VIRAGEN INC, 10-K405, 2000-09-28

VIRAGEN INC
10-K405, 2000-09-28
BIOLOGICAL PRODUCTS, (NO DIAGNOSTIC SUBSTANCES)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)

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

FOR THE FISCAL YEAR ENDED JUNE 30, 2000

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

FOR THE TRANSITION PERIOD FROM ________ TO ________

COMMISSION FILE NUMBER 0-10252

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

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<S> <C>
DELAWARE 59-2101668
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

865 SW 78TH AVENUE, SUITE 100, 33324
PLANTATION, FLORIDA (Zip Code)
(Address of principal executive offices)
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Registrant's telephone number, including area code: (954) 233-8746

Securities registered pursuant to Section 12(b) of the Act:

COMMON STOCK, $.01 PAR VALUE

Securities registered pursuant to Section 12(g) of the Act:

NONE

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the 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. [X]

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 15,
2000 was approximately $141,887,000.

As of September 15, 2000, Viragen, Inc. had outstanding 92,094,395 shares
of common stock.

DOCUMENTS INCORPORATED BY REFERENCE

Risk Factors included in registration statement on Form S-3, File No.
333-37464, dated May 19, 2000, incorporated by reference into Part II Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
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VIRAGEN, INC. AND SUBSIDIARIES

INDEX TO ANNUAL REPORT ON FORM 10-K
YEAR ENDED JUNE 30, 2000

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PAGE
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 11
Item 3. Legal Proceedings........................................... 11
Item 4. Submission of Matters to a Vote of Security Holders......... 12

PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 13
Item 6. Selected Consolidated Financial Data........................ 14
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 15
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk...................................................... 20
Item 8. Financial Statements and Supplementary Data................. 21
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures................................. 21

PART III
Item 10. Directors and Executive Officers of the Registrant.......... 22
Item 11. Executive Compensation and Employment Agreements............ 25
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 29
Item 13. Certain Relationships and Related Transactions.............. 30

PART IV
Item 14. Exhibits and Reports on Form 8-K............................ 33
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PART I

ITEM 1. BUSINESS

INTRODUCTION

Viragen, Inc., a Delaware corporation, was organized in 1980. We operate
through:

- Viragen, Inc. -- parent company

- Viragen (Europe) Ltd. -- 89% owned by Viragen, Inc.

- Viragen (Scotland) Ltd. -- 100% owned by Viragen (Europe)

- Viragen (Germany) GmbH -- 100% owned by Viragen (Europe).

We are in the business of researching, developing and manufacturing
products, which help the human immune system resist viral infections, and
related technologies. Our primary product will be a natural interferon product
named Omniferon(TM). We produce Omniferon from human white blood cells. Natural
interferon stimulates and controls the human immune system. In addition,
interferon may stem the growth of various viruses including those involved with
diseases like hepatitis, cancer, multiple sclerosis, and HIV/AIDS.

Neither the United States Food and Drug Administration nor the European
Union regulatory authorities have approved Omniferon for sale to the public.
Viragen is currently seeking European Union regulatory authority approval for
its Omniferon product and intends to seek U.S. Food and Drug Administration
approval in the future. These approvals require several years of clinical trials
and substantial additional funds.

We are concentrating our efforts on the clinical trials necessary to obtain
approvals for Omniferon, currently within the European Union, and later in the
United States. We began our preclinical studies with Omniferon in March 1998 and
obtained approval of our Clinical Trial Exemption Application in July 1999. We
began our clinical trials of Omniferon in Europe, initially for the treatment of
hepatitis C, during the fourth calendar quarter of 1999.

RECENT DEVELOPMENTS

In December 1999, through Viragen (Scotland) Ltd., we entered into a
collaborative agreement with Memorial Sloan-Kettering Cancer Center in New York
City. The agreement is for the development of a human monoclonal antibody, to be
used in conjunction with our Omniferon product, for the treatment of melanoma, a
potentially fatal skin cancer. This technology could also prove useful in the
treatment of certain other cancers.

In June 2000, we entered into a Space Act Agreement with NASA's Lyndon B.
Johnson Space Center. This agreement provides for testing the concept of
manufacturing our Omniferon product in a micro-gravity environment. We believe
it is possible that NASA's micro-gravity bioreactor may lead to new
manufacturing techniques resulting in potentially higher production yields.
Higher production yields would lower our manufacturing costs resulting in a
lower cost to patients.

In July 2000, Viragen entered into an agreement with the United Kingdom's
Cancer Research Campaign Technology and the University of Nottingham to develop
a new cancer vaccine therapy for the treatment of several indications including
breast, ovarian and colorectal cancers. The development work will take place
primarily at the Cancer Research Campaign's Department of Clinical Oncology at
the University of Nottingham in England.

Under the Cancer Research Campaign Agreement, we were granted an exclusive
worldwide commercial license by the Cancer Research Campaign to develop,
manufacture and sell their patent pending technology based on a tumor-associated
antigen. The licensed technology covers the tumor-associated antigen, the method
of its isolation and its potential medical uses, including cancer vaccines.

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In September 2000, we obtained an exclusive worldwide license from the U.S.
National Institute of Health to use and further develop a monoclonal antibody
potentially useful in the treatment of certain cancers. The antibody or antibody
fragment recognizes the Notch-1 protein. The Notch-1 protein is over expressed
in certain tumors including cervical, breast and lung cancers. This project
centers on the development of a drug that attacks cancer cells by inducing them
to commit suicide, a process that is known as apoptosis.

OPERATIONS

In July 1999, Viragen (Scotland) Ltd. received regulatory approval of its
Clinical Trial Exemption Application, to begin Phase I/II human clinical trials
of its Omniferon product, initially for the treatment of hepatitis C. We began
our clinical trials in the fourth calendar quarter of 1999.

Viragen will require significant additional financing to continue
conducting and complete clinical trials for the purpose of obtaining European
Union and/or U.S. Food and Drug Administration approvals for Omniferon. Clinical
testing toward European Union and/or Food and Drug Administration approval is an
expensive process. This is expected to take several years to accomplish with no
assurance that regulatory approvals will eventually be obtained.

STRATEGIC ALLIANCES AND SUPPLY AGREEMENTS

We have entered into a series of strategic alliances and supply agreements
with major worldwide suppliers of blood products. These agreements secure
reliable and safe sources of human white blood cells, also known as leukocytes,
which are critical to the production of Omniferon. During 1998, we entered into
agreements with the American Red Cross and America's Blood Centers. Between
them, they collect annually a substantial majority of the U.S. blood supply. We
also entered into a series of agreements covering a majority of the blood supply
in Germany, a major European supplier.

In July 1998, we entered into a strategic alliance and supply agreement
with America's Blood Centers for the supply of human white blood cells.
America's Blood Centers is a national network of non-profit, independent
community blood centers operating in 45 states. America's Blood Centers members
annually collect over 45% of the U.S. blood supply through member blood donation
centers and mobile collection facilities. Under the America's Blood Centers
agreement, we have first and preferential access to all leukocytes produced by
America's Blood Centers members who have elected to participate in the program.
We pay a fixed cost per leukocyte provided during the first two years of the
agreement. After the first two years, the price may vary based upon increased
costs incurred by participating America's Blood Centers members. In September
2000, the initial two-year term of the agreement was extended for a third year
under the same terms.

The America's Blood Centers agreement also provides for a royalty payment
to be paid for each leukocyte provided under this agreement. The royalty is
based on the higher of:

- a percentage of net revenues realized by Viragen,

- the estimated net revenues that could have been realized, based on the
sale of Omniferon, using the America's Blood Centers leukocytes provided,
or

- a fixed dollar amount per leukocyte.

No minimum order requirement exists under the agreement. However, we have agreed
with them that, prior to the date that a New Drug Approval Application becomes
approved by the Food and Drug Administration, we will negotiate in good faith to
reach an agreement on a minimum leukocyte purchase commitment.

In August 1998, we entered into a fifteen-year agreement with the American
Red Cross for the supply of leukocytes. The American Red Cross collects
approximately half of the U.S. blood supply. The American Red Cross agreement
provides for us to purchase leukocytes, consistent with agreed upon
specifications based on quarterly forecasts. We may pay for the leukocytes in
cash or our common stock at the option of the American Red Cross. The valuation
of shares will be based on the average closing price of our shares for the five
days prior to the payment due date less a discount. The American Red Cross
agreement also contains an initial
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price per leukocyte modified by a volume discount pricing schedule and rebate
program. This pricing schedule may change based on periodic renegotiations. Upon
execution of the agreement, the American Red Cross received a warrant to
purchase up to 500,000 shares of our common stock with exercise prices ranging
from $5.50 to $11.00 per share. We also entered into a stockholder's agreement
and registration rights agreement. These agreements relate to shares underlying
the warrant and shares received in lieu of cash for leukocyte purchases.

In August 1998, we entered into a strategic alliance with Inflammatics,
Inc., a private drug development company, headquartered in Philadelphia, PA. At
the same time, we purchased a 10% equity interest in Inflammatics, which is
focused on the development of LeukoVAX, an immunomodulating therapy derived from
leukocytes. LeukoVAX is currently in Food and Drug Administration Phase I/II
clinical trials for rheumatoid arthritis.

Under the Inflammatics agreement, we made an initial investment by
purchasing series A convertible preferred stock of Inflammatics for $1 million
and warrants to purchase 250,000 shares of our common stock. The warrants are
exercisable at prices ranging between $1.00 and $1.78 per share. We also
received two options to acquire up to an additional 70% equity position in
Inflammatics through two additional fundings. These fundings would be made
solely at our option.

The first additional funding is subject to our evaluation of the Phase I/II
clinical trial results. It would include:

- the issuance of 1,000,000 shares of common stock,

- the issuance of 300,000 common stock purchase warrants exercisable at
$1.00 through August 14, 2003, and

- the underwriting of Phase III clinical trials.

In exchange, we can acquire an additional 36.3% equity interest in Inflammatics.
Preliminary estimates of the cost for Phase III clinical trials of LeukoVAX
range between $6.0 million and $10.0 million.

The second additional funding is subject to our further evaluation of the
Phase III clinical trial results. It provides for the issuance of an additional
2,000,000 shares of common stock in exchange for an additional 33.3% equity
interest in Inflammatics.

In the fourth fiscal quarter 2000, we received initial Phase I/II data
which suggests no statistically significant difference in outcomes between
patients who had received LeukoVAX and those who have not. We are still
evaluating the results reflected in the Phase I/II data and have not yet reached
a decision regarding additional funding, if any.

In November 1998, Viragen signed an exclusive supply and distribution
agreement with AGC, a Pakistan-based, multinational conglomerate. This agreement
provides for the purchase and distribution of Omniferon. Under this agreement,
AGC's designated territories include:

- India,
- Pakistan,
- Saudi Arabia,
- Kuwait,
- Yemen,
- Oman,
- UAE,
- Brunei, and
- other Middle Eastern countries.

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AGC must purchase a minimum of $20 million of Omniferon over five years. The
purchase minimums become binding on AGC if and when:

- AGC receives the required regulatory approvals for product
commercialization in all of the above territories, and

- we receive the regulatory approvals to export Omniferon from our
commercial manufacturing facility in Edinburgh, Scotland.

AGC has agreed to provide Viragen with its projected annual requirements to be
updated quarterly. Projected requirements in excess of agreed purchase minimums
are binding on AGC. The purchase minimums, if contractually triggered, will be
secured by a $1 million irrevocable revolving letter of credit. AGC and Viragen
have agreed that if and when we obtain regulatory approval for commercialization
of Omniferon in the United States and/or Europe, both parties will negotiate in
good faith an amendment to the agreement which could modify the purchase
minimums and selling price.

The AGC agreement has been approved by the boards of directors of AGC and
Viragen.

Under the AGC agreement, AGC is responsible for clinical and regulatory
costs to obtain approvals for commercialization of Omniferon in their designated
territories. AGC is also responsible for all subsequent sales, marketing and
distribution activities. AGC is required to build, own and operate, at their
expense, a pharmaceutical distribution facility in a mutually agreeable location
within the territories. AGC has informed us that they initially intend to focus
on distribution for hepatitis B and C. These diseases are at epidemic
proportions in the designated territories.

In July 1999, Viragen entered into a letter of intent with Drogsan
Healthcare, a Turkish pharmaceutical company. The letter of intent outlines the
terms of a supply and distribution agreement between Viragen and Drogsan for
natural interferon. These terms are similar to the AGC agreement. The final
agreement has not yet been completed.

THE PRODUCT

Viragen derives its Omniferon from human white cells also known as
leukocytes. Natural interferon is one of the body's natural defensive responses
to foreign substances like viruses. It is so named because it "interferes" with
viral growth. Natural interferon consists of protein molecules that induce
antiviral, antitumor and immunomodulatory responses within the body. Medical
studies indicate that interferons may inhibit malignant cell and tumor growth
without affecting normal cell activity.

There are two sources of interferon for medical use. They are
differentiated primarily by their method of manufacture and resulting
composition. The first, as produced by Viragen, is a multi-species natural,
human leukocyte-derived alpha interferon. This is produced by cultivated human
white blood cells. The introduction of a harmless agent 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 type of interferon is recombinant or synthetic
interferon (alpha or beta). This is a genetically engineered interferon.
Generally, it is produced from a single human gene in bacterial cells by
recombinant DNA techniques.

Clinical studies indicate that there may be significant therapeutic
differences between the use of natural interferon and synthetic interferon. We
believe that treatment with synthetic interferon may cause an immunological
response through the production by the human immune system of neutralizing
and/or binding antibodies. These antibodies reduce the effectiveness of the
treatment or may cause adverse side effects. We believe that the production of
neutralizing and/or binding antibodies may be essentially non-existent in
patients treated with natural interferon. Furthermore, primarily due to
biological differences, the side effects of treatment with natural interferon
may be milder than with a recombinant or synthetic interferon.

THE INTERFERON INDUSTRY

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

After the emergence of recombinant or synthetic alpha interferon, the
medical community's interest in natural interferon diminished. This was due
primarily to the limited availability and its higher cost of production. Most
clinical studies thereafter utilized a synthetic product.

Hoffman-LaRoche, Inc. and Schering-Plough Corporation continue to actively
market their products and promote the therapeutic benefits of their synthetic
interferon products. In 1993, Chiron Corp. received Food and Drug Administration
approval of BetaSeron(TM), its recombinant beta interferon, for the treatment of
relapsing/remitting multiple sclerosis. In 1996, Biogen, Inc. received Food and
Drug Administration approval for Avonex(TM), its recombinant beta interferon,
for relapsing/remitting multiple sclerosis. In 1997, Teva Pharmaceuticals
received Food and Drug Administration approval of its peptide chemical compound,
Copaxone(TM), for relapsing/remitting multiple sclerosis. In addition to the
manufacturers of synthetic interferons, Interferon Sciences, Inc. received Food
and Drug Administration approval in 1989 to sell, in injectable form,
Alferon(TM), a natural interferon product, for genital warts.

APPLICATIONS OF INTERFERON

Human leukocyte interferon is a naturally occurring protein which serves to
enhance the body's immune response to viral infections. Viragen believes
interferons can arrest the progress of viral based infections, reducing symptoms
and disease related complications with a minimum of side effects.

Hepatitis C

The hepatitis C virus is a major worldwide cause of acute and chronic
hepatitis. Hepatitis C, previously known as "non-A, non-B hepatitis", affects an
estimated 4 million Americans. Approximately 30,000 new cases are diagnosed each
year. It is responsible for an estimated 8,000 deaths annually. Hepatitis C is
currently a leading cause of liver transplantation in the United States. Based
on a review of published literature and evaluation by our scientific staff and
advisors, we believe that our Omniferon product may prove effective in the
treatment of this indication. Currently, the Food and Drug Administration has
approved interferons for the treatment of hepatitis C including:

- Hoffman-LaRoche's Roferon(TM),

- Schering-Plough's Intron A(TM), and

- Amgen's Infergen(TM).

We are currently conducting Phase II clinical trials in the European Union
for the treatment of hepatitis C.

Hepatitis B

Approximately 45% of the world population live in areas with a high
prevalence of hepatitis B infection. In these areas, the lifetime risk of
infection can exceed 60%. Most infections in these areas are acquired at birth
or during early childhood, when the risk of developing chronic infection is
highest. The United States is not in a high prevalence area. Here approximately
300,000 cases of acute hepatitis B are diagnosed annually. Between 2% and 10% of
these patients develop chronic infections. These infections put the patients at
risk of progressive liver disease possibly leading to cirrhosis and/or
hepatocellar carcinoma.

Synthetic interferon alpha is the only U.S. Food and Drug Administration
approved drug for hepatitis B. It has proven to be effective in the treatment of
some cases. Viragen believes that Omniferon may also prove effective in the
treatment of hepatitis B.

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Melanoma

Melanoma is a type of cancer which originates in the melanocytes, the cells
containing skin color. Approximately 32,000 cases per year are diagnosed in the
United States alone. Melanoma has one of the fastest growing occurrence rates,
increasing at a rate of approximately 4.3% per year. An American's lifetime risk
of developing melanoma is currently approximately one in 75 and it is the most
commonly occurring cancer in women between the ages of 25 and 29. Melanoma is
second only to breast cancer in women ages 30 to 34.

Through a collaboration agreement with Memorial Sloan-Kettering Cancer
Center, we are developing a monoclonal antibody to be used in conjunction with
our Omniferon product for treatment against this growing concern.

Chronic Myelogenous Leukemia

Chronic myelogenous leukemia is one of a group of diseases called
myeloproliferative disorders. It is usually recognized by a distinctive
cytogenetic abnormality, known as the Philadelphia chromosome. The current
treatment for chronic myelogenous leukemia is high dose chemotherapy with bone
marrow transplantation. Interferon therapy has emerged as a possible effective
initial treatment in this disease. This kind of therapy affects both the
presence of leukemia cells as well as the number of bone marrow cells having the
Philadelphia chromosome.

Multiple Sclerosis

In 1988, we conducted a patient funded, multi-phase clinical trial for the
treatment of multiple sclerosis with Alpha Leukoferon, our first-generation
natural interferon product. We conducted this study on a double-blind basis.
Certain patients received different dosage levels of that product and other
patients received a placebo. The study terminated in mid-1992. Published
information on these trials indicates that, in many cases, our Alpha Leukoferon
product provides favorable results in the treatment of patients afflicted with
relapsing/remitting, relapsing progressive and chronic progressive multiple
sclerosis.

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 our Alpha Leukoferon product in the treatment of various types of
multiple sclerosis. In 1994, the abstract, titled "Stabilization of
Relapsing -- Remitting and Progressive Multiple Sclerosis with Natural
Interferon Alpha: A Preliminary Trial," was published in the Annals of
Neurology. This is the official journal of the American Neurological
Association. The investigators and Viragen published an additional article,
titled "Natural Alpha Interferon in Multiple Sclerosis: Results of Three
Preliminary Series." It appeared in the Journal of International Medical
Research in 1996.

HIV/AIDS

In March 1996, Viragen, in collaboration with Biodoron, a Hollywood,
Florida based clinic, received approval from Health and Rehabilitative Services
under Florida's Investigational Drug Program to conduct an investigational study
in Florida of our Alpha Leukoferon product. This approval was for the treatment
of HIV/AIDS in hemophiliacs. Viragen entered into an agreement with Quantum
Health Resources, Inc., which contributed $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 began in March 1996. A total of 35
patients enrolled to receive Alpha Leukoferon for a minimum of six months in
combination with a comprehensive HIV/AIDS treatment program. While the study
suggested that Alpha Leukoferon was safe or well tolerated, the overall study
results proved to be inconclusive due to the smaller than anticipated number of
patients that finished the study.

MANUFACTURE OF INTERFERON

Human white blood cells, also known as leukocytes, and a stimulating agent
are needed to produce human interferon. These raw materials are readily
available to us. A stimulating agent, which is harmless to

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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. Viragen's Omniferon product is currently being
manufactured in our Scottish facility for use in the human clinical trials,
which began in the fourth quarter of calendar 1999.

Production methods that we have developed, as well as enhanced methods
currently under development, we believe will reduce our costs of production and,
ultimately, the market price of Omniferon to patients. However, we cannot assure
you that this new manufacturing technology will achieve the level of
manufacturing proficiency and product improvement hoped for.

RESEARCH AND DEVELOPMENT

The entire process of research, development and European Union and/or Food
and Drug Administration approvals of a new biopharmaceutical drug takes several
years. It also requires substantial funding. In July 1999, Viragen received
approval of its European Clinical Trial Exemption Application to begin clinical
trials of Omniferon. Also, through our equity investment in Inflammatics, we are
currently involved in Food and Drug Administration Phase I/II clinical trials of
LeukoVAX. Our present focus is the continued research and development of
Omniferon for the treatment of hepatitis B and C, melanoma, multiple sclerosis,
chronic myelogenous leukemia, herpes and HIV/AIDS.

We have spent a substantial amount of time and resources on the research
and development of improved cell stimulation and purification techniques for our
Omniferon product. We believe improving these processes will improve the purity
of the product while increasing production yields. We believe that focusing
research efforts on increased production yields, if successful, will
significantly lower costs of production. This will result in a lower more
competitive sales price of Omniferon.

Research and development costs totaled $4,836,753, $5,152,748 and
$4,222,332 for the fiscal years ended June 30, 2000, 1999 and 1998,
respectively.

ROYALTY AGREEMENT

Viragen and Medicore, Inc., a former affiliate, have a royalty agreement.
It provides for a maximum cap on royalties to be paid to Medicore of $2,400,000.
It includes 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, and

- 3% of the next $55,000,000

until the total of $2,400,000 royalty is paid. The agreement also states that
royalties of approximately $108,000 previously accrued as payable to Medicore
will be the final payment. As we have had no interferon sales, no royalty
expense has been recognized for the three fiscal years ended June 30, 2000.

INTELLECTUAL PROPERTY

Viragen believes its production techniques are unique and are capable of
yielding a superior quality product. We believe that our production techniques
will allow us to offer Omniferon at a price competitive with the recombinant
interferons.

Viragen has filed three patent applications covering Omniferon production
techniques. We have also submitted several foreign patent applications relating
to natural interferon for topical use. Several of these patents have been
granted. During fiscal 1999, our patent issued in Japan for the topical use of
interferon was challenged by a Japanese company. We successfully defended our
patent position.

Under a license agreement between Viragen and Viragen (Europe) Ltd. dated
July 12, 1995, Viragen (Europe) has exclusive rights to Viragen's technologies.
These include technologies covered by patent, for all countries in the European
Union. In addition, we granted Viragen (Europe) the non-exclusive rights to
Viragen's technology throughout the world, excluding the United States and its
territories. Viragen (Europe)
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will pay Viragen a licensing fee ranging from 10% to 5% of sales, with a minimum
of $2 million per year, subsequently modified to $167,000 per month. Viragen
deferred the minimum licensing payment until Viragen (Europe) has the necessary
cash flow to meet this payment. The initial term of this agreement is 15 years
and automatically renews for two successive 15-year periods.

In August 2000, the World Intellectual Property Organization published our
international patent application related to methods of isolating highly purified
natural type 1 interferons.

United States and European Union patents have been issued to others for
genetically engineered and human-derived interferon. In the event of valid
claims, Viragen may have to negotiate license agreements with patent holders to
use some processes and products. We believe that we do not infringe upon any
current patent. Also, no one has alleged patent infringement by Viragen.

Someone can challenge the validity and enforceability of a patent by
litigation after its issuance. If the outcome is against the owner of the
patent, other parties may be free to use the subject matter of the patent.
Protection provided by foreign patents may be different than in the United
States. We cannot assure you that any future patents will offer substantial
protection or commercial benefit to us.

REGULATION

United States and European Union

Viragen's activities, products and processes are subject to substantial
government regulation in the United States and within the European Union. The
European Union, Food and Drug Administration, state and local agencies regulate
the manufacturing, advertising and sale of biologic substances and
pharmaceutical products. Regulatory authorities have stringent mandatory
procedures and standards, which apply to the clinical testing, marketing and
manufacture of any biologic product, including ours. European Union and/or Food
and Drug Administration approvals for commercialization of any new product can
take significant time and capital, since it involves extensive testing
procedures and lengthy clinical trials. These trials involve the measurement of
product safety and efficacy under specific protocols. The process of obtaining
European Union and/or Food and Drug Administration approvals requires extensive
animal testing to demonstrate product safety. Human tests are then performed to
show and to document findings as to safety and effectiveness. Data is then
gathered and evaluated, followed by the submission of all information and data
to the regulatory authorities.

Viragen, through Viragen (Scotland), has completed the preclinical studies
of its Omniferon product in the European Union. In July 1999, we received
approval of our UK Clinical Trial Exemption application to begin clinical trials
on humans. We began the clinical trials during the fourth calendar quarter of
1999. Eventually, we expect to submit an Investigative New Drug Application to
the Food and Drug Administration for use of Omniferon in the U.S. To help us
during the approval process, we assembled a clinical advisory committee. It
consists of scientists, medical researchers and clinicians. They are acting in
an advisory capacity to assist us in developing the medical, scientific and
clinical aspects in support of our clinical trials, initially within the
European Union and eventually in the United States.

In Europe and the United States, human clinical trial programs generally
involve a three phase process. Typically, Phase I trials are conducted in
healthy volunteers to determine any early side effects 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 effectiveness and safety required by regulatory agencies. If Phase II
evaluations indicate potential effectiveness with an acceptable safety profile,
Phase III trials are performed. Phase III is performed to conclusively
demonstrate clinical effectiveness 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.

American pharmaceutical manufacturers who sell outside of the United States
are also subject to Food and Drug Administration jurisdiction. Semi-finished
drugs may be shipped, under controlled circumstances, for further processing,
packaging, labeling and distribution to third parties in approved foreign
countries. This controlled distribution is subject to the laws that apply in
those countries. For Viragen to conduct this type of sale, we must comply with
all Food and Drug Administration rules and regulations.

8
<PAGE> 11

License and Manufacturing Agreement

In July 1995, Viragen (Scotland) entered into a license and manufacturing
agreement with the Common Services Agency of Scotland to secure a sufficient
source of needed raw materials. We also wanted their 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. The
agency owns and operates a blood fractionation facility in Edinburgh, Scotland.
It has the physical and technical capacity to supply leukocytes and manufacture
alpha interferon from human leukocytes using our processes. We believe that
securing a sufficient qualified long-term source of blood-derived raw materials
within the European Union is critical for us to conduct European Union clinical
trials as well as providing a sufficient source of raw materials for future
subsequent commercial manufacturing.

During fiscal 1998, we were notified that, due to concerns over the
possible presence of Mad Cow disease in the UK blood supply, human leukocytes
collected in Scotland would not be approved for use in our clinical trials or
potential commercial production. This prohibition will remain until the European
regulatory authorities are satisfied that the risk of contamination has been
minimized. Due to this situation, we intend to use leukocytes collected in
Germany under our German Red Cross contractual arrangements, as well as other
approved sources.

Under the terms of the agreement with the German Red Cross, our subsidiary,
Viragen (Germany) GmbH, has the right to receive, on a preferential basis,
leukocytes produced by the German Red Cross. Viragen (Germany) has a right to
receive 1,000,000 leukocytes per year with deliveries to be ordered on a
quarterly basis. During the initial two-year period of the agreement, Viragen
(Germany) may determine its annual order quantity up to 1,000,000 leukocytes.
After the initial two-year period, the annual order quantity will be 1,000,000
leukocytes plus or minus 15%. Under this agreement, we will pay the German Red
Cross a percentage of sales of Omniferon attributable to Viragen (Germany)
leukocytes. The German Red Cross will also be entitled to receive priority
distributions of Omniferon from German sourced leukocytes. Leukocytes provided
by the German Red Cross have been approved for use in our Scottish facility.

We engaged professionally recognized consultants familiar with the European
Union regulatory process to assist in the manufacturing and product approval
submissions. In addition, the Scottish Blood Transfusion Service has a full-time
regulatory department that has obtained approval in the European Union of
numerous European Union blood-derived products. The Scottish Blood Transfusion
Service will also work with us to obtain a manufacturing license and later
product approvals at the conclusion of the European Union clinical studies.
After obtaining a manufacturing license for Omniferon, we intend to seek Food
and Drug Administration manufacturing approval of our Scottish manufacturing
facility. However, we can give you no assurances that the Food and Drug
Administration will license or approve the Scottish manufacturing facility or
Omniferon for clinical trials and distribution in the United States.

Viragen (Scotland) was organized to manufacture and distribute Omniferon
and related products in the European Union and other countries outside the
United States. Viragen has transferred patent and proprietary rights to Viragen
(Scotland) under a grant of license. Viragen (Scotland) has provided the
Transfusion Service 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 European Union. The Transfusion Service has
committed to participate with us in the manufacture of Omniferon in sufficient
scale to accommodate the European Union clinical trials. They also agreed to
conduct studies relevant to our product and cooperate with us in complying with
the laws and regulations of the European Union.

We are providing the Transfusion Service with full access to our
proprietary technology and specialized equipment under the license and
manufacturing agreement. We are also absorbing all costs of securing permits and
regulatory approvals, and expanding the Transfusion Service facilities, if
necessary, to participate in the manufacture of Omniferon. In addition, we are
bearing the costs of obtaining documentation showing compliance with European
Union regulatory requirements.

9
<PAGE> 12

We have agreed to pay the Transfusion Service for product manufactured:

- for use in clinical trials in the European Union,

- for sales prior to obtaining new drug application approval, and

- for sales following regulatory approval.

Under this arrangement, payments will be made at varying percentages in
relation to costs, as follows:

- for products manufactured for clinical trials, they are entitled to cost
plus 25%,

- for sales prior to obtaining new drug application approval, cost plus
40%, and

- for sales following approval, cost plus 50%.

Products manufactured and used 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.

We also have agreed to pay the Transfusion Service for providing process
documentation for any additional manufacturing facilities we might establish.

The term of the license and manufacturing agreement was for a five-year
period. There are also two additional five-year extension terms at our option.
The agreement also contains provisions protecting our proprietary rights and
limits various competitive activities by the Transfusion Service.

We are currently renegotiating the terms of the first five-year renewal
under an extension of the initial contract. The extension period expires in
November 2000.

COMPETITION

Competition in the research, development and production of interferon, and
other immunological products is intense. It involves major, well-established and
well-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 synthetic DNA technology.
A number of large companies, including Hoffman-LaRoche, Inc., Schering-Plough
Corporation, Biogen, Inc., Chiron Corp., Berlex Laboratories and Ares-Serono are
producing, selling and conducting clinical trials with these recombinant
interferons (alpha and beta) and other immunological products. These relate to
the treatment of cancer and viral infections, including hepatitis C, our first
targeted use of Omniferon.

In addition to the manufacturers of synthetic interferons, Interferon
Sciences, Inc., a domestic manufacturer of natural interferon, received Food and
Drug Administration approval in 1989 to sell, in injectable form, their natural
interferon product for genital warts.

We believe 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. Our
ability to develop products, complete clinical studies and obtain governmental
approvals in the past had been hampered by a lack of adequate capital. We are
not presently competitive in the biopharmaceutical industry, as we do not have
an approved product, which can be distributed, at this time.

EMPLOYEES

As of September 15, 2000, we have 42 employees. Of these, 27 are research
and development, manufacturing and quality assurance/quality control personnel.
The remaining 15 employees are management, regulatory and/or administrative
personnel.
10
<PAGE> 13

ITEM 2. PROPERTIES

In November 1996, Viragen entered into a ten year lease for 14,800 square
feet in Plantation, Florida. This location contains our domestic administrative
and executive offices. The lease contains an option for up to two additional
five-year terms. Base lease payments on the facility total $15,700 per month.
Our administrative offices are located at 865 SW 78th Avenue, Suite 100,
Plantation, Florida 33324; phone (954) 233-8746.

Viragen owned a 14,000 square foot building in Hialeah, Florida. This
facility included a laboratory for biomedical research and development
activities. In August 1999, we obtained a $600,000 mortgage on our Florida
laboratory facility. We refinanced this note during June 2000. The facility was
also pledged against a $400,000 promissory note obtained in November 1999, which
was paid in full during April 2000. The Florida laboratory facility was closed
during November 1999, and we consolidated our research and production assets in
our Edinburgh, Scotland facility. We sold the building in August 2000, and paid
off the $600,000 mortgage.

In November 1996, through Viragen (Scotland), we entered into a five year
lease agreement in a biotechnology park in the Edinburgh area of Scotland. This
facility, consisting of approximately 13,000 square feet, contains our European
laboratory and production facilities. This location augments other productive
assets available to us within the Transfusion Service facility under the
Scottish agreement. The annual base lease rate for the facility is 88,000 UK
pounds or approximately US$134,000 plus adjustment for common area maintenance
charges. Viragen (Scotland) has the right to renew the lease for four additional
five-year terms.

We believe our properties are in good condition, well-maintained and
generally suitable and adequate to carry on our business. We also believe that
we maintain sufficient insurance coverage on all of our real and personal
property.

ITEM 3. LEGAL PROCEEDINGS

In October 1997, Viragen, the company's president and Cytoferon Corp., a
former affiliate of the president, were named as defendants in a civil action
brought in the United States District Court for the Southern District of Florida
(Walter L Smith v Cytoferon Corp. et al; Case No: 97-3187-CIV-MARCUS). The
plaintiff is a former Viragen stockholder and investor in Cytoferon Corp. The
suit alleged the defendants violated federal and state securities laws, federal
and state RICO statutes, fraud, conspiracy, breach of fiduciary duties and
breach of contract. The plaintiff was seeking an unspecified monetary judgement
and the delivery of 441,368 shares of common stock. Viragen filed a motion to
dismiss denying the allegations and requesting reimbursement of its costs.

In November 1997, the plaintiff filed a notice of voluntary dismissal with
the federal court concurrently notifying Viragen of his intent to refile a
complaint in circuit court in the state of Florida.

In December 1998, the U.S. District Court awarded us reimbursement of
attorneys' fees and expenses under Rule 11 of the Federal Rules of Civil
Procedure and the Private Securities Litigation Reform Act. We had submitted to
the court a request for reimbursement of litigation related costs of
approximately $75,000. Ultimately, we recovered $31,000 during fiscal 2000.

In November 1997, the plaintiff filed a complaint in the Circuit Court of
the 11th Judicial Circuit for Miami-Dade County, Florida (Case No: 97-25587
CA30) naming the same defendants. The suit alleges breach of contract, fraud,
violation of Florida's RICO statute and breach of fiduciary duties. It seeks an
unspecified monetary judgment and specific performance delivery of 441,368
shares of common stock. The plaintiff is claiming that he is entitled to
additional shares of common stock under a consulting agreement. He also says
that Viragen's president breached his fiduciary duty to Cytoferon Corp. by not
achieving sufficient financing for Viragen which would have entitled Cytoferon
Corp. to additional shares. He is also claiming misrepresentations in connection
with the previous Cytoferon financings.

In March 1998 the Circuit Court granted Viragen's motion to dismiss the
complaint. Subsequently, the plaintiff filed an amended complaint alleging
breach of contract, fraud, violation of Florida's RICO Act and breach of
fiduciary duties and seeking an unspecified monetary judgement and specific
performance delivery

11
<PAGE> 14

of 441,368 shares of common stock. In April 1998, Viragen filed a motion to
dismiss plaintiff's amended complaint which was denied by the court.

In August 2000, counsel for plaintiff indicated that they intended to
withdraw as counsel. On August 28, 2000, the Special Master entered a report
setting Viragen's pending motions for summary judgment for hearing on October 25
and 26, 2000 and indicated that no continuances of the hearings would be
granted.

Viragen denies the allegations of the complaint and intends to continue to
vigorously defend the claims. We cannot determine at this point, the ultimate
liability, if any, resulting from this litigation. No accrual for loss has been
recorded.

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

We held our annual shareholders' meeting at the American Stock Exchange in
New York, New York on July 27, 2000. Shareholders voted:

1. To elect three directors to the board of directors, who were
classified as class B directors, to serve for the term of their designated
class and until their successors have been elected and qualified; and

2. To ratify the appointment of our independent auditors.

With a majority (87%) of the outstanding shares voting either by proxy or
in person, the stockholders approved the proposals with the following votes:

<TABLE>
<CAPTION>
PROPOSAL 1. FOR WITHHOLD
----------- ---------- --------
<S> <C> <C>
Election of directors:
Robert H. Zeiger.......................................... 74,494,572 936,573
Dennis W. Healey.......................................... 74,478,803 952,342
Peter D. Fischbein........................................ 74,476,739 954,406
</TABLE>

<TABLE>
<CAPTION>
PROPOSAL 2. FOR AGAINST ABSTAIN
----------- ---------- ------- -------
<S> <C> <C> <C>
Appointment of independent auditors..................... 74,511,708 742,233 177,204
</TABLE>

12
<PAGE> 15

PART II

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

Viragen's common stock traded on the NASDAQ National Market between
December 29, 1996 and June 28, 1999, under the symbol "VRGN." Our common stock
then traded on the over-the-counter bulletin board from June 29, 1999 through
April 16, 2000, under the same stock symbol. Our common stock began trading on
the American Stock Exchange on April 17, 2000, under the symbol "VRA." The
following table lists the high and low closing quotations for our common stock
since July 1, 1998.

<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
1999 - 2000
First quarter ended 9/30/99................................. $1.05 $ .48
Second quarter ended 12/31/99............................... 1.59 .55
Third quarter ended 3/31/00................................. 4.75 1.09
Fourth quarter ended 6/30/00................................ 3.00 1.31

1998 - 1999
First quarter ended 9/30/98................................. $2.19 $1.06
Second quarter ended 12/31/98............................... 1.44 .63
Third quarter ended 3/31/99................................. .97 .38
Fourth quarter ended 6/30/99................................ 1.22 .38
</TABLE>

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

As of September 15, 2000, we had approximately 2,600 stockholders of
record. On September 15, 2000, the closing price of the common stock was $1.625
per share.

We have never paid any dividends on our common stock. We do not anticipate
paying any cash dividends in the foreseeable future because:

- we have experienced losses since inception,
- we have significant capital requirements in the future, and
- we presently intend to retain future earnings, if any, to finance the
expansion of our business.

Future dividend policy will depend on:

- our earnings, if any,
- capital requirements,
- expansion plans,
- financial condition, and
- other relevant factors.

13
<PAGE> 16

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

In the table below, we provide you with selected historical consolidated
financial data of Viragen, Inc. We have prepared this information using Viragen
Inc.'s audited consolidated financial statements for the five years ended June
30, 2000.

When you read this selected historical consolidated financial data, it is
important that you read along with it the historical consolidated financial
statements and related notes included in our annual reports, as well as the
section of our annual reports titled "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Our annual reports are filed
with the Securities and Exchange Commission.

CONSOLIDATED STATEMENT OF OPERATIONS DATA

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenues..................................... $ 171 $ 374 $ 1,143 $ 1,404 $ 739
Net loss..................................... (12,311) (10,651) (7,856) (4,775) (4,672)
Loss attributable to common stock............ (12,316) (11,653) (10,354) (14,674) (5,570)
Loss per average common share................ (0.16) (0.19) (0.21) (0.37) (0.15)
Weighted average common shares outstanding... 78,453 60,109 50,503 39,135 36,198
</TABLE>

CONSOLIDATED BALANCE SHEET DATA

<TABLE>
<CAPTION>
JUNE 30,
-----------------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Working capital (deficit)........................ $ 7,006 $(2,290) $ 7,842 $29,331 $18,266
Total assets..................................... 14,450 8,529 15,895 37,462 20,617
Long-term debt................................... 658 352 7,466 239 116
Stockholders' equity............................. 11,816 3,836 5,887 32,144 17,275
</TABLE>

14
<PAGE> 17

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 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. These include statements regarding Viragen's expectations, hopes,
intentions, beliefs, or strategies regarding the future. Forward looking
statements include our 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 on this date, and we assume no obligation to update any of our
forward-looking statements. You should note that actual results could differ
materially from those contained in forward-looking statements. Among the factors
that may cause our actual results to differ materially are the risks discussed
in the "Risk Factors" section included in our registration statement on Form S-3
(File No. 333-37464) as filed with the Securities and Exchange Commission on May
19, 2000. These "Risk Factors" are incorporated by reference from the
registration statement on Form S-3 (File No. 333-37464). You should also consult
the risk factors listed from time to time in our reports on Forms 10-Q, 8-K,
S-1, S-3, 10-K and annual reports to stockholders.

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 time of new
product introductions. Increased competition from existing biopharmaceutical
companies as well as the entry into the market of new competitors could
adversely affect our financial condition or results of operations.

Our future success depends in part upon intellectual property, including
patents, trade secrets, know-how and continuing technological innovation. We
cannot provide assurances that any steps we take to protect our intellectual
property will be adequate to prevent misappropriation or that others will not
develop competitive technologies or products. We cannot offer any assurances
that any current or future patent, if any, owned by us will not be invalidated,
circumvented or challenged, that the rights granted to us will provide
competitive advantages or that any future patent applications will be issued
with the scope of the claims sought by us, if at all. Furthermore, we cannot
assure you that others will not develop technologies that are similar or
superior to ours, duplicate our technology or design around any patents held by
us.

Viragen has incurred operational losses and operated with negative cash
flows since its inception in December 1980. Losses have totaled $12,310,895,
$10,650,832 and $7,856,136 for the fiscal years ended June 30, 2000, 1999 and
1998, respectively.

LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2000, Viragen had on-hand approximately $8,100,000 in cash.
Between July 1, 2000 and September 15, 2000, we have raised $1,860,000 in
additional equity capital. We believe that our current cash balances, coupled
with planned fundings under our investment banking agreement with Ladenburg
Thalmann & Co., Inc. will provide sufficient capital to fund our planned
operations, including clinical trials, for at least the next 12 months.

Our working capital totaled approximately $7,006,000 on June 30, 2000, an
increase in working capital of $9,296,000 from the previous year end balance.
This increase in working capital is attributable to the conversion of $2,000,000
in convertible notes, outstanding at June 30, 1999, plus related interest into
5,210,411 shares of common stock and the sale of approximately 10,200,000 shares
of common stock for $10,588,000, net of related fees, during fiscal 2000. The
increase can also be attributed to capital raised through stock option and
warrant exercises totaling approximately $2,158,000 and collections on
promissory notes issued for stock option exercises totaling approximately
$652,000. Also, Viragen raised $2,000,000, during fiscal 2000, by issuing
additional convertible notes. These notes were converted into common stock
during June 2000. The increases are offset, however, by use of cash to fund
operations totalling approximately $7,988,000 and additions to property, plant
and equipment of $238,000.

15
<PAGE> 18

While subject to significant limitation, Viragen, at June 30, 2000, has
available approximately $36 million in net tax operating loss carryforwards
expiring between 2001 and 2020. We can use these carryforwards to offset taxable
income, if any, during those periods. Our ability to generate revenues during
future periods is dependent upon obtaining regulatory approvals of our
Omniferon()(TM) product. As we cannot determine that we will be successful in
obtaining the necessary regulatory approvals, we are unable to conclude that
realization of benefits from our deferred tax assets is more likely than not, as
prescribed by Statement of Financial Accounting Standards No. 109. As a result,
we have recognized a valuation allowance to offset 100% of the deferred tax
assets related to these carryforwards.

We believe that our Omniferon product, which is currently under
development, can be manufactured in sufficient quantity and be priced at a level
to offer patients an attractive alternative treatment to the synthetic
interferons currently being marketed. We began our clinical trials in the
European Union during the fourth calendar quarter of 1999 and intend to
eventually submit an Investigational New Drug Application to the U.S. Food and
Drug Administration. We cannot assure you that we will be able to obtain
approval of this project since they are subject to the successful completion of
lengthy and costly clinical trials. The completion of the project also depends
on our ability to raise significant additional investment capital.

We need additional funding to conduct the clinical trial process relating
to Omniferon both in the European Union and domestically, prior to receiving
regulatory approval to market Omniferon. Management estimates our funding
requirements related to approval of Omniferon for hepatitis C, the first
approval we are seeking in the European Union, are as follows:

- Phase I and Phase II trials -- $3.2 million, and

- Phase III studies -- $9.1 million.

We estimate that we will require funding of approximately $25 million, over
the next two years. These funds would be used to fund operations including
clinical trials.

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 clinical Phase I and Phase II
studies -- $1.5 -- $2.0 million.

We will also use future funding, if any, for continued product development,
general working capital purposes, including administrative support functions,
and possible equity investments in businesses complementary to our operations.

In August 1998, Viragen entered into a strategic alliance concurrent with
the purchase of a 10% equity interest in Inflammatics, Inc., a private drug
development company, headquartered in Philadelphia, PA. Inflammatics has
focussed on the development of LeukoVAX, an immunomodulating white blood cell
(leukocyte) preparation. LeukoVAX is currently in U.S. Food and Drug
Administration Phase I/II clinical trials for rheumatoid arthritis. Under the
terms of this agreement, we have options to acquire an additional 70% equity
position in Inflammatics through two additional fundings. During the fourth
quarter of fiscal 2000, we received initial Phase I/II data which suggests no
statistically significant difference in outcomes between patients who have
received LeukoVAX and those who have not. We are still evaluating the results
reflected in the Phase I/II data and have not yet reached a decision regarding
additional funding, if any.

We will make the additional funding, if any, at our sole option, based upon
our evaluation of LeukoVAX clinical trial data. This funding will be used to
underwrite a Phase III clinical trial. The agreement also provides for us to
issue up to 3 million shares of common stock and warrants to acquire 300,000
shares of common stock, in exchange for additional series A convertible
preferred shares of Inflammatics, if all funding phases are completed.
Preliminary estimates for the funding of Phase III clinical trials of LeukoVAX
range between $6.0 million and $10.0 million.

16
<PAGE> 19

On March 17, 1999, we entered into a purchase agreement with the Isosceles
Fund Limited and Cefeo Investments Limited, which was amended on June 16, 1999.
Under the purchase agreement, we issued Isosceles and Cefeo 8% convertible
promissory notes in the aggregate principal amount of $2,000,000 and warrants to
purchase shares of our common stock.

Because the related registration statement (File No. 333-75749) was not
effective by July 7, 1999, we began incurring $40,000 in penalties per month,
until the registration statement became effective on February 11, 2000. We
incurred $332,000 in penalties in that time. The penalties were paid during
March 2000.

On August 10, 1999, Viragen mortgaged its Florida-based research facility
for $600,000. We were required to pay interest on the promissory note in eleven
monthly installments, which began on September 10, 1999. Interest was calculated
at the rate of 1% over the prime rate per annum, as quoted by the Wall Street
Journal, and the rate was adjusted on a daily basis. The principal balance of
$600,000 plus any unpaid interest was due on July 10, 2000. On June 16, 2000, we
refinanced this note to be paid over five years. However, the principal and
accrued interest were paid in full on August 15, 2000, upon the sale of our
Florida-based research facility.

On November 24, 1999, Viragen entered into a common stock and warrants
purchase agreement with:

- AMRO International, S.A.,

- Markham Holdings, Limited, and

- Tashdale Ltd.

The agreement was for gross proceeds of $2.5 million. Viragen issued, in
three tranches between November 24, 1999 and February 11, 2000, an aggregate
4,600,000 shares of common stock and warrants to purchase 375,000 shares of
common stock. The warrants are exercisable at $1.15 per share and expire on
November 30, 2002. We entered into this financing under Regulation S of the
Securities Act of 1933.

In connection with this transaction, Viragen paid a fee of 7% of the amount
invested to AMRO International in consideration of locating the other two
investors, as well as other issuance costs. Total costs approximated $247,000.
Net proceeds from this transaction totalled $2,253,000. AMRO International also
received warrants to purchase 125,000 shares of common stock. The warrants are
exercisable at $1.15 per share through November 30, 2002.

Robert C. Salisbury, a director of Viragen and member of the audit and
finance committee and the compensation committee, is a director and investor in
Fundamental Management Corporation. Charles J. Simons, a director of Viragen and
the chairman of its audit and finance committee and its compensation committee,
is an investor in Active Investors Ltd. II.

Active Investors Ltd. II elected to convert the entire principal balance
and accrued interest of $35,400 into 1,015,716 common shares, on June 30, 2000.
17
<PAGE> 20

On March 1, 2000, Viragen entered into a loan and escrow agreement with
AMRO International, S.A. Under the terms of this agreement, we issued to AMRO
International a convertible promissory note for the principal amount of
$1,000,000. The promissory note had an interest rate of 8% per annum. The
principal and accrued interest were payable on March 1, 2001. Viragen paid
$70,000 for placement fees and expenses on the transaction. Under the
subscription agreement, AMRO International also received warrants to purchase
100,000 common shares. The warrant is exercisable at $1.72 per share through
March 1, 2004.

AMRO International could elect to convert the unpaid principal and
interest, at any time, into common shares at the fixed rate of $1.00 per share.
On June 20, 2000, AMRO International elected to convert the entire principal
balance and accrued interest of $24,900 into 1,024,899 common shares.

During fiscal 2000, Viragen received approximately $2,158,000 from the
exercise of common stock options and warrants and $651,500 in principal payments
on promissory notes issued for common stock option exercises.

In December 1999, we retained the investment banking firm of Ladenburg
Thalmann & Co., Inc. to aid us in raising up to $60 million in additional
investment capital, on a best effort basis. In March 2000, the Securities and
Exchange Commission declared our related shelf registration on Form S-3 (File
No. 333-32306) effective. Between April 1 and June 30, 2000, we raised
approximately $8,335,000 in investment capital, net of fees and other costs
amounting to approximately $590,000, under this agreement. Between July 1, 2000
and September 15, 2000, we raised an additional $1,860,000, net of fees and
related costs. Active Investors Ltd. II has also participated as an investor
under the shelf registration. Active Investors Ltd. II invested $1,000,000 in
exchange for 784,300 shares of our common stock, as part of the above financing
activity.

We intend to continue financing our operations for the foreseeable future
from cash on hand and additional investment placements under the Ladenburg
Thalmann agreement. As of September 15, 2000, we had placed approximately $11
million of the total $60 million available under this agreement.

RESULTS OF OPERATIONS

Viragen recognized no sales revenue or related costs for the fiscal years
ended June 30, 2000, 1999, or 1998. We have limited potential for sales prior to
receiving the necessary regulatory approvals from the U.S. Food and Drug
Administration and/or comparable European authorities. We could begin generating
sales revenue through export sales of Omniferon, prior to receiving EU
regulatory approvals for marketing, under an agreement with the AGC group of
companies. These sales, however, are contingent upon AGC's receipt of the
required regulatory approvals for product commercialization in the designated
territories, and our receipt of required regulatory approvals.

We did receive approval of our Clinical Trial Exemption Application from
the European Union regulatory authorities to begin clinical trials of Omniferon,
our multi-species natural human leukocyte-derived alpha interferon. We began
clinical trials in the European Union during the fourth calendar quarter of
1999. We intend to submit an Investigational New Drug Application to the Food
and Drug Administration. We cannot assure you that we will receive these
approvals. These approvals require the successful completion of clinical trials
and our ability to raise significant additional investment capital to fund the
completion of these trials.

2000 Compared to 1999

Research and development costs totaled approximately $4,837,000 for fiscal
2000 compared to $5,153,000 for the previous year. This represents a decrease of
$316,000 in research related costs between years.

In November 1999, we ceased all research projects being conducted in our
Florida laboratory facility. All research related projects, including research
related to production scale-up, are now being conducted in our Edinburgh,
Scotland facility. We believe that this consolidation step will improve and
streamline our scientific development efforts, as well as reduce operating costs
by consolidating operations in one facility. During fiscal
18
<PAGE> 21

2000, domestic laboratory supplies expense and research related salaries and
support fees decreased by $609,000 and $503,000 , respectively, when compared to
the previous year, while foreign laboratory supplies expense and research
related salaries and support fees increased by $171,000 and $647,000,
respectively, when compared to the previous year. The increase in foreign
research costs also reflects the additional costs associated with our clinical
trials for hepatitis C, which began in Europe during fiscal 2000. Total research
and development costs will continue to increase in the following periods as we
continue expanding our clinical trials of Omniferon.

General and administrative expenses totaled approximately $6,067,000 for
the current year, an increase of approximately $538,000 over the preceding year.
This increase reflects an increase in compensation expense on stock options and
warrants granted or modified of $1,485,000 offset by a decrease in
administrative salaries and support fees of $694,000 due to the implementation
of our cost reduction program. Also, legal fees decreased between the years by
$275,000, primarily due to reduced litigation fees and higher fees in the prior
year associated with contract negotiations completed in fiscal 1999.

On February 7, 2000, the board of directors voted to modify the terms of an
option to purchase 1.4 million shares of common stock, which had been granted to
Viragen's president during October 1995. The board of directors extended the
expiration of this common stock option by three years. Under the modified terms,
the common stock option will now expire on October 5, 2003. No other terms were
changed. Under the provisions of APB No. 25, we recognized compensation expense
of $941,000 relating to the modification of the grant.

We recognized approximately $653,000 in losses related to our investment in
Inflammatics, Inc. during fiscal 2000. This is down from $757,000 in the prior
year. This loss reflects 100% of the losses incurred by Inflammatics associated
with the clinical testing of LeukoVAX. The loss also includes the amortization
of the capitalized finders fee and warrant costs. These costs are being
amortized in proportion to the losses incurred by Inflammatics as compared to
our initial cash capital contribution to Inflammatics.

The significant increase in interest expense is related to debt instruments
that were outstanding during fiscal 2000, but not outstanding during the prior
year. Specifically, Viragen had outstanding 8% convertible promissory notes with
a principal balance of $2,000,000 during the first quarter of fiscal 2000. Also,
Viragen incurred approximately $700,000 of interest expense on reset shares
issued to investors upon the conversion of the promissory notes during the first
fiscal quarter. Viragen also borrowed $1,000,000 during the current fiscal year
through two short-term promissory notes. During February and March 2000, Viragen
borrowed an additional $2,000,000 by issuing convertible notes to Active
Investors Ltd. II and AMRO International, S.A. bearing interest rates ranging
between 8% and 9.5%. Viragen recognized $440,000 in additional interest expense,
due to a beneficial conversion rate on these promissory notes. The conversion
rates on the notes were discounted 18% from the current market price of our
common stock.

Our management anticipates operational losses will continue increasing as
we expand our clinical trials of Omniferon. In January 1999, we began
implementing a cost-reduction plan. Planned cost reductions implemented in
calendar 1999 are expected to save approximately $2.4 million annually in
operating expenses. The reductions include the elimination of administrative and
research positions in the U.S. saving approximately $1.6 million. We also closed
our Florida-based research facility consolidating these operations in our
Scottish facility and saving approximately an additional $800,000 annually. We
sold our Florida-based research facility in August 2000. These changes in
operations reflect the shift from developing Omniferon in our domestic
laboratories to scale-up development and conducting clinical research in the
European Union. As a result, while significant savings will be realized in the
U.S., particularly in general and administrative expenses, these savings will be
more that offset by increasing expenses in our Scottish facilities, as we
continue to expand our clinical trial program in the European Union.

During fiscal 2000, we spent approximately $50,000 on year 2000 computer
related projects. During that period and subsequent to our year end, we have not
experienced any significant year 2000 related disruptions. However, we are
continuing to monitor our computer dependent scientific and administrative
systems.

19
<PAGE> 22

1999 Compared to 1998

The significant decline in interest and other income for 1999, compared to
the previous year reflects the reduction in cash balances invested between
periods. This reduction resulted primarily from operational losses, the cash
investment in Inflammatics, Inc., and expenditures associated with expansion of
our laboratory and manufacturing facility in Scotland.

Research and development costs totaled approximately $5,153,000 for fiscal
1999 compared to $4,222,000 for the previous year. The increase of $931,000
(22%) included an increase in research related salaries and support fees of
$468,030, and an increase in equipment maintenance costs of $127,988. We also
recognized $136,021 in compensation expense on warrants issued to scientific
consultants, under the guidelines of FAS 123. We did not incur this expense in
the prior year. We are now performing the bulk of our development work in our
Scottish facility.

General and administrative expenses totaled approximately $5,528,000 for
fiscal 1999, a decrease of approximately $52,000 from the preceding year. During
1999, we waived a 90-day expiration provision on stock options held by three
directors who were not re-nominated to the board of directors. We recognized
$171,875 in compensation expense, as a result of the modified grants. We also
recognized $61,751 in compensation expense on warrants issued to consultants
during the year. Overall, compensation expense from stock options and warrants
increased by $176,000 compared to the prior year. These increased expenses were
offset by a decrease in insurance costs of $93,689 from the prior year due to
favorable rates obtained on policy renewals. Also, legal fees decreased by
$222,600 between periods due to the settlement of litigation during the prior
year, as well as the completion of contract negotiations.

During the year, we recognized approximately $757,000 in losses related to
our investment in Inflammatics, Inc. This loss reflects 100% of the losses
incurred by Inflammatics associated with the clinical testing of LeukoVAX. The
loss also includes the amortization of the capitalized finders fee and warrant
costs. These costs are being amortized in proportion to the losses incurred by
Inflammatics as compared to our initial cash capital contribution to
Inflammatics.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

On January 28, 1997, the Securities and Exchange Commission adopted
Securities Act Release No. 7386. This release requires that we disclose our
policies used to account for derivatives and quantitative and qualitative
information about market risk exposures. Market risk generally represents the
risk of loss that may result from the potential change in value of a financial
instrument as a result of fluctuations in interest rates and market prices.

We have not traded or otherwise transacted in derivatives nor do we expect
to do so in the future. We have established policies and internal processes
related to the management of market risks which we use in the normal course of
our business operations.

Interest Rate Risk

The fair value of long-term interest rate debt is subject to interest rate
risk. As we had a minimal amount of long-term debt at June 30, 2000, a change in
interest rates would not have a material impact on our future operating results
or cash flows. Additionally, we paid our $600,000 mortgage note during August
2000, upon the sale of our Florida-based research facility.

Foreign Currency Exchange Risk

We believe our foreign currency risk is not material. At the present time,
we do not have sales revenues or related receivables. Also, we do not purchase
foreign currencies on a regular basis. Transfers of funds to our foreign
subsidiary in Scotland are infrequent and are transferred at the then current
exchange rate.

20
<PAGE> 23

We were not impacted by the European Union's adoption of the "Euro"
currency. Our foreign operations are located in Scotland, and the United Kingdom
did not participate in the adoption of the Euro. The United Kingdom does not
have a scheduled date for the eventual adoption of the Euro.

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 DISCLOSURES

Not applicable.

21
<PAGE> 24

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

<TABLE>
<CAPTION>
SERVED AS OFFICER
NAME AGE POSITION WITH THE COMPANY AND/OR DIRECTOR SINCE CLASS
---- --- ------------------------- --------------------- -----
<S> <C> <C> <C> <C>
Gerald Smith.............................. 69 Chairman of the Board 1994
Chief Executive Officer 1998 C
President 1993
Robert H. Zeiger.......................... 56 Vice Chairman of the Board 1995 B
Dennis W. Healey.......................... 52 Chief Financial Officer 1980
Treasurer 1980 B
Director 1984
Executive Vice President 1993
Secretary 1994
D. Magnus Nicolson, Ph.D.................. 40 Chief Operating Officer 1999
Melvin Rothberg........................... 53 Executive Vice President 1999
Carl N. Singer............................ 84 Director 1997 C
Peter D. Fischbein........................ 60 Director 1981 B
Sidney Dworkin, Ph.D...................... 79 Director 1994 A
Charles J. Simons......................... 82 Director 1998 A
Robert C. Salisbury....................... 56 Director 1998 A
Jose I. Ortega............................ 28 Controller 1996
</TABLE>

On February 28, 1997, we amended our Certificate of Incorporation and set
up a classified board of directors with the 1997 annual meeting. Following that
meeting, we divided directors into three subclasses consisting of class A, class
B and class C. The initial term of the class A directors expired after the 1998
annual meeting of stockholders; the term of the class B directors initially
expires after the 1999 annual meeting; and the term of the class C directors
initially expires after the 2000 annual meeting. At each annual meeting,
stockholders will elect directors of the class whose term expired. Directors
will be elected to hold office for a term to expire at the third ensuing annual
meeting.

Gerald Smith became president of Viragen in May 1993. Since 1982, Mr. Smith
was a principal stockholder, president, chief executive officer and a director
of Business Development Corp. Business Development 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 was also the president, chief
executive officer and a director of Cinescopic Corporation and International
Database Service, Inc. These are computer-oriented companies which developed
database technology using the personal computer for audio, video, animation and
real time communication. Mr. Smith discontinued the operations of Business
Development Corp. in order to devote all of his time to Viragen. Mr. Smith is
also chairman of the board and president of Viragen (Europe) Ltd.

Robert H. Zeiger was appointed chief executive officer and chief operating
officer of Viragen, during May 1995. At that time, he was also elected as a
director. Mr. Zeiger has served as a pharmaceutical executive since 1971. From
1985 to 1994, Mr. Zeiger was employed by Glaxo, Inc., Research Triangle Park,
North Carolina. He served as vice president and general manager of their
Dermatological Division from 1985 to 1988. He then served as vice president and
general manager of Glaxo Pharmaceuticals from 1991 to 1994. Previously, Mr.
Zeiger served as vice president marketing and sales with Stiefel Laboratories,
Inc., Coral Gables, Florida, from 1979 to 1985. He was national sales manager to
Knoll Pharmaceutical Company, Whipping, New Jersey from 1971 to 1979. Mr. Zeiger
has also served as chief executive officer and a director of Viragen (Europe).
On July 31, 1998 Mr. Zeiger resigned his positions of chief executive officer of
Viragen and Viragen (Europe) and director of Viragen (Europe) for health
reasons. His resignations were effective September 30, 1998. Mr. Zeiger
continues to serve as vice chairman and senior pharmaceutical advisor to the
Viragen board, as well as a member of Viragen's executive committee.

22
<PAGE> 25

Dennis W. Healey is a certified public accountant. He was appointed
chairman of the board and chief executive officer on April 13, 1993. In June
1994, Mr. Healey relinquished his position as chairman of the board to Mr.
Smith. In July 1994, he relinquished the position of chief executive officer.
Upon Gerald Smith becoming president in May 1993, Mr. Healey became executive
vice president. He has served as chief financial officer and treasurer since
1980. Mr. Healey is also executive vice president, treasurer, secretary and a
director of Viragen (Europe) and Viragen U.S.A.

D. Magnus Nicolson, Ph.D. was appointed chief operating officer of Viragen
and Viragen (Europe) upon the resignation of Dr. Jay Sawardeker in July 1999 and
August 1999, respectively. Dr. Nicolson was elected a director of Viragen
(Europe) in 1997. He has served as the managing director of Viragen (Scotland)
since April 1996. From 1992 to 1995, Dr. Nicolson was employed by Scottish
Enterprise, an agency of the Scottish government responsible for generating
economic development in Scotland. During his time at Scottish Enterprise, he
served as:

- technology manager for Locate in Scotland (1995),

- senior executive (1993 to 1995), and

- contractor, healthcare liaison office of Dunbartonshire Enterprise (1992
to 1993).

From 1990 to 1992, Dr. Nicolson conducted various market research projects
for a variety of public and private enterprises as an independent marketing
consultant. In 1988, Dr. Nicolson was awarded a Doctorate in Immunology from the
University of Strathclyde. He earned a Masters Degrees in both Immunology and
Business in 1985 and 1992, respectively. Dr. Nicolson is a Fellow of the Royal
Society of Medicine, a Member of the Royal Society of Chemistry, and a Member of
the Chartered Institute of Marketing.

Melvin Rothberg joined Viragen as chief executive officer of Viragen U.S.A.
in April 1998. In April 1999, Mr. Rothberg assumed the position of an executive
vice president of Viragen. Prior to joining Viragen, Mr. Rothberg served as a
vice president of Althin Medical, Inc., a U.S. subsidiary of a Swedish medical
company, from 1990 to 1998. Mr. Rothberg served as a director and manager of a
number of divisions of C.D. Medical, a division of the Dow Chemical Company,
from 1983 to 1990.

Carl N. Singer was elected a director in August 1997 and currently serves
as chairman emeritus. He currently serves as chairman of the executive committee
of the board of directors. Since 1981, Mr. Singer has also served as chairman of
Fundamental Management Corporation, a Florida-based institutional investment
fund, which manages the Active Investors II fund. During fiscal 2000, Active
Investors II invested a total of $2,000,000 in Viragen, in two separate
transactions, receiving 1,800,016 shares of common stock. Mr. Singer has also
served as a director, president and CEO of Sealy, Inc., Scripto, Inc. and the
BVD Company.

Peter D. Fischbein is an attorney who has been practicing law for
approximately 35 years. Mr. Fischbein served as Viragen's secretary between May
and December 1994. His former law firm on occasion represented Viragen and the
Viragen Research Associates Limited Partnership, which has contracts with
Viragen, Inc. Mr. Fischbein is also a director of Medicore, Inc. since 1984 and
a director of Techdyne, Inc. since 1985. Mr. Fischbein has been general partner
of several limited partnerships engaged in oil exploration and real estate
development.

Sidney Dworkin, Ph.D. was elected a director in August 1994. He was a
founder, former president, chief executive officer and chairman of Revco, Inc.
Between 1987 and the present, Dr. Dworkin has also served as chairman 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 Comtrex Systems, 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.,
Northern Technologies International Corporation and Crager Industries, Inc. All
are publicly-traded companies.

Charles J. Simons was elected to the board of directors in July 1998. He
currently serves as chairman of the audit, finance and compensation committee of
the board of directors. Mr. Simons is the vice-chairman of
23
<PAGE> 26

the board of G.W. Plastics, Inc., a plastic manufacturer. Also, he is an
independent management and financial consultant. From 1940 to 1981, he was
employed by Eastern Airlines, last serving as vice chairman, executive vice
president and as a director. Mr. Simons is a director of Veridian Corporation,
an aerospace company; and a number of private companies. He was also a director
of Home Intensive Care, Inc. from 1988 until July 1993. Mr. Simons is also a
director of MedWaste, Inc., Work Group, Inc. and Excalibur Corporation. Mr.
Simons is an investor in Active Investors II. During fiscal 2000, Active
Investors II invested a total of $2,000,000 in Viragen in two separate
transactions, in exchange for 1,800,016 shares of our common stock.

Robert C. Salisbury was appointed a director of Viragen in December 1998.
From 1974 to 1995, Mr. Salisbury was employed by the Upjohn Company serving in
several financial related positions. These positions included manager of cash
management, internal control and corporate finance from 1975 to 1981. He was
vice president from 1985 to 1990, senior vice president from 1991 to 1994, and
executive vice president for finance and chief financial officer from 1994 to
1995. Following the merger of Pharmacia and Upjohn, Inc. in 1995, Mr. Salisbury
served as executive vice president and chief financial officer until 1998. Mr.
Salisbury also serves as a director of Packard Bio-Science Company, a leading
supplier of instruments to the life sciences research and nuclear industries.
Mr. Salisbury also serves as a director and investor in Fundamental Management
Corporation, a Florida-based institutional investment fund which manages the
Active Investors II fund. During fiscal 2000, Active Investors II invested a
total of $2,000,000 in Viragen, in two separate transactions, receiving
1,800,016 shares of common stock.

Jose I. Ortega is a certified public accountant and joined Viragen as its
controller in June 1996. From 1993 until joining Viragen, Mr. Ortega was a
member of the audit staff of Ernst & Young LLP, Viragen's independent audit
firm.

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

During fiscal 2000, Viragen's board of directors met on three occasions.
Viragen has an executive committee, an audit and finance committee and a
compensation committee. The executive committee consists of Messrs. Singer
(chairperson), Smith and Zeiger. The audit and finance committee and the
compensation committee includes Messrs. Simons (chairperson), Dworkin and
Salisbury.

The executive committee acts for the full board during intervals between
board meetings, except on matters which by law may not be delegated. The
executive committee will meet as necessary. All actions by the committee are to
be reported at the next board of directors meeting. During fiscal 2000, the
executive committee met on four occasions.

The audit and finance committee oversees Viragen's audit activities to
protect against improper and unsound practices and to furnish adequate
protection to all assets and records. The audit and finance committee also
communicates with Viragen's independent certified public accountants, on behalf
of the board of directors. This committee receives written reports, supplemented
by oral reports, from the audit firm. The committee is responsible for
supervising the implementation of Viragen's budget process. During fiscal 2000,
the audit and finance committee met on eight occasions.

The compensation committee provides overall guidance for officer
compensation programs, including salaries and other forms of compensation
including all employee stock option grants and warrant grants to non-employees.

AUDIT AND FINANCE COMMITTEE AND COMPENSATION COMMITTEE INTERLOCKS AND INSIDER
PARTICIPATION IN COMPENSATION DECISIONS

Currently, there are three members of the audit and finance committee and
the compensation committee. All members are outside directors.

24
<PAGE> 27

ITEM 11. EXECUTIVE COMPENSATION AND EMPLOYMENT AGREEMENTS

The following table includes information concerning the compensation and
employment agreements of the chief executive officers of Viragen and the four
other most highly compensated executive officers as of June 30, 2000.

SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
-------------------------------------
AWARDS PAYOUTS
----------------------- -----------
SECURITIES
ANNUAL COMPENSATION RESTRICTED UNDERLYING
------------------------------------------------ STOCK OPTIONS/
NAME AND OTHER ANNUAL AWARDS SARs LTIP
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) COMPENSATION ($) ($) (#) PAYOUTS ($)
------------------ ---- ---------- --------- ---------------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Gerald Smith............... 2000 $282,000 $ -- $ -- $ -- -- $ --
Chairman of the 1999 282,000 -- -- -- -- --
Board, CEO and 1998 263,000 -- -- -- -- --
President

Dennis W. Healey........... 2000 252,000 -- -- -- -- --
Exec. V.P., 1999 252,000 -- -- -- -- --
Treasurer, CFO 1998 240,000 -- -- -- -- --
and Director

D. Magnus Nicolson......... 2000 170,000 -- -- -- 200,000 --
COO 1999 115,000 -- -- -- -- --
1998 100,054 -- -- -- -- --

Melvin Rothberg............ 2000 160,000 -- -- -- 350,000 --
Exec. V.P. 1999 150,000 -- -- -- -- --
1998 25,000 -- -- -- -- --

Patrick Yeramian........... 2000 162,000 -- -- -- -- --
Chief Medical 1999 171,000 -- -- -- -- --
Director 1998 14,000 -- -- -- 250,000 --

NAME AND ALL OTHER
PRINCIPAL POSITION COMPENSATION ($)
------------------ ----------------
<S> <C>
Gerald Smith............... $ --
Chairman of the --
Board, CEO and --
President

Dennis W. Healey........... --
Exec. V.P., --
Treasurer, CFO --
and Director

D. Magnus Nicolson......... --
COO --
--

Melvin Rothberg............ --
Exec. V.P. --
--

Patrick Yeramian........... --
Chief Medical --
Director --
</TABLE>

Employment Agreements

On March 1, 1997, Mr. Smith entered into a two-year employment agreement.
This agreement provided for:

- a salary of $190,000 and $200,000 for the first and second years,
respectively,

- options to purchase 1,000,000 shares of common stock at $3.22 per share
exercisable over five years,

- health and life insurance,

- similar employee benefits generally available to other employees,

- use of an automobile and related maintenance, and

- reimbursement of business related expenses.

On March 1, 1997, Mr. Smith also entered into a two year employment
agreement with Viragen (Europe) Ltd. under terms similar to those of his Viragen
employment agreement. The agreement provided for an annual salary of $10,000 and
$20,000 for the first and second years. We amended the agreement on July 3,
1997, to provide for an annual salary of $72,000 for the year July 1, 1997
through June 30, 1998, and $82,000 per annum for the period from July 1, 1998
through February 28, 1999. Mr. Smith's employment agreements with both Viragen
and Viragen (Europe) expired on March 1, 1999. On that date, he entered into a
single two year employment agreement with Viragen under terms similar to his
previous agreement. This agreement provides for a total annual salary of
$282,000. Mr. Smith continues to serve as the president and chairman of Viragen
(Europe).

25
<PAGE> 28

On March 1, 1997 Mr. Healey entered into a two-year employment agreement.
The agreement, which was amended on July 1, 1997, provided for:

- a salary $190,000 and $195,000 for the first and second years,

- options to purchase 300,000 shares of common stock at $3.22 per share,
exercisable over five years,

- health and life insurance,

- similar employee benefits generally available to other employees, and

- reimbursement of automobile and business related expenses.

On March 1, 1997, Mr. Healey entered into a two-year employment agreement
with Viragen (Europe) Ltd., subsequently amended on July 3, 1997. This agreement
was to run concurrent with Mr. Smith's Viragen (Europe) agreement and superceded
all previous agreements. This agreement provided for a salary of $31,700 for the
four month period ending June 30, 1997, $52,000 for the year ended June 30,
1998, and $38,000 for the eight month period ending February 28, 1998. Upon the
expiration of Mr. Healey's employment agreements with Viragen and Viragen
(Europe), on March 1, 1999, he entered into a single employment agreement with
Viragen under terms similar to his previous agreements. The agreement provides
for a total annual salary of $252,000. Mr. Healey continues to serve as
executive vice president, chief financial officer, secretary and director of
Viragen (Europe).

On July 1, 1999, Dr. Nicolson entered into a two year employment agreement
with Viragen. This agreement supercedes all previous agreements. The agreement
provided for:

- an annual salary of $170,000,

- the grant of an option to acquire 200,000 shares of common stock at
$.625, vesting one-third on the date of grant, one-third on the first
anniversary of the grant date and one-third on the second anniversary,

- similar employee benefits generally available to executive officers,

- use of an automobile, and

- reimbursement of business related expenses.

On July 1, 1999, Mr. Rothberg entered into a two year employment agreement
with Viragen. This agreement supercedes all previous agreements. The agreement
provided for:

- an annual salary of $160,000 and $172,500 for the first and second years,
respectively,

- the grant of an option to acquire 250,000 shares of common stock at $.625
per share, vesting one-half on the date of grant and one-half on the
first year anniversary,

- health insurance,

- similar employee benefits generally available to executive employees,

- $400 per month auto allowance, and

- reimbursement of business related expenses.

In April 2000, Mr. Rothberg was granted an option to acquire 100,000 shares
of common stock at $2.00 per share, vesting on the date of grant. These options
were granted simultaneously with the cancellation of an option to acquire
100,000 shares of Viragen U.S.A., Inc. at $0.22 per share held by Mr. Rothberg.
The potential replacement of Viragen U.S.A. options was addressed in Mr.
Rothberg's April 28, 1998 option agreement.

26
<PAGE> 29

On June 1, 1998, Dr. Yeramian entered into a two year employment agreement
with Viragen. The agreement provided for:

- an annual salary of $170,000 and $177,000 for the first and second years,
respectively,

- the grant of an option to acquire 250,000 shares of common stock at $2.22
per share exercisable over 5 years,

- health and life insurance,

- similar employee benefits generally available to other employees, and

- reimbursement of business related expenses.

Upon the expiration of his employment agreement in May 2000, Dr. Yeramian
entered into a two year consulting agreement with Viragen. The consulting
agreement provides for:

- consulting fee of $1,000 per day and $1,100 per day for the first and
second years, respectively,

- the grant of a warrant to acquire 50,000 shares of common stock at $1.44
per share, exercisable 25,000 after the first year and 25,000 after the
second year, and

- reimbursement of business related expenses.

OPTION/SAR GRANTS IN LAST FISCAL YEAR

The following table includes information as to the grant of options to
purchase shares of common stock during the fiscal year ended June 30, 2000 to
each person named in the summary compensation table.

<TABLE>
<CAPTION>
POTENTIAL REALIZED
INDIVIDUAL GRANTS VALUE AT ASSUMED
------------------------------------------------------ ANNUAL RATES OF
NUMBER OF % OF TOTAL STOCK PRICE
SECURITIES OPTIONS/SARs APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM
OPTIONS/SARs EMPLOYEES IN BASE PRICE EXPIRATION --------------------
NAME GRANTED (#) FISCAL YEAR ($/SH) DATE 5% 10%
---- ------------ ------------ ----------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Gerald Smith................ -- -- $ -- -- $ -- $ --

Dennis W. Healey............ -- -- -- -- -- --

D. Magnus Nicolson.......... 200,000 -- 0.63 -- 42,666 97,667

Melvin Rothberg............. 350,000 -- 1.02 -- 103,250 230,750

Patrick Yeramian............ -- -- -- -- -- --
</TABLE>

On February 7, 2000, the board of directors approved a three year extension
on 1,400,000 options held by Mr. Smith. The options, exercisable at $.50 per
share, were extended to October 5, 2003. No other terms of the option agreement
were modified. Viragen recognized approximately $941,000 in compensation
expense, under the provisions of APB No. 25, relating to the modification of
grant.

Following the expiration of his employment agreement, Dr. Yeramian received
50,000 warrants to acquire common shares at $1.44, under the terms of a
consulting agreement.

27
<PAGE> 30

OPTION EXERCISES AND HOLDINGS

The following table includes information as to the exercise of options to
purchase shares of common stock during the fiscal year ended June 30, 2000 by
each person named in the summary compensation table and the unexercised options
held as of the end of the 2000 fiscal year.

AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-
OPTIONS AT FY END (#) MONEY OPTIONS AT FY END ($)
SHARES ACQUIRED ON VALUE --------------------------- -----------------------------
NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------------ ------------ ----------- ------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Gerald Smith......... 400,000 $369,000 2,050,000 -- $1,750,000 $ --
Dennis W. Healey..... 200,000 21,880 450,000 -- 175,000 --
D. Magnus Nicolson... 20,000 42,500 46,666 133,334 76,000 217,000
Melvin Rothberg...... 125,000 143,595 100,000 125,000 25,000 203,750
Patrick Yeramian..... -- -- 250,000 -- 10,000 --
</TABLE>

1997 AMENDED 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 to
define certain terms and clarify the minimum exercise price of the non-qualified
options. The minimum exercise price of non-qualified options cannot be less than
55% of the fair market value. Viragen stockholders ratified the 1995 stock
option plan at the annual meeting held on December 15, 1995.

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
1997 stock option plan contains terms and provisions similar to the 1995 stock
option plan. Viragen stockholders ratified the 1997 stock option plan at the
annual meeting held on February 28, 1997. On April 24, 1998 the board of
directors adopted, subject to ratification by the stockholders, an amendment to
the 1997 stock option plan. This amendment reserved an additional 1,000,000
shares of common stock for issuance under that plan. This amendment brought the
total shares reserved under the 1997 stock option plan to 4,000,000 shares. On
July 31, 1998, the stockholders ratified this amendment to the 1997 stock option
plan.

The audit and finance committee and the compensation committee of the board
of directors and the board of directors currently administer the plans.
Administration of the plan includes determining:

- the persons who will be granted plan options,

- the type of plan options to be granted,

- the number of shares subject to each plan options, and

- the plan options price.

Options granted under either the 1995 or the 1997 stock option plans may
qualify as incentive stock options, under Section 422 of the Internal Revenue
Code of 1986, as amended. In addition, the plans also include a reload option
provision. This provision permits an eligible person to pay the exercise price
of the plan option with shares of common stock owned by the eligible person. The
person then receives a new plan option to purchase shares of common stock equal
in number to the tendered shares. Any incentive option, which is granted under a
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. The exercise price of
any incentive option granted to an eligible employee owning more than 10% of our
common stock must be at least 110% of the fair market value, as determined on
the date of the grant. The board of directors, the audit and finance committee
or the compensation committee determine the term of each plan option and the
manner in which it may be exercised. No plan option may be exercisable more than
10 years after the date of its grant. In the case of an

28
<PAGE> 31

incentive option granted to an eligible employee owning more than 10% of
Viragen's common stock, no plan option may be exercisable more than five years
after the date of the grant.

Officers, directors, key employees and consultants of Viragen and its
subsidiaries are eligible to receive non-qualified options under the stock
option plans. Only officers, directors and employees who are employed by Viragen
or by any of its subsidiaries are eligible to receive incentive options.

Incentive options are non-assignable and nontransferable, except by will or
by the laws of descent and distribution during the lifetime of the optionee.
Only the optionee may exercise incentive options. Under a recent amendment to
the 1997 stock option plan, non-qualified options may be transferable under
limited circumstances for estate planning, if authorized by the board of
directors or the committee. If an optionee's employment is terminated for any
reason, other than his death or disability, or if an optionee is not an employee
but is a member of Viragen'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 will 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 will
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, 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 the disability.

The board of directors may amend, suspend or terminate the stock option
plans at any time. However, no amendment can be made which changes the minimum
purchase price, except in the event of adjustments due to changes in Viragen's
capitalization. Unless the plans have been suspended or terminated by the board
of directors, the 1995 stock option plan will terminate on May 15, 2005, and the
1997 stock option plan will terminate on January 27, 2007. The termination of
either plan will not affect the validity of any plan options previously granted.

As of September 15, 2000, we have issued 3,197,800 options under the 1995
stock option plan and 3,692,700 options under the 1997 stock option plan.

OTHER OPTION GRANTS

In March 2000, Mr. Carl Singer, a director and chairperson of our executive
committee was granted 100,000 options to purchase common stock. The options are
exercisable at $3.75 per share. In July 1999, Mr. Jose Ortega was granted 50,000
options to purchase common stock. The options are exercisable at $0.625 per
share.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table shows certain information regarding Viragen's common
stock beneficially owned at September 15, 2000, by:

- each person who is known by us to own beneficially or exercise voting or
dispositive control over 5% or more of Viragen's common stock,

- each of Viragen's directors, and

- all officers and directors as a group.

29
<PAGE> 32

A person is considered a beneficial owner of any securities that the person
has the right to acquire beneficial ownership of within 60 days. At September
15, 2000, there were 92,094,395 shares of common stock outstanding.

<TABLE>
<CAPTION>
COMMON SHARES
BENEFICIALLY OWNED
--------------------------
BENEFICIAL PERCENT OF ACQUIRABLE
NAME OF BENEFICIAL OWNER OWNERSHIP CLASS CURRENTLY WITHIN 60 DAYS
------------------------ ----------- ---------- --------- --------------
<S> <C> <C> <C> <C>
Gerald Smith...................................... 2,067,000 2.2% 17,000 2,050,000
Robert H. Zeiger.................................. 515,000 0.6 -- 515,000
Carl N. Singer.................................... 4,015,841 4.3 3,915,841 100,000
Dennis W. Healey.................................. 715,000 0.8 265,000 450,000
Peter D. Fischbein................................ 400,000 0.4 350,000 50,000
Sidney Dworkin, Ph.D.............................. 325,244 0.4 175,244 150,000
Charles J. Simons................................. 35,000 0.0 10,000 25,000
Robert C. Salisbury............................... 30,000 0.0 30,000 --
Officers & Directors (as a Group of 11 persons)... 8,624,035 9.0 4,779,035 3,753,333
</TABLE>

The beneficial ownership figures include 3,836,341 shares held by
Fundamental Management Corporation, a Florida-based institutional investment
fund, which have been attributed to Carl N. Singer. Mr. Singer is the
chairperson of Fundamental Management Corporation. Mr. Salisbury is also a
director and investor in Fundamental Management Corporation.

BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

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

To our knowledge, based solely on a review of the copies of these reports
furnished to us and written representations that no other reports were required,
during the fiscal year ended June 30, 2000, all Section 16(a) filing
requirements applicable to our officers, directors and greater than ten percent
(10%) beneficial owners were completed and timely filed.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Gerald Smith and Dennis W. Healey, who are principal officers of Viragen,
also serve as the principal officers of Viragen (Europe).

On April 25, 1997, Viragen loaned William Saeger, a former director,
$100,000. In exchange, Viragen received a one-year promissory note bearing
interest at 8 1/2%. In April 1998, Mr. Saeger defaulted on this note. Due to a
subsequent deterioration in Mr. Saeger's health and financial condition, we were
unable to determine the amounts which could ultimately be realized on the
promissory note. Accordingly, we wrote-off the entire amount due under the note
with related accrued interest of approximately $10,000 as uncollectible by
fiscal 1998 year end. We are continuing to pursue collection efforts relative to
this transaction.

On September 1, 1998, Gerald Smith and Dennis W. Healey each exercised
250,000 options to purchase common stock. Both exercised their options through
the issuance of promissory notes payable to Viragen totaling $300,000. Mr. Smith
and Mr. Healey also entered into related pledge and escrow agreements. The
promissory notes carried an interest rate of 5.47%, payable semi-annually, and
were secured by the underlying common stock purchased. The purchased shares were
being held in escrow, pending payment of the related notes pursuant to the
provisions of the pledge and escrow agreements. Mr. Smith paid $100,000 of the
principal on his promissory note, plus related interest, during January 2000.
Mr. Healey paid-in-full the $150,000 principal, plus related interest, on his
promissory note, during March 2000. Viragen released the collateral on the two
promissory notes.

30
<PAGE> 33

Carl N. Singer, a director of Viragen and the chairman of its executive
committee, also exercised options for 50,000 shares on October 1, 1998. Peter
Fischbein, a director, exercised options for 200,000 shares on October 8, 1998.
Charles F. Fistel, a former officer, exercised options totaling 410,000 shares
on May 3, 1999 and May 11, 1999 These options were all exercised through the
issuance of promissory notes payable Viragen totaling $302,000, and related
pledge and escrow agreements. The promissory notes bear interest at rates
ranging between 5.06% and 5.15%, payable semi-annually, and are secured by the
underlying common stock purchased. The purchased shares are being held in
escrow, pending payment of the related notes pursuant to the provisions of the
pledge and escrow agreements. During February 2000, Mr. Fischbein exercised
options for an additional 25,000 common shares through the issuance of another
promissory note and escrow agreement. Principal on the promissory note totals
$12,500 and bears interest at 6.46%. Mr. Singer paid-in-full the $59,000
principal, plus related interest, on his promissory note, during March 2000. Mr.
Singer's collateral was released from escrow upon receipt of his payment. Mr.
Fistel paid $30,000 of the principal on his promissory notes, plus related
interest, during March 2000. A pro-rated number of escrowed common shares were
released to Mr. Fistel upon receipt of his payment.

During January 2000, we contracted Cameron Associates, Inc. to act as an
investor relation's consultant. Cameron Associates received $6,000 per month
through February 2000, subsequently reduced to $3,000 per month, as compensation
for their services. They also received warrants to purchase 100,000 common
shares of Viragen at $1.17 per share through January 2005. Mr. Singer serves as
a director on Cameron Associates' board of directors and is a minority
stockholder.

On February 7, 2000, the board of directors voted to modify the terms of an
option to purchase 1.4 million shares of common stock, which had been granted to
Mr. Smith, Viragen's president, during October 1995. The board of directors
extended the expiration of this common stock option by three years. Under the
modified terms, the common stock option will now expire on October 5, 2003. No
other terms were changed. Under the provisions of APB 25, we recognized
compensation expense of $941,000 relating to this modification.

On February 18, 2000, we entered into a subscription agreement with Active
Investors Ltd. II, an investment fund managed by Mr. Carl Singer, a director of
Viragen, through Fundamental Management Corporation, a Florida-based
institutional investment fund. Under the terms of the subscription agreement, we
issued to Active Investors Ltd. II a convertible promissory note for the
principal amount of $1,000,000. The promissory note had an interest rate of 9.5%
per annum. The principal and interest were payable on February 17, 2001.

Active Investors Ltd. II could elect to convert the unpaid principal and
interest, at any time, into common shares at the fixed rate of $1.00 per share.
They also received a warrant to purchase 100,000 common shares. The warrant is
exercisable at $2.00 per share through February 17, 2003. This note was
converted into 1,015,716 shares of common stock, which included $35,400 in
interest on June 30, 2000.

Active Investors Ltd. II has also participated as an investor under the
shelf registration on Form S-3 dated March 21, 2000 (File No. 333-32306). Active
Investors Ltd. II invested $1,000,000 in exchange for 784,300 shares of our
common stock.

Mr. Robert Salisbury, a director of Viragen, also serve as a director and
investor in Fundamental Management Corporation which manages the Active
Investors II fund. Mr. Charles Simons, a director of Viragen, is an investor in
the Active Investors II fund.

Between February and March 2000, Mr. Smith exercised options for 400,000
additional common shares through the issuance of two promissory notes and escrow
agreements. Principal on the promissory notes totaled $200,000. Mr. Smith
paid-in-full both notes during March 2000 and the escrowed shares were released.

During March 2000, Melvin Rothberg, an executive vice-president of Viragen,
exercised options for 100,000 common shares through the issuance of a promissory
note and related escrow agreement. Principal on the promissory note totaled
$62,500. Mr. Rothberg paid-in-full the principal on his note during April 2000,
and the escrowed shares were released.

31
<PAGE> 34

Commencing in March 2000, Mr. Singer is receiving $100,000 per year for his
services as a director and chairperson of the executive committee. He receives
no other director fees. In addition, for these services on March 14, 2000, Mr.
Singer was granted an option to acquire 100,000 shares of common stock. The
option provides for:

- an exercise price of $3.75 per share,

- are exercisable for 5 years from the vesting date,

- an exercisable 33,333 shares on the grant date; 33,333 shares on the
first anniversary of the grant date and 33,334 shares on the second
anniversary of the grant date.

32
<PAGE> 35

PART IV

ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K

(a) The following is a list of documents filed as part of this annual
report.

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
--------- -----------
<C> <C> <S>
1 -- All financial statements see Index to Consolidated Financial
Statements.
2 -- Exhibits
(3) -- Articles of Incorporation and By-Laws.
3.1 -- Articles of Incorporation and By-Laws (incorporated by
reference to Viragen's registration statement on Form S-1
dated June 8, 1981, File No. 2-72691).
3.2 -- Certificate of Amendment of Certificate of Incorporation
dated September 11, 1986 (incorporated by reference to
Viragen's registration statement on Form S-2 dated October
24, 1986, File No. 33-9714).
3.3 -- Certificate of Amendment of Certificate of Incorporation
dated April 8, 1987 (incorporated by reference to Viragen's
current report on Form 8-K dated April 17, 2000, filed on
April 13, 2000).
3.4 -- Certificate of Amendment of Certificate of Incorporation
dated May 11, 1993 (incorporated by reference to Viragen's
current report on Form 8-K dated April 17, 2000, filed on
April 13, 2000).
3.5 -- Certificate of Amendment of Certificate of Incorporation
dated February 28, 1997 (incorporated by reference to
Viragen's current report on Form 8-K dated April 17, 2000,
filed on April 13, 2000).
3.6 -- Certificate of Amendment of Certificate of Incorporation
dated July 2, 1997 (incorporated by reference to Viragen's
current report on Fort 8-K dated April 17, 2000, filed on
April 13, 2000).
3.7 -- Certificate of Amendment of Certificate of Incorporation
dated October 4, 1999 (incorporated by reference to
Viragen's current report on Form 8-K dated April 17, 2000,
filed on April 13, 2000).
(4) -- Instruments defining the rights of security holders,
including indentures.
4.1 -- Form of common Stock Certificate (incorporated by reference
to Viragen's registration statement on Form S-1 dated June
8, 1981, File No. 2-72691).
4.2 -- Certificate of Designation for Series A Preferred Stock, as
amended (incorporated by reference to 1986 Form S-2, Part
II, Item 16, 4.4).
4.3 -- Specimen Certificate for Unit (Series A Preferred Stock and
Class A Warrant) (incorporated by reference to 1986 Form
S-2, Part II, Item 15.
4.4 -- 1995 Stock Option Plan (incorporated by reference to
Viragen's Registration Statement on Form S-8 filed June 9,
1995).
4.5 -- 1997 Stock Option Plan (incorporated by reference to
Viragen's Registration Statement of Form S-8 filed April 17,
1998).
4.6 -- Subscription Agreement between Active Investors Ltd. II and
Viragen, Inc. dated February 18, 2000 (incorporated by
reference to Viragen's Registration Statement on Form S-3
filed May 19, 2000).
4.7 -- Loan and Escrow Agreement between AMRO International, S.A.
and Viragen, Inc. dated March 1, 2000 (incorporated by
reference to Viragen's Registration Statement on Form S-3
filed May 19, 2000).
4.8 -- Common Stock Purchase Warrant issued to Equitable Equity
Lending, Inc. dated November 1, 1999 (incorporated by
reference to Viragen's Registration Statement on Form S-3
filed May 19, 2000).
</TABLE>

33
<PAGE> 36

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
--------- -----------
<C> <C> <S>
4.9 -- Common Stock Purchase Warrant granted to Girmon Investment
Co., Limited dated December 21, 1998 (incorporated by
reference to Viragen's Registration Statement on Form S-8
filed May 19, 2000).
4.10 -- Common Stock Purchase Warrant granted to Robert Keller, M.D.
dated November 1, 1999 (incorporated by reference to
Viragen's Registration Statement on Form S-8 filed May 19,
2000).
4.11 -- Common Stock Purchase Warrant granted to David W.
Kirchembaum dated November 1, 1999 (incorporated by
reference to Viragen's Registration Statement on Form S-8
filed May 19, 2000).
4.12 -- Common Stock Purchase Warrant granted to Bradford J. Beilly
dated November 1, 1999 (incorporated by reference to
Viragen's Registration Statement on Form S-8 filed May 19,
2000).
4.13 -- Common Stock Purchase Warrant granted to Catherine Patrick
dated November 1, 1999 (incorporated by reference to
Viragen's Registration Statement on Form S-8 filed May 19,
2000).
4.14 -- Form of Common Stock Purchase Warrants granted to Pablo A.
Guzman, M.D. between April 2, 1998 and November 4, 1999
(incorporated by reference to Viragen's Registration
Statement on Form S-8 filed May 19, 2000).
4.15 -- Common Stock Purchase Warrant granted to Dunwoody Brokerage
Services, Inc. dated December 28, 1999 (incorporated by
reference to Viragen's Registration Statement on Form S-8
filed May 19, 2000).
4.16 -- Common Stock Purchase Warrant granted to David Squillacote
dated July 1, 1999 (incorporated by reference to Viragen's
Registration Statement on Form S-8 filed May 19, 2000).
4.17 -- Common Stock Purchase Warrant granted to Cameron Associates,
Inc. dated January 17, 2000 (incorporated by reference to
Viragen's Registration Statement on Form S-8 filed May 19,
2000).
4.18 -- Common Stock Purchase Warrant granted to Nassau Securities,
Int'l. dated April 17, 2000 (incorporated by reference to
Viragen's Registration Statement on Form S-8 filed May 19,
2000).
4.19 -- Stock Option Agreement between Viragen, Inc. and Gerald
Smith dated February 7, 2000 (incorporated by reference to
Viragen's Registration Statement on Form S-8 filed May 19,
2000).
(10) -- Material contracts.
10.1 -- 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)).
10.2 -- 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)).
10.3 -- Royalty Agreement between the Company and Medicore, Inc.
dated November 7, 1986 (incorporated by reference to the
November 1986 Form 8-K, Item 7(c)(i)).
10.4 -- 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)).
10.5 -- 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)).
10.6 -- 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)).
</TABLE>

34
<PAGE> 37

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
--------- -----------
<C> <C> <S>
10.7 -- 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)).
10.8 -- 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)).
10.9 -- Agreement for Sale of Stock between Cytoferon 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)(xxiv)).
10.10 -- 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)).
10.11 -- 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)).
10.12 -- 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).
10.13 -- 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).
10.14 -- 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).
10.15 -- 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).
10.16 -- 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).
10.17 -- 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).
10.18 -- 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).
10.19 -- 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).
10.20 -- 10% Promissory Note to Clearwater Fund IV, Ltd.
(incorporated by reference to the Company's current Report
on Form 8-K dated September 22, 1997, Item 7(c)1).
10.21 -- Series H Convertible Preferred Stock, Form of Subscription
Agreement dated February 17, 1998 and related Registration
Agreement and Common Stock Purchase Warrants (incorporated
by reference to the Company's Registration Statement on Form
S-3 dated April 17, 1998).
10.22 -- Series I Convertible Preferred Stock, Form of Subscription
Agreement dated April 2, 1998 and related Registration
Rights Agreement and Common Stock Purchase Warrants
(incorporated by reference to the Company's Registration
Statement on Form S-3 dated April 17, 1998).
10.23 -- Cooperation and Supply Agreement between the Company,
Viragen Deutschland GmbH and German Red Cross dated March
19, 1998 (Certain portions of this exhibit have been
redacted pursuant to a Confidentiality Request submitted to
the Securities and Exchange Commission).
</TABLE>

35
<PAGE> 38

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
--------- -----------
<C> <C> <S>
10.24 -- Buffycoat Supply Agreement between America's Blood Centers
and the Company dated July 15, 1998 (Certain portions of
this exhibit have been redacted pursuant to a
Confidentiality Request submitted to the Securities and
Exchange Commission).
10.25 -- Agreement between the Company and the American Red Cross
dated August 18, 1998 (Certain portions of this exhibit have
been redacted pursuant to a Confidentiality Request
submitted to the Securities and Exchange Commission).
10.26 -- Strategic Alliance Agreement between the Company and
Inflammatics, Inc. and Inflammatics Inc. Series A
Convertible Preferred Stock Purchase Agreement (incorporated
by reference to the Company's Annual Report on Form 10-K for
the year ended June 30, 1998).
10.27 -- Common Stock Private Equity Line Subscription Agreement,
Registration Rights Agreement, Private Placement Agreement,
Placement Agent Warrant and Investor Warrant dated September
22, 1998 (incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended June 30, 1998).
10.28 -- Gerald Smith Pledge and Escrow Agreement for 200,000 shares
dated September 1, 1998 (incorporated by reference to the
Company's Annual Report on Form 10-K/A for the year ended
June 30, 1998).
10.29 -- Gerald Smith Pledge and Escrow Agreement for 50,000 shares
dated September 1, 1998 (incorporated by reference to the
Company's Annual Report on Form 10-K/A for the year ended
June 30, 1998).
10.30 -- Dennis W. Healey Pledge and Escrow Agreement for 200,000
shares dated September 1, 1998 (incorporated by reference to
the Company's Annual Report on Form 10-K/A for the year
ended June 30, 1998).
10.31 -- Dennis W. Healey Pledge and Escrow Agreement for 50,000
shares dated September 1, 1998 (incorporated by reference to
the Company's Annual Report on Form 10-K/A for the year
ended June 30, 1998).
10.32 -- Southern Health SDN. BHD Option to Purchase Master License
dated March 23, 1998.
10.33 -- Placement Agreement, Placement Agent Warrant and Investor
Warrant dated September 22, 1998 (incorporated by reference
to Viragen's Annual Report on Form 10-K for the year ended
June 30, 1998).
10.34 -- Purchase Agreement between the Registrant, the Isosceles
Fund and Cefeo Investments Limited dated March 17, 1999
(incorporated by reference to Viragen's Amendment No. 1 to
Registration Statement on Form S-3 filed on June 21, 1999,
File No. 333-75749).
10.35 -- 8% Redeemable Convertible Promissory Note to the Isosceles
Fund dated March 17, 1999 (incorporated by reference to
Viragen's Form S-3 registration statement filed April 6,
1999, File No. 333-75749).
10.36 -- 8% Redeemable Convertible Promissory Note to Cefeo
Investments Limited dated March 17, 1999 (incorporated by
reference to Viragen's Form S-3 registration statement filed
April 6, 1999, File No. 333-75749).
10.37 -- Common Stock Purchase Warrant issued to the Isosceles Fund
dated March 17, 1999 (incorporated by reference to Viragen's
Form S-3 registration statement filed April 6, 1999, File
No. 333-75749).
10.38 -- Supply and Distribution Agreement between Viragen and the
Adamjee Group of Companies dated November 16, 1998
(incorporated by reference to the Viragen (Europe) Ltd.
Annual Report on Form 10-K for the year ended June 30,
1999).
10.39 -- Employment Agreement between Viragen and Gerald Smith dated
March 1, 1999 (incorporated by reference to Viragen's Annual
Report on Form 10-K for the year ended June 30, 1999).
10.40 -- Employment Agreement between Viragen and Dennis W. Healey
dated March 1, 1999 (incorporated by reference to Viragen's
Annual Report on Form 10-K for the year ended June 30,
1999).
</TABLE>

36
<PAGE> 39

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
--------- -----------
<C> <C> <S>
10.41 -- Memorandum of Agreement between the Isosceles Fund and the
Company dated March 17, 1999 (incorporated by reference to
Viragen's Annual Report on Form 10-K for the year ended June
30, 1999).
10.42 -- Letter of Intent between the Company and Drogsan Healthcare
dated July 2, 1999 (incorporated by reference to the Viragen
(Europe) Ltd. Annual Report on Form 10-K for the year ended
June 30, 1999).
10.43 -- Common stock and Warrants Agreement. Stock Purchase Warrant
and Registration Rights Agreement dated November 24, 1999
(incorporated by reference to Viragen's Current Report on
Form 8-K dated December 9, 1999).
10.44 -- Carl N. Singer Promissory Note, Pledge and Escrow Agreement
for 50,000 shares dated October 1, 1998 (incorporated by
reference to Viragen's Form S-1/A registration statement
filed December 22, 1999, File No. 333-75749).
10.45 -- Peter Fischbein Promissory Note, Pledge and Escrow Agreement
for 200,000 shares dated October 8, 1998 (incorporated by
reference to Viragen's Form S-1/A registration statement
filed December 22, 1999, File No. 333-75749).
10.46 -- Employment Agreement, Stock Option Agreement between Viragen
and Melvin Rothberg dated July 1, 1999 (incorporated by
reference to Viragen's Form S-1/A registration statement
filed December 22, 1999, File No. 333-75749).
10.47 -- Employment Agreement, Stock Option Agreement between Viragen
(Scotland) Ltd. and Dr. D. Magnus Nicolson dated July 1,
1999 (incorporated by reference to Viragen's Form S-1/A
registration statement filed December 22, 1999, File No.
333-75749).
10.48 -- Promissory Note and Mortgage and Security Agreement dated
August 10, 1999 (incorporated by reference to Viragen's Form
S-1/A registration statement filed December 22, 1999, File
No. 333-75749).
10.49 -- Mortgage and Security Agreement dated November 3, 1999
(incorporated by reference to Viragen's Form S-1/A
registration statement filed December 22, 1999, File No.
333-75749).
(11) -- Statement re: computation of per share earnings*
(21) -- Subsidiaries of the registrant.*
(23) -- Consent of Independent Certified Public Accountants.*
(27) -- Financial Data Schedule (for SEC use only).*
</TABLE>

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

* Filed herewith

37
<PAGE> 40

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/ GERALD SMITH
------------------------------------
Gerald Smith
Chairman of the Board of Directors
and President

Dated: September 26, 2000

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.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>

/s/ GERALD SMITH Chairman of the Board of September 26, 2000
--------------------------------------------------- Directors, President and
Gerald Smith Principal Executive Officer

/s/ ROBERT H. ZEIGER Vice Chairman of the Board September 26, 2000
---------------------------------------------------
Robert H. Zeiger

/s/ CARL N. SINGER Director and Chairman of the September 26, 2000
--------------------------------------------------- Executive Committee
Carl N. Singer

/s/ DENNIS W. HEALEY Executive Vice President, September 26, 2000
--------------------------------------------------- Treasurer, Principal
Dennis W. Healey Financial Officer, Director
and Secretary

/s/ CHARLES J. SIMONS Director September 26, 2000
---------------------------------------------------
Charles J. Simons

/s/ PETER D. FISCHBEIN Director September 26, 2000
---------------------------------------------------
Peter D. Fischbein

/s/ SIDNEY DWORKIN Director September 26, 2000
---------------------------------------------------
Sidney Dworkin

/s/ ROBERT C. SALISBURY Director September 26, 2000
---------------------------------------------------
Robert C. Salisbury

/s/ JOSE I. ORTEGA Controller and Principal September 26, 2000
--------------------------------------------------- Accounting Officer
Jose I. Ortega
</TABLE>

38
<PAGE> 41

VIRAGEN, INC. AND SUBSIDIARIES

FORM 10-K -- ITEM 8

VIRAGEN, INC. AND SUBSIDIARIES

LIST OF CONSOLIDATED FINANCIAL STATEMENTS

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

<TABLE>
<S> <C>
Report of Independent Certified Public Accountants.......... F-2

Consolidated balance sheets -- June 30, 2000 and 1999....... F-3

Consolidated statements of operations -- Year ended June 30,
2000, 1999 and 1998....................................... F-4

Consolidated statements of stockholders' equity -- Years
ended June 30, 2000, 1999 and 1998........................ F-5

Consolidated statements of cash flows -- Years ended June
30, 2000, 1999 and 1998................................... F-8

Notes to consolidated financial statements.................. F-10
</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.

F-1
<PAGE> 42

VIRAGEN, INC. AND SUBSIDIARIES

REPORT OF INDEPENDENT CERTIFIED 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, 2000 and 1999, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended June 30, 2000. 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 auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the 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, 2000 and 1999, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended June 30, 2000, in conformity with accounting principles
generally accepted in the United States.

(ERNST & YOUNG SIGNATURE)

Miami, Florida
September 8, 2000

F-2
<PAGE> 43

VIRAGEN, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
JUNE 30,
---------------------------
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents................................. $ 8,094,448 $ 1,055,587
Prepaid expenses.......................................... 418,238 254,057
Other current assets...................................... 294,776 306,433
------------ ------------
Total current assets.............................. 8,807,462 1,616,077
Property, Plant and Equipment
Land, building and improvements........................... 3,557,486 3,492,585
Equipment and furniture................................... 5,976,641 5,556,106
Construction in progress.................................. 59,026 309,431
------------ ------------
9,593,153 9,358,122
Less accumulated depreciation............................. (4,073,394) (3,337,807)
------------ ------------
5,519,759 6,020,315
Investment in unconsolidated company........................ 18,767 671,744
Deposits and other assets................................... 103,938 221,218
------------ ------------
$ 14,449,926 $ 8,529,354
============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable.......................................... $ 1,061,457 $ 1,132,323
Convertible promissory notes.............................. -- 1,929,877
Accrued expenses and other liabilities.................... 616,400 702,209
Current portion of long-term debt......................... 123,400 142,109
------------ ------------
Total current liabilities......................... 1,801,257 3,906,518
Royalties payable........................................... 107,866 107,866
Long-term debt, less current portion........................ 600,106 231,107
Minority interest........................................... 66,772 326,684
Convertible Series I cumulative preferred stock, $1.00 par
value. Authorized 200 shares; issued and outstanding 11
shares at June 30, 1999................................... -- 120,920
Put warrants, 100,000 common shares exercisable at $2.75 per
share through June 20, 2001............................... 58,000 --
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
Common stock, $.01 par value. Authorized 125,000,000 and
75,000,000 shares at June 30, 2000 and 1999,
respectively; issued 91,397,402 and 69,913,762 shares
at June 30, 2000 and 1999, respectively, of which
845,277 shares are held as treasury stock at June 30,
2000 and 1999.......................................... 913,972 699,135
Capital in excess of par value............................ 75,408,262 55,353,205
Treasury stock, at cost................................... (1,277,613) (1,277,613)
Accumulated deficit....................................... (62,837,272) (50,521,028)
Accumulated other comprehensive (loss) income............. (231,213) 46,752
Notes due from directors.................................. (162,861) (466,842)
------------ ------------
Total stockholders' equity........................ 11,815,925 3,836,259
------------ ------------
$ 14,449,926 $ 8,529,354
============ ============
</TABLE>

See notes to consolidated financial statements which are an integral part of
these statements.

F-3
<PAGE> 44

VIRAGEN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------------
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Income
Interest and other income................................. $ 170,512 $ 374,064 $ 1,143,112
------------ ------------ ------------
170,512 374,064 1,143,112
Costs and Expenses
Research and development costs............................ 4,836,753 5,152,748 4,222,332
General and administrative expenses....................... 6,066,784 5,528,410 5,580,213
Equity in losses of unconsolidated company................ 652,978 757,256 --
Interest expense.......................................... 1,717,316 574,375 590,867
------------ ------------ ------------
13,273,831 12,012,789 10,393,412
------------ ------------ ------------
Loss before minority interest............................... (13,103,319) (11,638,725) (9,250,300)
Minority interest in loss of consolidated subsidiaries...... 792,424 987,893 1,394,164
------------ ------------ ------------
NET LOSS........................................... (12,310,895) (10,650,832) (7,856,136)
Deduct required dividends on convertible preferred stock,
series A.................................................. 2,650 2,650 2,823
Deduct required dividends on convertible preferred stock,
series D.................................................. -- -- 169,221
Deduct required dividends on convertible preferred stock,
series E.................................................. -- -- 127,918
Deduct required dividends on convertible preferred stock,
series F.................................................. -- -- 524,416
Deduct required dividends on convertible preferred stock,
series G.................................................. -- -- 708,139
Deduct required dividends on convertible preferred stock,
series H.................................................. -- 676,498 733,681
Deduct required dividends on convertible preferred stock,
series I.................................................. 2,699 322,774 232,154
------------ ------------ ------------
LOSS ATTRIBUTABLE TO COMMON STOCK........................... $(12,316,244) $(11,652,754) $(10,354,488)
============ ============ ============
BASIC AND DILUTED LOSS PER COMMON SHARE, after deduction for
required dividends on convertible preferred stock......... $ (0.16) $ (0.19) $ (0.21)
============ ============ ============
BASIC AND DILUTED WEIGHTED AVERAGE COMMON SHARES............ 78,452,813 60,109,133 50,502,503
============ ============ ============
</TABLE>

See notes to consolidated financial statements which are an integral part of
these statements.

F-4
<PAGE> 45

VIRAGEN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>

CAPITAL IN
PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED EXCESS
STOCK, STOCK, STOCK, STOCK, STOCK, STOCK, COMMON OF PAR
SERIES A SERIES B SERIES C SERIES D SERIES E SERIES F STOCK VALUE
--------- --------- --------- --------- --------- --------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at July 1, 1997......... $2,650 $ 7,445 $ 974 $10,200 $ 5,000 $ -- $462,601 $59,995,768
Exercise of compensatory common
stock options and warrants..... 2,305 115,583
Compensation expense on stock
options and warrants........... 57,530
Cost of issuance of series H
preferred stock, net........... (374,520)
Cost of issuance of series I
preferred stock, net........... (159,689)
Exchange of series B preferred
stock for a promissory note.... (7,445) (7,437,555)
Purchase of treasury stock......
Conversion of series C preferred
stock.......................... (974) 2,814 (554,881)
Conversion of series D preferred
stock.......................... (2,250) 13,903 (11,653)
Conversion of series E preferred
stock.......................... (1,000) 5,060 (4,060)
Exchange of series D preferred
stock for series F preferred
stock.......................... (7,950) 7,950
Exchange of series E preferred
stock for series G preferred
stock.......................... (4,000) (3,996,000)
Conversion of series F preferred
stock.......................... (5,500) 43,377 (37,877)
Exercise of cash-out option on
conversion of series F
preferred stock................ (2,450) (2,447,550)
Conversion of series G preferred
stock.......................... 3,511 454,489
Cash dividends on preferred
stock..........................
Dividends on preferred stock,
paid in common stock........... 597 86,558
Accretion of series H and series
I preferred stock..............
Redemption of series G preferred
stock..........................
Interest income on director's
note...........................
Bad debt expense on director's
note...........................
Foreign currency translation
adjustment.....................
Unrealized gain on marketable
securities, available for
sale...........................
Net loss........................
------ ------- ----- ------- ------- ------- -------- -----------
Balance at June 30, 1998........ $2,650 $ -- $ -- $ -- $ -- $ -- $534,168 $45,686,143
====== ======= ===== ======= ======= ======= ======== ===========

<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE NOTES
TREASURY ACCUMULATED (LOSS) DUE FROM
STOCK DEFICIT INCOME DIRECTORS
--------- ------------ ------------- ---------
<S> <C> <C> <C> <C>
Balance at July 1, 1997......... $(699,150) $(27,802,624) $262,857 $(101,417)
Exercise of compensatory common
stock options and warrants.....
Compensation expense on stock
options and warrants...........
Cost of issuance of series H
preferred stock, net...........
Cost of issuance of series I
preferred stock, net...........
Exchange of series B preferred
stock for a promissory note.... (2,247,748)
Purchase of treasury stock...... (297,391)
Conversion of series C preferred
stock..........................
Conversion of series D preferred
stock..........................
Conversion of series E preferred
stock..........................
Exchange of series D preferred
stock for series F preferred
stock..........................
Exchange of series E preferred
stock for series G preferred
stock..........................
Conversion of series F preferred
stock..........................
Exercise of cash-out option on
conversion of series F
preferred stock................ (294,000)
Conversion of series G preferred
stock..........................
Cash dividends on preferred
stock.......................... (521,725)
Dividends on preferred stock,
paid in common stock........... (91,732)
Accretion of series H and series
I preferred stock.............. (185,865)
Redemption of series G preferred
stock.......................... (625,059)
Interest income on director's
note........................... (8,500)
Bad debt expense on director's
note........................... 109,917
Foreign currency translation
adjustment..................... 13,612
Unrealized gain on marketable
securities, available for
sale........................... 8,521
Net loss........................ (7,856,136)
--------- ------------ -------- ---------
Balance at June 30, 1998........ $(996,541) $(39,624,889) $284,990 $ --
========= ============ ======== =========
</TABLE>

See notes to consolidated financial statements which are an integral part of
these statements.

F-5
<PAGE> 46

VIRAGEN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY -- (CONTINUED)
<TABLE>
<CAPTION>

PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED CAPITAL
STOCK, STOCK, STOCK, STOCK, STOCK, STOCK, COMMON IN EXCESS OF
SERIES A SERIES B SERIES C SERIES D SERIES E SERIES F STOCK PAR VALUE
--------- --------- --------- --------- --------- --------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1998........ $2,650 $-- $-- $-- $-- $-- $534,168 $45,686,143
Consulting fees paid with common
stock......................... 250 12,250
Compensation expense on stock
options and warrants.......... 369,647
Exercise of compensatory common
stock options and warrants.... 500 49,500
Exercise of compensatory common
stock options with promissory
notes......................... 11,600 592,900
Exercise of debt and equity
offering warrants............. 2,785 200,704
Sale of detachable warrants on
convertible promissory
notes......................... 344,854
Cost of warrants issued to
finders on convertible
promissory notes.............. 24,078
Private placement of common
stock......................... 27,500 1,347,500
Purchase of treasury stock......
Accrued interest income on
directors' notes..............
Capitalized cost of warrants
issued for investment in
unconsolidated company........ 329,000
Capital contribution to Viragen
(Europe) Ltd.................. (788,641)
Conversion of series H preferred
stock......................... 82,556 4,917,444
Conversion of series I preferred
stock......................... 32,718 1,857,282
Dividend on series A preferred
stock.........................
Accretion of series H and series
I preferred stock.............
Accretion paid in common
stock......................... 7,058 410,544
Foreign currency translation
adjustment....................
Unrealized gain on marketable
securities, available for
sale..........................
Net loss........................
------ -- -- -- -- -- -------- -----------
Balance at June 30, 1999........ $2,650 $-- $-- $-- $-- $-- $699,135 $55,353,205
====== == == == == == ======== ===========

<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE NOTES DUE
TREASURY ACCUMULATED (LOSS) FROM
STOCK DEFICIT INCOME DIRECTORS
----------- ------------ ------------- ---------
<S> <C> <C> <C> <C>
Balance at June 30, 1998........ $ (996,541) $(39,624,889) $ 284,990 $ --
Consulting fees paid with common
stock.........................
Compensation expense on stock
options and warrants..........
Exercise of compensatory common
stock options and warrants....
Exercise of compensatory common
stock options with promissory
notes......................... (459,500)
Exercise of debt and equity
offering warrants.............
Sale of detachable warrants on
convertible promissory
notes.........................
Cost of warrants issued to
finders on convertible
promissory notes..............
Private placement of common
stock.........................
Purchase of treasury stock...... (281,072)
Accrued interest income on
directors' notes.............. (7,342)
Capitalized cost of warrants
issued for investment in
unconsolidated company........
Capital contribution to Viragen
(Europe) Ltd..................
Conversion of series H preferred
stock.........................
Conversion of series I preferred
stock.........................
Dividend on series A preferred
stock......................... (2,650)
Accretion of series H and series
I preferred stock............. (242,657)
Accretion paid in common
stock.........................
Foreign currency translation
adjustment.................... (240,329)
Unrealized gain on marketable
securities, available for
sale.......................... 2,091
Net loss........................ (10,650,832)
----------- ------------ --------- ---------
Balance at June 30, 1999........ $(1,277,613) $(50,521,028) $ 46,752 $(466,842)
=========== ============ ========= =========
</TABLE>

See notes to consolidated financial statements which are an integral part of
these statements.

F-6
<PAGE> 47

VIRAGEN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY -- (CONTINUED)
<TABLE>
<CAPTION>

PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED CAPITAL IN
STOCK, STOCK, STOCK, STOCK, STOCK, STOCK, COMMON EXCESS OF PAR
SERIES A SERIES B SERIES C SERIES D SERIES E SERIES F STOCK VALUE
--------- --------- --------- --------- --------- --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1999...... $2,650 $-- $-- $-- $-- $-- $699,135 $55,353,205
Consulting fees paid with
common stock................ 1,070 85,930
Conversion of convertible
promissory notes into common
stock....................... 61,529 4,054,832
Reset shares issued on 8%
convertible promissory
notes....................... 10,981 686,265
Beneficial conversion rate on
convertible promissory
notes....................... 440,000
Exercise of compensatory
common stock options and
warrants.................... 15,674 1,310,421
Exercise of compensatory
common stock options with
promissory notes............ 5,250 269,750
Exercise of debt and equity
offering warrants........... 15,286 816,403
Compensation expense on stock
options and warrants........ 2,149,654
Sale of detachable warrants on
convertible promissory notes
and short-term borrowings... 166,250
Private placement of common
stock, net.................. 102,281 10,485,867
Collections on promissory
notes issued for common
stock exercises.............
Dividend on series A preferred
stock.......................
Capital contribution to
Viragen (Europe) Ltd........ (532,512)
Exercise of subsidiaries'
common stock options........ 1,344
Conversion of series I
preferred stock............. 2,461 107,539
Accretion of series I
preferred stock.............
Accretion paid in common
stock....................... 305 13,314
Accrued interest income on
directors' notes............
Foreign currency translation
adjustment..................
Net loss......................
------ -- -- -- -- -- -------- -----------
Balance at June 30, 2000...... $2,650 $-- $-- $-- $-- $-- $913,972 $75,408,262
====== == == == == == ======== ===========

<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE NOTES DUE
TREASURY ACCUMULATED (LOSS) FROM
STOCK DEFICIT INCOME DIRECTORS
----------- ------------ ------------- ---------
<S> <C> <C> <C> <C>
Balance at June 30, 1999...... $(1,277,613) $(50,521,028) $ 46,752 $(466,842)
Consulting fees paid with
common stock................
Conversion of convertible
promissory notes into common
stock.......................
Reset shares issued on 8%
convertible promissory
notes.......................
Beneficial conversion rate on
convertible promissory
notes.......................
Exercise of compensatory
common stock options and
warrants....................
Exercise of compensatory
common stock options with
promissory notes............ (275,000)
Exercise of debt and equity
offering warrants...........
Compensation expense on stock
options and warrants........
Sale of detachable warrants on
convertible promissory notes
and short-term borrowings...
Private placement of common
stock, net..................
Collections on promissory
notes issued for common
stock exercises............. 571,500
Dividend on series A preferred
stock....................... (2,650)
Capital contribution to
Viragen (Europe) Ltd........
Exercise of subsidiaries'
common stock options........
Conversion of series I
preferred stock.............
Accretion of series I
preferred stock............. (2,699)
Accretion paid in common
stock.......................
Accrued interest income on
directors' notes............ 7,481
Foreign currency translation
adjustment.................. (277,965)
Net loss...................... (12,310,895)
----------- ------------ --------- ---------
Balance at June 30, 2000...... $(1,277,613) $(62,837,272) $(231,213) $(162,861)
=========== ============ ========= =========
</TABLE>

See notes to consolidated financial statements which are an integral part of
these statements.

F-7
<PAGE> 48

VIRAGEN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------------
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Net loss.................................................... $(12,310,895) $(10,650,832) $ (7,856,136)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 682,009 635,692 506,934
Impairment loss recognized on long-lived assets........... 101,859 -- --
Amortization of discounts on convertible promissory notes
and short-term borrowings............................... 236,373 274,731 --
Interest expense on reset shares.......................... 697,246 -- --
Interest expense on beneficial conversion rate of
convertible promissory notes............................ 440,000 -- --
Consulting fees paid with common stock.................... 47,000 12,500 --
Compensation expense on stock options and warrants........ 2,149,654 369,647 57,530
Minority interest in loss of subsidiary................... (792,424) (987,893) (1,394,164)
Recovery of bad debts..................................... (24,630) -- --
Bad debt expense.......................................... -- 24,630 109,917
Increase (decrease) relating to operating activities from:
Prepaid expenses.......................................... (72,759) (37,566) 73,097
Other current assets...................................... (43,713) 344,887 198,022
Investment in unconsolidated company...................... 652,977 757,256 --
Deposits and other assets................................. 223,801 215,977 19,705
Accounts payable.......................................... (70,866) 302,662 (601,550)
Accrued expenses and other liabilities.................... 88,807 (9,783) 133,663
Deferred income........................................... -- (200,000) 200,000
Notes due from directors.................................. 7,481 (7,342) (8,500)
------------ ------------ ------------
Net cash used in operating activities.............. (7,988,080) (8,955,434) (8,561,482)
INVESTING ACTIVITIES
Additions to property, plant and equipment, net........... (237,712) (497,117) (1,622,817)
Investment in unconsolidated company...................... -- (1,100,000) --
Sale of marketable securities, available-for-sale......... -- 6,108,504 27,347,892
Purchase of marketable securities, available-for-sale..... -- -- (14,897,903)
------------ ------------ ------------
Net cash (used in) provided by investing
activities....................................... (237,712) 4,511,387 10,827,172
FINANCING ACTIVITIES
Proceeds from sale of convertible promissory notes, net... 1,772,985 1,516,966 --
Proceeds from sale of detachable warrants with convertible
promissory notes and short-term borrowings.............. 166,250 344,854 --
Proceeds from short-term borrowings, net.................. 887,740 -- --
Payments on short-term borrowings......................... (400,000) -- (9,720,241)
Payments on long-term debt................................ (285,937) (168,977) (43,374)
Proceeds from private placements, net..................... 10,588,148 1,375,000 --
Proceeds from sale of preferred stock series H and I,
net..................................................... -- -- 6,465,791
Proceeds from exercise of compensatory common stock
options and warrants.................................... 1,326,095 50,000 117,888
Collections on promissory notes issued for compensatory
common stock option exercises........................... 651,500 -- --
Proceeds from exercise of debt and equity offering
warrants................................................ 831,689 203,489 --
Preferred dividends paid to preferred stock series A, B,
D, E, F and G........................................... -- -- (664,702)
Refund of capital investment to preferred stock series C
investors............................................... -- -- (1,391,198)
Exercise of cash-out option on conversion of preferred
stock series F.......................................... -- -- (2,744,000)
Redemption of redeemable preferred stock series G......... -- -- (4,167,059)
Purchase of treasury stock................................ -- (281,072) (297,391)
Proceeds from exercise of subsidiaries' common stock
options................................................. 1,344 -- --
------------ ------------ ------------
Net cash provided by (used in) financing activities... 15,539,814 3,040,260 (12,444,286)
Effect of exchange rate fluctuations on cash.......... (275,161) (248,943) 13,612
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents.......... 7,038,861 (1,652,730) (10,164,984)
Cash and cash equivalents at beginning of period.......... 1,055,587 2,708,317 12,873,301
------------ ------------ ------------
Cash and cash equivalents at end of period................ $ 8,094,448 $ 1,055,587 $ 2,708,317
============ ============ ============
</TABLE>

See notes to consolidated financial statements which are an integral part of
these statements.
F-8
<PAGE> 49

VIRAGEN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)

SUPPLEMENTAL CASH FLOW INFORMATION:

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Interest paid.............................................. $ 94,446 $ 299,644 $ 580,271
Income taxes paid.......................................... -- -- --
</TABLE>

During the years ended June 30, 2000, 1999 and 1998, Viragen had the
following non-cash investing and financing activities:

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Refinancing of short-term borrowings to long-term debt..... $ 600,000 $ -- $ --
Accrued consulting fees paid with common stock............. 40,000 -- --
Conversion of convertible notes and accrued interest into
common stock............................................. 4,116,361 -- --
Issuance of put warrants for consulting fees............... 58,000 -- --
Conversion of preferred stock into common stock............ 110,000 6,890,000 467,724
Accretion paid in common stock............................. 13,619 417,602 --
Preferred dividends paid in common stock................... -- -- 91,732
Exercise of common stock options with promissory notes..... 275,000 604,500 --
Contribution of intercompany balances as capital to Viragen
(Europe) Ltd............................................. (532,512) (788,641) --
Purchase of insurance with notes payable................... 33,422 94,627 210,147
Equipment acquired through capital leases.................. -- 4,809 --
Capitalized cost of warrants issued for investment in
unconsolidated company................................... -- 329,000 --
Cost of warrants issued to finders on convertible notes.... -- 24,078 --
Conversion of preferred stock series B principal and
accrued dividends to a short-term note payable........... -- -- 9,720,241
Modification of preferred stock series D terms into
preferred stock series F................................. -- -- 7,950
Modification of preferred stock series E terms into
redeemable preferred stock series G...................... -- -- 4,000,000
</TABLE>

See notes to consolidated financial statements which are an integral part of
these statements.

F-9
<PAGE> 50

VIRAGEN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999

NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Consolidation and Basis of Presentation: Viragen, Inc. and its
subsidiaries are engaged in the research, development and manufacture of
immunological products for commercial application. The consolidated financial
statements include the parent company and all subsidiaries, including those
operating outside the United States of America. All significant transactions
between our businesses have been eliminated. We made certain reclassifications
to the 1999 and 1998 financial statements to conform to the 2000 presentation.

Viragen owns a 10% equity interest in Inflammatics, Inc., a
biopharmaceutical company currently in the research and development stage. While
we have the option to increase our ownership interest up to 80%, the financial
accounts of Inflammatics are not consolidated with those of Viragen. We account
for our investment under the equity method of accounting. The parties that own
the remaining 90% equity in Inflammatics are not currently funding its research
and development efforts. Accordingly, while Viragen only owns 10% of
Inflammatics, it is recognizing 100% of the losses incurred by the
unconsolidated company. Costs related to this transaction include finders fees
and warrants issued. These costs are being amortized in proportion to the losses
incurred by Inflammatics as compared to our initial cash contribution to
Inflammatics.

In preparing the financial statements, management must use some estimates
and assumptions that may affect reported amounts and disclosures. Estimates are
used when accounting for depreciation, amortization, and asset valuation
allowances. We are also subject to risks and uncertainties that may cause actual
results to differ from estimated results including changes in the health care
environment, competition, foreign exchange and legislation.

Cash and Cash Equivalents: Cash equivalents include demand deposits,
certificates of deposit and time deposits with maturity periods of three months
or less when purchased.

Marketable Securities, Available-for-Sale: Viragen invests in debt
securities, rated A or better, issued by the U.S. Treasury, other U.S.
government agencies and corporations. These investments are classified as
current assets, in accordance with ARB No. 43, at their fair market value based
upon published quotations. Realized gains and losses are computed based on the
cost of securities sold using the specific identification method.

Financial Instruments: The carrying amount of financial instruments
including cash and cash equivalents, accounts payable, and accrued expenses and
other liabilities approximate fair value as of June 30, 2000, due to their
short-term nature. The carrying value of long-term debt approximates fair value
as of June 30, 2000, based on the current interest rates and repayment terms.
The fair value of the put warrants is based on valuation models using current
market rates.

Other Current Assets: Other current assets consisted of the following at
June 30, 2000 and 1999:

<TABLE>
<CAPTION>
JUNE 30,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Notes receivable............................................ $115,885 $171,123
VAT tax refund receivable................................... 143,104 119,352
Other current assets........................................ 35,787 15,958
-------- --------
$294,776 $306,433
======== ========
</TABLE>

F-10
<PAGE> 51
VIRAGEN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 by using accelerated methods for income tax purposes. The estimated
useful lives used for financial reporting purposes are:

<TABLE>
<S> <C>
Building and improvements................................... 15 - 39 years
Equipment and furniture..................................... 5 - 10 years
</TABLE>

Debt Issued with Stock Purchase Warrants: Viragen accounts for debt issued
with stock purchase warrants in accordance with APB 14 -- "Accounting for
Convertible Debt and Debt Issued with Stock Purchase Warrants." At June 30,
1999, the $2,000,000 principal in convertible promissory notes is being offset
by $70,123 in unamortized discount from the issuance of detachable warrants.

Accrued Expenses and Other Liabilities: Accrued expenses and other
liabilities consisted of the following at June 30, 2000 and 1999:

<TABLE>
<CAPTION>
JUNE 30,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Accrued salaries............................................ $ 46,114 $ 24,317
Accrued rent expense........................................ 129,249 122,213
Accrued accounting fees..................................... 156,867 114,940
Accrued legal fees.......................................... 3,798 36,077
Other accrued expenses...................................... 280,372 404,662
-------- --------
$616,400 $702,209
======== ========
</TABLE>

Sale of Stock by Subsidiaries: Viragen accounts for sales of stock by its
subsidiaries as capital transactions for financial reporting purposes.

Foreign Currency Translation: For foreign operations, local currencies are
considered their functional currencies. Viragen translates assets and
liabilities to their U.S. dollar equivalents at rates in effect at the balance
sheet date and records translation adjustments in stockholders' equity.
Statement of operations accounts are translated at average rates for the period.
Transaction adjustments, which are not material, are recorded in results of
operations.

Research and Development Costs: Viragen accounts for research and
development costs in accordance with SFAS No. 2 -- "Accounting for Research and
Development Costs." Accordingly, all research and development costs are expensed
as incurred.

Stock Based Compensation: Viragen accounts for stock-based compensation
plans under the provisions of APB No. 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. We have provided supplemental disclosures as required by the provisions
of SFAS No. 123 -- "Accounting for Stock-Based Compensation."

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.

Loss Per Common Share: Loss per common share has been computed based on
the weighted average number of shares outstanding during each period, in
accordance with SFAS No. 128 -- "Earnings per Common Share." The effect of
convertible debt and equity securities, warrants, and options are antidilutive.
As a result, diluted loss per share data does not include the assumed conversion
of these instruments and has been presented jointly with basic loss per share.
Loss attributable to common stock reflects adjustments for

F-11
<PAGE> 52
VIRAGEN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

cumulative preferred dividends, as well as embedded dividends arising from
discounted conversion terms on convertible preferred stocks and related
warrants.

Embedded dividends included in loss attributable to common stock during
each fiscal year presented are:

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------
PREFERRED STOCK 2000 1999 1998
--------------- ---- -------- --------
<S> <C> <C> <C>
Series A................................................... $-- $ -- $ --
Series D................................................... -- -- --
Series E................................................... -- -- --
Series F................................................... -- -- --
Series G................................................... -- -- --
Series H................................................... -- 510,731 586,830
Series I................................................... -- 245,884 193,140
</TABLE>

Comprehensive Loss: SFAS No. 130 -- "Reporting Comprehensive Income"
establishes standards for reporting and display of comprehensive income and its
components in financial statements. Viragen's comprehensive loss for fiscal
years 2000, 1999, and 1998 totaled $12,588,860, $10,889,070 and $7,834,003,
respectively.

Recent Pronouncements: In June 1998, the Financial Accounting Standards
Board issued SFAS No. 133 -- "Accounting for Derivative Instruments and Hedging
Activities." This statement establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. This statement amends SFAS No. 52 -- "Foreign
Currency Translation," and supersedes SFAS No. 80 -- "Accounting for Future
Contracts," SFAS No. 105 -- "Disclosure of Information about Financial
Instruments with Off-Balance-Sheet Risk and Financial Instruments with
Concentration of Credit Risk," SFAS No. 107 -- "Disclosures about Fair Value of
Financial Instruments," and SFAS No. 119 "Disclosure about Derivative Financial
Instruments." The Financial Accounting Standards Board delayed the effective
date of this pronouncement until fiscal years beginning after June 15, 2000.
Viragen plans to adopt SFAS No. 133 in fiscal 2001.

Management believes that the impact of SFAS No. 133 will not be significant
to Viragen.

NOTE B. REDEEMABLE PREFERRED STOCK

Series G

In September 1997, Viragen concluded an exchange agreement. As a result,
4,000 of the outstanding shares of the series E preferred stock were exchanged
for a like number of series G preferred shares. The terms of the series G
preferred stock provided that commencing in September 1997, the holder was
limited to converting 667 preferred shares, or $667,000 in principal, per month
over a 6 month period. The provisions further provided that we were required to
redeem $667,000 per month less the number of series G preferred shares converted
during the preceding calendar month. In addition, the holder was restricted from
converting into common stock if the market price of our common stock was less
than $2.50, subject to adjustment, at the date of the conversion notice. In
consideration for the restrictions on conversion, management 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 of the series G preferred stock was
calculated by dividing the number of shares to be redeemed by the preferential
conversion rate of 85%. As a result, the maximum aggregate redemption could have
totaled $4,705,882, if all 4,000 shares of series G preferred stock were
redeemed by the holder. This cash redemption amount would have been reduced to
account for conversions of the preferred

F-12
<PAGE> 53
VIRAGEN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

shares during the redemption period. All shares of series G preferred stock were
redeemed for cash or converted into common stock by February 28, 1998.

Series H and Series I

During the third and fourth fiscal quarters of 1998, Viragen closed $7
million in financing replacing a portion of the funds used to redeem previous
preferred stock issuances. In February 1998, we received net proceeds of
approximately $4,625,000 from the sale of 500 shares of series H convertible
preferred stock with an aggregate stated value of $5 million. In April 1998,
Viragen received net proceeds of approximately $1,840,000 from the sale of 200
shares of series I convertible preferred stock. We incorporated certain
restrictions as part of the series H and series I preferred stock designations
which, in the opinion of management, would facilitate a more orderly market
relative to the underlying shares of our common stock. The series H and series I
preferred stock did not bear dividends although, upon liquidation or conversion,
an 8% accretion factor was included in the calculation for purposes of
determining the liquidation and conversion amount.

Neither the series H preferred stock nor the series I preferred stock
issuances were convertible until August 19, 1998, the six month anniversary of
the Series H closing. The conversion price was the lower of (1) $1.59 per share,
and (2) the variable conversion price which was equal to 82% of the market price
at the date of conversion. Management retained the right to redeem both
issuances of preferred stock at various prices upon receipt of a notice of
conversion.

In addition, the right of conversion was further limited to a maximum of
15% of the aggregate principal amount of the series H and series I preferred
stock issued to each holder for each one month period cumulatively to a maximum
of not in excess of 25% for any month in the event the holder has converted less
than 15% in any of the preceding months.

Pursuant to the terms of the subscription agreements, the holders of the
series H and series I preferred stock also received Nine Month warrants, Twelve
Month warrants and Fifteen Month warrants to purchase shares of common stock of
Viragen. The number of warrants and exercise price were to be determined at
future dates during fiscal 1999.

During fiscal 1999, Viragen allocated the warrants reserved for the series
H and I investors, as follows:

<TABLE>
<CAPTION>
H INVESTORS I INVESTORS TOTAL
----------- ----------- ---------
<S> <C> <C> <C>
Investor warrants reserved at June 30, 1998............ 1,948,052 779,221 2,727,273
Less warrants allocated to investors during fiscal
1999:
Nine Month warrants (exercise price = $0.80/share)... 352,627 166,273 518,900
Twelve Month warrants (exercise price =
$0.59/share)...................................... 193,221 114,406 307,627
Fifteen Month warrants (exercise price =
$0.39/share)...................................... -- 56,410 56,410
--------- ------- ---------
Investor warrants cancelled during fiscal 1999......... 1,402,204 442,132 1,844,336
========= ======= =========
</TABLE>

The Nine Month, Twelve Month, and Fifteen Month warrants are exercisable
through February 17, 2003. During fiscal 1999, the series H and I investors
exercised 189,490 of the Nine Month warrants. They also exercised 88,983 of the
Twelve Month warrants during fiscal 1999.

During fiscal 2000, the series H and I investors exercised 216,469 of the
Nine Month warrants. They also exercised 147,457 of the Twelve Month warrants
during fiscal 2000. All of the Fifteen Month warrants were exercised during
fiscal 2000. At June 30, 2000, there are 112,941 and 71,187 of the Nine Month
and Twelve Month warrants outstanding, respectively.

The series H and series I placement agent received a commission of $490,000
for the placement of the series H preferred stock and H warrants and series I
preferred stock and I warrants. In addition, the placement

F-13
<PAGE> 54
VIRAGEN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

agent received placement agent warrants to purchase an aggregate of 402,052
shares of common stock, which were subsequently transferred to affiliates and
employees of the placement agent. The placement agent warrants entitle the
holders to exercise those warrants at an exercise price of $1.684 per share at
any time between the date of their respective issuances and February 19, 2003;
provided that if the date of exercise occurs after February 19, 1999, the
exercise price of the placement agent warrants will be the lesser of $1.684 per
share or the lowest reset price as calculated on each one year anniversary of
the date of issuance during the warrant term. During fiscal 2000, these
individuals exercised warrants for 109,064 shares of common stock. The H and I
placement agents have 292,988 warrants remaining at June 30, 2000.

NOTE C. CAPITAL STOCK

PREFERRED STOCK

Series A

The series A preferred stock provides for a 10% cumulative dividend,
payable at the option of Viragen, in either cash or common stock and 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. Management 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, at
$11.00 per share for a period of five years from that date, and then at $10.00
per share.

Series B

On June 7, 1996, Viragen entered into a securities purchase agreement with
GFL Performance Ltd., GFL Advantage Fund Ltd. and Proton Global Asset
Management, LDC pursuant to which they acquired 15,000 shares of 5% cumulative
convertible preferred stock, series B for $15 million.

In connection with the sale and issuance of the series B preferred stock,
we issued warrants to purchase 225,000 shares of common stock at $10.59 per
share for a period of 3 years from date of issuance. Viragen also paid
approximately $900,000 in cash fees to certain finders and an investor
representative who participated in the transaction plus certain additional
expenses. These costs were netted against the proceeds of the sale. All of the
warrants expired on June 6, 1999.

The series B preferred stock provided for a cash dividend equal to 5% of
the stated value of the series B preferred stock, although management had the
option to utilize shares of common stock, under certain conditions, to satisfy
the dividend requirement. The investors had the right to convert the series B
preferred stock into shares of common stock at a conversion price equal to the
lesser of 76.8% of the average market price of Viragen's common stock, as
described in the securities purchase agreement, prior to the conversion date, or
$8.74. In July 1997, the unconverted series B preferred stock was exchanged for
a promissory note in the amount of $9,720,241. The note provided for interest at
10% per annum with principal and interest payable over nine monthly installments
commencing in October 1997.

The note could be prepaid without penalty and was not convertible into
common stock. The principal value of the note was comprised of the following
components:

<TABLE>
<S> <C>
Principal balance........................................... $7,445,000
Beneficial conversion feature (($7.445 million/76.81%) minus
$7.445 million)........................................... 2,247,748
Preferred dividends earned (6/8/97 - 7/1/97)................ 27,493
----------
$9,720,241
==========
</TABLE>

The note was paid-in-full in April 1998.

F-14
<PAGE> 55
VIRAGEN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Series C

In December 1996, Viragen issued 5,000 shares of its series C convertible
preferred stock in consideration for $4,740,923, net of issuance costs totaling
$259,077. The purchases were made by Strome Hedgecap Limited, Strome Offshore
Limited, Strome Partners, L.P. and Strome Susskind Hedgecap, L.P., 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 purchasers of the series C
preferred stock. All of the warrants expired during fiscal 2000.

The terms of the series C preferred stock provided that up to 25% of the
series C preferred stock could be converted into common stock on or after 10
days from the date the registration statement registering the underlying shares
was deemed effective by the Securities and Exchange Commission. Thereafter 25%
could be converted on or after the 30th, 60th and 90th day on a cumulative
basis. The preferred stock was convertible into a number of common shares
determined by dividing the stated value of the series C preferred stock, or
$1,000 per share, by the closing price of Viragen's common stock over the five
day period preceding notice of conversion. The conversion price could not be
less than $3.46 nor more than $7.00. In the event the conversion price fell
below $3.46, the difference between $3.46 and the conversion price would be paid
to the holder in cash. Any shares of series C preferred stock which were
outstanding on December 5, 1997 would be automatically converted into shares of
common stock based on the conversion price at that time 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 over
a two month period. The modified conversion price was the lower of (1) $2.20 per
share or (2) the average closing price of Viragen'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, we were 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 would increase if conversions occurred below $2.20. All shares
of series C preferred stock were converted into common stock by December 31,
1997. During fiscal 1998, we paid $1,391,198 in capital refunds to the series C
purchasers. Of the total refunds, $553,041 were related to conversions,
occurring under the modified terms, during fiscal 1998. The balance of $838,157
related to conversions, under the original terms, during fiscal 1997.

Series D and Series F

In February 1997, Viragen issued 15,000 shares of its 6% series D
convertible preferred stock to P.R.I.F., L.P. in consideration for $14,050,349,
net of issuance costs totaling $949,651. The series D preferred sock was
convertible into a number of shares of common stock determined by dividing the
five day trading average price of our 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, we
also issued 375,000 common stock purchase warrants, exercisable at $6.00 per
share. All of the warrants expired on June 30, 1998.

In September 1997, we concluded an exchange agreement whereby the series D
preferred stock were exchanged for series F preferred shares. The series F
preferred stock provided for a restriction on the holder limiting conversion
during any two week period to 800 preferred shares, or $800,000 in principal.
The terms also provided management 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, we agreed to
increase the dividend rate from 6% for the series D preferred stock to 10% for
the series F preferred stock. All shares of series F preferred stock were
redeemed for cash or converted into common stock by March 31, 1998. During
fiscal 1998, Viragen paid $2,744,000 to the series F holder upon exercise of the
cash-out option on conversions.

F-15
<PAGE> 56
VIRAGEN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Series E

In February 1997, Viragen also issued 5,000 shares of its 5% series E
convertible preferred stock in consideration for $4,681,744, net of issuance
costs totaling $318,256. Dividends on the series E preferred stock accrued from
the date of issuance and were payable quarterly commencing April 1, 1997.
Dividends were payable in cash or, at management's option and subject to certain
other conditions, in shares of common stock.

The series E preferred stock was convertible into shares of common stock
commencing May 11, 1997 at a conversion price of the lesser of (1) the average
market price for the five trading days prior to the notice of conversion
multiplied by 85%, subject to adjustment, or (2) $7.00, subject to adjustment.

COMMON STOCK

During May 1999, Viragen completed a private placement for the sale of
2,750,000 shares of common stock. The common shares were sold to three
accredited investors at $0.50 per share. Viragen received proceeds of $1,375,000
from the sale of these shares. During October 1999, Viragen issued the finder
37,500 shares of common stock for identifying the three investors.

On August 13, 1999, following shareholder approval, the board of directors
elected to increase the authorized common shares up to 125,000,000 shares.

On November 24, 1999, Viragen entered into a common stock and warrants
purchase agreement with:

- AMRO International, S.A.,
- Markham Holdings, Limited, and
- Tashdale Ltd.

The agreement was for gross proceeds of $2.5 million. Viragen issued, in three
tranches between November 24, 1999 and February 11, 2000, an aggregate 4,600,000
shares of common stock and warrants to purchase 375,000 shares of common stock.
The warrants are exercisable at $1.15 per share and expire on November 30, 2002.
We entered into this financing under Regulation S of the Securities Act of 1933.

AMRO International also received warrants to purchase 125,000 shares of
common stock. The warrants are exercisable at $1.15 per share through November
30, 2002. During fiscal 2000, the finder exercised 15,000 of these warrants.

In December 1999, Viragen retained the investment banking firm of Ladenburg
Thalmann & Co., Inc. to aid us in raising up to $60 million in additional
investment capital, on a best efforts basis. On March 21, 2000, the Securities
and Exchange Commission declared our shelf registration on Form S-3 (File No.
333-32306) effective. Between April 1 and June 30, 2000, we have raised
approximately $8,335,000 in additional capital, net of a 7% finders fee and
other issuance costs amounting to approximately $590,000, under the shelf
registration. We issued an aggregate of 5,590,528 common shares, as a result of
this financing activity. We also issued warrants, to the investors and to the
finders, to purchase an aggregate 336,448 common shares. These warrants are
exercisable at prices ranging between $1.70 and $2.55 per share, through June
2003.

Active Investors Ltd. II, an investment fund managed by Carl N. Singer
through Fundamental Management Corporation, has participated as an investor
under the shelf registration. Mr. Singer is a director of Viragen and the
chairman of its executive committee. Robert C. Salisbury, also a director of
Viragen, and member if its audit and finance committee and its compensation
committee, is a director and investor in Fundamental Management Corporation.
Charles J. Simons, a director of Viragen and the chairman of its audit and
finance committee and its compensation committee, is an investor in Active
Investors Ltd. II.
F-16
<PAGE> 57
VIRAGEN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Active Investors Ltd. II invested $1,000,000 in exchange for 784,300 shares of
our common stock, as part of the above financing activity. We did not pay any
finders fees on the investment by Active Investors Ltd. II. Also, no warrants
were issued in this transaction.

OPTIONS AND WARRANTS

Under Viragen's 1995 stock option plan, 4,000,000 shares of common stock
were reserved for issuance to officers, directors, employees and consultants of
Viragen for stock options designated as incentive stock options within the
meaning of Section 422 of the Internal Revenue Code. Options granted under the
1995 stock option plan have various vest dates and all options granted have
five-year terms from the vesting date.

Viragen's 1997 stock option plan, adopted during February 1997, authorized
the grant of options to officers, directors, employees and consultants for up to
3,000,000 shares of common stock. In April 1998, the 1997 stock option plan was
amended increasing the number of common shares authorized to 4,000,000 shares.
Options granted under the plan have various vest dates and all options granted
have 5 year terms from the vesting date.

At June 30, 2000, 802,200 shares and 307,300 shares remain available under
the 1995 and the 1997 stock option plans, respectively.

STOCK BASED COMPENSATION

Viragen has elected to follow APB No. 25 and related Interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under SFAS No. 123 requires use
of option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, Viragen recognized compensation expense in the
amount of $940,800, $172,000, and $-0- in 2000, 1999, and 1998, respectively,
because the exercise price of a portion of the company's employee stock options
was less than the market price of the underlying stock on the date of grant.
During 2000, 1999 and 1998, we recognized approximately $1,209,000, $199,000,
and $58,000, respectively, in compensation expense on warrants granted to
consultants pursuant to SFAS 123.

Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if we had accounted for our
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: dividend
yield of zero percent for all periods; expected life of the option within a
range of 1 to 15 years; risk-free interest rates within a range of 4.00% to
6.40%; and a volatility factor of the expected market price of Viragen's common
stock of 0.98, 0.77, and 0.75 for 2000, 1999 and 1998, respectively.

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 Viragen'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
our opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of our employee stock options and warrants.

F-17
<PAGE> 58
VIRAGEN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Based on calculations using a Black-Scholes option valuation model, the
weighted average grant date fair value of options was $0.80, $0.57, and $1.10 in
fiscal 2000, 1999 and 1998, respectively. The pro forma impact on Viragen's net
loss per share had compensation cost been recorded as determined under the fair
value method is shown below.

<TABLE>
<CAPTION>
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Pro forma net loss........................... $(12,484,278) $(11,122,679) $ (8,897,455)
Pro forma loss attributable to common
stock...................................... (12,489,627) (12,124,601) (11,395,807)
Pro forma loss per common share.............. (0.16) (0.20) (0.23)
</TABLE>

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

<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE OPTIONS WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE EXERCISABLE EXERCISE PRICE
---------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C>
Outstanding at July 1, 1997....... 7,895,500 $1.59 6,443,167 $1.51
Granted......................... 417,500 2.08
Exercised....................... (100,000) 0.50
Cancelled....................... -- --
----------
Outstanding at June 30, 1998...... 8,213,000 1.62 7,379,500 1.54
Granted......................... 94,000 1.00
Exercised....................... (1,210,000) 0.54
Cancelled....................... (33,500) 2.21
----------
Outstanding at June 30, 1999...... 7,063,500 1.79 6,896,500 1.79
Granted......................... 740,000 1.25
Exercised....................... (1,651,100) 0.82
Cancelled....................... (154,000) 1.00
----------
Outstanding at June 30, 2000...... 5,998,400 $2.02 5,599,199 $2.08
==========
</TABLE>

The following table summarizes information about stock options outstanding
at June 30, 2000:

<TABLE>
<CAPTION>
STOCK OPTIONS OUTSTANDING
-----------------------------------------------
WEIGHTED AVERAGE STOCK OPTIONS EXERCISABLE
REMAINING ----------------------------
NUMBER OF CONTRACTUAL LIFE WEIGHTED AVERAGE NUMBER OF WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES OPTIONS (YEARS) EXERCISE PRICE OPTIONS EXERCISE PRICE
------------------------ --------- ---------------- ---------------- --------- ----------------
<S> <C> <C> <C> <C> <C>
$0.30 - $0.50......... 1,305,000 2.57 $0.50 1,305,000 $0.50
$0.61 - $1.00......... 1,005,400 2.98 0.84 686,666 0.94
$1.31 - $2.00......... 633,500 3.06 1.80 619,700 1.80
$2.06 - $2.79......... 908,000 2.85 2.43 908,000 2.43
$3.06 - $3.22......... 1,757,500 1.67 3.22 1,757,500 3.22
$3.69 - $4.13......... 377,000 2.64 4.01 310,333 4.07
$7.13................. 12,000 2.58 7.13 12,000 7.13
--------- ---------
$0.30 - $7.13......... 5,998,400 2.47 $2.02 5,599,199 $2.08
========= =========
</TABLE>

F-18
<PAGE> 59
VIRAGEN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

A summary of Viragen's warrant activity, excluding warrants issued in
conjunction with debt and equity offerings, and related information for the
years ended June 30, is as follows:

<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE WARRANTS WEIGHTED AVERAGE
WARRANTS EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C>
Outstanding at July 1, 1997........ 746,321 $0.87 734,321 $0.84
Granted.......................... 32,000 1.00
Exercised........................ (130,565) 0.52
Cancelled........................ (12,500) 0.80
---------
Outstanding at June 30, 1998....... 635,256 1.06 635,256 1.06
Granted.......................... 1,500,000 3.67
Exercised........................ -- --
Cancelled........................ (305,000) 1.26
---------
Outstanding at June 30, 1999....... 1,830,256 3.12 405,256 1.26
Granted.......................... 809,500 1.24
Exercised........................ (441,256) 0.54
Cancelled........................ -- --
---------
Outstanding at June 30, 2000....... 2,198,500 $2.94 1,226,280 $1.38
=========
</TABLE>

The following table summarizes information about stock warrants, excluding
warrants issued in conjunction with debt and equity offerings, outstanding at
June 30, 2000:

<TABLE>
<CAPTION>
STOCK WARRANTS OUTSTANDING
-----------------------------------------------
WEIGHTED AVERAGE STOCK WARRANTS EXERCISABLE
REMAINING ----------------------------
NUMBER OF CONTRACTUAL LIFE WEIGHTED AVERAGE NUMBER OF WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES WARRANTS (YEARS) EXERCISE PRICE WARRANTS EXERCISE PRICE
------------------------ --------- ---------------- ---------------- --------- ----------------
<S> <C> <C> <C> <C> <C>
$0.50 - $0.86......... 618,500 1.79 $ 0.53 296,280 $0.56
$1.00 - $1.44......... 668,000 3.91 1.08 568,000 1.03
$1.78 - $2.75......... 412,000 2.78 2.05 312,000 2.13
$5.50 - $7.50......... 150,000 13.12 6.83 50,000 5.50
$9.00 - $11.00........ 350,000 13.12 10.14 -- --
--------- ---------
$0.50 - $11.00........ 2,198,500 5.20 $ 2.94 1,226,280 $1.38
========= =========
</TABLE>

The weighted-average fair values of each Viragen warrant granted in fiscal
2000, 1999 and 1998 were $0.63, $1.00, and $1.52, respectively.

Viragen's majority owned subsidiary, Viragen (Europe) Ltd., has also
granted stock options to one of its officers. The fair value of Viragen (Europe)
options was estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted-average assumptions: dividend yield of zero
percent for all periods; risk-free interest rates of 5.69% and 6.09% for 2000
and 1998, respectively; volatility factors of the expected market price of
Viragen (Europe)'s common stock of 1.250 and 0.723 for 2000 and 1998,
respectively; and an expected life of the options of 3 years. The weighted
average fair values of the Viragen (Europe) options granted in fiscal 2000 and
1998 were $0.68 and $2.97 per share, respectively.

F-19
<PAGE> 60
VIRAGEN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

A summary of Viragen (Europe)'s stock option and warrant activity, and
related information for the years ended June 30, follows:

<TABLE>
<CAPTION>
NUMBER OF OPTIONS AND
OPTIONS AND WEIGHTED AVERAGE WARRANTS WEIGHTED AVERAGE
WARRANTS EXERCISE PRICE EXERCISABLE EXERCISE PRICE
----------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C>
Outstanding at July 1, 1997....... 50,000 $7.00 50,000 $7.00
Granted......................... 75,000 5.72
Exercised....................... -- --
Cancelled....................... -- --
-------
Outstanding at June 30, 1998...... 125,000 6.23 50,000 7.00
Granted......................... -- --
Exercised....................... -- --
Cancelled....................... -- --
-------
Outstanding at June 30, 1999...... 125,000 6.23 87,500 6.45
Granted......................... 216,500 0.95
Exercised....................... (1,600) 0.84
Cancelled....................... (2,000) 0.84
-------
Outstanding at June 30, 2000...... 337,900 $2.90 246,000 $3.68
=======
</TABLE>

The following table summarizes information about Viragen (Europe)'s stock
options and warrants outstanding at June 30, 2000:

<TABLE>
<CAPTION>
STOCK OPTIONS AND
STOCK OPTIONS AND WARRANTS OUTSTANDING WARRANTS EXERCISABLE
------------------------------------------------- ------------------------------
WEIGHTED AVERAGE
NUMBER OF REMAINING NUMBER OF
OPTIONS AND CONTRACTUAL LIFE WEIGHTED AVERAGE OPTIONS AND WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES WARRANTS (YEARS) EXERCISE PRICE WARRANTS EXERCISE PRICE
------------------------ ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$0.84 - $1.19......... 212,900 5.10 $0.95 121,000 $1.04
$5.72 - $7.00......... 125,000 2.70 6.23 125,000 6.23
------- -------
$0.84 - $7.00......... 337,900 4.19 $2.90 246,000 $3.68
======= =======
</TABLE>

Viragen's majority owned subsidiary, Viragen U.S.A., Inc., has also granted
stock options to certain officers and employees. The fair value of Viragen
U.S.A. options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions for the option
granted, during fiscal 1998: dividend yield of zero percent; risk-free interest
rate of 5.75%; volatility factor of 0.765; and an expected life of the option of
3 years.

The weighted average fair value of the Viragen U.S.A. option granted in
fiscal 1998 was $0.05.

F-20
<PAGE> 61
VIRAGEN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE EXERCISE OPTIONS WEIGHTED AVERAGE
OPTIONS PRICE EXERCISABLE EXERCISE PRICE
--------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C>
Outstanding at July 1, 1997......... -- $ -- -- $ --
Granted........................... 125,000 0.22
Exercised......................... -- --
Cancelled......................... -- --
--------
Outstanding at June 30, 1998........ 125,000 0.22 -- --
Granted........................... -- --
Exercised......................... -- --
Cancelled......................... -- --
--------
Outstanding at June 30, 1999........ 125,000 0.22 50,000 0.22
Granted........................... -- --
Exercised......................... -- --
Cancelled......................... (125,000) 0.22
--------
Outstanding at June 30, 2000........ -- $ -- -- $ --
========
</TABLE>

COMMON SHARES RESERVED

Shares of our common stock reserved at June 30, 2000 for possible future
issuance are as follows:

<TABLE>
<S> <C>
Convertible preferred stock, series A....................... 11,289
Officers and directors options (exercisable through March
2007)..................................................... 5,467,000
Employee option plans (exercisable through August 2006)..... 531,400
Consultant warrants (exercisable through August 2013)....... 2,198,500
Debt and equity offering warrants (exercisable through
October 2004)............................................. 1,398,564
---------
9,606,753
=========
</TABLE>

NOTE D. PUT WARRANTS

During fiscal 2000, Viragen issued to a consultant warrants to purchase
100,000 common shares at $2.75 per share. The consultant can put the underlying
shares to Viragen, upon exercise of the warrants. The warrants are exercisable
through June 2001.

In accordance with Accounting Series Release 268, the put warrants have
been classified as temporary capital on the balance sheet. We valued the put
warrants at $58,000 using a Black-Scholes valuation model.

NOTE E. INVESTMENT IN UNCONSOLIDATED COMPANY

In August 1998, Viragen entered into a strategic alliance concurrent with
the purchase of a 10% equity interest in Inflammatics, Inc., a private drug
development company headquartered in Philadelphia, PA. Inflammatics is focused
on the development of therapeutic drugs for autoimmune disorders. Its lead
product is LeukoVAX, an immunomodulating leukocyte preparation currently in Food
and Drug Administration Phase I/II clinical trials for rheumatoid arthritis.

Under the terms of the Inflammatics agreement, Viragen made an initial
investment in the form of series A convertible preferred stock of Inflammatics
for $1 million and warrants to purchase 250,000 shares of common stock at prices
ranging between $1.00 and $1.78 per share. Viragen further obtained two options
to

F-21
<PAGE> 62
VIRAGEN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

acquire an additional 70% equity position in Inflammatics through two additional
fundings to be made at our option. The first additional funding, subject to
management's evaluation of the Phase I/II clinical trial results, provides for
the issuance of 1,000,000 shares of common stock, the issuance of 300,000
commons stock purchase warrants exercisable at $1.00 through August 14, 2003,
and the underwriting of Phase III clinical trials, in exchange for an additional
36.3% equity interest. Preliminary estimates for the funding of Phase III
clinical trials of LeukoVAX range between $6.0 million and $10.0 million. The
second additional funding, subject to management's further evaluation of
clinical trial results, provides for the issuance of an additional 2,000,000
shares of common stock in exchange for an additional 33.3% equity interest.
During the fourth quarter of fiscal 2000, we received initial Phase I/II data
which suggests no statistically significant difference in outcomes between
patients who have received LeukoVAX and those who have not. We are still
evaluating the results reflected in the Phase I/II data and have not yet reached
a decision regarding additional funding, if any.

The investment in Inflammatics was capitalized at $1,429,000, which
consisted of the $1,000,000 paid to Inflammatics, a $100,000 finders fee paid to
Sumitomo Bank, and $329,000 in costs associated with the warrants issued, which
were valued using a Black-Scholes valuation model.

Viragen recognized approximately $653,000 and $757,000 in losses related to
its investment in Inflammatics, Inc. during the fiscal years ended June 30, 2000
and 1999, respectively. These losses reflect 100% of the losses incurred by
Inflammatics associated with the clinical testing of LeukoVAX. The losses also
include the amortization of the capitalized finders fee and warrant costs. These
costs are being amortized in proportion to the losses incurred by Inflammatics
as compared to our initial cash capital contribution to Inflammatics.

NOTE F. CONVERTIBLE PROMISSORY NOTES WITH DETACHABLE WARRANTS

On March 17, 1999, we entered into a purchase agreement with the Isosceles
Fund Limited and Cefeo Investments Limited, which was subsequently amended on
June 16, 1999. Under the purchase agreement, we issued Isosceles and Cefeo 8%
convertible promissory notes in the aggregate principal amount of $2,000,000
with detachable warrants to purchase 932,039 shares of our commons stock.
Viragen received $1,861,820 from the issuance of the convertible notes and
detachable warrants. The proceeds were net of $138,180 paid as finders' fees. As
required by APB No. 14 -- "Accounting for Convertible Debt and Debt Issued with
Stock Purchase Warrants," we recorded the value of the detachable warrants as a
discount on principal. We valued the warrants at $344,854 using a Black-Scholes
valuation model.

One-half of the principal balance, which accrued interest at a rate of 8%
annually, and accrued interest on the related principal converted automatically
into 2,049,533 shares of our common stock on July 7, 1999. In addition, the
remaining one-half of the principal balance and accrued interest on the notes
converted automatically into 2,062,685 shares of our common stock on August 6,
1999. The conversion price was $0.50 per common share.

In addition to the shares issued on conversion of the notes, the note
holders were entitled to receive additional shares of our common stock 30 days
after each one-half of the notes converted into shares of our common stock, as
required by a re-set provision. The purpose of this arrangement was to make sure
that the note holders had a return of at least 20% on the shares received on the
conversion of the first half of the notes and at least a 22% return on the
conversion on the remaining half of the notes. The number of additional shares
to which the note holders were entitled was calculated by dividing $0.644 by the
lowest closing bid price of our common stock during the ten consecutive trading
days preceding each re-set date.

On August 6, 1999, Isosceles and Cefeo received an aggregate amount of
546,990 additional common shares, based on the first re-set calculation. These
shares were issued using a future price of $0.61 per share. On September 5,
1999, Isosceles and Cefeo received an aggregate amount of 551,203 additional
common

F-22
<PAGE> 63
VIRAGEN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

shares, based on the second re-set calculation. These shares were issued using a
future price of $0.62 per share. Viragen recognized approximately $700,000 in
interest expense, as a result of issuing these additional shares.

The warrants issued to Isosceles and Cefeo to purchase an aggregate of
932,039 shares of our common stock were exercisable until March 17, 2004 with an
exercise price of $.50 per share. Isosceles and Cefeo exercised all of their
warrants during fiscal 2000.

We also issued warrants to purchase an aggregate of up to 155,339 shares of
our common stock at $.773 per share to certain parties in consideration for
introducing Viragen to Isosceles and Cefeo. The warrants issued were exercisable
currently until March 17, 2004. As we did not pre-pay the notes issued to
Isosceles and Cefeo before July 7, 1999, one-half of these warrants were
returned to Viragen. The remaining 77,670 warrants were exercised during fiscal
2000.

Events of default, on our obligations to Isosceles and Cefeo, included:
default under the promissory notes, failure to maintain effectiveness of our
registration under the Securities Act of 1933, delisting our stock from NASDAQ
(which occurred), and failure to have our registration statement become
effective by July 7, 1999 (which occurred).

On February 18, 2000, we entered into a subscription agreement with Active
Investors Ltd. II, an investment fund managed by Carl N. Singer through
Fundamental Management Corporation. Mr. Singer is a director of Viragen and the
chairman of its executive committee. Under the terms of the subscription
agreement, we issued to Active Investors Ltd. II a convertible promissory note
for the principal amount of $1,000,000. The promissory note had an interest rate
of 9.5% per annum. The principal and accrued interest were payable on February
17, 2001. Robert C. Salisbury, also a director of Viragen and member of its
audit and finance committee and its compensation committee, is a director and
investor in Fundamental Management Corporation. Charles J. Simons, a director of
Viragen and the chairman of its audit and finance committee and its compensation
committee, is an investor in Active Investors Ltd. II. Under the subscription
agreement, Active Investors Ltd. II also received warrants to purchase 100,000
common shares. The warrants are exercisable at $2.00 per share through February
17, 2003. We valued the warrants at $56,000 using a Black-Scholes valuation
model. The value of the warrants was recorded as a discount on the principal
amount of the convertible promissory note, as required by APB No. 14.

Active Investors Ltd. II could elect to convert the unpaid principal and
interest, at any time, into common shares. Viragen recognized $220,000 in
additional interest expense, due to a beneficial conversion rate on the
promissory note. The conversion rate was discounted 18% from the current market
price of our common stock. Active Investors Ltd. II elected to convert the
entire principal balance and accrued interest of $35,400 into 1,015,716 common
shares, on June 30, 2000.

On March 1, 2000, Viragen entered into a loan and escrow agreement with
AMRO International, S.A. Under the terms of this agreement, we issued to AMRO
International a convertible promissory note for the principal amount of
$1,000,000. The promissory note had an interest rate of 8% per annum. The
principal and accrued interest were payable on March 1, 2001. Viragen paid
$70,000 for placement fees and expenses on the transaction. Under the
subscription agreement, AMRO International also received warrants to purchase
100,000 common shares. The warrants are exercisable at $1.72 per share through
March 1, 2004. We valued the warrants at $96,000 using a Black-Scholes valuation
model. The value of the warrants was recorded as a discount on the principal
amount of the loan, as required by APB No. 14.

F-23
<PAGE> 64
VIRAGEN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

AMRO International could elect to convert the unpaid principal and
interest, at any time, into common shares at the fixed rate of $1.00 per share.
Viragen recognized another $220,000 in additional interest expense, due to a
beneficial conversion rate on the promissory note. The conversion rate was
discounted 18% from the current market price of our common stock. On June 20,
2000, AMRO International elected to convert the entire principal balance and
accrued interest of $24,900 into 1,024,899 common shares.

NOTE G. SHORT-TERM BORROWINGS

On August 10, 1999, Viragen mortgaged its Florida-based research facility
for $600,000. We were required to pay interest on the promissory note in eleven
monthly installments, which began on September 10, 1999. Interest was calculated
at the rate of 1% over the prime rate per annum, as quoted by the Wall Street
Journal, and the rate was adjusted on a daily basis. The principal balance of
$600,000 plus any unpaid interest were due on July 10, 2000. On June 16, 2000,
we refinanced this note to be paid over five years.

On November 3, 1999, Viragen secured a $400,000 short-term loan by pledging
its domestic scientific equipment and a second mortgage on our Florida based
research facility as collateral. We paid interest on the promissory note in 6
monthly installments, beginning on December 3, 1999. Interest was calculated at
the rate of 12% per annum. The principal balance of $400,000 plus any unpaid
interest was due on May 3, 2000. The lender also received 25,000 detachable
warrants exercisable at $0.95 per share through October 31, 2004. We valued the
warrants at $14,250 using a Black-Scholes valuation model. The value of the
warrants was recorded as a discount on the principal amount of the promissory
note, as required by APB No. 14. The note and accrued interest were paid in full
on April 21, 2000.

On May 15, 2000, Viragen was approved for a $500,000 unsecured line of
credit. Interest is payable monthly at the prime rate, as quoted by The Wall
Street Journal. The interest rate will be adjusted daily. The outstanding
principal plus unpaid interest is payable on May 15, 2001. Viragen has not
borrowed any funds through September 15, 2000.

NOTE H. LONG-TERM DEBT

Long-term debt at June 30, 2000 and 1999 is as follows:

<TABLE>
<CAPTION>
JUNE 30,
---------------------
2000 1999
--------- ---------
<S> <C> <C>
Mortgage note payable secured by Florida-based research
facility. Payable in monthly installments of $2,500 plus
accrued interest. The remaining principal and accrued
interest are payable on June 16, 2005. Interest rate is
based on prime rate +1% and is to be adjusted on a daily
basis..................................................... $ 600,000 $ --
Notes payable resulting from purchase of insurance. Notes
range in term up to 36 months, with interest rates ranging
from 7.00% to 10.75%...................................... 105,723 187,170
Unsecured loan from Scotland Regional Development Authority.
Payable quarterly over 20 years, with an effective
interest rate of 11.00%. Note matures on August 28,
2017...................................................... 9,494 139,852
Capital lease obligations resulting from acquisition of
equipment, with a cost totaling $217,939 capitalized from
three to five years....................................... 8,289 46,194
--------- ---------
723,506 373,216
Less current portion........................................ (123,400) (142,109)
--------- ---------
$ 600,106 $ 231,107
========= =========
</TABLE>

F-24
<PAGE> 65
VIRAGEN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Scheduled maturities of long-term debt at June 30, 2000 are: 2001 --
$123,400; 2002 -- $60,106; 2003 -- $30,000; 2004 -- $30,000; and 2005 and
thereafter -- $480,000.

NOTE I. INCOME TAXES

Viragen, Inc. and its majority-owned subsidiaries, as defined by the
Internal Revenue Code, file consolidated federal and state income tax returns,
except for Viragen (Europe) Ltd.

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
Viragen's deferred tax liabilities and assets as of June 30, 2000 and 1999 are
as follows:

<TABLE>
<CAPTION>
JUNE 30,
---------------------------
2000 1999
------------ ------------
<S> <C> <C>
Deferred tax liabilities
Tax over book depreciation.............................. $ 57,000 $ 137,000
Prepaid expenses and other.............................. 174,000 21,000
------------ ------------
Total deferred tax liabilities.................. 231,000 158,000
Deferred tax assets
Net operating loss carryforwards........................ 13,405,000 11,782,000
Research and development credit......................... 645,000 622,000
Deferred compensation................................... 1,069,000 205,000
Other................................................... 204,000 308,000
------------ ------------
Total deferred tax assets....................... 15,323,000 12,917,000
Valuation allowance for deferred tax assets............. (15,092,000) (12,759,000)
------------ ------------
231,000 158,000
------------ ------------
Net deferred taxes.............................. $ -- $ --
============ ============
</TABLE>

The change in the valuation allowance was a net increase of $2,333,000 for the
year ended June 30, 2000.

Viragen 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.

Viragen has net operating loss and tax credit carryforwards, with expiration
dates, as follows:

<TABLE>
<CAPTION>
NET OPERATING
LOSSES TAX CREDITS EXPIRATION
------------- ----------- -----------
<S> <C> <C>
$ 82,000 $ 13,000 2001
2,785,000 132,000 2002 - 2003
3,126,000 -- 2004 - 2006
29,630,000 500,000 2007 - 2020
----------- --------
$35,623,000 $645,000
=========== ========
</TABLE>

For financial reporting purposes, a valuation allowance has been recognized
to offset the deferred tax assets related to these carryforwards.

F-25
<PAGE> 66
VIRAGEN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The reconciliation of income tax computed at the U.S. federal statutory
rate applied to Viragen's net loss is as follows:

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------
2000 1999 1998
------ ------ ------
<S> <C> <C> <C>
Tax at U.S. statutory rate............................. (34.00)% (34.00)% (34.00)%
State taxes, net of federal benefit.................... (3.63) (3.63) (3.63)
Non-deductible items................................... 1.08 0.18 (2.89)
Change in valuation allowance.......................... 34.45 34.21 40.00
Other.................................................. 2.10 3.24 0.52
------ ------ ------
--% --% --%
====== ====== ======
</TABLE>

Viragen (Europe) Ltd. was included in Viragen's consolidated federal and
state income tax returns for the period December 8, 1995 through March 15, 1996,
when Viragen, Inc.'s percentage ownership of Viragen (Europe) Ltd. exceeded 80%.
Even though Viragen's ownership percentage of Viragen (Europe) exceeds 80% again
as of December 31, 1998, Viragen (Europe) will continue filing separate income
tax returns. Viragen (Scotland) Ltd., a wholly-owned subsidiary of Viragen
(Europe), files separate income tax returns in the United Kingdom. Viragen
(Germany) GmbH, also a wholly-owned subsidiary of Viragen (Europe), files
separate income tax returns in Germany.

Deferred tax assets of Viragen (Europe)'s U.S. operations at June 30, 2000
and 1999 are as follows:

<TABLE>
<CAPTION>
JUNE 30,
-----------------------
2000 1999
----------- ---------
<S> <C> <C>
Total deferred tax assets................................... $ 1,077,000 $ 993,000
Valuation allowance for deferred tax assets................. (1,077,000) (993,000)
----------- ---------
$ -- $ --
=========== =========
</TABLE>

At June 30, 2000, Viragen (Europe) has net operating losses totaling
approximately $2,825,000, expiring between 2003 and 2020. Viragen (Scotland) has
approximately $16,300,000 in net operating losses available to carry-forward at
June 30, 2000.

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

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------------
2000 1999 1998
------------ ------------ -----------
<S> <C> <C> <C>
U.S........................................... $ (6,160,927) $ (6,048,656) $(3,615,140)
Foreign....................................... (6,149,968) (4,602,176) (4,240,996)
------------ ------------ -----------
$(12,310,895) $(10,650,832) $(7,856,136)
============ ============ ===========
</TABLE>

NOTE J. TRANSACTIONS WITH RELATED PARTIES

In June 1996, Viragen loaned $50,000 to a now-former employee. The
promissory note is for a term of five years with an annual interest rate of
6.48%. Interest is to be paid semi-annually with the principal balance and
unpaid interest payable on the fifth anniversary of the note. Management had
reserved approximately $25,000 of the principal balance as uncollectable at June
30, 1999. The entire principal balance of $50,000 plus unpaid interest were
collected during March 2000.

In April 1997, we loaned $100,000 to one of Viragen's directors. The
secured promissory note was for a term of one year with the principal and
interest payable upon maturity. The note bears interest at 8.50% per annum. In
April 1998, the director defaulted on the note. Management is unable to
ascertain the amounts, if

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VIRAGEN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

any, which could ultimately be realized on the promissory note. Accordingly, the
entire amount due under the note with related accrued interest of approximately
$10,000 was been written-off as uncollectable on June 30, 1998. Management is
continuing to pursue collection efforts relative to this transaction.

On July 31, 1998, we held our 1997 annual shareholders meeting. Certain
directors did not seek re-election to serve as directors of the company. In
appreciation of their past service, Viragen waived the requirement to exercise
outstanding stock options within 90 days of their last day as directors. All
outstanding stock options will expire under their normal terms. We recognized
approximately $199,000 in compensation expense upon waiving the 90-day
expiration clause.

During fiscal 1999, certain directors and a former officer exercised
1,160,000 options to purchase common stock at prices ranging between $0.30 and
$1.19 per share. The options were exercised through the issuance of promissory
notes payable to Viragen with related pledge and escrow agreements. The
promissory notes bear interest at rates ranging between 5.06% and 5.47%, payable
semi-annually and are secured by the underlying common stock purchased. The
shares are being held in escrow pending payment of the related notes pursuant to
the provisions of the pledge and escrow agreements. During fiscal 2000, Viragen
collected $339,000 in related principal payments. Viragen released 650,000
shares from escrow upon receipt of the payments.

During January 2000, we contracted Cameron Associates, Inc. to act as an
investor relations consultant. Cameron Associates receives $6,000 per month as
compensation for their services. They also received warrants to purchase 100,000
common shares of Viragen at $1.17 per share through January 2005. Carl N.
Singer, a director of Viragen, serves as a director on Cameron Associates' board
of directors. He is also a minority stockholder of Cameron Associates.

On February 7, 2000, the board of directors voted to modify the terms of an
option to purchase 1.4 million shares of common stock, which had been granted to
Gerald Smith, Viragen's president, during October 1995. The board of directors
extended the expiration of this common stock option by three years. Under the
modified terms, the common stock option will now expire on October 5, 2003. No
other terms were changed. Under the provisions of APB No. 25, we recognized
compensation expense of approximately $941,000 relating to this modification.

During fiscal 2000, Active Investors II invested a total of $2,000,000 in
Viragen, in two separate transactions, receiving 1,800,016 shares of common
stock. The Active Investors II fund is managed through Fundamental Management
Corporation, a Florida-based institutional fund. Mr. Carl N. Singer, a director
of Viragen and chairman of its executive committee, serves as the chairman of
Fundamental Management Corporation. Mr. Robert C. Salisbury, a director of
Viragen, also serves as a director and investor in Fundamental Management
Corporation. Mr. Charles J. Simons, a director of Viragen, is an investor in the
Active Investors II fund.

During fiscal 2000, certain directors and an officer exercised 525,000
options to purchase common stock at prices ranging between $0.50 and $0.63 per
share. The options were exercised through the issuance of promissory notes
payable to Viragen with related pledge and escrow agreements. The promissory
notes bear interest at rates ranging between 6.46% and 6.69%, payable
semi-annually and are secured by the underlying common stock purchased. The
shares are being held in escrow pending payment of the related notes, pursuant
to the provisions of the pledge and escrow agreements. During fiscal 2000,
Viragen collected $262,500 in related principal payments. Viragen released
500,000 shares from escrow upon receipt of the payments.

NOTE K. COST REDUCTION PLAN

During fiscal 1999, Viragen began implementing a cost-reduction plan
targeted to reduce domestic research costs. These changes in operations
reflected our shift from developing our product in our domestic laboratories to
scale-up development and clinical research in our European facility. We closed
our Florida-based research facility during November 1999, and consolidated these
operations in our Scottish facility.
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<PAGE> 68
VIRAGEN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

EITF 94-3 -- "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity" requires restructuring costs to be
accrued under specific guidelines. SFAS No. 121 -- "Accounting for the
Impairment of Long-Lived Assets" 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 then the assets'
carrying amount.

Viragen recognized no exit costs, because the criteria for recognizing exit
costs, as specified in EITF 94-3, was not met. Personnel reductions came from
the elimination of positions where employment agreements had expired.
Accordingly, these individuals did not receive severance pay.

Upon termination of research activities in our domestic facility, equipment
considered to be useful to our Scottish operations was transferred to our
Scottish facility, where it is being used in continuing research activity, as
well as manufacturing and quality assurance operations.

At June 30, 2000, Viragen recognized a loss totaling $101,859 due to
impairment of some of our long-lived plant equipment and furniture held for
sale. This loss is included in general and administrative expenses in the
statements of operations. These items had been used in the Florida-based
research facility. We are not aware of any other impairment, and accordingly,
have not recognized any additional losses due to impairment on our other
long-lived assets.

At June 30, 2000, long-lived assets with a net book value totaling
$441,260, as adjusted, were held for sale. These assets and their related net
book values were:

<TABLE>
<S> <C>
Land, building and improvements............................. $421,260
Equipment and furniture..................................... 20,000
--------
$441,260
========
</TABLE>

On August 15, 2000, Viragen completed the sale of its Florida-based
research facility. The land, building and related improvements were sold for
$760,000. A gain on the sale of the facility, totaling approximately $300,000,
will be recognized during the first quarter of fiscal 2001. The related mortgage
note was paid in full at the time of the sale. Plant equipment and furniture
identified for disposal were also sold for the highest bid, during August 2000.

NOTE L. LICENSE AND MANUFACTURING AGREEMENTS

Through a fifteen-year license agreement granted by Viragen, Viragen
(Europe) Ltd. and its wholly-owned subsidiary, Viragen (Scotland) Ltd., secured
certain rights to engage in the research, development, and manufacture of
certain proprietary products and technologies that relate to the therapeutic
application of human leukocyte-derived interferon for various diseases that
affect the human immune system. With these rights, on July 20, 1995, Viragen
(Scotland) entered into a license and manufacturing agreement with the Common
Services Agency, an agency acting on behalf of the Scottish National Blood
Transfusion Service. This agreement provides that the Transfusion Service, on
behalf of Viragen (Scotland), will manufacture and supply Viragen (Scotland)'s
product to Viragen (Scotland) for distribution in the European Union in return
for certain fees. It was considered critical to our operations and to planned
clinical trials to secure a sufficient qualified source of human source
leukocytes, a critical component in the manufacture of our product. Viragen
(Scotland) commenced operations concurrent with the execution of its agreement
with the Transfusion Service. The term of the Scottish agreement is five years
with two additional five-year extension terms exercisable at the option of
Viragen (Scotland).

We are currently renegotiating the terms of the first five-year renewal
under an extension of the initial contract. The extension period expires in
November 2000.

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VIRAGEN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Under the terms of our license, Viragen (Scotland) was to prepay $2 million
to Viragen, within six months of the July 12, 1995 effective date. Beginning one
year from the effective date, Viragen (Scotland), was to pay to Viragen fees, 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 going forward. The license will
renew automatically for two consecutive fifteen-year terms.

Both parties modified the license deferring the initial payment until the
date when Viragen transferred the processes and technology, as defined by the
license, to Viragen (Scotland). Viragen had substantially transferred the
processes and technology to Viragen (Scotland) by the end of May 1997. At that
time, Viragen required the initial royalty payment be made. Completion of the
transfer occurred on November 1, 1997.

In April 1998, Viragen entered into an option agreement with Southern
Health SDN.DHD, a private Malaysian/Australian-based healthcare investment
group. The option agreement initially provided Southern Health the right to
acquire, through September 30, 1998, subsequently extended to March 31, 1999, an
exclusive, private-label manufacturing and distribution license covering
Malaysia, Indonesia, the Philippines, Thailand, Taiwan, Korea, Singapore,
Australia and New Zealand, for our proprietary natural interferon production
process in exchange for an initial cash licensing fee of $20 million and a
continuing royalty of 12% of Southern Health's related revenues. Southern Health
paid a $200,000 option fee.

On March 31, 1999, the option agreement expired, without being exercised.
We recognized one-half of the fee, or $100,000, as revenue, and the balance was
refunded to Southern Health during April 1999.

NOTE M. RESEARCH AND DEVELOPMENT AGREEMENTS

Viragen has a contract with Viragen Research Associated Limited
Partnership, for Viragen to perform the research and development with respect to
two therapeutic products for the topical treatment of herpes virus infections.
Pursuant to the contract, we assigned all of our patent rights to the processes
and topical products to Viragen Research Associated in exchange for an exclusive
worldwide licensing agreement. Viragen Research Associated is to receive 5% of
the gross revenues of topical products until it has received approximately
$900,000 and, thereafter, it is to receive 2% of the gross revenues of topical
products.

NOTE N. ROYALTY AGREEMENT

Viragen has a royalty agreement with Medicore, Inc. that will pay Medicore
a maximum of $2,400,000 in royalties. Royalties are to be paid as follows: 5% on
the first $7 million of sales of interferon and related products; 4% of the next
$10 million of sales; and 3% on the next $55 million of sales up to the maximum
of $2,400,000 in royalty payments. Royalties incurred in prior years under the
agreement, totaling approximately $108,000, are included in royalties payable.
This amount will be paid as the final payment under the royalty agreement.

NOTE O. COMMITMENTS

In November 1996, Viragen (Scotland) Ltd. executed a five-year lease on
property located in Edinburgh, Scotland that will serve as our laboratory and
production facilities. Base monthly rental on the property is approximately
$11,000. In addition, Viragen (Scotland) may extend the term of the lease at its
option, for four five-year periods.

In November 1996, Viragen entered into a ten-year lease on property in
Plantation, Florida. This facility contains our executive and administrative
offices. 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 years ended June 30, 2000, 1999 and 1998, Viragen recognized
rent expense and related charges of $274,000, 298,000 and $290,000,
respectively, for its Plantation, Florida property lease and $208,000, $195,000
and $202,000, respectively, attributable to its Edinburgh, Scotland facility.
Future

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<PAGE> 70
VIRAGEN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

minimum lease payments on the two facilities are: 2001 -- $321,555;
2002 -- $227,619; 2003 -- $200,913; 2004 -- $207,945; and 2005 and
thereafter -- $609,394.

Viragen has entered into employment agreements with its officers and key
employees. These agreements represent a commitment to pay an aggregate amount of
approximately $956,000, per year in salaries to these individuals.

NOTE P. CONTINGENCIES

In October 1997, Viragen, the company's president, and Cytoferon Corp., a
former affiliate of Viragen's president, were named as defendants in a civil
action brought in the United States District Court for the Southern District of
Florida (Case No: 97-3187-CIV-MARCUS). The plaintiff is a former Viragen
stockholder and investor in Cytoferon Corp. The suit alleged the defendants
violated federal and state securities laws, federal and state RICO statutes,
fraud, conspiracy, breach of fiduciary duties and breach of contract. The
plaintiff was seeking an unspecified monetary judgement and the specific
performance delivery of 441,368 shares of common stock. Viragen filed a motion
to dismiss denying the allegations and requesting reimbursement of its costs.

In September 1999, the federal court recommended that Viragen receive
reimbursement for attorney's fees and expenses incurred in the federal suit
described above. Ultimately, we recovered $31,000, during fiscal 2000.

In November 1997, the plaintiff filed a complaint in the Circuit Court of
the 11th Judicial Circuit in and for Miami-Dade County, Florida (Case No:
97-25587 CA30) naming the same defendants. The suit alleges breach of contract,
fraud, violation of Florida's RICO statute and breach of fiduciary duties. It
seeks a judgment similar to that of the dismissed federal suit.

In March 1998, the circuit court granted Viragen's motion to dismiss in
this matter. Subsequently, the plaintiff filed an amended complaint alleging
similar claims and seeking a judgement similar to that of the dismissed federal
and initial state of Florida suits. In April 1998, Viragen filed a motion to
dismiss the plaintiff's amended complaint which was denied by the court.

Viragen denies the allegations of the complaint and intends to vigorously
defend the claims with regard to this matter. The ultimate liability, if any,
cannot be determined at this time and no accrual for loss has been recorded.

NOTE Q. GEOGRAPHIC INFORMATION

Identifiable assets in Scotland totaled approximately $9,192,000 and
$4,506,000 at June 30, 2000 and 1999, respectively. Identifiable assets
represent those assets used in the operations of the geographic area.

NOTE R. SUBSEQUENT EVENTS (UNAUDITED)

Between July and September 2000, we have raised approximately $1,860,000 in
additional capital, net of a 7% finders fee and other issuance costs, under our
shelf registration on Form S-3 (File No. 333-32306). During that time, we have
issued an aggregate of 1,462,279 common shares, as a result of this financing
activity. We have also issued warrants, to the investors and to the finders, to
purchase an aggregate 102,359 common shares. These warrants are exercisable at
prices ranging between $1.61 and $1.97 per share, through September 2003.

F-30