Document:

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                                                                   EXHIBIT 10.79

                               SECURITY AGREEMENT

         THIS SECURITY AGREEMENT (the "AGREEMENT"), is entered into and made
effective as of July 18, 2003, by and between ADVANCED VIRAL RESEARCH CORP. (the
"COMPANY"), and the BUYER(S) listed on Schedule I attached to the Securities
Purchase Agreement dated the date hereof (the "SECURED PARTY").

         WHEREAS, the Company shall issue and sell to the Secured Party, as
provided in the Securities Purchase Agreement dated the date hereof, and the
Secured Party shall purchase up to One Million Dollars ($1,000,000) of five
percent (5%) secured convertible debentures (the "CONVERTIBLE DEBENTURES"),
which shall be convertible into shares of the Company's common stock, par value
$0.00001 (the "COMMON STOCK") (as converted, the "CONVERSION SHARES"), for a
total purchase price of up to One Million Dollars ($1,000,000), in the
respective amounts set forth opposite each Buyer(s) name on Schedule I attached
to the Securities Purchase Agreement;

         WHEREAS, to induce the Secured Party to enter into the transaction
contemplated by the Securities Purchase Agreement, the Secured Convertible
Debenture, the Investor Registration Rights Agreement, the Irrevocable Transfer
Agent Instructions, and the Escrow Agreement (collectively referred to as the
"TRANSACTION DOCUMENTS"), the Company hereby grants to the Secured Party a
security interest in and to the pledged property identified on EXHIBIT "A"
hereto (collectively referred to as the "PLEDGED PROPERTY") until the earlier to
occur of (i) the fiftieth (50th) day following the effectiveness of the
Registration Statement referred to in the Investor Registration Rights
Agreement, pursuant to the terms and conditions of this Agreement; (ii) the
Company receives, after the date of this Agreement, Three Million Dollars
($3,000,000) of capital, in any form other than through the issuance of
free-trading shares of the Company's common stock, from sources other than the
Secured Party ("Capital Raise"); or (iii) satisfaction of the Obligations, as
defined herein below ((i), (ii) and (ii) are sometimes hereinafter individually
referred to as an "EXPIRATION EVENT").

         NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, and for other good and valuable consideration, the
adequacy and receipt of which are hereby acknowledged, the parties hereto hereby
agree as follows:

                                   ARTICLE 1.

                         DEFINITIONS AND INTERPRETATIONS

         Section 1.1. RECITALS.

         The above recitals are true and correct and are incorporated herein, in
their entirety, by this reference.

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         Section 1.2. INTERPRETATIONS.

         Nothing herein expressed or implied is intended or shall be construed
to confer upon any person other than the Secured Party any right, remedy or
claim under or by reason hereof.

         Section 1.3. OBLIGATIONS SECURED.

         The obligations secured hereby are any and all obligations of the
Company to the Secured Party, whether oral or written and whether arising
before, on or after the date hereof including, without limitation, those
obligations of the Company to the Secured Party under the Securities Purchase
Agreement, the Secured Convertible Debenture, the Investor Registration Rights
Agreement and Irrevocable Transfer Agent Instructions, in the principal amounts
thereof outstanding from time to time, and any other amounts payable by or
chargeable to the Company thereunder or hereunder (collectively, the
"OBLIGATIONS"), PROVIDED, HOWEVER, the Scheduled Effective Deadline set forth in
the Investor Registration Rights Agreement dated April 28, 2003 shall be one
hundred thirty-five (135) days from the date hereof.

                                   ARTICLE 2.

              PLEDGED COLLATERAL, ADMINISTRATION OF COLLATERAL AND
                        TERMINATION OF SECURITY INTEREST

         Section 2.1. PLEDGED PROPERTY.

                  (a) Company hereby pledges to the Secured Party, and creates
in the Secured Party for its benefit, a first position security interest, from
the date hereof through an Expiration Event, in and to all of the property of
the Company as set forth in EXHIBIT "A" attached hereto (collectively, the
"PLEDGED PROPERTY"):

         The Pledged Property, as set forth in EXHIBIT "A" attached hereto, and
the products thereof and the proceeds of all such items are hereinafter
collectively referred to as the "PLEDGED COLLATERAL."

                  (b) Simultaneously with the execution and delivery of this
Agreement, the Company shall make, execute, acknowledge, file, record and
deliver to the Secured Party any documents reasonably requested by the Secured
Party to perfect its security interest in the Pledged Property. Simultaneously
with the execution and delivery of this Agreement, the Company shall make,
execute, acknowledge and deliver to the Secured Party such documents and
instruments, including, without limitation, financing statements, certificates,
affidavits and forms as may, in the Secured Party's reasonable judgment, be
necessary to effectuate, complete or perfect, or to continue and preserve, the
security interest of the Secured Party in the Pledged Property, and the Secured
Party shall hold such documents and instruments as secured party, subject to the
terms and conditions contained herein.

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         Section 2.2. RIGHTS; INTERESTS; ETC.

                  (a) So long as no Event of Default (as hereinafter defined)
shall have occurred and be continuing:

                           (i) the Company shall be entitled to exercise any and
all rights pertaining to the Pledged Property or any part thereof for any
purpose not inconsistent with the terms hereof; and

                           (ii) the Company shall be entitled to receive and
retain any and all payments paid or made in respect of the Pledged Property.

                  (b) Upon the occurrence and during the continuance of an Event
of Default:

                           (i) All rights of the Company to exercise the rights
which it would otherwise be entitled to exercise pursuant to Section 2.2(a)(i)
hereof and to receive payments which it would otherwise be authorized to receive
and retain pursuant to Section 2.2(a)(ii) hereof shall be suspended, and all
such rights shall thereupon become vested in the Secured Party who shall
thereupon have the sole right to exercise such rights and to receive and hold as
Pledged Collateral such payments; PROVIDED, HOWEVER, that if the Secured Party
shall become entitled and shall elect to exercise its right to realize on the
Pledged Collateral pursuant to Article V hereof, then all cash sums received by
the Secured Party, or held by Company for the benefit of the Secured Party and
paid over pursuant to Section 2.2(b)(ii) hereof, shall be applied against any
outstanding Obligations; and

                           (ii) All interest, dividends, income and other
payments and distributions which are received by the Company contrary to the
provisions of Section 2.2(b)(i) hereof shall be received in trust for the
benefit of the Secured Party, shall be segregated from other property of the
Company and shall be forthwith paid over to the Secured Party; or

                           (iii) The Secured Party in its sole discretion shall
be authorized to sell any or all of the Pledged Property at public or private
sale in order to recoup all of the outstanding principal plus accrued interest
owed pursuant to the Convertible Debenture as described herein

                  (c) Each of the following events shall constitute a default
under this Agreement (each an "EVENT OF DEFAULT"):

                           (i) any default, whether in whole or in part, shall
occur in the payment to the Secured Party of principal, interest or other item
comprising the Obligations as and when due or with respect to any other debt or
obligation of the Company to a party other than the Secured Party;

                           (ii) any default, whether in whole or in part, shall
occur in the due observance or performance of any obligations or other
covenants, terms or provisions to be performed under this Agreement or the
Transaction Documents;
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                           (iii) the Company shall: (1) make a general
assignment for the benefit of its creditors; (2) apply for or consent to the
appointment of a receiver, trustee, assignee, custodian, sequestrator,
liquidator or similar official for itself or any of its assets and properties;
(3) commence a voluntary case for relief as a debtor under the United States
Bankruptcy Code; (4) file with or otherwise submit to any governmental authority
any petition, answer or other document seeking: (A) reorganization, (B) an
arrangement with creditors or (C) to take advantage of any other present or
future applicable law respecting bankruptcy, reorganization, insolvency,
readjustment of debts, relief of debtors, dissolution or liquidation; (5) file
or otherwise submit any answer or other document admitting or failing to contest
the material allegations of a petition or other document filed or otherwise
submitted against it in any proceeding under any such applicable law, or (6) be
adjudicated a bankrupt or insolvent by a court of competent jurisdiction; or

                           (iv) any case, proceeding or other action shall be
commenced against the Company for the purpose of effecting, or an order,
judgment or decree shall be entered by any court of competent jurisdiction
approving (in whole or in part) anything specified in Section 2.2(c)(iii)
hereof, or any receiver, trustee, assignee, custodian, sequestrator, liquidator
or other official shall be appointed with respect to the Company, or shall be
appointed to take or shall otherwise acquire possession or control of all or a
substantial part of the assets and properties of the Company, and any of the
foregoing shall continue unstayed and in effect for any period of thirty (30)
days.

         Section 2.3       TERMINATION OF SECURITY INTEREST.

                  (a) Notwithstanding any provision to the contrary contained
herein, the rights of Secured Party under this Agreement, including but not
limited to, Secured Party's security interest in the Pledged Property and the
Pledged Collateral, shall automatically terminate upon the occurrence of an
Expiration Event.

                  (b) Upon the occurrence of an Expiration Event, the Secured
Party shall make, execute, acknowledge, file, record and deliver to the Company
any documents reasonably requested by the Company to terminate the Secured
Party's security interest in the Pledged Property and the Pledged Collateral.
Upon the occurrence of an Expiration Event, the Secured Party shall make,
execute, acknowledge and deliver to the Company such documents and instruments,
including, without limitation, financing statements, certificates, affidavits
and forms as may, in the Company's reasonable judgment, be necessary to
eliminate and terminate, the security interest of the Secured Party in the
Pledged Property and the Pledged Collateral, and the Company is authorized to
file such documents as necessary to terminate Secured Party's security interest
in the Pledged Property and the Pledged Collateral.

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                                   ARTICLE 3.

                          ATTORNEY-IN-FACT; PERFORMANCE

         Section 3.1. SECURED PARTY APPOINTED ATTORNEY-IN-FACT.

         Upon the occurrence of an Event of Default, the Company hereby appoints
the Secured Party as its attorney-in-fact, with full authority in the place and
stead of the Company and in the name of the Company or otherwise, from time to
time in the Secured Party's discretion to take any action and to execute any
instrument which the Secured Party may reasonably deem necessary to accomplish
the purposes of this Agreement, including, without limitation, to receive and
collect all instruments made payable to the Company representing any payments in
respect of the Pledged Collateral or any part thereof and to give full discharge
for the same. The Secured Party may demand, collect, receipt for, settle,
compromise, adjust, sue for, foreclose, or realize on the Pledged Property as
and when the Secured Party may determine. To facilitate collection, the Secured
Party may notify account debtors and obligors on any Pledged Property or Pledged
Collateral to make payments directly to the Secured Party.

         Section 3.2. SECURED PARTY MAY PERFORM.

         If the Company fails to perform any agreement contained herein, the
Secured Party, at its option, may itself perform, or cause performance of, such
agreement, and the expenses of the Secured Party incurred in connection
therewith shall be included in the Obligations secured hereby and payable by the
Company under Section 8.3.

                                   ARTICLE 4.

                         REPRESENTATIONS AND WARRANTIES

         Section 4.1. AUTHORIZATION; ENFORCEABILITY.

         Each of the parties hereto represents and warrants that it has taken
all action necessary to authorize the execution, delivery and performance of
this Agreement and the transactions contemplated hereby; and upon execution and
delivery, this Agreement shall constitute a valid and binding obligation of the
respective party, subject to applicable bankruptcy, insolvency, reorganization,
moratorium and similar laws affecting creditors' rights or by the principles
governing the availability of equitable remedies.

         Section 4.2. OWNERSHIP OF PLEDGED PROPERTY.

         The Company warrants and represents that it is the legal and beneficial
owner of the Pledged Property free and clear of any lien, security interest,
option or other charge or encumbrance except for the security interests
identified on EXHIBIT A hereto and the security interest created by this
Agreement.

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                                   ARTICLE 5.

                    DEFAULT; REMEDIES; SUBSTITUTE COLLATERAL

         Section 5.1. DEFAULT AND REMEDIES.

                  (a) If an Event of Default described in Section 2.2(c)(i) and
(ii) occurs, then in each such case the Secured Party may declare the
Obligations to be due and payable immediately, by a notice in writing to the
Company, and upon any such declaration, the Obligations shall become immediately
due and payable. If an Event of Default described in Sections 2.2(c)(iii) or
(iv) occurs and is continuing for the period set forth therein, then the
Obligations shall automatically become immediately due and payable without
declaration or other act on the part of the Secured Party.

                  (b) Upon the occurrence of an Event of Default, the Secured
Party shall,: (i) be entitled to receive all distributions with respect to the
Pledged Collateral, (ii) to cause the Pledged Property to be transferred into
the name of the Secured Party or its nominee, (iii) to dispose of the Pledged
Property, and (iv) to realize upon any and all rights in the Pledged Property
then held by the Secured Party.

         Section 5.2. METHOD OF REALIZING UPON THE PLEDGED PROPERTY: OTHER
REMEDIES.

         Upon the occurrence of an Event of Default, in addition to any rights
and remedies available at law or in equity, the following provisions shall
govern the Secured Party's right to realize upon the Pledged Property:

                  (a) Any item of the Pledged Property may be sold for cash or
other value in any number of lots at brokers board, public auction or private
sale and may be sold without demand, advertisement or notice (except that the
Secured Party shall give the Company ten (10) days' prior written notice of the
time and place or of the time after which a private sale may be made (the "SALE
NOTICE")), which notice period shall in any event is hereby agreed to be
commercially reasonable. At any sale or sales of the Pledged Property, the
Company may bid for and purchase the whole or any part of the Pledged Property
and, upon compliance with the terms of such sale, may hold, exploit and dispose
of the same without further accountability to the Secured Party. The Company
will execute and deliver, or cause to be executed and delivered, such
instruments, documents, assignments, waivers, certificates, and affidavits and
supply or cause to be supplied such further information and take such further
action as the Secured Party reasonably shall require in connection with any such
sale.

                  (b) Any cash being held by the Secured Party as Pledged
Collateral and all cash proceeds received by the Secured Party in respect of,
sale of, collection from, or other realization upon all or any part of the
Pledged Collateral shall be applied as follows:

                           (i) to the payment of all amounts due the Secured
Party for the expenses reimbursable to it hereunder or owed to it pursuant to
Section 8.3 hereof;

                           (ii) to the payment of the Obligations then due and
unpaid.

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                           (iii) the balance, if any, to the person or persons
entitled thereto, including, without limitation, the Company.

                  (c) In addition to all of the rights and remedies which the
Secured Party may have pursuant to this Agreement, the Secured Party shall have
all of the rights and remedies provided by law, including, without limitation,
those under the Uniform Commercial Code.

                  (d)

                           (i) If the Company fails to pay such amounts due upon
the occurrence of an Event of Default which is continuing, then the Secured
Party may institute a judicial proceeding for the collection of the sums so due
and unpaid, may prosecute such proceeding to judgment or final decree and may
enforce the same against the Company and collect the monies adjudged or decreed
to be payable in the manner provided by law out of the property of Company,
wherever situated.

                           (ii) The Company agrees that it shall be liable for
any reasonable fees, expenses and costs incurred by the Secured Party in
connection with enforcement, collection and preservation of the Transaction
Documents, including, without limitation, reasonable legal fees and expenses,
and such amounts shall be deemed included as Obligations secured hereby and
payable as set forth in Section 8.3 hereof.

         Section 5.3. PROOFS OF CLAIM.

                  In case of the pendency of any receivership, insolvency,
liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or
other judicial proceeding relating to the Company or the property of the Company
or of such other obligor or its creditors, the Secured Party (irrespective of
whether the Obligations shall then be due and payable as therein expressed or by
declaration or otherwise and irrespective of whether the Secured Party shall
have made any demand on the Company for the payment of the Obligations), subject
to the rights of Previous Security Holders, shall be entitled and empowered, by
intervention in such proceeding or otherwise:

                           (i) to file and prove a claim for the whole amount of
the Obligations and to file such other papers or documents as may be necessary
or advisable in order to have the claims of the Secured Party (including any
claim for the reasonable legal fees and expenses and other expenses paid or
incurred by the Secured Party permitted hereunder and of the Secured Party
allowed in such judicial proceeding), and

                           (ii) to collect and receive any monies or other
property payable or deliverable on any such claims and to distribute the same;
and any custodian, receiver, assignee, trustee, liquidator, sequestrator or
other similar official in any such judicial proceeding is hereby authorized by
the Secured Party to make such payments to the Secured Party and, in the event
that the Secured Party shall consent to the making of such payments directed to
the Secured Party, to pay to the Secured Party any amounts for expenses due it
hereunder.

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         Section 5.4. DUTIES REGARDING PLEDGED COLLATERAL.

         The Secured Party shall have no duty as to the collection or protection
of the Pledged Property or any income thereon or as to the preservation of any
rights pertaining thereto, beyond the safe custody and reasonable care of any of
the Pledged Property actually in the Secured Party's possession.

                                   ARTICLE 6.

                              AFFIRMATIVE COVENANTS

         The Company covenants and agrees that, from the date hereof and until
the Obligations have been fully paid and satisfied, unless the Secured Party
shall consent otherwise in writing (as provided in Section 8.4 hereof):

         Section 6.1. EXISTENCE, PROPERTIES, ETC.

                  (a) The Company shall do, or cause to be done, all things, or
proceed with due diligence with any actions or courses of action, that may be
reasonably necessary (i) to maintain Company's due organization, valid existence
and good standing under the laws of its state of incorporation, and (ii) to
preserve and keep in full force and effect all qualifications, licenses and
registrations in those jurisdictions in which the failure to do so could have a
Material Adverse Effect (as defined below); and (b) the Company shall not do, or
cause to be done, any act impairing the Company's corporate power or authority
(i) to carry on the Company's business as now conducted, and (ii) to execute or
deliver this Agreement or any other document delivered in connection herewith,
including, without limitation, any UCC-1 Financing Statements required by the
Secured Party (which other loan instruments collectively shall be referred to as
the "LOAN INSTRUMENTS") to which it is or will be a party, or perform any of its
obligations hereunder or thereunder. For purpose of this Agreement, the term
"MATERIAL ADVERSE EFFECT" shall mean any material and adverse affect as
determined by Secured Party in its sole discretion, whether individually or in
the aggregate, upon (a) the Company's assets, business, operations, properties
or condition, financial or otherwise; (b) the Company's to make payment as and
when due of all or any part of the Obligations; or (c) the Pledged Property.

         Section 6.2. FINANCIAL STATEMENTS AND REPORTS.

         The Company shall furnish to the Secured Party such financial data as
the Secured Party may reasonably request. Without limiting the foregoing, the
Company shall furnish to the Secured Party (or cause to be furnished to the
Secured Party) the following:

                  (a) as soon as practicable and in any event within ninety (90)
days after the end of each fiscal year of the Company, the balance sheet of the
Company as of the close of such fiscal year, the statement of earnings and
retained earnings of the Company as of the close of such fiscal year, and
statement of cash flows for the Company for such fiscal year, all in reasonable
detail, prepared in accordance with generally accepted accounting principles
consistently applied, certified by the chief executive and chief financial
officers of the Company as being true and correct and accompanied by a
certificate of the chief executive and chief financial officers of the Company,
stating that the Company has kept, observed, performed and fulfilled each

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covenant, term and condition of this Agreement and the other Loan Instruments
during such fiscal year and that no Event of Default hereunder has occurred and
is continuing, or if an Event of Default has occurred and is continuing,
specifying the nature of same, the period of existence of same and the action
the Company proposes to take in connection therewith;

                  (b) within thirty (30) days of the end of each calendar month,
a balance sheet of the Company as of the close of such month, and statement of
earnings and retained earnings of the Company as of the close of such month, all
in reasonable detail, and prepared substantially in accordance with generally
accepted accounting principles consistently applied, certified by the chief
executive and chief financial officers of the Company as being true and correct;
and

                  (c) promptly upon receipt thereof, copies of all accountants'
reports and accompanying financial reports submitted to the Company by
independent accountants in connection with each annual examination of the
Company.

         Section 6.3. ACCOUNTS AND REPORTS.

         The Company shall maintain a standard system of accounting in
accordance with generally accepted accounting principles consistently applied
and provide, at its sole expense, to the Secured Party the following:

                  (a) as soon as available, a copy of any notice or other
communication alleging any nonpayment or other material breach or default, or
any foreclosure or other action respecting any material portion of its assets
and properties, received respecting any of the indebtedness of the Company in
excess of $50,000 (other than the Obligations), or any demand or other request
for payment under any guaranty, assumption, purchase agreement or similar
agreement or arrangement respecting the indebtedness or obligations of others in
excess of $50,000, including any received from any person acting on behalf of
the Secured Party or beneficiary thereof; and

                  (b) within fifteen (15) days after the making of each
submission or filing, a copy of any report, financial statement, notice or other
document, whether periodic or otherwise, submitted to the shareholders of the
Company, or submitted to or filed by the Company with any governmental authority
involving or affecting (i) the Company that could have a Material Adverse
Effect; (ii) the Obligations; (iii) any part of the Pledged Collateral; or (iv)
any of the transactions contemplated in this Agreement or the Loan Instruments.

         Section 6.4. MAINTENANCE OF BOOKS AND RECORDS; INSPECTION.

         The Company shall maintain its books, accounts and records in
accordance with generally accepted accounting principles consistently applied,
and permit the Secured Party, its officers and employees and any professionals
designated by the Secured Party in writing, at any time to visit and inspect any
of its properties (including but not limited to the collateral security
described in the Loan Instruments), corporate books and financial records, and
to discuss its accounts, affairs and finances with any employee, officer or
director thereof.

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         Section 6.5. MAINTENANCE AND INSURANCE.

                  (a) The Company shall maintain or cause to be maintained, at
its own expense, all of its assets and properties in good working order and
condition, making all necessary repairs thereto and renewals and replacements
thereof.

                  (b) The Company shall maintain or cause to be maintained, at
its own expense, insurance in form, substance and amounts (including
deductibles), which the Company deems reasonably necessary to the Company's
business, (i) adequate to insure all assets and properties of the Company, which
assets and properties are of a character usually insured by persons engaged in
the same or similar business against loss or damage resulting from fire or other
risks included in an extended coverage policy; (ii) against public liability and
other tort claims that may be incurred by the Company; (iii) as may be required
by the Loan Instruments or applicable law and (iv) as may be reasonably
requested by Secured Party, all with adequate, financially sound and reputable
insurers.

         Section 6.6. CONTRACTS AND OTHER COLLATERAL.

         The Company shall perform all of its obligations under or with respect
to each instrument, receivable, contract and other intangible included in the
Pledged Property to which the Company is now or hereafter will be party on a
timely basis and in the manner therein required, including, without limitation,
this Agreement.

         Section 6.7. DEFENSE OF COLLATERAL, ETC.

         The Company shall defend and enforce its right, title and interest in
and to any part of: (a) the Pledged Property; and (b) if not included within the
Pledged Property , those assets and properties whose loss could have a Material
Adverse Effect, the Company shall defend the Secured Party's right, title and
interest in and to each and every part of the Pledged Property, each against all
manner of claims and demands on a timely basis to the full extent permitted by
applicable law.

         Section 6.8. PAYMENT OF DEBTS, TAXES, ETC.

         The Company shall pay, or cause to be paid, all of its indebtedness and
other liabilities and perform, or cause to be performed, all of its obligations
in accordance with the respective terms thereof, and pay and discharge, or cause
to be paid or discharged, all taxes, assessments and other governmental charges
and levies imposed upon it, upon any of its assets and properties on or before
the last day on which the same may be paid without penalty, as well as pay all
other lawful claims (whether for services, labor, materials, supplies or
otherwise) as and when due.

         Section 6.9. TAXES AND ASSESSMENTS; TAX INDEMNITY.

         The Company shall (a) file all tax returns and appropriate schedules
thereto that are required to be filed under applicable law, prior to the date of
delinquency, (b) pay and discharge all taxes, assessments and governmental
charges or levies imposed upon the Company, upon its income and profits or upon
any properties belonging to it, prior to the date on which penalties attach

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thereto, and (c) pay all taxes, assessments and governmental charges or levies
that, if unpaid, might become a lien or charge upon any of its properties;
PROVIDED, HOWEVER, that the Company in good faith may contest any such tax,
assessment, governmental charge or levy described in the foregoing clauses (b)
and (c) so long as appropriate reserves are maintained with respect thereto.

         Section 6.10. COMPLIANCE WITH LAW AND OTHER AGREEMENTS.

         The Company shall maintain its business operations and property owned
or used in connection therewith in compliance with (a) all applicable federal,
state and local laws, regulations and ordinances governing such business
operations and the use and ownership of such property, and (b) all agreements,
licenses, franchises, indentures and mortgages to which the Company is a party
or by which the Company or any of its properties is bound. Without limiting the
foregoing, the Company shall pay all of its indebtedness promptly in accordance
with the terms thereof.

         6.11. NOTICE OF DEFAULT.

         The Company shall give written notice to the Secured Party of the
occurrence of any default or Event of Default under this Agreement, the
Transaction Documents or any other Loan Instrument or any other agreement of
Company for the payment of money, promptly upon the occurrence thereof.

         6.12. NOTICE OF LITIGATION.

         The Company shall give notice, in writing, to the Secured Party of (a)
any actions, suits or proceedings wherein the amount at issue is in excess of
$50,000, instituted by any persons against the Company, or affecting any of the
assets of the Company, and (b) any dispute, not resolved within fifteen (15)
days of the commencement thereof, between the Company on the one hand and any
governmental or regulatory body on the other hand, which might reasonably be
expected to have a Material Adverse Effect on the business operations or
financial condition of the Company.

                                   ARTICLE 7.

                               NEGATIVE COVENANTS

                  The Company agrees to abide by the covenants set forth in the
Securities Purchase Agreement. The covenants contained in the Securities
Purchase Agreement, and any of the Transaction Documents, shall remain in full
force and effect pursuant to their terms, notwithstanding the termination of
this Agreement.

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                                   ARTICLE 8.

                                  MISCELLANEOUS

         Section 8.1. NOTICES.

         All notices or other communications required or permitted to be given
pursuant to this Agreement shall be in writing and shall be considered as duly
given on: (a) the date of delivery, if delivered in person, by nationally
recognized overnight delivery service or (b) five (5) days after mailing if
mailed from within the continental United States by certified mail, return
receipt requested to the party entitled to receive the same:

      If to the Secured Party:           Cornell Capital Partners, LP
                                         101 Hudson Street-Suite 3606
                                         Jersey City, New Jersey 07302
                                         Attention:   Mark Angelo
                                                      Portfolio Manager
                                         Telephone:   (201) 986-8300
                                         Facsimile:   (201) 985-8266

      With a copy to:                    Butler Gonzalez LLP
                                         1000 Stuyvesant Avenue - Suite 6
                                         Union, New Jersey  07083
                                         Attention:   David Gonzalez, Esq.
                                         Telephone:   (908) 810-8588
                                         Facsimile:   (908) 810-0973

      And if to the Company:             Advanced Viral Research Corp.
                                         200 Corporate Boulevard South
                                         Yonkers, NY 10701
                                         Attention:   Alan Gallantar,
                                                      Chief Financial Officer
                                         Telephone:   (914) 376-7383
                                         Facsimile:   (914) 376-7638

      With a copy to:                    Kirkpatrick & Lockhart LLP
                                         201 South Biscayne Boulevard-Suite 2000
                                         Miami, Florida  33131-2399
                                         Attention:   Clayton E. Parker, Esq.
                                         Telephone:   (305) 539-3300
                                         Facsimile:   (305) 358-7095

         Any party may change its address by giving notice to the other party
stating its new address. Commencing on the tenth (10th) day after the giving of
such notice, such newly designated address shall be such party's address for the
purpose of all notices or other communications required or permitted to be given
pursuant to this Agreement.

                                       12
<PAGE>

         Section 8.2. SEVERABILITY.

         If any provision of this Agreement shall be held invalid or
unenforceable, such invalidity or unenforceability shall attach only to such
provision and shall not in any manner affect or render invalid or unenforceable
any other severable provision of this Agreement, and this Agreement shall be
carried out as if any such invalid or unenforceable provision were not contained
herein.

         Section 8.3. EXPENSES.

         In the event of an Event of Default, the Company will pay to the
Secured Party the amount of any and all reasonable expenses, including the
reasonable fees and expenses of its counsel, which the Secured Party may incur
in connection with: (i) the custody or preservation of, or the sale, collection
from, or other realization upon, any of the Pledged Property; (ii) the exercise
or enforcement of any of the rights of the Secured Party hereunder or (iii) the
failure by the Company to perform or observe any of the provisions hereof.

         Section 8.4. WAIVERS, AMENDMENTS, ETC.

         The Secured Party's delay or failure at any time or times hereafter to
require strict performance by Company of any undertakings, agreements or
covenants shall not waiver, affect, or diminish any right of the Secured Party
under this Agreement to demand strict compliance and performance herewith. Any
waiver by the Secured Party of any Event of Default shall not waive or affect
any other Event of Default, whether such Event of Default is prior or subsequent
thereto and whether of the same or a different type. None of the undertakings,
agreements and covenants of the Company contained in this Agreement, and no
Event of Default, shall be deemed to have been waived by the Secured Party, nor
may this Agreement be amended, changed or modified, unless such waiver,
amendment, change or modification is evidenced by an instrument in writing
specifying such waiver, amendment, change or modification and signed by the
Secured Party.

         Section 8.5. CONTINUING SECURITY INTEREST.

         This Agreement shall create a continuing security interest in the
Pledged Property and shall: (i) remain in full force and effect until the
occurrence of an Expiration Event; and (ii) be binding upon the Company and its
successors and heirs and (iii) inure to the benefit of the Secured Party and its
successors and assigns. Upon the occurrence of an Expiration Event, the Company
shall be entitled to the return, at its expense, of such of the Pledged Property
as shall not have been sold in accordance with Section 5.2 hereof or otherwise
applied pursuant to the terms hereof.

         Section 8.6. INDEPENDENT REPRESENTATION.

         Each party hereto acknowledges and agrees that it has received or has
had the opportunity to receive independent legal counsel of its own choice and
that it has been sufficiently apprised of its rights and responsibilities with
regard to the substance of this Agreement.

                                       13
<PAGE>

         Section 8.7. APPLICABLE LAW: JURISDICTION.

         This Agreement shall be governed by and interpreted in accordance with
the laws of the State of Delaware without regard to the principles of conflict
of laws. The parties further agree that any action between them shall be heard
in Hudson County, New Jersey, and expressly consent to the jurisdiction and
venue of the Superior Court of New Jersey, sitting in Hudson County and the
United States District Court for the District of New Jersey sitting in Newark,
New Jersey for the adjudication of any civil action asserted pursuant to this
Paragraph.

         Section 8.8. WAIVER OF JURY TRIAL.

         AS A FURTHER INDUCEMENT FOR THE SECURED PARTY TO ENTER INTO THIS
AGREEMENT AND TO MAKE THE FINANCIAL ACCOMMODATIONS TO THE COMPANY, THE COMPANY
HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING RELATED IN ANY
WAY TO THIS AGREEMENT AND/OR ANY AND ALL OTHER DOCUMENTS RELATED TO THIS
TRANSACTION.

         Section 8.9. ENTIRE AGREEMENT.

         This Agreement constitutes the entire agreement among the parties and
supersedes any prior agreement or understanding among them with respect to the
subject matter hereof.

         IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.

                                        COMPANY:
                                        ADVANCED VIRAL RESEARCH CORP.

                                        By:  /s/ SHALOM Z. HIRSCHMAN
                                           -------------------------------------
                                        Name: Shalom Z. Hirschman
                                        Title: Chief Executive Officer

                                        SECURED PARTY:
                                        CORNELL CAPITAL PARTNERS, LP

                                        BY: YORKVILLE ADVISORS, LLC
                                        ITS: GENERAL PARTNER

                                        By:  /s/ MARK ANGELO
                                           -------------------------------------
                                        Name: Mark Angelo
                                        Title: Portfolio Manager

                                       14
<PAGE>

                                    EXHIBIT A
                         DEFINITION OF PLEDGED PROPERTY

         For the purpose of securing prompt and complete payment and performance
by the Company of all of the Obligations, the Company unconditionally and
irrevocably hereby grants to the Secured Party a continuing security interest in
and to, and lien upon, the following Pledged Property of the Company:

                  (a) all goods of the Company, including, without limitation,
machinery, equipment, furniture, furnishings, fixtures, signs, lights, tools,
parts, supplies and motor vehicles of every kind and description, now or
hereafter owned by the Company or in which the Company may have or may hereafter
acquire any interest, and all replacements, additions, accessions, substitutions
and proceeds thereof, arising from the sale or disposition thereof, and where
applicable, the proceeds of insurance and of any tort claims involving any of
the foregoing;

                  (b) all inventory of the Company, including, but not limited
to, all goods, wares, merchandise, parts, supplies, finished products, other
tangible personal property, including such inventory as is temporarily out of
Company's custody or possession and including any returns upon any accounts or
other proceeds, including insurance proceeds, resulting from the sale or
disposition of any of the foregoing;

                  (c) all contract rights and general intangibles of the
Company, including, without limitation, goodwill, trademarks, trade styles,
trade names, leasehold interests, partnership or joint venture interests,
patents and patent applications, including but not limited to those relating to
the composition and uses of Product R, copyrights, deposit accounts whether now
owned or hereafter created;

                  (d) all documents, warehouse receipts, instruments and chattel
paper of the Company whether now owned or hereafter created;

                  (e) all accounts and other receivables, instruments or other
forms of obligations and rights to payment of the Company (herein collectively
referred to as "ACCOUNTS"), together with the proceeds thereof, all goods
represented by such Accounts and all such goods that may be returned by the
Company's customers, and all proceeds of any insurance thereon, and all
guarantees, securities and liens which the Company may hold for the payment of
any such Accounts including, without limitation, all rights of stoppage in
transit, replevin and reclamation and as an unpaid vendor and/or lienor, all of
which the Company represents and warrants will be bona fide and existing
obligations of its respective customers, arising out of the sale of goods by the
Company in the ordinary course of business;

                  (f) to the extent assignable, all of the Company's rights
under all present and future authorizations, permits, licenses and franchises
issued or granted in connection with the operations of any of its facilities;

                  (g) all products and proceeds (including, without limitation,
insurance proceeds) from the above-described Pledged Property.

                                      A-1<PAGE>
                                                                    Exhibit 10.1

                                                                        W. ADAIR

                         EXECUTIVE EMPLOYMENT AGREEMENT

         THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into
this 21st day of July 2003, between DIRECT GENERAL CORPORATION, a Tennessee
corporation (the "Company") and WILLIAM C. ADAIR (the "Executive").

                                    RECITALS

     A.   It is the desire of the Company to continue the employment of the
          Executive as its Chief Executive Officer and President as described in
          this Agreement.

     B.   The Executive desires to provide his services to the Company on the
          terms set forth in this Agreement.

     C.   The independent directors of the Company's Board of Directors have
          approved this Agreement as it relates to the Executive's compensation.

         NOW, THEREFORE, in consideration of the foregoing, and of the
respective covenants and agreements set forth below, the parties hereto agree as
follows:

                                    ARTICLE I
                                SERVICES AND TERM

         1.1. TERM. Subject to the termination provisions set forth in Section
3.1, the Company will employ the Executive and the Executive accepts employment
with the Company for a period of five (5) years (the "Term") commencing on the
date of the completion of the initial public offering of Company's stock (the
"Effective Date").

         1.2. SERVICES. During the Term, the Executive will serve as the
Company's Chief Executive Officer and President and will be primarily
responsible for overseeing the implementation of the Company's business strategy
and such other duties, commensurate with his position and authority, as are
reasonably determined, from time to time, by the Company's Board of Directors
(the "Board"). The duties of the Executive shall at all times be subject to the
direction, approval and control of the Board. The Executive shall devote his
full business time and effort to the performance of his duties hereunder.

         1.3. PERSONAL. During this Agreement, it shall not be a violation of
this Agreement for Executive to (i) serve on corporate, civic or charitable
boards or committees; (ii) deliver lectures, fulfill speaking engagements or
teach at educational institutions; or (iii) manage personal investments or
companies in which personal investments are made so long as such activities do
not significantly interfere with the performance of Executive's responsibilities
with the Company and which companies are not in direct competition with or
otherwise conflict with the interests of the Company or its subsidiaries. Any
income incurred by Executive outside the scope of his employment and permitted
pursuant to the provisions hereof, shall inure to the benefit of Executive, and
the Company shall not claim any entitlement thereto; provided, however, that any
income derived by Executive related to the business of the Company or its
subsidiaries, including, without limitation, cash or equity compensation for
serving on boards of directors of companies in which the Company or its
subsidiaries has a

<PAGE>

significant investment, shall be paid over to the Company as and when received
unless otherwise agreed upon in writing by the parties.

                                   ARTICLE II
                              COMPENSATION PACKAGE

         2.1. CASH COMPENSATION.

                  (a) BASE SALARY. During the Term, the Company will pay the
Executive an annual base salary of at least $500,000.00 for each twelve-month
period of the Term. The Executive's base salary shall be payable in accordance
with the normal payroll procedures of the Company. The Company's Board of
Directors or Compensation Committee shall annually review such base salary and
may increase such base salary.

                  (b) BONUS OPPORTUNITY. The Executive shall be eligible for the
payment of a bonus and to participate in such bonus program, option program or
other form of equity participation as the Compensation Committee of the
Company's Board of Directors may determine, in its sole discretion, based on
Executive's performance and the Company's business and financial condition and
operating results achieved.

         2.2 BENEFITS.

                  (a) BENEFIT PLANS. During the Term, the Executive shall be
eligible to participate in such medical, dental, health, retirement, savings,
welfare and life and disability insurance plans (including supplemental
retirement and savings plans) generally made available from time to time to
senior executives of the Company (subject to the usual terms of such plans), and
to receive other fringe benefits on terms and conditions that are at least as
favorable as the fringe benefits generally provided to other senior executives
of the Company at the time such other fringe benefits, if any, are made
available to them.

                  (b) PAID TIME OFF AND OTHER PAID LEAVE. During the term of
this Agreement, Executive shall be entitled to a minimum of 24 days of paid time
off ("PTO") annually, which shall accrue in accordance with the Company's PTO
policy applicable to all full-time employees as in effect from time to time. In
addition, Executive shall be entitled to paid time off for the same holidays as
other employees of the Company.

                  (c) BUSINESS EXPENSES. The Company will promptly pay or
reimburse the Executive for all reasonable business-related expenses incurred by
him in connection with the performance of his duties hereunder upon presentation
of written documentation, subject, however, to the Company's reasonable policies
relating to business-related expenses as in effect from time to time.

                  (d) COMPANY CAR AND EXPENSES. The Company will provide
Executive with vehicles for his business and personal use during the entire term
of his employment with Company. It is the Company's desire to furnish Executive
with vehicle(s) that meet his reasonable satisfaction; therefore, the Executive
shall have prior approval as to any vehicles purchased for his use. The Company
will pay all expenses associated with or necessary for such vehicles operation,
including, but not limited to, any and all repair and gasoline costs. Said
Company vehicles will be replaced on a regular basis in accordance with the
Company's policy and procedures then in effect, but in any event upon the
vehicles incurring in excess of 60,000 miles. Executive's use of such vehicles
and Company's payment of related operation expenses may be subject to applicable
state and federal withholding taxes. In such event, Executive agrees that
Executive will pay the taxes through the Company's usual and customary payroll
tax deductions.

                                       2

<PAGE>

         2.3. STOCK OPTIONS.

         In accordance with the provisions of the Company's 2003 Equity
Incentive Plan (the "2003 Plan") and the specific authorization of the Committee
(as that term is defined in the 2003 Plan), the Company will grant to the
Executive stock options for the purchase of Twenty Five Thousand (25,000) shares
of Company Common Stock ("Option Stock"). The effective date of such grant shall
be the date of the Company's initial public offering of its Common Stock ("IPO")
and the per share exercise price for said ISOs shall be equal to the Fair Market
Value (as defined in the 2003 Plan) of the Common Stock on the effective date of
the grant. The options shall vest in five (5) equal annual installments, with
the first annual installment vesting on the first anniversary of the date of
grant of the options. The options to be granted pursuant to this paragraph are
intended to qualify as incentive stock options ("ISOs") under the terms of the
2003 Plan, to the maximum extent permitted by law and applicable regulations.
Executive understands that the Committee may designate a portion of the options
granted under this paragraph to be non-qualified options, if necessary to comply
with applicable law and regulations related to ISOs. The options to be granted
pursuant to this paragraph shall be subject to such other terms and conditions
that are consistent with the 2003 Plan, as determined by the Committee in its
sole discretion, and such terms and conditions shall be reflected in one or more
option agreement(s) entered into between Executive and the Company pursuant to
the 2003 Plan. Notwithstanding anything to the contrary contained in this
Agreement or the 2003 Plan, all options to acquire Option Stock shall
irrevocably vest thirty (30) calendar days prior to the scheduled consummation
of a Change of Control (as defined herein by reference to the 2003 Plan). If any
change(s) in the federal income tax laws materially affect tax treatment of
Employee with respect to an option or the Option Stock, the parties agree to
negotiate in good faith to reach an agreement that will take advantage of, or
minimize the disadvantages of, such changes. As used in this Agreement, "Change
of Control" shall have the same meaning as provided in the 2003 Plan.

         2.4. INDEMNIFICATION. The Company shall indemnify Executive (and his
executors, administrators, heirs and assigns), to the fullest extent permitted
by applicable law and the Company's Charter and Bylaws.

                                  ARTICLE III
                             TERMINATION OF SERVICES

         3.1. TERMINATION. Executive's employment with the Company hereunder may
be terminated by the Company or the Executive, as applicable, at any time prior
to the end of the Term for any of the following reasons:

                  (a) DISABILITY. The Company may terminate the Executive's
employment hereunder upon the failure of the Executive to render services to the
Company on a full-time basis for a continuous period of six (6) months because
of the Executive's physical or mental disability or illness ("Disability"),
provided such termination does not otherwise violate applicable law. If there
should be a dispute between the parties as to the Executive's physical or mental
disability, such dispute shall be settled by the opinion of an impartial
reputable physician agreed upon for such purpose by the parties or their
representatives. If the parties are unable to agree upon a physician within 30
days after one party submits the name of a physician to the other party, then
the selection of a physician for the purposes of this paragraph shall be
submitted to arbitration in accordance with Section 5.4 (Disputes) hereof. The
certificate of such physician as to the matter in dispute shall be final and
binding on the parties.

                                       3

<PAGE>

                  (b) FOR CAUSE. The Company may terminate this Agreement and
the Executive's employment hereunder for Cause. For purposes of this Agreement,
"Cause" shall mean: (i) the Executive's failure or refusal to materially perform
his duties under this Agreement; (ii) the Executive's failure or refusal to
follow material lawful directions of the Board or any other act of material
insubordination on the part of Executive; (iii) the engaging by the Executive in
misconduct, including but not limited to any type of sexual harassment, which
misconduct is materially and demonstrably injurious to the Company or any of its
divisions, subsidiaries or affiliates, monetarily or otherwise; (iv) the
Executive's conviction of, or plea of guilty or nolo contendere with respect to
a felony (other than a traffic violation); or (v) the commission (or attempted
commission) of any act of fraud or dishonesty by the Executive which is
materially detrimental to the business or reputation of the Company or any of
its divisions, subsidiaries or affiliates.

                  (c) WITHOUT CAUSE OR FOR GOOD REASON.

                          (i) The Company may terminate the Executive's
employment hereunder without Cause upon thirty (30) days written notice to the
Executive.

                          (ii) The Executive may terminate his employment
hereunder for Good Reason upon thirty (30) days written notice to the Company.

                           "Good Reason" for termination by the Executive of the
Executive's employment shall mean the occurrence (without the Executive's
express written consent), of any one of the following acts by the Company, or
failures by the Company to act:

                                    (I)      the assignment to the Executive of
                                             any duties inconsistent with the
                                             Executive's status as an executive
                                             officer of the Company (including
                                             by reason of the Company becoming a
                                             subsidiary of another company) or a
                                             substantial adverse alteration in
                                             the nature or status of the
                                             Executive's title or
                                             responsibilities from those in
                                             effect as of the date hereof;

                                    (II)     a reduction by the Company in the
                                             Executive's annual base salary or
                                             annual bonus opportunity as set
                                             forth in the Agreement or as the
                                             same may thereafter be increased
                                             from time to time, or a failure to
                                             provide the Executive with
                                             participation in any stock option
                                             or other equity-based plan in which
                                             other employees of the Company (and
                                             any parent, surviving or acquiring
                                             company) participate on a basis
                                             that does not unreasonably
                                             discriminate against the Executive
                                             as compared to such other employees
                                             who have similar levels of
                                             responsibility and compensation;

                                    (III)    the relocation of the Executive's
                                             principal place of employment to a
                                             location more than fifty (50) miles
                                             from the Executive's principal
                                             place of employment as of the date
                                             hereof, except for required travel
                                             and overnight stays on the
                                             Company's business to an extent
                                             substantially consistent with the
                                             Executive's business travel
                                             obligations as of the date hereof;
                                             or

                                    (IV)     any material breach by the Company
                                             of its obligations under this
                                             Agreement.

                  The Executive's right to terminate the Executive's employment
         for Good Reason shall not be affected by the Executive's incapacity due
         to physical or mental illness. Except as provided

                                       4

<PAGE>

         above, the Executive's continued employment shall not constitute
         consent to, or a waiver of rights with respect to, any act or failure
         to act constituting Good Reason hereunder. The Executive may resign for
         Good Reason only if such Executive provides the thirty (30) days
         written Notice of Termination to the Company, as described in Section
         3.1(c)(ii) above, within three months of the Executive becoming aware
         that the basis for such Good Reason exists.

                  (d) DEATH. The Executive's employment hereunder shall
         automatically terminate on the death of the Executive.

         3.2. PAYMENT ON TERMINATION BY COMPANY FOR CAUSE. In the event that
Executive's employment is terminated by the Company for Cause pursuant to
Section 3.1(b) hereof, Executive shall be entitled to receive the following
payments not later than twenty (20) business days after the date of termination:

                  (a) payment of any earned but unpaid salary accrued through
         and including the date of termination;

                  (b) payment of accrued, but unused, PTO time; and

                  (c) reimbursement of any unreimbursed business expenses
         incurred prior to the date of termination.

         3.3. PAYMENT ON TERMINATION BY COMPANY WITHOUT CAUSE OR BY EXECUTIVE
FOR GOOD REASON. Subject to the Executive's continuing compliance with the
covenants contained in Article IV of this Agreement (the "Covenants") and the
execution by the Executive of a customary binding general waiver and release of
claims (the "Release"), in the event that the Executive's employment is
terminated by the Company without Cause pursuant to Section 3.1(c)(i) hereof or
by the Executive for Good Reason pursuant to 3.1(c)(ii) hereof, then the
Executive, or the Executive's estate in the event of his death following such
termination, shall be entitled to receive the following less any required
withholdings:

                  (a) payment of any earned, but unpaid salary accrued through
         and including the date of termination;

                  (b) payment of (i) any earned but unpaid annual bonus from a
         previous calendar year and (ii) any earned but unpaid amounts that may
         be paid under any company long term incentive plans to be paid
         according to the terms of such plans;

                  (c) payment of the bonus amounts which would have been awarded
         for the then current year pursuant to Section 2.1(b) (Bonus
         Opportunity), pro-rated based on the actual number of days elapsed in
         the year in which Executive's termination takes place;

                  (d) continued payment of Executive's most recent salary for a
         period of twenty- four (24) months from the date of termination;

                  (e) payment of accrued, but unused PTO time;

                  (f) reimbursement any unreimbursed business expenses, or
         automobile expenses incurred prior to the date of termination;

                  (g) for twenty-four (24) months from the date of termination,
         the Company shall continue to provide Executive and his or his eligible
         dependents with all benefit plans and other

                                       5

<PAGE>

         fringe benefits as described in Section 2.2(a) (Benefit Plans) that
         were being provided to the Executive immediately prior to his
         termination of employment upon the same terms and conditions as
         provided to other senior executives; after twenty-four (24) months,
         Executive and his or his eligible dependents shall be eligible for
         COBRA benefits for eighteen (18) months or such longer period as
         provided by COBRA; and

                  (h) immediate amendment to any outstanding option
         agreement(s), pursuant to which any stock options of the Company have
         been granted to Executive, to provide that (i) 100% of such options
         shall immediately vest and (ii) may be exercised within three (3) years
         of Executive's termination date; provided, however, that if such
         amendment to extend the term for the exercise of such options would
         disqualify the ISO status of any such options, Executive may elect that
         any such option agreement(s) not be amended to the extent necessary to
         maintain the tax qualified status of such ISOs.

                  (i) in the event Executive's employment is terminated in
         connection with a Change of Control, the Company shall make an
         additional payment of a lump sum amount equal to (a) three times his
         annual salary as in effect at the time plus (b) three times the highest
         amount of his bonus paid to Executive within the three years preceding
         such termination.

                  In the event that the termination of Executive's employment is
         for one of the reasons set forth in Section 3.1(c) (Without Cause or
         For Good Reason) and the aggregate of all payments or benefits made or
         provided to Executive under Section 3.3 and under all other plans and
         programs of the Company (the "Aggregate Payment") is determined to
         constitute a Parachute Payment, as such term is defined in Section
         280G(b)(2) of the Internal Revenue Code, the Company shall pay to
         Executive, prior to the time any excise tax imposed by Section 4999 of
         the Internal Revenue Code ("Excise Tax") is payable with respect to
         such Aggregate Payment, an additional amount which, after the
         imposition of all income and excise taxes thereon, is equal to the
         Excise Tax on the Aggregate Payment. The determination of whether the
         Aggregate Payment constitutes a Parachute Payment and, if so, the
         amount to be paid to the Executive and the time of payment pursuant to
         this Section 3.3 shall be made by an independent auditor (the
         "Auditor") jointly selected by the Company and Executive and paid by
         the Company. The Auditor shall be a nationally recognized United States
         public accounting firm which has not, during the two years preceding
         the date of its selection, acted in any way on behalf of the Company or
         any Affiliate thereof. If Executive and the Company cannot agree on the
         firm to serve as the Auditor, then Executive and the Company shall each
         select one accounting firm and those two firms shall jointly select the
         accounting firm to serve as the Auditor.

                  In the event of any termination of employment under Section
         3.1(c), Executive shall be under no obligation to seek other
         employment, and there shall be no offset against amounts due Executive
         under this Employment Agreement on account of any remuneration
         attributable to any subsequent employment.

                  Any amounts due under this Section 3.3 are in the nature of
         severance payments in amounts considered to be reasonable by the
         Company and are not in the nature of a penalty.

                                       6

<PAGE>

         3.4. PAYMENT ON TERMINATION DUE TO DEATH OR DISABILITY. Company shall
make the following payments to Executive in the event of termination due to
Disability (as defined in Section 3.1(a) of this Agreement) or to Executive's
estate in the event of Executive's Death: the payments set forth in Sections
3.3(a), (b), (c) (d), (e) and (f). In the event of Death following Disability,
amounts remaining to be paid under this section shall be paid to Executive's
estate.

                                   ARTICLE IV
                                    COVENANTS

         4.1. NON-COMPETITION.

                (a) During the Term. The Executive covenants and agrees that
during the Term, the Executive shall not directly or indirectly own an interest
in, operate, join, control, advise, consult to, work for, serve as a director or
manager of, have a financial interest, or participate in any corporation,
partnership, proprietorship, firm, association, person, or other entity that
engages or is planning to be engaged in the business of writing, issuing,
underwriting, selling, distributing or re-insuring personal property and
casualty or life insurance products or any other business in which the Company
is engaged during the Term (the "Business"). This Covenant applies to each state
or territory in which the Company is doing Business or is making an active
effort to do Business during the Term.

                (b) During Post-Termination Period. The Executive covenants and
agrees that for a period of twenty-four (24) months (the "Post-Termination
Period"), following a termination of his or his employment by the Company
without Cause pursuant to Section 3.1(c)(i) hereof, or by the Executive for Good
Reason pursuant to Section 3.1(c)(ii) hereof, the Executive shall not directly
or indirectly own an interest in, operate, join, control, advise, consult to,
work for, serve as a director or manager of, have a financial interest, or
participate in any corporation, partnership, proprietorship, firm, association,
person, or other entity that engages or is planning to be engaged in the
business of writing, issuing, underwriting, selling, distributing or re-insuring
non-standard personal automobile insurance or any other business in which the
Company is engaged at the time of such termination of Executive's employment
(the "Pre-Termination Business"). This Covenant applies to each state or
territory in which the Company is doing such Pre-Termination Business or is
making an active effort to do such Pre-Termination Business at the time the
Executive's employment with the Company is terminated.

                  (c) Passive Investments Permitted. This non-competition
Covenant does not prohibit the passive ownership, during either the Term or
during the Post-Termination Period, of less than five percent (5%) of the
outstanding stock or debt of any corporation, the securities of which are
publicly traded, as long as the Executive is not otherwise in violation of this
Section 4.1.

         4.2 NO DIVERSION. The Executive covenants and agrees that (i) during
the Term and (ii) during the Post-Termination Period, he shall not divert or
attempt to divert or take advantage of or attempt to take advantage of any
actual or potential Business or Pre-Termination Business opportunities, as the
case may be, which the Executive becomes or became aware of during his or his
employment with the Company.

                                       7

<PAGE>

         4.3. NON-RECRUITMENT. The Executive agrees that the Company has
invested substantial time and effort in assembling its present workforce.
Accordingly, the Executive covenants and agrees that during the Term and the
Post-Termination Period, he shall not directly or indirectly entice or solicit
(other than pursuant to general, non-targeted public media advertisements) or
seek to induce or influence any of the Company's Employees to leave their
employment.

         4.4. NON-DISCLOSURE. This Agreement hereby incorporates by reference in
its entirety that certain Confidentiality Agreement entered into between the
Company and the Executive as of January 22, 2003 (the "Confidentiality
Agreement").

         4.5. TERMINATION FOR CAUSE. Executive agrees that if his employment is
terminated for Cause pursuant to Section 3.1 (b) hereof, Executive shall be
bound (i) to the Covenants set forth in Sections 4.2 (No Diversion) and 4.3
(Non-Recruitment) hereof, for the duration of the Post-Termination Period, (ii)
to the Covenant set forth in Section 4.4 (Non-Disclosure) hereof for the
duration on the Post-Termination Period or the term of the Confidentiality
Agreement, whichever period is longer, and (iii) to the Covenants set forth in
Subsections (b) and (c) of Section 4.1 (Non-Competition) hereof for a duration
of six (6)months following such termination.

         4.6. INJUNCTIVE REMEDIES. The Executive acknowledges that should he
violate any of the Covenants, it will be difficult to determine the resulting
damages to the Company and, in addition to any other remedies it may have, and
notwithstanding the provisions of Section 5.4 (Disputes) hereof, the Company
shall be entitled to temporary injunctive relief, up to such time as the
arbitration proceedings provided by Section 5.4 hereof have been completed,
without being required to post a bond.

         The Company may elect to seek one or more of these injunctive remedies
at its sole discretion on a case-by-case basis. Failure to seek any or all
remedies in one situation does not restrict the Company from seeking any such
remedies in another situation. Such action by the Company or Executive shall not
constitute a waiver of any of its or the Executive's other rights hereunder.

         4.7. SEVERABILITY AND MODIFICATION OF ANY UNENFORCEABLE COVENANT. It is
the parties' intent that each of the Covenants be read and interpreted with
every reasonable inference given to its enforceability. However, without
limiting the generality of Section 5.5 (Severability, Enforceability) hereof, it
is also the parties' intent that if any term, provision or condition of the
Covenants is held to be invalid, void or unenforceable, the remainder of the
provisions thereof shall remain in full force and effect and shall in no way be
affected, impaired or invalidated. Finally, it is also the parties' intent that
if it is determined any of the Covenants are unenforceable because of over
breadth, then the covenant shall be modified so as to make it reasonable and
enforceable under the prevailing circumstances.

         4.8. TOLLING. In the event of the breach by Executive of any Covenant
the running of the period of restriction shall be automatically tolled and
suspended for the amount of time that the breach continues, and shall
automatically recommence when the breach is remedied so that the Company shall
receive the benefit of Executive's compliance with the Covenants. This paragraph
shall not apply to any period for which the Company is awarded and receives
actual monetary damages for breach by the Executive of a Covenant with respect
to which this paragraph applies.

                                   ARTICLE V
                                  MISCELLANEOUS

         5.1. SUCCESSORS. This Agreement shall inure to the benefit of the
Company and its successors and assigns, as applicable and to the benefit of
Executive's personal or legal representatives, executors, administrators or
heirs. If the Company shall merge or consolidate with or into, or transfer
substantially

                                       8

<PAGE>

all of its assets, including goodwill, to another corporation or
other form of business organization, this Agreement shall be binding on, and run
to the benefit of, the successor of the Company resulting from such merger,
consolidation, or transfer. The Executive shall not assign, pledge, or encumber
his interest in this Agreement, or any part thereof, without the prior written
consent of the Company, and any such attempt to assign, pledge or encumber any
interest in this Agreement shall be null and void and shall have no effect
whatsoever.

         5.2. GOVERNING LAW. This Agreement is being made and executed in and is
intended to be performed in the State of Tennessee and shall be governed,
construed, interpreted and enforced in accordance with the substantive laws of
the State of Tennessee, without regard to the conflict of laws principles
thereof.

         5.3. ENTIRE AGREEMENT. This Agreement, the Confidentiality Agreement
referenced in Section 4.4 (Non-Disclosure) hereof, and any stock option or other
incentive award agreement(s) entered into between Executive and the Company
under the Company's 1996 Employee Stock Incentive Plan or its 2003 Equity
Incentive Plan comprise the entire agreement between the parties hereto relating
to the subject matter hereof and as of the Effective Date, supersedes, cancels
and annuls all other previous agreements between the Company (and/or its
predecessors) and the Executive, as the same may have been amended or modified,
and any right of the Executive under such other previous agreement, other than
for compensation accrued thereunder as of the date hereof, and supersedes,
cancels and annuls all other prior written and oral agreements between the
Executive and the Company or any predecessor to the Company. The terms of this
Agreement and the other agreements identified in this paragraph are intended by
the parties to be the final expression of their agreement with respect to the
employment of the Executive by the Company and may not be contradicted by
evidence of any other prior or contemporaneous agreement.

         5.4. DISPUTES.

                (a) Any dispute or controversy arising under, out of, in
connection with or in relation to this Agreement, including any claims for
discrimination or other similar violation of federal law, shall be finally
determined and settled by arbitration in Shelby County Tennessee, in accordance
with the rules and procedures of the American Arbitration Association, and
judgment upon the award may be entered in any court having jurisdiction thereof.

                (b) If any arbitration or other proceeding is brought for the
enforcement of this Agreement, or because of an alleged dispute, breach, default
or misrepresentation in connection with any of the provisions of this Agreement,
in addition to any other relief that may be granted, the prevailing party shall
be entitled to recover reasonable attorneys' fees and other costs incurred in
that action or proceeding; provided that with respect to any arbitration
proceeding, the amount of such recovery may be limited in whole or in part as
may be determined by the arbitrators.

                                       9

<PAGE>

         5.5. SEVERABILITY, ENFORCEABILITY. If any provision of this Agreement,
or the application thereof to any person, place, or circumstance, shall be held
to be invalid, unenforceable, or void by the final determination of an
arbitration proceeding mandated by Section 5.4 (Disputes) hereof or, if
applicable, a court of competent jurisdiction in any jurisdiction and all
appeals therefrom shall have failed or the time for such appeals shall have
expired, as to that jurisdiction and subject to this Section 5.5, such clause or
provision shall be deemed eliminated from this Agreement, but the remaining
provisions shall nevertheless be given full force and effect. In the event this
Agreement or any portion hereof is more restrictive than permitted by the law of
the jurisdiction in which enforcement is sought, this Agreement or such portion
shall be limited in that jurisdiction only, and shall be enforced in that
jurisdiction as so limited to the maximum extent permitted by the law of that
jurisdiction.

         5.6. NOTICES. Any notice, request, claim, demand, document and other
communication hereunder to any party shall be effective upon receipt (or refusal
of receipt) and shall be in writing and delivered personally or sent by
facsimile (with confirmation), electronic mail, commercial courier service, or
U.S. certified or registered mail, postage prepaid, as follows:

                  If to the Company:

                  Direct General Corporation

                  Attention: General Counsel or Vice President - Human Resources

                  1281 Murfreesboro Road

                  Nashville, TN 37217

                  Fax: (615) 366-3722

                  E-mail: ron.wilson@directins.com

                   or to such other facsimile number, address or addresses as
the Company may specify to Executive in writing from time to time.

                  If to the Executive:

                  William C. Adair

                  7775 Highway 310 West, Como, MS 38619

                  Fax: 901-541-3382

                  E-mail: Tammy.Adair@directins.com

                  or to such other facsimile number or address or addresses as
Executive may specify to the Company in writing from time to time.

         5.7. COUNTERPARTS. This Agreement may be executed by facsimile and in
several counterparts, each of which shall be deemed to be an original, but all
of which together will constitute one and the same Agreement. If executed by
facsimile, within five (5) business days after the parties exchange signed
facsimiles, each party shall provide to the other party the originally signed
Agreement or counterpart.

         5.8. AMENDMENTS; WAIVERS. This Agreement may not be modified, amended,
or terminated except by an instrument in writing, approved by the Board (or the
Committee, if related to compensation matters) and signed by the Executive and
the Company. By an instrument in writing similarly executed, the Executive or
the Company may, with the approval of the Board (or the Committee, if related to
compensation matters), waive compliance by the other party or parties with any
provision of this Agreement that such other party was or is obligated to comply
with or perform; provided, however, that such waiver shall not operate as a
waiver of, or estoppel with respect to, any other or subsequent failure.

                                       10

<PAGE>

No failure to exercise and no delay in exercising any right, remedy or power
hereunder shall preclude any other or further exercise of any other right,
remedy or power provided herein or by law or in equity.

         5.9. NO INCONSISTENT ACTIONS. The parties hereto shall not voluntarily
undertake any action inconsistent with, or voluntarily undertake or fail to
undertake any action or course of action to avoid or evade, the provisions or
essential intent of this Agreement. Furthermore, it is the intent of the parties
hereto to act in a fair and reasonable manner with respect to the interpretation
and application of the provisions of this Agreement.

                  IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date and year first above written, to become effective on the
Effective Date as provided in Section 1.1 (Term) hereof.

DIRECT GENERAL CORPORATION                  EXECUTIVE

By: /s/ Barry D. Elkins
   -------------------------------------    /s/ William C. Adair
                                            ------------------------------------
Name:  Barry D. Elkins                      William C. Adair
       ---------------------------------
Title: Senior Vice President and CFO
       ---------------------------------

                                       11

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