UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTER ENDED DECEMBER 31, ~~2003~~2004

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

Commission File Number 0-17827

VIRAGEN INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

Delaware

11-2788282

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

865 SW 78^th Avenue, Suite 100, Plantation, Florida 33324

(Address of principal executive offices)

(954) 233-8377

(Registrant’s telephone number, including area code)

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

~~Yes~~Indicate xby Nocheck mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of February 94, ~~2004~~2005, there were 6873,~~113~~669,~~764~~320 shares of the registrant’s common stock outstanding, par value $0.01.

VIRAGEN INTERNATIONAL, INC. AND SUBSIDIARIES

INDEX

PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements
	1) Consolidated condensed statements of operations (unaudited) for the three and six months ended December 31, 2003 and 2002
	1) Consolidated condensed statements of operations (unaudited) for the three and six months ended December 31, 2004 and 2003	3
	2) Consolidated condensed balance sheets as of December 31, 2003 (unaudited) and June 30, 2003
	2) Consolidated condensed balance sheets as of December 31, 2004 (unaudited) and June 30, 2004	4
	3) Consolidated condensed statements of cash flows (unaudited) for the six months ended December 31, 2003 and 2002
	3) Consolidated condensed statements of cash flows (unaudited) for the six months ended December 31, 2004 and 2003	5
	4) Notes to consolidated condensed financial statements (unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26
Item 4.	Controls and Procedures	27
PART II - OTHER INFORMATION		29
Item 5.	Other Information
Item 6.	Exhibits	29
Item 6.	Exhibits and Reports on Form 8-K
SIGNATURES		30
SIGNATURES

VIRAGEN INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended December 31,						Six Months Ended December 31,
	2003			2002			2003			2002
	2004			2003			2004			2003
Product sales	$	6052,~~041~~548		$	~~126~~60,~~592~~041		$	~~111~~82,~~647~~965		$	~~471~~111,~~477~~647
Costs and expenses
Cost of sales		~~532~~754,~~023~~352			~~103~~532,~~784~~023			~~901~~1,~~030~~230,612			~~421~~901,~~957~~030
Research and development		341,027			235,450			653,296			467,050
Inventory write-down		539,900			—			539,900			—
Selling, general and administrative		939,388			890,359			1,786,172			1,718,125
Research and development		193,629			341,027			594,501			653,296
Amortization of intangible assets		38,814			58,108			76,227			115,125
Selling, general and administrative		1,136,000			939,388			2,193,870			1,786,172
Interest and other income		(138,341	)		(75,205	)		(255,966	)		(89,307	)
Amortization of intangible assets		43,503			38,814			83,883			76,227
Interest expense		44,945			48,819			84,275			98,538
Interest and other income		(664,116	)		(138,341	)		(707,944	)		(255,966	)
Loss before income taxes		(1,697,815	)		(1,134,723	)		(3,133,387	)		(2,260,011	)
Interest expense		14,391			44,945			63,612			84,275
Income tax benefit		10,957			19,386			21,914			38,772
Loss before income taxes		(1,965,111	)		(1,697,815	)		(3,915,469	)		(3,133,387	)
Net loss	$	(1,686,858	)	$	(1,115,337	)	$	(3,111,473	)	$	(2,221,239	)
Income tax benefit		10,957			10,957			21,914			21,914
Loss per common share – basic and diluted	$	(0.02	)	$	(0.02	)	$	(0.05	)	$	(0.05	)
Net loss	$	(1,954,154	)	$	(1,686,858	)	$	(3,893,555	)	$	(3,111,473	)
Weighted average common shares – basic and diluted		68,113,764			46,540,427			68,113,764			46,516,083
Loss per common share - basic and diluted	$	(0.03	)	$	(0.02	)	$	(0.05	)	$	(0.05	)
Weighted average common shares - basic and diluted		73,669,320			68,113,764			71,827,532			68,113,764

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

VIRAGEN INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

	December 31,2003			June 30,2003
	December 31, 2004			June 30, 2004
	(Unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	~~319~~1,~~964~~052,756		$	~~264~~688,~~224~~985
Accounts receivable		7417,~~867~~585			~~105~~31,~~334~~788
Inventories		3,~~665~~329,~~239~~837			3,~~311~~477,~~583~~214
Prepaid expenses		~~126~~164,~~211~~151			~~173~~238,~~254~~258
Other current assets		~~197~~92,~~907~~448			61221,~~184~~807
Total current assets		4,~~384~~656,~~188~~777			34,~~915~~658,~~579~~052
Property, plant and equipment
Land, building and improvements		35,~~263~~561,~~769~~511			3,~~143~~425,~~965~~723
Equipment and furniture		45,~~736~~194,~~750~~473			4,~~625~~675,~~543~~402
Construction in progress		~~1,383,830~~—			~~551~~1,~~493~~861,846
		9,384,349			8,321,001
		10,755,984			9,962,971
Less accumulated depreciation		(34,~~122~~102,~~476~~202	)		(23,~~708~~419,~~844~~041	)
		6,261,873			5,612,157
		6,653,782			6,543,930
Goodwill		1011,~~731~~761,~~744~~879			910,~~678~~295,~~302~~140
Developed technology, net		1,~~989~~997,~~109~~102			1,~~869~~828,122
	$	2325,~~366~~069,~~914~~540		$	2123,~~075~~325,~~160~~244
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	~~870~~330,~~058~~050		$	1540,~~300,919~~028
Accrued expenses and other liabilities		~~398~~637,~~727~~346			~~598~~728,~~157~~492
Line of credit		~~842,391~~—			~~999~~806,~~192~~899
Current portion of long-term debt		~~129~~39,~~161~~364			60153,~~421~~723
Total current liabilities		21,~~240~~006,~~337~~760			2,~~958~~229,~~689~~142
Long-term debt, less current portion		1728,~~228,755~~234			1,~~124~~072,~~335~~087
Advances from parent		716,~~999~~871,~~992~~217			312,~~680~~623,~~530~~782
Deferred income tax liability		~~522~~478,~~282~~454			~~544~~500,~~196~~368
Commitments and contingencies
Stockholders’ equity
Common stock, $.01 par value; 90,000,000 shares authorized; 68,113,764 shares issued and outstanding at December 31, 2003 and June 30, 2003		681,138			681,138
Common stock, $.01 par value; 90,000,000 shares authorized; 73,669,320 shares issued and outstanding at December 31, 2004; 68,113,764 shares issued and outstanding at June 30, 2004;		736,694			681,138
Additional paid-in capital		45,537,903			45,537,903
Capital in excess of par value		46,482,347			45,537,903
Accumulated deficit		(3946,~~062~~920,~~724~~857	)		(3543,~~951~~027,~~251~~302	)
Accumulated other comprehensive income		45,~~219~~686,~~231~~691			23,~~499~~708,~~620~~126
Total stockholders’ equity		115,~~375~~984,~~548~~875			126,~~767~~899,~~410~~865
	$	2325,~~366~~069,~~914~~540		$	2123,~~075~~325,~~160~~244

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

VIRAGEN INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

	Six Months Ended December 31,
	2003			2002
	2004			2003
OPERATING ACTIVITIES
Net loss	$	(3,~~111~~893,~~473~~555	)	$	(23,~~221~~111,~~239~~473	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		374,103			354,055
Depreciation and amortization		386,431			374,103
Amortization of intangible assets		7683,~~227~~883			~~115~~76,~~125~~227
Loss on sale of property, plant, and equipment		19,794			8,578
Inventory write-down		539,900			—
Deferred income tax benefit		(21,914	)		(38,772	)
Loss on sale of property, plant and equipment		—			19,794
Deferred income tax benefit		(21,914	)		(21,914	)
Gain on remeasurement of liability to Viragen, Inc.		(595,776	)		—
Increase (decrease) relating to operating activities from:
Accounts receivable		3014,~~467~~203			~~286~~30,~~882~~467
Inventories		(~~353~~392,~~656~~523	)		(~~972~~353,~~491~~656	)
Prepaid expenses and other current assets		~~(89~~178,~~680~~728	)		~~748~~(89,~~914~~680	)
Accounts payable and accrued expenses		(~~630~~301,~~291~~124	)		~~603~~(630,~~441~~291	)
Net cash used in operating activities		(34,~~706~~001,~~423~~747	)		(13,~~115~~706,~~507~~423	)
INVESTING ACTIVITIES
Additions to property, plant and equipment, net		(~~754~~85,~~295~~586	)		(~~314~~754,~~437~~295	)
Net cash used in investing activities		(754,295	)		(314,437	)
Contribution received for capital investment in Sweden		278,005			—
Net cash provided by (used in) investing activities		192,419			(754,295	)
FINANCING ACTIVITIES
Advances from parent		4,319,462			1,275,652
Advances from parent, net		5,247,435			4,319,462
Net (payment) borrowing on line of credit		(247,008	)		87,664
Payments on line of credit, net		(779,955	)		(247,008	)
Net borrowing (payment) on long-term debt		43,205			(27,391	)
(Payments) borrowings on long-term debt, net		(569,794	)		43,205
Net cash provided by financing activities		43,~~115~~897,~~659~~686			14,~~335~~115,~~925~~659
Effect of exchange rate fluctuations on cash		400,799			40,167
Effect of exchange rate fluctuations on cash and cash equivalents		275,413			400,799
Increase (decrease) in cash and cash equivalents		55,740			(53,852	)
Increase in cash and cash equivalents		363,771			55,740
Cash and cash equivalents at beginning of period		~~264~~688,~~224~~985			77264,~~405~~224
Cash and cash equivalents at end of period	$	~~319~~1,~~964~~052,756		$	23319,~~553~~964
During the six months ended December 31, 2004 and 2003, Viragen International had the following non-cash financing activity:
	December 31,
	2004			2003
Contribution to capital of inter-company balances by Viragen, Inc.	$	1,000,000		$	—

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

VIRAGEN INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS ~~– (Continued)~~

(Unaudited)

NOTE A – OVERVIEW AND BASIS OF PRESENTATION

We are engaged in the research, development, manufacture, and sale of a natural human alpha interferon product indicated for treatment of a broad range of viral and malignant diseases. We produce a natural human alpha interferon product under the tradename of Multiferon™® from human white blood cells, also known as leukocytes. Natural ~~interferon-~~alpha interferon is one of the body’s most important natural defense mechanisms to foreign substances like viruses, ~~and~~but it also stimulates and modulates the human immune system. In addition, interferon inhibits the growth of various viruses including those associated with diseases ~~like~~such ~~hepatitis,~~as ~~some types of cancer, multiple sclerosis, and severe acute respiratory syndrome (SARS)~~hepatitis.

We are a majority owned subsidiary of Viragen, Inc. (Viragen) (AMEX: VRA). As of December 31, ~~2003~~2004, Viragen owned 5459,~~262~~818,~~745~~301 shares of our common stock representing approximately 7981.72% of our 6873,~~113~~669,~~764~~320 outstanding shares. We operate primarily through our foreign wholly owned subsidiaries, ViraNative AB (“ViraNative”), a company located in Umeå, Sweden and Viragen (Scotland) Limited (“Viragen (Scotland)”), a company located near Edinburgh, Scotland. ViraNative and Viragen (Scotland) house our manufacturing and research laboratory facilities.

The accompanying interim consolidated condensed financial statements include Viragen International, Inc. and all of its subsidiaries, including those operating outside the United States of America. All significant transactions among our ~~businesses~~subsidiaries have been eliminated. These ~~statements~~ statements have been prepared in conformity with accounting principles generally accepted in the United States, consistent in all material respects with those applied in our Annual Report on Form 10-K for the fiscal year ended June 30, ~~2003~~2004, filed with the Securities and Exchange Commission.

The accompanying ~~interim~~ interim consolidated condensed financial statements for Viragen International have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information and footnote disclosures normally ~~included~~ included in financial statements included in our Annual Report on Form 10-K have been condensed or omitted. ~~Certain amounts in prior periods’ consolidated condensed financial statements have been reclassified to conform to the current periods’ presentation.~~ The ~~reclassifications had no effect on previously reported results of operations. The~~ accompanying interim consolidated condensed financial statements should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in this report and the audited consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the fiscal year ended June 30, ~~2003~~2004.

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. The accounting estimates that require management’s most difficult and subjective judgments include: the assessment of recoverability of goodwill and long-lived assets; and the valuation of inventories. Actual results could differ materially from those estimates.

The interim financial information is unaudited, but, in the opinion of management, reflects all adjustments, including normal recurring adjustments, considered necessary for a fair presentation of results of the interim periods presented. Operating results for the three and six ~~month~~months ~~periods~~ ended December 31, ~~2003~~2004 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, ~~2004~~2005.

VIRAGEN INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

NOTE A – OVERVIEW AND BASIS OF PRESENTATION – (Continued)

During the three and six months ended December 31, ~~2003~~2004 we incurred losses of approximately $1,~~687~~954,000 and $3,~~111~~894,000, respectively. During the fiscal years ended June 30, ~~2003~~2004, ~~2002~~2003 and ~~2001~~2002, we incurred significant losses of approximately $57,~~165~~076,000, $5,~~591~~165,000, and $75,~~915~~591,000, respectively., Weand have an accumulated deficit of approximately $3946,~~063~~921,000 as of December 31, ~~2003~~2004. ~~Management~~We ~~anticipates~~had a cash balance of approximately $1,053,000 and working capital of approximately $3,650,000 at December 31, 2004. We anticipate additional future losses as itwe ~~commercializes~~commercialize ~~its~~our natural human alpha interferon product and ~~conducts~~conduct additional research and development activities and clinical trials to obtain additional regulatory approvals. ~~We had cash and cash equivalents of approximately $320~~Accordingly,~~000~~ ~~and~~we ~~working capital of approximately $2,144,000 at December 31, 2003. We~~ will require substantial additional funding ~~to support our operations~~. Historically, Viragen, ~~our parent company,~~ has provided us with the working capital necessary to fund operations. Viragen has sufficient capital on hand to fund their operations through at least December 31, 2005 and has agreed to provide us with the working capital necessary to fund our operations through at least December 31, ~~2004~~2005. However, Viragen will berequire ~~required~~substantial ~~to raise~~ additional ~~funds~~funding to support our operations subsequent to December 31, ~~2004~~2005. NoIf ~~assurance~~we ~~can~~are beunable ~~given~~to ~~that~~generate sufficient ~~additional~~cash ~~capital~~flows ~~will~~from beour ~~available~~operations, ~~when~~Viragen’s ~~required~~plans orinclude ~~upon~~seeking ~~terms~~additional ~~acceptable~~capital tothrough ~~Viragen~~equity and debt financings.

NOTE B – STOCK -BASED COMPENSATION

As currently permitted under Statement of Financial Accounting Standards (SFAS) No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure, which amended SFAS No. 123, Accounting for Stock-Based Compensation, our employee stock option plan is accounted for under Accounting Principles Board Opinion No. 25 ~~(APB 25)~~, Accounting for Stock Issued to Employees, and ~~related~~ related interpretations. Compensation expense for a stock option grant is currently recognized if the exercise price is less than the fair value of our common stock on the grant date. See Note K for recent accounting pronouncement.

The following table illustrates the effect on net loss and loss per common share if we had applied the fair value method to measure stock -based compensation as required under the disclosure provisions of SFAS No. 123,: ~~Accounting for Stock Based Compensation.~~

	Three Months Ended December 31,						Six Months Ended December 31,
	Three Months EndedDecember 31,						Six Months EndedDecember 31,
	2003			2002			2003			2002
	2004			2003			2004			2003
Net loss as reported	$	(1,~~686~~954,~~858~~154	)	$	(1,~~115~~686,~~337~~858	)	$	(3,~~111~~893,~~473~~555	)	$	(23,~~221~~111,~~239~~473	)
Stock based compensation determined under the fair value method		~~(1,740~~—	)		(71,~~901~~740	)		(~~8,363~~966	)		(228,~~219~~363	)
Pro forma net loss	$	(1,~~688~~954,~~598~~154	)	$	(1,~~123~~688,~~238~~598	)	$	(3,~~119~~894,~~836~~521	)	$	(23,~~243~~119,~~458~~836	)
Loss per common share:
Basic and diluted – as reported	$	(0.0203	)	$	(0.02	)	$	(0.05	)	$	(0.05	)
Basic and diluted – pro forma	$	(0.0203	)	$	(0.02	)	$	(0.05	)	$	(0.05	)

The effects of applying SFAS No. 123 and SFAS No. 148 on pro forma disclosures of net loss and net loss per share for the three and six months ended December 31, 2004 and 2003, are not likely to be representative of the pro forma results of net loss and net loss per share in future periods. Specifically, the amount of stock-based compensation, including the number of stock options that may be issued under our stock option plan, and the terms of future stock-based compensation, are not known at this time. In addition, the assumptions used to determine the fair value of stock-based compensation can vary significantly.

VIRAGEN INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

NOTE C – INVENTORIES ~~ACQUISITION~~

OnInventories ~~September~~consist 28of raw materials and supplies, ~~2001~~work in process, weand ~~acquired~~finished ~~all~~product. Finished product consists of ~~the~~purified ~~outstanding~~natural ~~shares~~human alpha interferon. Costs of ~~BioNative~~raw ABmaterials ~~(“BioNative”),~~and asupplies ~~privately~~are ~~held biotechnology~~determined ~~company~~on ~~located~~a first-in ~~Umeå~~, ~~Sweden~~first-out basis. ~~BioNative~~Costs ~~manufactured~~of awork ~~natural~~in ~~human~~process ~~alpha~~and ~~interferon~~finished product, consisting ~~called~~of ~~Interferon~~raw ~~Alfanative®~~materials, labor and overhead, are recorded at a standard cost (which approximates actual cost). ~~Subsequent~~Excess/idle tocapacity ~~the~~costs ~~acquisition~~represent fixed production costs incurred at our Swedish manufacturing facility, ~~BioNative~~which ~~was~~were ~~renamed~~not ~~ViraNative~~absorbed ~~and~~as a ~~Interferon~~result ~~Alfanative~~of ~~was~~the ~~further~~production ~~developed,~~of inventory at less than normal operating levels. Excess/idle capacity costs are expensed in the period in which they are incurred and isare ~~now~~included ~~marketed as~~in ~~Multiferon~~cost of sales.

~~The~~Our ~~initial~~inventories ~~purchase~~are ~~consideration consisted~~stated ofat ~~2,933,190~~the ~~shares~~lower of ~~Viragen~~cost ~~International~~or ~~common~~market ~~stock~~(estimated net realizable value). InIf ~~January~~the ~~2002~~cost of the inventories exceeds their expected market value, ~~ViraNative~~provisions ~~achieved~~are ~~two~~recorded ~~milestones~~currently asfor ~~defined~~the indifference between the ~~acquisition~~cost ~~agreement~~and the market value. AsThese aprovisions ~~result,~~are ~~the~~determined ~~former~~based ~~shareholders~~on estimates. The valuation of our ~~ViraNative~~inventories ~~were~~also ~~issued~~requires anus ~~additional~~to ~~8,799,570 shares~~estimate ofexcess ~~Viragen~~inventories ~~International~~and ~~common~~inventories ~~stock~~that are not saleable. InThe ~~connection~~determination ~~with~~of excess or non-saleable inventories requires us to estimate the ~~acquisition,~~future demand for our product and consider the ~~former~~shelf ~~shareholders~~life of the ~~ViraNative~~inventory. ~~are~~If ~~entitled~~actual demand is less than our estimated demand, we could be required to ~~additional~~record ~~shares~~inventory ofwrite-downs, ~~Viragen~~which ~~International~~would ~~common~~have ~~stock~~an ~~contingent~~adverse ~~upon~~impact ~~the~~on ~~attainment~~our results of ~~certain~~operations. ~~milestones~~During the quarter ended December 31, 2004 we recorded a ~~related~~write-down toof ~~regulatory~~our ~~approvals:~~finished product inventory of approximately $540,000.

•Inventories ~~8,799,570~~consisted ~~additional shares when and if the Mutual Recognition Procedures application has received the approval~~ of the ~~requisite~~following ~~national~~at ~~and~~December ~~EU regulatory authorities for the use~~31, ~~sale~~2004 and ~~marketing~~June of30, ~~Multiferon~~2004: ~~in certain countries which must include Germany; and~~

• 2,933,190 additional shares when and if Multiferon has been approved by the requisite regulatory bodies in the EU for the treatment of Melanoma or when Multiferon has been approved by the requisite regulatory bodies for sale in the USA.


	December 31, 2004		June 30, 2004
Finished product	$	978,407	$	1,038,944
Work in process		2,033,423		2,176,116
Raw materials and supplies		318,007		262,154

Total inventories	$	3,329,837	$	3,477,214

IfCertain ~~and~~raw asmaterials used ~~each~~in the manufacture of ~~these~~our ~~milestones~~natural ishuman ~~met~~alpha interferon product, ~~the~~including ~~additional~~human ~~shares~~white blood cells, are only available from a limited number of ~~Viragen~~suppliers. ~~International~~We ~~will~~are bedependent ~~issued~~on our suppliers to allocate a sufficient portion of their capacity to meet our needs.

NOTE D – GOODWILL AND OTHER INTANGIBLE ASSETS

~~The~~On ~~goodwill~~September ~~reported in our balance sheets as of December 31~~28, ~~2003 and June 30~~2001, ~~2003~~we ~~arose~~acquired ~~from~~all ~~our acquisition~~ of ~~ViraNative~~the ~~on September 28, 2001 and~~outstanding ~~the~~shares ~~subsequent attainment~~ of ~~certain~~BioNative ~~milestones~~AB by(“BioNative”), ~~ViraNative~~a inprivately ~~January~~held ~~2002~~biotechnology ascompany ~~discussed~~located in ~~Note~~Umeå, CSweden. Subsequent to the ~~initial~~acquisition, ~~recording~~BioNative ofwas ~~goodwill,~~renamed ~~the~~ViraNative. ~~gross~~The ~~carrying~~initial ~~amount~~purchase ~~has~~consideration ~~increased~~consisted byof ~~approximately $3~~2,~~144~~933,~~000~~190 ~~as a result~~ shares of ~~foreign currency~~Viragen ~~fluctuations~~International ~~between~~common ~~the U~~stock.S. ~~dollar~~In ~~and~~January ~~the~~2002, ~~Swedish~~ViraNative ~~Krona.~~achieved ~~The~~two ~~following~~milestones ~~table~~defined ~~reflects~~in the ~~changes~~acquisition inagreement. As a result, the ~~carrying~~former ~~amount~~shareholders of ~~goodwill~~ViraNative ~~for~~were ~~the~~issued ~~six~~an ~~months~~additional ~~ended~~8,799,570 ~~December~~shares ~~31,~~of ~~2003:~~Viragen International common stock.

Balance as of June 30, 2003	$	9,678,302
Foreign exchange adjustment		1,053,442
Balance as of December 31, 2003	$	10,731,744

In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, this goodwill is not amortized but is reviewed for impairment on an annual basis or sooner if indicators of impairment arise. During the fourth quarter of our fiscal year ended June 30, 2003, we completed the annual impairment review of our goodwill with the assistance of an independent valuation firm. Based on the results of the review, we determined that no impairment of this asset existed as of April 1, 2003. As of December 31, 2003, we are not aware of any items or events that would cause us to adjust the recorded value of our goodwill for impairment. Future changes in the estimates used to conduct the impairment review, including revenue projections or the fair market value of the shares of our common stock, could cause our analysis to indicate that our goodwill is impaired in subsequent periods and result in a write-off of a portion or all of our goodwill.

VIRAGEN INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

NOTE D – GOODWILL AND OTHER INTANGIBLE ASSETS – (Continued)

The goodwill ~~developed technology intangible asset~~ reported in our balance sheets as of December 31, ~~2003~~2004 and June 30, ~~2003~~2004 arose from our acquisition of ViraNative onand ~~September~~the ~~28,~~subsequent ~~2001~~achievement of the milestones. ASubsequent ~~detail~~to the initial recording of ~~our~~goodwill, ~~developed~~the ~~technology~~gross ~~intangible~~carrying ~~asset~~amount has increased by approximately $4,174,000 as a result of ~~December~~foreign ~~31,~~currency ~~2003~~fluctuations between the U.S. dollar and ~~June~~the ~~30,~~Swedish ~~2003~~Krona. isThe asfollowing ~~follows~~table reflects the changes in the carrying amount of goodwill for the six months ended December 31, 2004:

	December 31,2003			June 30,2003
Balance as of June 30, 2004	$	10,295,140
Developed technology, gross	$	2,364,675		$	2,132,555
Foreign exchange adjustment		1,466,739
Accumulated amortization		(375,566	)		(263,433	)
Balance as of December 31, 2004	$	11,761,879
Developed technology, net	$	1,989,109		$	1,869,122

~~Our~~In ~~developed~~accordance with ~~technology~~Statement ~~consists~~ of ~~the~~Financial ~~production~~Accounting Standards No. 142, Goodwill and ~~purification~~Other ~~methods~~Intangible ~~developed~~Assets, bygoodwill ~~ViraNative~~is ~~prior~~not toamortized ~~the~~but ~~acquisition~~is byreviewed ~~Viragen~~for ~~International~~impairment on an annual basis or sooner if indicators of impairment arise. ~~This~~We ~~technology~~periodically ~~was~~evaluate ~~complete~~that acquired ~~and~~business ~~ViraNative~~for ~~had~~potential ~~been~~impairment ~~selling~~indicators. Our judgments regarding the ~~resultant~~existence ~~natural~~of ~~interferon~~impairment ~~product~~indicators ~~prior~~are to based on legal factors, market conditions, and the ~~acquisition~~operational byperformance ~~Viragen~~of ~~International~~the acquired business. ~~Developed~~As ~~technology~~of ~~was~~April ~~recorded~~1, at2004, ~~its~~we evaluated ~~estimated~~our ~~fair~~goodwill ~~value~~for atimpairment with the ~~date~~assistance of ~~acquisition~~an independent valuation firm. ~~Subsequent~~The toimpairment ~~the~~review ~~initial~~indicated ~~recording~~that ofour ~~this~~goodwill ~~intangible~~was ~~asset,~~not impaired. Future changes in the ~~gross~~estimates ~~carrying~~used ~~amount~~to ~~has~~conduct ~~increased~~the byimpairment review, including revenue ~~approximately~~projections ~~$715~~or market values,~~000~~ ascould acause ~~result~~our ofanalysis ~~foreign~~to ~~currency~~indicate ~~fluctuations~~that ~~between~~our ~~the~~goodwill ~~U.S.~~is ~~dollar~~impaired in subsequent periods and ~~the~~result ~~Swedish~~in ~~Krona~~a write-off of a portion or all of our goodwill.

The developed technology intangible asset reported in our balance sheets as of December 31, 2004 and June 30, 2004 arose from our acquisition of ViraNative. A detail of our developed technology intangible asset as of December 31, 2004 and June 30, 2004 is as follows:


	December 31, 2004			June 30, 2004
Developed technology	$	2,591,659		$	2,268,472
Accumulated amortization		(594,557	)		(440,350	)

Developed technology, net	$	1,997,102		$	1,828,122

Our developed technology consists of the production and purification methods developed by ViraNative prior to the acquisition by Viragen International. This technology was complete and ViraNative had been selling the resultant natural interferon product prior to the acquisition by Viragen International. Developed technology was recorded at its estimated fair value at the date of acquisition. Subsequent to the initial recording of this intangible asset, the gross carrying amount has increased by approximately $942,000 as a result of foreign currency fluctuations between the U.S. dollar and the Swedish Krona.

Developed technology is being amortized over its estimated useful life of approximately 14 years. The 14-year life assigned to this asset was determined using a weighted average of the remaining lives of the patents on the various components of the production and purification processes.

The estimated aggregate amortization expense for the fiscal year ending June 30, 2004 and the four succeeding fiscal years is as follows:

2004	$	154,000
2005		155,000
2006		155,000
2007		155,000
2008		155,000

Our intangible assets were pledged as collateral in connection with a series of convertible debentures issued by Viragen, Inc., our parent company. These debentures were issued from January 2003 through June 2003 totaling approximately $11.8 million. As of December 31, 2003, there was no principal balance outstanding on these convertible debentures. Viragen, Inc., satisfied the obligation either by payment of the outstanding debentures or through the issuance of shares of Viragen common stock upon conversion of the debentures.

VIRAGEN INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

NOTE E – ~~INVENTORIES~~ DEBT

Inventories consist of raw materials and supplies, work in process, and finished product. Finished product consists of purified natural human alpha interferon. Finished product and work in process costs consisting of materials, labor and overhead are recorded at a standard cost (which approximates actual cost). Raw materials and supplies cost is determined on a first-in, first-out basis. Our inventories are stated at the lower of cost or market (estimated net realizable value). If the cost of the inventories exceeds their expected market value, provisions are recorded currently for the difference between the cost and the market value. These provisions are determined based on estimates.

Inventories consisted of the following at December 31, 2003 and June 30, 2003:

	December 31,2003		June 30,2003
Finished product	$	1,197,315	$	845,836
Work in process		2,268,402		2,307,499
Raw materials and supplies		199,522		158,248
Total inventories	$	3,665,239	$	3,311,583

Certain raw materials used in the manufacture of our natural human alpha interferon product are available from a limited number of suppliers. We are dependent on our suppliers to allocate a sufficient portion of their capacity to meet our needs.

NOTE F – DEBT

Line of Credit

~~Through~~Our ~~our~~ Swedish subsidiary maintains an overdraft facility, ~~ViraNative~~denominated in Swedish Krona, wewith ~~may~~a ~~borrow~~bank upin toSweden. ~~approximately~~In $1July 2004,~~160,000~~ ~~under~~the anterms of this overdraft facility ~~with~~were renegotiated to provide for a ~~bank~~reduced interest rate and a reduction in ~~Sweden~~the maximum borrowing capacity. ~~Borrowings~~The maximum borrowing capacity on this overdraft facility was approximately $908,000 as of December 31, 2004 compared to $1.1 million at June 30, 2004. Borrowings outstanding under this overdraft facility are at a floating rate of interest, which was approximately 75.425% at December 31, ~~2003~~2004 compared to 7.40% ~~The~~at June 30, 2004. This overdraft facility renews annually and was renewed in December ~~2003~~2004. ~~Outstanding~~There ~~borrowings~~was ~~under~~no ~~this~~outstanding ~~agreement~~balance ~~totaled~~under ~~approximately $842,000~~this ~~and~~overdraft ~~$999,000~~facility as of December 31, ~~2003~~2004. ~~and~~Outstanding borrowings under this overdraft facility were approximately $807,000 as of June 30, ~~2003, respectively~~2004. ~~The~~This overdraft facility is secured by certain assets of ViraNative including inventories and accounts receivable.

Long-Term Debt

~~Long-term~~Our ~~debt~~Swedish ~~includes~~subsidiary has a 25-year mortgage with a Swedish bank obtained to purchase one of our facilities in Sweden. The outstanding principal balance on this loan, which is payable in Swedish Krona, was approximately $~~736~~768,000 and $~~680~~689,000 at December 31, ~~2003~~2004 and June 30, ~~2003~~2004, respectively. This loan carries a floating rate of interest which was approximately 5.25% at December 31, ~~2003~~2004 and June 30, 2004. We are required to make quarterly payments of principal and interest of approximately $912,000 under this agreement. This loan matures in September 2024 and is secured by the related land and building, including improvements, with a carrying value of approximately $~~925,000~~2.8 million as of December 31, ~~2003~~2004.

Under the terms of a loan with a Swedish governmental agency that was obtained for the purposes of conducting clinical trials, we were required to make quarterly payments of principal and interest of approximately $34,000. The loan carried a floating rate of interest at the Stockholm interbank offered rate (STIBOR) 90 plus 7%, which was approximately 9.3% as of June 30, 2004. This loan had an outstanding balance, which was payable in Swedish Krona, of approximately $537,000 at June 30, 2004. On September 30, 2004, we paid the entire outstanding principal including accrued interest on this loan. No amounts are due on this loan as of December 31, 2004.

NOTE F – CAPITAL STOCK

On August 31, 2004, Viragen contributed to capital $1,000,000 in inter-company balances with Viragen International. On that date, the closing price of our common stock was $0.18 per share as quoted on the over-the-counter bulletin board. Viragen received 5,555,556 shares of our common stock for the capital contribution. This contribution increased Viragen’s ownership of our outstanding common stock to approximately 81.2%.

VIRAGEN INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -– (Continued)

(Unaudited)

NOTE F – ~~DEBT~~CAPITAL STOCK – (Continued)

~~Under~~In ~~the~~connection ~~terms of a loan~~ with ~~a Swedish governmental agency that was obtained for~~ the ~~purposes of~~ ~~conducting~~acquisition ~~clinical trials, we are required to make quarterly payments~~ of ~~principal~~ViraNative ~~and~~discussed ~~interest~~in ofNote ~~approximately $31~~D,~~000.~~ ~~The~~the ~~loan~~former ~~carries~~shareholders ~~a floating rate~~ of ~~interest~~ViraNative atare ~~the~~entitled ~~Stockholm~~to ~~Interbank~~additional ~~Offered~~shares ~~Rate (STIBOR) 90 plus 7%, which was approximately 9.90% as~~ of ~~December~~Viragen ~~31,~~International ~~2003.~~common ~~This~~stock ~~loan~~contingent ~~had~~upon anthe ~~outstanding~~attainment ~~balance~~ of ~~approximately~~certain ~~$622,000~~milestones ~~and~~related ~~$505,000~~to atregulatory ~~December 31, 2003 and June 30, 2003, respectively.~~ approvals:

•

8,799,570 additional shares when and if a Mutual Recognition Procedures application is filed and receives approval from the requisite national and EU regulatory authorities for the use, sale and marketing of Multiferon^® in certain countries, which must include Germany; and

•

2,933,190 additional shares when and if Multiferon^® has been approved by the requisite regulatory bodies in the EU for the treatment of Melanoma or when Multiferon^® has been approved by the requisite regulatory bodies for sale in the USA.

If and as each of these milestones is met, additional shares of Viragen International will be issued.

NOTE G – ROYALTY AGREEMENT

Viragen, Inc., our parent company, and Medicore, Inc. entered into a royalty agreement with respect to interferon, transfer factor and products using interferon and transfer factor in November 1986. The agreement was subsequently amended in November 1989 and May 1993. The amended agreement 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,

•

4% of the next $10,000,000, and

•

3% of the next $55,000,000

These royalties are to be paid until the total of $2,400,000 is achieved. The amended agreement also states that royalties of approximately $108,000 previously accrued by Viragen, Inc. prior to May 1993 under the agreement are payable to Medicore as the final payment. From May 1993 through September 2001, Viragen, Inc. paid royalties under the amended agreement totaling approximately $70,000.

Royalties owed to Medicore of approximately $90,000, based on our natural human alpha interferon sales from October 1, 2001 through June 30, 2003, are payable asin ~~follows~~three installments: $30,000 was payable by August 1, 2003; $30,000 was payable by August 1, 2004; and $30,000 is payable by August 1, 2005. The ~~payment~~first two ofinstallments totaling $3060,000, ~~due~~plus ~~August 1~~$3,000 ~~2003~~in ~~has~~interest, have been made. WeSubsequent ~~will~~to ~~pay~~June 30, 2003, in accordance with the terms of the amended agreement, royalties are paid to Medicore based on ~~the~~sales ~~sale~~ of ~~our~~ natural human alpha interferon ~~subsequent~~on toa quarterly ~~June~~basis. ~~30,~~For ~~2003~~the onthree amonths ~~quarterly~~ended ~~basis~~December in31, ~~accordance~~2004 ~~with~~and ~~the~~2003, ~~terms~~royalties ofdue under the ~~amended~~ agreement. ~~For~~totaled ~~the~~approximately ~~three~~$2,000 and $3,000, respectively. For the six months ended December 31, 2004 and 2003, royalties due under the agreement totaled approximately $24,~~900~~000 and $56,~~500~~000, respectively.

NOTE H – COMPREHENSIVE LOSS

Comprehensive loss is comprised of our net loss and other comprehensive income. Other comprehensive income refers to revenue, expenses, gains and losses that under accounting principles generally accepted in the United States are included in comprehensive loss but are excluded from net loss as these amounts are recorded directly as an adjustment to stockholders’ equity. Our other comprehensive income is composed of foreign currency translation adjustments. The following table sets forth the computation of comprehensive loss for the periods indicated:

	Three Months Ended December 31,						Six Months Ended December 31,
	2003			2002			2003			2002
Net loss	$	(1,686,858	)	$	(1,115,337	)	$	(3,111,473	)	$	(2,221,239	)
Other comprehensive income:
Currency translation adjustment		1,033,684			769,550			1,719,611			721,592
Comprehensive loss	$	(653,174	)	$	(345,787	)	$	(1,391,862	)	$	(1,499,647	)

VIRAGEN INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

NOTE H – COMPREHENSIVE LOSS

Comprehensive loss is comprised of our net loss and other comprehensive income. Other comprehensive income refers to revenue, expenses, gains and losses that under accounting principles generally accepted in the United States are included in comprehensive loss but are excluded from net loss as these amounts are recorded directly as an adjustment to stockholders’ equity. Our other comprehensive income consists of foreign currency translation adjustments. The following table sets forth the computation of comprehensive loss for the periods indicated:


	Three Months Ended December 31,						Six Months Ended December 31,
	2004			2003			2004			2003
Net loss	$	(1,954,154	)	$	(1,686,858	)	$	(3,893,555	)	$	(3,111,473	)
Other comprehensive income:
Currency translation adjustment		1,555,525			1,033,684			1,978,565			1,719,611

Comprehensive loss	$	(398,629	)	$	(653,174	)	$	(1,914,990	)	$	(1,391,862	)

NOTE I – TRANSACTIONS WITH PARENT

Viragen, ~~our parent company,~~ provides certain administrative services to us including management and general corporate assistance. Viragen also incurs certain costs attributable to us including insurance, rent and ~~rent~~professional services. These expenses are charged on the basis of direct usage, when identifiable, or on the basis of estimated time spent. ~~Management~~We ~~believes~~believe that the expenses allocated to Viragen International are representative of the operating expenses incurred by Viragen on our behalf. However, the financial information included herein may not reflect the consolidated financial statements of Viragen International had we operated as a separate stand-alone entity during the periods presented. For the three and six months ended December 31, ~~2003~~2004, expenses allocated by Viragen totaled approximately $~~223~~343,000 and $~~447~~690,000, respectively, compared to approximately $~~232~~254,000 and $~~472~~509,000 for the three and six months ended December 31, ~~2002~~2003, respectively.

InViragen ~~January,~~(Scotland) ~~February,~~conducts ~~April,~~research ~~May,~~and development and ~~June~~performs ~~2003,~~administrative ~~Viragen~~functions ~~International,~~on ~~its~~behalf ~~subsidiaries~~of ~~and~~Viragen. ~~all~~These ~~wholly-owned~~costs ~~subsidiaries~~incurred ofby Viragen (Scotland) ~~executed~~relate ~~guarantee~~to oncology and ~~security~~avian ~~agreements~~transgenic ~~collateralizing~~projects aand ~~series~~are ofallocated ~~convertible debentures~~to ~~issued by~~ Viragen ~~totaling~~as ~~approximately $11~~incurred.8 ~~million.~~For ~~The~~the ~~guarantee~~three and ~~security~~six ~~agreements~~months ~~covered~~ended ~~all~~December ~~assets~~31, ~~including~~2004, ~~tangible~~research and ~~intangible~~development ~~assets~~costs ~~not~~charged ~~otherwise~~to ~~pledged,~~Viragen oftotaled ~~Viragen~~approximately $386,000 and $733,000, ~~its~~respectively ~~subsidiaries~~compared to approximately $303,000 ~~including~~and ~~Viragen International.~~$537,000 Asfor ofthe three and six months ended December 31, 2003, ~~there~~respectively. ~~was~~The noamount ~~principal~~of ~~balance~~administrative ~~outstanding~~expenses oncharged ~~these~~to ~~convertible~~Viragen ~~debentures.~~totaled ~~Viragen~~approximately $25,000 ~~Inc.~~and $70,000, ~~satisfied~~for the three ~~obligation~~and ~~either~~six bymonths ~~payment~~ended ofDecember ~~the~~31, ~~outstanding~~2004, ~~debentures~~respectively orcompared ~~through~~to approximately $61,000 and $87,000 for the ~~issuance~~three ofand ~~shares~~six ofmonths ended December 31, 2003, respectively. These expenses charged to Viragen are offset against the respective line ~~common~~items ~~stock~~in ~~upon~~our ~~conversion~~statements of ~~the debentures~~operations.

NOTE J – RECENT ACCOUNTING PRONOUNCEMENTS

In January 2003, FASB issued Interpretation Number 46, Consolidation of Variable Interest Entities (FIN No. 46). This interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements, provides guidance for identifying a controlling interest in a variable interest entity established by means other than voting interests. FIN No. 46 also requires consolidation of a variable interest entity by an enterprise that holds such a controlling interest. In December 2003, the FASB completed its deliberations regarding the proposed modification to FIN No. 46 and issued Interpretation Number 46R, Consolidation of Variable Interest Entities – an Interpretation of ARB No. 51 (FIN No. 46R). The decisions reached included a deferral of the effective date and provisions for additional scope exceptions for certain types of variable interests. Application of FIN No. 46R is required in financial statements of public entities that have interests in variable interest entities or potential variable interest entities commonly referred to as special-purpose entities for periods ending after December 15, 2003. Application by public entities (other than small business issuers) for all other types of entities is required in financial statements for periods ending after March 15, 2004. We do not expect the adoption of FIN No. 46R to have a material impact on our consolidated financial position, results of operations or cash flows.

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. SFAS 149 improves financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. SFAS 149 clarifies 1) the circumstances in which a contract with an initial net investment meets the characteristics of a derivative, 2) when a derivative contains a financing component and amends certain other existing pronouncements. This Statement is effective for contracts entered into or modified after June 30, 2003. Adoption of this standard did not have a material impact on our consolidated financial position, results of operations or cash flows.

VIRAGEN INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -– (Continued)

(Unaudited)

NOTE JI – ~~RECENT~~ ~~ACCOUNTING~~TRANSACTIONS ~~PRONOUNCEMENTS~~WITH PARENT – (Continued)

InDuring ~~May~~the quarter ~~2003~~ended December 31, 2004 we recorded a $596,000 gain on the ~~FASB~~remeasurement ~~issued~~of ~~SFAS~~a Noliability to Viragen, Inc. ~~150~~by Viragen (Scotland), ~~Accounting~~which ~~for~~was ~~Certain~~denominated ~~Financial~~in ~~Instruments~~U.S. ~~with~~dollars. In prior periods, this liability had been translated at historical ~~Characteristics~~exchange ofrates ~~both~~since ~~Liabilities~~this ~~and~~liability ~~Equity.~~was ~~SFAS~~determined Noto be long-term in nature. ~~150~~This ~~requires~~determination ~~that~~was ~~certain~~based ~~financial~~on ~~instruments,~~the ~~which~~fact ~~under~~that ~~previous~~Viragen ~~guidance~~(Scotland) ~~were~~did ~~accounted~~not ~~for~~have asthe ~~equity,~~ability beor ~~accounted~~intent ~~for~~to asrepay ~~liabilities~~the liability to Viragen. ~~The~~Beginning ~~financial~~in ~~instruments~~fiscal ~~affected~~2002, ~~include~~Viragen ~~mandatorily~~(Scotland) ~~redeemable~~began ~~stock~~gradually settling the liability by charging Viragen, ~~certain~~Inc. ~~financial~~for ~~instruments~~services ~~that~~performed ~~require~~on ortheir ~~may~~behalf. ~~require~~Management anticipates the ~~issuer~~liability towill ~~buy~~be ~~back~~settled ~~some~~through ofthese ~~its~~charges ~~shares~~ in ~~exchange~~the ~~for~~near ~~cash~~term. orTherefore, ~~other~~during ~~assets~~the ~~and~~quarter ~~certain~~ended December ~~obligations~~31, 2004, it was determined that ~~can~~the account should no longer be ~~settled~~considered ~~with~~long-term ~~shares~~and ofthus ~~stock~~translation at current exchange rates is appropriate. ~~SFAS~~Since Nothe liability was denominated in U.S. ~~150~~dollars ~~is effective~~and ~~for~~the ~~all~~Pound ~~financial~~Sterling ~~instruments~~has ~~entered~~been strengthening ~~into~~against orthe ~~modified~~U.S. ~~after~~dollar ~~May~~over 31the last few years, ~~2003~~the ~~and~~remeasurement ~~must~~of bethe ~~applied~~liability toresulted ~~existing~~in ~~financial~~a ~~instruments~~gain. ~~effective~~Had ~~after~~the determination been made when Viragen (Scotland) began settling the ~~beginning~~liability ofwith charges to Viragen in prior periods and the ~~first~~liability ~~fiscal~~been ~~period~~remeasured ~~after~~at ~~June~~then 15current exchange rates, ~~2003.~~the ~~Adoption~~impact ofon ~~this~~the ~~standard~~statements ~~did~~of operations would not have abeen material ~~impact~~and there would have been no effect on ~~our~~stockholders’ ~~consolidated~~equity ~~financial~~as ~~position,~~such ~~results~~currency ofgains ~~operations~~are orreclassifications ~~cash~~from accumulated ~~flows~~other comprehensive income.

NOTE J – CONTRIBUTION

During the quarter ended December 31, 2004 we received a contribution in the amount of $278,000 from a business development agency in Sweden. This contribution was awarded in connection with our capital investment in our renovated facility in Umeå, Sweden, which was completed during our fiscal year ended June 30, 2004. This contribution was recorded as a reduction of the cost of the building improvements. We could be required to repay a portion of this contribution if we do not meet certain conditions under the award, including, but not limited to, keeping the facility in operation. The amount we could be required to repay decreases on an annual basis beginning in July 2005. After July 2005, we could only be required to repay 70% of the award. Upon the second, third and fourth anniversary, the repayment amount decreases to 45%, 25% and 10%, respectively, of the award. At this time, we have no reason to believe we will be required to repay any portion of the contribution.

VIRAGEN INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

NOTE K – RECENT ACCOUNTING PRONOUNCEMENTS

In December 2004, the Financial Accounting Standards Board (FASB) issued Statement No. 123R, Share-Based Payment, which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation. Statement No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. This new standard will be effective for public companies in the first interim or annual reporting period beginning after June 15, 2005. We plan to adopt Statement No. 123R on July 1, 2005. Statement No. 123R permits public companies to adopt its requirements using one of two methods:

A “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of Statement No. 123R for all share-based payments granted after the effective date and (b) based on the requirements of Statement No. 123 for all awards granted to employees prior to the effective date of Statement No. 123R that remain unvested on the effective date.

A “modified retrospective” method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under Statement No. 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption.

We are evaluating the methods of adoption and have not determined which method will be used to adopt the requirements of Statement 123R.

We are unable to determine the future impact of the adoption of Statement No. 123R on our results of operations because the amount and terms of future share-based payments are not known at this time. As of December 31, 2004, all outstanding stock options granted to employees and directors are fully vested. Had we adopted Statement 123R in prior periods, the impact of that standard would have approximated the impact of Statement No. 123 as described in the disclosure of pro forma net loss and loss per common share in Note B.

In November 2004, the FASB issued FASB Statement No. 151, Inventory Costs - an Amendment of ARB No. 43, Chapter 4. Statement No. 151 amends ARB 43, Chapter 4, to clarify that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges. Historically, we have expensed such costs as incurred. In addition, this Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The provisions of this Statement are effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The adoption of the provisions of SFAS No. 151 is not expected to have a material impact on our financial position or results of operations.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Introduction

We are engaged in the research, development, manufacture, and sale of a natural human alpha interferon product indicated for treatment of a broad range of viral and malignant diseases. We produce a natural human alpha interferon product under the tradename of Multiferon^® from human white blood cells, also known as leukocytes. Natural alpha interferon is one of the body’s most important natural defense mechanisms to foreign substances like viruses, but it also stimulates and modulates the human immune system. In addition, interferon inhibits the growth of various viruses including those associated with diseases such as hepatitis.

We are a majority owned subsidiary of Viragen, Inc. (Viragen) (AMEX: VRA). As of December 31, 2004, Viragen owned 59,818,301 shares of our common stock representing approximately 81.2% of our 73,669,320 outstanding shares. We operate through our foreign wholly owned subsidiaries, ViraNative AB (“ViraNative”), a company located in Umeå, Sweden and Viragen (Scotland) Limited (“Viragen (Scotland)”), a company located near Edinburgh, Scotland. ViraNative and Viragen (Scotland) house our manufacturing and research laboratory facilities.

Cautionary Factors That May Affect Future Results

This document and other documents we may file with the Securities and Exchange Commission contain forward-looking statements. Also, our ~~company~~ management may make forward-looking statements orally to investors, analysts, the media and others.

Forward-looking statements express our expectations or predictions of future events or results. They are not guarantees and are subject to many risks and uncertainties. There are a number of factors—many beyond our control—that could cause actual events or results to be significantly different from those described in the forward-looking statement. Any or all of our forward-looking statements in this report or in any other public statements we make may turn out to be wrong.

Forward-looking statements might include one or more of the following:

• anticipated debt or equity fundings;

•

projections of future revenue;

•

anticipated debt or equity fundings;

•

anticipated clinical trial commencement dates, completion timelines or results;

•

anticipated receipt of regulatory approvals;

•

descriptions of plans or objectives of management for future operations, products or services;

•

forecasts of future economic performance; and

•

descriptions or assumptions underlying or relating to any of the above items.

Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They use words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe” or words of similar meaning. They may also use words such as “~~will~~would,” “~~would~~should,” “~~should,” “~~could” or “may.”

~~Factors~~15 that may cause actual results to differ materially include the risks and uncertainties discussed below, as well as in the “Risk Factors” section included in our Prospectus (File No. 333-75998) filed on November 22, 2002 with the Securities and Exchange Commission pursuant to Rule 424 (b) (3) of the Securities Act of 1933. You should read them. You should also read the risk factors listed from time to time in our reports on Forms 10-Q or 10-K and registration statements and amendments, if any. We will provide you with a copy of any or all of these documents at no charge.

OurTable business, results of operations and financial condition could be adversely affected by a number of risks and uncertainties, including the following: Contents

Factors that may cause actual results to differ materially include the risks and uncertainties discussed below, as well as in the “Risk Factors” section included in our Prospectus (File No. 333-75998) filed on November 22, 2002 with the Securities and Exchange Commission pursuant to Rule 424(b)(3) of the Securities Act of 1933. You should read them. You should also read the risk factors identified from time to time in our reports on Forms 10-Q or 10-K and registration statements and amendments, if any. We will provide you with a copy of any or all of these documents at no charge. Copies of these documents may also be obtained free of charge from our website at www.viragen.com and the Securities and Exchange Commission website at www.sec.gov. The information on our website is neither incorporated into, nor a part of this report.

Our business, results of operations and financial condition could be materially and adversely affected by a number of risks and uncertainties, which could result in our having to curtail or possibly suspend or cease operations. These risks and uncertainties include the following:

•

whether we are able to secure sufficient funding to maintain our operations, complete clinical trials, and successfully market our product;

• whether the efficacy, production, price and timing of approvals of our natural human alpha interferon will enable us to compete with other well established, highly capitalized, biopharmaceutical companies;

•

whether our patent applications result in the issuance of patents, or whether patents and other intellectual property rights provide adequate protections in the event of misappropriation or infringement by third parties;

•

whether clinical testing confirms the efficacy of our product, and results in the receipt of regulatory approvals. We have not sought the approval of our natural human alpha interferon product from the U.S. Food and Drug Administration or its European Union counterparts, except Sweden;

•

whether, despite achievement of regulatory approvals, our products are accepted as a treatment superior to that of our competitors; and

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whether we can generate revenue sufficient to offset our historical losses and achieve profitability.

Our natural human alpha interferon product was developed and is manufactured overseas in our Swedish facility. Our dependence on foreign manufacturing and expected international sales exposes us to a number of risks, including:

•

unexpected changes in regulatory requirements;

•

tariffs and other trade barriers, including import and export restrictions;

•

political or economic instability;

•

compliance with foreign laws;

•

transportation delays and interruptions;

•

difficulties in protecting intellectual property rights in foreign countries; and

•

currency exchange risks.

Recent Developments

In ~~February~~November 2004, ~~Viragen~~we ~~filed~~announced athe ~~patent~~approval of Multiferon® for sale in Bulgaria. The Bulgarian regulatory authorities approved an application ~~with~~filed by our distribution partner, Arriani Pharmaceuticals S.A., who holds the ~~British~~exclusive ~~Patent~~rights ~~Office~~to ~~covering~~distribute the ~~use~~drug ofin ~~natural,~~Greece ~~multi-subtype~~and designated ~~alpha~~Balkan ~~interferon~~countries. Multiferon® is now approved in Bulgaria for ~~human~~the second-line treatment of any and ~~prevention~~all ofdiseases ~~avian~~in ~~influenza~~which ~~virus,~~recombinant ~~commonly~~interferon ~~known~~therapy asfailed ~~avian~~or ~~flu~~the patient was unable to tolerate the regimen.

~~Avian~~16 influenza is an infectious viral disease of birds caused by type A influenza strain. The type A influenza group of viruses have certain characteristics that make them of particular concern to the human population. They have a tendency to undergo mutation, resulting in new variants for which no vaccine is available. In addition, such viruses have the potential to combine with viruses from other species, leading to pandemics due to the resulting difficulties in developing effective treatments or preventive measures.

WhileTable no studies are currently planned or ongoing, we believe that Multiferon is a prime candidate for evaluation in avian influenza studies. We are contacting those international research organizations which are conducting studies in this area and offering samples of our product for in vitro and human evaluations. Contents

In ~~November~~October ~~2003~~2004, we ~~entered~~announced ~~into~~the anresults ~~agreement~~from ~~with~~a ~~Pentafarma S.A.~~7-year ~~(Pentafarma)~~follow-up to ~~distribute~~a ~~our~~Phase ~~natural~~II/III ~~human~~clinical ~~alpha~~study ~~interferon,~~that evaluated ~~Multiferon™,~~the ~~exclusively~~use inof ~~Chile. Headquartered in Santiago~~Multiferon®, ~~Pentafarma~~our natural ishuman aalpha ~~specialized~~interferon, ~~leader~~ for the ~~distribution~~treatment of ~~healthcare~~malignant ~~products~~melanoma ~~related~~after tosurgical ~~dialysis~~removal ~~and~~of ~~nephrology~~all ~~and~~tumor ismasses acompared ~~wholly-owned~~to ~~subsidiary~~surgery ofalone. ~~Fresenius Medical~~The ~~Care,~~analysis ~~the~~confirmed ~~world’s~~a ~~largest,~~statistically ~~integrated~~significant ~~provider~~increase ofin ~~products~~overall ~~and~~survival ~~services~~ for ~~chronic~~patients ~~kidney~~treated ~~failure.~~with adjuvant ~~Pentafarma~~dacarbazine ~~believes~~(DTIC) ~~that~~followed by Multiferon®, ~~may~~compared ~~offer benefits~~ to apatients ~~growing~~with ~~segment~~no ofadjuvant ~~its~~treatment. ~~dialysis~~The ~~patients~~study ~~and~~data ~~intends~~served toas ~~initially evaluate~~ the ~~use~~basis offor ~~Multiferon~~our inapplication, ~~dialysis~~filed ~~patients~~in ~~diagnosed~~February ~~with~~2005 ~~chronic~~in ~~hepatitis~~Sweden, C.to ~~The~~seek ~~agreement~~expanded ~~provides~~approval ~~that~~for ~~Pentafarma~~Multiferon® ~~shall~~to ~~take~~include ~~all~~the ~~measures~~first-line ~~necessary~~adjuvant totreatment ~~achieve~~of ~~regulatory~~high-risk ~~approval~~malignant ~~for Multiferon in Chile~~melanoma.

After a 7-year follow-up, the results showed an actual 51.3% overall survival in high-risk patients treated with short-term DTIC, followed by Multiferon^® as adjuvant low-dose treatment for 6 months versus 30.3% overall survival among patients who underwent surgery only (p=0.0077).

A follow-up beyond 7 years was obtained in most patients and 9-year follow-up results showed an estimated 50.9% overall survival in the treated population versus 23.5% in the control group. This suggests that a significant survival benefit is sustained beyond 7 years.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. On an on-going basis, we evaluate our estimates, including those related to inventories, depreciation, amortization, asset valuation allowances, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe that the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements.

• Inventories. Inventories consist of raw materials and supplies, work in process and finished product. Finished product consists of purified natural human alpha interferon. ~~Our~~Cost ~~inventories are stated at the lower~~ of ~~cost~~raw ~~or market (estimated net realizable value). Raw~~ materials and supplies ~~cost~~are is determined on a first-in, first-out basis. ~~Work~~Cost of work in process and finished product, ~~costs~~ consisting of raw materials, labor and overhead, are recorded at a standard cost (which approximates actual cost). Excess/idle capacity costs are expensed in the period in which they are incurred and are recorded in cost of sales. Our inventories are stated at the lower of cost or market (estimated net realizable value). If the cost of ~~the~~our inventories exceeds their expected market value, provisions are recorded currently for the difference between the cost and the market value. These provisions are determined based on estimates. The valuation of our inventories also requires us to estimate excess inventories and inventories that are not saleable. The determination of excess or non-saleable inventories requires us to estimate the future demand for our product and consider the shelf life of the inventory. If actual demand is less than our estimated demand, we could be required to record inventory ~~reserves~~write-downs, which would have an adverse impact on our results of operations.

1517

•

Long-lived assets. In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we review our long-lived assets, including intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be fully recoverable. The assessment of possible impairment is based on our ability to recover the carrying value of our asset based on our estimate of its undiscounted future cash flows. If these estimated future cash flows are less than the carrying value of the asset, an impairment charge is recognized for the difference between the asset’s estimated fair value and its carrying value. As of the date of these financial statements, we are not aware of any items or events that would cause us to adjust the recorded value of our long-lived assets, including intangible assets, for impairment.

• Goodwill. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, goodwill is not amortized. Goodwill is reviewed for impairment on an annual basis or sooner if indicators of impairment arise. All of our goodwill arose from the acquisition of ViraNative in September 2001 and the subsequent achievement of certain milestones defined in the acquisition agreement. We periodically evaluate that acquired business for potential impairment indicators. Our judgments regarding the existence of impairment indicators are based on legal factors, market conditions, and the operational performance of the acquired business. During the fourth quarter of fiscal ~~2003~~2004, we completed our annual impairment review of our goodwill with the assistance of an independent valuation firm. The impairment review indicated that our goodwill was not impaired. Future changes in the estimates used to conduct the impairment review, including revenue projections or the fair market value of the shares of our common stock, could cause our analysis to indicate that our goodwill is impaired in subsequent periods and result in a write-off of a portion or all of our goodwill.

•

Revenue recognition. We recognize revenue from sales of our natural human alpha interferon product when title and risk of loss has been transferred, which is generally upon shipment. Moreover, recognition requires persuasive evidence that an arrangement exists, the price is fixed and determinable, and collectibility is reasonably assured.

Liquidity and Capital Resources

We are currently dependent upon advances by Viragen, Inc., our parent company, and to a lesser extent, revenue generated from the sale of our natural human alpha interferon product ~~and advances by Viragen~~, ~~Inc., our parent company,~~ to fund our operations. Our operating losses and working capital requirements continue to adversely affect cash flow. Historically, Viragen has provided us with the working capital necessary to fund operations. Viragen has sufficient capital on hand to fund their operations through at least December 31, 2005 and has agreed to provide us with the working capital necessary to fund our operations through at least December 31, ~~2004~~2005. However, Viragen will require besubstantial ~~required to raise~~ additional ~~funds~~funding to support our operations subsequent to December 31, ~~2004~~2005. If we are unable to generate sufficient cash flows from our operations, Viragen’s plans include seeking additional capital through equity and debt financings. No assurance can be given that additional capital will be available when required or upon terms acceptable to Viragen. Our or Viragen’s inability to generate substantial revenue or obtain additional capital through equity or debt financings, would have a material adverse effect on our financial condition and our ability to continue operations.

~~For~~18 the six months ended December 31, 2003, our funding consisted of revenue generated from the sale of our natural human alpha interferon product totaling approximately $112,000 and advances from our parent company totaling approximately $4,319,000. At December 31, 2003, cash on hand totaled approximately $320,000 and working capital totaled approximately $2,144,000, an increase of approximately $1,187,000 when compared to working capital of approximately $957,000 as of June 30, 2003. Cash used to fund operations during the six months ended December 31, 2003 totaled approximately $3,706,000, which included the reduction in our accounts payable and other accrued expenses balance by approximately $630,000 since June 30, 2003. During the six months ended December 31, 2003 we also had capital expenditures totaling approximately $775,000, primarily for the build-out of our production facility in Sweden.

~~Our~~For ~~future~~the ~~capital~~six ~~requirements~~months ~~are~~ended ~~dependent~~December ~~upon~~31, ~~many factors~~2004, ~~including:~~our ~~revenue~~funding ~~generated~~primarily consisted of net advances from ~~the~~our ~~sale~~parent ofcompany ~~our~~totaling ~~natural~~approximately ~~human~~$5,247,000. ~~alpha~~At ~~interferon~~December ~~product;~~31, ~~progress~~2004, ~~with~~cash ~~future~~on ~~and~~hand ~~ongoing~~totaled ~~clinical~~approximately ~~trials;~~$1,053,000 ~~the~~and ~~costs~~working ~~associated~~capital ~~with~~totaled ~~obtaining~~approximately ~~regulatory~~$3,650,000, ~~approvals;~~an ~~the~~increase ~~costs~~of ~~involved~~approximately in$1,221,000 ~~patent~~when ~~applications;~~compared ~~competing~~to ~~technologies~~working ~~and~~capital ~~market~~of ~~developments;~~approximately ~~and~~$2,429,000 ~~our~~as ~~ability~~of toJune ~~establish~~30, ~~collaborative~~2004. ~~arrangements~~Cash ~~and~~used ~~effective~~to ~~commercialization~~fund ~~activities.~~operations ~~For~~during ~~fiscal~~the ~~2004,~~six wemonths ~~anticipate~~ended ~~the~~December ~~need~~31, of2004 totaled approximately $74,002,000.0 ~~million~~We ~~for~~utilized ~~operating~~approximately ~~activities,~~ $1.5,350,000 ~~million~~of ~~for~~the ~~investing~~advances ~~activities and~~from ~~$0.2~~our ~~million~~parent company to ~~service~~payoff the outstanding borrowings on our ~~financing~~line ~~obligations~~of credit and a portion of our long-term debt in Sweden.

~~Manufacturing~~During ofthe ~~our~~quarter ~~natural~~ended ~~human~~December ~~alpha~~31, ~~interferon~~2004 atwe ~~our~~received ~~leased~~a ~~facility~~contribution in ~~Umea,~~the ~~Sweden~~amount of $278,000 ~~has~~from ~~been~~a ~~suspended~~business ~~since~~development ~~March~~agency ~~31,~~in ~~2003~~Sweden. This ~~planned~~contribution ~~break in routine manufacturing~~ was ~~necessary~~awarded toin ~~allow~~connection ~~for~~with ~~certain~~our ~~steps~~capital ofinvestment ~~the production~~in ~~process to be segregated and transferred to~~ our ~~owned~~renovated facility ~~which is also located~~ in ~~Umea~~Umeå, Sweden, which iswas incompleted ~~the~~during ~~process~~our offiscal ~~being~~year ~~renovated.~~ended ~~Renovation~~June of30, ~~this~~2004. ~~facility~~This ~~commenced~~contribution inwas ~~2003~~recorded ~~and~~as isa inreduction ~~line~~of ~~with~~the ~~our~~cost ~~plan~~of tothe ~~expand~~building ~~our~~improvements. ~~productive capacity~~We ofcould ~~our~~be ~~natural~~required ~~human~~to ~~alpha~~repay ~~interferon.~~a ~~The~~portion ~~estimated total cost~~ of this contribution ~~initial~~if ~~phase~~we isdo ~~$1.2~~not ~~million~~meet ~~and~~certain itconditions isunder ~~scheduled~~the toaward, beincluding, ~~completed~~but ~~during~~not ~~2004.~~limited Asto, ofkeeping ~~December~~the ~~31,~~facility ~~2003,~~in weoperation. ~~have~~The ~~invested~~amount ~~approximately~~we ~~$775,000~~could onbe ~~the~~required ~~renovation~~to ~~of this~~repay ~~facility~~decreases ~~and~~on ~~the~~an ~~project~~annual isbasis ~~proceeding~~beginning ~~according~~in toJuly ~~plan~~2005. WeAfter ~~believe~~July ~~that~~2005, ~~our~~we could ~~current~~only ~~inventory~~be ~~levels~~required ~~are sufficient~~ to ~~meet~~repay ~~our~~70% ~~current~~of ~~sales~~the ~~forecasts~~award. ~~during~~Upon the ~~period~~second, inthird ~~which~~and ~~routine~~fourth ~~production~~anniversary, isthe ~~planned~~repayment toamount bedecreases ~~suspended.~~to We45%, ~~plan~~25% ~~to expand~~and ~~the~~10%, ~~use~~respectively, of ~~our~~the ~~owned~~award. ~~facility~~At inthis ~~phases~~time, ~~based~~we onhave ~~product~~no ~~demand~~reason ~~and~~to ~~available~~believe ~~financing.~~we ~~Maximum~~will ~~expansion,~~be ifrequired ~~warranted, could cost up~~ to anrepay any ~~additional~~portion ~~$10~~of ~~million~~the contribution.

WeOur ~~believe~~future ~~that~~cash ~~our natural human alpha interferon product can be manufactured in sufficient quantity and be priced at a~~requirements ~~level~~are todependent ~~offer~~upon ~~patients~~many ~~an attractive alternative treatment to the synthetic interferons currently being marketed. However~~factors, weincluding: can not assure you of the success of our commercialization efforts and other projects. Required regulatory approvals are subject to the successful completion of lengthy and costly clinical trials. The successful commercialization of Multiferon and the completion of required clinical trials and facility expansions depend on our ability to raise significant additional funding.

•

revenue generated from the sale of our natural human alpha interferon product;

•

progress with future clinical trials;

•

the costs associated with obtaining regulatory approvals;

•

the costs involved in patent applications;

•

competing technologies and market developments; and

•

our ability to establish collaborative arrangements and effective commercialization activities.

For the remainder of fiscal 2005, we anticipate the need of approximately $4.0 million for operating activities, $500,000 for investing activities and $50,000 to service our financing obligations other than with our parent, Viragen.

Our Swedish subsidiary maintains an overdraft facility, denominated in Swedish Krona, with a bank in Sweden. In July 2004, the terms of this overdraft facility were renegotiated to provide for a reduced interest rate and a reduction in the maximum borrowing capacity. The maximum borrowing capacity on this overdraft facility was approximately $908,000 as of December 31, 2004 compared to $1.1 million at June 30, 2004. Borrowings outstanding under this overdraft facility are at a floating rate of interest, which was approximately 5.25% at December 31, 2004 compared to 7.4% at June 30, 2004. The overdraft facility renews annually and was renewed in December 2004. There was no outstanding balance under this overdraft facility as of December 31, 2004. Outstanding borrowings under this overdraft facility were approximately $807,000 as of June 30, 2004. This overdraft facility is secured by certain assets of ViraNative including inventories and accounts receivable.

Manufacturing of Multiferon^® at our leased facility in Umeå, Sweden, was suspended in March 31, 2003. This planned break in routine manufacturing was necessary to allow for certain steps of our production process to be segregated and transferred to our owned facility also located in Umeå, Sweden. Renovation of this facility commenced in 2003 and was in line with our plan to expand our productive capacity of our natural human alpha interferon. The cost of this initial phase totaled approximately $1.5 million and was completed during September 2004. Production of Multiferon^® will resume as demand dictates. We believe that our current inventory levels are sufficient to meet our current sales demand for the remainder of at least fiscal 2005. We plan to expand the use of our owned facility in phases based on product demand and available financing. Maximum expansion, if warranted, could cost up to an additional estimated $10 million.

We believe that our natural human alpha interferon product 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. However, we can not assure you of the success of our commercialization efforts and other projects. Required regulatory approvals are subject to the successful completion of lengthy and costly clinical trials. The successful commercialization of Multiferon^® and the completion of required clinical trials and facility expansions depend on our ability to raise significant additional funding.

Off Balance Sheet Arrangements

Under SEC regulations, we are required to disclose our off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. An off-balance sheet arrangement means a transaction, agreement or contractual arrangement to which any entity that is not consolidated with us is a party, under which we have:

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Any obligation under certain guarantee contracts;

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Any retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity or market risk support to that entity for such assets;

•

Any obligation under a contract that would be accounted for as a derivative instrument, except that it is both indexed to our stock and classified in stockholders’ equity in our statement of financial position; and

•

Any obligation arising out of a material variable interest held by us in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to us, or engages in leasing, hedging or research and development services with us.

As of the date of this report, we do not have any off-balance sheet arrangements that we are required to disclose pursuant to these regulations. In the ordinary course of business, we enter into operating lease commitments, purchase commitments and other contractual obligations. These transactions are recognized in our financial statements in accordance with generally accepted accounting principles in the United States.

Results of Operations

Product sales ~~and cost of sales~~

For the three months ended December 31, ~~2003~~2004, product sales totaled approximately $6053,000 compared to ~~product sales of~~ approximately $~~127~~60,000 for the ~~quarter~~three ~~ended~~months ended December 31, ~~2002~~2003. For the six months ended December 31, ~~2003~~2004, product sales totaled approximately $~~112~~83,000 compared to approximately $~~472~~112,000 for the six months ended December 31, ~~2002~~2003. ~~The~~These decreases in product sales of approximately $677,000 and $~~360~~29,000 ~~for the three and six months ended December 31~~, ~~2003,~~ respectively, are primarily attributed to ~~the absence of sales to Alfa Wasserman under~~ a ~~contractual~~ ~~arrangement~~reduction ~~which expired~~ in ~~December 2002. For the three and six months ended December 31, 2002,~~ sales tovolume ~~Alfa~~in ~~Wasserman totaled approximately $56,000 and $378,000, respectively~~Sweden.

~~During~~We ~~2002~~have ~~and 2003, we~~ entered into several agreements for the distribution of our natural human alpha interferon, Multiferon®, in various countries. To date, we have not recognized revenue from many of these agreements. The majority of these agreements require that the distributor obtain the necessary regulatory approvals, which ~~are~~may not yet to be obtained. Regulatory approval is a mandatory step in the marketing of a drug, but it is by no means the final challenge in marketing a biopharmaceutical product. Multiferon® is a critical care product that is is typically administered in a hospital setting. Therefore, in certain instances, it must be part of a hospital’s approved formulary to enable physicians to be able to prescribe the product. This may include becoming approved within a ~~nationalized~~ nationalized network of hospitals. Also, the physicians must be educated as to the potential merits and advantages of the product.

There are other challenges associated with international marketing activities including: language and cultural barriers, in some cases poorly organized ~~regulatory~~ regulatory infrastructure and/ or compliance procedures in certain countries where Multiferon® may be marketed, performance of ~~assigned~~our ~~distributors~~distribution channels, government’s willingness to promote cheaper generic products and the general population’s inability to afford private care drug products. It ~~may~~will take significant time to overcome these challenges with no assurance that a particular market will ever be effectively penetrated.

17Cost of Sales and Inventory Write-down

Cost of sales, which includes excess/idle production costs, totaled approximately $754,000 for the three months ended December 31, 2004 compared to approximately $532,000 for the same period in the prior year. Cost of sales totaled approximately $1,231,000 for the six months ended December 31, 2004 compared to approximately $901,000 for the same period in the prior year. The increases in cost of sales for the three and six months ended December 31, 2004, were primarily attributed to excess/idle capacity. Excess/idle capacity costs represent fixed production costs incurred at our Swedish manufacturing facility, which were not absorbed as a result of the production of inventory at less than normal operating levels. For the three and six months ended December 31, 2004, excess/idle capacity costs were due to minimal production activities as a result of low sales demand. For the three and six months ended December 31, 2003 the excess/idle capacity costs were the result of the suspension of routine manufacturing as of March 31, 2003. This planned break in routine manufacturing was necessary to allow for certain steps of our production process to be segregated and transferred to our owned facility located in Umeå, Sweden. We will continue to incur excess/idle production costs until we generate higher sales demand and resume production at normal operating levels that absorb our fixed production costs.

During the quarter ended December 31, 2004, we recorded a write-down of approximately $540,000 of our finished product inventory. Upon evaluating the shelf-life of certain lots of our Multiferon^® inventory, near-term sales forecasts and consideration of alternative uses, a write-down of the value of this inventory was deemed necessary.

Cost of Sales

Cost of sales and excess/idle production costs totaled approximately $532,000 and $901,000 for the three and six months ended December 31, 2003, respectively. The increases in cost of sales of approximately $428,000 and $479,000 for the three and six months ended December 31, 2003, respectively, and the resulting negative margins are attributed to excess/idle capacity costs. Excess/idle capacity costs represent fixed production costs incurred at our Swedish manufacturing facility, which were not absorbed as a result of the suspension of routine manufacturing as of March 31, 2003. This planned break in routine manufacturing was necessary to allow for certain steps of our production process to be segregated and transferred to our owned facility also located in Umea, Sweden, which is currently being renovated. We will continue to incur excess/idle production costs until we resume production at normal operating levels that absorb our fixed production costs.

Research and Development Costs

Research and development costs include scientific salaries and support fees, laboratory supplies, consulting fees, equipment rentals, repairs and maintenance, utilities and research related travel. Research and development costs for the three months ended December 31, ~~2003~~2004 totaled approximately $~~341~~194,000, ana ~~increase~~decrease of approximately $~~106~~147,000 when compared to the three months ended December 31, ~~2002~~2003. For the six months ended December 31, ~~2003~~2004, research and development costs totaled approximately $~~653~~595,000, ana ~~increase~~decrease of approximately $~~186~~59,000 when compared to the six months ended December 31, ~~2002~~2003. These ~~increases~~ decreases in research and development costs were primarily attributed to ~~costs incurred in~~ the ~~development~~reversal of ~~potential~~a ~~commercial applications~~long-standing oftrade ~~our~~liability ~~natural~~of ~~human alpha interferon product at our Scottish facility totaling~~ approximately $66182,000 ~~and~~during ~~$147,000 for~~ the ~~three~~quarter ~~and six month~~ ended December 31, ~~2003~~2004, ~~respectively.~~which ~~These~~was ~~costs~~offset ~~were~~by ~~mainly~~an ~~related~~increase toin ~~laboratory supplies,~~consulting ~~personnel~~fees ~~related~~incurred ~~expenses~~at ~~and~~our Florida ~~repairs and maintenance~~headquarters.

We will continue incurring research and development costs, ~~for~~including ~~additional clinical trial~~ projects associated with Multiferon® as well as other projects to more fully develop potential commercial applications of our natural human alpha interferon product and related technologies. We anticipate expenditures to increase over the next twelve months, particularly in the area of regulatory-related consulting fees. Our ability to successfully conclude additional clinical trials, a prerequisite for expanded commercialization of any product, is dependent upon Viragen’s continued funding of our operations, our ability to independently raise significant additional funding, or our ability to generate sufficient cash flow from operations.

Selling, General and Administrative Expenses

Selling, general and administrative expenses include administrative personnel salaries and related expenses, office and equipment leases, utilities, insurance, legal, accounting, consulting, depreciation and amortization. ~~Selling~~For the three months ended December 31, 2004, selling, general and administrative expenses totaled approximately $~~939~~1,136,000, ~~for~~an increase of approximately $197,000 when compared to the three months ended December 31, 2003. ~~compared~~This increase is mainly attributed to increases in consulting and legal fees at our Florida headquarters of approximately $~~890~~27,000 ~~for~~and $13,000, respectively. Also contributing to the ~~three~~increase ~~months~~in selling, ~~ended~~general ~~December~~and ~~31,~~administrative ~~2002,~~expenses ~~representing~~were anincreases ~~increase~~in legal fees and personnel-related costs at our Swedish subsidiary of approximately $4954,000 orand 6%$20,000, respectively. For the three months ended December 31, ~~2003~~2004 selling, general and administrative expenses allocated by Viragen, our parent company, totaled approximately $~~223~~343,000 compared to approximately $~~232~~254,000 for the three months ended December 31, ~~2002~~2003. The increased allocation is primarily due to additional personnel-related costs and professional services fees incurred by Viragen on our behalf.

For the six months ended December 31, ~~2003~~2004, selling, general and administrative expenses totaled approximately $12,~~786~~194,000, an increase of approximately $68408,000 ~~or 4%,~~ when compared to the six months ended December 31, 2003. ~~2002~~This increase is mainly attributed to increases in consulting and legal fees at our Florida headquarters of approximately $79,000 and $40,000, respectively. Also contributing to the increase in selling, general and administrative expenses were increases in personnel-related costs and consulting fees at our Swedish subsidiary of approximately $83,000 and $51,000, respectively. For the six months ended December 31, ~~2003~~2004 selling, general and administrative expenses allocated by Viragen, our parent company, totaled approximately $~~447~~690,000 compared to approximately $~~472~~509,000 for the six months ended December 31, ~~2002~~2003. The increased allocation is primarily due to additional personnel-related costs and professional services fees incurred by Viragen on our behalf.

18Our successful commercialization of Multiferon® will require additional marketing and promotional activities, which is dependent upon Viragen’s continued funding of our operations, our ability to independently raise significant additional funding, or our ability to generate sufficient cash flow from operations.

~~Our~~We ~~successful~~anticipate ~~commercialization~~that ofselling ~~Multiferon~~related expenses will ~~require~~increase ~~additional~~significantly ~~marketing~~in ~~and~~fiscal ~~promotional activities~~2005. ~~which~~This increase is mainly ~~dependent~~expected ~~upon~~due ~~Viragen’s~~to ~~continued~~the ~~funding~~planned expansion of our ~~operations~~Multiferon® sales efforts. These increases will be incurred in sales personnel related expenses, ~~our~~consulting ~~ability~~fees, totravel ~~independently~~related ~~raise~~expenses, promotional materials and other marketing related costs. We also expect to incur significant ~~additional~~costs ~~funding,~~associated orwith ~~our~~efforts ~~ability~~necessary to ~~generate~~comply ~~sufficient~~with ~~cash~~the ~~flow~~requirements ~~from~~of ~~operations~~Section 404 of the Sarbanes-Oxley Act of 2002.

Amortization of Intangible Assets

Amortization of intangible assets ~~includes~~represents the amortization of ~~the~~our ~~purchase price~~acquired ~~allocated to separately identified intangible assets obtained in the acquisition of ViraNative in September 2001. The separately identified intangible assets consist of~~ developed technology ~~and a customer contract~~. ~~The~~This developed technology is being amortized over its estimated useful life of approximately 14 years. ~~The customer contract was amortized over the term of the contract, which expired in December 2002.~~ For the three and six months ended December 31, ~~2003~~2004, amortization of intangible assets totaled approximately $3944,000 and $7684,000, respectively, compared to approximately $5839,000 and $~~115~~76,000 during the three and six ~~acquired~~ months ended December 31, ~~2002~~2003. ~~These~~The ~~decreases~~period ofover ~~approximately~~period ~~$19,000~~differences ~~and $39,000 in the amortization of intangible assets for the three and six months ended December 31, 2003,~~ are adue ~~result~~to offoreign ~~the~~exchange ~~acquired customer contract being fully amortized as of December 2002~~fluctuations.

Interest and Other Income

The primary components of interest and other income are interest earned on cash and cash equivalents, sublease income on certain office space in our facility in Scotland, transaction gains or losses on foreign exchange, gains or losses on the disposal of property and equipment, and income generated from research and development support services provided by our Swedish Subsidiary. Interest and other income for the three and six months ended December 31, 2003, totaled approximately $138,000 and $256,000, respectively. Interest and other income increased approximately $63,000 and $167,000 when compared to the three and six months ended December 31, 2002, respectively. These increases are mainly attributed to increases in income generated from research and development support services provided by our Swedish subsidiary totaling approximately $25,000 and $124,000 for the three and six month ended December 31, 2003. Also contributing to the increases in interest and other income were increases in sublease income at our Scottish facility totaling approximately $16,000 and $20,000 for the three and six months ended December 31, 2003, respectively.

Interest Expense

Interest expense consists of interest incurred on the debt facilities maintained by our Swedish subsidiary. These debt facilities have interest rates of approximately 5.25%. Interest expense for the three and six months ended December 31, ~~2003~~ 2004 totaled approximately $4514,000 and $8464,000, respectively, compared to ~~interest expense totaling~~ approximately $4945,000 and $9984,000, respectively, for three and six months ended December 31, ~~2002, respectively~~2003. ~~This~~We expect interest expense ~~primarily~~to ~~represents~~decrease ~~interest incurred~~in onfiscal 2005 compared to fiscal 2004 due to the ~~debt~~repayment ~~facilities~~in ~~maintained~~September by2004 of one of our ~~Swedish~~loans ~~subsidiary.~~that ~~These~~carried ~~credit~~a ~~facilities~~high ~~have~~interest rate and a reduction in the interest ~~rates~~rate ~~ranging~~and ~~from~~average ~~5.25%~~outstanding tobalance on 9our line of credit in Sweden.~~90%.~~

19Interest and other income, net

The primary components of interest and other income, net are interest earned on cash and cash equivalents, sub-lease income on certain office space in our facility in Scotland, transaction and remeasurement gains or losses on foreign exchange, gains or losses on the disposal of property and equipment, and income generated from research and development support services provided by our Swedish subsidiary.

For the three months ended December 31, 2004, interest and other income totaled approximately $664,000, an increase of approximately $526,000 when compared to the three months ended December 31, 2003. For the six months ended December 31, 2004, interest and other income totaled approximately $708,000, an increase of approximately $452,000 when compared to the six months ended December 31, 2003. During the quarter ended December 31, 2004 we recorded a $596,000 gain on the remeasurement of a liability to Viragen, Inc. by Viragen (Scotland), which was denominated in U.S. dollars. In prior periods, this liability had been translated at historical exchange rates since this liability was determined to be long-term in nature. This determination was based on the fact that Viragen (Scotland) did not have the ability or intent to repay the liability to Viragen. In recent periods, Viragen (Scotland) has been gradually settling the liability by charging Viragen, Inc. for services performed on their behalf. Management anticipates the liability will be settled through these charges in the near term. Therefore, it was determined that the account should no longer be considered long-term and thus translation at current exchange rates is appropriate. Since the liability was denominated in U.S. dollars and the Pound Sterling has been strengthening against the U.S. dollar over the last few years, the remeasurement of the liability resulted in a gain. Had the determination been made when Viragen (Scotland) began settling the liability with charges to Viragen in prior periods and the liability been remeasured at then current exchange rates, the impact on the statements of operations would not have been material and there would have been no effect on stockholders’ equity as such currency gains are reclassifications from accumulated other comprehensive income.

These income items were partially offset by a decrease in income generated from research and development support services provided by our Swedish subsidiary totaling approximately $71,000 and $140,000 for the three and six months ended December 31, 2004, respectively.

Income Tax Benefit

We are subject to tax in the United States, Sweden, and the United Kingdom. These jurisdictions have different marginal tax rates. For the ~~six~~three ~~months~~and six months ended December 31, ~~2003~~2004 and ~~December 31~~2003, ~~2002,~~the income tax ~~benefit~~benefits totaled approximately $2211,000 and $3922,000, respectively. Income tax ~~benefit~~benefits for these periods isarose ~~primarily~~from ~~related to~~ the amortization expense on certain intangible assets. Due to the treatment of the identifiable intangible assets under Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes, our balance sheet reflects a deferred income tax liability of approximately $~~522~~478,000 as of December 31, ~~2003,~~ 2004, all of which is related to our developed technology intangible asset acquired on September 28, 2001.

As of June 30, 2004, we had a net operating loss carry-forward of approximately $6 million for U.S. federal income tax purposes expiring between 2005 and 2024. Approximately $1.1 million of this amount will expire by the year 2010. These losses may be used to offset taxable income, if any, during those periods. Our ability to generate revenue and net income during future periods is dependent upon obtaining regulatory approvals for further commercialization of Multiferon®. Based on our accumulated losses, a full valuation allowance is provided to reduce deferred income tax assets to the amount that will more likely than not be realized. At June 30, 2004, Viragen (Scotland) and ViraNative had net operating loss carry-forwards totaling approximately $24.8 million and $8.2 million, respectively.

Recent Accounting Pronouncements

In ~~January~~December ~~2003~~2004, ~~FASB~~the ~~issued~~Financial ~~Interpretation~~Accounting ~~Number~~Standards ~~46,~~Board ~~Consolidation of Variable Interest Entities~~ (~~FIN No. 46~~FASB). ~~This~~issued ~~interpretation~~Statement ~~of Accounting Research Bulletin~~ No. 51123R, ~~Consolidated~~Share-Based ~~Financial Statements~~Payment, which ~~provides~~is ~~guidance for identifying~~ a ~~controlling~~revision ~~interest~~of inFASB aStatement ~~variable~~No. ~~interest~~123, ~~entity~~Accounting ~~established~~for ~~by means~~Stock-Based ~~other than voting interests~~Compensation. ~~FIN~~Statement No. 46123R ~~also~~ requires ~~consolidation~~all ofshare-based apayments ~~variable interest entity by an enterprise that holds such a controlling interest. In December 2003, the FASB completed its deliberations regarding the proposed modification~~ to ~~FIN No. 46 and issued Interpretation Number 46R~~employees, ~~Consolidation~~including ofgrants ~~Variable Interest Entities – an Interpretation~~ of ~~ARB~~employee ~~No.~~stock 51options, ~~(FIN~~to ~~No.~~be ~~46R).~~recognized ~~The~~in ~~decisions reached included a deferral of~~ the ~~effective~~income ~~date and provisions~~statement ~~for~~based ~~additional~~on ~~scope~~their ~~exceptions~~fair ~~for certain types of variable interests~~values. ~~Application~~This ofnew ~~FIN~~standard ~~No.~~will ~~46R~~be iseffective ~~required~~for ~~in financial statements of~~ public ~~entities~~companies ~~that have interests~~ in ~~variable~~the ~~interest~~first ~~entities~~interim or ~~potential~~annual ~~variable~~reporting ~~interest~~period ~~entities commonly~~beginning ~~referred to as special-purpose entities for periods ending~~ after ~~December~~June 15, ~~2003~~2005. ~~Application~~We byplan ~~public~~to ~~entities~~adopt ~~(other~~Statement ~~than~~No. ~~small~~123R ~~business~~on ~~issuers)~~July ~~for all other types of entities is required in financial statements for periods ending after March 15~~1, ~~2004~~2005. WeStatement ~~do not expect the adoption of FIN~~ No. ~~46R~~123R topermits public ~~have~~companies ato ~~material~~adopt ~~impact~~its onrequirements ~~our~~using ~~consolidated~~one ~~financial position, results~~ of ~~operations~~two ormethods: ~~cash flows.~~

~~In April 2003, the FASB issued SFAS No~~1. ~~149,~~A ~~Amendment~~“modified ofprospective” ~~Statement~~method ~~133~~in onwhich ~~Derivative~~compensation ~~Instruments~~cost ~~and~~is ~~Hedging Activities.~~recognized ~~SFAS~~beginning ~~149 improves financial reporting by requiring that contracts~~ with ~~comparable~~the ~~characteristics~~effective bedate ~~accounted~~(a) ~~for~~based ~~similarly.~~on ~~SFAS 149 clarifies 1)~~ the ~~circumstances~~requirements inof ~~which~~Statement aNo. ~~contract~~123R ~~with~~for anall ~~initial~~share-based ~~net~~payments ~~investment~~granted ~~meets~~after the ~~characteristics~~ ofeffective adate ~~derivative,~~and 2(b) ~~when~~based aon ~~derivative~~the ~~contains~~requirements aof ~~financing~~Statement ~~component and amends certain other existing pronouncements~~No. ~~This~~123 ~~Statement is effective~~ for ~~contracts~~all ~~entered~~awards ~~into~~granted orto ~~modified~~employees ~~after~~prior ~~June~~to ~~30,~~the ~~2003.~~effective ~~Adoption~~date of ~~this~~Statement ~~standard did~~No. ~~not~~123R ~~have~~that aremain ~~material~~unvested ~~impact~~ on ~~our~~the ~~consolidated~~effective ~~financial position, results of operations or cash flows~~date.

~~In May 2003, the FASB issued SFAS No~~2. ~~150,~~A ~~Accounting~~“modified ~~for~~retrospective” ~~Certain~~method ~~Financial~~which ~~Instruments~~includes ~~with~~the ~~Characteristics~~requirements of ~~both~~the ~~Liabilities~~modified ~~and~~prospective ~~Equity.~~method ~~SFAS No.~~described ~~150 requires that certain financial instruments~~above, ~~which~~but ~~under~~also ~~previous~~permits ~~guidance~~entities ~~were~~to ~~accounted~~restate ~~for~~based ason ~~equity, be accounted for as liabilities. The financial instruments affected include mandatorily redeemable stock, certain financial instruments that require or may require~~ the ~~issuer~~amounts topreviously ~~buy~~recognized ~~back~~under ~~some~~Statement ofNo. ~~its~~123 ~~shares in exchange~~ for ~~cash~~purposes ~~or other assets and certain obligations that can be settled with shares~~ of ~~stock.~~pro ~~SFAS~~forma ~~No.~~disclosures ~~150~~either is(a) ~~effective for~~ all ~~financial~~prior ~~instruments~~periods ~~entered~~presented ~~into~~ or ~~modified~~ ~~after~~(b) ~~May~~prior ~~31,~~interim ~~2003~~periods ~~and must be applied to existing financial instruments effective after the beginning~~ of the ~~first~~year ~~fiscal period after June 15, 2003. Adoption~~ of ~~this standard did not have a material impact on our consolidated financial position, results of operations or cash flows~~adoption.

20We are evaluating the methods of adoption and have not determined which method will be used to adopt the requirements of Statement 123R.

We are unable to determine the future impact of the adoption of Statement No. 123R on our results of operations because the amount and terms of future share-based payments is not known at this time. As of December 31, 2004, all outstanding stock options granted to employees and directors are fully vested. Had we adopted Statement 123R in prior periods, the impact of that standard would have approximated the impact of Statement No. 123 as described in the disclosure of pro forma net loss and loss per common share in Note B to our consolidated condensed financial statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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 debt is subject to interest rate risk. While changes in market interest rates may affect the fair value of our fixed-rate long-term debt, we believe a change in interest rates would not have a material impact on our financial condition, future results of operations or cash flows.

Foreign Currency Exchange Risk

We conduct operations in several different countries. The balance sheet accounts of our operations in Scotland and Sweden, including intercompany accounts that are considered long-term in nature, are translated to U.S. dollars for financial reporting purposes and resulting adjustments are made to stockholders’ equity. The value of the respective local currency may strengthen or weaken against the U.S. dollar, which would impact the value of stockholders’ investment in our common stock. Fluctuations in the value of the British Pound and Swedish Krona against the U.S. dollar have occurred during our history, which have resulted in unrealized foreign currency translation gains and losses, which are included in accumulated other comprehensive income and shown in the equity section of our balance sheet. Intercompany trading accounts, which are short-term in nature, are remeasured at current exchange rates as of the balance sheet dates and any gains or losses are recorded in other income.

While most of the transactions of our U.S. and foreign operations are denominated in the respective local currency, some transactions are denominated in other currencies. ~~Since~~Transactions ~~the accounting records of our foreign operations are kept in the respective local currency, any transactions~~ denominated in other currencies are accounted for in the respective local currency at the time of the transaction. Upon settlement of this type of transaction, any foreign currency gain or loss results in an adjustment to income.

Our results of operations may be impacted by the fluctuating exchange rates of foreign currencies, especially the British Pound and Swedish Krona, in relation to the U.S. dollar. Most of the revenue and expense items of our foreign subsidiaries are denominated in the respective local ~~currency~~currencies. AnThe ~~unfavorable~~strengthening ~~change in the exchange rate~~ of ~~the~~these ~~foreign~~local ~~currency~~currencies against the U.S. dollar will result in ~~lower~~greater revenue, expenses, assets and liabilities of our foreign subsidiaries, when translated into U.S. dollars. ~~Operating~~During ~~expenses~~the ~~would~~six ~~also~~months beended ~~lower~~December in31, ~~these~~2004, ~~circumstances~~the U.S. dollar experienced a decline against the British Pound and Swedish Krona. Based on foreign currency exchange rates as of December 31, 2004, the U.S. dollar has lost approximately 6.6% of its value against the British Pound and 14.3% of its value against the Swedish Krona, since June 30, 2004.

During the six months ended December 31, 2003, the U.S. dollar has experienced adverse fluctuations against the British Pound and the Swedish Krona. Based on the foreign currency exchange rates as of December 31, 2003, the U.S. dollar has lost approximately 7.77% and 10.88% of its value against the British Pound and Swedish Krona, respectively, since June 30, 2003. The weakening of the U.S. dollar has resulted in greater revenues, operating expenses, assets and liabilities of our foreign subsidiaries when translated to U.S. dollars.

We do not currently engage in hedging activities with respect to our foreign currency exposure. However, we continually monitor our exposure to currency fluctuations. We have not incurred significant realized losses on exchange transactions. If realized losses on foreign transactions were to become significant, we would evaluate appropriate strategies, including the possible use of foreign exchange contracts, to reduce such losses.

21We were not adversely impacted by the European Union’s adoption of the “Euro” currency. Our foreign operations to date have been located in Scotland and Sweden, which have not participated in the adoption of the Euro as of December 31, 2004.

We were not adversely impacted by the European Union’s adoption of the “Euro” currency. Our foreign operations to date have been located in Scotland and Sweden which have not participated in the adoption of the Euro as of December 31, 2003.

Item 4. Controls and Procedures

Quarterly Controls Evaluation and Related CEO and CFO Certifications

We conducted an evaluation of the effectiveness of the design and operation of our “disclosure controls and procedures” (Disclosure Controls) as of the end of the period covered by this Quarterly Report. The controls evaluation was done under the supervision and with the participation of management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO).

Attached as exhibits to this Quarterly Report are certifications of the CEO and the CFO, which are required in accord with Rule 13a-14 of the Exchange Act. This Controls and Procedures section includes the information concerning the controls evaluation referred to in the certifications and it should be read in conjunction with the certifications for a more complete understanding of the topics presented.

Definition of Disclosure Controls

Disclosure Controls are controls and procedures designed to reasonably assure that information required to be disclosed in our reports filed under the Exchange Act, such as this Quarterly Report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure Controls are also designed to reasonably assure that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Our Disclosure Controls include components of our internal control over financial reporting, which consists of control processes designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements in accordance with accounting principles generally accepted in the United States.

Limitations on the Effectiveness of Controls

Our management, including the CEO and CFO, does not expect that our Disclosure Controls or our internal control over financial reporting will prevent all ~~error~~ ~~and~~potential ~~all~~for error or fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitations in aany ~~cost-effective~~ control system, misstatements due to error or fraud may occur and not be detected.

2227

Conclusions

Based upon the controls evaluation, our CEO and CFO have concluded that, subject to the limitations noted above, as of the end of the period covered by this Quarterly Report, our Disclosure Controls were effective to provide reasonable assurance that material information relating to Viragen International and its consolidated subsidiaries is made known to management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting (as defined in Rules13a-15(f) of the Exchange Act) that occurred during the quarter ended December 31, ~~2003~~2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

2328

PART II. OTHER INFORMATION

Item 56. ~~Other~~Exhibits ~~Information~~

In October 2003, Gerald Smith resigned as a director of Viragen International.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits:



31.1	—	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2	—	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1	—	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2	—	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

~~(b)~~29 ~~Reports on Form 8-K:~~

None

SIGNATURES

Pursuant to the requirements 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 International, Inc. By: /s/ DENNIS W. HEALEY Dennis W. Healey Executive Vice President and Principal Financial Officer


	Viragen International, Inc.

Date: February 7, 2005	By:	/s/ Dennis W. Healey
		Dennis W. Healey
		Executive Vice President and
		Principal Financial Officer

Date: February 7, 2005	By:	/s/ Nicholas M. Burke
		Nicholas M. Burke
		Vice President, Controller and
		Principal Accounting Officer

~~By:~~30 ~~/s/ NICHOLAS M. BURKE Nicholas M. Burke Controller and Principal Accounting Officer~~

Date: February 6, 2004

INDEX OF EXHIBITS


Exhibit No.		Description
31.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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OurTable business, results of operations and financial condition could be adversely affected by a number of risks and uncertainties, including the following: Contents

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Filing Compare · VIRAGEN INTERNATIONAL INC