Stock Agreement, the Company had approved the
Management and Marketing Services Agreement ("MMS Agreement") subject to certain
modifications, which appointed Cytoferon as consultant to the Company relating
to production, administration, marketing and regulatory affairs for which
Cytoferon was to receive a consulting fee of $204,000 the first year and
$240,000 the next two years provided certain minimum sales requirements were
met. For the years ended June 30, 1996 and 1995, the Company incurred
management fees of $140,000 and $100,100, and sales commission

F27
<PAGE> 65
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

expenses of $10,690 and $25,100, respectively, under the terms of the MMS
Agreement.

In August 1994, the Board of Directors of the Company voted to
terminate the MMS Agreement with Cytoferon. Concurrent with the cancellation,
the Company recognized a contract termination fee expense of $525,000 in August
1994.

NOTE I - LICENSE AND MANUFACTURING AGREEMENTS

Through a fifteen-year License Agreement (the "License") granted by
VTI, VSL secured certain rights to engage in the development and manufacture of
certain proprietary products and technologies that related to the therapeutic
application of human leukocyte interferon (the "Product") for various diseases
that affect the human immune system. Pursuant to these rights, on July 20, 1995,
VSL entered into a License and Manufacturing Agreement with the Common Services
Agency ("Agency"), an agency acting on behalf of the Scottish National Blood
Transfusion Service ("SNBTS") pursuant to which SNBTS, on behalf of VSL, will
participate in the manufacture and supply of VSL's Product to VSL for
distribution in the EU in return for certain fees. It was considered critical to
VSL's operations and to planned clinical trials to secure a sufficient qualified
source of human source leukocytes, a critical component in the manufacture of
the Product. VSL was a newly formed corporation which commenced operation
concurrent with the execution of its agreement with SNBTS.

Pursuant to the terms of the License, VSL is to prepay $2 million of
royalties to VTI, within six months of the Effective Date (July 12, 1995).
Commencing one year from the Effective Date, VSL is to pay to VTI royalties, as
follows: the greater of $2 million annually or 10% of gross revenues until the
sum of $18 million has been paid; 8% of gross revenues until the sum of $25
million has been paid; and 5% of gross revenues thereafter. The License will
renew automatically for two consecutive fifteen-year terms.

Both parties have modified the License deferring the initial royalty
payment until the date when VTI transfers the processes and technology, as
defined by the License, to VSL. VTI has transferred a substantial portion of the
processes and technology to VSL by the end of May 1997. At that time, VTI
required the initial royalty payment be made. Completion of the transfer is
targeted for November 1997, with subsequent royalty payments commencing November
1, 1998.

In the event the transfer of processes and technology is not deemed
complete by both parties, the initial royalty payment of $2.0 million will be
refunded to VSL.

NOTE J - RESEARCH AND DEVELOPMENT AGREEMENTS

In 1983, the Company contracted with Viragen Research Associated
Limited Partnership, ("Limited Partnership") for the company to perform the
research and development with respect to two therapeutic products for the
topical treatment of herpes virus infections. The Company received $456,500 from
the Limited Partnership and assigned all of its patent rights to the processes
and topical products to the Limited Partnership for $5,000 and an exclusive
worldwide licensing agreement. The Limited Partnership is to receive 5% of the
gross revenues of such products until it has received approximately $900,000
and, thereafter, it is to receive 2% of the gross revenues of such products. The
Company is not presently pursuing the development or commercialization of a
topically applied product.

NOTE K - ROYALTY AGREEMENT

In May 1993, the Company renegotiated its royalty agreement with
Medicore, Inc. ("Medicore"). Under the new terms, the Company will pay Medicore
5% of sales to $7 million; 4% of the next $10 million; and 3% on the next $55
million to a maximum of $2.4 million in royalty payments. Royalties incurred in
prior years under the previous agreement, totaling approximately $108,000 are
included in royalties payable. This amount will be paid as the final payment
under the $2.4 million total royalty agreement. Royalties expense incurred
totaled $11,901 and $28,826 in 1996 and 1995, respectively.

NOTE L - COMMITMENTS

In November 1996, the Company executed a five-year lease on property
located in Edinburgh, Scotland that will serve as the Company's laboratory and
production facilities. Monthly rental on the property is approximately $11,400.
In addition, the Company may extend the term of the lease at its option, for
four-five year periods.

In November 1996, the Company entered into a ten-year lease on
property in Plantation, Florida. This facility contains the executive and
administrative offices for the Company and VEL. Monthly rental on the property
is approximately $15,700. The lease contains provisions for two additional
five-year periods at the Company's option.

During the year ended June 30, 1997, the Company recognized $29,000 and
$47,000 in rent expense arising from the Edinburgh, Scotland and Plantation,
Florida property leases, respectively. Future minimum lease payments on the two
facilities are: 1998-$234,622; 1999-$307,109; 2000-$318,012; 2001-$324,355; and
2002 and thereafter-$1,292,171.

During the year, the Company also entered into a purchase commitment
for plant equipment to be used in its Scottish facility totaling $1.3 million.
Through June 30, 1997, the Company had made payments totaling $1.1 million
towards the purchase of the equipment. The remaining balance will become due
during the second quarter of fiscal 1998.

The Company has entered into Employment Agreements with officers of the
Company. These agreements represent a commitment by the Company to pay an
aggregate amount of approximately $1,300,000 per year in salaries to these
individuals.

NOTE M - CONTINGENCIES

In May 1997, the Company in the name of Sector Associates, Ltd.
(now VEL) was named as a defendant in an action brought in the United States
Bankruptcy Court, Southern District of Florida by the bankruptcy trustee. The
suit alleges that during the period from December 1993 to May 1994, prior to the
Company's reverse acquisition of Sector, Sector received preferential transfers
of approximately $2.1 million. The Company denies that such transfers were
preferential and will vigorously defend the claims. However, the Company can not
predict the ultimate outcome of this matter.

NOTE N - GEOGRAPHIC INFORMATION

In 1997, the Company completed a manufacturing facility in Edinburgh,
Scotland. Identifiable assets in Scotland totaled $7,178,000 and $2,829,000 at
June 30, 1997 and 1996, respectively. Identifiable assets represent those
assets used in the operations of the geographic area.

F28

<PAGE> 1
EMPLOYMENT AGREEMENT

AGREEMENT dated May 19, 1997(the "Effective Date"), by and between
VIRAGEN, INC., a Delaware Corporation ("Employer" or the "Company"), and ROBERT
C. RECH ("Employee").

W I T N E S S E T H:

WHEREAS, Employer desires to employ Employee upon the terms and
conditions hereinafter set forth and Employee desires to accept employment upon
such terms and conditions; and

WHEREAS, Employer and Employee desire to set forth in writing the terms
and conditions of their agreements and understandings with respect to Employee's
employment by Employer.

NOW, THEREFORE, Employer hereby employs Employee and Employee hereby
accepts employment under the following terms and conditions:

1. EMPLOYMENT

Employer hereby employs Employee, and Employee hereby accepts
employment by Employer, upon all the terms and conditions hereinafter set forth.

2. TERM

Subject to the provisions for earlier termination set forth in
Section 9 hereof, this Agreement shall commence on the Effective Date and shall
end as of the close of business of the day immediately preceding the first
anniversary of the Effective Date (the "Employment Term"). Notwithstanding any
of the foregoing to the contrary, if this Employment Agreement is terminated
prior to the expiration of the Employment Term, a year shall mean, with respect
to the year during which termination occurs, the period commencing on the first
day of such year and ending as of the close of business of the day of
termination of Employee's employment, and "Employment Term" shall mean the
period commencing on the Effective Date and ending as of the close of business
of the day of termination of Employee's employment.

3. EMPLOYEE'S REPRESENTATIONS AND WARRANTIES

Employee represents and warrants to Employer that he is free
to accept full-time employment with Employer as contemplated herein and has no
other written or oral obligations or commitments of any kind or nature which
would in any way interfere with his acceptance of employment pursuant to the
terms hereof or the full performance of his obligations hereunder or the
exercise of his best efforts in his employment hereunder. Employee represents
and warrants that he is not in breach of any existing confidentiality or
covenant not to complete agreements, if any, the Employee may have executed with
other third parties prior to the Effective Date.
<PAGE> 2

4. DUTIES AND EXTENT OF SERVICES

Employee shall be employed as a Vice President and Officer of
the Company, and as such, shall, subject to the direction of the Company's
President, perform such duties and responsibilities as may be assigned to
Employee from time to time by the Company's President and/or Executive
Committee.

Employee agrees to devote sufficient time, skill, attention and energy
diligently and competently to perform the duties and responsibilities assigned
to him hereunder or pursuant hereto. Employee shall use his best efforts to be
loyal and faithful at all times and constantly endeavor to improve his ability
and his knowledge of the business of Employer in an effort to increase the value
of his services for the mutual benefit of Employer and Employee. Employee agrees
not to enter into any other employment agreement with any third party during the
term hereof.

5. COMPENSATION

Employee shall receive a salary of $140,000 during the first
full year of the Employment Term and $151,200 during the second full year of the
Employment Term, payable in accordance with the Company's normal payroll
process, currently bi-weekly. Employee is also entitled to receive fringe
benefits that shall be made available to Employee described in this Agreement.

6. FRINGE BENEFITS AND EXPENSES

A. Employee Plans. Employee shall be eligible (subject to the
terms and conditions of particular plans and programs) to participate in such
medical, hospitalization, group health, accident, disability and life insurance
programs and plans, such pension, profit sharing, stock option, incentive
compensation and stock purchase plans and such other employee benefit programs
to the same extent such plans and programs are made generally available from
time to time by Employer to all of its other similarly-situated employees;
provided, however, Employer shall be under no obligation to make any of such
plans or programs available to its employees or continue any which currently or
in the future exist, except as otherwise required by law.

B. Other Expenses. Employer shall reimburse Employee for his
reasonable out-of-pocket costs and expenses, approved by the Company's President
in advance, incurred in connection with the performance of his duties and
responsibilities hereunder. Reimbursement of such expenses shall be subject to
the submission by Employee of appropriate invoices, receipts and other
supporting documentation, consistent with Employer's customary reimbursement
policies and procedures.

C. AUTOMOBILE ALLOWANCE. Employer shall pay directly to
Employee a monthly automobile allowance of $400. Employer shall also pay for the
monthly expenses associated with parking the Employee's car in Manhattan.
Employee shall submit such parking expenses to Employer who shall pay them
directly to the owner or lessor of the parking facility as the case may be.

7. VACATIONS

Employee shall be entitled to normal vacation taken by other
similar employees during the Employment Term. Employee shall not be entitled to
be compensated for any unused

2
<PAGE> 3
vacation upon termination of this Agreement. The periods during which Employee
will be absent from work shall be determined by Employee taking into account the
needs of Employer's business and shall be subject to the approval of the
Executive Committee of the Company (which shall not be unreasonably withheld).

8. FACILITIES

Employer shall provide and maintain (or cause to be provided
and maintained) such facilities, equipment, supplies and personnel as it
reasonably determines is adequate for Employee's performance of his duties and
responsibilities under this Agreement. Employer agrees to also provide Employee
at Employer's expense during the Employment Term a suitable office in Manhattan
and a secretary should Employee determine one is necessary to carry out
Employee's job function.

9. TERMINATION OF EMPLOYMENT

A. Termination Events. Notwithstanding any provisions of this
Agreement to the contrary, Employee's employment may be terminated by Employer
with Cause (as hereinafter defined) effective upon the delivery of written
notice to Employee. In addition, Employee's employment shall terminate (i) upon
Employee's death or (ii) upon Employee becoming Disabled (as hereinafter
defined).

B. Definition of Disabled. For purposes of this Agreement,
Employee shall be deemed to be "Disabled" when, by reason of physical or mental
illness or of injury, he is unable to perform substantially all of the duties
and responsibilities required of him in connection with his employment
hereunder. No disability shall be deemed to exist until after Employee shall be
unable to perform his duties hereunder for ninety (90) consecutive days (the
"Disability Period"). If Employee shall have been under a disability but shall
have returned to work prior to the end of the Disability Period, any new
disability commencing within thirty (30) days of the termination of the prior
disability shall be a continuation of the prior disability, and the period of
all such disabilities shall be added together to determine whether, or how much
of, the Disability Period has elapsed.

C. Definition of Cause. For purposes of this Agreement,
"Cause" shall include, but not limited to: (a) conviction for fraud or criminal
conduct (other than conviction of, or a plea of guilty to, a non-DUI related
traffic violation) (b) habitual drunkenness or drug addiction; (c) embezzlement;
(d) sanctions against Employee in his capacity as an employee of Employer by
regulatory agencies governing Employer or against Employer because of wrongful
acts or conduct of Employee; (e) material breach or default by Employee of any
of the terms or conditions of this Agreement; or (f) the resignation or quitting
of Employee prior to the end of the Employment Term (in this last event,
Employee's employment shall be deemed terminated with Cause on the date that he
resigns or quits).

10. NON-DISCLOSURE OF CONFIDENTIAL INFORMATION

A. Confidential Information. Employee acknowledges that
Employee has been informed that it is the policy of Employer to maintain as
secret and confidential all information

3
<PAGE> 4
relating to (i) the financial condition, businesses and interests of Employer
and its affiliates, (ii) the systems, know-how, products, services, costs,
inventions, patents, patent applications, formulae, research and development
procedures, notes and results, computer software programs, marketing and sales
techniques and/or programs, methods, methodologies, manuals, lists and other
trade secrets heretofore or hereafter acquired, sold, developed and/or used by
Employer and its affiliates and (iii) the nature and terms of Employer's and its
affiliates' relationships with their respective customers, clients, suppliers,
lenders, vendors, consultants, independent contractors and employees (all such
information being hereinafter collectively referred to as "Confidential
Information"), and Employee further acknowledges that such Confidential
Information is of great value to Employer and its affiliates and, in and by
reason and as a result of Employee's employment by Employer, Employee will be
making use of, acquiring and/or adding to such Confidential Information.
Therefore, Employee understands that it is reasonably necessary to protect
Employer's and its affiliates' trade secrets, good will and business interests
that Employee agree and, accordingly, Employee does hereby agree, that Employee
will not directly or indirectly (except where authorized by the President of
Employer for the benefit of Employer and/or its affiliate(s) and/or as required
in the course of his employment) at any time during Employee's employment or for
a period of five (5) years after employees termination divulge or disclose for
any purpose whatsoever to any persons, firms, corporations or other entities
other than Employer or its affiliates (hereinafter referred to collectively as
"Third Parties"), or use or cause or authorize any Third Parties to use, any
such Confidential Information, except as otherwise required by law. Confidential
Information does not include information which (i) becomes or has generally been
available to the public other than as a result of disclosure by Employee which
was not so authorized by the Employer, (ii) was available to Employee on a
non-confidential basis from a source other than the Employer, or (iii) becomes
available to Employee on a non-confidential basis from a source other than the
Employer, provided, however, that such source is not bound by a confidentiality
agreement with the Employer.

B. Employer's Materials. In accordance with the foregoing,
Employee furthermore agrees that (i) Employee will at no time retain or remove
from the premises of Employer or its affiliates any research and development
materials, drawings, notebooks, notes, reports, formulae, software programs or
discs or other containers of software, manuals, data, books, records, materials
or documents of any kind or description for any purpose unconnected with the
strict performance of Employee's duties with Employer and (ii) upon the
cessation or termination of Employee's employment with Employer for any reason,
Employee shall forthwith deliver or cause to be delivered up to Employer any and
all research and development materials, drawings, notebooks, notes, reports,
formulae, software programs or discs or other containers of software, manuals,
data, books, records, materials and other documents and materials in Employee's
possession or under Employee's control relating to any Confidential Information
or any property or information which is otherwise the property of Employer or
its affiliates.

11. COVENANT-NOT-TO-COMPETE

4
<PAGE> 5

and agrees that, so long as Employee is employed by Employer and for a period of
two (2) years after Employee ceases for any reason to be employed by Employer,
Employee hereby agrees to refrain from, anywhere in the world (the "Geographical
Area"), directly or indirectly owning, managing, operating, controlling or
financing, or participating in the ownership, management, control or financing,
or participating in the ownership, management, control or financing of, or being
connected with or having an interest in, or otherwise taking any part as a
stockholder, director, officer, employee, agent, consultant, partner or
otherwise in, any biopharmaceutical product competitive with products developed
or being developed by Employer or its affiliates during Employee's term of
employment including, but not limited to, natural human leukocyte-derived
interferon alpha and any derivative product therefrom. Without limitation of the
foregoing, Employer's business is acknowledged to include the development,
manufacture and sale of human leukocyte interferon therapy and products and
other natural or recombinant technologies aimed at enhancing the human immune
system. Employee acknowledges that Employer's business is anticipated to be
international in scope, that a similar business could effectively compete with
Employer's and its affiliates businesses from any location in the world, and
that, therefore, the restricted Geographical Area is reasonable in scope to
protect Employer's and its affiliates' trade secrets and legitimate business
interests.

12. EMPLOYER'S REMEDIES FOR BREACH OF SECTIONS 10 AND 11

Employee covenants and agrees that if Employee shall violate
or breach any of Employee's covenants or agreements provided for in Sections 10
and 11 hereof, Employer and/or its affiliates shall be entitled to an accounting
and repayment of all profits, compensation, commissions, remunerations or
benefits which Employee directly or indirectly has realized or realizes as a
result of, growing out of or in connection with any such violation or breach. In
addition, in the event of a breach or violation or threatened or imminent breach
or violation of any provisions of Sections 10 or 11 hereof, Employer and/or its
affiliates shall be entitled to a temporary and permanent injunction or any
other appropriate decree of specific performance or equitable relief, without
posting of bond, from a court of competent jurisdiction in order to prevent,
prohibit or restrain any such breach or violation or threatened or imminent
breach or violation by Employee, by Employee's partners, agents,
representatives, servants, employers or employees and/or by any third parties.
Employer shall be entitled to such injunctive or other equitable relief in
addition to any damages which are suffered, and the prevailing party shall be
entitled to reasonable attorneys' and paralegals' fees and costs and other costs
incurred in connection with any such litigation, both before and at trial and at
all tribunal levels. Resort by Employer and/or its affiliates to such injunctive
or other equitable relief shall not be deemed to waive or to limit in any
respect any other rights or remedies which Employer or its affiliates may have
with respect to such breach or violation.

5
<PAGE> 6
13. REASONABLENESS OF RESTRICTIONS

A. Reasonableness. Employee acknowledges that any breach or
violation of Sections 10 or 11 hereof will cause irreparable injury and damage
and incalculable harm to Employer and its affiliates and that it would be very
difficult or impossible to measure the damages resulting from any such breach or
violation. Employee further acknowledges that Employee has carefully read and
considered the provisions of Sections 10, 11 and 12 hereof and, having done so,
agrees that the restrictions and remedies set forth in such Sections (including,
but not limited to, the time period, geographical and types of restrictions
imposed) are fair and reasonable and are reasonably required for the protection
of the business, trade secrets, interests and good will of Employer and its
affiliates.

B. Severability. Employee understands and intends that each
provision and restriction agreed to by Employee in Sections 10, 11 and 12 hereof
shall be construed as separate and divisible from every other provision and
restriction and that, in the event that any one of the provisions of, or
restrictions in, Sections 10, 11 and/or 12 hereof shall be held to be invalid or
unenforceable, the remaining provisions thereof and restrictions therein shall
nevertheless continue to be valid and enforceable as though the invalid or
unenforceable provisions or restrictions had not been included therein, and any
one or more of such valid provisions and restrictions may be enforced in whole
or in part as the circumstances warrant. In the event that any such provision
relating to time period and/or geographical and/or type of restriction shall be
declared by a court of competent jurisdiction to exceed the maximum or
permissible time period, geographical area or type of restriction such court
deems reasonable and enforceable, said time period and/or geographical and/or
type of restriction shall be deemed to become and shall thereafter be the
maximum time period and/or geographical restriction and/or type of restriction
which such court deems reasonable and enforceable.

C. Survivability. The restrictions, acknowledgments, covenants
and agreements of Employee set forth in Sections 10, 11, 12 and 13 of this
Agreement shall survive any termination of this Agreement or of Employee's
employment (for any reason, including expiration of the Employment Term).

6
<PAGE> 7
14. STOCK OPTIONS

Effective the Effective Date, Employer hereby grants to
Employee options to acquire up to 300,000 shares of Viragen, Inc. $.01 par value
Common Stock (the "Options"), subject to and upon the following terms and
conditions:

(a) The Options shall be exercisable by Employee (i) with
respect to up to 150,000 shares of Common Stock, during the period commencing
the first Anniversary of the Effective Date and shall end as of the close of
business on the day immediately preceding the end of the 60th month following
the Effective Date (the "First Exercise Period"), and (ii) with respect to up to
150,000 shares of Common Stock, during the period commencing on the second
anniversary of the Effective Date, and shall end as of the close of business on
the day immediately preceding the end of the 60th month following the Effective
Date (the "Second Exercise Period"). The commencement of the First Exercise
Period shall be permanently accelerated upon the date which the average market
price of Common Stock for the 90 previous days has averaged 75% or more above
the Exercise Price. The commencement of the Second Exercise Period shall be
permanently accelerated upon the date which the average price of Common Stock
for the 90 previous days has averaged 150% or more above the Exercise Price. In
no event shall the commencement of the First or Second Exercise Period be
delayed from the dates stated in the first sentence of this paragraph.

The exercise price with respect to the Options shall be the
lower of the market close price of the Common Stock as of the Effective Date or
the date this Agreement has been duly executed (the "Exercise Price").

(b) In the event Employee's employment is terminated with
Cause, all unexercised Options, and all Options which have been exercised but
which exercise has not been consummated by tender of payment for the purchase of
Common Stock, shall automatically terminate on the date of Termination.

(c) In the event Employee dies or becomes Disabled, Employee
or his personal representative shall have a period of twelve (12) months
following the date of Employee's death or the last day of the Disability period
(as the case may be) to exercise all Options which were exercisable on the date
of Employee's death or that he became Disabled (as the case may be).

(d) Employee may exercise the Options by delivering written
notice of exercise to Employer during the First or Second Exercise Period
("Exercise Notice") as the case may be. Such Options may be exercised, in whole
or in part, as specified in the Exercise Notice.

(e) In the event that Employee exercises Options during the
First Exercise Period, the purchase price for the Common Stock to be purchased
by Employee shall be by cashiers check payable to the Employer the amount equal
to the number of shares of Common Stock with respect to which Employee has
exercised the Options, multiplied by the Exercise Price (the "First Option
Purchase Price"). In the event that Employee exercises Options

7
<PAGE> 8
during the Second Exercise Period, the purchase price for the Common Stock to be
purchased by Employee shall be by cashiers check payable to the Employer the
amount equal to the number of shares of Common Stock (up to ______) with respect
to which Employee has exercised the Options, multiplied by the Exercise Price
(the "Second Option Purchase Price").

(f) The closing of the purchase of shares of Common Stock
pursuant to the exercise of Options during the First Exercise Period or the
Second Exercise Period (as the case may be, an "Option Closing"), shall occur on
or before the tenth (10th) business day following the date the applicable
exercised Notice was given. At the Option Closing (or at each Option Closing, if
more than one), Employer shall issue to Employee a stock certificate evidencing
the First Option Purchased Stock or the Second Option Purchased Stock, as the
case may be.

(g) At Employee's request, subject to the provisions of any
applicable securities laws, Employee may designate his spouse, children,
siblings, nieces or nephews or a trust for their benefit of which Employee is
sole trustee to own and hold record or beneficial title to all or portions of
the First Option Purchased Stock and Second Option Purchased Stock.

(h) The Options granted hereunder are personal to Employee,
and, except as permitted by subsection (g) above, may not be sold, assigned,
devised, transferred, pledged, hypothecated or in any way disposed of, by
operation of law or otherwise, at any time. Any purported sale, assignment,
devise, transfer, pledge, hypothecation or disposition shall be utterly void and
of no force or effect.

15. EMPLOYEE'S DISCLOSURES AND REPRESENTATIONS
AND WARRANTIES.

Employee hereby acknowledges, represents and warrants to,
and/or agrees with, Employer as follows:

(a) That Employee and his representatives and agents (i) have
received and read and are familiar with this Agreement, and (ii) are familiar
with the business and operations conducted and to be conducted by Employer and
the risks attendant thereto.

(b) That Employee and/or his representatives and agents have
had an opportunity to ask questions of and receive satisfactory answers from
Employer and/or a person or persons authorized to act on Employer's behalf
concerning the terms and conditions of this Agreement, this transaction and
Employer and its currently contemplated business and operations.

(c) That Employee has been represented by such legal and other
professional advisors (if any), each of whom has been personally selected by
Employee, as Employee has found necessary to consult concerning the transactions
contemplated in or by this Agreement.

8
<PAGE> 9

(d) That Employee has full right, power and authority to
perform all obligations under this Agreement.

Employee hereby agrees to indemnify and hold harmless Employer
and its shareholders, directors, officers, employees and agents from and against
any and all loss, damage, liability, cost or expense (including reasonable
attorneys' and paralegals' fees and costs before and at trial and at all
appellate levels) due to or arising out of any inaccuracy in, or breach of, any
representation, warranty or covenant of Employee contained in this Section 15.

16. INDEPENDENT COUNSEL

Employer and Employee agree that each of them have been, or
were advised and fully understand that they are entitled to be, represented by
independent legal counsel with respect to all matters contemplated herein, from
the commencement of negotiations at all times through the execution hereof.

17. LAW APPLICABLE

This Agreement shall be governed by and construed pursuant to
the laws of the State of Florida, without giving effect to conflicts of laws
principles.

18. NOTICES

Any notices required or permitted to be given pursuant to this
Agreement shall be sufficient, if in writing, and if personally delivered or
sent by certified or registered mail, return receipt requested, to his
residence, in the case of Employee, or to its then principal office, in the case
of Employer.

19. SUCCESSION

This Agreement shall inure to the benefit of and be binding
upon the parties hereto and their respective legal representatives, heirs,
assignees and/or successors in interest of any kind whatsoever; provided,
however, that Employee acknowledges and agrees that he cannot assign or delegate
any of his rights, duties, responsibilities or obligations hereunder to any
other person or entity, except as provided for in Section 14(g) herein.

20. ENTIRE AGREEMENT

This Agreement constitutes the entire final agreement between
the parties with respect to, and supersedes any and all prior agreements between
the parties hereto both oral and written concerning, the subject matter hereof
and may not be amended, modified or terminated except by a writing signed by the
parties hereto.

9
<PAGE> 10

21. SEVERABILITY

If any provision of this Agreement shall be held to be invalid
or unenforceable, and is not reformed by a court of competent jurisdiction, such
invalidity or unenforceability shall attach only to such provision and shall not
in any way affect or render invalid or unenforceable any other provision of this
Agreement, and this Agreement shall be carried out as if such invalid or
unenforceable provision were not contained herein.

22. NO WAIVER

A waiver of any breach or violation of any term, provision or
covenant contained herein shall not be deemed a continuing waiver or a waiver of
any future or past breach or violation. No oral waiver shall be binding.

23. ATTORNEYS' FEES

In the event that either of the parties to this Agreement
institutes suit against the other party to this Agreement to enforce any of his
or its rights hereunder, the prevailing party in such action shall be entitled
to recover from the other party all reasonable costs thereof, including
reasonable attorneys' and paralegals' fees and costs incurred before and at
trial and at all tribunal levels.

24. CONSULTING

Employee may act as a consultant to the senior management or
Board of up to two companies so long as it shall not interfere or materially
detract with from Employee's duties to the Employer. Employee must submit the
nature of any such consulting arrangement to Employer in advance for Employer's
approval, such approval not to be unreasonably withheld.

IN WITNESS WHEREOF, the undersigned have hereunto set their hands on
the day and year first above written.

VIRAGEN, INC.

By: /s/ DENNIS W. HEALEY
Dennis W. Healey
Executive Vice President

EMPLOYEE

By: /s/ ROBERT C. RECH
Robert C. Rech

<PAGE> 1
EMPLOYMENT AGREEMENT

AGREEMENT dated as of March 1, 1997 (the "Effective Date") by and
between VIRAGEN, INC., a Delaware corporation ("Employer or the "Company"), and
GERALD SMITH ("Employee").

W I T N E S S E T H:

WHEREAS, Employer desires to employ the Employee upon the terms and
conditions hereinafter set forth and Employee desires to accept employment upon
such terms and conditions; and

WHEREAS, Employer and Employee desire to set forth in writing the terms
and conditions of their agreements and understandings with respect to Employee's
employment by Employer.

NOW, THEREFORE, Employer hereby employs Employee and Employee hereby
accepts employment under the following terms and conditions:

1. EMPLOYMENT

Employer hereby employs Employee, and Employee hereby accepts
employment by Employer, upon all the terms and conditions hereinafter set forth.

2. TERM

Subject to the provisions for earlier termination set forth in
Section 9 hereof, this Agreement shall commence on the Effective Date and shall
end as of the close of business on February 28, 1999 (the "Employment Term").
The term "first year", as used herein, means the period commencing on the
Effective Date and ending as of the close of business on February 28, 1998, the
term "second year", as used herein, means the period commencing on March 1, 1998
and ending as of the close of business on February 28, 1999, and the term
"year", as used herein, means, as the context requires, the first year or the
second year. Notwithstanding any of the foregoing to the contrary, if this
Employment Agreement is terminated prior to the expiration of the Employment
Term, a year shall mean, with respect to the year during which termination
occurs, the period commencing on the first day of such year and ending as of the
close of business of the day of termination of Employee's employment, and
"Employment Term" shall mean the period commencing on the Effective Date and
ending as of the close of business of the day of termination of Employee's
employment.

<PAGE> 2
3. EMPLOYEE'S REPRESENTATIONS AND WARRANTIES

Employee represents and warrants to Employer that he is free
to accept employment with Employer as contemplated herein and has no other
written or oral obligations or commitments of any kind or nature which would in
any way interfere with his acceptance of employment pursuant to the terms hereof
or the full performance of his obligations hereunder or the exercise of his best
efforts in his employment hereunder.

4. DUTIES AND EXTENT OF SERVICES

Employee shall be employed as Employer's President and, as
such, shall, subject to the direction of Employer's Board of Directors,
supervise the conduct of all of Employer's operations and affairs, and perform
such other duties and responsibilities as may be assigned to Employee from time
to time consistent with such title by Employer's Board of Directors. Employee
agrees to devote sufficient time, skill, attention and energy diligently and
competently to perform the duties and responsibilities reasonably assigned to
him hereunder or pursuant hereto to the best of his abilities. Employee shall
use his best efforts to be loyal and faithful at all times and constantly
endeavor to improve his ability and his knowledge of the business of Employer in
an effort to increase the value of his services for the mutual benefit of
Employer and Employee. Employer acknowledges that Employee is Chairman and
President of Cytoferon Corp. and a consultant to Tablelamps USA, Inc.
("Tablelamps") and Employer consents to Employee continuing to act as Chairman
and President of Cytoferon Corp. and consultant to Tablelamps. Employee has
informed Employer that Employee's duties for Tablelamps are minimal and such
duties will not interfere with the satisfactory performance of his obligations
under this Agreement. Employee agrees not to enter into any other employment
agreement, other than with subsidiaries and/or affiliates of the Company as may
be approved by the Company's Board of Directors, during the term hereof.

5. COMPENSATION

Employee shall receive an annual salary during the Employment
Term as follows: $190,000 for the period March 1, 1997 to February 28, 1998, and
$200,000 for the period March 1, 1998 to February 28, 1999. Employee's salary
shall be payable in accordance with the Company's normal payroll process,
currently bi-weekly. Additional consideration payable to Employee hereunder
consists of (a) the grant to Employee of options to acquire 1,000,000 shares of
common stock of Employer (as further described herein), and (b) fringe benefits,
if any, that shall be made available to Employee further described herein.

6. FRINGE BENEFITS AND EXPENSES

2
<PAGE> 3
sharing, stock option, incentive compensation and stock purchase plans and such
other employee benefit programs to the same extent such plans and programs are
made generally available from time to time by Employer to all of its other
similarly-situated employees; provided, however, Employer shall be under no
obligation to make any of such plans or programs available to its employees or
continue any which currently or in the future exist, except as otherwise
required by law.

B. Automobile. For the term of this Agreement, Employer shall
provide to Employee an automobile and shall pay all gas, maintenance, insurance
and other expenses related thereto, for performance of Employee's duties on
behalf of Employer as specified herein.

C. Other Expenses. Employer shall promptly pay directly or
reimburse Employee for his reasonable out-of-pocket costs and expenses incurred
in connection with the performance of his duties and responsibilities hereunder
subject to the submission by Employee of appropriate invoices, receipts and
other supporting documentation, consistent with Employer's customary
reimbursement policies and procedures.

7. VACATIONS

Employee shall be entitled to normal vacation (of not less
than two weeks) taken by other members of senior management during each
twelve-month period of the Employment Term. Employee shall not be entitled to be
compensated for any unused vacation upon termination of this Agreement. The
periods during which Employee will be absent from work shall be determined by
Employee taking into account the needs of Employer's business.

8. FACILITIES

9. TERMINATION OF EMPLOYMENT

3
<PAGE> 4
after Employee shall be unable to perform his duties hereunder for ninety (90)
consecutive days (the "Disability Period"). If Employee shall have been under a
disability but shall have returned to work prior to the end of the Disability
Period, any new disability commencing within thirty (30) days of the termination
of the prior disability shall be a continuation of the prior disability, and the
period of all such disabilities shall be added together to determine whether, or
how much of, the Disability Period has elapsed.

C. Definition of Cause. For purposes of this Agreement,
"Cause" shall be: (a) conviction for fraud or criminal conduct (other than
conviction of, or a plea of guilty to, a traffic violation), from which no
appeal can be taken; (b) habitual drunkenness or drug addiction; (c)
embezzlement; (d) material sanctions against Employee in his capacity as an
employee of Employer by regulatory agencies governing Employer or against
Employer because of wrongful acts or conduct of Employee which have a material
adverse affect upon the Employer and its business; (e) material breach or
default by Employee of any of the material terms or conditions of this
Agreement, and the continuation of such material breach or default by Employee
for a period of seven (7) days following the date of receipt of written notice
from Employer specifying the breach or default of Employee; or (f) the
resignation or quitting of Employee prior to the end of the Employment Term (in
this last event, Employee's employment shall be deemed terminated with Cause on
the date that he resigns or quits).

If Employee's employment is terminated by Employer without
Cause as defined in this Section, Employee shall be given sixty (60) days
written notice of termination by Employer and be entitled to receive the greater
of (i) two years compensation and fringe benefits/expenses as provided for in
Sections 5 & 6 hereof or (ii) compensation and fringe benefits/expenses as
provided for in sections 5 & 6 payable through the remainder of the Employment
Term as provided for in Section 2 hereof. Additionally, in the event of
termination without Cause, or non-renewal of this Agreement at the end of the
Employment Term, any outstanding but unexercised stock options or warrants
granted to Employee shall continue to be fully exercisable through their stated
respective Exercise Period(s).

D. Termination Following a Change of Control.

i. In the event that a "Change of Control" as hereinafter
defined, of the Company shall occur at any time during the Employment Term, the
Employee shall have the right to terminate the Employee's employment under this
Agreement upon thirty (30) days written notice given at any time within one year
after the occurrence of such event, and such termination of the Employee's
employment with the Company pursuant to this Subsection 9D, then, in any such
event, such termination shall be deemed to be a Termination by the Company Other
than for Cause and the Employee shall be entitled to such Compensation and
Benefits as set forth in Subsection 9D of this Agreement.

4
<PAGE> 5
15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"); provided
that, without limitation, such a change in control shall be deemed to have
occurred at such time as:

(A) any person (as such term is used in Section 13(d) and
14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in
Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the
Company representing fifty percent (50%) or more of the combined voting power of
the Company's outstanding securities then having the right to vote at elections
of directors; or,

(B) the individuals who at the commencement date of this
Agreement the Board of Directors cease for any reason to constitute a majority
thereof unless the election, or nomination for election, of each new director
was approved by a vote of at least two thirds of the directors then in office
who were directors at the commencement of this Agreement; or

(C) there is a failure to elect five or more (or such number
of directors as would constitute a majority of the Board of Directors)
candidates nominated by management of the Company to the Board of Directors; or

(D) the business of the Company for which the Employee's
services are principally performed is disposed of by the Company pursuant to a
partial or complete liquidation of the Company, a sale of assets (including
stock of a subsidiary of the Company) or otherwise.

Anything herein to the contrary notwithstanding, this Subsection 9D will not
apply where the Employee gives the Employee's explicit written waiver stating
that for the purposes of this Subsection 9D a Change in Control shall not be
deemed to have occurred. The Employee's participation in any negotiations or
other matters in relation to a Change in Control shall in no way constitute such
a waiver which can only be given by an explicit written waiver as provided in
the preceding sentence.

10. NON-DISCLOSURE OF CONFIDENTIAL INFORMATION

A. Confidential Information. Employee acknowledges that
Employee has been informed that it is the policy of Employer to maintain as
secret and confidential all information relating to (i) the financial condition,
businesses and interests of Employer and its affiliates, (ii) the systems,
know-how, products, services, costs, inventions, patents, patent applications,
formulae, research and development procedures, notes and results, computer
software programs, marketing and sales techniques and/or programs, methods,
methodologies, manuals, lists and other trade secrets heretofore or hereafter
acquired, sold, developed and/or used by Employer and its affiliates and (iii)
the nature and terms of Employer's and its affiliates' relationships with their
respective customers, clients, suppliers, lenders, vendors, consultants,
independent contractors and employees (all such information being hereinafter
collectively referred to as "Confidential Information"), and Employee further
acknowledges that such Confidential Information is of great value to

5
<PAGE> 6
Employer and its affiliates and, in and by reason and as a result of Employee's
employment by Employer, Employee will be making use of, acquiring and/or adding
to such Confidential Information. Therefore, Employee understands that it is
reasonably necessary to protect Employer's and its affiliates' trade secrets,
good will and business interests that Employee agree and, accordingly, Employee
does hereby agree, that Employee will not directly or indirectly (except where
authorized by the Board of Directors of Employer for the benefit of Employer
and/or its affiliate(s) and/or as required in the course of his employment) at
any time hereafter divulge or disclose for any purpose whatsoever to any
persons, firms, corporations or other entities other than Employer or its
affiliates (hereinafter referred to collectively as "Third Parties"), or use or
cause or authorize any Third Parties to use, any such Confidential Information,
except as otherwise required by law.

11. COVENANT-NOT-TO-COMPETE

In view of the Confidential Information to be obtained by or
disclosed to Employee, because of the know-how acquired and to be acquired by
Employee, and as a material inducement to Employer to enter into this Agreement,
issue the Options (as defined below) and continue to employ Employee, Employee
covenants and agrees that, so long as Employee is employed by Employer and for a
period of two (2) years after Employee ceases for any reason to be employed by
Employer, Employee shall not, directly or indirectly, (i) divert business from,
(ii) solicit or transact any business competitive with Employer or its
affiliates with, or (iii) sell any products or services sold or offered by
Employer or its affiliates to, any customer or former customer of Employer or
its affiliates. In addition, Employee covenants and agrees that, so long as
Employee is employed by Employer and for a period of two (2) years after
Employee ceases for any reason to be employed by Employer, Employee hereby
agrees to refrain from, anywhere in the world (the "Geographical Area"),
directly or indirectly owning, managing, operating, controlling or financing, or
participating in the ownership, management, control or financing of, or being
connected with or having an interest in, or otherwise taking any part as a
stockholder (other than deminimus amounts as a passive investor), director,
officer, employee, agent, consultant, partner or otherwise in, any

6
<PAGE> 7
business competitive with that engaged in or being developed by Employer or its
affiliates during Employee's term of employment. Without limitation of the
foregoing, Employer's business is acknowledged to include the development,
manufacture and sale of human leukocyte interferon therapy and products and
other natural or recombinant technologies aimed at enhancing the human immune
system. Employee acknowledges that Employer's business is anticipated to be
international in scope, that a similar business could effectively compete with
Employer's and its affiliates businesses from any location in the world, and
that, therefore, the restricted Geographical Area is reasonable in scope to
protect Employer's and its affiliates' trade secrets and legitimate business
interests.

12. EMPLOYER'S REMEDIES FOR BREACH OF SECTIONS 10 & 11

Employee covenants and agrees that if Employee shall violate
or breach any of Employee's covenants or agreements provided for in Sections 10
or 11 hereof, Employer and/or its affiliates shall be entitled to an accounting
and repayment of all profits, compensation, commissions, remunerations or
benefits which Employee directly or indirectly has realized or realizes as a
result of, growing out of or in connection with any such violation or breach. In
addition, in the event of a breach or violation or threatened or imminent breach
or violation of any provisions of Sections 10 or 11 hereof, Employer and/or its
affiliates shall be entitled to a temporary and permanent injunction or any
other appropriate decree of specific performance or equitable relief, without
posting of bond, from a court of competent jurisdiction in order to prevent,
prohibit or restrain any such breach or violation or threatened or imminent
breach or violation by Employee, by Employee's partners, agents,
representatives, servants, employers or employees and/or by any third parties.
Employer shall be entitled to such injunctive or other equitable relief in
addition to any damages which are suffered, and the prevailing party shall be
entitled to reasonable attorneys' and paralegals' fees and costs and other costs
incurred in connection with any such litigation, both before and at trial and at
all tribunal levels. Resort by Employer and/or its affiliates to such injunctive
or other equitable relief shall not be deemed to waive or to limit in any
respect any other rights or remedies which Employer or its affiliates may have
with respect to such breach or violation.

13. REASONABLENESS OF RESTRICTIONS

7
<PAGE> 8

D. Comparable Restrictions. Employer agrees that it will use
its best efforts to have other senior executives execute and observe agreements
containing similar provisions as are contained in Sections 10, 11 and 12 hereof.

14. STOCK OPTIONS

Effective the Effective Date, Employer hereby grants to
Employee, pursuant to Employer's 1997 Stock Option Plan (the "Plan"), options to
acquire 1,000,000 shares of the Company's Common Stock (the "Options"), for a
period of five (5) years from the date hereof, in accordance with the Stock
Option Agreement attached hereto (Exhibit A) and made a part hereof. Such
Options shall vest in full upon execution of this Employment Agreement.

Employer represents and warrants that (i) all shares
underlying the Options will be issued from shares authorized by and subject to
the provisions of the Plan (ii) the Company shall use its best efforts to
register the Plan and the shares underlying the Options under the applicable
regulations of the Securities and Exchange Commission on Form S-8 and (iii) such
registration covering the shares underlying the Options will be maintained as
effective for the longer of (a) the Employment Term or (b) the Exercise Period
of the Options as defined in Exhibit A.

8
<PAGE> 9

15. EMPLOYEE'S DISCLOSURES & REPRESENTATIONS
& WARRANTIES.

Employee hereby acknowledges, represents and warrants to,
and/or agrees with, Employer as follows:

(a) Subject to Employee's right to designate family members to
own the stock acquired through exercise of the Options, that Employee is
acquiring the Options for his own account, for investment purposes only, and not
with a view to the public sale or distribution thereof, except as applicable
under the Form S-8 Registration to be filed by the Company covering the Shares
underlying the Options.

(b) That Employee has full right, power and authority to
perform all obligations under this Agreement.

(c) That Employee understands that the Options are
nonassignable, and that the Shares acquired through exercise of the Options may
be sold or transferred only pursuant to the Form S-8 Registration to be filed by
the Company covering the Shares underlying the Options.

Employee hereby agrees to indemnify and hold harmless Employer
and its shareholders, directors, officers, employees and agents from and against
any and all loss, damage, liability, cost or expense (including reasonable
attorneys' and paralegals' fees and costs before and at trial and at all
appellate levels) due to or arising out of any material inaccuracy in, or
material breach of, any material representation, warranty or covenant of
Employee contained herein.

16. INDEPENDENT COUNSEL

Employer and Employee agree that each of them have been, or
were advised and fully understand that they are entitled to be represented by
independent legal counsel with respect to all matters contemplated herein from
the commencement of negotiations at all times through the execution hereof.

17. LAW APPLICABLE

This Agreement shall be governed by and construed pursuant to
the laws of the State of Florida, without giving effect to conflicts of laws
principles.

9
<PAGE> 10

18. NOTICES

19. SUCCESSION

20. ENTIRE AGREEMENT

This Agreement constitutes the entire final agreement between
the parties with respect to, and supersedes any and all prior agreements, both
oral and written, between the parties hereto, except as related to rights of the
Employee and obligations related thereto of Employer regarding previously
granted stock options and previously purchased stock, as may have been modified
from time to time. The subject matter hereof may not be amended, modified or
terminated except by a writing signed by the parties hereto.

21. SEVERABILITY

22. NO WAIVER

23. ATTORNEYS' FEES

<PAGE> 1

EMPLOYMENT AGREEMENT

AGREEMENT dated as of March 1, 1997 (the "Effective Date") by and between
VIRAGEN, INC., a Delaware corporation ("Employer or the "Company"), and DENNIS
W. HEALEY ("Employee").

W I T N E S S E T H:

WHEREAS, Employer desires to employ the Employee upon the terms and
conditions hereinafter set forth and Employee desires to accept employment upon
such terms and conditions; and

WHEREAS, Employer and Employee desire to set forth in writing the terms
and conditions of their agreements and understandings with respect to Employee's
employment by Employer.

NOW, THEREFORE, Employer hereby employs Employee and Employee hereby
accepts employment under the following terms and conditions:

1. EMPLOYMENT

Employer hereby employs Employee, and Employee hereby accepts
employment by Employer, upon all the terms and conditions hereinafter set forth.

2. TERM

Employee represents and warrants to Employer that he is free to
accept employment with Employer as contemplated herein and has no other written
or oral obligations or commitments of any kind or nature which would in any way
interfere with his acceptance of employment pursuant to the terms hereof or the
full performance of his obligations hereunder or the exercise of his best
efforts in his employment hereunder.

4. DUTIES AND EXTENT OF SERVICES

Employee shall be employed as Employer's Executive Vice President
and Chief Financial Officer and, as such, shall, subject to the direction of
Employer's President, supervise the conduct the Employer's operations and
affairs as assigned by the President, and perform such other duties and
responsibilities as may be assigned to Employee from time to time consistent
with such title by Employer's President. Employee agrees to devote sufficient
time, skill, attention and energy diligently and competently to perform the
duties and responsibilities reasonably assigned to him hereunder or pursuant
hereto to the best of his abilities. Employee shall use his best efforts to be
loyal and faithful at all times and constantly endeavor to improve his ability
and his knowledge of the business of Employer in an effort to increase the value
of his services for the mutual benefit of Employer and Employee. Employee agrees
not to enter into any other employment agreement, other than with subsidiaries
and/or affiliates of the Company as may be approved by the Company's Board of
Directors, during the term hereof.

5. COMPENSATION

Employee shall receive an annual salary during the Employment Term
as follows: $95,000 for the period March 1, 1997 to February 28, 1998, and
$100,000 for the period March 1, 1998 to February 28, 1999. Employee's salary
shall be payable in accordance with the Company's normal payroll process,
currently bi-weekly. Additional consideration payable to Employee hereunder
consists of (a) the grant to Employee of options to acquire 300,000 shares of
common stock of Employer (as further described herein), and (b) fringe benefits,
if any, that shall be made available to Employee further described herein.

6. FRINGE BENEFITS AND EXPENSES

A. Employee Plans. Employee shall be eligible (subject to the terms
and conditions of particular plans and programs) to participate in such medical,
hospitalization, group health, accident, disability and life insurance programs
and plans, such pension, profit sharing, stock option, incentive compensation
and stock purchase plans and such other employee benefit programs to the same
extent such plans and programs are made generally available from time to time by
Employer to all of its other similarly-situated employees; provided, however,
Employer shall be under no obligation to make any of such plans or

2
<PAGE> 3
programs available to its employees or continue any which currently or in the
future exist, except as otherwise required by law.

B. Automobile. For the term of this Agreement, Employer
shall provide to Employee an automobile, acceptable to the Employer's
President, and shall pay all gas, maintenance, insurance and other
expenses related thereto, for performance of Employee's duties on behalf
of Employer as specified herein.

C. Other Expenses. Employer shall promptly pay directly or reimburse
Employee for his reasonable out-of-pocket costs and expenses incurred in
connection with the performance of his duties and responsibilities hereunder
subject to the submission by Employee of appropriate invoices, receipts and
other supporting documentation, consistent with Employer's customary
reimbursement policies and procedures.

7. VACATIONS

Employee shall be entitled to normal vacation (of not less than two
weeks) taken by other members of senior management during each twelve-month
period of the Employment Term. Employee shall not be entitled to be compensated
for any unused vacation upon termination of this Agreement. The periods during
which Employee will be absent from work shall be determined by Employee taking
into account the needs of Employer's business.

8. FACILITIES

9. TERMINATION OF EMPLOYMENT

B. Definition of Disabled. For purposes of this Agreement, Employee
shall be deemed to be "Disabled" when, by reason of physical or mental illness
or of injury, he is unable to perform substantially all of the duties and
responsibilities required of him in connection with his employment hereunder. No
disability shall be deemed to exist until after Employee shall be unable to
perform his duties hereunder for ninety (90) consecutive days (the "Disability
Period"). If Employee shall have been under a disability but shall have returned
to work prior to the end of the Disability Period, any new disability commencing
within thirty (30) days of the termination of the prior disability shall be a

3
<PAGE> 4
continuation of the prior disability, and the period of all such disabilities
shall be added together to determine whether, or how much of, the Disability
Period has elapsed.

C. Definition of Cause. For purposes of this Agreement, "Cause"
shall be: (a) conviction for fraud or criminal conduct (other than conviction
of, or a plea of guilty to, a traffic violation), from which no appeal can be
taken; (b) habitual drunkenness or drug addiction; (c) embezzlement; (d)
material sanctions against Employee in his capacity as an employee of Employer
by regulatory agencies governing Employer or against Employer because of
wrongful acts or conduct of Employee which have a material adverse affect upon
the Employer and its business; (e) material breach or default by Employee of any
of the material terms or conditions of this Agreement, and the continuation of
such material breach or default by Employee for a period of seven (7) days
following the date of receipt of written notice from Employer specifying the
breach or default of Employee; or (f) the resignation or quitting of Employee
prior to the end of the Employment Term (in this last event, Employee's
employment shall be deemed terminated with Cause on the date that he resigns or
quits).

If Employee's employment is terminated by Employer without Cause as
defined in this Section, Employee shall be given sixty (60) days written notice
of termination by Employer and be entitled to receive the greater of (i) two
years compensation and fringe benefits/expenses as provided for in Sections 5 &
6 hereof or (ii) compensation and fringe benefits/expenses as provided for in
sections 5 & 6 payable through the remainder of the Employment Term as provided
for in Section 2 hereof. Additionally, in the event of termination without
Cause, or non-renewal of this Agreement at the end of the Employment Term, any
outstanding but unexercised stock options or warrants granted to Employee shall
continue to be fully exercisable through their stated respective Exercise
Period(s).

D. Termination Following a Change of Control.

ii. For purposes of this Agreement, a "Change of Control" of
the Company shall mean a change in control (A) as set forth in Section 280G of
the Internal Revenue Code or (B) of a nature that would be required to be
reported in response to Item 1 of the current report on Form 8K, as in effect on
the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 (the "Exchange Act"); provided that, without limitation, such a change
in control shall be deemed to have occurred at such time as:

4
<PAGE> 5
(A) any person (as such term is used in Section 13(d) and
14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in
Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the
Company representing fifty percent (50%) or more of the combined voting power of
the Company's outstanding securities then having the right to vote at elections
of directors; or,

(C) there is a failure to elect five or more (or such
number of directors as would constitute a majority of the Board of Directors)
candidates nominated by management of the Company to the Board of Directors; or

10. NON-DISCLOSURE OF CONFIDENTIAL INFORMATION

A. Confidential Information. Employee acknowledges that Employee has
been informed that it is the policy of Employer to maintain as secret and
confidential all information relating to (i) the financial condition, businesses
and interests of Employer and its affiliates, (ii) the systems, know-how,
products, services, costs, inventions, patents, patent applications, formulae,
research and development procedures, notes and results, computer software
programs, marketing and sales techniques and/or programs, methods,
methodologies, manuals, lists and other trade secrets heretofore or hereafter
acquired, sold, developed and/or used by Employer and its affiliates and (iii)
the nature and terms of Employer's and its affiliates' relationships with their
respective customers, clients, suppliers, lenders, vendors, consultants,
independent contractors and employees (all such information being hereinafter
collectively referred to as "Confidential Information"), and Employee further
acknowledges that such Confidential Information is of great value to Employer
and its affiliates and, in and by reason and as a result of Employee's
employment by Employer, Employee will be making use of, acquiring and/or adding
to such Confidential Information. Therefore, Employee understands that it is
reasonably necessary

5
<PAGE> 6
to protect Employer's and its affiliates' trade secrets, good will and business
interests that Employee agree and, accordingly, Employee does hereby agree, that
Employee will not directly or indirectly (except where authorized by the Board
of Directors of Employer for the benefit of Employer and/or its affiliate(s)
and/or as required in the course of his employment) at any time hereafter
divulge or disclose for any purpose whatsoever to any persons, firms,
corporations or other entities other than Employer or its affiliates
(hereinafter referred to collectively as "Third Parties"), or use or cause or
authorize any Third Parties to use, any such Confidential Information, except as
otherwise required by law.

B. Employer's Materials. In accordance with the foregoing, Employee
furthermore agrees that (i) Employee will at no time retain or remove from the
premises of Employer or its affiliates any research and development materials,
drawings, notebooks, notes, reports, formulae, software programs or discs or
other containers of software, manuals, data, books, records, materials or
documents of any kind or description for any purpose unconnected with the strict
performance of Employee's duties with Employer and (ii) upon the cessation or
termination of Employee's employment with Employer for any reason, Employee
shall forthwith deliver or cause to be delivered up to Employer any and all
research and development materials, drawings, notebooks, notes, reports,
formulae, software programs or discs or other containers of software, manuals,
data, books, records, materials and other documents and materials in Employee's
possession or under Employee's control relating to any Confidential Information
or any property or information which is otherwise the property of Employer or
its affiliates.

11. COVENANT-NOT-TO-COMPETE

In view of the Confidential Information to be obtained by or
disclosed to Employee, because of the know-how acquired and to be acquired by
Employee, and as a material inducement to Employer to enter into this Agreement,
issue the Options (as defined below) and continue to employ Employee, Employee
covenants and agrees that, so long as Employee is employed by Employer and for a
period of two (2) years after Employee ceases for any reason to be employed by
Employer, Employee shall not, directly or indirectly, (i) divert business from,
(ii) solicit or transact any business competitive with Employer or its
affiliates with, or (iii) sell any products or services sold or offered by
Employer or its affiliates to, any customer or former customer of Employer or
its affiliates. In addition, Employee covenants and agrees that, so long as
Employee is employed by Employer and for a period of two (2) years after
Employee ceases for any reason to be employed by Employer, Employee hereby
agrees to refrain from, anywhere in the world (the "Geographical Area"),
directly or indirectly owning, managing, operating, controlling or financing, or
participating in the ownership, management, control or financing of, or being
connected with or having an interest in, or otherwise taking any part as a
stockholder (other than deminimas amounts as a passive investor), director,
officer, employee, agent, consultant, partner or otherwise in, any business
competitive with that engaged in or being developed by Employer or its
affiliates during Employee's term of employment. Without limitation of the
foregoing, Employer's business is acknowledged to include the development,
manufacture and sale of human

6
<PAGE> 7
leukocyte interferon therapy and products and other natural or recombinant
technologies aimed at enhancing the human immune system. Employee acknowledges
that Employer's business is anticipated to be international in scope, that a
similar business could effectively compete with Employer's and its affiliates
businesses from any location in the world, and that, therefore, the restricted
Geographical Area is reasonable in scope to protect Employer's and its
affiliates' trade secrets and legitimate business interests.

12. EMPLOYER'S REMEDIES FOR BREACH OF SECTIONS 10 & 11

Employee covenants and agrees that if Employee shall violate or
breach any of Employee's covenants or agreements provided for in Sections 10 or
11 hereof, Employer and/or its affiliates shall be entitled to an accounting and
repayment of all profits, compensation, commissions, remunerations or benefits
which Employee directly or indirectly has realized or realizes as a result of,
growing out of or in connection with any such violation or breach. In addition,
in the event of a breach or violation or threatened or imminent breach or
violation of any provisions of Sections 10 or 11 hereof, Employer and/or its
affiliates shall be entitled to a temporary and permanent injunction or any
other appropriate decree of specific performance or equitable relief, without
posting of bond, from a court of competent jurisdiction in order to prevent,
prohibit or restrain any such breach or violation or threatened or imminent
breach or violation by Employee, by Employee's partners, agents,
representatives, servants, employers or employees and/or by any third parties.
Employer shall be entitled to such injunctive or other equitable relief in
addition to any damages which are suffered, and the prevailing party shall be
entitled to reasonable attorneys' and paralegals' fees and costs and other costs
incurred in connection with any such litigation, both before and at trial and at
all tribunal levels. Resort by Employer and/or its affiliates to such injunctive
or other equitable relief shall not be deemed to waive or to limit in any
respect any other rights or remedies which Employer or its affiliates may have
with respect to such breach or violation.

13. REASONABLENESS OF RESTRICTIONS

7
<PAGE> 8
that any one of the provisions of, or restrictions in, Sections 10, 11 and/or 12
hereof shall be held to be invalid or unenforceable, the remaining provisions
thereof and restrictions therein shall nevertheless continue to be valid and
enforceable as though the invalid or unenforceable provisions or restrictions
had not been included therein, and any one or more of such valid provisions and
restrictions may be enforced in whole or in part as the circumstances warrant.
In the event that any such provision relating to time period and/or geographical
and/or type of restriction shall be declared by a court of competent
jurisdiction to exceed the maximum or permissible time period, geographical area
or type of restriction such court deems reasonable and enforceable, said time
period and/or geographical and/or type of restriction shall be deemed to become
and shall thereafter be the maximum time period and/or geographical restriction
and/or type of restriction which such court deems reasonable and enforceable.

C. Survivability. The restrictions, acknowledgments, covenants and
agreements of Employee set forth in Sections 10, 11, 12 and 13 of this Agreement
shall survive any termination of this Agreement or of Employee's employment (for
any reason, including expiration of the Employment Term).

D. Comparable Restrictions. Employer agrees that it will use its
best efforts to have other senior executives execute and observe agreements
containing similar provisions as are contained in Sections 10, 11 and 12 hereof.

14. STOCK OPTIONS

Effective the Effective Date, Employer hereby grants to Employee,
pursuant to Employer's 1997 Stock Option Plan (the "Plan"), options to acquire
up to 300,000 shares of the Company's Common Stock (the "Options"), for a period
of five (5) years from the date hereof, in accordance with the Stock Option
Agreement attached hereto (Exhibit A) and made a part hereof. Such Options shall
vest in full upon execution of this Employment Agreement.

Employer represents and warrants that (i) all shares underlying the
Options will be issued from shares authorized by and subject to the provisions
of the Plan (ii) the Company shall use its best efforts to register the Plan and
the shares underlying the Options under the applicable regulations of the
Securities and Exchange Commission on Form S-8 and (iii) such registration
covering the shares underlying the Options will be maintained as effective for
the longer of (a) the Employment Term or (b) the Exercise Period of the Options
as defined in Exhibit A.

15. EMPLOYEE'S DISCLOSURES AND REPRESENTATIONS
AND WARRANTIES.

Employee hereby acknowledges, represents and warrants to, and/or
agrees with, Employer as follows:

8
<PAGE> 9
(a) Subject to Employee's right to designate family members to
own the stock acquired through exercise of the Options, that Employee is
acquiring the Options for his own account, for investment purposes only, and not
with a view to the public sale or distribution thereof, except as applicable
under the Form S-8 Registration to be filed by the Company covering the Shares
underlying the Options.

(b) That Employee has full right, power and authority to
perform all obligations under this Agreement.

Employee hereby agrees to indemnify and hold harmless Employer and
its shareholders, directors, officers, employees and agents from and against any
and all loss, damage, liability, cost or expense (including reasonable
attorneys' and paralegals' fees and costs before and at trial and at all
appellate levels) due to or arising out of any material inaccuracy in, or
material breach of, any material representation, warranty or covenant of
Employee contained herein.

16. INDEPENDENT COUNSEL

Employer and Employee agree that each of them have been, or were
advised and fully understand that they are entitled to be represented by
independent legal counsel with respect to all matters contemplated herein from
the commencement of negotiations at all times through the execution hereof.

17. LAW APPLICABLE

This Agreement shall be governed by and construed pursuant to the
laws of the State of Florida, without giving effect to conflicts of laws
principles.

18. NOTICES

19. SUCCESSION

9
<PAGE> 10
cannot assign or delegate any of his rights, duties, responsibilities or
obligations hereunder to any other person or entity.

20. ENTIRE AGREEMENT

This Agreement constitutes the entire final agreement between the
parties with respect to, and supersedes any and all prior agreements, both oral
and written, between the parties hereto, except as related to rights of the
Employee and obligations related thereto of Employer regarding previously
granted stock options and previously purchased stock, as may have been modified
from time to time. The subject matter hereof may not be amended, modified or
terminated except by a writing signed by the parties hereto.

21. SEVERABILITY

If any provision of this Agreement shall be held to be invalid or
unenforceable, and is not reformed by a court of competent jurisdiction, such
invalidity or unenforceability shall attach only to such provision and shall not
in any way affect or render invalid or unenforceable any other provision of this
Agreement, and this Agreement shall be carried out as if such invalid or
unenforceable provision were not contained herein.

22. NO WAIVER

23. ATTORNEYS' FEES

In the event that either of the parties to this Agreement institutes
suit against the other party to this Agreement to enforce any of his or its
rights hereunder, the prevailing party in such action shall be entitled to
recover from the other party all reasonable costs thereof, including reasonable
attorneys' and paralegals' fees and costs incurred before and at trial and at
all tribunal levels.

24. COUNTERPARTS

This Agreement may be executed in counterparts, each of which shall
be an original, but both of which together shall constitute one and the same
instrument.

25. INDEMNITY OF EMPLOYEE

10
<PAGE> 11
Employer or by reason of Employee acting or having acted as a director or
officer of Employer, to the maximum extent permitted by law, including Section
607.0850, Florida Statutes (including the advancement of expense provisions
thereof); provided, however, that such indemnity shall not apply to acts or
omissions of Employee which constitute misconduct, gross negligence or which
were intended by Employee to personally benefit Employee, directly or
indirectly, at the expense of Employer, unless the matter which benefits
Employee was first fully disclosed to the Board of Directors of Employer and
approved by said Board.

IN WITNESS WHEREOF, the undersigned have hereunto set their hands on the
day and year first above written.

VIRAGEN, INC.

By: /s/ GERALD SMITH
---------------------------
Gerald Smith
President

EMPLOYEE

/s/ DENNIS W. HEALEY
---------------------------
Dennis W. Healey

<PAGE> 1

EMPLOYMENT AGREEMENT

AGREEMENT dated August 1, 1997 (the "Effective Date") by and between
VIRAGEN, INC., a Delaware Corporation ("Employer or the "Company"), and ROBERT
H. ZEIGER ("Employee").

W I T N E S S E T H

WHEREAS, Employer desires to employ Employee upon the terms and conditions
hereinafter set forth and Employee desires to accept employment upon such terms
and conditions; and

WHEREAS, Employer and Employee desire to set forth in writing the terms
and conditions of their agreements and understandings with respect to Employee's
employment by Employer.

NOW, THEREFORE, Employer hereby to employs Employee and Employee hereby
accepts employment under the following terms and conditions:

1. EMPLOYMENT

Employer hereby employs Employee, and Employee hereby accepts
employment by Employer, upon all the terms and conditions hereinafter set forth.

2. TERM

Subject to the provisions for earlier termination set forth in
Section 9 hereof, this Agreement shall commence on the Effective Date and shall
end as of the close of business of the day immediately preceding the first
anniversary of the Effective Date (the "Employment Term"). Notwithstanding any
of the foregoing to the contrary, if this Employment Agreement is terminated
prior to the expiration of the Employment Term, "Employment Term" shall mean the
period commencing on the Effective Date and ending as of the close of business
of the day of termination of Employee's employment.

3. EMPLOYEE'S REPRESENTATIONS AND WARRANTIES

Employee represents and warrants to Employer that he is free to
accept employment with Employer as contemplated herein and has no other written
or oral obligations or commitments of any kind or nature which would in any way
interfere with his acceptance of employment pursuant to the terms hereof or the
full performance of his obligations hereunder or the exercise of his best
efforts in his employment hereunder.
<PAGE> 2
4. DUTIES AND EXTENT OF SERVICES

Employee shall be employed as Employer's Chief Executive Officer and
as such, shall, subject to the direction of Employer's President, supervise the
conduct of Employer's operations and affairs, consistent with the position of
Chief Executive Officer and perform such other duties and responsibilities as
may be reasonably assigned to Employee from time to time consistent with such
title by the Employer's President. Employee agrees to devote sufficient time,
skill, attention and energy as Employee deems necessary to perform the duties
and responsibilities reasonably assigned to him hereunder or pursuant hereto to
the best of his abilities. Employee shall use his best efforts to be loyal and
faithful at all times. Employee agrees not to enter into any other employment
agreement during the term hereof.

5. COMPENSATION

Employee shall be compensated at a rate of $500 per day ($750 per
day if traveling on behalf of the Company) for each day Employee is present on
the Company's premises or otherwise performing his duties as Chief Executive
Officer, to a maximum of $120,000 per year during the Employment Term, payable
in accordance with the Company's normal payroll process, currently bi-weekly.
Employee is also entitled to receive fringe benefits that shall be made
available to Employee described in this Agreement.

Commencing September 1, 1997, Employer shall pay to Employee
additional compensation ("Additional Compensation") of $5,000 per month, payable
on the first business day of each month, for a period of six consecutive months,
for each whole month Employee continues to be employed by Employer. Both
Employer and Employee acknowledge that such Additional Compensation represents
monthly payment in areas for services provided by Employee.

6. FRINGE BENEFITS AND EXPENSES

A. Employee Plans. Employee shall be eligible (subject to the terms
and conditions of particular plans and programs) to participate in such medical,
hospitalization, group health, accident, disability and life insurance programs
and plans, such pension, profit sharing, stock option, incentive compensation
and stock purchase plans and such other employee benefit programs to the same
extent such plans and programs are made generally available from time to time by
Employer to all of its other executives; provided, however, Employer shall be
under no obligation to make any of such plans or programs available to its
employees or continue any which currently or in the future exist, except as
otherwise required by law.

2
<PAGE> 3
B. Other Expenses. Employer shall promptly pay directly or reimburse
Employee for his reasonable out-of-pocket costs and expenses incurred in
connection with the performance of his duties and responsibilities hereunder
subject to the submission by Employee of appropriate invoices, receipts and
other supporting documentation, consistent with Employer's customary
reimbursement policies and procedures.

C. Automobile. For the term of this Agreement, Employer shall pay
Employee $400 per month, payable in advance, for performance of Employee's
duties to Employer as specified herein.

7. VACATIONS

Employee shall be entitled to normal vacation (of not less than two
weeks) taken by other members of senior management during the Employment Term.
Employee shall not be entitled to be compensated for any unused vacation upon
termination of this Agreement. The periods during which Employee will be absent
from work shall be determined by Employee taking into account the needs of
Employer's business and shall be subject to the approval of the President (which
shall not be unreasonably withheld).

8. FACILITIES

9. TERMINATION OF EMPLOYMENT

A. Employee Notice of Termination. Employer and Employee acknowledge
that Employee may terminate this Agreement prior to the expiration of the
Employment Term with 60 days written notice ("60 day notice period") to
Employer. Employee shall deliver such written notice to the Company's principal
administrative office: Viragen, Inc., 865 SW 78th Avenue, Suite 100, Plantation,
Florida 33324, attention President. Following the expiration of the 60 day
notice period, both Employer and Employee are released from the provisions of
this Agreement, it being understood that the restrictions, acknowledgements,
covenants and agreements of Employee set forth the Sections 10, 11, 12 and 13 of
this Agreement shall survive.

B. Other Termination Events. Notwithstanding any provisions of this
Agreement to the contrary, Employee's employment may be terminated by Employer
with Cause (as hereinafter defined) effective upon the delivery of written
notice to Employee. In addition, Employee's employment shall terminate (i) upon
Employee's death or (ii) upon Employee becoming Disabled (as hereinafter
defined).

3
<PAGE> 4
C. Definition of Disabled. For purposes of this Agreement, Employee
shall be deemed to be "Disabled" when, by reason of physical or mental illness
or of injury as confirmed by competent medical evidence, he is unable to perform
substantially all of the duties and responsibilities required of him in
connection with his employment hereunder. No disability shall be deemed to exist
until after Employee shall be unable to perform his duties hereunder for ninety
(90) consecutive days (the "Disability Period"). If Employee shall have been
under a disability but shall have returned to work prior to the end of the
Disability Period, any new disability commencing within thirty (30) days of the
termination of the prior disability shall be a continuation of the prior
disability, and the period of all such disabilities shall be added together to
determine whether, or how much of, the Disability Period has elapsed.

D. Definition of Cause. For purposes of this Agreement, "Cause"
shall be: (a) felony conviction for fraud or criminal conduct (other than
conviction of, or a plea of guilty to, a traffic violation), from which no
appeal can be taken; (b) habitual drunkenness or drug addiction; (c)
embezzlement; (d) material sanctions against Employee in his capacity as an
employee of Employer by regulatory agencies governing Employer or against
Employer because of wrongful acts or conduct of Employee which have a material
adverse affect upon the Employer and its business; (e) material breach or
default by Employee of any of the material terms or conditions of this
Agreement, and the continuation of such material breach or default by Employee
for a period of seven (7) days following the date of receipt of written notice
from Employer specifying the material breach of default of Employee or (f) the
resignation or quitting of Employee prior to the end of the Employment Term,
such resignation or quitting not being in accordance with the provisions of
Section 9.A (in this last event, Employee's employment shall be deemed
terminated with cause on the date that he resigns or quits).

If Employee's employment is terminated by Employer without Cause as
defined in this Section, Employee shall be given sixty (60) days written notice
of termination by Employer and be entitled to receive compensation and fringe
benefits/expenses as provided for in sections 5 & 6 payable through the
remainder of the Employment Term as provided for in Section 2 hereof.
Additionally, in the event of termination without Cause, any outstanding but
unexercised stock options or warrants granted to Employee, shall immediately
vest and become fully exercisable through their stated respective Exercise
Period(s).

If Employee's employment is terminated for cause, Employee will be
entitled to receive the equivalent of one month's compensation (exclusive of the
Additional Compensation as described in Section 2) from the date of such
termination.

10. NON-DISCLOSURE OF CONFIDENTIAL INFORMATION

A. Confidential Information. Employee acknowledges that Employee has
been informed that it is the policy of Employer to maintain as secret and
confidential all

4
<PAGE> 5
information relating to (i) the financial condition, businesses and interests of
Employer and its affiliates, (ii) the systems, know-how, products, services,
costs, inventions, patents, patent applications, formulae, research and
development procedures, notes and results, computer software programs, marketing
and sales techniques and/or programs, methods, methodologies, manuals, lists and
other trade secrets heretofore or hereafter acquired, sold, developed and/or
used by Employer and its affiliates and (iii) the nature and terms of Employer's
and its affiliates' relationships with their respective customers, clients,
suppliers, lenders, vendors, consultants, independent contractors and employees
(all such information being hereinafter collectively referred to as
"Confidential Information"), and Employee further acknowledges that such
Confidential Information is of great value to Employer and its affiliates and,
in and by reason and as a result of Employee's employment by Employer, Employee
will be making use of, acquiring and/or adding to such Confidential Information.
Therefore, Employee understands that it is reasonably necessary to protect
Employer's and its affiliates' trade secrets, good will and business interests
that Employee agree and, accordingly, Employee does hereby agree, that Employee
will not directly or indirectly (except where authorized by the President of
Employer for the benefit of Employer and/or its affiliate(s) and/or as required
in the course of his employment) at any time hereafter divulge or disclose for
any purpose whatsoever to any persons, firms, corporations or other entities
other than Employer or its affiliates (hereinafter referred to collectively as
"Third Parties"), or use or cause or authorize any Third Parties to use, any
such Confidential Information, except as (i) otherwise required to be disclosed
by a Federal or State Regulatory agency, (ii) is approved for release by prior
written authorization of the Employer or (iii) is or becomes publicly available
through no wrongful or negligent act of Employee.

B. Employer's Materials. In accordance with the foregoing, Employee
furthermore agrees that (i) Employee will at no time retain or remove from the
premises of Employer or its affiliates any research and development materials,
drawings, notebooks, notes, reports, formulae, software programs or discs or
other containers of software, manuals, data, books, records, materials or
documents of any kind or description for any purpose unconnected with the strict
performance of Employee's duties with Employer and (ii) upon the cessation or
termination of Employee's employment with Employer for any reason, Employee
shall forthwith deliver or cause to be delivered up to Employer any and all
research and development materials, drawings, notebooks, notes, reports,
formulae, software programs or discs or other containers of software, manuals,
data, books, records, materials and other documents and materials in Employee's
possession or under Employee's control relating to any Confidential Information
or any property or information which is otherwise the property of Employer or
its affiliates.

11. COVENANT-NOT-TO-COMPETE

5
<PAGE> 6
Employee, Employee covenants and agrees that, so long as Employee is employed by
Employer and for a period of two (2) years after Employee ceases for any reason
to be employed by Employer, Employee shall not, directly or indirectly (i)
divert business from, (ii) solicit or transact any business competitive with
Employer or its affiliates with, or (iii) sell any products or services sold or
offered by Employer or its affiliates to, any customer or former customer of
Employer or its affiliates. In addition, Employee covenants and agrees that, so
long as Employee is employed by Employer and for a period of two (2) years after
Employee ceases for any reason to be employed by Employer, Employee hereby
agrees to refrain from, anywhere in the world (the "Geographical Area"),
directly or indirectly owning, managing, operating, controlling or financing, or
participating in the ownership, management, control or financing, or
participating in the ownership, management, control or financing of, or being
connected with or having an interest in, or otherwise taking any part as a
stockholder, director, officer, employee, agent, consultant, partner or
otherwise in, any business competitive with that engaged in or being developed
by Employer or its affiliates during Employee's term of employment. Employer's
business is acknowledged to be the development, manufacture and sale of human
leukocyte interferon therapy products. Employee acknowledges that Employer's
business is anticipated to be international in scope, that a similar business
could effectively compete with Employer's and its affiliates businesses from any
location in the world, and that, therefore, the restricted Geographical Area is
reasonable in scope to protect Employer's and its affiliates' trade secrets and
legitimate business interests.

12. EMPLOYER'S REMEDIES FOR BREACH
OF SECTIONS 10 AND 11

Employee covenants and agrees that if Employee shall violate or
breach any of Employee's covenants or agreements provided for in Sections 10 and
11 hereof, Employer and/or its affiliates shall be entitled to an accounting and
repayment of all profits, compensation, commissions, remuneration's or benefits
which Employee directly or indirectly has realized or realizes as a result of,
growing out of or in connection with any such violation or breach. In addition,
in the event of a breach or violation or threatened or imminent breach or
violation of any provisions of Sections 10 or 11 hereof, Employer and/or its
affiliates shall be entitled to a temporary and permanent injunction or any
other appropriate decree of specific performance or equitable relief, without
posting of bond, from a court of competent jurisdiction in order to prevent,
prohibit or restrain any such breach or violation or threatened or imminent
breach or violation by Employee, by Employee's partners, agents,
representatives, servants, employers or employees and/or by any third parties.
Employer shall be entitled to such injunctive or other equitable relief in
addition to any damages which are suffered. Resort by Employer and/or its
affiliates to such injunctive or other equitable relief shall not be deemed to
waive or to limit in any respect any other rights or remedies which Employer or
its affiliates may have with respect to such breach or violation.

6
<PAGE> 7
13. REASONABLENESS OF RESTRICTIONS

C. Survivability. The restrictions, acknowledgments, covenants and
agreements of Employee set forth in Sections 10, 11, 12 and 13 of this Agreement
shall survive any termination of this Agreement or of Employee's employment (for
any reason, including expiration of the Employment Term).

D. Comparable Restrictions. Employer agrees that it will use its
best efforts to have other senior executives execute and observe agreements
containing similar provisions as are contained in Sections 10, 11 and 12 hereof.

7
<PAGE> 8
14. EMPLOYEE'S DISCLOSURES AND REPRESENTATIONS
AND WARRANTIES.

Employee hereby acknowledges, represents and warrants to,
and/or agrees with, Employer as follows:

(a) That Employee and his representatives and agents (i) have
received and read and are familiar with this Agreement. (ii) are familiar with
the business and operations conducted and to be conducted by Employer and the
risks attendant thereto, (iii) have been given access to and have examined or
have had an opportunity to examine before the date hereof all applicable
agreements, documents, records and books and such other applicable information
as are available and relevant to such business and operations and to enable them
to verify the accuracy of any information, agreements, documents, records or
books provided to them.

(d) That Employee has full right, power and authority to
perform all obligations under this Agreement.

Employee hereby agrees to indemnify and hold harmless Employer and
its shareholders, directors, officers, employees and agents from and against any
and all loss, damage, liability, cost or expense (including reasonable
attorneys' and paralegals' fees and costs before and at trial and at all
appellate levels) due to or arising out of any inaccuracy in, or breach of, any
representation, warranty or covenant of Employee contained in this Section 14.

15. INDEPENDENT COUNSEL

Employer and Employee agree that each of them have been, or were
advised and fully understand that they are entitled to be, represented by
independent legal counsel with respect to all matters contemplated herein, from
the commencement of negotiations at all times through the execution hereof.

8
<PAGE> 9
16. LAW APPLICABLE

This Agreement shall be governed by and construed pursuant to the
laws of the State of Florida, without giving effect to conflicts of laws
principles.

17. NOTICES

18. SUCCESSION

This Agreement shall inure to the benefit of and be binding upon the
parties hereto and their respective legal representatives, heirs, assignees
and/or successors in interest of any kind whatsoever; provided, however, that
Employee and Employer acknowledge and agree that they cannot assign or delegate
any of their rights, duties, responsibilities or obligations hereunder to any
other person or entity.

19. ENTIRE AGREEMENT

This Agreement constitutes the entire final agreement between the
parties with respect to, and supersedes any and all prior agreements between the
parties hereto both oral and written concerning, the subject matter hereof and
may not be amended, modified or terminated except by a writing signed by the
parties hereto.

20. SEVERABILITY

If any provision of this Agreement shall be held to be invalid or
unenforceable, and is not reformed by a court of competent jurisdiction, such
invalidity or unenforceability shall attach only to such provision and shall not
in any way affect or render invalid or unenforceable any other provision of this
Agreement, and this Agreement shall be carried out as if such invalid or
unenforceable provision were not contained herein.

21. NO WAIVER

A waiver of any breach or violation by either party of any term,
provision or covenant contained herein shall not be deemed a continuing waiver
or a waiver of any future or past breach or violation. No oral waiver shall be
binding.

9
<PAGE> 10
22. INDEMNITY OF EMPLOYEE

Employer shall indemnify and hold harmless Employee from and against
any and all claims, judgments, fines, penalties, liabilities, losses, costs and
expenses (including reasonable attorneys' fees and costs) asserted against or
incurred by Employee as a result of acts or omissions of Employee taken or made
in the course of performing his duties for Employer or by reason of Employee
acting or having acted as an officer of Employer, to the maximum extend
permitted by law, including Section 607.0850, Florida Statutes (including the
advancement of expense provisions thereof); provided, however, that such
indemnity shall not apply to acts or omissions of Employee which constitute
misconduct, gross negligence or which were intended by Employee to personally
benefit Employee, directly or indirectly, at the expense of Employer, unless the
matter which benefits Employee was first fully disclosed to the Board of
Directors of Employer and approved by said Board.

IN WITNESS WHEREOF, the undersigned have hereunto set their hands on the
day and year first above written.

VIRAGEN, INC.

By: /s/ GERALD SMITH
---------------------
Gerald Smith
President

/s/ ROBERT H. ZEIGER
---------------------
Robert H. Zeiger

<PAGE> 1

EXHIBIT 11

COMPUTATION OF LOSS PER COMMON SHARE
<TABLE>
<CAPTION>

1997 1996 1995
---- ---- ----

<S> <C> <C> <C>
PRIMARY AND FULLY DILUTED
Weighted average shares outstanding......................... 39,134,631 36,198,302 32,137,693
=========== =========== ===========
Net Loss.................................................... $ (4,775,245) $(4,672,271) $(3,951,839)
Deduct required dividends on convertible preferred stock,
Series A............................................... 20,760 2,650 3,450
Deduct required dividends on convertible preferred stock,
Series B............................................... 4,441,676 894,976 --
Deduct required dividends on convertible preferred stock,
Series C............................................... 844,960 -- --
Deduct required dividends on convertible preferred stock,
Series D............................................... 3,619,407 -- --
Deduct required dividends on convertible preferred stock,
Series E............................................... 971,936 -- --
============ =========== ===========
Net loss attributable to common stock....................... $ (14,673,984) $(5,569,897) $(3,955,289)
============= =========== ===========
Loss per common share after deduction for required dividends
on convertible preferred stock......................... $ (0.37) $ (0.15) $ (0.12)
============= =========== ===========
</TABLE>

<PAGE> 1

EXHIBIT (21)

SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>

PERCENTAGE
JURISDICTION OF OWNED BY
INCORPORATION REGISTRANT
--------------- -------------
<S> <C> <C>
Vira-Tech, Inc........................................................... Florida 100%
Viragen (Scotland) Ltd. (1).............................................. Scotland (UK) 70%
Viragen Technology, Inc. (2)............................................. Florida 100%
Viragen (Europe) Ltd. (3)................................................ Delaware 70%
Viragen U.S.A., Inc. (4)................................................. Delaware 94%
Viragen Reagents, Inc. (5)............................................... Florida 100%
</TABLE>

- --------------
(1) Incorporated January 17, 1995, 100% owned by Viragen (Europe) Ltd.
(2) Incorporated January 13, 1995
(3) Acquired December 8, 1995
(4) Incorporated April 4, 1996
(5) Incorporated July 14, 1997

<PAGE> 1
Exhibit 23

CONSENT OF INDEPENDENT

CERTIFIED PUBLIC ACCOUNTANTS

We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-60131) pertaining to the Viragen, Inc. 1995 Stock Option Plan,
Employment Contracts with Key Executives and Stock Option Agreements with
Directors of Viragen, Inc. of our report dated September 25, 1997 with respect
to the consolidated financial statements of Viragen, Inc. included in the Annual
Report (Form 10-K) for the year ended June 30, 1997.

/s/ Ernst & Young LLP
---------------------
Ernst & Young LLP

September 29, 1997
Miami, Florida

<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 12,873,301
<SECURITIES> 18,541,616
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 32,381,458
<PP&E> 7,290,590
<DEPRECIATION> 2,252,392
<TOTAL-ASSETS> 37,461,543
<CURRENT-LIABILITIES> 3,050,378
<BONDS> 0
0
26,269
<COMMON> 462,601
<OTHER-SE> 31,655,434
<TOTAL-LIABILITY-AND-EQUITY> 37,461,543
<SALES> 0
<TOTAL-REVENUES> 1,403,610
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 6,389,157
<LOSS-PROVISION> 20,345
<INTEREST-EXPENSE> 30,713
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,775,245)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,775,245)
<EPS-PRIMARY> (0.37)
<EPS-DILUTED> (0.37)

</TABLE>