Edgar Filing: HEMISPHERX BIOPHARMA INC

As filed with the Securities and Exchange Commission on July 29, 2004
Registration No. 333-117178
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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PRE-EFFECTIVE AMENDMENT NO.1 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

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

Delaware 2836 52-0845822
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation or Industrial Classification Identification Number)
organization) Code Number)

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1617 JFK Boulevard
Philadelphia, Pennsylvania 19103
(215) 988-0080
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)

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William A. Carter, M.D., Chief Executive Officer
Hemispherx Biopharma, Inc.
1617 JFK Boulevard
Philadelphia, Pennsylvania 19103
(215) 988-0080

(Name, address, including zip code, and telephone number, including area code,
of agent for service)

Copies of all communications to:
Richard Feiner, Esq.
Silverman Sclar Shin & Byrne PLLC
381 Park Avenue South, Suite 1601
New York, New York, 10016
(212) 779-8600 Fax (212)
779-8858

Approximate date of proposed sale to the public: From time to time or at
any time after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933 ("Securities Act"), other than securities offered only in connection
with dividend or reinvestment plans, check the following box. [X]

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

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

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

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

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CALCULATION OF REGISTRATION FEE

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Proposed Maximum Proposed Maximum
Title of Each Class of Amount to be Offering Price Per Aggregate Offering Amount of
Securities to be Registered Registered (1) Share(5) Price Registration Fee
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Common Stock 1,300,000(2) $4.50 $5,850,000 $741.20
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Common Stock 1,300,000(3) $3.75 $4,875,000 $617.66
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Common Stock 74,742(3) $3.39 $ 253,375 $ 32.10
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Common Stock 5,000(4) $3.51 $ 17,550 $ 2.22
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Common Stock 50,000(2) $4.07 $ 203,500 $ 25.78
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Total Registration Fee $1,418.96(6)
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(1) Pursuant to Rule 416 of the Securities Act of 1933, there are also being
registered an indeterminate number of additional shares of common stock as
may become offered, issuable or sold to prevent dilution resulting from
stock splits, stock dividends or similar transactions.

(2) Pursuant to an agreement with the beneficial holders of these shares,
represents 135% of the shares of common stock that are issuable upon the
exercise of warrants issued by the registrant in a private placement.

(3) Represent shares owned by certain selling stockholders.

(4) Represent shares issuable upon exercise of warrants owned by certain
selling stockholders.

(5) Estimated solely for the purpose of computing the registration fee in
accordance with Rules 457(c) of the Securities Act.

(6) $756.75 of this fee previously paid.

Pursuant to Rule 429 under the Securities Act of 1933, as amended, the
prospectus included in this Registration Statement also relates to the remaining
unsold shares which were previously registered by the Registrant under
Registration Statement Nos. 333-108645, 333-111135 and 333-113796.

The Registrant hereby amends this registration statement on the date or dates as
may be necessary to delay its effective date until the Registrant shall file a
further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended, or until the registration statement shall
become effective on a date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.

The information in this prospectus is not complete and may be amended. Neither
we nor the selling stockholders may sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where an offer or sale is not
permitted.

Subject to Completion
Preliminary Prospectus Dated July 29, 2004
HEMISPHERX BIOPHARMA, INC.

11,732,107 Shares of Common Stock

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This prospectus relates to the resale of 11,732,107 shares of our common
stock that may be offered and sold from time to time by selling shareholders,
consisting of: (1) 135% of 1,622,816 shares of common stock issuable upon the
conversion, redemption or other payments relating to our 6% Senior Convertible
Debentures Due January 2006 ("January 2004 Debentures") and as payment of
interest thereon and 135% of 790,514 shares of common stock issuable upon the
exercise of the related warrants ("July 2009 Warrants"); (2) 135% of 813,970
shares of common stock issuable upon the conversion, redemption or other
payments relating to our 6% Senior Convertible Debentures Due January 2006
(issued in July 2004 upon exercise of Additional Investment Rights held by the
holders of the January 2004 Debentures) ("July 2004 Debentures"), and as payment
of interest thereon; (3) 135% of 1,129,221 shares of common stock issuable upon
the conversion, redemption or other payments relating to our 6% Senior
Convertible Debentures Due October 2005 ("October 2003 Debentures") and as
payment of interest thereon; (4) 135% of 334,371 shares of common stock issuable
upon the conversion, redemption or other payments relating to our 6% Senior
Convertible Debentures Due July 2005 ("July 2003 Debentures") and as payment of
interest thereon; (5) 135% of 1,300,000 shares of common stock issuable upon the
exercise of warrants issued to the Debenture holders in May 2004 ("May 2009
Warrants"); (6) 135% of the 1,300,000 shares of common stock issuable upon the
exercise of warrants issued to the Debenture Holders in July 2004 ("June 2009
Warrants") and 1,254,910 shares of common stock issuable upon exercise of other
warrants; and (7) 795,200 shares of common stock (which includes the shares
issued upon exercise of warrants that were issued to the Debenture Holders in
June, July and October 2003) to be sold by certain of the selling stockholders
listed on page 68 of this prospectus. We are registering these shares of common
stock pursuant to commitments to register the securities with the selling
stockholders.

We will not receive any proceeds from the sale of the shares of common
stock by the selling stockholders other than payment of the exercise price of
the warrants.

Our common stock is listed on the American Stock Exchange under the symbol
HEB. The reported last sale price on the American Stock Exchange on July 26,
2004 was $2.54.

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Please see the risk factors beginning on page 6 to read about certain
factors you should consider before buying shares of common stock.

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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined that
this prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.

The date of this prospectus is July __, 2004

PROSPECTUS SUMMARY

In the following summary, we have highlighted information that we believe
is the most important about us. However, because this is a summary, it may not
contain all information that may be important to you. You should read this
entire prospectus, including the information incorporated by reference and the
financial data and related notes, before making an investment decision. When
used in this prospectus, the terms "we," "our" and "us" refer to Hemispherx and
not to the selling stockholders.

About Hemispherx

In the course of almost three decades, we have established a strong
foundation of laboratory, pre-clinical and clinical data with respect to the
development of nucleic acids to enhance the natural antiviral defense system of
the human body and the development of therapeutic products for the treatment of
chronic diseases. Our strategy is to obtain the required regulatory approvals
which will allow the progressive introduction of Ampligen(R) (our proprietary
drug) for treating Myalgic Encephalomyelitis/ Chronic Fatigue Syndrome
("ME/CFS"), HIV, Hepatitis C ("HCV") and Hepatitis B ("HBV") in the U.S.,
Canada, Europe and Japan. Ampligen(R) is currently in the open label portion of
phase III clinical trials in the U.S. for use in treatment of ME/CFS and is in
Phase IIb Clinical Trials in the U.S. for the treatment of newly emerging
multi-drug resistant HIV, and for the induction of cell mediated immunity in HIV
patients that are under control using potentially toxic drug cocktails.

Our proprietary drug technology utilizes specifically configured
ribonucleic acid ("RNA") and is protected by more than 250 patents worldwide,
with over 16 additional patent applications pending to provide further
proprietary protection in various international markets. Certain patents apply
to the use of Ampligen(R) alone and certain patents apply to the use of
Ampligen(R) in combination with certain other drugs. Some compositions of matter
patents pertain to other new RNA compounds, which have a similar mechanism of
action.

In March 2003 we obtained from Interferon Sciences, Inc. ("ISI") all of
its raw materials, work-in-progress and finished product ALFERON N Injection(R),
together with a limited license to sell ALFERON N Injection(R), a natural alpha
interferon that has been approved for commercial sale for the intralesional
treatment of refractory or recurring external condylomata acuminata ("genital
warts") in patients 18 years of age or older in the United States. In March
2004, we acquired from ISI the balance of ISI's rights to its product as well as
ISI's production facility. We are marketing the ALFERON N Injection(R) in the
United States through sales facilitated via third party agreements.
Additionally, we intend to implement studies testing the efficacy of ALFERON N
Injection(R) in multiple sclerosis and other chronic viral diseases. In this
regard, the FDA recently authorized a Phase II clinical study designed to
investigate the activity and safety of Alferon LDO(R) in early stage HIV
positive patients.

We were incorporated in Maryland in 1966 under the name HEM Research,
Inc., and originally served as a supplier of research support products. Our
business was redirected in the early 1980's to the development of nucleic acid
pharmaceutical technology and the commercialization of RNA drugs. We were
reincorporated in Delaware and changed our name to HEM Pharmaceutical Corp., in
1991 and to Hemispherx Biopharma, Inc., in June 1995. We have three domestic
subsidiaries `BioPro Corp., BioAegean Corp., and Core BioTech Corp., all of
which are incorporated in Delaware. Our foreign subsidiaries include Hemispherx
Biopharma Europe N.V./S.A. established in Belgium in 1998 and Hemispherx
Biopharma Europe S.A. ("Hemispherx, S.A.") incorporated in Luxembourg in 2002.

Our principal executive offices are located at One Penn Center, 1617 JFK
Boulevard, Philadelphia, Pennsylvania 19103, and its telephone number is
215-988-0080.

THE OFFERING

Common stock to be offered
by the selling stockholders ....... 11,732,107 Shares

Common stock outstanding
prior to this offerng ............. 45,207,788 Shares

Use of Proceeds ................... We will not receive any of the proceeds from
the sale of the shares of common stock
because they are being offered by the
selling stockholders and we are not offering
any shares for sale under this prospectus,
but we may receive proceeds from the
exercise of warrants held by certain of the
selling stockholders. We will apply such
proceeds, if any, toward funding our
research and development efforts, working
capital and, possibly, acquisitions. See
"Use of Proceeds."

American Stock Exchange symbol .... HEB

The 11,732,107 shares of our common stock offered consist of:

o 135% of 1,622,816 shares of common stock issuable upon the
conversion, redemption or other payments relating to our 6% Senior
Convertible Debentures Due January 2006 ("January 2004 Debentures")
and as payment of interest thereon;

o 135% of 790,514 shares of common stock issuable upon the exercise of
the related warrants ("July 2009 Warrants");

o 135% of 813,970 shares of common stock issuable upon the conversion,
redemption or other payments relating to our 6% Senior Convertible
Debentures Due January 2006 (issued in July 2004 upon exercise of
Additional Investment Rights held by the holders of the January 2004
Debentures) ("July 2004 Debentures") and as payment of interest
thereon;

o 135% of 1,129,221 shares of common stock issuable upon the
conversion, redemption or other payments relating to our 6% Senior
Convertible Debentures Due October 2005 ("October 2003 Debentures")
and as payment of interest thereon;

o 135% of 334,371 shares of common stock issuable upon the conversion,
redemption or other payments relating to our 6% Senior Convertible
Debentures Due July 2005 ("July 2003 Debentures") and as payment of
interest thereon;

o 135% of 1,300,000 shares of common stock issuable upon the exercise
of warrants issued to the Debenture holders in May 2004 ("May 2009
Warrants");

o 135% of 1,300,00 shares of common stock issued to the Debenture
Holders in July 2004 ("June 2009 warrants");

o 1,254,910 shares of common stock issuable upon exercise of other
warrants; and

o 795,200 shares of common stock owned by certain of the selling
stockholders.

We are registering these shares of common stock pursuant to commitments to
register the securities with the selling stockholders.

Summary Consolidated Financial Data

In the table below, we provide you with our summary historical financial
data. We have prepared this information using our audited financial statements
for each of the five years in the period ended December 31, 2003 and our
unaudited financial statements for the three months ended March 31, 2003 and
March 31, 2004. Operating results for the three months ended March 31, 2004 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2004. The Pro Forma information is presented for
illustrative purposes only and is not indicative of the operating results if the
acquisitions had occurred in an earlier period, nor is it indicative of future
operating results.

It is important that you read this summary historical financial data in
conjunction with our historical financial statements and related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this prospectus.

(in thousands except share and per share data)

Pro Forma for
Asset
Consolidated Statements Three Months Acquisitions
of Operations Data: Ended Year ended
Year ended December 31, March 31, December 31,
1999 2000 2001 2002 2003(2) 2003 2004 2003(4)
-------- ------- ------- ------- -------- ------- ------- --------

Revenues:
Sale of Products $ -- $ -- $ -- $ -- $ 509 $ 19 $ 259 $ 751
Clinical Treatment
Programs 678 788 390 341 148 47 49 148
License Fees Income
-- -- -- 563 -- -- -- --
-------- ------- ------- ------- -------- ------- ------- --------

Total Revenues 678 788 390 904 657 66 308 899

Cost & Expenses:

Production Costs/ Costs
of Goods Sold 502 118 601 876
Research & Development 4,737 6,136 5,780 4,946 3,150 873 964 3,327
General &
Administrative(1) 8,721 3,695 3,412 2,015 4,257 667 2,844 4,598

Total Cost and Expenses 13,458 9,831 9,192 6,961 7,909 1,658 4,409 8,801

Interest and Other
Income 482 572 284 103 80 50 11 80
Interest Expense -- -- -- -- (253) (17) (101) (253)
Financing Costs(3) -- -- -- -- (7,345) (58) (3,851) (7,413)
Other Expense -- (81) (565) (1,470) -- -- --

Net Loss $(12,298) $(8,552) $(9,083) $(7,424) $(14,770) $(1,617) $(8,042) $(15,488)

Basic and Diluted
Loss Per Share $ (.47) $(.29) $(.29) $(.23) $(.42) $(.05) $(.20) $(.43)

Basic and Diluted 26,380,351 31,443,208 35,234,526 40,688,478
Weighted Average Shares
Outstanding 29,251,846 32,095,776 32,393,754 36,055,994

Other Cash Flow Data
Cash Used in
Operating Activities $(6,990) $(8,074) $(7,281) $(6,409) $(7,022) $(1,692) $(1,722)

Capital Expenditures (251) (171) -- -- (19) -- (143)

Balance Sheet Data: December 31, March 31,
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1999 2000 2001 2002 2003 2003 2004
---- ---- ---- ---- ---- ---- ----

Working
Capital $ 9,507 $ 7,550 $ 7,534 $ 2,925 $ 7,000 $ 4,073 $ 5,761
Total Assets 14,168 13,067 12,035 6,040 13,404 8,729 17,053
Shareholders'
Equity 12,657 11,572 10,763 3,630 9,248 4,603 9,290

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(1) General and Administrative expenses include stock compensation expense
totaling $4,618, $397, $673, $132 and $237 for the years ended December 31,
1999, 2000, 2001, 2002 and 2003, respectively and $0 and $1,769 for the
three months ended March 31, 2003 and 2004, respectively.

(2) For information concerning recent acquisitions of certain assets of
Interferon Sciences, Inc. ("ISI") and related financing see notes 1, 4 and
7 to our consolidated financial statements for the year ended December 31,
2003 and note 6 to our consolidated financial statements for the three
months ended March 31, 2004, contained elsewhere in this prospectus.

(3) In accounting for the March 12, 2003, July 10, 2003, and October 29, 2003
issuances of 6% Senior Convertible Debentures in the principal amounts of
$5,426,000, $5,426,000, and $4,142,357, respectively, and related embedded
conversion features and warrant issuances, we recorded debt discounts of
approximately $11.3 million which, in effect, reduced the carrying value of
the debt to $1.6 million. In accounting for the January 26, 2004 issuance
of 6% Senior Convertible Debentures, we recorded debt discounts of $2.9
million. Excluding the application of related accounting standards, our
debt outstanding as of December 31, 2003 and March 31, 2004 totaled
approximately $6.6 million and $7.1 million, respectively. For the year
ended December 31, 2003 and for the three months ended March 31, 2004, we
have recorded charges of approximately $7.3 million and $3.9 million,
respectively, for amortization of original issue discount and other related
debt costs. Such amounts have been reflected as financing costs in the
statement of operations. For additional information refer to note 7 to our
consolidated financial statements for the year ended December 31, 2003 and
for the three months ended March 31, 2004.

(4) The unaudited Pro Forma consolidated statements of operations data for the
year ended December 31, 2003 have been prepared giving effect to the
acquisition of certain assets of ISI and the related funding of the
transaction, by our March 12, 2003 6% senior convertible debentures, as if
they occurred on January 1, 2003.

RISK FACTORS

Special Note Regarding Forward-Looking Statements

Certain statements in this prospectus constitute "forwarding-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities and Exchange Act of 1995
(collectively, the "Reform Act"). Certain, but not necessarily all, of such
forward-looking statements can be identified by the use of forward-looking
terminology such as "believes," "expects," "may," "will," "should," or
"anticipates" or the negative thereof or other variations thereon or comparable
terminology, or by discussions of strategy that involve risks and uncertainties.
All statements other than statements of historical fact, included in this
prospectus regarding our financial position, business strategy and plans or
objectives for future operations are forward-looking statements. Without
limiting the broader description of forward-looking statements above, we
specifically note that statements regarding potential drugs, their potential
therapeutic effect, the possibility of obtaining regulatory approval, our
ability to manufacture and sell any products, market acceptance or our ability
to earn a profit from sales or licenses of any drugs or our ability to discover
new drugs in the future are all forward-looking in nature.

Such forward-looking statements involve known and unknown risks,
uncertainties and other factors, including but not limited to, the risk factors
discussed below, which may cause the actual results, performance or achievements
of Hemispherx and its subsidiaries to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements and other factors referenced in this prospectus. We
do not undertake and specifically decline any obligation to publicly release the
results of any revisions which may be made to any forward-looking statement to
reflect events or circumstances after the date of such statements or to reflect
the occurrence of anticipated or unanticipated events.

The following cautionary statements identify important factors that could
cause our actual result to differ materially from those projected in the
forward-looking statements made in this prospectus. Among the key factors that
have a direct bearing on our results of operations are:

No assurance of successful product development

Ampligen(R) and related products. The development of Ampligen(R) and our
other related products is subject to a number of significant risks. Ampligen(R)
may be found to be ineffective or to have adverse side effects, fail to receive
necessary regulatory clearances, be difficult to manufacture on a commercial
scale, be uneconomical to market or be precluded from commercialization by
proprietary right of third parties. Our products are in various stages of
clinical and pre-clinical development and, require further clinical studies and
appropriate regulatory approval processes before any such products can be
marketed. We do not know when, if ever, Ampligen(R) or our other products will
be generally available for commercial sale for any indication. Generally, only a
small percentage of potential therapeutic products are eventually approved by
the U.S. Food and Drug Administration ("FDA") for commercial sale.

ALFERON N Injection(R). Although ALFERON N Injection(R) is approved for
marketing in the United States for the intralesional treatment of refractory or
recurring external genital warts in patients 18

years of age or older, to date it has not been approved for other indications.
We face many of the risks discussed above, with regard to developing this
product for use to treat other ailments such as multiple sclerosis and cancer.

Our drug and related technologies are investigational and subject to regulatory
approval. If we are unable to obtain regulatory approval, our operations will be
significantly affected.

All of our drugs and associated technologies other than ALFERON N
Injection(R) are investigational and must receive prior regulatory approval by
appropriate regulatory authorities for general use and are currently legally
available only through clinical trials with specified disorders. At present,
ALFERON N Injection(R) is only approved for the intralesional treatment of
refractory or recurring external genital warts in patients 18 years of age or
older. Use of ALFERON N Injection(R) for other indications will require
regulatory approval. In this regard, Interferon Sciences, Inc. ("ISI"), the
company from which we obtained our rights to ALFERON N Injection(R), conducted
clinical trials related to use of ALFERON N Injection(R) for treatment of HIV
and Hepatitis C. In both instances, the FDA determined that additional studies
were necessary in order to fully evaluate the efficacy of ALFERON N Injection(R)
in the treatment of HIV and Hepatitis C diseases. We have no obligation or
immediate plans to conduct these additional studies at this time.

Our products, including Ampligen(R), are subject to extensive regulation
by numerous governmental authorities in the U.S. and other countries, including,
but not limited to, the FDA in the U.S., the Health Protection Branch ("HPB") of
Canada, and the European Medical Evaluation Agency ("EMEA") in Europe. Obtaining
regulatory approvals is a rigorous and lengthy process and requires the
expenditure of substantial resources. In order to obtain final regulatory
approval of a new drug, we must demonstrate to the satisfaction of the
regulatory agency that the product is safe and effective for its intended uses
and that we are capable of manufacturing the product to the applicable
regulatory standards. We require regulatory approval in order to market
Ampligen(R) or any other proposed product and receive product revenues or
royalties. We cannot assure you that Ampligen(R) will ultimately be demonstrated
to be safe or efficacious. In addition, while Ampligen(R) is authorized for use
in clinical trials in the United States and other countries, we cannot assure
you that additional clinical trial approvals will be authorized in the United
States or in other countries, in a timely fashion or at all, or that we will
complete these clinical trials. If Ampligen(R) or one of our other products does
not receive regulatory approval in the U.S. or elsewhere, our operations most
likely will be materially adversely affected.

We may continue to incur substantial losses and our future profitability is
uncertain.

We began operations in 1966 and last reported net profit from 1985 through
1987. Since 1987, we have incurred substantial operating losses, as we pursued
our clinical trial effort and expanded our efforts in Europe. As of March 31,
2004 our accumulated deficit was approximately $121,886,000. We have not yet
generated significant revenues from our products and may incur substantial and
increased losses in the future. We cannot assure that we will ever achieve
significant revenues from product sales or become profitable. We require, and
will continue to require, the commitment of substantial resources to develop our
products. We cannot assure that our product development efforts will be
successfully completed or that required regulatory approvals will be obtained or
that any products will be manufactured and marketed successfully, or be
profitable.

We may require additional financing which may not be available.

The development of our products will require the commitment of substantial
resources to conduct the time-consuming research, preclinical development, and
clinical trials that are necessary to bring pharmaceutical products to market.
As of March 31, 2004, we had approximately $7,238,000 million in

cash and cash equivalents and short-term investments. We believe that these
funds plus 1) the gross proceeds received from the exercise of warrants of
approximately $2,400,000 on May 14, 2004, 2) the infusion of approximately
$1,550,000 million in remaining net proceeds from the October 2003 Debentures in
April 2004, 3) the gross proceeds received from the exercise of warrants and the
Additional Investment Rights of approximately $4,198,980 on July 13, 2004, 4)
the projected net cash flow from the sale of ALFERON N Injection(R) and 4) the
proceeds from licensing agreements should be sufficient to meet our operating
cash requirements including debt service during the next 18 months. We may need
to raise additional funds through additional equity or debt financing or from
other sources in order to complete the necessary clinical trials and the
regulatory approval processes and begin commercializing Ampligen(R) products.
There can be no assurances that we will raise adequate funds from these or other
sources, which may have a material adverse effect on our ability to develop our
products.

We may not be profitable unless we can protect our patents and/or receive
approval for additional pending patents.

We need to preserve and acquire enforceable patents covering the use of
Ampligen(R) for a particular disease in order to obtain exclusive rights for the
commercial sale of Ampligen(R) for such disease. When we obtained all rights to
ALFERON N Injection(R), we need to preserve and acquire enforceable patents
covering its use for a particular disease too. Our success depends, in large
part, on our ability to preserve and obtain patent protection for our products
and to obtain and preserve our trade secrets and expertise. Certain of our
know-how and technology is not patentable, particularly the procedures for the
manufacture of our drug product which are carried out according to standard
operating procedure manuals. We have been issued certain patents including those
on the use of Ampligen(R) and Ampligen(R) in combination with certain other
drugs for the treatment of HIV. We also have been issued patents on the use of
Ampligen(R) in combination with certain other drugs for the treatment of chronic
Hepatitis B virus, chronic Hepatitis C virus, and a patent which affords
protection on the use of Ampligen(R) in patients with Chronic Fatigue Syndrome.
We have not yet been issued any patents in the United States for the use of
Ampligen(R) as a sole treatment for any of the cancers, which we have sought to
target. With regard to ALFERON N Injection(R), we have acquired from ISI its
patents for natural alpha interferon produced from human peripheral blood
leukocytes and its production process. We cannot assure that our competitors
will not seek and obtain patents regarding the use of similar products in
combination with various other agents, for a particular target indication prior
to our doing such. If we cannot protect our patents covering the use of our
products for a particular disease, or obtain additional patents, we may not be
able to successfully market our products.

The patent position of biotechnology and pharmaceutical firms is highly
uncertain and involves complex legal and factual questions.

To date, no consistent policy has emerged regarding the breadth of
protection afforded by pharmaceutical and biotechnology patents. There can be no
assurance that new patent applications relating to our products or technology
will result in patents being issued or that, if issued, such patents will afford
meaningful protection against competitors with similar technology. It is
generally anticipated that there may be significant litigation in the industry
regarding patent and intellectual property rights. Such litigation could require
substantial resources from us and we may not have the financial resources
necessary to enforce the patent rights that we hold. No assurance can be made
that our patents will provide competitive advantages for our products or will
not be successfully challenged by competitors. No assurance can be given that
patents do not exist or could not be filed which would have a materially adverse
effect on our ability to develop or market our products or to obtain or maintain
any competitive position that we may achieve with respect to our products. Our
patents also may not prevent others from developing competitive products using
related technology.

There can be no assurance that we will be able to obtain necessary licenses if
we cannot enforce patent rights we may hold. In addition, the failure of third
parties from whom we currently license certain proprietary information or from
whom we may be required to obtain such licenses in the future, to adequately
enforce their rights to such proprietary information, could adversely affect the
value of such licenses to us.

If we cannot enforce the patent rights we currently hold we may be
required to obtain licenses from others to develop, manufacture or market our
products. There can be no assurance that we would be able to obtain any such
licenses on commercially reasonable terms, if at all. We currently license
certain proprietary information from third parties, some of which may have been
developed with government grants under circumstances where the government
maintained certain rights with respect to the proprietary information developed.
No assurances can be given that such third parties will adequately enforce any
rights they may have or that the rights, if any, retained by the government will
not adversely affect the value of our license.

There is no guarantee that our trade secrets will not be disclosed or known by
our competitors.

To protect our rights, we require certain employees and consultants to
enter into confidentiality agreements with us. There can be no assurance that
these agreements will not be breached, that we would have adequate and
enforceable remedies for any breach, or that any trade secrets of ours will not
otherwise become known or be independently developed by competitors.

If our distributors do not market our products successfully, we may not generate
significant revenues or become profitable.

We have limited marketing and sales capability. We are dependent upon
existing and, possibly future, marketing agreements and third party distribution
agreements for our products in order to generate significant revenues and become
profitable. As a result, any revenues received by us will be dependent on the
efforts of third parties, and there is no assurance that these efforts will be
successful. Our agreement with Accredo offers the potential to provide some
marketing and distribution capacity in the United States while agreements with
Bioclones (Proprietary), Ltd , Biovail Corporation and Laboratorios Del Dr.
Esteve S.A. should provide a sales force in South America, Africa, United
Kingdom, Australia and New Zealand, Canada, Spain and Portugal.

We cannot assure that our domestic or foreign marketing partners will be
able to successfully distribute our products, or that we will be able to
establish future marketing or third party distribution agreements on terms
acceptable to us, or that the cost of establishing these arrangements will not
exceed any product revenues. The failure to continue these arrangements or to
achieve other such arrangements on satisfactory terms could have a materially
adverse effect on us.

There are no long-term agreements with suppliers of required materials. If we
are unable to obtain the required raw materials, we may be required to scale
back our operations or stop manufacturing ALFERON N Injection.

A number of essential materials are used in the production of ALFERON N
Injection(R), including human white blood cells. We do not have long-term
agreements for the supply of any of such materials. There can be no assurance we
can enter into long-term supply agreements covering essential materials on
commercially reasonable terms, if at all. If we are unable to obtain the
required raw materials, we may be required to scale back our operations or stop
manufacturing ALFERON N Injection(R). The costs and availability of products and
materials we need for the commercial production of ALFERON N Injection(R) and
other products which we may commercially produce are subject to fluctuation
depending on a variety

of factors beyond our control, including competitive factors, changes in
technology, and FDA and other governmental regulations and there can be no
assurance that we will be able to obtain such products and materials on terms
acceptable to us or at all.

There is no assurance that successful manufacture of a drug on a limited scale
basis for investigational use will lead to a successful transition to
commercial, large-scale production.

Small changes in methods of manufacturing may affect the chemical
structure of Ampligen(R) and other RNA drugs, as well as their safety and
efficacy. Changes in methods of manufacture, including commercial scale-up may
affect the chemical structure of Ampligen(R) and can, among other things,
require new clinical studies and affect orphan drug status, particularly, market
exclusivity rights, if any, under the Orphan Drug Act. The transition from
limited production of pre-clinical and clinical research quantities to
production of commercial quantities of our products will involve distinct
management and technical challenges and will require additional management and
technical personnel and capital to the extent such manufacturing is not handled
by third parties. There can be no assurance that our manufacturing will be
successful or that any given product will be determined to be safe and
effective, capable of being manufactured economically in commercial quantities
or successfully marketed.

We have limited manufacturing experience and capacity.

Ampligen(R) is currently produced only in limited quantities for use in
our clinical trials and we are dependent upon certain third party suppliers for
key components of our products and for substantially all of the production
process. The failure to continue these arrangements or to achieve other such
arrangements on satisfactory terms could have a material adverse affect on us.
Also, to be successful, our products must be manufactured in commercial
quantities in compliance with regulatory requirements and at acceptable costs.
To the extent we are involved in the production process, our current facilities
are not adequate for the production of our proposed products for large-scale
commercialization, and we currently do not have adequate personnel to conduct
commercial-scale manufacturing. We intend to utilize third-party facilities if
and when the need arises or, if we are unable to do so, to build or acquire
commercial-scale manufacturing facilities. We will need to comply with
regulatory requirements for such facilities, including those of the FDA and HPB
pertaining to current Good Manufacturing Practices ("cGMP") regulations. There
can be no assurance that such facilities can be used, built, or acquired on
commercially acceptable terms, or that such facilities, if used, built, or
acquired, will be adequate for our long-term needs.

The purified drug concentrate utilized in the formulation of ALFERON N
Injection(R) is manufactured in ISI's facility and ALFERON N Injection(R) is
formulated and packaged at a production facility operated by Abbott Laboratories
located in Kansas. In March 2004 we acquired ISI's New Brunswick, NJ facility.
We still will be dependent upon Abbott Laboratories and/or another third party
for product formulation and packaging.

We may not be profitable unless we can produce Ampligen(R) or other products in
commercial quantities at costs acceptable to us.

We have never produced Ampligen(R) or any other products in large
commercial quantities. Ampligen(R) is currently produced for use in clinical
trials. We must manufacture our products in compliance with regulatory
requirements in large commercial quantities and at acceptable costs in order for
us to be profitable. We intend to utilize third-party manufacturers and/or
facilities if and when the need arises or, if we are unable to do so, to build
or acquire commercial-scale manufacturing facilities. If we cannot manufacture
commercial quantities of Ampligen(R) or enter into third party agreements for
its manufacture at costs acceptable to us, our operations will be significantly
affected. Also, each production lots of Alferon N Injection(R) is subject to FDA
review and approval prior to releasing the lots

to be sold. This review and approval process could take considerable time, which
would delay our having product in inventory to sell. Alferon N Injection(R) has
a shelf life of 18 months after having been bottled.

Rapid technological change may render our products obsolete or non-competitive.

The pharmaceutical and biotechnology industries are subject to rapid and
substantial technological change. Technological competition from pharmaceutical
and biotechnology companies, universities, governmental entities and others
diversifying into the field is intense and is expected to increase. Most of
these entities have significantly greater research and development capabilities
than us, as well as substantial marketing, financial and managerial resources,
and represent significant competition for us. There can be no assurance that
developments by others will not render our products or technologies obsolete or
noncompetitive or that we will be able to keep pace with technological
developments.

Our products may be subject to substantial competition.

Ampligen(R) . Competitors may be developing technologies that are, or in
the future may be, the basis for competitive products. Some of these potential
products may have an entirely different approach or means of accomplishing
similar therapeutic effects to products being developed by us. These competing
products may be more effective and less costly than our products. In addition,
conventional drug therapy, surgery and other more familiar treatments may offer
competition to our products. Furthermore, many of our competitors have
significantly greater experience than us in pre-clinical testing and human
clinical trials of pharmaceutical products and in obtaining FDA, HPB and other
regulatory approvals of products. Accordingly, our competitors may succeed in
obtaining FDA, HPB or other regulatory product approvals more rapidly than us.
There are no drugs approved for commercial sale with respect to treating ME/CFS
in the United States. The dominant competitors with drugs to treat HIV diseases
include Gilead Pharmaceutical, Pfizer, Bristol-Myers, Abbott Labs, Glaxo
Smithkline, Merck and Schering-Plough Corp. These potential competitors are
among the largest pharmaceutical companies in the world, are well known to the
public and the medical community, and have substantially greater financial
resources, product development, and manufacturing and marketing capabilities
than we have. Although we believe our principal advantage is the unique
mechanism of action of Ampligen(R) on the immune system, we cannot assure that
we will be able to compete.

ALFERON N Injection(R). Many potential competitors are among the largest
pharmaceutical companies in the world, are well known to the public and the
medical community, and have substantially greater financial resources, product
development, and manufacturing and marketing capabilities than we have. ALFERON
N Injection(R) currently competes with Schering's injectable recombinant alpha
interferon product (INTRON(R) A) for the treatment of genital warts. 3M
Pharmaceuticals also received FDA approval for its immune-response modifier,
Aldara(R), a self-administered topical cream, for the treatment of external
genital and perianal warts. ALFERON N Injection(R) also competes with surgical,
chemical, and other methods of treating genital warts. We cannot assess the
impact products developed by our competitors, or advances in other methods of
the treatment of genital warts, will have on the commercial viability of ALFERON
N Injection(R). If and when we obtain additional approvals of uses of this
product, we expect to compete primarily on the basis of product performance. Our
potential competitors have developed or may develop products (containing either
alpha or beta interferon or other therapeutic compounds) or other treatment
modalities for those uses. In the United States, three recombinant forms of beta
interferon have been approved for the treatment of relapsing-remitting multiple
sclerosis. There can be no assurance that, if we are able to obtain regulatory
approval of ALFERON N Injection(R) for the treatment of new indications, we will
be able to achieve any significant penetration into those markets. In addition,
because certain competitive products are not dependent on a source of human
blood cells, such products may be able to be produced in greater volume and at a
lower cost than

ALFERON N Injection(R). Currently, our wholesale price on a per unit basis of
ALFERON N Injection(R) is higher than that of the competitive recombinant alpha
and beta interferon products.

General. Other companies may succeed in developing products earlier than
we do, obtaining approvals for such products from the FDA more rapidly than we
do, or developing products that are more effective than those we may develop.
While we will attempt to expand our technological capabilities in order to
remain competitive, there can be no assurance that research and development by
others or other medical advances will not render our technology or products
obsolete or non-competitive or result in treatments or cures superior to any
therapy we develop.

Possible side effects from the use of Ampligen(R) or ALFERON N Injection(R)
could adversely affect potential revenues and physician/patient acceptability of
our product.

Ampligen(R). We believe that Ampligen(R) has been generally well tolerated
with a low incidence of clinical toxicity, particularly given the severely
debilitating or life threatening diseases that have been treated. A mild
flushing reaction has been observed in approximately 15% of patients treated in
our various studies. This reaction is occasionally accompanied by a rapid heart
beat, a tightness of the chest, urticaria (swelling of the skin), anxiety,
shortness of breath, subjective reports of "feeling hot," sweating and nausea.
The reaction is usually infusion-rate related and can generally be controlled by
slowing the infusion rate. Other adverse side effects include liver enzyme level
elevations, diarrhea, itching, asthma, low blood pressure, photophobia, rash,
transient visual disturbances, slow or irregular heart rate, decreases in
platelets and white blood cell counts, anemia, dizziness, confusion, elevation
of kidney function tests, occasional temporary hair loss and various flu-like
symptoms, including fever, chills, fatigue, muscular aches, joint pains,
headaches, nausea and vomiting. These flu-like side effects typically subside
within several months. One or more of the potential side effects might deter
usage of Ampligen(R) in certain clinical situations and therefore, could
adversely affect potential revenues and physician/patient acceptability of our
product.

ALFERON N Injection(R). At present, ALFERON N Injection(R) is only
approved for the intralesional (within the lesion) treatment of refractory or
recurring external genital warts in adults. In clinical trials conducted for the
treatment of genital warts with ALFERON N Injection(R), patients did not
experience serious side effects; however, there can be no assurance that
unexpected or unacceptable side effects will not be found in the future for this
use or other potential uses of ALFERON N Injection(R) which could threaten or
limit such product's usefulness.

We may be subject to product liability claims from the use of Ampligen(R) or
other of our products which could negatively affect our future operations.

We face an inherent business risk of exposure to product liability claims
in the event that the use of Ampligen(R) or other of our products results in
adverse effects. This liability might result from claims made directly by
patients, hospitals, clinics or other consumers, or by pharmaceutical companies
or others manufacturing these products on our behalf. Our future operations may
be negatively affected from the litigation costs, settlement expenses and lost
product sales inherent to these claims. While we will continue to attempt to
take appropriate precautions, we cannot assure that we will avoid significant
product liability exposure. Although we currently maintain product liability
insurance coverage, there can be no assurance that this insurance will provide
adequate coverage against product liability claims. A successful product
liability claim against us in excess of our $1,000,000 in insurance coverage or
for which coverage is not provided could have a negative effect on our business
and financial condition.

The loss of Dr. William A. Carter's services could hurt our chances for success.

Our success is dependent on the continued efforts of Dr. William A. Carter
because of his position as a pioneer in the field of nucleic acid drugs, his
being the co-inventor of Ampligen(R), and his knowledge of our overall
activities, including patents and clinical trials. The loss of Dr. Carter's
services could have a material adverse effect on our operations and chances for
success. We have secured key man life insurance in the amount of $2 million on
the life of Dr. Carter and we have an employment agreement with Dr. Carter that,
as amended, runs until May 8, 2008. However, Dr. Carter has the right to
terminate his employment upon not less than 30 days prior written notice. The
loss of Dr. Carter or other personnel, or the failure to recruit additional
personnel as needed could have a materially adverse effect on our ability to
achieve our objectives.

Uncertainty of health care reimbursement for our products.

Our ability to successfully commercialize our products will depend, in
part, on the extent to which reimbursement for the cost of such products and
related treatment will be available from government health administration
authorities, private health coverage insurers and other organizations.
Significant uncertainty exists as to the reimbursement status of newly approved
health care products, and from time to time legislation is proposed, which, if
adopted, could further restrict the prices charged by and/or amounts
reimbursable to manufacturers of pharmaceutical products. We cannot predict
what, if any, legislation will ultimately be adopted or the impact of such
legislation on us. There can be no assurance that third party insurance
companies will allow us to charge and receive payments for products sufficient
to realize an appropriate return on our investment in product development.

There are risks of liabilities associated with handling and disposing of
hazardous materials.

Our business involves the controlled use of hazardous materials,
carcinogenic chemicals and various radioactive compounds. Although we believe
that our safety procedures for handling and disposing of such materials comply
in all material respects with the standards prescribed by applicable
regulations, the risk of accidental contamination or injury from these materials
cannot be completely eliminated. In the event of such an accident or the failure
to comply with applicable regulations, we could be held liable for any damages
that result, and any such liability could be significant. We do not maintain
insurance coverage against such liabilities.

The market price of our stock may be adversely affected by market volatility.

The market price of our common stock has been and is likely to be
volatile. In addition to general economic, political and market conditions, the
price and trading volume of our stock could fluctuate widely in response to many
factors, including:

o announcements of the results of clinical trials by us or our
competitors;

o adverse reactions to products;

o governmental approvals, delays in expected governmental approvals or
withdrawals of any prior governmental approvals or public or
regulatory agency concerns regarding the safety or effectiveness of
our products;

o changes in U.S. or foreign regulatory policy during the period of
product development;

o developments in patent or other proprietary rights, including any
third party challenges of our intellectual property rights;

o announcements of technological innovations by us or our competitors;

o announcements of new products or new contracts by us or our
competitors;

o actual or anticipated variations in our operating results due to the
level of development expenses and other factors;

o changes in financial estimates by securities analysts and whether
our earnings meet or exceed the estimates;

o conditions and trends in the pharmaceutical and other industries;

o new accounting standards; and

o the occurrence of any of the risks described in these "Risk
Factors."

Our common stock is listed for quotation on the American Stock Exchange.
For the 12-month period ended June 30, 2004, the price of our common stock has
ranged from $1.83 to $5.40 per shares. We expect the price of our common stock
to remain volatile. The average daily trading volume of our common stock varies
significantly. Our relatively low average volume and low average number of
transactions per day may affect the ability of our stockholders to sell their
shares in the public market at prevailing prices and a more active market may
never develop.

In the past, following periods of volatility in the market price of the
securities of companies in our industry, securities class action litigation has
often been instituted against companies in our industry. If we face securities
litigation in the future, even if without merit or unsuccessful, it would result
in substantial costs and a diversion of management attention and resources,
which would negatively impact our business.

Our stock price may be adversely affected if a significant amount of shares,
primarily those registered herein and in a prior registration statement, are
sold in the public market.

As of July 23, 2004, approximately 180,851 shares of our common stock,
constituted "restricted securities" as defined in Rule 144 under the Securities
Act of 1933. 84,112 of these shares are registered herein or in a prior
registration statement pursuant to agreements between us and the holders of
these shares. In addition, we have registered 11,647,995 shares issuable (i)
upon conversion of approximately 135% of the January 2004 Debentures, the
October 2003 Debentures, the July 2003 Debentures and the July 2004 Debentures;
(ii) as payment of 135% of the interest on all of the Debentures; (iii) upon
exercise of 135% of the July 2009 Warrants, the May 2009 Warrants and the June
2009 Warrants; and (iv) upon exercise of certain other warrants and stock
options. Registration of the shares permits the sale of the shares in the open
market or in privately negotiated transactions without compliance with the
requirements of Rule 144. To the extent the exercise price of the warrants is
less than the market price of the common stock, the holders of the warrants are
likely to exercise them and sell the underlying shares of common stock and to
the extent that the conversion price and exercise price of these securities are
adjusted pursuant to anti-dilution protection, the securities could be
exercisable or convertible for even more shares of common stock. We also may
issue shares to be used to meet our capital requirements or use shares to
compensate employees, consultants and/or directors. We are unable to estimate
the amount, timing or nature of future sales of outstanding common stock. Sales
of substantial amounts of our common stock in the public market could cause the
market price for our common stock to decrease. Furthermore, a decline in the
price of our common stock would likely impede our ability to raise capital
through the issuance of additional shares of common stock or other equity
securities.

Provisions of our Certificate of Incorporation and Delaware law could defer a
change of our management which could discourage or delay offers to acquire us.

Provisions of our Certificate of Incorporation and Delaware law may make
it more difficult for someone to acquire control of us or for our stockholders
to remove existing management, and might discourage a third party from offering
to acquire us, even if a change in control or in management would be beneficial
to our stockholders. For example, our Certificate of Incorporation allows us to
issue shares of preferred stock without any vote or further action by our
stockholders. Our Board of Directors has the

authority to fix and determine the relative rights and preferences of preferred
stock. Our Board of Directors also has the authority to issue preferred stock
without further stockholder approval. As a result, our Board of Directors could
authorize the issuance of a series of preferred stock that would grant to
holders the preferred right to our assets upon liquidation, the right to receive
dividend payments before dividends are distributed to the holders of common
stock and the right to the redemption of the shares, together with a premium,
prior to the redemption of our common stock. In this regard, in November, 2002
we adopted a stockholder rights plan and, under the Plan, our Board of Directors
declared a dividend distribution of one Right for each outstanding share of
Common Stock to stockholders of record at the close of business on November 29,
2002. Each Right initially entitles holders to buy one unit of preferred stock
for $30.00. The Rights generally are not transferable apart from the common
stock and will not be exercisable unless and until a person or group acquires or
commences a tender or exchange offer to acquire, beneficial ownership of 15% or
more of our common stock. However, for Dr. Carter, our chief executive officer,
who already beneficially owns 11.3% of our common stock, the Plan's threshold
will be 20%, instead of 15%. The Rights will expire on November 19, 2012, and
may be redeemed prior thereto at $.01 per Right under certain circumstances.

Because the risk factors referred to above could cause actual results or
outcomes to differ materially from those expressed in any forward-looking
statements made by us, you should not place undue reliance on any such
forward-looking statements. Further, any forward-looking statement speaks only
as of the date on which it is made and we undertake no obligation to update any
forward-looking statement or statements to reflect events or circumstances after
the date on which such statement is made or reflect the occurrence of
unanticipated events. New factors emerge from time to time, and it is not
possible for us to predict which will arise. In addition, we cannot assess the
impact of each factor on our business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statements. Our research in clinical efforts
may continue for the next several years and we may continue to incur losses due
to clinical costs incurred in the development of Ampligen(R) for commercial
application. Possible losses may fluctuate from quarter to quarter as a result
of differences in the timing of significant expenses incurred and receipt of
licensing fees and/or cost recovery treatment revenues in Europe, Canada and in
the United States.

USE OF PROCEEDS

Proceeds, if any, from stockholders exercising some or all of the Warrants
will be used to fund our research and development efforts, working capital and
possible acquisitions.

DIVIDEND POLICY

We have not paid any cash dividends since our inception and do not
anticipate paying cash dividends in the foreseeable future.

PRICE RANGE OF COMMON STOCK

Since October 1997, our common stock has been listed and traded on the
American Stock Exchange ("AMEX") under the symbol HEB. The following table sets
forth the high and low sales prices for our Common Stock for the last two fiscal
years as reported by the AMEX.

COMMON STOCK

High Low
---- ---
Year Ended December 31, 2002
First Quarter $ 4.95 $ 3.40
Second Quarter 4.00 2.30
Third Quarter 2.89 .75
Fourth Quarter 2.95 1.10

Year Ending December 31, 2003
First Quarter 2.19 1.33
Second Quarter 3.35 1.33
Third Quarter 2.35 1.85
Fourth Quarter 2.94 1.83

Year Ending December 31, 2004
First Quarter 4.85 2.27

Second Quarter 5.40 3.30

On July 26, 2004, the closing sale price of our common stock as reported
on the AMEX was $2.54 per share. As of July 26, 2004, there were approximately
266 holders of record of our common stock not including holders in street name.
We estimate that there are some 3,300 holders if you include shares held in
street name.

SELECTED CONSOLIDATED FINANCIAL DATA

Our selected historical consolidated financial information presented as of
December 31, 1999, 2000, 2001, 2002 and 2003 and for each of the five years
ended December 31, 2003 was derived from our audited consolidated financial
statements. Our selected historical consolidated financial information presented
as of March 31, 2003 and 2004 and for the three month periods ended March 31,
2003 and 2004 are unaudited. Operating results for the three months ended March
31, 2004 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2004. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for fair
presentation have been included.

This information should be read in conjunction with the historical
financial statements and related notes included herein, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

(in thousands except share and per share data)

Consolidated Statements Three Months ended
of Operations Data: Year ended December 31, March 31,
---------------------- ------------------
1999 2000 2001 2002 2003(2) 2003 2004
---- ---- ---- ---- ------ ---- ----

Revenues:
Sale of Products $ -- $ -- $ -- $ -- $ 509 $ 19 $ 259
Clinical Treatment
Programs 678 788 390 341 148 47 49
License Fee Income -- -- -- 563 -- -- --
------------ ------------ ------------ ------------ ------------ ------------ ------------
Total Revenues 678 788 390 904 657 66 308

Cost & Expenses:
Production Costs/ Cost
of Goods Sold -- -- -- -- 502 118 601
Research & Development
4,737 6,136 5,780 4,946 3,150 873 964
General &
Ad-ministrative(1) 8,721 3,695 3,412 2,015 4,257 667 2,844

Total Cost and
Expenses
13,458 9,831 9,192 6,961 7,909 1,658 4,409

Interest and Other
Income 482 572 284 103 80 50 11

Interest Expense -- -- -- -- (253) (17) (101)
Financing Costs(3) -- -- -- -- (7,345) (58) (3,851)
Other Expense -- (81) (565) (1,470) -- -- --

Net Loss $ (12,298) $ (8,552) $ (9,083) $ (7,424) $ (14,770) $ (1,617) $ (8,042)

Basic and Diluted
Loss Per Share $ (.47) $ (.29) $ (.29) $ (.23) $ (.42) $ (.05) $ (.20)
Basic and Diluted 26,380,351 31,443,208 35,234,526 40,688,478
Weighted Average Shares
Outstanding 29,251,846 32,095,776 32,393,754

Other Cash Flow Data
Cash Used in
Operating Activities $ (5,853) $ (6,990) $ (7,281) $ (6,409) $ (7,022) $ (1,692) $ (1,722)
Capital Expenditures (151) (251) -- -- (19) -- (143)

Balance Sheet Data:

December 31, March 31,
------------ ---------
1999 2000 2001 2002 2003 2003 2004
---- ---- ---- ---- ---- ---- ----

Working Capital
$9,507 $7,550 $7,534 $2,925 $7,000 $4,073 $5,761
Total Assets 14,168 13,067 12,035 6,040 13,404 8,729 17,053
Shareholders'

Equity 12,657 11,572 10,763 3,630 9,248 4,603 9,290
Book value per
share(4) $.48 $.40 $.34 $.11 $.26 $.14 $.23

----------
(1) General and Administrative expenses include stock compensation expense
totaling $397, $673, $132, $132 and $237 for the years ended December 31,
1999, 2000, 2001, 2002 and 2003, respectively. These expenses include $0
and $1,769 for the three months ended March 31, 2003 and 2004,
respectively.

(2) For information concerning recent acquisitions of certain assets of ISI and
related financing see notes 4 and 7 to our consolidated financial
statements for the year ended December 31, 2003 and note 6 to our
consolidated financial statements for the three months ended March 31,
2004, contained elsewhere in this prospectus.

(3) In accounting for the March 12, 2003, July 10, 2003, and October 29, 2003
issuances of 6% Senior Convertible Debentures in the principal amounts of
$5,426,000, $5,426,000, and $4,142,357, respectively, and related embedded
conversion features and warrant issuances, we recorded debt discounts of
approximately $11.3 million which, in effect, reduced the carrying value of
the debt to $1.6 million. In accounting for the January 26, 2004 issuance
of 6% Senior Convertible Debentures, we recorded debt discounts of $2.9
million. Excluding the application of related accounting standards, our
debt outstanding as of December 31, 2003 and March 31, 2004 totaled
approximately $6.6 million and $7.1 million, respectively. For the year
ended December 31, 2003 and for the three months ended March 31, 2004, we
have recorded charges of approximately $7.3 million and $3.9 million,
respectively for amortization of original issue discount and other related
debt costs. Such amounts have been reflected as financing costs in the
statement of operations. For additional information refer to note 7 to our
consolidated financial statements for the year ended December 31, 2003 and
for the three months ended March 31, 2004.

(4) Book value per share is computed by dividing shares outstanding into
shareholders' equity as of the above date.

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

You should read the following discussion and analysis of our financial
condition and results of operations in conjunction with our financial statements
and related notes included elsewhere in this prospectus. This discussion and
analysis contains forward-looking statements that involve risks, uncertainties
and assumptions. Our actual results may differ materially from those anticipated
in these forward-looking statements as a result of a number of factors
including, but not limited to, those set forth under "Risk Factors" and
elsewhere in this prospectus.

Background

We have reported net income only from 1985 through 1987. Since 1987, we
have incurred, as expected, substantial operating losses due to our conducting
clinical testing.

We have established a strong foundation of laboratory and pre-clinical
data with respect to the development of nucleic acid to enhance the natural
antiviral defense system of the human body and the development of the
therapeutic products for the treatment of chronic disease. Our strategy is to
obtain the required regulatory approval which will allow the progressive
introduction of Ampligen(R) (our proprietary drug) for treating Myalgic
Encephalomyelitis/Chronic Fatigue Syndrome (ME/CFS"), HIV, hepatitis C ("HCV")
and hepatitis B ("HBV") in the U.S., Canada, Europe and Japan. In February,
2004, we completed the double-blind segment of the AMP 516 Phase III clinical
trial for use of Ampligen(R) in treating ME/CFS. The 14 remaining patients are
enrolled in the open label portion of the trial and will complete this segment
in August, 2004. With the conclusion of the double-blind segment we can finalize
data collection and start data analysis in anticipation of preparing the NDA for
submission to the FDA. Ampligen(R) is also in Phase IIb Clinical trials in the
U.S for the induction of Cell mediated immunity in HIV patients that are under
control using potentially toxic drug cocktail.

Our proprietary drug technology utilizes specifically configured
ribonucleic acid ("RNA") and is protected by more than 250 patents worldwide as
well as over 16 additional patent applications pending to provide further
proprietary protection in various international markets. Certain patents apply
to the use of Ampligen(R) alone and certain patent apply to the use of
Ampligen(R) in combination with certain other drugs. Some composition of matter
patents pertain to other new potential medication, which have a similar
mechanism of action.

In March, 2003, we acquired from ISI, all of ISI's raw materials,
work-in-progress and finished product of Alferon N Injection(R), together with a
limited license for the production, manufacture, use, marketing and sale of the
product, Alferon N Injection(R) . In March 2004, we acquired from ISI the
balance of ISI's rights to its product, as well as, ISI's production facility.
We intend to market this product in the United States through sales facilitated
via third party marketing agreements. Additionally, we intend to implement
studies, beyond those conducted by ISI, for testing the potential treatment of
HIV, Hepatitis C and other indications, including multiple sclerosis.

Result of Operations

Three months ended March 31, 2004 versus Three months ended March 31, 2003

Net loss

Our net loss was approximately $8,042,000 for the three months ended March
31, 2004 versus a net loss of $1,617,000 for the same period a year ago. Per
share loss for the three months ended March 31,

2004 was $0.20 per share versus $0.05 a year earlier for the same period. This
year-to-year increase in losses of $6,425,000 is primarily due to non-cash
financing costs of $3,851,000 relating to our July 2003 Debentures, October 2003
Debentures and January 2004 Debentures (Collectively, the "Debentures") as well
as a non-cash stock compensation charge of $1,769,000 resulting from warrants
issued to Dr. Carter in 2003 that vested in the current quarter. These warrants
vested upon the execution of the second ISI asset closing on March 17, 2004. In
addition, our loss during the current period includes $606,000 in operating
losses relating to our new Alferon division. The operating loss for the period
March 11, 2003 through March 31, 2003 for our Alferon division amounted to
$170,000. These three factors represent 77% of our net loss for the three months
ended March 31, 2004. For comparative purposes, excluding our March 31, 2004
losses for these three factors, our losses were $1,816,000 for the three months
ended March 31, 2004 compared to $1,447,000 for the same period in 2003 after
adjustment for the Alferon division losses or an increase of approximately
$369,000. The primary reason for the increase was attributed to higher general
corporate legal costs and director's fees.

Revenues

Revenues for the three months ended March 31, 2004 were $308,000 as
compared to revenues of $66,000 for the same period in 2003. Revenues from our
ME/CFS cost recovery treatment programs principally underway in the U.S., Canada
and Europe were $49,000 for the three months ended March 31, 2004 versus $47,000
for the three months ended March 31, 2003. These clinical programs allow us to
provide Ampligen(R) therapy at our cost to severely debilitated ME/CFS patients.
Under this program the patients pay for the cost of Ampligen(R) doses infused.
These costs total approximately $7,200 for a 24-week treatment program.

In addition, revenues for the three months ended March 31, 2004 from sales
of ALFERON N totaled $259,000 versus $19,000 for the 20-day period of March 11,
2003, the date we acquired the rights to the Alferon N business from ISI,
through March 31, 2003. Sales of Alferon N are anticipated to increase as we are
producing more product and our marketing/sales programs are underway.

Since acquiring the right to manufacture and market Alferon N on March 11,
2003, we have focused on converting the work-in-progress inventory into finished
goods. This work-in-progress inventory included three production lots totaling
the equivalent of approximately 55,000 vials (doses) at various stages of the
manufacturing process. In August 2003, we released the first lot of product to
Abbott Laboratories for bottling and realized some 21,000 vials of ALFERON N.
Preliminary work has started on completing the second lot of approximately
16,000 vials. Our production and quality control personnel in our newly acquired
New Brunswick, NJ facility are involved in the extensive process of
manufacturing and validation required by the FDA. Plans are underway for
completing the third lot of some 18,000 vials now in very early stages of
production.

Our marketing and sales plan for ALFERON N consists of engaging sales
force contract organizations and supplementing their sales efforts with
marketing support. This marketing support would consist of building awareness of
ALFERON N with physicians as a successful and effective treatment of refractory
on recurring external genital warts in patients of age 18 or older and to assist
primary prescribers in expanding their practice.

In addition, in August 2003, we entered into a sales and marketing
agreement with Engitech, LLC. to distribute ALFERON N on a nationwide basis. The
agreement stipulated that Engitech will deploy a sales force of 100 sales
representatives within one year in the U.S. domestic market and further expand
the sales team up to 250 sales representative in the second year and after that
as many as it takes to continually drive market share. Engitech, Inc. is to
develop and implement marketing plans including extensive scientific and
educational programs for use in marketing ALFERON N.

We executed a Memorandum of Understanding (MOI) in January 2004 with
Fujisawa Deutschland GmbH, ("Fuji") a major pharmaceutical corporation, granting
them an exclusive option for a limited number of months to enter a Sales and
Distribution Agreement with exclusive rights to market Ampligen(R) for ME/CFS in
Germany, Austria and Switzerland. The MOI required us to file the full report on
the results of our AMP 516 Clinical Trial with Fuji by May 31, 2004. If the full
report was not provided to Fuji by May 31, 2004 and Fuji did not wish to
exercise its option, we would have been required to refund one half of the
400,000 Euro fee. We submitted our initial report to Fuji on May 28, 2004 and we
now await their response. We expect that Fuji will be requesting additional
information as they review the initial report. The option period ends 12 weeks
after the later of Fuji's review of the full report on the results of our Amp
516 clinical trial and Fuji's meeting with the trial's principal investigators.
We received an initial fee of 400,000 Euros (approximately $497,000 US). If we
do not provide them with the full report by December 31, 2004 and Fuji does not
wish to exercise its option, we will be required to refund the entire fee. If
Fuji exercises the option, Fuji would be required to pay us an additional
1,600,000 Euros upon execution of the Sales and Distribution agreement, purchase
Ampligen(R) exclusively from us and meet certain annual minimum purchase quotas.
We would be required to file an application with the EMEA for commercial sale of
Ampligen(R) for ME/CFS on or before December 31, 2005. Upon our filing of that
application, we would receive an additional 1,000,000 Euros and, upon approval
by the EMEA, an additional 2,000,000 Euros. If we failed to meet the December
31, 2005 filing deadline, we would be required to return 40% of all payments
that we had received from Fuji. We would be required to sell Ampligen(R) to Fuji
at a 20% price discount until the aggregate amount of the discount reached
$1,000,000 Euros (representing 50% of the initial 2,000,000 fee paid to us on
and prior to execution of the definitive agreement). The foregoing is a summary
of the memorandum of understanding. We cannot assure that we can prepare and
issue the AMP 516 report within the time frames noted or that Fuji will exercise
the option or that the proposed terms of the Sales and Distribution Agreement
will not change materially. The initial fee has been recorded on our balance
sheet at March 31, 2004 as deferred revenue.

On March 17, 2004, we closed on the acquisition of all of the worldwide
rights of ALFERON N as well as the FDA approved biological production facility
in New Brunswick, New Jersey. In addition, there are currently 70 sales
representatives in the U.S. domestic market, which we provide with sales
training and professional marketing materials. We will also continue to focus
our efforts on a worldwide sales plan for Alferon N.

Production costs/cost of goods sold

Production costs for the three months ended March 31, 2004 and 2003 were
$601,000 and $118,000, respectively. These costs reflect approximately $111,000
for the cost of sales of ALFERON N Injection(R) for the three months ended March
31, 2004. In addition, costs of salesfor Alferon N Injection(R) for the period
March 11, 2003 (acquisition date of inventory from ISI) through March 31, 2003
amounted to $12,000. The remaining production costs represent expenditures
associated with the ramping up of the New Brunswick facility for further
production of Alferon N Injection(R).

Research and Development costs

Overall research and development direct costs for the three months ended
March 31, 2004 were $964,000 as compared to $873,000 during the same period a
year earlier. These costs primarily reflect the direct costs associated with our
effort to develop our lead product, Ampligen(R), as a therapy in treating
chronic diseases and cancers. At this time, this effort primarily consists of
on-going clinical trials involving patients with HIV.

Our strategy is to develop our lead compound, the experimental
immunotherapeutic Ampligen(R), to treat chronic diseases for which there is
currently no adequate treatment available. We seek the required regulatory
approval, which will allow the commercial introduction of Ampligen for ME/CFS
and HIV/AIDS in the U.S., Canada, Europe and Japan.

We recently completed the double-blind segment of our AMP 516 ME/CFS Phase
III clinical trial for use of Ampligen(R) in the treatment of ME/CFS. Clinical
data on the primary endpoint exercise treadmill duration was presented at the
17th International Conference on Anti-viral Research in Tucson, AZ on May 3,
2004. The data showed that patients receiving Ampligen for 40 weeks improved
exercise treadmill performance 19.4% vs. 5.1% in the placebo group (p=0.022).
Ampligen is also currently in two Phase IIb studies for the treatment of HIV to
overcome multi-drug resistance, virus mutation and toxicity associated with
current HAART therapies. One study, the AMP-719, is a Salvage Therapy, conducted
in the U.S. and evaluating the potential synergistic efficacy of Ampligen in
multi-drug resistant HIV patients for immune enhancement. The second study, the
AMP-720, is a clinical trial designed to evaluate the effect of Ampligen under
Strategic Treatment Intervention and is also conducted in the U.S. Enrollment in
the AMP 719 study is presently on hold as we devote our efforts on the AMP 720
study.

General and Administrative Expenses

General and Administrative ("G&A") expenses for the three months ended
March 31, 2004 and 2003 were approximately $2,844,000 and $667,000,
respectively. The increase in G&A expenses of $2,177,000 during this period is
primarily due to a non-cash stock compensation charge of $1,769,000 resulting
from warrants issued to Dr. Carter in 2003 that vested in the current quarter.
These warrants vested upon the execution of the second ISI asset closing on
March 17, 2004. Aside from the expenses related to our Alferon division totaling
$265,000 and $58,000 in 2004 and 2003, respectively, and the non-cash stock
compensation charge noted above, our G&A expenses were $810,000 for the three
months ended March 31, 2004 as compared to $609,000 during the same three months
in 2003. The primary reason for the increase in G&A costs of $201,000 was
attributable to higher general corporate legal costs and directors' fees in the
current quarter.

Other Income/Expense

Interest and other income for the three months ended March 31, 2004 and
2003 totaled $11,000 and $50,000, respectively. The primary reason for the
decrease in interest and other income during the current quarter can be
attributed to lower cash available for investment, a shorter holding period for
investments and lower interest rates versus the same period a year ago. All
funds in excess of our immediate need are invested in short-term high quality
securities.

Interest Expense and Financing Costs

Interest expense and financing costs were $3,952,000 for the three months
ended March 31, 2004 versus $75,000 for the same three months a year ago.
Non-cash financing costs consist of the amortization of debenture closing costs,
the amortization of Original Issue Discounts and the amortization of costs
associated with beneficial conversion features of our debentures and the fair
value of the warrants relating to the Debentures. These charges are reflected in
the Consolidated Statements of Operations under the caption "Financing Costs."
In connection with the redemption obligation recorded in connection with the
January 2004 Debentures, we recorded additional financing costs of approximately
$947,000. Please see Note 7 in the consolidated financial statements for the
three months ended March 31, 2004 contained herein for more details on these
transactions.

Years Ended December 31, 2003 vs. 2002

During the year ended December 31, 2003, we 1) acquired certain assets and
patent rights to ALFERON N Injection(R), 2) privately placed the March 2005, the
July 2005, and October 2005, 6% convertible debentures with an aggregate
maturity value of $14,994,357 (gross proceeds of $12,850,000), 3) continued our
efforts to develop Ampligen(R) for the treatment of patients afflicted with
ME/CFS and HIV, 4) activated the ISI New Brunswick production facility to
process doses of Alferon N and 5) produced some 21,000 doses of Alferon N for
sale in 2003.

Net loss

Our net loss was approximately $14,770,000 for the year ended December 31,
2003 versus a net loss of $7,424,000 in 2002. Per share loss in 2003 was $0.42
cents versus a per share loss of $0.23 in 2002. This year-to-year increase in
losses of $7,346,000 is primarily due to non-cash financing costs of $7,345,000
relating to our March 2005, July 2005, and October 2005 6% convertible
debentures. These non-cash charges account for 48% of our net losses for the
year ended December 31, 2003. In addition, our losses during this period include
$957,000 in operating expenses relating to our new Alferon division. Solely for
comparison purposes, excluding our 2003 losses for these two factors, our losses
were $6,775,000 in 2003 compared to $7,424,000 in 2002 or a reduction totaling
$649,000. This was primarily due to a decrease in research and development
direct costs of $1,800,000 in 2003 due to reduced costs associated with the
development of Ampligen(R) to treat ME/CFS patients. During 2002, our AMP 516
ME/CFS Phase III clinical trial was in full force and effect therefore
increasing our manufacturing and clinical support expenses during that period
(See "Research and Development Costs" below). This was offset by the recovery of
certain legal expenses in 2002 of approximately $1,050,000 related to the
Asensio lawsuit and trial from our insurance carrier. This recovery produced a
one-time reduction in G&A Expenses for 2002 (See "General and Administrative
Expenses" below).

Revenues

Our revenues were $657,000 in 2003 compared to revenues of $904,000 in
2002. Our 2002 revenues included a licensing fee payment of approximately
$563,000 which was not repeated in 2003.

Revenues from our ME/CFS cost recovery treatment programs principally
underway in the U.S., Canada and Europe were $148,000 in 2003 versus $341,000 in
2002. These clinical programs allow us to provide Ampligen(R) therapy at our
cost to severely debilitated ME/CFS patients. Under this program the patients
pay for the cost of Ampligen(R) doses infused. These costs total approximately
$7,200 for a 24 weeks treatment program. In addition, since the March 11, 2003,
acquisition of inventory from ISI, revenues from sales of ALFERON N totaled
$509,000. Sales of Alferon N are anticipated to increase as we are producing
more product and our marketing/sales programs are underway.

Revenues from the cost recovery treatment programs in 2002 were $341,000
or 57% higher than 2003 revenues. We expected revenues in the U.S. to decline
due to our efforts to complete the AMP 516 ME/CFS Phase III trials and the focus
of our clinical resources on the start up of the AMP 720 HIV clinical trials.
The clinical data collected from treating patients under the cost recovery
treatment programs will augment and supplement the clinical data collected in
the U.S. AMP 516 Phase III ME/CFS trial.

In 2002, We received a licensing fee of 625,000 Euros ($563,000) from
Laboratorios Del Dr. Esteve S.A. ("Esteve") pursuant to a sales and distribution
agreement in which Esteve was granted the exclusive right to market Ampligen(R)
in Spain, Portugal and Andorra for the treatment of ME/CFS in turn

we provided to Esteve technical scientific and commercial information. The
agreement terms require no additional performance by us.

Since acquiring the right to manufacture and market Alferon N in March
2003, we have focused on converting the work-in-progress inventory into finished
goods. This work-in-progress inventory included three production lots totaling
the equivalent of approximately 55,000 vials (doses) at various stages of the
manufacturing process. In August 2003, we released the first lot of product to
Abbott Laboratories for bottling and realized some 21,000 vials of ALFERON N.
Preliminary work has started on completing the second lot of approximately
16,000 vials. Our production and quality control personnel in the New Brunswick
facility are involved in the extensive process of manufacturing and validation
required by the FDA. Plans are underway for completing the third lot of some
18,000 vials now in very early stages of production.

On August 18, 2003, we entered into a sales and marketing agreement with
Engitech, LLC. to distribute ALFERON N on a nationwide basis. The agreement
stipulated that Engitech will deploy a sales force of 100 sales representatives
within one year in the U.S. domestic market and further expand the sales team up
to 250 sales representative in the second year and after that as many as it
takes to continually drive market share. Engitech, Inc. is to develop and
implement marketing plans including extensive scientific and educational
programs for use in marketing ALFERON N.

Production costs

Production costs were $502,000 for the year ended December 31, 2003. These
costs reflect approximately $240,000 for the cost of sales of ALFERON N
Injection(R) during the period of April 1, 2003 through December 31, 2003. In
addition, we recorded $262,000 of production costs at the New Brunswick
facility. We ramped up the facility in April 2003 and started production on
three lots of Alferon N Injection(R) work in process inventory of which one lot
was completed and is ready to be sold.

Research and Development costs

Our overall research and development direct costs in 2003 were $3,150,000
compared to research and development direct costs in 2002 of $4,946,000. These
costs primarily reflect the direct costs associated with our effort to develop
our lead product, Ampligen(R), as a therapy in treating chronic diseases and
cancers. At this time, this effort consists of on-going clinical trials
involving patients with HIV. Our research and development direct costs are
$1,796,000 lower in 2003 due to reduced costs associated with the development of
Ampligen(R) to treat ME/CFS patients. During 2002, our AMP 516 ME/CFS Phase III
clinical trial was in full force and effect, therefore, increasing our
manufacturing and clinical support expenses during that period.

We recently completed the double-blind segment of our AMP 516 ME/CFS Phase
III clinical trial for use of Ampligen(R) in the treatment of ME/CFS. Ampligen
is also currently in two Phase IIb

studies for the treatment of HIV to overcome multi-drug resistance, virus
mutation and toxicity associated with current HAART therapies. One study, the
AMP-719, is a Salvage Therapy, conducted in the U.S. and evaluating the
potential synergistic efficacy of Ampligen in multi-drug resistant HIV patients
for immune enhancement. The second study, the AMP-720, is a clinical trial
designed to evaluate the effect of Ampligen under Strategic Treatment
Intervention and is also conducted in the U.S. The AMP 719 study is presently on
hold as we devote our efforts on the AMP 720 study.

AMP 516

Over 230 patients have participated in our ME/CFS Phase III clinical
trial. Approximately 10 patients are in the open label phase of the clinical
process. We have completed the randomized placebo controlled phase of this study
and expect to complete data collection and start the data analysis process with
the expectation of filing an NDA (New Drug Application) with the FDA by the end
of 2004. As with any experimental drug being tested for use in treating human
diseases, the FDA must approve the testing and clinical protocols employed and
must render their decision based on the safety and efficacy of the drug being
tested. Historically this is a long and costly process. Our ME/CFS AMP 516
clinical study is a Phase III study, which based on favorable results, will
serve as the basis for us to file a new drug application with the FDA. The FDA
review process could take 18-24 months and result in one of the following
events; 1) approval to market Ampligen(R) for use in treating ME/CFS patients,
2) required more research, development, and clinical work, 3) approval to market
as well as conduct more testing, or 4)reject our application. Given these
variables, we are unable to project when material net cash inflows are expected
to commence from the sale of Ampligen(R).

AMP 719 and AMP 720

We are currently focused on recruiting additional clinical investigators
and HIV patients to participate in the AMP 720 HIV clinical trial. Our efforts
to do this have been somewhat hampered in late 2003 as most of our clinical
resources have been directed to completing the AMP 516 ME/CFS clinical trial.
Now that the AMP 516 patients have completed the randomized segment of the
clinical trial, we expect to devote more resources toward the AMP 720 HIV
clinical trial. Our AMP 719 HIV clinical trial has been put on hold at this
time.

In July 2003, Dr. Blick, a principal investigator in our HIV studies,
presented updated results on our Amp 720 HIV study at the 2nd IAS CONFERENCE ON
HIV PATHOGENESIS AND TREATMENT in Paris France. In this study using Strategic
Treatment Interruption (STI), patients' antiviral HAART regimens are interrupted
and Ampligen(R) is substituted as mono-immunotherapy. Ampligen(R) is an
experimental immunotherapeutic designed to display both antiviral an immune
enhancing characteristics. Prolonged use of Highly Active Antiretroviral Therapy
(HAART) has been associated with long-term, potentially fatal, toxicities. The
clinical study AMP 720 is designed to address these issues by evaluating the
administration of our lead experimental agent, Ampligen(R), a double stranded
RNA drug acting potentially both as an immunomodulator and antiviral. Patients,
who have completed at least nine months of Ampligen(R) therapy, were able to
stay off HAART for a total STI duration with a mean time of 29.0 weeks whereas
the control group, which was also taken off HAART, but not given Ampligen(R),
had earlier HIV rebound with a mean duration of 18.7 weeks. Thus, on average,
Ampligen(R) therapy spared the patients excessive exposure to HAART, with its
inherent toxicities, for more than 11 weeks. As more patients are enrolled, the
related clinical costs will continue to increase with some offset to our overall
expenses due to the diminishing cost of the ME/CFS clinical trial. It is
difficult to estimate the duration or projected costs of these two clinical
trials due to the many variables involved, i.e.: patient drop out rate,
recruitment of clinical investigators, etc. The length of the study and costs
related to our clinical trials cannot be determined at this time as such will be
materially influenced by (a) the number of clinical investigators needed to
recruit and treat the required number of patients, (b) the rate of accrual of
patients and (c) the retention of patients in the

studies and their adherence to the study protocol requirements. Under optimal
conditions, the cost of completing the studies could be approximately $2.0 to
$3.0 million. The rate of enrollment depends on patient availability and on
other products being in clinical trials for the treatment of HIV, as there is
competition for the same patient population. At present, more than 18 FDA
approved drugs for HIV treatment may compete for available patients. The length,
and subsequently the expense of these studies, will also be determined by an
analysis of the interim data, which will determine when completion of the
ongoing Phase IIb is appropriate and whether a Phase III trial be conducted or
not. In case a Phase III study is required; the FDA might require a patient
population exceeding the current one which will influence the cost and time of
the trial. Accordingly, the number of "unknowns" is sufficiently great to be
unable to predict when, or whether, we may obtain revenues from our HIV
treatment indications.

General and Administrative Expenses

General and Administrative expenses ("G&A") were $4,257,000 during the
year ended December 31, 2003, which includes $957,000 of expenses relating to
our new Alferon Division and $237,000 for a non cash stock compensation charge.
Excluding the Alferon expenses, our G&A costs were $3,300,000 compared to
$2,015,000 of expenses in 2002. This increase of $1,285,000 is primarily due to
the recovery of certain legal expenses in 2002 of approximately $1,050,000
related to the Asensio lawsuit and trial from our insurance carrier. This
recovery produced a one time reduction in G&A Expenses for 2002. Also, we
recorded non-cash stock compensation expenses of $237,000 in 2003 as compared to
$133,000 in 2002.

Equity Loss-Unconsolidated Affiliates

In the year ended December 31, 2002, we recorded a non-cash charge of
$1,470,000 to operations with respect to our investments in unconsolidated
affiliates. $1,074,000 of these charges were related to our investment in R.E.D.
These charges were the result of our determination that R.E.D.'s business and
financial position had deteriorated to the point that our investment had been
permanently impaired.

We also recorded a non-cash charge of $292,000 with respect to our
investment in Chronix Biomedical. This impairment reduced our carrying value in
this investment to reflect a permanent decline in Chronix's market value based
on its then proposed equity offerings.

These charges are reflected in the Consolidated Statements of Operations
under the caption "Equity loss in unconsolidated affiliate." Please see
"Research And Development/Collaborative Agreements" in "Our Business" for more
details on these transactions.

Other Income/Expense

Interest and other income totaled $80,000 in 2003 compared to $103,000
recorded in 2002. Lower cash available for investment basically accounted for
the difference as interest rates remained relatively low in 2003. All funds in
excess of our immediate need are invested in short-term high quality securities.

Interest Expense and Financing Costs

Interest expense and financing costs were $7,598,000 in 2003. Non-cash
financing costs consist of $581,000 for the amortization of debenture closing
costs, $1,066,000 for the amortization of Original Issue Discounts and
$5,698,000 for the amortization of costs associated with beneficial conversion
features of the debentures and the fair value of the warrants relating to the
January 2005, July 2005 and October 2005 6% convertible debentures. These
charges are reflected in the Consolidated Statements of Operations under the
caption "Financing Costs." Please see Note 16 in the consolidated financial
statements for the year ended December 31, 2003 contained herein for more
details on these transactions.

Years Ended December 31, 2002 vs. 2001

Net loss

Our net loss was approximately $7,424,000 for the year ended December 31,
2002 versus a net loss of $9,083,000 in 2001. Per share loss in 2002 was $0.23
versus a per share loss of $0.29 in 2001. This year to year decrease in losses
of $1,659,000 was primarily due to higher revenues and lower costs in 2002.
Revenues were up $514,000 in 2002 and total expenses were down by $2,231,000
offset by a write down in the carrying value of our investments in the amount of
$1,366,000 for a net cost decrease of $865,000.

Revenues

Our revenues came from our ME/CFS cost recovery treatment programs
principally underway in the U.S., Canada and Europe. These clinical programs
allow us to provide Ampligen(R) therapy at our cost to severely debilitated
ME/CFS patients. Under this program the patients pay for the cost of Ampligen(R)
doses infused. These costs total approximately $7,200 for a 24 weeks treatment
program. Revenues from cost recovery treatment programs totaled some $341,000 in
2002. In 2001, these revenues were $390,000 or 14% higher than 2002 revenues. We
expected revenues in the U.S. to decline due to the focus of our clinical
resources on conducting and completing the AMP 516 ME/CFS Phase III clinical
trial as well as the start up of the AMP 719 and AMP 720 HIV clinical trials.
The clinical data collected from treating patients under the cost recovery
treatment programs will augment and supplement the data collected in the U.S.
Phase III ME/CFS trial.

We received a licensing fee of 625,000 Euros (some $563,000) from Esteve
pursuant to a sales and distribution agreement in which Esteve was granted the
exclusive right to market Ampligen(R) in Spain, Portugal and Andorra for the
treatment of ME/CFS. In turn we provided to Esteve technical scientific and
commercial information. The agreement terms require no additional performance by
us. Our total revenues, including this licensing fee, in 2002 was $904,000
compared to revenues of $390,000 in 2001.

Research and Development costs

At December 31, 2002, Ampligen was being tested in a Phase III clinical
trial, in the U.S., for use in treatment of ME/CFS, the so-called AMP-516 study.
It also was in two Phase IIb studies for the treatment of HIV to overcome
multi-drug resistance, virus mutation and toxicity associated with current HAART
therapies. One study, the AMP-719, is a Salvage Therapy, conducted in the U.S.
and evaluating the potential synergistic efficacy of Ampligen in multi-drug
resistant HIV patients for immune enhancement. The second study, the AMP-720, is
a clinical trial designed to evaluate the effect of Ampligen under Strategic
Treatment Intervention and is also conducted in the U.S.

AMP 516

As of December, 2002, the AMP 516 clinical trial was fully enrolled with
more than the targeted 230 patients in order to potentially compensate for "drop
outs". The last patients completed the

randomized segment of this clinical trial in February, 2004. The next stage of
the program is final data collection, quality assurance of the data to insure
its accuracy and analysis of the data according to regulatory guidelines to
facilitate the New Drug Application (NDA), expected to be filed by the end of
2004. The date of potential commercial approval depends on whether we receive
Fast Track Status from the FDA. In case of Fast Track the FDA approval time is
maximum six months. If we are not granted Fast Track Designation, the approval
time can take substantially longer, depending on the progress made by the FDA in
review of the application. The FDA may deny full commercial approval to the drug
at any time, including after Fast Track Status has been awarded.

As with any experimental drug being tested for use in treating human
diseases, the FDA must approve the testing and clinical protocols employed and
must render their decision based on the safety and efficacy of the drug being
tested. Historically this is a long and costly process. Our ME/CFS AMP 516
clinical study is a Phase III study, which based on favorable results, will
serve as the basis for us to file a new drug application with the FDA. The FDA
review process could take 18-24 months and result in one of the following
events; 1) approval to market Ampligen(R) for use in treating ME/CFS patients,
2) require more research, development, and clinical work, 3) approval to market
as well as conduct more testing, or 4) reject our application. Given these
variables, we are unable to project when material net cash inflows are expected
to commence from the sale of Ampligen(R).

AMP 719 and AMP 720

As of December 2002, approximately 55 patients had been enrolled in both
studies combined and they were being treated in approximately 10 different
active sites around the U.S.

The length of the study and the costs related to these trials cannot be
determined at this time as it will be materially influenced by (a) the number of
clinical investigators needed to fulfill the required number of patients, (b)
the rate of accrual of patients and (c) the retention of patients on the
protocol and their adherence to the protocol requirements. See "AMP 719 and AMP
720" in "Result of Operations; Years Ended December 31, 2003 vs. 2002; Research
and Development costs" above.

Our overall research and development direct costs in 2002 were $4,946,000
compared to direct research and development costs in 2001 of $5,780,000 and
$6,136,000 in 2000. We estimate that 80% of these expenditures are related to
our ME/CFS research and development and 20% related to our HIV studies.

General and Administrative Expenses

Excluding stock compensation expense, general and administrative expenses
were approximately $1,882,000 in 2002 versus $2,741,000 in 2001. This decease in
expenses of $859,000 in 2002, is due to several factors including the recovery
of certain legal expenses of approximately $1,050,000 relating to the Asensio
lawsuit from our insurance carrier and lower overall legal expenses due to less
litigation, partially offset by higher Insurance premiums.

Stock compensation expenses was $133,000 or $538,000 lower than recorded
in the year 2001. The compensation reflects the imputed non-cash expense
recorded to reflect the cost of warrants granted to outside parties for services
rendered to us.

Equity Loss-Unconsolidated Affiliates

During the three months ended June 2002 and December 2002, we recorded a
non-cash charge of $678,000 and $396,000 respectively, to operations with
respect to our $1,074,000 investment in R.E.D.

These charges were the result of our determination that R.E.D.'s business and
financial position had deteriorated to the point that our investment had been
permanently impaired. Please see "Research And Development/Collaborative
Agreements" in "Our Business" for more details on these transactions.

In May 2000, we acquired an equity interest in Chronix Biomedical Corp.
("Chronix") for $700,000. During the quarter ended December 31, 2002, we
recorded a noncash charge of $292,000 with respect to our investment in Chronix.
This impairment reduces our carrying value to reflect a permanent decline in
Chronix's market value based on its then proposed equity offerings. Please see
"Research And Development/Collaborative Agreements" in "Our Business" for more
details on these transactions.

In April, 1999 we acquired a 30% equity position in the California
Institute of Molecular Medicine ("CIMM") for $750,000. During the fourth quarter
of 2001 we recorded a non-cash charge of $485,000 with respect to our investment
in CIMM. This was a result of our determination that CIMM's operations have not
yet evolved to the point where the full carrying value of our investment could
be supported based on that company's financial position and operating results.
This amount represented the unamortized balance of goodwill included as part of
our investment. During 2002, CIMM continued to suffer significant losses
resulting in a deterioration of its financial condition. The $485,000 written
off during 2001 represented the un-amortized balance of goodwill included as
part of our investment. Additionally, during 2001 we reduced our investment in
CIMM based on our percentage interest in CIMM's continued operating losses. Our
remaining investment at December 12, 2002 in CIMM, representing a 30% interest
in CIMM's equity at such date, was completely written off during 2002. Such
amount was not material.

Interest and Other Income

Interest and other income totaled $103,000 in 2002 compared to $284,000
recorded in 2001. Significantly lower interest rates on money market accounts
and lower cash available for investment basically account for the difference.
All funds in excess of our immediate need are invested in short term high
quality securities, which earned much lower interest income in 2002.

Liquidity And Capital Resources

Cash used in operating activities for the three months ended March 31,
2004 was $1,722,000. Cash provided by financial activities for the three months
ended March 31, 2004 amounted to $3,939,000, substantially from proceeds from a
debenture offering (see below). As of March 31, 2004, we had approximately
$7,238,000 million in cash and short-term investments. As of March 31, 2004, we
had approximately $7,238,000 million in cash and cash equivalents and short-term
investments. We believe that these funds plus 1) the gross proceeds received
from the exercise of warrants of approximately $2,400,000 on May 14, 2004, 2)
the infusion of approximately $1,550,000 million in remaining net proceeds from
the October 2003 Debentures in April 2004, 3) the gross proceeds received from
the exercise of warrants and the Additional Investment Rights of approximately
$4,198,980 on July 13, 2004, 4) the projected net cash flow from the sale of
ALFERON N Injection(R) and 4) the proceeds from licensing agreements should be
sufficient to meet our operating cash requirements including debt service during
the next 18 months. Sales of ALFERON N Injection(R) could be greater than
expected which would improve our cash position during the next twelve months.
Also, we have the ability to curtail discretionary spending, including some
research and development activities, if required to conserve cash.

On March 12, 2003, we issued an aggregate of $5,426,000 in principal
amount of 6% Senior Convertible Debentures due January 2005 (the "March
Debentures") and an aggregate of 743,288 warrants to two investors in a private
placement for aggregate gross proceeds of $4,650,000. The March Debentures were
to mature on January 31, 2005 and bore interest at 6% per annum, payable
quarterly in cash or, subject to satisfaction of certain conditions, common
stock. Any shares of common stock issued to the investors as payment of interest
were valued at 95% of the average closing price of the common stock during the
five consecutive business days ending on the third business day immediately
preceding the applicable interest payment date. Pursuant to the terms and
conditions of the March Debentures, we pledged all of our assets, other than our
intellectual property, as collateral and were subject to comply with certain
financial and negative covenants, which include but were not limited to the
repayment of principal balances upon achieving certain revenue milestones.

The March Debentures were convertible at the option of the investors at
any time through January 31, 2005 into shares of our common stock. The
conversion price under the March Debentures was fixed at $1.46 per share,
subject to adjustment for anti-dilution protection for issuance of common stock
or securities convertible or exchangeable into common stock at a price less than
the conversion price then in effect.

The investors also received Warrants to acquire at any time through March
12, 2008 an aggregate of 743,288 shares of common stock at a price of $1.68 per
share.

We entered into a Registration Rights Agreement with the investors in
connection with the issuance of the March Debentures and the Warrants. The
Registration Rights Agreement requires that we register the shares of common
stock issuable upon conversion of the Debentures, as interest shares under the
Debentures and upon exercise of the Warrants. In accordance with this agreement,
we have registered these shares for public sale.

During 2003, the investors converted the total $5,426,000 principal of the
March Debentures into 3,716,438 shares of our common stock. The total interest
on these debenture was $111,711 of which $17,290 was paid in cash and $94,421
was paid by the issuance of shares of our common stock. The investor exercised
all 743,288 warrants in July 2003 which produced proceeds in the amount of
$1,248,724.

On July 10, 2003, we issued an aggregate of $5,426,000 in principal amount
of 6% Senior Convertible Debentures due July 31, 2005 (the "July 2003
Debentures") and an aggregate of 507,103 Warrants (the "July 2008 Warrants") to
the same investors who purchased the March Debentures, in a private placement
for aggregate proceeds of $4,650,000. Pursuant to the terms of the July 2003
Debentures, $1,550,000 of the proceeds from the sale of the July 2003 Debentures
were to have been held back and released to us if, and only if, we acquired
ISI's facility with in a set timeframe. These funds were released to us in
October 2003 although we had not acquired ISI's facility at that time. The July
2003 Debentures mature on July 31, 2005 and bear interest at 6% per annum,
payable quarterly in cash or, subject to satisfaction of certain conditions,
common stock. Any shares of common stock issued to the investors as payment of
interest shall be valued at 95% of the average closing price of the common stock
during the five consecutive business days ending on the third business day
immediately preceding the applicable interest payment date.

The July 2003 Debentures are convertible at the option of the investors at
any time through July 31, 2005 into shares of our common stock. The conversion
price under the July 2003 Debentures was fixed at $2.14 per share; however, as
part of the new debenture placement closed on October 29, 2003 (see below), the
conversion price under the July 2003 Debentures was lowered to $1.89 per share.
The conversion price is subject to adjustment for anti-dilution protection for
issuance of common stock or securities convertible or exchangeable into common
stock at a price less than the conversion price then in

effect. In addition, in the event that we do not pay the redemption price at
maturity, the Debenture holders, at their option, may convert the balance due at
the lower of (a) the conversion price then in effect and (b) 95% of the lowest
closing sale price of our common stock during the three trading days ending on
and including the conversion date.

The July 2008 Warrants received by the investors, as amended, were an
aggregate of 507,102 shares of common stock at a price of $2.46 per share. These
Warrants were exercised in July 2004 which produced gross proceeds in the amount
of $1,247,470.

On June 25, 2003, we issued to each of the March 12, 2003 Debenture
holders a warrant to acquire at any time through June 25, 2008 an aggregate of
500,000 shares of common stock at a price of $2.40 per share (the "June 2008
Warrants"). Pursuant to our agreement with the Debenture holders, we have
registered the shares issuable upon exercise of these June 2008 Warrants for
public sale. These warrants were exercised in May 2004 and we received gross
proceeds of $2,400,000.

On October 29, 2003, we issued an aggregate of $4,142,357 in principal
amount of 6% Senior Convertible Debentures due October 31, 2005 (the "October
2003 Debentures") and an aggregate of 410,134 Warrants (the "October 2008
Warrants") in a private placement for aggregate gross proceeds of $3,550,000.
Pursuant to the terms of the October 2003 Debentures, $1,550,000 of the proceeds
from the sale of the October 2003 Debentures were held back and were to be
released to us if, and only if, we acquired ISI's facility within 90 days of
January 26, 2004 and provide a mortgage on the facility as further security for
the October 2003 Debentures. In March 2004, we acquired the facility and we
subsequently provided the mortgage of the facility to the Debenture holders. The
October 2003 Debentures mature on October 31, 2005 and bear interest at 6% per
annum, payable quarterly in cash or, subject to satisfaction of certain
conditions, common stock. Any shares of common stock issued to the investors as
payment of interest shall be valued at 95% of the average closing price of the
common stock during the five consecutive business days ending on the third
business day immediately preceding the applicable interest payment date.

Upon completing the sale of the October 2003 Debentures, we received
$3,275,000 in net proceeds consisting of $1,725,000 from the October 2003
Debentures and $1,550,000 that had been withheld from the July 2003 Debentures.
As noted above, pursuant to the terms of the October 2003 Debentures, $1,550,000
of the proceeds from the sale of the October 2003 Debentures had been held back.
However, these proceeds were released to us in April 2004. As required by the
Debentures, we have provided a mortgage on the ISI facility as further security
for the Debentures.

The October 2003 Debentures are convertible at the option of the investors
at any time through October 31, 2005 into shares of our common stock. The
conversion price under the October 2003 Debentures is fixed at $2.02 per share,
subject to adjustment for anti-dilution protection for issuance of common stock
or securities convertible or exchangeable into common stock at a price less than
the conversion price then in effect. In addition, in the event that we do not
pay the redemption price at maturity, the Debenture holders, at their option,
may convert the balance due at the lower of (a) the conversion price then in
effect and (b) 95% of the lowest closing sale price of our common stock during
the three trading days ending on and including the conversion date.

The October 2008 Warrants, as amended, received by the investors were to
acquire an aggregate of 410,134 shares of common stock at a price of $2.32 per
share. These Warrants were exercised in July 2004 which produced gross proceeds
in the amount of $951,510.

As of June 30, 2004, the investors have converted $12,462,328 of debt from
the March 2005, July 2005, October 2005 and January 2006 Debentures into
7,350,213 shares of our common stock. The March

Debentures have been fully converted. The remaining principal balance on the
outstanding debentures is convertible into shares of our stock at the option of
the investors at any time, through the maturity date. In addition, we have paid
$1,300,000 into the debenture cash collateral account as required by the terms
of the October 2003 Debentures. The amounts paid through March 31, 2004 have
been accounted for as advances receivable and are reflected as such on the
accompanying balance sheet as of March 31, 2004. The cash collateral account
provides partial security for repayment of the July and October 2003 and January
2004 Debentures in the event of default.

On January 26, 2004, we issued an aggregate of $4,000,000 in principal
amount of 6% Senior Convertible Debentures due January 31, 2006 (the "January
2004 Debentures"), an aggregate of 790,514 warrants (the "July 2009 Warrants")
and 158,103 shares of common stock, and Additional Investment Rights (to
purchase up to an additional $2,000,000 principal amount of January 2004
Debentures commencing in six months) in a private placement for aggregate net
proceeds of $3,695,000. The January 2004 Debentures mature on January 31, 2006
and bear interest at 6% per annum, payable quarterly in cash or, subject to
satisfaction of certain conditions, common stock. Any shares of common stock
issued to the investors as payment of interest shall be valued at 95% of the
average closing price of the common stock during the five consecutive business
days ending on the third business day immediately preceding the applicable
interest payment date. Commencing January 26, 2004, we are required to start
repaying the then outstanding principal amount under the January 2004 Debentures
in monthly installments amortized over 18 months in cash or, at our option, in
shares of common stock. Any shares of common stock issued to the investors as
installment payments shall be valued at 95% of the average closing price of the
common stock during the 10-day trading period commencing on and including the
eleventh trading day immediately preceding the date that the installment is due.

The January 2004 Debentures are convertible at the option of the investors
at any time through January 31, 2006 into shares of our common stock. The
conversion price under the January 2004 Debentures is fixed at $2.53 per share,
subject to adjustment for anti-dilution protection for issuance of common stock
or securities convertible or exchangeable into common stock at a price less than
the conversion price then in effect. In addition, in the event that we do not
pay the redemption price at maturity, the Debenture holders, at their option,
may convert the balance due at the lower of (a) the conversion price then in
effect and (b) 95% of the lowest closing sale price of our common stock during
the three trading days ending on and including the conversion date.

There are two classes of July 2009 Warrants received by the Investors:
Class A and Class B. The Class A warrants are to acquire any time from July 26,
2004 through July 26, 2009 an aggregate of up to 395,257 shares of common stock
at a price of $3.29 per share. The Class B warrants are to acquire any time from
July 26, 2004 through July 26, 2009 an aggregate of up to 395,257 shares of
common stock at a price of $5.06 per share. On January 27, 2005, the exercise
price of these July 2009 Class A and Class B Warrants will reset to the lesser
of (x) their respective exercise price then in effect or (y) the greater of a
price equal to the average of the daily price of the common stock between
January 27, 2004 and January 26, 2005 or $2.58 per share with regard to the
Class A warrants or $3.54 per share with regard to the Class B Warrants. The
exercise price (and the reset price) under the July 2009 Warrants also is
subject to similar adjustments for anti-dilution protection. Notwithstanding the
foregoing, the exercise price of the Class A warrants as adjusted for
anti-dilution, will in no event be less than $2.58 per share.

We also issued to the investors Additional Investment Rights pursuant to
which the investors have the right to acquire up to an additional $2,000,000
principal amount of January 2004 Debentures (the July 2004 Debentures") from us.
The July 2004 Debentures are identical to the January 2004 Debentures except
that the conversion price is $2.58. The investors exercised the Additional
Investment Rights on July 13, 2004.

Pursuant to the terms and conditions of the July 2003 Debentures, October
2003 Debentures and January 2004 Debentures (collectively, the "Debentures"), we
have pledged all of our assets, other than our intellectual property, as
collateral, and we are subject to comply with certain financial and negative
covenants. In addition, we have paid $1,300,000 into the Debenture cash
collateral account as required by the terms of the Debentures. The cash
collateral account provides additional security for repayment of the Debentures
in the event of default.

On May 14, 2004, in consideration for the Debenture holders' exercise of
all of the June 2008 Warrants, we issued to the holders warrants (the "May 2009
Warrants") to purchase an aggregate of 1,300,000 shares of our common stock. We
issued 1,000,000 shares of common stock and received gross proceeds of
$2,400,000 from the exercise of the June 2008 Warrants.

The May 2009 Warrants are to acquire at any time commencing on November
14, 2004 through April 30, 2009 an aggregate of 1,300,000 shares of common stock
at a price of $4.50 per share. On May 14, 2005, the exercise price of these May
2009 Warrants will reset to the lesser of the exercise price then in effect or a
price equal to the average of the daily price of the common stock between May
15, 2004 and May 13, 2005. The exercise price (and the reset price) under the
May 2009 Warrants also is subject to adjustments for anti-dilution protection
similar to those in the other Warrants. Notwithstanding the foregoing, the
exercise price as reset or adjusted for anti-dilution, will in no event be less
than $4.008 per share. This transaction will generate a non-cash charge of about
$2,300,000 financing costs in the second quarter of 2004.

On July 13, 2004, the Debenture holders exercise of all of the July 2003
and October 2003 Warrants and the Additional Investment Rights. We issued to
these holders warrants (the "June 2009 Warrants") to purchase an aggregate of
1,300,000 shares of common stock.

The June 2009 Warrants are to acquire at any time commencing on January
13, 2005 through June 30, 2009 an aggregate of 1,300,000 shares of common stock
at a price of $3.75 per share. On July 13, 2005, the exercise price of these
June 2009 Warrants will reset to the lesser of the exercise price then in effect
or a price equal to the average of the daily price of the common stock between
July 14, 2004 and July 12, 2005. The exercise price (and the reset price) under
the June 2009 Warrants also is subject to adjustments for anti-dilution
protection similar to those in the other Warrants. Notwithstanding the
foregoing, the exercise price as reset or adjusted for anti-dilution, will in no
event be less than $3.33 per share. This transaction is subject to a non-cash
financing charge of $1,676,000 to be amortized over the remaining life of the
October 2003 Debentures.

We entered into Registration Rights Agreements with the investors in
connection with the issuance of (i) the Debentures (including the July 2004
Debentures); (ii) the June 2008, July 2008, October 2008, July 2009, May 2009
and June 2009 Warrants (collectively, the "Warrants"); and (iii) the shares
issued in January 2004. Pursuant to the Registration Rights Agreements we have
registered on behalf of the investors the shares issued to them in January 2004
and 135% of the shares issuable upon conversion of the Debentures (including the
July 2004 Debentures) and upon exercise of all of the Warrants other than the
July 2009 Warrants. If, subject to certain exceptions, sales of all shares so
registered cannot be made pursuant to the registration statements, then we will
be required to pay to the investors their pro rata share of $.00067 times the
outstanding principal amount of the relevant Debentures for each day the above
condition exists.

made by the two Debenture holders and issued to Cardinal the following common
stock purchase warrants: (i) 112,500 exercisable at $2.57 per share; (ii) 87,500
exercisable at $2.42 per share; and (iii) 100,000 exercisable at $3.04 per
share. The $2.57 warrants expire on July 10, 2008, the $2.42 warrants expire on
October 30, 2008 and the $3.04 warrants expire on January 5, 2009. With regard
to the exercise of the June 2008 Warrants and issuance of the May 2009 Warrants,
Cardinal received an investment banking fee of 7%, half in cash and half in
shares. With regard to the exercise of the Additional Investment Rights, the
July 2008 and October 2008 Warrants and issuance of the July 2009 Warrants,
Cardinal received an investment banking fee of 7%, $146,980 in cash and 22,703
is shares, as well as, 50,000 warrants exercisable at $4.07 expiring on July 12,
2009. By agreement with Cardinal, we have registered all of the foregoing shares
and shares issuable upon exercise of the above mentioned warrants for public
sale and we have agreed to register the balance.

Section 713 of the American Stock Exchange ("AMEX") Company Guide provides
that we must obtain stockholder approval before issuance, at a price per share
below market value, of common stock, or securities convertible into common
stock, equal to 20% or more of our outstanding common stock (the "Exchange
Cap"). Taken separately, the July 2003, October 2003 and January 2004 Debenture
transactions do not trigger Section 713. However, the AMEX has taken the
position that the three transactions should be aggregated and, as such,
stockholder approval was required for the issuance of common stock for a portion
of the potential exercise of the warrants and conversion of the Debentures in
connection with the January 2004 Debentures. The amount of potential shares that
we could exceed the Exchange Cap amounted to approximately 1,299,000. In
accordance with EITF 00-19, Accounting For Derivative Financial Instruments
Indexed to and Potentially Settled in a Company's Own Stock, we recorded on
January 26, 2004, a redemption obligation of approximately $1,244,000. This
liability represents the fair market value of the warrants and beneficial
conversion feature related to the 1,299,000 shares.

In addition, in accordance with EITF 00-19, we revalued this redemption
obligation associated with the beneficial conversion feature and warrants as of
March 31, 2004. We recorded an additional redemption obligation and finance
charge of $947,000 as a result of this revaluation. Upon stockholder approval,
our redemption obligation will be recorded as additional paid in capital as of
the date approval is received.

The requisite stockholder approval was obtained at our Annual Meeting of
Stockholders on June 23, 2004.

In connection with the Debenture agreements, we have outstanding letters
of credit of $1 million as additional collateral.

On March 11, 2003, we acquired from ISI, ISI's inventory of ALFERON N
Injection(R) and a limited license for the production, manufacture, use,
marketing and sale of this product. As partial consideration, we issued 487,028
shares of our common stock to ISI Pursuant to our agreements with ISI, we
registered these shares for public sale and ISI has reported that it has sold
all of these shares. We also agreed to pay ISI 6% of the net sales of ALFERON N
Injection(R).

On March 11, 2003, we also entered into an agreement to purchase from ISI
all of its rights to the product and other assets related to the product
including, but not limited to, real estate and machinery. For these assets, we
agreed to issue to ISI an additional 487,028 shares and to issue 314,465 shares
and 267,296 shares, respectively to the American National Red Cross and GP
Strategies Corporation, two creditors of ISI. We guaranteed the market value of
all but 62,500 of these shares to be $1.59 per share on the termination date. As
discussed below, we issued all of these shares and ISI, GP Strategies and the
American National Red Cross have reported that they have sold all of their
shares.

We also agreed to satisfy other liabilities of ISI which were past due and
secured by a lien on ISI's real estate and to pay ISI 6% of the net sales of
products containing natural alpha interferon.

In March 2004, we issued 487,028 shares to ISI to complete the acquisition
of the balance of ISI's rights to market its product as well its production
facility in New Brunswick, New Jersey. As of June 30, 2004, ISI has sold all of
its shares.

Prior to our annual meeting of stockholders in September 2003, we had a
limited number of shares of Common Stock authorized but not issued or reserved
for issuance upon conversion or exercise or outstanding convertible and
exercisable securities such as debentures, options and warrants. Prior to the
meeting, to permit consummation of the sale of the July 2003 Debentures and the
related warrants, Dr. Carter agreed that he would not exercise his warrants or
options unless and until our stockholders approve an increase in our authorized
shares of common stock. For Dr. Carter's waiver of his right to exercise certain
options and warrants prior to approval of the increase in our authorized shares,
we agreed to compensate Dr. Carter. See "Executive Compensation; Employment
Agreements" for details related to how Dr. Carter has been compensated with
respect to this matter.

On November 6, 2003 we acquired some of the outstanding ISI property tax
lien certificates in the aggregate amount of $456,839 from certain investors.
These tax liens were issued for property taxes and utilities due for 2000, 2001
and 2002.

In May 2004, the Debenture holders agreed to amend the provisions of all
of the outstanding Debentures (including the July 2004 Debentures) and Warrants
to limit the maximum amount of funds that the holders could receive in lieu of
shares upon conversion of the Debentures and/or exercise of the Warrants in the
event that the Exchange Cap was reached to 119.9% of the conversion price of the
relevant Debentures and 19.9% of the relevant Warrant exercise price.

Because of our long-term capital requirements, we may seek to access the
public equity market whenever conditions are favorable, even if we do not have
an immediate need for additional capital at that time. Any additional funding
may result in significant dilution and could involve the issuance of securities
with rights, which are senior to those of existing stockholders. We may also
need additional funding earlier than anticipated, and our cash requirements, in
general, may vary materially from those now planned, for reasons including, but
not limited to, changes in our research and development programs, clinical
trials, competitive and technological advances, the regulatory process, and
higher than anticipated expenses and lower than anticipated revenues from
certain of our clinical trials for which cost recovery from participants has
been approved.

Contractual Obligations as of December 31, 2003

(dollars in thousands)
Obligations Expiring by Period
Contractual Cash Obligations =======================================================================
Total 2004 2005-2006 2007-2008
===================================== ================= ===============

Operating Leases $784 $286 $433 $65

Convertible Debentures
July 10, 2003 5,426,000 6%
Senior Convertible Debenture 4,257 -- 4,257 --

October 29, 2003 $4,142,000 6% Senior
Convertible Debenture 2,334 -- 2,334 --
-----------------------------------------------------------------------

Total $7,375 $286 $7,024 $65
===================================== ================= ===============

New Accounting Pronouncements

In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, including Indirect
Guarantees of Indebtedness of Others" ("Interpretation No. 45"). Interpretation
No. 45 elaborates on the existing disclosure requirements for most guarantees,
including loan guarantees such as standby letters of credit. It also clarifies
that at the time a company issues a guarantee, the company must recognize an
initial liability for the fair market value of the obligations it assumes under
the guarantee and must disclose that information in its interim and annual
financial statements. The initial recognition and measurement provisions of
Interpretation No. 45 apply on a prospective basis to guarantees issued or
modified after December 31, 2002. Interpretation No. 45 did not have an effect
on our financial statements.

In December 2002, the FASB issued Statement No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure", and amendment of FASB
Statement No. 123 ("SFAS"). SFAS 148 amends FASB Statement No. 123, Accounting
for Stock-Based Compensation, to provide alternative method of transition for an
entity that voluntarily changes to the fair value based of accounting for
stock-based employee compensation. It also amends the disclosure provisions of
that Statement to require prominent disclosure about the effects on reported net
income of an entity's accounting policy decisions with respect to stock-based
employee compensation. Finally, this Statement amends Accounting Principles
Board ("APB") Opinion No. 28, Interim Financial Reporting to require disclosure
about those effects in interim financial information. SFAS 148 is effective for
financial statements for fiscal years ending after December 15, 2002. We will
continue to account for stock-based compensation using the intrinsic value
method of APB Opinion No. 25, "Accounting for Stock Issued to Employees," but
have adopted the enhanced disclosure requirements of SFAS 148.

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("Interpretation No. 46"), that clarifies the
application of Accounting Research Bulletin No. 51, Consolidated Financial
Statements, "to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. Interpretation No. 46 is
applicable immediately for variable interest entities created after January 31,
2003. For variable

interest entities created prior to January 31, 2003, the provisions of
Interpretation No. 46 have been deferred to the first quarter of 2004. This
Interpretation did not have an effect on our consolidated financial statements.

In May 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity"
("SFAS 150"). SFAS 150 requires an issuer to classify certain financial
instruments, such as mandatory redeemable shares and obligations to repurchase
the issuers equity shares, as liabilities. The guidance is effective for
financial instruments entered into or modified subsequent to May 31, 2003, and
is otherwise effective at the beginning of the first interim period after June
15, 2003. SFAS 150 did not have an impact on our financial condition or results
of operations.

Disclosure About Off-Balance Sheet Arrangements

Prior to our annual meeting of stockholders in September 2003, we had a
limited number of shares of Common Stock authorized but not issued or reserved
for issuance upon conversion or exercise of outstanding convertible and
exercisable securities such as debentures, options and warrants. Prior to the
meeting, to permit consummation of the sale of the July 2003 Debentures and the
related warrants, Dr. Carter agreed that he would not exercise his warrants or
options unless and until our stockholders approve an increase in our authorized
shares of common stock. For Dr. Carter's waiver of his right to exercise certain
options and warrants prior to approval of the increase in our authorized shares,
we have agreed to compensate Dr. Carter. See "Executive Compensation; Employment
Agreements" for details related to how Dr. Carter has been compensated with
respect to this matter.

In connection with the Debenture agreements, we have outstanding letters
of credit of $1,000,000 as additional collateral.

Critical Accounting Policies

Financial Reporting Release No. 60 requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. Our significant accounting policies are described in Notes
to the Consolidated Financial Statements. The significant accounting policies
that we believe are most critical to aid in fully understanding our reported
financial results are the following:

Revenue

Revenues for non-refundable license fees are recognized under the
Performance Method-Expected Revenue. This method considers the total amount of
expected revenue during the performance period, but limits the amount of revenue
recognized in a period to total non-refundable cash received to date. This
limitation is appropriate because future milestone payments are contingent on
future events.

Upon receipt, the upfront non-refundable payment is deferred. The
non-refundable upfront payments plus non-refundable payments arising from the
achievement of defined milestones are recognized as revenue over the performance
period based on the lesser of (a) percentage of completion or (b) non-refundable
cash earned (including the upfront payment).

This method requires the computation of a ratio of cost incurred to date
to total expected costs and then apply that ratio to total expected revenue. The
amount of revenue recognized is limited to the total non-refundable cash
received to date.

Revenue from the sale of Ampligen(R) under cost recovery clinical
treatment protocols approved by the FDA is recognized when the treatment is
provided to the patient.

Revenues from the sale of product are recognized when the product is
shipped, as title is transferred to the customer. We have no other obligation
associated with our products once shipment has occurred.

Patents and Trademarks

Effective October 1, 2001, we adopted a 17-year estimated useful life for
the amortization of our patents and trademark rights in order to more accurately
reflect their useful life. Prior to October 1, 2001, we were using a ten year
estimated useful life.

Patents and trademarks are stated at cost (primarily legal fees) and are
amortized using the straight-line method over the life of the assets. We review
our patents and trademark rights periodically to determine whether they have
continuing value. Such review includes an analysis of the patent and trademark's
ultimate revenue and profitability potential on an undiscounted cash basis to
support the realizability of our respective capitalized cost. In addition,
management's review addresses whether each patent continues to fit into our
strategic business plans.

Concentration of Credit Risk

Financial instruments that potentially subject us to credit risks consist
of cash equivalents and accounts receivable.

Our policy is to limit the amount of credit exposure to any one financial
institution and place investments with financial institutions evaluated as being
credit worthy, or in short-term money markets, which are exposed to minimal
interest rate and credit risks. At times, we have bank deposits and overnight
repurchase agreements that exceed federally insured limits.

Concentration of credit risk, with respect to receivables, is limited
through our credit evaluation process. We do not require collateral on our
receivables. Our receivables consist principally of amounts due from wholesale
drug companies as of March 31, 2004.

Quantitative And Qualitative Disclosures About Market Risk

Excluding obligations to pay us for various licensing related fees, we had
approximately $7,238,000 in cash and cash equivalents and short-term investments
at March 31, 2004. To the extent that our cash and cash equivalents exceed our
near term funding needs, we invest the excess cash in three to six month high
quality interest bearing financial instruments. We employ established
conservative policies and procedures to manage any risks with respect to
investment exposure.

We have not entered into, and do not expect to enter into, financial
instruments for trading or hedging purposes.

OUR BUSINESS

We were founded in the early 1970s as a contract researcher for the
National Institutes of Health (NIH). Dr. William A. Carter, M.D., joined us in
1976 and ultimately become our CEO in 1988. He has focused us on exploring,
understanding and mastering the mechanism of nucleic acid technology to produce
a promising new class of drugs for treating chronic viral diseases and disorders
of the immune system. In the course of almost three decades, we have established
a strong foundation of laboratory, pre-clinical and clinical data with respect
to the development of nucleic acids to enhance the natural antiviral defense
system of the human body and the development of therapeutic products for the
treatment of chronic diseases. Our strategy is to use our proprietary drug,
Ampligen(R), to treat diseases for which adequate treatment is not available. We
seek the required regulatory approvals which will allow the progressive
introduction of Ampligen(R) for Myalgic Encephalomyelitis/Chronic Fatigue
Syndrome ("ME/CFS"), HIV, Hepatitis C ("HCV") and Hepatitis B ("HBV") in the
U.S., Canada, Europe and Japan. Ampligen(R) is currently in the open label
portion of phase III clinical trials in the U.S. for use in treatment of ME/CFS
and is in Phase IIb clinical development in the U.S. for the treatment of
patients with HIV infection.

In March, 2003, we acquired from Interferon Sciences Inc. ("ISI"), all of
ISI's raw materials, work-in-progress and finished product of Alferon N
Injection(R), together with a limited license for the production, manufacture,
use, marketing and sale of the product. Alferon N Injection(R) [interferon alfa-
n3 (human derived)] is a natural alpha interferon that has been approved by the
U.S. Food and Drug Administration ("FDA") for commercial sale for the
intralesional treatment of refractory or recurring external genital warts in
patients 18 years of age or older. We intend to market this product in the
United State through sales facilitated via third party marketing agreements. In
the future, we expect to implement studies, beyond those conducted by ISI, for
testing the potential treatment of HIV, Hepatitis C and other indications,
including multiple sclerosis.

In March, 2003, we entered into an agreement with ISI subject to certain
events that would grant us global rights to sell Alferon N Injection(R) as well
as acquire certain other assets of ISI which include but are not limited to,
real estate and property, plant and equipment. We acquired these assets in March
2004.

We outsource certain components of our research and development,
manufacturing, marketing and distribution while maintaining control over the
entire process through our quality assurance group and our clinical monitoring
group.

Ampligen(R)

Our proprietary drug technology includes Ampligen(R) and utilizes
specially configured ribonucleic acid ("RNA") and currently is protected by more
than 250 patents worldwide with over 16 additional patent applications pending
to provide further proprietary protection in various international markets.
Certain patents apply to the use of Ampligen(R) alone and certain patents apply
to the use of Ampligen(R) in combination with certain other drugs. Some
composition of matter patents pertain to other new medications which have a
similar mechanism of action. In April 2004, we reviewed our patents and patent
applications. As a result, various patents and patent applications were elected
not to be renewed in the second quarter 2004. The non-renewed patents consisted
mostly of international origin or were not conducive to oral application.

The main U.S. ME/CFS treatment patent (#6130206) expires January 23, 2015.
Our main patents covering HIV treatment (#4795744, #4820696, #5063209, and
#5091374) expire on August 26, 2006, September 30, 2008, August 10, 2010, and
May 6, 2011, respectively; Hepatitis treatment coverage is conveyed by U.S.
patent #5593973 which expires on October 5, 2014. The U.S. Ampligen(R) Trademark
(#1,515,099) expires on December 6, 2008 and can be renewed thereafter for an
additional 10 years. The

U.S. FDA has granted us "orphan drug status" for our nucleic acid-derived
therapeutics for ME/CFS, HIV, and renal cell carcinoma and malignant melanoma.
Orphan drug status grants us protection against competition for a period of
seven years following FDA approval, as well as certain federal tax incentives,
and other regulatory benefits.

Nucleic acid compounds represent a potential new class of pharmaceutical
products that are designed to act at the molecular level for treatment of human
diseases. There are two forms of nucleic acids, DNA and RNA. DNA is a group of
naturally occurring molecules found in chromosomes, the cell's genetic
machinery. RNA is a group of naturally occurring informational molecules which
orchestrate a cell's behavior and which regulate the action of groups of cells,
including the cells, which comprise the body's immune system. RNA directs the
production of proteins and regulates certain cell activities including the
activation of an otherwise dormant cellular defense against virus and tumors.
Our drug technology utilizes specially configured RNA. Our double-stranded RNA
drug product, trademarked Ampligen(R), which is administered intravenously, is
(or has been) in human clinical development for various disease indications,
including treatment for ME/CFS, HIV, renal cell carcinoma and malignant
melanoma. Further studies are planned in cancer treatment but initiation dates
have not been set.

Based on the results of published, peer reviewed pre-clinical studies and
clinical trials, we believe that Ampligen(R) may have broad-spectrum anti-viral
and anti-cancer properties. Over 500 patients have received Ampligen(R) in
clinical trials authorized by the FDA at over twenty clinical trial sites across
the U.S., representing the administration of more than 45,000 doses of this
drug.

Myalgic Encephalomyelitis/Chronic Fatigue Syndrome (ME/CFS)

ME/CFS is a debilitating disease that is difficult to diagnose and for
which, at present, there is no cure. People suffering from this illness
experience, among other symptoms, a constant tiredness, recurring dull
headaches, joint and muscle aches, a feeling of feverishness and chills, low
grade fever, depression, difficulty in concentrating on tasks, and tender lymph
glands. With progression of the disease they can become bed-ridden, lose their
jobs and become dependent upon the state for support and medical care.

ME/CFS has been given official recognition by the U.S. Social Security
Administration, and some European nations, rendering ME/CFS patients eligible
for disability benefits and heightening awareness of this debilitating disease
in the medical community. A further scientific publication by independent
academicians on the accurate laboratory diagnosis of ME/CFS appeared in a
peer-reviewed journal (American Journal of Medicine) in February 2000. The U.S.
Centers for Disease Control ("CDC") reconfirmed its research commitment to
ME/CFS following an audit by the U.S. Government Accounting Office ("GAO") which
was announced July 28, 1999.

Estimates of ME/CFS patient numbers in the United States range from a low
of 500,000 (1995-Centers for Disease Control, Atlanta, GA) to a high of
1,000,000 (1999-DePaul University study). Estimates of patient numbers in Europe
range from 600,000 to 2,200,000 as reported in the British Medical Journal in
January 2000. It is believed worldwide patient totals may be as high as ten
million.

In 1989, we received FDA authorization to conduct a Phase II study of
Ampligen(R) for ME/CFS. In 1991, we completed a 24-week, 92 patient, randomized,
placebo-controlled, double-blinded, multi-center trial of Ampligen(R) for
treating patients with ME/CFS. The results, published in a peer review journal
in 1994, suggested enhanced physical performance, greater cognitive functions
and improved ability to perform daily living activities. Patients required
reduced medications, while suffering little or no significant adverse side
effects. The FDA raised certain issues with respect to this clinical trial,
which required further study. These issues were reviewed and satisfactorily
resolved.

In February 1993, we presented results of our Phase II study of
Ampligen(R) for ME/CFS to a FDA Advisory Committee and these results were
published in early 1994 in Clinical Infectious Diseases, a peer reviewed medical
journal, which emphasizes the understanding and potential treatment of
infectious diseases. The results suggested that patients on Ampligen(R), in
contrast to those receiving a placebo, showed significant improvement in
physical capacity as determined by performance on treadmill testing. The
Ampligen(R) treated patient group also required less pain medication than did
the placebo group.

In 1998, we were authorized by the FDA to initiate a Phase III
multicenter, placebo-controlled, randomized, double blind clinical trial to
treat 230 patients with ME/CFS in the U.S. The objective of this Phase III,
clinical study, denoted as Amp 516, is to evaluate the safety and efficacy of
Ampligen(R) as a treatment for ME/CFS. Over the course of the study, we engaged
the services of twelve (12) clinical investigators at Medical Centers in
California, New Jersey, Florida, North Carolina, Wisconsin, Pennsylvania,
Nevada, Illinois, Utah and Connecticut. These clinical investigators are medical
doctors with special knowledge of ME/CFS who have recruited, prescreened and
enrolled ME/CFS patients for inclusion in the Phase III Amp 516 ME/CFS clinical
trial. This clinical trial enrolled and randomized over 230 ME/CFS patients. We
recently completed the stage I, forty week, double-blind, randomized,
placebo-controlled portion of the clinical trial. At present, 10 patients remain
in the stage II or the open label treatment portion of the clinical trial. We
anticipate that the last patient will complete this segment in August 2004. To
date there have been no reported serious adverse events definitely related to
the study medication. The next stage in our program is the completion of stage
II and the final data collection, quality assurance of data to insure its
accuracy and analysis of the data according to regulatory guidelines to
facilitate filing for commercial approval to sell.

Human Immunodeficiency Virus (HIV)

Over fifteen antiviral drugs are currently approved by the FDA for the
treatment of HIV infection. Most target the specific HIV enzymes, reverse
transcriptase ("RT") and protease. The use of various combinations of three or
more of these drugs is often referred to as Highly Active Anti-Retroviral
Therapy ("HAART"). HAART involves the utilization of several antiretrovirals
with different mechanisms of action to decrease viral loads in HIV-infected
patients. The goal of these combination treatments is to reduce the amount of
HIV in the body ("viral load") to as low as possible. Treatments include
different classes of drugs, but they all work by stopping parts of the virus so
the virus cannot reproduce. Experience has shown that using combinations of
drugs from different classes is a more effective strategy than using only one or
two drugs. HAART has provided dramatic decreases in morbidity and mortality of
HIV infection. Reduction of the viral load to undetectable levels in patients
with wild type virus (i.e., non-drug-resistant virus)is routinely possible with
the appropriate application of HAART. HIV mainly infects important immune system
cells called CD4 cells. After HIV has infected a CD4 cell, the CD4 cell becomes
damaged and is eventually destroyed. Fewer CD4 cells means more damage to the
immune system and, ultimately, results in AIDS. Originally, reduction of HIV
loads was seen as possibly allowing the reconstitution of the immune system and
led to early speculation that HIV might be eliminated by HAART.

Subsequent experience has provided a more realistic view of HAART and the
realization that chronic HIV suppression using HAART, as currently practiced,
would require treatment for life with resulting significant cumulative
toxicities. The various reverse transcriptase and protease inhibitor drugs that
go into HAART have significantly reduced the morbidity and mortality connected
with HIV; however there has been a significant cost due to drug toxicity. It is
estimated that 50% of HIV deaths are from the toxicity of the drugs in HAART.
Current estimates suggest that it would require as many as 60 years of HAART for
elimination of HIV in the infected patient. Thus the toxicity of HAART drugs and
the enormous cost of treatment make this goal impractical.

Although more potent second generation drugs are under development which
target the reverse transcriptase and protease genes as well as new HIV targets,
such as HIV integrase and HIV fusion inhibitors, the problem of drug toxicities,
the complex interactions between these drug classes, and the likelihood of
life-long therapy will remain a serious drawback to their usage.

Failure of antiretroviral therapies over time and the demonstration of
resistance have stimulated intensive searches for appropriate combinations of
agents, or sequential use of different agents, that act upon the same or
different viral targets. This situation has created interest in our drug
technology, which operates by a different mechanism.

We believe that the concept of Strategic Therapeutic Interruption ("STI")
of HAART provides a unique opportunity to minimize the current deficiencies of
HAART while retaining the HIV suppression capacities of HAART. STI is the
cessation of HAART until HIV again becomes detectable (i.e., rebounds) followed
by resumption of HAART with subsequent suppression of HIV. By re-institution of
HAART, HIV may be suppressed before it can inflict damage to the immune system
of the patient. Based on recent publications (AIDS 2001,15: F19-27 and AIDS
2001, 15:1359-1368) in peer reviewed medical literature, it is expected that in
just 30 days after stopping HAART approximately 80% to 90%, of the patients will
suffer a relapse evidencing detectable levels of HIV. We believe that
Ampligen(R) combined with the STI approach may offer a unique opportunity to
retain HAART's superb ability to suppress HIV while potentially minimizing its
deficiencies. All present approved drugs block certain steps in the life cycles
of HIV. None of these drugs address the immune system, as Ampligen(R)
potentially does, although HIV is an immune-based disease.

By using Ampligen(R) in combination with STI of HAART, we will undertake
to boost the patients' own immune system's response to help them control their
HIV when they are off of HAART. Our minimum expectation is that Ampligen(R) has
potential to lengthen the HAART-free time interval with a resultant decrease in
HAART-induced toxicities. The ultimate potential, which of course requires full
clinical testing to accept or reject the hypothesis, is that Ampligen(R) may
potentiate STI of HAART to the point that the cell mediated immune system will
be sufficient to eliminate requirement for HAART. Clinical results of using our
technology has been presented at several International AIDS Scientific Forums in
2003, including the XVI International Conference on Antiviral Research in
Savannah, Georgia in April 2003 and the 2nd IAS Conference on HIV Pathogenesis
and Treatment in Paris, France in July 2003.

Our AMP 720 HIV clinical trial is being conducted with individuals
infected with HIV who are responding well to HAART at the moment. Patients in
this study are required to meet minimum immune system requirements of CD4 cell
levels greater than 400, maximum HIV infection levels of less that 50 copies/ml,
and a HAART regimen containing at least one anti-viral drug showing therapeutic
synergy with Ampligen(R) based on recently reported ex vivo study in a
peer-reviewed scientific journal (Reference: Robinson W. McDougall B and Essay
R. Mixed Dose Effect Analysis of a Biological Response Modifier (Ampligen) with
14 FDA-approved anti-HIV Agents. Antiviral Res, 46:A48, No. 46, 2000). All
patients are chronically HIV infected and will have been receiving the indicated
HAART regimen prior to starting the STI. The trial applies strategic treatment
interruption of HAART based on the hypothesis that careful management of HIV
rebound following STI may have potential to result in the development of
protective immune responses to HIV in order to achieve control of HIV
replication. We believe that the addition of Ampligen(R), with its potential
immunomodulatory properties, may reasonably achieve this outcome. Half of the
participants in the trial are given 400 mg of Ampligen(R) twice a week and once
they start the STI will remain off of HAART until such time as their HIV
rebounds. The other half of the participants (the control group) are on STI, but
they are given no Ampligen(R) during the "control" portion of the clinical test.

The targeted enrollment in the AMP 720 Clinical Trial is 120 HIV-infected
persons who meet the criteria. We expect to have 60 people on STI with
Ampligen(R) and 60 people on STI without Ampligen(R). Presently, this study is
approximately 35% enrolled at approximately ten medical centers around the U.S.

Other Diseases

We are evaluating potential novel clinical programs which would involve
using Ampligen(R) to treat both HCV and HIV when they coexist on the same
patient. We expect to commence these studies in collaboration with one or more
prospective corporate partners. A collaborative Clinical study in Europe, in
conjunction with Laboratorios Del Dr. Esteve S.A., is expected to commence in
2004.

We have acquired a series of patents on Oragen(TM), potentially a set of
oral broad spectrum antivirals, immunological enhancers through a licensing
agreement with Temple University in Philadelphia, PA. We were granted an
exclusive worldwide license from Temple for the Oragen(TM) products. Pursuant to
the arrangement, we are obligated to pay royalties of 2% to 4% on sales of
Oragen(TM), depending on how much technological assistance is required of
Temple. We currently pay minimum royalties of $30,000 per year to Temple. These
compounds have been evaluated in various academic laboratories for application
to chronic viral and immunological disorders.

An FDA authorized Phase I/II study of Ampligen(R) in cancer, including
patients with renal cell carcinoma was completed in 1994. The results of this
study indicated that patients receiving high doses (200-500mg) twice weekly
experienced an increase in medium survival compared to the low dose group and as
compared to an historical control group. We received authorization from the FDA
to initiate a Phase II study using Ampligen(R) to treat patients with metastatic
renal cell carcinoma. Patients with metastatic melanoma were included in the
Phase I/II study of Ampligen(R) in cancer. The FDA has authorized us to conduct
a Phase II clinical trial using Ampligen(R) in melanoma. We do not expect to
devote any significant resources to funding these studies in the near future and
are seeking strategic partnerships to expand these promising studies.

ALFERON N INJECTION(R)

Interferons are a group of proteins produced and secreted by cells to
combat diseases. Researchers have identified four major classes of human
interferon: alpha, beta, gamma and omega. The ALFERON N Injection(R) product
contains a multi-species form of alpha interferon. The worldwide market for
injectable alpha interferon-based products has experienced rapid growth and
various alpha interferon injectable products are approved for many major medical
uses worldwide.

Alpha interferons are manufactured commercially in three ways: by genetic
engineering, by cell culture, and from human white blood cells. All three of
these types of alpha interferon are or were approved for commercial sale in the
U.S. Our natural alpha interferon is produced from human white blood cells.

The potential advantages of natural alpha interferon over recombinant
interferon may be based upon their respective molecular compositions. Natural
alpha interferon is composed of a family of proteins containing many molecular
species of interferon. In contrast, recombinant alpha interferon each contain
only a single species. Researchers have reported that the various species of
interferons may have differing antiviral activity depending upon the type of
virus. Natural alpha interferon presents a broad complement of species, which we
believe may account for its higher activity in laboratory studies. Natural alpha
interferon is also glycosylated (partially covered with sugar molecules). Such
glycosylation is not present on the currently U.S. marketed recombinant alpha
interferons. We believe that the absence of glycosylation may be, in part,
responsible for the production of interferon-neutralizing antibodies seen in
patients treated with recombinant alpha interferon. Although cell
culture-derived interferon is also composed of multiple

glycosylated alpha interferon species, the types and relative quantity of these
species are different from our natural alpha interferon.

On October 10, 1989, the FDA approved ALFERON N Injection(R) for the
intralesional (within lesions) treatment of refractory (resistant to other
treatment) or recurring external genital warts in patients 18 years of age or
older. Certain types of human papillomaviruses ("HPV") cause genital warts, a
sexually transmitted disease ("STD"). A published report estimates that
approximately eight million new and recurrent causes of genital warts occur
annually in the United States alone.

Basically, our interest in acquiring Alferon N Injection(R)was driven by
two factors;

(1) Our belief that the use of Alferon N in combination with Ampligen(R)
has the potential to increase the positive therapeutic responses in
chronic life threatening viral diseases. Combinational therapy is
evolving to the standard of acceptable medical care based on a
detailed examination of the Biochemistry of the body's natural
antiviral immune response; and

(2) New knowledge about the competitive products in the interferon arena
that we believe implies a large untapped market and potential new
therapeutic indication for Alferon N Injection(R)which could
accelerate its revenues in the near term. Specifically, the
recombinant DNA derived alpha interferon are now reported to have
decreased effectiveness after one year, probably due to antibody
formation and other severe toxicities. These detrimental effects
have not been reported with Alferon N Injection which could allow
this product to assume a much larger market share. These revenues
would provide operational capital to complete the Phase III clinical
trials of our experimental drug, Ampligen(R)in a more cost
effective, non-dilutive manner on a shareholder's equity.

Alferon N Injection(R) [Interferon alfa-n3 (human leukocyte derived)] is a
highly purified, natural-source, glycosylated, multispecies alpha interferon
product. There are essentially no antibodies observed against natural interferon
to date and the product has a relatively low side-effect profile. Alferon is the
only natural-source, multispecies alpha interferon currently sold in the U.S.

The Alferon N Injection(R) targeted market consists of urologists,
proctologists, dermatologists, and obstetricians/gynecologists. These physicians
normally see patients with papilloma concondylomas (genital warts) in their
practice. For our marketing plans, see "Marketing/Distribution" below.

According to the NIH, there are one million new cases of venereal warts
every year.

Pipeline Products (Alpha Interferon)

The following products, together with other assets were acquired in March
2004, upon the closing of the second ISI agreement.

ALFERON N Injection(R) -Other Applications

ALFERON N Injection(R) has been approved by the U.S. FDA for the
intralesional treatment of refractory or recurring external genital warts in
patients 18 years of age or older and has been studied for the potential
treatment of HIV, Hepatitis C and other indications. ISI, the company from which
we obtained our rights to ALFERON N Injection(R) has conducted clinical trials
with regard to the use of ALFERON N

Injection(R) in the treatment of HIV and Hepatitis C. While ISI found the
results to be encouraging, in both instances, the FDA determined that additional
trials were necessary.

We anticipate initiating clinical trials to evaluate the use of Alferon N
Injection(R) to treat west Nile Virus infections and SARS that is dependent on
NIH providing the funds needed.

ALFERON LDO

ALFERON LDO is an experimental low-dose, oral liquid formulation of
Natural Alpha Interferon. Two Phase 2 clinical trials using ALFERON LDO for the
treatment of HIV-infected patients have been completed. We are entering an
active phase of Alferon LDO research. The FDA has recently authorized a new
Phase II clinical study designed to investigate the activity and safety of
Alferon LDO(R) in HIV positive subjects in early stage disease. The endpoints of
the study include an increase or upregulation of expression of genes known to be
mediators of the natural immune response using cutting edge gene chip
technology, as well as, absolute CD4 cell counts and plasma HIV RNA level.

There can be no assurance that any of these proposed products will be
cost-effective, safe, and effective or that we will be able to obtain FDA
approval for such use. Furthermore, even if such approval is obtained, there can
be no assurance that such products will be commercially successful or will
produce significant revenues or profits for us.

European Operations

Our European operations were set up to prepare for the introduction of
Hemispherx products and to accelerate market penetration into the European
market once full approval is obtained from the European Medicine Evaluation
Agency ("EMEA"). The EMEA is the equivalent of the United States FDA. From a
regulatory point of view the member countries of the European Economic Union
("EEU") represent a common market under the jurisdiction of the EMEA. However,
from a practical point of view, every country is different regarding developing
relations with the medical community, patient associations and obtaining
reimbursement for treatment from the equivalent of Social Security Agencies and
insurance carriers. This program will be integrated into our new commercial
asset, ALFERON N Injection(R), as well.

Our European operations have assisted the growth of a number of
patient/physician educational associations. The French Chronic Fatigue Syndrome
Association has grown from ten members in the year 2000 to 800 currently. Every
major country now has an active educational association with substantial numbers
of members who regularly meet and "network". These programs have been modeled on
the successful experience in the U.S. of conducting twice a year meetings on
ME/CFS with Health and Human Services, FDA, NIH and Centers for Disease Control.

We maintain contact with the EMEA, keeping the agency aware of our
activities, as well as the health ministries in numerous countries in the
European Union. In early 2001, our application for "orphan" drug status for the
use of Ampligen(R) in ME/CFS was rejected because the Board found that the
prevalence of ME/CFS was significantly above the five person per 10,000 limit
required to grant orphan drug status in the European Union. Although no
applications are on file currently with the EEU, we are exploring various ways
to accelerate the commercial availability of our products in the various nations
of the EEU, including potential appreciation of the "foreign import" rule for
accepting products already approved in the U.S.

Limited numbers of ME/CFS patients were treated during 2003 with
Ampligen(R) in the United Kingdom, Austria and Belgium under existing regulatory
procedures in these countries, which allow the therapeutic use of an
experimental drug under certain conditions. These procedures allowed us to
recover

the cost of Ampligen(R) used as well as to collect additional clinical data.
Corresponding procedures are being considered in several other countries at the
request of locally based physicians.

Our European operations are considering implementing clinical trials in
Europe for the use of Ampligen(R) in the treatment of HIV/AIDS on the basis of
the new U.S. Protocols involving the use of the drug either in combination with
"cocktail" therapies or as part of a strategic interruption of the "cocktail"
therapies. We presented results of one these programs (AMP 720) at the LAS
Conference on HIV Pathogenesis and Treatment in Paris, France, in July 2003.

The efforts of our European operation have started to produce results. In
March 2002, our European subsidiary Hemispherx Biopharma Europe, S.A.
("Hemispherx, S.A.") entered into a Sales and Distribution Agreement with
Laboratorios Del Dr. Esteve S.A. ("Esteve"). Pursuant to the terms of the
Agreement, Esteve was granted the exclusive right to market Ampligen(R) in
Spain, Portugal and Andorra ("Territory") for the treatment of ME/CFS. In
addition to other terms and other projected payments, Esteve paid an initial and
non-refundable fee of 625,000 Euros (approximately $563,000) to Hemispherx, S.A.
on April 24, 2002. Esteve is to pay a fee of 1,000,000 Euros after U.S. FDA
approval of Ampligen(R) for the treatment of ME/CFS and a fee of 1,000,000 Euros
upon Spain's approval of the final marketing authorization for using Ampligen(R)
for the treatment of ME/CFS. The agreement runs for the longer of ten years from
the date of first arms-length sale in the Territory, the expiration of the last
Hemispherx patent exploited by Esteve or the period of regulatory data
protection for Ampligen(R) in the applicable territory. Pursuant to the terms of
the agreement Esteve is to conduct clinical trials using Ampligen(R) to treat
patients with both HCV and HIV and is required to purchase certain minimum
annual amounts of Ampligen(R) following regulatory approval. The agreement is
terminable by either party if Ampligen(R) is withdrawn from the territory for a
specified period due to serious adverse health or safety reasons, bankruptcy,
insolvency or related issues of one of the parties; or material breach of the
agreement. Hemispherx may transform the agreement into a non-exclusive agreement
or terminate the agreement in the event that Esteve does not meet specified
percentages of its annual minimum purchase requirements under the agreement.
Esteve may terminate the agreement in the event that Hemispherx fails to supply
Ampligen(R) to the territory for a specified period of time or certain clinical
trials being conducted by Hemispherx are not successful.

We executed a Memorandum of Understanding (MOI) in January 2004 with
Fujisawa Deutschland GmbH, ("Fuji"), a major pharmaceutical corporation,
granting them an exclusive option for a limited number of months to enter a
Sales and Distribution Agreement with exclusive rights to market Ampligen(R) for
ME/CFS in Germany, Austria and Switzerland. The option period ends 12 weeks
after the later of Fuji's review of the full report on the results of our Amp
516 clinical trial and Fuji's meeting with three of the trial's principal
investigators. We received an initial fee of 400,000 Euros (approximately
$497,000 US). The MOI provides that if we have not provided Fuji with the full
report on the results of our AMP 516 Clinical Trial with Fuji by May 31, 2004
and Fuji did not wish to exercise its options, we would have to refund one half
of the 400,000 Euro fee to Fuji on May 31, 2004. Our initial report was
submitted to Fuji on May 28, 2004 and we now await their response. We expect
that Fuji will be requesting additional information as they review the initial
report. The MOI provides that if we have not provided Fuji the full report by
December 31, 2004 and Fuji does not wish to exercise its option we will be
required to refund the entire fee to Fuji. If Fuji exercises the option, Fuji
would be required to pay us an additional 1,600,000 Euros upon execution of the
Sales and Distribution agreement, purchase Ampligen(R) exclusively from us and
meet certain annual minimum purchase quotas. We would be required to file an
application with the EMEA for commercial sale of Ampligen(R) for ME/CFS on or
before December 31, 2005. Upon our filing of that application, we would be paid
by Fuji an additional 1,000,000 Euros and, upon approval by the EMEA, an
additional 2,000,000 Euros. If we failed to meet the December 31, 2005 filing
deadline, we would be required to return 40% of all payments that we had
received from Fuji. We would be required to sell Ampligen(R) to Fuji at a 20%
price discount until the aggregate amount of the discount reached $1,000,000
Euros (representing 50% of the initial 2,000,000 fee

paid to us on and prior to execution of the definitive agreement). The foregoing
is a summary of the memorandum of understanding. We cannot assure that we can
prepare and issue the AMP 516 report within the time frames noted or that Fuji
will exercise the option or that the proposed terms of the Sales and
Distribution Agreement will not change materially.

We continue negotiations with other prospective partners for the marketing
and distribution of Ampligen(R) in other European territories.

Manufacturing

Historically, we outsourced the manufacturing of Ampligen(R) to certain
contractor facilities in the United States and South Africa while maintaining
full quality control and supervision of the process. Nucleic Acid polymers
constitute the raw material used in the production of Ampligen(R). We acquire
our raw materials from Ribotech, Ltd. ("Ribotech") located in South Africa.
Ribotech, is jointly owned by us (24.9%) and Bioclones (Proprietary), Ltd.
(75.1%). Bioclones manages and operates Ribotech. There are a limited number of
manufacturers in the United States available to provide the polymers if Ribotech
is unable to supply our needs based on product specifications and pricing.
Sourcing our needs from U.S. suppliers could result in a cost increase for our
raw materials.

Until 1999, we distributed Ampligen(R) in the form of a freeze-dried
powder to be formulated by pharmacists at the site of use. We perfected a
production process to produce ready to use liquid Ampligen(R) in a dosage form,
which will mainly be used upon commercial approval of Ampligen(R). At the
present time, we have engaged the services of Schering-Plough Products to mass
produce ready-to-use Ampligen(R) doses. There are other pharmaceutical
processing companies that can supply our production needs.

Bioclones (PTY) Ltd. is headquartered in South Africa and is the majority
owner in Ribotech, Ltd. (we own 24.9%) which produces most of the polymers used
to date in manufacturing Ampligen(R). The licensing agreement with Bioclones
presently includes South Africa, South America, Ireland, Australia, New Zealand
and the United Kingdom. The agreement imposes certain clinical trial
requirements on Ribotech, as well as, certain GMP standards on their facilities.
We plan to consult and work with Bioclones in 2004 to assure GMP compliance of a
new manufacturing facility. Bioclones has conducted limited clinical studies in
patients with ME/CFS in Australia and South Africa.

We currently occupy and use the New Brunswick, New Jersey laboratory and
production facility that we acquired from ISI. This facility is approved by the
FDA for the manufacture of Alferon N Injection(R).

GMP's require that a product be consistently manufactured to an identical
potency (strength) and purity with each lot, and that the manufacturing facility
itself and all the equipment therein, be certified to operate within a strict
set of performance standards. Our facilities in New Jersey (Alferon) and
Maryland (Ampligen) meet these performance standards.

Marketing/Distribution

Our marketing strategy for Ampligen(R) reflects the differing health care
systems around the world, and the different marketing and distribution systems
that are used to supply pharmaceutical products to those systems. In the U.S.,
we expect that, subject to receipt of regulatory approval, Ampligen(R) will be
utilized in four medical arenas: physicians' offices, clinics, hospitals and the
home treatment setting. We currently plan to use a service provided in the home
infusion (non-hospital) segment of the U.S. market to execute direct marketing
activities, conduct physical distribution of the product and handle billing and
collections. Accordingly, we are developing marketing plans to facilitate the
product distribution and

medical support for indication, if and when they are approved, in each arena. We
believe that this approach will facilitate the generation of revenue without
incurring the substantial costs associated with a sales force. Furthermore,
management believes that the approach will enable us to retain many options for
future marketing strategies. In February 1998, we and Accredo Health Services
(formerly Gentiva Health Services) entered into a Distribution/Specialty
Agreement for the distribution of Ampligen(R) for the treatment of ME/CFS
patients under the U.S. treatment protocols.

In Europe, we plan to adopt a country-by-country and, in certain cases, an
indication-by-indication marketing strategy due to the heterogeneity regulation
and alternative distribution systems in these areas. We also plan to adopt an
indication-by-indication strategy in Japan. Subject to receipt of regulatory
approval, we plan to seek strategic partnering arrangements with pharmaceutical
companies to facilitate introductions in these areas. The relative prevalence of
people from target indications for Ampligen(R) varies significantly by
geographic region, and we intend to adjust our clinical and marketing planning
to reflect the specialty of each area. We have a marketing arrangement with
Bioclones pursuant to the Bioclones Agreement that covers South America, the
United Kingdom, Ireland, Africa, Australia, Tasmania, New Zealand, and certain
other countries and territories. In Spain, Portugal and Andorra we have entered
into a Sales Distribution Agreement with Esteve, and, in Germany, Austria and
Switzerland, we have entered into a memorandum of understanding with Fuji (see
"European Operations" above).

Our marketing and distribution plan for Alferon N Injection(R) is focused
on increasing the sales of Alferon N Injection(R) for the intralesional
treatment of refractory and recurring external genital warts in adults. We will
reach out to a targeted audience of physicians consisting of OB/GYNs,
Urologists, Proctologists and Dermatologists and simultaneously create product
awareness in the patient population through several media and health
organizations. Different regional meetings and seminars are scheduled during
which guest speakers will explain the therapeutic benefits and safety profile of
Alferon. Additional exposure will be created by exhibiting at several STD
related conferences, expanded web presence, mailings and publications. We also
have engaged a contract sales organization in order to build up a nationwide
network of dedicated representatives in the U.S. We obtained the foreign
marketing rights to Alferon N Injection(R) at the second asset closing in March
2004 and we expect to amend the current marketing/distribution agreements with
Biovail, Esteve, Bioclones and Fujisawa to include Alferon N Injection(R). For
more information about our arrangements with Accredo Health Services, Inc.,
Bioclones, Esteve and Biovails, see "Research And Development/Collaborative
Agreements" below.

In August 2003, we entered into a non-exclusive Sales and Marketing
agreement with Engitech, a pharmaceutical contract sales organization, to launch
Alferon N Injection(R) on a nationwide scale in the United States. The agreement
stipulates that Engitech will deploy a sales force of 100 sales representatives
within one year in the U.S. domestic market and further expand the sales team up
to 250 sales representatives in the second year and after that as many as it
takes to continually drive market share. Engitech will also develop and
implement a strategic and tactical marketing action plan as well as organize a
scientific and educational program towards a targeted audience of physicians and
consumers. Engitech has been in business since 1987. This privately held company
has several clients in the pharmaceutical industry.

Competition

Our potential competitors are among the largest pharmaceutical companies
in the world, are well known to the public and the medical community, and have
substantially greater financial resources, product development, and
manufacturing and marketing capabilities than we have.

These companies and their competing products may be more effective and
less costly than our products. In addition, conventional drug therapy, surgery
and other more familiar treatments will offer competition to our products.
Furthermore, our competitors have significantly greater experience than we

do in pre-clinical testing and human clinical trials of pharmaceutical products
and in obtaining FDA, EMEA Health Protection Branch ("HPB") and other regulatory
approvals of products. Accordingly, our competitors may succeed in obtaining
FDA, EMEA and HPB product approvals more rapidly than us. If any of our products
receive regulatory approvals and we commence commercial sales of our products,
we will also be competing with respect to manufacturing efficiency and marketing
capabilities, areas in which we have no experience. Our competitors may possess
or obtain patent protection or other intellectual property rights that prevent,
limit or otherwise adversely affect our ability to develop or exploit our
products.

The major competitors with drugs to treat HIV diseases include Gilead
Pharmaceutical, Pfizer, Bristol-Myers, Abbott Labs, Glaxo Smithkline, Merck and
Schering-Plough Corp. ("Schering"). ALFERON N Injection(R) currently competes
with a product produced by Schering for treating genital warts. 3M
Pharmaceutical also has received FDA approval for its immune response modifier
product for the treatment of genital and perianal warts.

Government Regulation

Regulation by governmental authorities in the U.S. and foreign countries
is and will be a significant factor in the manufacture and marketing of ALFERON
N products and our ongoing research and product development activities.
Ampligen(R) and the products developed from the ongoing research and product
development activities will require regulatory clearances prior to
commercialization. In particular, new human drug products for humans are subject
to rigorous preclinical and clinical testing as a condition for clearance by the
FDA and by similar authorities in foreign countries. The lengthy process of
seeking these approvals, and the ongoing process of compliance with applicable
statutes and regulations, has required, and will continue to require the
expenditure of substantial resources. Any failure by us or our collaborators or
licensees to obtain, or any delay in obtaining, regulatory approvals could
materially adversely affect the marketing of any products developed by us and
our ability to receive product or royalty revenue. We have received orphan drug
designation for certain therapeutic indications, which might, under certain
conditions, accelerate the process of drug commercialization. ALFERON N
Injection(R) is only approved for use in intralesional treatment of refractory
or recurring external genital warts in patients 18 years of age or older. Use of
Alferon N Injection(R) for other applications requires regulatory approval.

A "Fast-Track" designation by the FDA, while not affecting any clinical
development time per se, has the potential effect of reducing the regulatory
review time by fifty percent (50%) from the time that a commercial drug
application is actually submitted for final regulatory review. Regulatory
agencies may apply a "Fast Track" designation to a potential new drug to
accelerate the approval and commercialization process. Criteria for "Fast Track"
include: a) a devastating disease without adequate therapy and b) laboratory or
clinical evidence that the candidate drug may address the unmet medical need. As
of this date, we have not received a Fast-Track designation for any of our
potential therapeutic indications although we have received "Orphan Drug
Designation" for both ME/CFS and HIV/AIDS in the U.S. We will continue to
present data from time to time in support of obtaining accelerated review. We
have not yet submitted any New Drug Application (NDA) for Ampligen(R) or any
other drug to a North American regulatory authority. Assuming the results are
positive, we expect to finalize the data of our double-blind, placebo controlled
AMP516 ME/CFC Phase III clinical trial and submit an NDA by year end 2004. There
are no assurances that such designation will be granted, or if granted, there
are no assurances that Fast Track designation will materially increase the
prospect of a successful commercial application. In 2000 we submitted an
emergency treatment protocol for clinically-resistant HIV patients, which was
withdrawn by us during the statutory 30 day regulatory review period in favor of
a set of individual physician-generated applications. There are no assurances
that authorizations to commence such treatments will be granted by any
regulatory authority or that the resultant treatments, if any, will support drug
efficacy and safety. In 2001, we did

receive FDA authorization for two separate Phase IIb HIV treatment protocols in
which our drug is combined with certain presently available antiretroviral
agents. Interim results were presented in 2002 and 2003 at various international
scientific meetings.

We are subject to various federal, state and local laws, regulations and
recommendations relating to such matters as safe working conditions, laboratory
and manufacturing practices, the experimental use of animals and the use of and
disposal of hazardous or potentially hazardous substances, including radioactive
compounds and infectious disease agents, used in connection with our research
work. We believe that our Rockville, Maryland manufacturing and quality
assurance/control facility is in substantial compliance with all material
regulations applicable to these activities as advanced by the European Union
Inspections team which conducted detailed audits in year 2000. The laboratory
and production facility in New Brunswick, New Jersey, which we acquired from
ISI, is approved for the manufacture of Alferon N Injection(R) and we believe it
is in substantial compliance with all material regulations. However, we cannot
give assurances that facilities owned and operated by third parties, including
those operated by Bioclones Ltd. and Ribotech, Ltd., that are utilized in the
manufacture of our products, are in substantial compliance, or if presently in
substantial compliance, will remain so. These third party facilities include
manufacturing operations in San Juan, Puerto Rico; Cape Town, South Africa;
Columbia, Maryland, and Melbourne, Australia.

Research And Development/Collaborative Agreements

In 1994, we entered into a licensing agreement with Bioclones
(Proprietory) limited ("Bioclones") for manufacturing and international market
development in Africa, Australia, New Zealand, Tasmania, the United Kingdom,
Ireland and certain countries in South Africa, of Ampligen(R) and Oragen(TM).
Bioclones is to pursue regulatory approval in the areas of its franchise and is
required to conduct Hepatitis clinical trials, based on international GMP and
GLP standards. Thus far, these Hepatitis studies have not yet commenced to a
meaningful level. Bioclones has been given the first right of refusal, subject
to pricing, to manufacture that amount of polymers utilized in the production of
Ampligen(R) sufficient to satisfy at least one-third of the worldwide sales
requirement of Ampligen(R) and other nucleic acid-derived drugs. Pursuant to
this arrangement, we received: 1) access to worldwide markets, 2)
commercial-scale manufacturing resources, 3) a $3 million cash payment in 1995
from Bioclones, 4) a 24.9% ownership in Ribotech, Ltd., a company set up by
Bioclones to develop and manufacture RNA drug compounds, and 5) royalties of 8%
on Bioclones nucleic acid-derived drug sales in the licensed territories. The
agreement with Bioclones terminates three years after the expiration of the last
of the patents supporting the license granted to Bioclones, subject to earlier
termination by the parties for uncured defaults under the agreement, or
bankruptcy or insolvency of either party. The last patent expires on December
22, 2012.

In August, 1998, we entered into a strategic alliance with Accredo to
develop certain marketing and distribution capacities for Ampligen(R) in the
United States. Accredo is one of the nation's largest home health care companies
with over 400 offices and sixty thousand caregivers nationwide. Pursuant to the
agreement, Accredo assumed certain responsibilities for distribution of
Ampligen(R) for which they received a fee. Through this arrangement, Hemispherx
may mitigate the necessity of incurring certain up-front costs. Accredo has also
worked with us in connection with the Amp 511 ME/CFS cost recovery treatment
program, Amp 516 ME/CFS Phase III clinical trial and the Amp 719 (combining
Ampligen with other antiviral drugs in HIV-salvage therapy and Amp 720 HIV Phase
IIb clinical trials now under way). There can be no assurances that this
alliance will develop a significant commercial position in any of its targeted
chronic disease markets. The agreement had an initial one year term from
February 9, 1998 with successive additional one year terms unless either party
notifies the other not less than 180 days prior to the anniversary date of its
intent to terminate the agreement. Also, the agreement may be terminated for
uncured defaults, or bankruptcy, or insolvency of either party and will
automatically terminate upon our receiving an NDA for Ampligen(R) from the FDA,
at which time, a new agreement will need to be negotiated with Accredo or

another major drug distributor. There were no initial fees and subsequent fees
paid under this agreement total approximately $15,000 for services performed in
2003.

We have acquired a series of patents on Oragen(TM), potentially an oral
broad spectrum antiviral, immunological enhancer through a licensing agreement
with Temple University. We were granted an exclusive worldwide license from
Temple for the Oragen(TM) products. Pursuant to the arrangement, we are
obligated to pay royalties of 2% to 4% on sales of Oragen(TM), depending on how
much technological assistance is required of Temple. There were no initial fees
and we currently pay minimum royalties of $30,000 per year to Temple. These
compounds have been evaluated in various academic laboratories for application
to chronic viral and immunological disorders. This agreement is to remain in
effect until the date that the last licensed patent expires unless terminated
sooner by mutual consent or default due to royalties not being paid. The last
Oragen(TM) patent expires on August 22, 2015.

In December, 1999, we entered into an agreement with Biovail Corporation
International ("Biovail"). Biovail is an international full service
pharmaceutical company engaged in the formulation, clinical testing,
registration and manufacture of drug products utilizing advanced drug delivery
systems. Biovail is headquartered in Toronto, Canada. The agreement grants
Biovail the exclusive distributorship of our product in the Canadian territories
subject to certain terms and conditions. In return, Biovail agrees to conduct
certain pre-marketing clinical studies and market development programs,
including without limitation, expansion of the Emergency Drug Release Program in
Canada with respect to our products. In addition, Biovail agrees to work with us
in preparing and filing a New Drug Submission with Canadian Regulatory
Authorities at the appropriate time. Biovail invested $2,250,000 in Hemispherx
equity at prices above the then current market price and agreed to make an
additional investment of $1,750,000 based on receiving approval to market
Ampligen(R) in Canada from the appropriate regulatory authorities in Canada. The
agreement requires Biovail to buy exclusively from us and penetrate certain
market segments at specific rates in order to maintain market exclusivity. The
agreement terminates on December 15, 2009, subject to successive two-year
extensions by the parties and subject to earlier termination by the parties for
uncured defaults under the agreement, bankruptcy or insolvency of either party,
or withdrawal of our product from Canada for a period of more than ninety days
for serious adverse health or safety reasons.

In 1998, we invested $1,074,000 for a 3.3% equity interest in R.E.D.
Laboratory ("R.E.D."). R.E.D. is a privately held biotechnology company for the
development of diagnostic markers for Chronic Fatigue Syndrome and other chronic
immune diseases. Primarily, R.E.D.'s research and development is based on
certain technology owned by Temple University and licensed to R.E.D. We have an
informal collaboration arrangement with R.E.D. to assist in this development. We
have supplied scientific data with respect to ME/CFS and engaged R.E.D. to
conduct certain blood tests for our ME/CFS clinical trials. We have no other
obligations to R.E.D. R.E.D. is headquartered in Belgium. The investment was
recorded at cost in 1998. During the three months ended June 2002 and December
2002 respectively, we recorded a non-cash charge of $678,000 and $396,000,
respectively, to operations with respect to our investment in R.E.D. These
charges were the result of our determination that R.E.D.'s business and
financial position had deteriorated to the point that our investment had been
permanently impaired.

In May 2000, we acquired an interest in Chronix Biomedical Corp.
("CHRONIX"). Chronix focuses upon the development of diagnostics for chronic
diseases. We issued 100,000 shares of common stock to Chronix toward a total
equity investment of $700,000. Pursuant to a strategic alliance agreement, we
provided Chronix with $250,000 to conduct research in an effort to develop
intellectual property on potential new products for diagnosing and treating
various chronic illnesses such as ME/CFS. The strategic alliance agreement
provides us certain royalty rights with respect to certain diagnostic technology
developed from this research and a right of first refusal to license certain
therapeutic technology developed from this research. The strategic alliance
agreement provides us with a royalty payment of 10% of all net sales of
diagnostic technology developed by Chronix for diagnosing Chronic Fatigue
Syndrome, Gulf War

Syndrome and Human Herpes Virus-6 associated diseases. The royalty continues for
the longer of 12 years from September 15, 2000 or the life of any patent(s)
issued with regard to the diagnostic technology. The strategic alliance
agreement also provides us with the right of first refusal to acquire an
exclusive worldwide license for any and all therapeutic technology developed by
Chronix on or before September 14, 2012 for treating Chronic Fatigue Syndrome,
Gulf War Syndrome and Human Herpes Virus-6 associated diseases. During the
quarter ended December 31, 2002, we recorded a noncash charge of $292,000 with
respect to our investment in Chronix. This impairment reduces our carrying value
to reflect a permanent decline in Chronix's market value based on its then
proposed equity offerings.

In April, 1999 we acquired a 30% equity position in the California
Institute of Molecular Medicine ("CIMM") for $750,000. CIMM'S research is
focused on developing therapies for use in treating patients affected by
Hepatitis C ("HCV"). We use the equity method of accounting with respect to this
investment. During the fourth quarter of 2001 we recorded a non-cash charge of
$485,000 with respect to our investment in CIMM. This was a result of our
determination that CIMM's operations have not yet evolved to the point where the
full carrying value of our investment could be supported based on that company's
financial position and operating results. During 2002, CIMM continued to suffer
significant losses resulting in a deterioration of its financial condition. The
$485,000 written off during 2001 represented the unamortized balance of goodwill
included as part of our investment. Additionally, during 2001 we reduced our
investment in CIMM based on our percentage interest in CIMM's continued
operating losses. Our remaining investment at December 31, 2001 in CIMM,
representing our 30% interest in CIMM's equity at such date, was not deemed to
be permanently impaired, but was completely written off during 2002. Such amount
was not material. These charges are reflected in the Consolidated Statements of
Operations under the caption "Equity loss in unconsolidated affiliate". We still
believe CIMM will succeed in their efforts to advance therapeutic treatment of
HCV. We believe that CIMM's Hepatitis C diagnostic technology has great promise
and will fill a long-standing global void in the collective abilities to
diagnose and treat Hepatitis C infection at an early stage of the disorder.

In March 2002, our European subsidiary Hemispherx S.A. entered into a
Sales and Distribution agreement with Esteve. Pursuant to the terms of the
Agreement, Esteve was granted the exclusive right to market Ampligen(R) in
Spain, Portugal and Andorra for the treatment of ME/CFS. In addition to other
terms and other projected payments, Esteve agreed to conduct certain clinical
trials using Ampligen(R) in the patient population coinfected with HCV and HIV
viruses. The Agreement runs for the longer of ten years from the date of first
arms-length sale in th e Territory, the expiration of the last Hemispherx patent
exploited by Esteve or the period of regulatory data protection for Ampligen(R)
in the applicable territory. Pursuant to the terms of the agreement Esteve is to
conduct clinical trials using Ampligen(R) to treat patients with both HCV and
HIV and is required to purchase certain minimum annual amounts of Ampligen(R)
following regulatory approval. We expect Esteve to start HIV/HCV clinical trials
in Spain in late 2004. The agreement is terminable by either party if
Ampligen(R) is withdrawn from the territory for a specified period due to
serious adverse health or safety reasons; bankruptcy, insolvency or related
issues of one of the parties; or material breach of the agreement. Hemispherx
may transform the agreement into a non-exclusive agreement or terminate the
agreement in the event that Esteve does not meet specified percentages of its
annual minimum purchase requirements under the agreement. Esteve may terminate
the agreement in the event that Hemispherx fails to supply Ampligen(R) to the
territory for a specified period of time or certain clinical trials being
conducted by Hemispherx are not successful. The last patent with respect to this
agreement expires on June 5, 2012.

The development of our nucleic acid based products requires the commitment
of substantial resources to conduct the time-consuming research, preclinical
development, and clinical trials that are necessary to bring pharmaceutical
products to market and to establish commercial-scale production and marketing
capabilities. During our last three fiscal years, we have directly spent
approximately $13,876,000 in research and development, of which approximately
$3,150,000 was expended in the year

ended December 31, 2003. These direct costs do not include the overhead and
administrative costs necessary to support the research and development effort.
Our European subsidiary has an exclusive license on all the technology and
support from us concerning Ampligen(R) for the use of ME/CFS and other
applications for all countries of the European Union (excluding the UK where
Bioclones has a marketing license) and Norway, Switzerland, Hungary, Poland, the
Balkans, Russia, Ukraine, Romania, Bulgaria, Slovakia, Turkey, Iceland and
Liechtenstein. As mentioned above, Hemispherx S.A. entered into a Sales and
Distribution Agreement with Esteve. Pursuant to the terms of this agreement,
Esteve has been granted the exclusive right in Spain, Portugal and Andorra to
market Ampligen(R) for the treatment of ME/CFS. See "European Operations", above
for more detailed information.

Human Resources

As of July 26, 2004, we had 42 personnel consisting of 31 full time
employees, 11 regulatory/research medical personnel on a part-time basis. Part
time personnel are paid on a per diem or monthly basis. 34 personnel are engaged
in our research, development, clinical, and manufacturing effort. Eight of our
personnel perform regulatory, general administration, data processing, including
bio-statistics, financial and investor relations functions.

We believe that the combination of Hemispherx and ISI Scientific employees
has 1) significantly strengthened our overall organization, 2) added expertise
to monitor and complete our ongoing clinical trials and 3) improved our data
management and system administration.

While we have been successful in attracting skilled and experienced
scientific personnel, there can be no assurance that we will be able to attract
or retain the necessary qualified employees and/or consultants in the future.

Scientific Advisory Board

We reestablished a Scientific Advisory Board in October 2003 consisting of
individuals who we believe have particular scientific and medical expertise in
Virology, Cancer, Immunology, Biochemistry and related fields. These individuals
will advise us about current and long term scientific planning including
research and development. The Scientific Advisory Board will hold periodic
meetings as needed by the clinical studies in progress by us. In addition,
individual Scientific Advisory Board Members sometimes will consult with, and
meet informally with our employees. All members of the Scientific Advisory are
employed by others and may have commitments to and/or consulting agreements with
other entities, including our potential competitors. Members of the Scientific
Advisory Board are compensated at the rate of $1,000 per meeting attended or per
day devoted to our affairs.

In January 2004 a meeting was held in Philadelphia where certain
Scientific Advisory Board members from Cornell University, University of
Virginia and the Pasteur Institute gathered to review and make suggestions
pertaining to our clinical and research programs in 2004. A member of our Board
of Directors, Dr. William Mitchell of Vanderbilt University, also attended the
meeting.

Facilities

We currently lease and occupy a total of approximately 18,850 square feet
of laboratory and office space in two states and some office space in Paris,
France. Our headquarters is located in Philadelphia, Pennsylvania consisting of
a suite of offices of approximately 15,000 square feet. We also lease space of
approximately 3,850 square feet in Rockville, Maryland for research and
development, our pharmacy, packaging, quality assurance and quality control
laboratories, as well as additional office space. Approximately 2,000 square
feet are dedicated to the pharmacy, packaging, quality assurance and control

functions. We believe that our Rockville facilities will meet our requirements,
for planned clinical trials and treatment protocols through 2004 and possibly
longer after which time we may need to increase our Rockville facilities either
through third parties or by building or acquiring commercial-scale facilities.

We currently occupy and use the New Brunswick, New Jersey laboratory and
production facility that we acquired from ISI. These facilities consist of two
buildings located on 2.8 acres. One building is a two story facility consisting
of a total of 31,300 square feet. This facility has offices, laboratories and
production space and shipping and receiving areas. Building Two has 11,670
square feet consisting of offices, laboratories and warehouse space. The
property has parking space for approximately 100 vehicles.

We also have a 24.9% interest in Ribotech, Ltd. located in South Africa.
Ribotech was established by Bioclones to develop and operate a manufacturing
facility. Manufacturing at the pilot facility commenced in 1996. We expect that
Ribotech will start construction on a new commercial production facility in the
future, although no assurance can be given that this will occur. We have no
obligation to fund this construction. Our interest in Ribotech, is a result of
the marketing and manufacturing agreement executed with Bioclones in 1994.

Legal Proceedings

On September 30, 1998, we filed a multi-count complaint against Manuel P.
Asensio, Asensio & Company, Inc. ("Asensio"). The action included claims of
defamation, disparagement, tortuous interference with existing and prospective
business relations and conspiracy, arising out of Asensio's false and defamatory
statements. The complaint further alleged that Asensio defamed and disparaged us
in furtherance of a manipulative, deceptive and unlawful short-selling scheme in
August and September, 1998. In 1999, Asensio filed an answer and counterclaim
alleging that in response to Asensio's strong sell recommendation and other
press releases, we made defamatory statements about Asensio. We denied the
material allegations of the counterclaim. In July 2000, following dismissal in
federal court for lack of subject matter jurisdiction, we transferred the action
to the Pennsylvania State Court. In March 2001, the defendants responded to the
complaints as amended and a trial commenced on January 30, 2002. A jury verdict
disallowed the claims against the defendants for defamation and disparagement
and the court granted us a directed verdict on the counterclaim. On July 2, 2002
the Court entered an order granting us a new trial against Asensio for
defamation and disparagement. Thereafter, Asensio appealed the granting of a new
trial. This appeal is now pending in the Superior Court of Pennsylvania.

In June 2002, a former ME/CFS clinical trial patient and her husband filed
a claim in the Superior Court of New Jersey, Middlesex County, against us, one
of our clinical trial investigators and others alleging that she was harmed in
the ME/CFS clinical trial as a result of negligence and breach of warranties. On
June 25, 2004 all claims against us were dismissed with prejudice.

In June 2002, a former ME/CFS clinical trial patient in Belgium filed a
claim in Belgium, against Hemispherx Biopharma Europe, NV/SA, our Belgian
subsidiary, and one of our clinical trial investigators alleging that she was
harmed in the Belgium ME/CFS clinical trial as a result of negligence and breach
of warranties. We believe the claim is without merit and we are defending the
claim against us through our product liability insurance carrier.

In June 2004, One Penn Associates, L.P. filed a claim in the Philadelphia
Municipal Court for the Commonwealth of Pennsylvania seeking $44,242.68 for
alleged unpaid rent and charges related to our offices in One Penn Center in
Philadelphia. We believe this claim is without merit and are defending same
pursuant to the terms of our lease as we were damaged and deprived of the use of
a portion of the offices due to water from the landlord's faulty sprinkler
system.

MANAGEMENT

The following sets forth biographical information about each of our
directors and executive officers as of the date of this prospectus:

Name Age Position

William A. Carter, M.D. 66 Chairman, Chief Executive Officer,
and President
Robert E. Peterson 67 Chief Financial Officer

David R. Strayer, M.D. 58 Medical Director, Regulatory Affairs

Mei-June Liao, Ph.D. 53 Vice President of Regulatory Affairs,
Quality Control and Research and
Development

Robert Hansen 60 Vice President of Manufacturing

Carol A. Smith, Ph.D. 54 Director of Process Development

Richard C. Piani 77 Director

William M. Mitchell, M.D. 69 Director

Ransom W. Etheridge 65 Director, Secretary and General
Counsel

Iraj Eqbhal Kiani, Ph.D. 58 Director

Antoni Esteve, Ph.D. 45 Director

Each director has been elected to serve until the next annual meeting of
stockholders, or until his earlier resignation, removal from office, death or
incapacity. Each executive officer serves at the discretion of the Board of
Directors, subject to rights, if any, under contracts of employment.

WILLIAM A. CARTER, M.D., the co-inventor of Ampligen, joined us in 1978,
and has served as: (a) our Chief Scientific Officer since May 1989; (b) the
Chairman of our Board of Directors since January 1992; (c) our Chief Executive
Officer since July 1993; (d) our President since April, 1995; and (e) a director
since 1987. From 1987 to 1988, Dr. Carter served as our Chairman. Dr. Carter was
a leading innovator in the development of human interferon for a variety of
treatment indications including various viral diseases and cancer. Dr. Carter
received the first FDA approval to initiate clinical trials on a beta interferon
product manufactured in the U.S. under his supervision. From 1985 to October
1988, Dr. Carter served as our Chief Executive Officer and Chief Scientist. He
received his M.D. degree from Duke University and underwent his post-doctoral
training at the National Institutes of Health and Johns Hopkins University. Dr.
Carter also served as Professor of Neoplastic Diseases at Hahnemann Medical
University, a position he held from 1980 to 1998. Dr. Carter served as Director
of Clinical Research for Hahnemann Medical University's Institute for Cancer and
Blood Diseases, and as a professor at Johns Hopkins School of Medicine and the
State University of New York at Buffalo. Dr. Carter is a Board certified
physician and author of more than 200 scientific articles, including the editing
of various textbooks on anti-viral and immune therapy.

ROBERT E. PETERSON has served as our Chief Financial Officer since April,
1993 and served as an Independent Financial Advisor to us from 1989 to April,
1993. Also, Mr. Peterson has served as Vice

President of the Omni Group, Inc., a business consulting group based in Tulsa,
Oklahoma since 1985. From 1971 to 1984, Mr. Peterson worked for PepsiCo, Inc.
and served in various financial management positions including Vice President
and Chief Financial Officer of PepsiCo Foods International and PepsiCo
Transportation, Inc. Mr. Peterson is a graduate of Eastern New Mexico
University.

DAVID R. STRAYER, M.D. who served as Professor of Medicine at the Medical
College of Pennsylvania and Hahnemann University, has acted as our Medical
Director since 1986. He is Board Certified in Medical Oncology and Internal
Medicine with research interests in the fields of cancer and immune system
disorders. Dr. Strayer has served as principal investigator in studies funded by
the Leukemia Society of America, the American Cancer Society, and the National
Institutes of Health. Dr. Strayer attended the School of Medicine at the
University of California at Los Angeles where he received his M.D. in 1972.

MEI-JUNE LIAO, Ph.D. has served as Vice President of Regulatory Affairs,
Quality and Research & Development since October 2003 and as Vice President of
Research & Development since March 2003 with responsibilities for the
regulatory, quality control and product development of Alferon(R). Before the
acquisition of certain assets of ISI, Dr. Liao was Vice President of Research
and Development from 1995 to 2003 and held senior positions in the Research and
Development Department of ISI from 1983 to 1994. Dr. Liao received her Ph.D.
from Yale University in 1980 and completed a three year postdoctoral appointment
at the Massachusetts Institute of Technology under the direction of Nobel
Laureate in Medicine, Professor H. Gobind Khorana. Dr. Liao has authored many
scientific publications and invention disclosures.

ROBERT HANSEN joined us as Vice President of Manufacturing in 2003 upon
the acquisition of certain assets of ISI. He is responsible for the manufacture
of Alferon N(R). Mr. Hansen had been Vice President of Manufacturing for ISI
since 1997, and served in various capacities in manufacturing since joining ISI
in 1987. He has a B.S. degree in Chemical Engineering from Columbia University
in 1966.

CAROL A. SMITH, Ph.D. is Director of Process Development and has served as
our Director of Manufacturing and Process Development since April 1995, as
Director of Operations since 1993 and as the Manager of Quality Control from
1991 to 1993, with responsibility for the manufacture, control and chemistry of
Ampligen(R). Dr. Smith was Scientist/Quality Assurance Officer for Virotech
International, Inc. from 1989 to 1991 and Director of the Reverse Transcriptase
and Interferon Laboratories and a Clinical Monitor for Life Sciences, Inc. from
1983 to 1989. She received her Ph.D. from the University of South Florida
College of Medicine in 1980 and was an NIH post-doctoral fellow at the
Pennsylvania State University College of Medicine.

RICHARD C. PIANI has been a director since 1995. Mr. Piani has been
employed as a principal delegate for Industry to the City of Science and
Industry, Paris, France, a billion dollar scientific and educational complex.
Mr. Piani provided consulting to us in 1993, with respect to general business
strategies for our European operations and markets. Mr. Piani served as Chairman
of Industrielle du Batiment-Morin, a building materials corporation, from 1986
to 1993. Previously Mr. Piani was a Professor of International Strategy at Paris
Dauphine University from 1984 to 1993. From 1979 to 1985, Mr. Piani served as
Group Director in Charge of International and Commercial Affairs for
Rhone-Poulenc and from 1973 to 1979 he was Chairman and Chief Executive Officer
of Societe "La Cellophane", the French company which invented cellophane and
several other worldwide products. Mr. Piani has a Law degree from Faculte de
Droit, Paris Sorbonne and a Business Administration degree from Ecole des Hautes
Etudes Commerciales, Paris.

RANSOM W. ETHERIDGE has been a director since October 1997, and presently
serves as our secretary and general counsel. Mr. Etheridge first became
associated with us in 1980 when he provided consulting services to us and
participated in negotiations with respect to our initial private placement
through Oppenheimer & Co., Inc. Mr. Etheridge has been practicing law since
1967, specializing in transactional law. Mr. Etheridge is a member of the
Virginia State Bar, a Judicial Remedies Award Scholar, and has

served as President of the Tidewater Arthritis Foundation. He is a graduate of
Duke University, and received his Law degree from the University of Richmond
School of Law.

WILLIAM M. MITCHELL, M.D., Ph.D. has been a director since July 1998. Dr.
Mitchell is a Professor of Pathology at Vanderbilt University School of
Medicine. Dr. Mitchell earned a M.D. from Vanderbilt and a Ph.D. from Johns
Hopkins University, where he served as an Intern in Internal Medicine, followed
by a Fellowship at its School of Medicine. Dr. Mitchell has published over 200
papers, reviews and abstracts dealing with viruses and anti-viral drugs. Dr.
Mitchell has worked for and with many professional societies, including the
International Society for Interferon Research, and committees, among them the
National Institutes of Health, AIDS and Related Research Review Group. Dr.
Mitchell previously served as one of our directors from 1987 to 1989.

IRAJ EQHBAL KIANI, M.B.A., Ph.D., was appointed to the Board of Directors
on May 1, 2002. Dr. Kiani is a citizen of England and resides in Newport,
California. Dr. Kiani served in various local government position including the
Governor of Yasoi, Capital of Boyerahmand, Iran. In 1980, Dr. Kiani moved to
England, where he established and managed several trading companies over a
period of some 20 years. Dr. Kiani is a planning and logistic specialist who is
now applying his knowledge and experience to build a worldwide immunology
network, which will use our proprietary technology. Dr. Kiani received his Ph.D.
degree from the University of Warwick in England.

ANTONI ESTEVE, Ph.D. became a member of our Board of Directors in November
2003. Dr. Esteve is a Member of the Executive Committee and Director of
Scientific and Commercial Operations for Laboratorios del Dr. Esteve S.A. He has
been engaged at Laboratorios del Dr. Esteve since 1984. Since 1986 he is
Professor at the Autonomous University of Barcelona, School of Pharmacy. In 2001
he was elected as member of the Advisory Board for R&D of the Spanish Ministry
of Science and Technology. Since 2002 he also has been President of Centre de
Transfussio i Banc de Teixits (the Transfusion and Tissues Bank Center of
Catalonia). Dr. Esteve received a degree in Pharmacy from the University of
Barcelona, Faculty of Pharmacy, in 1981 and a Ph.D. in Pharmaceutical Science in
1990.

Committees of the Board

The board of directors maintains the following committees:

Audit Committee. Our Audit Committee of the Board of Directors consists of
Richard Piani, Committee Chairman, William Mitchell, M.D. and Iraj-Eqhbal Kiani.
Mr. Piani, Dr. Mitchell and Iraj-Eqhbal Kiani are Independent Directors. We do
not have a financial expert as defined in Securities and Exchange Commission
rules on the committee in the true sense of the description. However, Mr. Piani
is a Businessman and has 40 years of experience of working with budgets,
analyzing financials and dealing with financial institutions. We believe Mr.
Piani, Dr. Mitchell and Iraj-Eqhbal Kiani to be independent of management and
free of any relationship that would interfere with their exercise of independent
judgment as members of this committee. Our audit committee is responsible for
annually recommending independent accountants, preparing the reports or
statements as may be required by AMEX or the securities laws, and reviewing: (i)
the adequacy of our system of internal accounting controls; (ii) our audited
financial statements and reports and discussing the statements and reports with
management, including any significant adjustments, management judgments and
estimates, new accounting policies and disagreements with management; and (iii)
disclosures by independent accountants concerning relationships with our company
and the performance of our independent accountants

Executive Committee. The Executive Committee is composed of William A.
Carter, Chief Executive Officer and President, Ransom W. Etheridge, Secretary
and General Counsel, and Iraj-Eqhbal

Kiani. The Executive Committee makes recommendations to management regarding
general business matters of Hemispherx.

Compensation Committee. The Compensation Committee is composed of William
Mitchell, director, and Richard C. Piani, director. The Compensation Committee
makes recommendations concerning salaries and compensation for employees of and
consultants to Hemispherx.

Nominating Committee. The nominating committee is composed of William
Mitchell, Iraj Eqhbal Kiani and Richard Piani, all independent directors, and is
responsible for recommending to the Board the slate of nominees to be put forth
for election by the stockholders at our annual meeting. This committee also
reviews proposals for nominations from stockholders that are submitted in
accordance with the procedures published in our proxy statement.

Compensation of Directors

Board member compensation consists of an annual retainer of $100,000 to be
paid 50% in cash and 50% in our common stock. In addition, prior to September
2003, two independent directors received an aggregate of $55,750 in 2003 for
special project work performed on our behalf. Pursuant to the American Stock
Exchange definition of Independence set forth in Section 121A of the AMEX
Company Guide the Board of Directors adopted a policy to cease all Independent
Director special project work and related compensation. Historically, all
directors have been granted options to purchase common stock under our 1990
Stock Option Plan and/or Warrants to purchase common stock. We believe such
compensation and payments are necessary in order for us to attract and retain
qualified outside directors.

EXECUTIVE COMPENSATION

The summary compensation table below sets forth the aggregate compensation
paid or accrued by us for the fiscal years ended December 31, 2003, 2002 and
2001 to (i) our Chief Executive Officer and (ii) our four most highly paid
executive officers other than the CEO who were serving as executive officers at
the end of the last completed fiscal year and whose total annual salary and
bonus exceeded $100,000 (collectively, the "Named Executives").

EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE

Restricted Warrants & Options All Other
Name and Principal Position Year Salary ($) Stock Awards Awards ompensation (1)
-----------------------------------------------------------------------------------------------------------------------

William A. Carter 2003 (4)$582,461 -- (5)1,450,000 $37,175
Chairman of 2002 (4) 565,514 -- (8)1,000,000 25,747
the Board and CEO 2001 (4) 551,560 -- (2) 386,650 22,917
--

Robert E. Peterson 2003 (9)$230,450 -- -- --
Chief Financial 2002 151,055 -- (8) 200,000 --
Officer 2001 146,880 -- (3) 40,000 --

David R. Strayer, M.D. 2003 (6)$190,096 -- -- --
Medical Director 2002 (6)178,594 -- (8) 50,000 --
2001 (6)174,591 -- (7) 10,000 --

Carol A. Smith, Ph.D. 2003 $140,576 -- -- --
Director of 2002 128,346 -- (8) 20,000 --
Manufacturing 2001 124,800 -- (7) 10,000 --

Robert Hansen, V.P. of 2003 (10)$104,500 -- -- --
Manufacturing 2002 -- -- -- --
2001 -- -- -- --

----------
(1) Consists of insurance premiums paid by us with respect to term life and
disability insurance for the benefit of the named executive officer.

(2) Consists of 188,325 warrants to purchase common stock at $6.00 per
share and 188,325 warrants to purchase common stock at $9.00 per share.
Also includes a stock option grant of 10,000 shares exercisable at
$4.03 per share.

(3) Consist of a stock option grant of 10,000 shares exercisable at $4.03
per share and 30,000 warrants to purchase common stock at $5.00 per
share.

(4) Includes bonuses of $94,952, $96,684 and $99,481 in 2001, 2002 and
2003, respectively. Also includes funds previously paid to Dr. Carter
by Hahnemann Medical University where he served as a professor until
1998. This compensation was continued by us and totaled $79,826 in
2001, $82,095 in 2002 and $84,776 in 2003.

(5) Represents warrants to purchase common stock exercisable at $2.20 per
share.

(6) Includes $98,926 paid by Hahnemann Medical University where Dr. Strayer
served as a professor until 1998. This compensation was continued by us
in 2001, 2002 and 2003.

(7) Consist of stock option grant of 10,000 shares exercisable at $4.03 per
share.

(8) Represents number of warrants to purchase shares of common stock at $2
per share.

(9) 2003 includes a bonus of $74,464 paid in 2004.

(10) Compensation since March 2003. Employed by ISI prior to that.

The following table sets forth certain information regarding stock
warrants granted during 2003 to the executive officers named in the Summary
Compensation Table.

==========================================================================================================================
Individual Grants
==========================================================================================================================
Percentage Of
Number Of Total Warrants Potential Realizable Value At
Securities Granted To Assumed Rates Of Stock Price
Underlying Employees In Exercise Appreciation For Warrants Term
Warrants Fiscal Year Price Per Expiration ------------------------------
Name Granted (1) 2003(2) Share (3) Date 5% (4) 10%(4)
--------------------------------------------------------------------------------------------------------------------------

Carter, W.A. 1,450,000 100% $2.20 9/8/08 $4,071,338 $5,137,527
==========================================================================================================================

(1) These warrants became exercisable on March 17, 2004 when the second ISI
asset acquisition was completed.

(2) Total warrants issued to employees in 2003 were 1,450,000.

(3) The exercise price is equal to the closing price of our common stock at
the date of issuance.

(4) Potential realizable value is based on an assumption that the market price
of the common stock appreciates at the stated rates compounded annually,
from the date of grant until the end of the respective option term. These
values are calculated based on requirements promulgated by the Securities
and Exchange Commission and do not reflect our estimate of future stock
price appreciation.

The following table sets forth certain information regarding the stock
options held as of December 31, 2003 by the individuals named in the above
Summary Compensation Table.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUE

Securities Underlying Unexercised Value of Unexercised
Shares Warrants/Options at Fiscal Year In-the-Money-Options At
Name Exercise (#) Realized ($) End Numbers Fiscal Year End (1) Dollars
Acquired on Value Exercisable Unexercisable Exercisable Unexercisable
---------------------------------------------------------------------------------------------------------------------------------

William Carter -- -- 3,805,378(2) 1,950,000(3) $367,150 $217,000
Robert Peterson -- -- 403,750(4) 0 52,000 0
David Strayer -- -- 130,000(5) 0 13,000 0
Carol Smith -- -- 41,791(6) 0 5,200 0

----------

(1) Computation based on $2.26, the December 31, 2003 closing bid price for
the common stock on the American Stock Exchange.

(2) Consist of (i) 500,000 warrants exercisable at $2.00 per share expiring
on August 13, 2007 (ii) 188,325 warrants exercisable at $6.00 per share
expiring on February 22, 2006 (iii) 188,325 warrants exercisable at
$9.00 per share expiring on February 22, 2006 (iv) 100,000 warrants
exercisable at $6.25 per share expiring on April 8, 2004 (v) 25,000
warrants exercisable at $6.50 per share expiring on September 17, 2004
(vi) 25,000 warrants exercisable at $8.00 per share expiring on
September 17, 2004 (vii) 10,000 stock option exercisable at $4.03 per
share expiring on January 3, 2011 and (viii) 73,728 stock options
exercisable at $2.71 per share until exercised. Also include 2,695,000
warrants and options held in the name of Carter Investments, L.C. of
which W.A. Carter in the principal beneficiary. These securities
consist of (i) 340,000 warrants exercisable at $4.00 per share expiring
on January 1, 2008,(ii) 170,000 warrants exercisable at $5.00 per share
expiring on January 1, 2005,(iii) 300,000 warrants exercisable at $6.00
per share expiring on January 1, 2005 (iv) 20,000 warrants exercisable
at $4.00 per share expiring on 2008,(v) 465,000 warrants exercisable at
$1.75 expiring on June 3, 2005, and 1,400,000 warrants exercisable at
$3.50 per share expiring on October 16, 2004.

(3) Consists of (i) 500,000 warrants exercisable at $2.00 per share
expiring on August 13, 2007 and (ii) 1,450,000 warrants exercisable at
$2.20 per share expiring on September 8, 2008.

(4) Consists of (i) 10,000 stock options exercisable at $4.03 per share
expiring on January 3, 2011 (ii) 13,750 stock options exercisable at
$3.50 per share expiring on January 22, 2007, (iii) 200,000 warrants
exercisable at $2.00 per share expiring on August 13, 2007, (iv) 50,000
warrants exercisable at $3.50 expiring on March 1, 2006, (v) 100,000
warrants exercisable at $5.00 per share

expiring on April 14, 2006 and (vi) 30,000 warrants exercisable at
$5.00 per share expiring on February 28, 2009.

(5) Consists of (i) 50,000 warrants exercisable at $2.00 per share expiring
on August 13, 2007, (ii) 50,000 warrants exercisable at $4.00 per share
expiring on February 28, 2008, (iii) 10,000 stock options exercisable
at $4.03 expiring on January 3, 2011 and (iv) 20,000 stock options
exercisable at $3.50 per share expiring on January 22, 2007.

(6) Consists of (i) 20,000 warrants exercisable at $2.00 per share expiring
on August 13, 2007, (ii) 5,000 warrants exercisable at $4.00 per share
expiring on June 7, 2008, (iii) 10,000 stock options exercisable at
$4.03 per share expiring on January 3, 2016, and (iv) 6,791 stock
options exercisable at $3.50 per share expiring on January 22, 2007.

The following table gives information about our Common Stock that may
be issued upon the exercise of options, warrants and rights under all of our
equity compensation plans as of December 31, 2003.

Number of securities
Remaining available for
Weighted-average future issuance under
Number of Securities to Exercise price of equity compensation
be issued upon exercise Outstanding plans(excluding
of outstanding options, options, warrants securities reflected in
Plan Category warrants and rights and rights column (a))
------------- ----------------------- ----------------- -----------------------

(a) (b) (c)

Equity compensation plans approved by
security holders: 433,134 $ 3.16 --

Equity compensation plans not approved by
security holders: -- -- --

Total 433,134 $ 3.16 --

In September, 2003 our Board of Directors changed the non-employee Board
Member compensation to be 50% cash and 50% stock. The Board's stock compensation
is to be paid on the first day of each calendar quarter. The number of shares
paid shall have a value of $12,500 with the value of the shares being determined
by the closing price of our common stock on the American Stock Exchange on the
last trading day of the preceding quarter. In no event shall the number of
shares issued under this plan exceed 1,000,000 shares over a ten year period.

Employment Agreements

We entered into an amended and restated employment agreement with our
President and Chief Executive Officer, Dr. William A. Carter, dated as of
December 3, 1998, as amended in August 2003, which provided for his employment
until May 8, 2008 at an initial base annual salary of $361,586, subject to
annual cost of living increases. In addition, Dr. Carter could receive an annual
performance bonus of up to 25% of his base salary, at the sole discretion of the
board of directors. Dr. Carter will not participate in any discussions
concerning the determination of his annual bonus. Dr. Carter is also entitled to
an incentive bonus of 0.5% of the gross proceeds received by us from any joint
venture or corporate partnering arrangement, up to an aggregate maximum
incentive bonus of $250,000 for all such transactions. Dr. Carter's agreement
also provides that he be paid a base salary and benefits through May 8, 2004 if
he is terminated without "cause", as that term is defined in the agreement. This
agreement was extended to May 8, 2008. Pursuant to his original agreement, as
amended on August 8, 1991, Dr. Carter was granted options to purchase 73,728
shares of our common stock at an exercise price of $2.71 per share.

We entered into an engagement agreement with Robert E. Peterson dated June
23, 2004 which provides for Mr. Peterson's employment as our Chief Financial
Officer until June 30, 2006 at an annual base salary of $198,000 per year,
subject to annual cost of living increases. In addition, Mr. Peterson shall
receive bonus compensation upon Federal Drug Administration approval of Ampligen
.. Mr. Peterson's agreement also contains a provision for severance pay equal to
twelve months compensation.

2004 Equity Incentive Plan

Our 2004 Equity Incentive Plan ("2004 Plan") provides for the grant of
non-qualified and incentive stock options, stock appreciation rights, restricted
stock and other stock awards to our employees, directors, officers, consultants
and advisors for the purchase of up to an aggregate of 8,000,000 shares of
common stock. The 2004 plan is administered by the board of directors, which has
complete discretion to select eligible individuals to receive and to establish
the terms of grants under the plan. Stock options awarded under the Equity
Incentive Plan may be exercisable at such times (not later than 10 years after
the date of grant) and at such exercise prices (not less than fair market value
at the date of grant) as the Board may determine. The Board may provide for
options to become immediately exercisable upon a "change in control" as defined
in the plan. The number of shares of common stock available for grant under the
2004 Plan is subject to adjustment for changes in capitalization. As of June 30,
2004, 7,950,000 shares were available for grants under the 2004 Plan. Unless
sooner terminated, the Equity Incentive Plan will continue in effect for a
period of 10 years from its effective date.

1990 Stock Option Plan

Our 1990 Stock Option Plan, as amended ("1990 Plan"), provides for the
grant of options to our employees, directors, officers, consultants and advisors
for the purchase of up to an aggregate of 460,798 shares of common stock. The
1990 plan is administered by the Compensation Committee of the board of
directors, which has complete discretion to select eligible individuals to
receive and to establish the terms of option grants. The number of shares of
common stock available for grant under the 1990 Plan is subject to adjustment
for changes in capitalization. As of December 31, 2003, no options were
available for grants under the 1990 plan. This plan remains in effect until
terminated by the Board of Directors or until all options are issued.

401(K) Plan

In December 1995, we established a defined contribution plan, effective
January 1, 1995, entitled the Hemispherx Biopharma employees 401(K) Plan and
Trust Agreement. All of our full time employees are eligible to participate in
the 401(K) plan following one year of employment. Subject to certain limitations
imposed by federal tax laws, participants are eligible to contribute up to 15%
of their salary (including bonuses and/or commissions) per annum. Participants'
contributions to the 401(K) plan may be matched by Hemispherx at a rate
determined annually by the board of directors. Each participant immediately
vests in his or her deferred salary contributions, while our contributions will
vest over one year. In 2003 we provided matching contributions to each employee
for up to 6% of annual pay for a total of $34,000 for all eligible employees.

PRINCIPAL STOCKHOLDERS

The following table sets forth as of July 26, 2004, the number and
percentage of outstanding shares of common stock beneficially owned by:

o Each person, individually or as a group, known to us to be deemed
the beneficial owners of five percent or more of our issued and
outstanding common stock;

o each of our directors and the Named Executives; and

o all of our officers and directors as a group.

This table is based upon information supplied by Schedules 13D and 13G, if any,
filed with the Securities and Exchange Commission, and information obtained from
our directors and named executives. For purposes of this table, a person or
group of persons is deemed to have "beneficial ownership" of any shares of
common stock which such person has the right to acquire within 60 days of July
26, 2004. For purposes of computing the percentage of outstanding shares of
common stock held by each person or group of persons named in the table, any
security which such person or persons has or have the right to acquire within
such date is deemed to be outstanding but is not deemed to be outstanding for
the purpose of computing the percentage ownership of any other person. Except as
indicated in the footnotes to this table and pursuant to applicable community
property laws, we believe, based on information supplied by such persons, that
the persons named in this table have sole voting and investment power with
respect to all shares common stock which they beneficially own. As of July 26,
2004, 45,207,788 shares of our common stock were outstanding. Unless otherwise
noted, the address of each of the principal stockholders is care of us at One
Penn Center, 1617 JFK Boulevard, Philadelphia, Pennsylvania 19103.

Name and Address of Beneficial Owner Shares Beneficially Owned % Of Share Beneficially Owned
--------------------------------------------------------------------------------------------------------------

William A. Carter, M.D. 5,747,868 (1) 11.3

Robert E. Peterson 454,250 (2) *

Ransom W. Etheridge 421,422 (3) *
2610 Potters Rd.
Virginia Beach, VA 23452

Richard C. Piani 225,074 (4) *
97 Rue Jeans-Jaures
Levaillois-Perret
France 92300

William M. Mitchell, M.D. 223,967 (5) *
Vanderbilt University
Department of Pathology
Medical Center North
21st and Garland
Nashville, TN 37232

Antoni Esteve, Ph.D. 354,552 (6) *
Laboratorios Del Dr. Esteve S.A.
AV. Mare de Deu de Montserat
Barcelona, 08041, Spain

David R. Strayer, M.D. 138,746 (7) *

Carol A. Smith, Ph.D. 41,791 (8) *

Iraj-Eqhbal Kiani, Ph.D. 12,000 (9) *
Orange County Immune Institute
18800 Delaware Street
Huntingdon Beach, CA 92648

Mei-June Liao, Ph.D. 0 0

Robert Hansen 0 0

All directors and executive officers as a
group (11 persons) 7,619,670 14.7%

----------
* Less than 1%

(1) Includes (i) an option to purchase 73,728 shares of common stock from
Hemispherx at an exercise price of $2.71 per share and expiring on
August 8, 2004, (ii) Rule 701 Warrants to purchase 1,400,000 shares of
common stock at a price of $3.50 per share, originally expiring on
September 30, 2002 was extended to September 30,2007; (iii) warrants to
purchase 465,000 shares of common stock at $1.75 per share issued in
connection with the 1995 Standby Financing Agreement and expiring on
June 30, 2005; (iv) 340,000 common stock warrants exercisable at $4.00
per share and originally expiring on January 1, 2003 was extended to
January 1, 2008; (v) 170,000 common stock warrants exercisable at $5.00
per share and expiring on January 2, 2005;(vi) 25,000 warrants to
purchase common stock at $6.50 per share and expiring on September 17,
2004;(vii) 25,000 warrants to purchase common stock at $8.00 per share
and expiring on September 17, 2004;(viii) 100,000 warrants to purchase
common stock at $6.25 per share and expiring on September 17, 2004;
(ix)

20,000 warrants to purchase common stock at $4.00 per share originally
expiring January 1, 2003 was extended to January 1, 2008, (x) 188,325
common stock warrants exercisable at $6.00 per share and expiring on
February 22, 2006; (xi) 188,325 common stock warrants exercisable at
$9.00 per share and expiring on February 22, 2006 (xii) 300,000 common
stock warrants granted in 1998 that are exercisable at $6.00 per share
and expiring on January 1, 2006 (xiii) options to purchase 10,000
shares of common stock at $4.03 per share and expiring on January 3,
2011 (xiv) 500,000 warrants exercisable $2.00 per share in August 13,
2007 (xv) 1,450,000 warrants exercisable at $2.20 per share expiring on
September 9, 2008 and (xvi) 492,490 shares of common stock. Does not
include 500,000 warrants exercisable at $2.00 per share expiring on
August 13, 2007 that have not vested.

(2) Includes (i) 13,750 options to purchase common stock at an exercise
price of $3.50 per share, expiring on January 7, 2007; (ii) warrants to
purchase 50,000 shares of Common stock at an exercise price of $3.50
per share, expiring on March 1, 2006; (iii) warrants to purchase
100,000 shares of common stock at $5.00 per share, expiring on April
14, 2006; (iv) 30,000 warrants to purchase common stock at $5.00 per
share an expiring on February 28, 2009 (v) options to purchase 10,000
shares at $4.03 per share that expire on January 3, 2011 (vi) 200,000
warrants exercised at $2.00 per share expiring on November 13, 2007,
(vii) 50,000 options to purchase common stock at $3.44 per share
expiring on June 22, 2014 and (viii) 500 shares of common stock.

(3) Includes 20,000 warrants to purchase common stock at $4.00 per share,
originally expiring on January 1, 2003 and was extended to January 1,
2008; 25,000 warrants to purchase common stock at $6.50 per share;
25,000 warrants to purchase common stock at $8.00 per share, all
expiring on September 12, 2004; 100,000 warrants exercisable $2.00 per
share expiring on August 13, 2007; 200,000 stock options exercisable at
$2.75 per share and expiring on December 4, 2013 and 76,115 shares of
common stock.

(4) Includes (i) 20,000 warrants to purchase common stock at $4.00 per
share; (ii) warrants to purchase 25,000 shares of common stock at $6.50
per share; (iii) 25,000 warrants to purchase common stock at $8.00 per
share, all expiring on September 17, 2004;(vi) 100,000 warrants
exercisable at $2.00 per share expiring on August 13, 2007, (vi) 37,174
shares of common stock owned by Mr. Piani (vi) 12,900 shares of common
stock owned jointly by Mr. and Mrs. Piani; and (vii) 5000 shares of
common stock owned by Mrs. Piani.

(5) Includes (I) warrants to purchase 12,000 shares of common stock at
$6.00 per share, expiring on August 25, 2008; (ii) 25,000 warrants to
purchase common stock at $6.50 per share; (iii) 25,000 warrants to
purchase common stock at $8.00 per share all expiring on September 17,
2004; (iv) 100,000 warrants exercisable at $2.00 per share expiring in
August 13, 2007 and 41,967 shares of common stock.

(6) Consists of 347,446 shares of our common stock owned by Provesan S.A.,
an affiliate of Laboratorios del Dr. Esteve S.A. Dr. Antoni Esteve is a
member of the executive committee and director of Scientific and
Commercial Operations of Laboratorios del Dr. Esteve S.A. Dr. Esteve
personally owns 7,106 shares of common stock.

(7) Includes (i) stock options to purchase 20,000 shares of common stock at
$3.50 per share; (ii) 50,000 warrants to purchase common stock at $4.00
per share; (iii) 10,000 stock options exercisable at $4.03 per share
and expiring on January 3, 2011; 50,000 warrants to purchase common
stock at $2.00 per share and expiring on August 13, 2007 and; (iv)
8,746 shares of common stock.

(8) Consists of 5,000 warrants to purchase common stock at $4.00 per share
expiring June 7, 2008; 6,791 stock options exercisable at $3.50
expiring January 22, 2007, 20,000 warrants exercisable at

$2.00 per share expiring in August 13, 2007 and options to purchase
10,000 shares of common stock at $ 4.03 per share expiring on January
3, 2011.

(9) Consist of 12,000 warrants exercisable at $3.86 per share expiring on
April 30, 2005.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Ransom W. Etheridge, one of our officers and directors, is an attorney in
private practice who has rendered corporate legal services to us from time to
time, for which he has received fees. Mr. Etheridge received $60,000 for his
professional services in 2003.

Richard C. Piani, one of our directors, lives in Paris, France. Prior to
September 2003, he assisted our European subsidiary in its dealings with medical
institutions and the European Medical Evaluation Authority. Prior to September
2003, William M. Mitchell, M.D., another of our directors, worked with David R.
Strayer, M.D. (our Medical Director) in establishing clinical trial protocols as
well as other scientific work for us from time to time. For these services,
these two directors were paid an aggregate of $40,100 in the year 2003. In
September, 2003 the Board of Directors adopted a policy to cease all Independent
Director special project work and related compensation pursuant to the American
Stock Exchange definition of Independence set forth in Section 121A of the AMEX
Company Guide. William A. Carter, our Chief Executive Officer, received an
aggregate of $12,106 in short term advances in 2002 which were repaid as of
December 31, 2002. We loaned $60,000 to Mr. Etheridge in November 2001 for the
purpose of exercising 15,000 Class A Redeemable warrants. This loan bears
interest at 6% per annum. Dr. Carter's short term advances and Mr. Etheridge's
loan were approved by the Board of Directors.

We paid $57,750, $33,450 and $18,800 for the years ending December 31,
2001, 2002 and 2003, respectively, to Carter Realty for the rent of property
used at various times in 2001, 2002 and 2003. The property is owned by others
and managed by Carter Realty. Carter Realty is owned by Robert Carter, the
brother of William A. Carter, our Chief Executive Officer.

Antoni Esteve, Ph.D., one of our directors, is a member of the Executive
Committee and Director of Scientific and Commercial Operations of Laboratorios
Del Dr. Esteve S.A. In March 2002, our European subsidiary, Hemispherx Biopharma
S.A., entered into a Sales and Distribution Agreement with Laboratorios Del Dr.
Esteve S.A. In addition, in March 2003, we issued 347,445 shares of common stock
to Provesan S.A., an affiliate of Laboratorios Del Dr. Esteve S.A., in exchange
for 1,000,000 Euros of convertible preferred equity certificates of Hemispherx
S.A., owned by Laboratorios Del Dr. Esteve S.A.

SELLING STOCKHOLDERS

We have registered all 11,732,107 shares of common stock covered by this
prospectus on behalf of the selling stockholders named in the table below. We
issued the shares, the Debentures convertible into shares, and the warrants
exercisable for shares to the selling stockholders in private transactions. We
have registered the shares to permit the selling stockholders and their
respective transferees, assignees or other successors-in-interest that receive
their shares from a selling stockholder to resell the shares, from time to time,
when they deem appropriate.

The table below identifies the selling stockholders who will be offering
shares and other information regarding the beneficial ownership of the common
stock held by each of the selling stockholders. For the Debenture holders (the
first two stockholders listed below), the second column lists the number of
shares of common stock beneficially owned by each selling stockholder as of July
26, 2004, based on each selling stockholder's ownership of shares of common
stock, Debentures, warrants

and additional investment rights, and assumes the conversion of all the
Debentures, the payment of all interest in stock and the exercise of all
warrants and additional investment rights. Because the conversion price of the
Debentures and the exercise price of the warrants are subject to adjustment for
anti-dilution protection, the interest on the Debentures may be paid in cash or
common stock, and the value attributed to any shares issued to the investors as
interest (the "Interest Shares") depends on the average closing price of the
common stock during the five consecutive business days ending on the third
business day immediately preceding the applicable interest payment date, and the
number of repayment shares depends on the amount of our consolidated revenues,
the numbers listed in the second column may change. For the other selling
stockholders, the second column lists the number of shares of common stock
beneficially owned by the selling stockholder as of July 26, 2004, based on each
selling stockholder's ownership of shares of common stock, and, except as set
forth in the relevant footnotes, does not assume the conversion of any of the
Debentures, the exercise of any warrants or additional investment rights or the
payment of any interest on the Debentures in the form of common stock rather
than cash.

The third column lists each selling stockholder's portion, based on
agreements with us, of the 11,732,107 shares of common stock being offered by
this prospectus. With regard to the first two selling stockholders, the number
of shares being offered by this prospectus was determined in accordance with the
terms of the registration rights agreements with them, in which we agreed to
register the resale of an aggregate of 158,103 shares and 135% of (w) the number
of shares of common stock issuable upon conversion of the July and October 2003
and January and July 2004 Debentures, plus (x) the number of shares of common
stock issuable upon exercise of the May 2009 and July 2009 Warrants, plus (y) an
estimate of the number of Interest Shares that may be issued to the selling
stockholders as interest payments on the July and October 2003 and January and
July 2004 Debentures and assuming interest is paid exclusively in Interest
Shares over the full term of these debentures, rather than in cash. As we stated
above, the number of shares that will actually be issued may be more or less
than the 11,732,107 shares being offered by this prospectus.

Under the terms of the foregoing debentures and related warrants, no
selling stockholder who owns any of these securities may convert any of their
debentures or exercise any of the foregoing warrants to the extent that the
conversion or exercise would cause the selling stockholder, together with its
affiliates, to beneficially own more than 4.99% of the shares of our then
outstanding common stock following such conversion or exercise. For purposes of
making this determination, shares of common stock issuable upon conversion of
those debentures which have not been converted and upon exercise of the warrants
which have not been exercised are excluded. The number of shares in the second
and third columns does not reflect this limitation.

Any selling stockholder may sell all, some or none of its respective
shares in this offering. See "How The Shares May Be Distributed" below.

Common Stock Common Stock
Owned Prior No. of Shares Owned After
Selling Stockholder To Offering Being Offered The Offering
-------------------------------------------- ------------------- ------ ------------------ --------------------

Portside Growth & Opportunity Fund 3,295,034(1) 4,382,480 --
-------------------------------------------- ------------------- ------ ------------------ --------------------
Leonardo L.P. 4,427,882(2) 6,461,484 --
-------------------------------------------- ------------------- ------ ------------------ --------------------
Cardinal Securities LLC 604,953(3) 604,953(3) --
-------------------------------------------- ------------------- ------ ------------------ --------------------
H. David Coherd 604,953(4) 604,953(4) --
-------------------------------------------- ------------------- ------ ------------------ --------------------
Robert L. Rosenstein 604,953(4) 604,953(4) --
-------------------------------------------- ------------------- ------ ------------------ --------------------
Sharon Will 363,500(6) 263,500(6) --
-------------------------------------------- ------------------- ------ ------------------ --------------------
Saggi Capital 100,000(6) 100,000(6) --
-------------------------------------------- ------------------- ------ ------------------ --------------------

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

CEOCast, Inc. 45,000(7) 45,000(7) --
-------------------------------------------- ------------------- ------ ------------------ --------------------
Christopher Chipman 15,000(8) 15,000(8) --
-------------------------------------------- ------------------- ------ ------------------ --------------------
Fried Epstein & Rettig LLP 5,000(9) 5,000 --
-------------------------------------------- ------------------- ------ ------------------ --------------------
Peter W. Adolph 237,591(10) 4,255 233,336
-------------------------------------------- ------------------- ------ ------------------ --------------------
Business Asia Consultants, Inc. 4,602(11) 4,602 --
-------------------------------------------- ------------------- ------ ------------------ --------------------
Marc E. Komorsky 237,591(10) 4,255 233,336
-------------------------------------------- ------------------- ------ ------------------ --------------------

(1) Represents (a) up to 1,123,111 shares of common stock issuable upon
conversion of the January 2004 Debentures and July 2004 Debentures, (b)
up to 395,257 shares of common stock issuable upon exercise of the July
2009 Warrants, (c) up to 650,000 shares of common stock issuable upon
exercise of the May 2009 Warrants (d) up to 650,000 shares of common
stock issuable upon exercise of the June 2004 Warrants, and (e) 476,668
shares of common stock. Ramius Capital Group, LLC ("Ramius Capital") is
the investment adviser of Portside Growth & Opportunity Fund
("Portside") and consequently has voting control and investment
discretion over securities held by Portside. Ramius Capital disclaims
beneficial ownership of the shares held by Portside. Peter A. Cohen,
Morgan B. Stark, Thomas W. Strauss and Jeffrey M. Solomon are the sole
managing members of C4S& Co., LLC, the sole managing member of Ramius
Capital. As a result, Messrs. Cohen, Stark, Strauss and Solomon may be
considered beneficial owners of any shares deemed to be beneficially
owned by Ramius Capital. Messrs. Cohen, Stark, Strauss and Solomon
disclaim beneficial ownership of these shares.

(2) Represents (a) up to 317,461 shares of common stock issuable upon
conversion of the July 2003 Debentures, (b) up to 1,025,336 shares of
common stock issuable upon conversion of the October 2003 Debentures,
(c) up to 1,178,111 shares of common stock issuable upon conversion of
the January 2004 Debentures and July 2004 Debentures, (d) up to 650,000
shares of common stock issuable upon exercise of the May 2009 Warrants,
(e) up to 395,257 shares of common stock issuable upon exercise of the
July 2009 Warrants, (f) up to 650,000 shares of common stock issuable
upon the exercise of the June 2009 warrants, and (g) 211,717 shares of
common stock. Angelo, Gordon & Co., L.P. ("Angelo, Gordon") is the sole
director of the general partner of Leonardo, L.P. ("Leonardo") and
consequently has voting control and investment discretion over
securities held by Leonardo. Angelo, Gordon disclaims beneficial
ownership of the shares held by Leonardo. Mr. John M. Angelo, the Chief
Executive Officer of Angelo, Gordon, and Mr. Michael L. Gordon, the
Chief Operating Officer of Angelo, Gordon, are the sole general
partners of AG Partners, L.P., the sole general partner of Angelo,
Gordon. As a result, Messrs. Angelo and Gordon may be considered
beneficial owners of any shares deemed to be beneficially owned by
Angelo, Gordon. Messrs. Angelo and Gordon disclaim beneficial ownership
of these shares.

(3) Represents up to 561,250 shares of common stock issuable upon exercise
of warrants owned by Cardinal of which (i) 11,250 are exercisable at a
price of $1.74 per share, (ii)112,500 are exercisable at a price of
$2.57 per share, (iii) 200,000 are exercisable at a price of $2.50 per
share, (iv) 87,500 are exercisable at a price if $2.42 per share, (v)
100,000 are exercisable at a price of $3.04 per share, (vi) 50,000 are
exercisable at a price of $4.07 per share and (vii) 43,703 shares of
common stock. The members of Cardinal, who share voting control and
investment discretion, are H. David Coherd, Robert Rosenstein and Scott
Koch.

(4) The selling stockholder is one of the three members of Cardinal
Securities LLC. Accordingly, the shares beneficially owned by Cardinal
are deemed to be beneficially owned by each of Cardinal's members. In
the second column up to 511,250 shares of common stock issuable upon
exercise of warrants owned by Cardinal of which (i) 11,250 are
exercisable at a price of $1.74 per share, (ii)112,500 are exercisable
at a price of $2.57 per share, (iii) 200,000 shares of common

stock issuable upon exercise of additional warrants at an exercise
price of $2.50 per share, (iv) 87,500 shares of common stock
exercisable at $2.42 per share, (v) 100,000 are exercisable at $3.04
per share, (vi) 50,000 are exercisable at $4.07 per share and 43,703
shares of common stock. The third column includes all of the shares
issuable upon exercise of the warrants owned by Cardinal.

(5) In the second column, represents 230,000 shares issuable upon exercise
of warrants exercisable at $1.75 per share expiring on June 30, 2005;
and 85,160 shares issuable upon exercise of warrants exercisable at
$3.50 expiring on October 15, 2004. The principal shareholders,
officers and directors of Bridge Ventures are Harris Freedman and
Annelies Freedman.

(6) Sharon Will is the sole shareholder, officer and director of Saggi
Capital Corp. For Sharon Will, represents 260,000 shares issuable upon
exercise of warrants exercisable at $1.75 per shares expiring on June
30, 2005 and 3,500 shares of stock owned of record by Sharon Will, plus
100,000 shares issuable upon exercise of warrants exercisable at $3.50
per share expiring on October 15, 2004 owned by Saggi Capital Corp. The
numbers for Saggi Capital Corp. do not include the shares issuable upon
exercise of the Will warrants.

(7) Messrs. Ken Sgro and Rachel Glicksman share voting control and
investment discretion over the shares. CEOCast provides investor
relations consulting services to us.

(8) Represents a) 5,000 shares issuable upon exercise of warrants
exercisable at $3.91 per shares expiring on February 28, 2009, b) 5,000
shares issuable upon exercise of warrants exercisable at $4.25 per
shares expiring on January 31, 2009 and 5,000 shares issuable upon the
exercise of warrants at $3.51 per share expiring March 31, 2009. Mr.
Chipman provides us with financial and accounting consulting services.

(9) Represents shares issued to Fried Epstein & Rettig LLP, a law firm, for
legal services provided to us. The three named partners share voting
control and investment discretion over the shares.

(10) For each stockholder, the second column includes an aggregate of
233,336 shares issuable upon the exercise of outstanding warrants in
each of their names. These stockholders, together, provide financial
consulting and investment banking services to us.

(11) Business Asia Consultants, Inc. provides consulting services related to
obtaining distribution channels in China. It is owned by Lawrence
Kronick.

THE SELLING STOCKHOLDERS HAVE NOT BEEN EMPLOYED BY, HELD OFFICE IN, OR
HAD ANY OTHER MATERIAL RELATIONSHIP WITH US OR ANY OF OUR AFFILIATES WITHIN THE
PAST THREE YEARS EXCEPT AS DESCRIBED ABOVE IN THE FOOTNOTES ABOVE.

HOW THE SHARES MAY BE DISTRIBUTED

The shares to be sold in this offering have been or are in the process of
being listed on the American Stock Exchange, subject to official notice of
issuance. In the event that the American Stock Exchange determines not to list
some of the shares issued or to be issued to the first two Selling Stockholders
because the exchange takes the position that its rules require that our
stockholders approve the issuance of such shares, the selling stockholders will
not be able to sell these shares unless and until our stockholders approve them.
In such event, we have agreed to promptly seek stockholder approval. The selling
stockholders may sell their shares of common stock from time to time in various
ways and at

various prices. The shares may be sold in one or more transactions at fixed
prices, at prevailing market prices at the time of the sale, at varying prices
determined at the time of sale, or at negotiated prices. These sales may be
effected in transactions that may involve crosses or block transactions. Some of
the methods by which the selling stockholders may sell the shares include:

o on any national securities exchange or quotation service on which
the shares may be listed or quoted at the time of sale;

o in the over-the-counter market;

o in transactions otherwise than on these exchanges or systems or in
the over-the-counter market;

o through the writing of options, whether such options are listed on
an options exchange or otherwise;

o ordinary brokerage transactions and transactions in which the broker
solicits purchasers;

o privately negotiated transactions;

o block trades in which the broker or dealer will attempt to sell the
shares as agent but may position and resell a portion of the block
as principal to facilitate the transaction;

o purchases by a broker or dealer as principal and resale by that
broker or dealer for the selling stockholder's account under this
prospectus;

o sales under Rule 144 rather than by using this prospectus;

o through the settlement of short sales;

o a combination of any of these methods of sale; or

o any other legally permitted method.

In connection with sales of the shares or otherwise, the selling
stockholders may enter into hedging transactions with broker-dealers, which may
in turn engage in short sales of the shares in the course of hedging in
positions they assume. The selling stockholders may also sell shares short and
deliver shares to close out short positions, provided that the selling
stockholders may not close out short positions entered into prior to the
effective date of the registration statement of which this prospectus is a part
with any shares included in this prospectus. The selling stockholders may also
pledge their shares as collateral for a margin loan under their customer
agreements with their brokers. If there is a default by the selling
stockholders, the brokers may offer and sell the pledged shares from time to
time under this prospectus or an amendment to this prospectus under Rule
424(b)(3) or other applicable provisions of the Securities Act amending the list
of selling stockholders to include the pledgee, transferee or other successors
in interest as selling stockholders under this prospectus.

Brokers or dealers may receive commissions or discounts from the selling
stockholders (or, if the broker-dealer acts as agent for the purchaser of the
shares, from that purchaser) in amounts to be negotiated. These commissions may
exceed those customary in the types of transactions involved.

We cannot estimate at the present time the amount of commissions or
discounts, if any, that will be paid by the selling stockholders in connection
with sales of the shares.

The selling stockholders and any broker-dealers or agents that participate
with the selling stockholders in sales of the shares may be deemed to be
"underwriters" within the meaning of the Securities Act in connection with such
sales. In that event, any commissions received by the broker-dealers or agents
and any profit on the resale of the shares purchased by them may be deemed to be
underwriting commissions or discounts under the Securities Act. The selling
stockholders have advised us that they have not entered into any agreements,
understandings or arrangements with any underwriters or broker-dealers regarding
the sale of the shares. There is no underwriter or coordinating broker acting in
connection with the proposed sale of shares by the selling stockholders. In
addition, each of the selling

stockholders who is a registered broker-dealer or is affiliated with a
registered broker-dealer has advised us that:

o it purchased the shares in the ordinary course of business; and

o at the time of the purchase of the shares to be resold, it had no
agreements or understandings, directly or indirectly, with any
person to distribute the shares.

Under the securities laws of certain states, the shares may be sold in
those states only through registered or licensed broker-dealers. In addition,
the shares may not be sold unless they have been registered or qualified for
sale in the relevant state or unless they qualify for an exemption from
registration or qualification.

We do not know whether any selling stockholder will sell any or all of the
shares registered by the shelf registration statement of which this prospectus
forms a part.

We have agreed to pay all fees and expenses incident to the registration
of the shares, including certain fees and disbursements of counsel to certain of
the selling stockholders. We have agreed to indemnify the selling stockholders
against certain losses, claims, damages and liabilities, including liabilities
under the Securities Act.

Certain of the selling stockholders have also agreed to indemnify us, our
directors, officers, agents and representatives against certain liabilities,
including certain liabilities under the Securities Act.

The selling stockholders and other persons participating in the
distribution of the shares offered under this prospectus are subject to the
applicable requirements of Regulation M promulgated under the Exchange Act in
connection with sales of the shares.

We have agreed with the selling stockholders to keep the registration
statement of which this prospectus is a part effective until all the shares
registered under the registration statement have been resold.

DESCRIPTION OF SECURITIES BEING REGISTERED

The following section does not purport to be complete and is qualified in
all respects by reference to the detailed provisions of our certificate of
incorporation and by-laws, as amended, copies of which have been filed with the
Securities and Exchange Commission.

Our authorized capital stock consist of: (i) 100,000,000 shares of common
stock, $.001 par value; and (ii) 5,000,000 shares of preferred stock, $.01 par
value. 45,207,788 shares of common stock were issued and outstanding as of the
date of this prospectus.

Common Stock

Shares of our common stock are entitled to one vote per share, either in
person or by proxy, on all matters that may be voted upon by the owners of our
shares at meetings of our stockholders. There is no provision for cumulative
voting with respect to the election of directors by the holders of common stock.
Therefore, the holder of more than 50% of our shares of outstanding common stock
can, if they choose to do so, elect all of our directors. In this event, the
holders of the remaining shares of common stock will not be able to elect any
directors.

The holders of common stock:

o have equal rights to dividends from funds legally available
therefore, when and if declared by our board of directors;

o are entitled to share ratably in all of our assets available for
distribution to holders of common stock upon liquidation,
dissolution or winding up of our affairs; and

o do not have preemptive rights, conversion rights, or redemption of
sinking fund provisions.

The outstanding shares of our common stock are duly authorized, validly
issued, fully paid and nonassessable.

Anti-Takeover Provisions

Delaware Law

We are subject to the provisions of Section 203 of the Delaware General
Corporation Law, as amended, which restricts certain business combinations with
interested stockholders even if such a combination would be beneficial to all
stockholders. In general, Section 203 would require a two-thirds vote of
stockholders for any business combination (such as a merger or sale of all or
substantially all of our assets) between us and an "interested stockholder"
unless such transaction is approved by a majority of the disinterested directors
or meets certain other requirements. An "interested stockholder" is a person
who, together with affiliates and associates, owns (or within three years, did
own) 15% or more of our voting stock. These provisions could deprive
stockholders of an opportunity to receive a premium for their common stock as
part of a sale of us or may otherwise discourage a potential acquirer from
attempting to obtain control of us.

Certificate of Incorporation

Provisions of our Certificate of Incorporation may make it more difficult
for someone to acquire control of us or for our stockholders to remove existing
management, and might discourage a third party from offering to acquire us, even
if a change in control or in management would be beneficial to our stockholders.
For example, our Certificate of Incorporation allows us to issue shares of
preferred stock without any vote or further action by our stockholders. Our
Board of Directors has the authority to fix and determine the relative rights
and preferences of preferred stock. Our Board of Directors also has the
authority to issue preferred stock without further stockholder approval. As a
result, our Board of Directors could authorize the issuance of a series of
preferred stock that would grant to holders the preferred right to our assets
upon liquidation, the right to receive dividend payments before dividends are
distributed to the holders of common stock and the right to the redemption of
the shares, together with a premium, prior to the redemption of our common
stock.

Shareholder rights plan

In November, 2002 we adopted a shareholder rights plan and, under the
Plan, our Board of Directors declared a dividend distribution of one Right for
each outstanding share of Common Stock to stockholders of record at the close of
business on November 29, 2002. Each Right initially entitles holders to buy one
unit of preferred stock for $30.00. The Rights generally are not transferable
apart from the common stock and will not be exercisable unless and until a
person or group acquires or commences a tender or exchange offer to acquire,
beneficial ownership of 15% or more of our common stock. However, for William A.
Carter, M.D., our chief executive officer, who already beneficial owns 11.3% of
our

common stock, the Plan's threshold will be 20%, instead of 15%. The Rights will
expire on November 19, 2012, and may be redeemed prior thereto at $.01 per Right
under certain circumstances.

The rights have certain anti-takeover effects. The rights will cause
substantial dilution to a person or group that attempts to acquire us on terms
not approved by our Board of Directors. The rights should not interfere with any
merger or business combination approved by the Board of Directors.

Transfer Agent And Registrar

The transfer agent and registrar for our common stock and warrants is
Continental Stock Transfer and Trust Co., 17 Battery Place, 8th Floor, New York,
New York 10004.

LEGAL MATTERS

The validity of the common stock offered in this prospectus has been
passed upon for us by Silverman Sclar Shin & Byrne PLLC, 381 Park Avenue South,
Suite 1601, New York, New York 10016.

EXPERTS

Our consolidated financial statements included in this prospectus have
been audited by BDO Seidman, LLP, independent registered public accountants, to
the extent and for the periods set forth in their report appearing elsewhere
herein, and are included in reliance upon such report given upon the authority
of said firm as experts in auditing and accounting.

The consolidated financial statements and schedule of Interferon Sciences,
Inc. as of December 31, 2003 and 2002 and for each of the years in the three
year period ended December 31, 2003 included in this prospectus have been so
included in reliance on the report of Eisner LLP, independent registered public
accounting firm, given on authority of said firm as experts in auditing and
accounting.

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the Securities and Exchange Commission a registration
statement (which contains this prospectus) on Form S-1 under the Securities Act
of 1933. The registration statement relates to the shares offered by the selling
stockholders. This prospectus does not contain all of the information set forth
in the registration statement and the exhibits and schedules to the registration
statement. Please refer to the registration statement and its exhibits and
schedules for further information with respect to us, the common stock, the
debentures and the warrants. Statements contained in this prospectus as to the
contents of any contract or other document are not necessarily complete and, in
each instance, we refer you to the copy of that contract or document filed as an
exhibit to the Registration Statement. You may read and obtain a copy of the
registration statement and its exhibits and schedules from the SEC, as described
below.

We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission. You may read and copy
any document we file at the Securities and Exchange Commission's public
reference rooms at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call
the Securities and Exchange Commission at 1-800-SEC-0330 for further information
on the public reference rooms. Many of our Securities and Exchange Commission
filings are also available to the public from the Securities and Exchange
Commission's Website at "http://www.sec.gov."

HEMISPHERX BIOPHARMA, INC.
AND SUBSIDIARIES

Index to Financial Section

Item Page No.
---- --------

Financials for the Year Ended F-2
December 31, 2001, 2002, and 2003
for Hemispherx

Financials for the three months F-38
Ended March 31, 2004 for Hemispherx

Financials as of December 31, 2003 F-52
and for the years ended December 31,
2003 and 2002 for Interferon Sciences,
Inc. and subsidiaries ("ISI")

Financials as of December 31, 2002 F-71
and for the years ended December 31,
2002 and 2001 for ISI and subsidiaries

Unaudited Proforma Financial F-96
Statement of Operations Related
to the Acquisition of Certain
Assets of ISI by Hemispherx

F-1

HEMISPHERX BIOPHARMA, INC.
AND SUBSIDIARIES

Index to Consolidated Financial Statements - 2003

Report of Independent Registered Public Accountants ................... F-3

Consolidated Balance Sheets at December 31, 2002 and 2003 ............. F-4

Consolidated Statements of Operations for each of the years
in the three-year period ended December 31, 2003 .................... F-5

Consolidated Statements of Changes in Stockholders' Equity
and Comprehensive (Loss) for each of the years
in the three-year period ended December 31, 2003 .................... F-6

Consolidated Statements of Cash Flows for each of the years
in the three-year period ended December 31, 2003 .................... F-7

Notes to Consolidated Financial Statements .......................... F-9

F-2

Report of Independent Registered Public Accountants

The Board of Directors and Stockholders
Hemispherx Biopharma, Inc.

We have audited the accompanying consolidated balance sheets of Hemispherx
Biopharma, Inc. and subsidiaries as of December 31, 2002 and 2003 the related
consolidated statements of operations, changes in stockholders' equity and
comprehensive loss and cash flows for each of the three years in the period
ended December 31, 2003. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Hemispherx
Biopharma, Inc. and subsidiaries as of December 31, 2002 and 2003 and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2003 in conformity with accounting principles
generally accepted in the United States of America.

/s/ BDO SEIDMAN, LLP

Philadelphia, Pennsylvania
February 13, 2004

F-3

HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2002 and 2003
(in thousands)

December 31,
------------------------
2002 2003
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents ........................... $ 2,256 $ 3,764
Short term investments (Note 5) .................... 555 1,495
Inventory (Note 3) .................................. -- 2,896
Accounts and other receivables (Note 15) ............ 1,507 282
Prepaid expenses and
other current assets ............................... 71 170
--------- ---------
Total current assets .............................. 4,389 8,607
Property and equipment, net ......................... 155 94
Patent and trademark rights, net .................... 995 1,027
Investment .......................................... 408 408
Deferred acquisition costs (Note 4) ................. -- 1,546
Deferred financing costs ............................ -- 393
Advance receivable (Note 7) ......................... -- 1,300
Other assets ........................................ 93 29
--------- ---------
Total assets ...................................... $ 6,040 $ 13,404
========= =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................... $ 786 $ 488
Accrued expenses (Note 6) .......................... 678 1,119

--------- ---------
Total current liabilities ......................... 1,464 1,607
--------- ---------
Long-Term Debt-net of current portion (Note 7) ....... -- 2,058
Commitments and contingencies
(Notes 10, 12, 13 and 15)

Minority Interest in subsidiary (Note 8c) ............ 946 --
Redeemable common stock (Note 4) ..................... -- 491

Stockholders' equity
(Note 8):
Common stock ......................................... 33 39
Additional paid-in capital ........................... 107,155 123,054
Accumulated other comprehensive
income ............................................. 35 --
Accumulated deficit .................................. (99,073) (113,843)
Treasury stock ....................................... (4,520) (2)
--------- ---------
Total stockholders' equity ........................ 3,630 9,248
--------- ---------
Total liabilities and
stockholders' equity ............................. $ 6,040 $ 13,404
========= =========

See accompanying notes to consolidated financial statements.

F-4

HEMISPHERX BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For each of the years in the three-year period ended December 31, 2003
(in thousands, except share and per share data)

December 31,
--------------------------------------------
2001 2002 2003
------------ ------------ ------------

Revenues:
Sales of product net .............. $ -- $ -- $ 509
Clinical treatment programs
390 341 148
License Fee income (Note 12) ...... -- 563 --
------------ ------------ ------------
Total Revenues: ..................... 390 904 657
Costs and expenses:
Production/cost of goods sold ..... -- -- 502
Research and development .......... 5,780 4,946 3,150
General and
administrative ................ 3,412 2,015 4,257
------------ ------------ ------------
Total costs and expenses .......... 9,192 6,961 7,909
Equity loss and write offs of
investments in unconsolidated
affiliates (Note 2c) ................. (565) (1,470) --
Interest and other income ............ 284 103 80
Interest expense ..................... -- -- (253)
Financing costs (Note 7) ............. -- -- (7,345)
------------ ------------ ------------

Net loss ....................... $ (9,083) $ (7,424) $ (14,770)
============ ============ ============

Basic and diluted loss per share .. $ (.29) $ (.23) $ (.42)
============ ============ ============

Weighted average shares
outstanding ..................... 31,433,208 32,085,776 35,234,526
============ ============ ============

See accompanying notes to consolidated financial statements.

F-5

HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity and
Comprehensive (loss) For each of the years in the
three-year period ended December 31, 2003

(in thousands except share data)

Accumulated
Common Common Additional other Treasury
Stock Stock .001 paid-in Comprehensive Accumulated stock
Shares Par Value capital Income (loss) deficit shares
------ --------- ------- ------------- ------- ------

Balance at December 31, 2000 $30,367,888 $ 30 $ 97,984 $ 34 $ (82,566) 395,646

Common stock issued 2,155,900 3 8,072 -- -- --

Purchase of equity investment 12,000 -- 72 -- -- --

Treasury stock purchased -- -- -- -- -- 120,060

Note issued for purchase of stock -- -- (60) -- -- --

Stock issued in settlement of debt 21,198 -- 91 -- -- --

Stock and stock warrant
compensation expense 19,000 -- 673 -- -- --

Net comprehensive (loss) (17) (9,083)
----------- ------------ ------------ -------- ---------- ---------
Balance at December 31, 2001 32,575,986 33 106,832 17 (91,649) 515,706

Common stock issued 25,800 -- 37 -- -- --

Treasury stock Purchased -- -- -- -- -- 27,500

Stock issued in settlement of debt 48,392 -- 154 -- -- --

Stock and stock warrant
compensation expense -- 132 -- -- -- --

Net comprehensive (loss) -- -- -- 18 (7,424) --
----------- ------------ ------------ -------- ---------- ---------
Balance at December 31, 2002 32,650,178 33 107,155 35 (99,073) 543,206

Debt conversion and
interest payments
4,334,916 4 6,741
Fair value ascribed to
debenture beneficial
conversion features and
related warrants issued 9,363

Warrants exercised 790,745 1 1,234

Common stock issued in
connection with ISI
acquisition (Note 4) 1,068,789 1 1,667

Reclassification of
redeemable Common Stock
in connection with ISI
acquisition (Note 4) (491)

Treasury stock purchased 43,000

Treasury Stock retired (339,543) (4,272) (339,543)

Conversion of minority
interest of subsidiary
into common stock (Note (8c) 347,445 946

Stock issued in settlement of debt 215,047 474 (246,220)

Stock warrant compensation expense 237
Net comprehensive loss (35) (14,770)
----------- ------------ ------------ -------- ---------- ---------

Balance at December 31, 2003 39,067,577 39 $ 123,054 $ -- $ (113,843) 443
========== ============ ============ --====== ========== =========

Total
Treasury stockholders
Stock equity
------------ -----------

Balance at December 31, 2000 $ (3,910) $ 11,572

Common stock issued -- 8,075

Purchase of equity investment -- 72

Treasury stock purchased (560) (560)

Note issued for purchase of stock -- (60)

Stock issued in settlement of debt -- 91

Stock and stock warrant
compensation expense -- 673

Net comprehensive (loss) (9,100)
------------ ------------
Balance at December 31, 2001 (4,470) 10,763

Common stock issued -- 37

Treasury stock Purchased (50) (50)

Stock issued in settlement of debt -- 154

Stock and stock warrant
compensation expense -- 132

Net comprehensive (loss) -- (7,406)
------------ ------------
Balance at December 31, 2002 (4,520) 3,630

Debt conversion and
interest payments
6,745
Fair value ascribed to
debenture beneficial
conversion features and
related warrants issued 9,363

Warrants exercised 1,235

Common stock issued in
connection with ISI
acquisition (Note 4) 1,668

Reclassification of
redeemable Common Stock
in connection with ISI
acquisition (Note 4) (491)

Treasury stock purchased (83) (83)

Treasury Stock retired 4,144 (128)

Conversion of minority
interest of subsidiary
into common stock (Note (8c) 946

Stock issued in settlement of debt 457 931

Stock warrant compensation expense 237
Net comprehensive loss (14,805)
------------ ------------

Balance at December 31, 2003 $ (2) $ 9,248
============ ============

See accompanying notes to consolidated financial statements

F-6

HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
for each of the years in the three-year period ended December 31, 2003

(in thousands)

December 31,
-------------------------------------------
2001 2002 2003
-------- -------- --------

Cash flows from operating activities:
Net loss ..................................... $ (9,083) $ (7,424) $(14,770)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation of property
and equipment ............................... 127 91 80
Amortization of patent and
trademark rights ............................ 397 206 122
Amortization of deferred financing costs ..... -- -- 7,345
Equity loss and write offs of investments
in unconsolidated affiliates ....... 565 1,470 --
Stock option and warrant compensation and
service expense ............................ 673 132 237
Changes in assets and liabilities:
Inventory ................................... -- -- (1,429)
Accounts and other receivables .............. 52 (1,293) 1,225
Prepaid expenses
and other current assets ............... 202 104 (98)
Accounts payable ............................ (271) (67) (298)
Accrued expenses ............................ 139 385 558
Other assets ................................ (82) (13) 6
-------- -------- --------
Net cash used in
operating activities ..................... (7,281) (6,409) (7,022)
-------- -------- --------
Cash flows from investing activities:
Purchase of property and equipment ............ -- -- (19)
Additions to patent and trademark rights ...... (218) (176) (154)
Maturity of short term investments ............ 4,613 5,293 520
Purchase of short term investments ............ (5,293) (520) (1,496)
Investments in unconsolidated affiliates ...... (22) -- --
Deferred acquisition cost ..................... -- -- (638)
-------- -------- --------
Net cash (used in) provided by investing
activities ................................. (920) 4,597 (1,787)
-------- -------- --------

F-7

(CONTINUED)

HEMISPHERX BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
(in thousands)

December 31,
----------------------------------------
2001 2002 2003
-------- -------- --------

Cash flows from financing activities:
Proceeds from stock subscriptions and issuance
of common stock, net ................... $ 72 $ 65 --
Deferred financing costs ........................ -- -- (835)
Proceeds from issuance of preferred stock
certificates of Subsidiary ............. -- 946 --
Proceeds from long-term borrowing ............... -- -- 11,300
Advance receivable .............................. -- -- (1,300)
Proceeds from exercise of
stock warrants ...................... 8,075 -- 1,235
Purchase of treasury stock ...................... (560) (50) (83)
-------- -------- --------
Net cash provided by
financing activities ....................... 7,587 961 10,317
-------- -------- --------
Net increase (decrease) in cash and
cash equivalents ........................... (614) (851) 1,508
Cash and cash equivalents at
beginning of year ................... 3,721 3,107 2,256
-------- -------- --------
Cash and cash equivalents
at end of year ................ $ 3,107 $ 2,256 $ 3,764
======== ======== ========
Supplemental disclosures of cash flow information:
Issuance of common stock
for accrued expenses ....................... $ 91 $ 154 $ 931
======== ======== ========
Issuance of common stock
for note receivable ........................ $ 60 $ -- $ --
Issuance of Common Stock for ..................... ======== ======== =======
Acquisition of ISI assets, including
deferred acquisition costs ...................... $ -- $ -- $ 1,668
======== ========
Common Stock Issued for Compensation ............. $ 637 $ 132 $ 237
Issuance of Common Stock for ..................... ======== ======== ========
Debt Conversion and Interest Payments ............ $ -- $ -- $ 6,741
======== ======== ========
Common Stock Issued for Conversion of
Minority Interest in Subsidiary .................. -- -- $ 946
======== ======== ========

See accompanying notes to consolidated financial statements.

F-8

HEMISPHERX BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) Business

Hemispherx Biopharma, Inc. and subsidiaries (the Company) is a pharmaceutical
company using nucleic acid technologies to develop therapeutic products for the
treatment of viral diseases and certain cancers. The Company's drug technology
uses specially configured ribonucleic acid (RNA). The Company's double-stranded
RNA drug product, trademarked Ampligen(R), is in human clinical development for
various therapeutic indications. The potential efficacy and safety of
Ampligen(R) is being evaluated clinically for three anti-viral indications:
myalgic encephalomyelitis, also known as chronic fatigue syndrome ("ME/CFS"),
human immunodeficiency virus (HIV) associated disorders, and chronic hepatitis C
(HVC) virus infection. The Company also has clinical experience with Ampligen(R)
used in treating patients with certain cancers including renal cell carcinoma
(kidney cancer) and metastatic malignant melanoma. The Company has other
compounds to be evaluated.

On March 11, 2003, we acquired from Interferon Sciences, Inc. ("ISI") ISI's
inventory of ALFERON N Injection(R), a pharmaceutical product used for the
treatment of certain types of genital warts, and a limited license for the
production, manufacturing, use, marketing and sale of this product.

The consolidated financial statements include the financial statements of
Hemispherx BioPharma, Inc. and its wholly-owned subsidiaries BioPro Corp.,
BioAegean Corp. and Core BioTech Corp. which were incorporated in September
1994, and are inactive, and Hemispherx Biopharma-Europe N.V./S.A. which was
incorporated in 1998 and Hemispherx Biopharma Europe S.A., which was
incorporated during 2002. All significant intercompany balances and transactions
have been eliminated in consolidation.

On May 1, 1997, the Company received permission from the U.S. Food and Drug
Administration ("FDA") to recover the cost of Ampligen(R) from patients enrolled
in the Company's AMP-511 ME/CFS open-label treatment protocol. The cost of
Ampligen(R) to the patient is $2,100 for the first eight weeks of treatment and
$2,400 for each additional eight-week period thereafter.

In 1998, the Company initiated the recruitment of clinical investigators to
enroll ME/CFS patients in the confirmatory Phase III double blind
placebo-controlled clinical study of Ampligen(R). This clinical trial was
approved by the FDA in 1998 and is designed to test the safety and efficiency of
Ampligen(R) in treating ME/CFS.

We recently completed the double-blind segment of our AMP 516 ME/CFS Phase III
clinical trial for use of Ampligen(R) in the treatment of ME/CFS. Ampligen is
also currently in two Phase IIb studies for the treatment of HIV to overcome
multi-drug resistance, virus mutation and toxicity associated with current HAART
therapies. One study, the AMP-719, is a Salvage Therapy, conducted in the U.S.
and evaluating the potential synergistic efficacy of Ampligen in multi-drug
resistant HIV patients for immune enhancement. The second study, the AMP-720, is
a clinical trial designed to evaluate the effect of Ampligen under Strategic
Treatment Intervention and is also conducted in the U.S.

The ME/CFS Cost Recovery Treatment Program in Belgium was started in 1994 with
the approval of the Belgian Regulatory authorities. Since its inception, over

F-9

150 patients have participated in this program. Clinical data collected in the
treatment of these ME/CFS patients will be used to support the Company's
European Medical Evaluation Agency ("EMEA") Drug Approval Application and in
applications in other regulatory jurisdictions. A similar program underway in
Austria is undergoing expansion.

(2) Summary of Significant Accounting Policies

(a) Cash and Cash Equivalents

Cash equivalents consist of money market certificates and overnight repurchase
agreements collateralized by money market securities with original maturities of
less than three months, with both a cost and fair value of $2,256,000 and
$3,764,000 at December 31, 2002 and 2003, respectively.

(b) Short-term Investments

Investments with original maturities of more than three months and marketable
equity securities are considered available for sale. The investments classified
as available for sale include debt securities and equity securities carried at
estimated fair value of $555,000 and $1,495,000 at December 31, 2002 and 2003
respectively. The unrealized gains and losses are recorded as a component of
shareholders' equity.

Investments in companies in which the Company owns 20% or more and not more than
50% are accounted for using the equity method of accounting.

Investments in companies in which the Company owns less than 20% of and does not
exercise a significant influence are accounted for using the cost method of
accounting.

In 1998, the Company invested $1,074,000 for a 3.3% equity interest in R.E.D.
Laboratory ("R.E.D."). R.E.D. is a privately held biotechnology company for the
development of diagnostic markers for Chronic Fatigue Syndrome and other chronic
immune diseases. We have a research collaboration agreement with R.E.D. to
assist in this development. R.E.D. is headquartered in Belgium. The investment
was recorded at cost. During the three months ended June 30, 2002 and December
31, 2002 we recorded non-cash charges of $678,000 and $396,000 respectively, to
operations with respect to our investment in R.E.D. These charges were the
result of our determination that R.E.D.'s business and financial position had
deteriorated to the point that our investments had been permanently impaired.

In April, 1999 we acquired a 30% equity position in the California Institute of
Molecular Medicine ("CIMM") for $750,000 and entered into a research and
development arrangement. CIMM'S research is focused on developing therapies for
use in treating patients affected by Hepatitis C ("HCV"). We use the equity
method of accounting with respect to this investment. During the fourth quarter
of 2001 we recorded a non-cash charge of $485,000 with respect to our investment
in CIMM. This was a result of our determination that CIMM's operations have not
yet evolved to the point where the full carrying value of our investment could
be supported based on that company's financial position and operating results.
During 2002, CIMM continued to suffer significant losses resulting in a
deterioration of its financial condition. The $485,000 written off during 2001
represented the unamortized balance of goodwill included as part of the
Company's investment. Additionally, during 2001 the Company reduced its
investment in CIMM based on its percentage interest in CIMM's continued
operating losses. The Company's remaining investment at December 31, 2001 in

F-10

CIMM, representing its 30% interest in CIMM's equity at such date, was not
deemed to be permanently impaired, but was completely written off during 2002.
Such amount was not material. These charges are reflected in the Consolidated
Statements of Operations under the caption "Equity loss in unconsolidated
affiliates". We still believe CIMM will succeed in their efforts to advance
therapeutic treatment of HCV. We believe that CIMM's Hepatitis C diagnostic
technology has great promise and fills a long-standing global void in the
collective abilities to diagnose and treat Hepatitis C infection at an early
stage of the disorder.

The Company's investment in Ribotech, Ltd. is also accounted for using the
equity method of accounting. The Company received 24.9% of Ribotech, Ltd. as
partial compensation under the license agreement described in note 12. Ribotech,
Ltd. has incurred net losses since inception. The Company does not share in
those losses in accordance with the licensing agreement and is not obligated to
fund such losses. The net investment in Ribotech is zero at all year end periods
presented. During 2000, the Company prepaid $500,000 to Ribotech, Ltd. for raw
material purchases. $110,000 of materials were delivered in 2000 and the balance
of $390,000 was applied towards the purchase of materials during 2001.

Investments include an initial equity investment of $290,625 in Chronix
Biomedical ("Chronix"). Chronix focuses upon the development of diagnostics for
chronic diseases. This initial investment was made in May 31, 2000 by the
issuance of 50,000 shares of Company common stock from the treasury. On October
12, 2000, the Company issued an additional 50,000 shares of its common stock and
on March 7, 2001 the Company issued 12,000 more shares of its common stock from
the treasury to Chronix for an aggregate equity investment of $700,000. The
percentage ownership in Chronix is approximately 5.4% and is accounted for under
the cost method of accounting. During the quarter ended December 31, 2002, we
recorded a non cash charge of $292,000 with respect to our investment in
Chronix. This impairment reduces our carrying value to reflect a permanent
decline in Chronix's market value based on its then proposed investment
offerings.

During 2000, pursuant to a strategic alliance agreement, the Company provided
Chronix with $250,000 to conduct research in an effort to develop intellectual
property on potential new products for diagnosing and treating various chronic
illnesses including chronic fatigue syndrome. The strategic alliance agreement
provides the Company certain royalty rights with respect to certain diagnostic
technology developed from this research and a right of first refusal to license
certain therapeutic technology developed from this research. The payment of
$250,000 was charged to research and development expense during 2000.

(d) Property and Equipment
(000 omitted) December 31,
--------------------------
2002 2003
------- -------
Furniture, fixtures, and equipment $ 760 $ 779
Leasehold improvements 85 85
------- -------
Total property and equipment 845 864
Less accumulated depreciation 690 770
------- -------
Property and equipment, net $ 155 $ 94
======= =======

Property and equipment consists of furniture, fixtures, office equipment, and
leasehold improvements and is recorded at cost. Depreciation and amortization is
computed using the straight-line method over the estimated useful lives of the
respective assets, ranging from five to seven years. Depreciation and
amortization expense was $127,000, $91,000 and $80,000 for 2001, 2002 and 2003,
respectively. In 2002, fully depreciated equipment in the amount of $418,000 and

F-11

fully depreciated leasehold improvements in Europe in the amount of $12,000 were
written-off due to the closing of European offices.

(e) Patent and Trademark Rights

Effective October 1, 2001, the Company adopted a 17 year estimated useful life
for amortization of its patent and trademark rights in order to more accurately
reflect their useful life. Prior to October 1, 2001, the Company was using a 10
year estimated useful life. The adoption of the 17 year life has been accounted
for as a change in accounting estimate.

Patents and trademarks are stated at cost (primarily legal fees) and are
amortized using the straight line method over the life of the assets. The
Company reviews its patents and trademark rights periodically to determine
whether they have continuing value. Such review includes an analysis of the
patent and trademark's ultimate revenue and profitability potential on an
undiscounted cash flow basis to support the realizability of its respective
capitalized cost. Management's review addresses whether each patent continues to
fit into the Company's strategic business plans. During the years ended December
31, 2001, 2002 and 2003, the Company decided not to pursue the technology in
certain countries for strategic reasons and recorded charges of $38,000 $5,000,
and $5,000 respectively. Amortization expense was $359,000, $201,000 and
$122,000 in 2001, 2002 and 2003, respectively. The accumulated amortization as
of December 31, 2002 and 2003 is $2,096,000 and $2,150,000, respectively.

As of December 31, 2003, the weighted average remaining life of the patents and
trademarks was 8.6 years. Amortization of patents and trademarks for each of the
next five is as follows: 2004 - $96,000, 2005 - $94,000, 2006 - $90,000, 2007 -
$89,000 and 2008 - $87,000.

(f) Revenue and License Fee Income

On March 20, 2002 our European Subsidiary Hemispherx Biopharma Europe, S.A.
("Hemispherx, S.A.") entered into a Sales and Distribution agreement with
Laboratorios del Dr. Esteve S.A. ("Esteve"). Pursuant to the terms of the
Agreement, Esteve was granted the exclusive right to market Ampligen(R)in Spain,
Portugal and Andorra for the treatment of Myalgic Encephalitis/Chronic Fatigue
Syndrome ("ME/CFS"). Esteve paid the initial and non refundable fee of 625,000
Euros (approximately $563,000) to Hemispherx S.A. on April 24, 2002.

The terms of the agreement granting the licensee marketing rights for
Ampligen(R) for the treatment of myalgic/chronic fatigue syndrome ("ME/CFS") in
Spain, Portugal and Andorra require the Company to provide the licensee with
technical, scientific and commercial information. The Company fulfilled the
requirements during the first quarter of 2002. The agreement terms required no
additional performance on the part of the Company.

The agreement also requires the licensee to pay of 1,000,000 Euros after FDA
approval of Ampligen(R) for the treatment of ME/CFS and a fee of 1,000,000 after
issuance in Spain of final marketing approval authorization for Ampligen(R) for
the treatment of ME/CFS.

Revenues for non-refundable license fees are recognized under the Performance
Method-Expected Revenue. This method considers the total amount of expected
revenue during the performance period, but limits the amount of revenue
recognized in a period to total non-refundable cash received to date. This
limitation is appropriate because future milestone payments are contingent on
future events.

Upon receipt, the upfront non-refundable payment is deferred. The non-refundable
upfront payments plus non-refundable payments arising from the achievement of
defined milestones are recognized as revenue over the performance period based
on the lesser of (a)

F-12

percentage of completion or (b) non-refundable cash earned (including the
upfront payment).

This method requires the computation of a ratio of cost incurred to date to
total expected costs and then apply that ratio to total expected revenue. The
amount of revenue recognized is limited to the total non-refundable cash
received to date.

The percentage of expenses incurred to date to total expected expenses in
connection with the research and development project, exceed the percentage of
license fees received compared to total license fees to be earned per the
agreement. Therefore the amount of revenue recognized by the Company was limited
to the total non-refundable cash received to date of approximately $563,000.

Revenue from the sale of Ampligen(R) under cost recovery clinical treatment
protocols approved by the FDA is recognized when the treatment is provided to
the patient.

Revenues from the sale of Alferon N Injection(R) are recognized when the product
is shipped, as title is transferred to the customer. The Company has no other
obligation associated with its products once shipment has occurred.

During the years ending December 31, 2001, 2002 and 2003 the Company did not
receive any grant monies from local, state and or Federal Agencies.

(g) Net Loss Per Share

Basic and diluted net loss per share is computed using the weighted average
number of shares of common stock outstanding during the period. Equivalent
common shares, consisting of stock options and warrants, are excluded from the
calculation of diluted net loss per share since their effect is antidilutive.

(h) Accounting for Income taxes

Deferred income tax assets and liabilities are determined based on differences
between the financial statement reporting and tax bases of assets and
Liabilities and are measured using the enacted tax rates and laws in effect when
the differences are expected to reverse. The measurement of deferred income tax
assets is reduced, if necessary, by a valuation allowance for any tax benefits,
which are not expected to be realized. The effect on deferred income tax assets
and liabilities of a change in tax rates is recognized in the period that such
tax rate changes are enacted.

(i) Comprehensive (loss)

Comprehensive (loss) consists of net loss and net unrealized gains (losses) on
securities and is presented in the consolidated statements of changes in
stockholders' equity and comprehensive (loss).

(j) Use of Estimates

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses for the reporting period. Actual
results could differ from those estimates.

(k) Foreign currency translations

Assets and liabilities of the Company's foreign operations are generally
translated into U.S. dollars at current exchange rates as of balance sheet date.

F-13

Revenues and expenses are translated at average exchange rates during each
period. Transaction gains and losses that arise from exchange rate fluctuations
are included in the results of operations as incurred. The resulting translation
adjustments are immaterial for all years presented.

(l) Recent Accounting Standard and Pronouncements:

In November, 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, including Indirect
Guarantees of Indebtedness of Others" ("Interpretation No. 45"). Interpretation
No. 45 elaborates on the existing disclosure requirements for most guarantees,
including loan guarantees such as standby letters of credit. It also clarifies
that at the time a company issues a guarantee, the company must recognize an
initial liability for the fair market value of the obligations it assumes under
the guarantee and must disclose that information in its interim and annual
financial statements. The initial recognition and measurement provisions of
Interpretation No. 45 apply on a prospective basis to guarantees issued or
modified after December 31, 2002. Interpretation No. 45 did not have an effect
on our financial statements.

In December 2002, the FASB issued Statement No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure", and amendment of FASB
Statement No. 123 ("SFAS"). SFAS 148 amends FASB Statement No. 123, Accounting
for Stock-Based Compensation, to provide alternative method of transition for an
entity that voluntarily changes to the fair value based of accounting for
stock-based employee compensation. It also amends the disclosure provisions of
that Statement to require prominent disclosure about the effects on reported net
income of an entity's accounting policy decisions with respect to stock-based
employee compensation. Finally, this Statement amends Accounting Principles
Board ("APB") Opinion No. 28, Interim Financial Reporting to require disclosure
about those effects in interim financial information. SFAS 148 is effective for
financial statements for fiscal years ending after December 15, 2002. The
Company will continue to account for stock-based compensation using the
intrinsic value method of APB Opinion No. 25, "Accounting for Stock Issued to
Employees, "but has adopted the enhanced disclosure requirements of SFAS 148.

F-14

(m) Research and Development Costs

Research and development related to both future and present products are charged
to operation as incurred.

(n) Stock Based Compensation

The Company follows Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation." We chose to apply Accounting
Principal Board Opinion 25 and related interpretations in accounting for stock
options granted to our employees.
The Company provides pro forma disclosures of compensation expense under the
fair market value method of SFAS No. 123, "Accounting for Stock-Based
Compensation," and SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure."

The weighted average assumptions used for the years presented are as follows:

December 31,
2001 2002 2003
---- ---- ----
Risk-free interest rate 4.23% 5.23% 5.23%
Expected dividend yield -- -- --
Expected lives 3.0 yrs 2.5 yrs 2.5 yrs
Expected volatility 74.9% 63.17% 98.07%

Had compensation cost for the Company's option plan been determined using the
fair value method at the grant dates, the effect on the Company's net loss and
loss per share for the years ended December 31, 2001, 2002, and 2003 would have
been as follows:

(In Thousands except for per share data)

For the years ended December 31, 2001 2002 2003
--------------------------------- --------- --------- ---------
Net (loss)as reported $ (9,083) $ (7,424) $(14,770)

Add: Stock based compensation
included in net loss as reported,
net of related tax effects -- -- --

Deduct: Stock based compensation
determined under fair value based
method for all awards, net of
related tax effects (632) (1,085) (1,825)
-------- -------- --------

Pro forma - net loss $ (9,715) $ (8,509) $(16,595)
======== ======== ========

Basic and diluted loss
per share - as reported $ (.29) $ (.23) $ (.42)
======== ======== ========

Basic and diluted loss
per share - pro forma $ (.31) $ (.27) $ (.47)
======== ======== ========

For stock warrants granted to non-employees, the Company measures fair value of
the equity instruments utilizing the Black-Scholes method if that value is more
reliably measurable than the fair value of the consideration or service
received. The Company amortizes such cost over the related period of service.

F-15

The exercise price of all stock warrants granted was equal to the fair market
value of the underlying common stock as defined by APB 25 on the date of the
grant.

(0) Accounts Receivable

Concentration of credit risk, with respect to accounts receivable, is limited
due to the Company's credit evaluation process. The Company does not require
collateral on its receivables. The Company's receivables primarily consist of
amounts due from the wholesale drug companies as of December 31, 2003.

(3) Inventories

The Company uses the lower of first-in, first-out ("FIFO") cost or market method
of accounting for inventory.

Inventories consist of the following:

December 31, 2003
-----------------
Raw materials and work in process $1,729

Finished goods 1,167
-------
$2,896
=======

(4) ACQUISITION OF ASSETS OF INTEFERON SCIENCES, INC.

On March 11, 2003, we acquired from Interferon Sciences, Inc.'s ("ISI")
inventory of ALFERON N Injection, a pharmaceutical product used for the
treatment of certain types of genital warts, and a limited license for the
production, manufacture, use, marketing and sale of this product. As
consideration, we issued 487,028 shares of our common stock, assumed certain
liabilities and agreed to pay ISI 6% of the net sales of product. Pursuant to
our agreements with ISI, we have registered the foregoing shares for public
sale.

Except for 62,500 of the shares issued to ISI, we have guaranteed the market
value of the shares retained by ISI as of March 11, 2005, the termination date,
to be $1.59 per share. ISI is permitted to periodically sell certain amounts of
its shares. If, within 30 days after the termination date, holders of the
guaranteed shares request that we honor the guarantee, we will be obligated to
reacquire the holders' remaining guaranteed shares and pay the holders $1.59 per
share for a total of $675,000. Accordingly, certain shares issued in connection
with this transaction were initially recorded as redeemable common stock outside
of stockholders' equity. As of February 10, 2004, ISI had sold the 427,528
guaranteed shares at prices in excess of $1.59 per share.

On March 11, 2003, we also entered into an agreement to purchase from ISI all of
its rights to the product and other assets related to the product including, but
not limited to, real estate and machinery. For these assets, we agreed to issue
to ISI an additional 487,028 shares and to issue 314,465 shares and 267,296
shares, respectively to The American National Red Cross and GP Strategies, two
creditors of ISI, to continue to pay royalties of 6% on net sales of Alferon N
and other consideration, e.g., paying off a third creditor and paying a real
estate tax liability.

F-16

On May 30, 2003, we issued the shares to GP Strategies and the American National
Red Cross. Pursuant to our agreements with ISI and these two creditors, we have
agreed to register the foregoing shares for public sale. The acquisition of the
real estate and machinery is contingent on our receiving appropriate ISI
stockholder approval. The value of these guaranteed shares totaled $925,000 and
these shares are redeemable under certain conditions, accordingly they were
initially reflected as redeemable common stock and deferred acquisition costs on
the accompanying financial statements as of December 31, 2003. As of February
10, 2004 GP Strategies had sold their 247,296 shares. Additionally other
liabilities associated with the real estate in the amount of $621,000 have been
recorded as deferred acquisition costs. It is expected that ISI stockholder
approval will be obtained in March 2004 with substantially the entire amount of
the deferred purchase price being allocated to real estate.

As of December 31, 2003 all but 314,465 guaranteed shares had been sold. As a
result, the remaining liability for redeemable stock was $491,000.

Except for 62,500 of the 487,028 shares to be issued to ISI at closing of this
second asset acquisition, we have guaranteed the market value of the shares
retained by ISI on terms substantially similar to those for the guaranteed
shares issued to ISI on the first acquisition of ISI assets. Pursuant to our
agreement with ISI, we plan to register the foregoing shares for public sale.

We will account for these transactions as a Business Combination under Statement
of Financial Accounting Standards ("SFAS") No. 141 Accounting for Business
Combinations.

As a result of the first agreement, the following table summarizes the estimated
fair value of the assets and liabilities assumed at the initial acquisition
date.

At March 11, 2003
-----------------

Inventory $ 1,840,762

Fair Value of liabilities
Assumed (1,081,041)
-----------
Fair Value of Common Shares
Issued $ 759,721
===========

The following table represents the Unaudited pro forma results of operations as
though the acquisition, described in the first agreement, of certain net assets
of ISI occurred on January 1, 2002.

F-17

Years Ended December 31,
------------------------------------
2002 2003
---------- ----------
(in thousands except for share data)

Net revenues $ 2,830 $ 899
Expenses (14,699) (16,215)
------------ ------------
Net Loss $ (11,869) $ (15,316)
============ ============
Basic and diluted loss per share $ (.36) $ (.43)
------------ ------------
Weighted average shares outstanding 32,572,804 35,326,594
============ ============

In giving effect to the additional shares that would be issued as a result of
the second agreement with ISI the weighted average shares outstanding during the
Years Ending December 31, 2002 and 2003 would have been 33,641,593 and
36,055,994 resulting in a pro forma loss per share as adjusted of $(.36) and
$(.45) for said periods respectively.

(5) Short-term investments:

Securities classified as available for sale consisted of General Motors
commercial paper at December 31, 2003 where its cost approximated its market
value of $1,495,000 and matures in April and May 2004, and Calamos Mutual Market
at December 31, 2002 where its carrying value of $555,000 exceeded its cost by
$34,000.

(6) Accrued Expenses

Accrued expenses at December 31, 2002 and 2003 consists of the following:

(000's omitted)
December 31,
------------------
2002 2003
------- -------
Compensation ................................... $ 6 $ 366
Interest ....................................... -- 158
Commissions and royalties ...................... -- 100
Professional fees .............................. -- 126
Other expenses ................................. 222 369
Fees associated with litigation settlement ..... 450 --
------- -------
$ 678 $ 1,119
======= =======

(7) Debenture Financing

F-18

quarterly in cash or, subject to satisfaction of certain conditions, common
stock. Any shares of common stock issued to the investors as payment of interest
were valued at 95% of the average closing price of the common stock during the
five consecutive business days ending on the third business day immediately
preceding the applicable interest payment date. Pursuant to the terms and
conditions of the March Debentures, we pledged all of our assets, other than our
intellectual property, as collateral and were subject to comply with certain
financial and negative covenants, which include but was not limited to the
repayment of principal balances upon achieving certain revenue milestones.

The March Debentures were convertible at the option of the investors at any time
through January 31, 2005 into shares of our common stock. The conversion price
under the March Debentures was fixed at $1.46 per share, subject to adjustment
for anti-dilution protection for issuance of common stock or securities
convertible or exchangeable into common stock at a price less than the
conversion price then in effect.

The investors also received Warrants to acquire at any time through March 12,
2008 an aggregate of 743,288 shares of common stock at a price of $1.68 per
share. On March 12, 2004, the exercise price of the Warrants was to reset to the
lesser of the exercise price then in effect or a price equal to the average of
the daily price of the common stock between March 13, 2003 and March 11, 2004
(but in no event less than $1.176 per share). The exercise price (and the reset
price) under the Warrants also was subject to similar adjustments for
anti-dilution protection. All of these warrants have been exercised.

We entered into a Registration Rights Agreement with the investors in connection
with the issuance of the March Debentures and the Warrants. The Registration
Rights Agreement requires that we register the shares of common stock issuable
upon conversion of the Debentures, as interest shares under the Debentures and
upon exercise of the Warrants. In accordance with this agreement, we have
registered these shares for public sale.

As of December 31, 2003 the investors had converted the $5,426,000 principal of
the March Debentures into 3,716,438 shares of our common stock. The total
imputed interest on the debenture was $111,711 of which $17,290 was paid in cash
and $94,421 was paid by the issuance of 39,080 shares of common stock. The
investors exercised the 743,288 warrants in July 2003 which produced proceeds in
the amount of $1,248,724

On July 10, 2003, we issued an aggregate of $5,426,000 in principal amount of 6%
Senior Convertible Debentures due July 31, 2005 (the "July Debentures") and an
aggregate of 507,102 Warrants (the "July 2008 Warrants") to the same investors
who purchased the March 12, 2003 Debentures, in a private placement for
aggregate anticipated gross proceeds of $4,650,000. Pursuant to the terms of the
July Debentures, $1,550,000 of the proceeds from the sale of the July Debentures
were to have been held back and will be released to us if, and only if, we
acquired ISI's facility within a set timeframe. Although we had not acquired
ISI's facility, these funds were released to us in October 2003. The July
Debentures mature on July 31, 2005 and bear interest at 6% per annum, payable
quarterly in cash or, subject to satisfaction of certain conditions, common
stock. Any shares of common stock issued to the investors as payment of interest
shall be valued at 95% of the average closing price of the common stock during
the five consecutive business days ending on the third business day immediately
preceding the applicable interest payment date.

F-19

The July Debentures are convertible at the option of the investors at any time
through July 31, 2005 into shares of our common stock. The conversion price
under the July Debentures was fixed at $2.14 per share; however, as part of the
debenture placement closed on October 29, 2003 (see below), the conversion price
under the July Debentures was lowered to $1.89 per share. The conversion price
is subject to adjustment for anti-dilution protection for issuance of common
stock or securities convertible or exchangeable into common stock at a price
less than the conversion price then in effect.

The July 2008 Warrants received by the investors, as amended, are to acquire at
any time commencing on July 26, 2004 through January 31, 2009 an aggregate of
507,102 shares of common stock at a price of $2.46 per share. On July 10, 2004,
the exercise price of these July 2008 Warrants will reset to the lesser of the
exercise price then in effect or a price equal to the average of the daily price
of the common stock between July 11, 2003 and July 9, 2004 (but in no event less
than $2.14 per share). The exercise price (and the reset price) under the July
2008 Warrants also is subject to similar adjustments for anti-dilution
protection.

We entered into a Registration Rights Agreement with the investors in connection
with the issuance of the July Debentures and the July 2008 Warrants. The
Registration Rights Agreement requires that we register on behalf of the holders
the shares of common stock issuable upon conversion of the Debentures, as
interest shares under the Debentures and upon exercise of the July 2008
Warrants. These shares have been registered for public sale.

On June 25, 2003, we issued to each of the March 12, 2003 Debenture holders a
warrant to acquire at any time through June 25, 2008 an aggregate of 500,000
shares of common stock at a price of $2.40 per share. On June 25, 2004, the
exercise price of these June 2008 Warrants will reset to the lesser of the
exercise price then in effect or a price equal to the average of the daily price
of the common stock between June 26, 2003 and June 24, 2004 (but in no event
less than $1.68 per share). The exercise price (and the reset price) under the
June 2008 Warrants also is subject to adjustments for anti-dilution protection
similar to those in the July 2008 Warrants. Pursuant to our agreement with the
Debenture holders, we have registered the shares issuable upon exercise of these
June 2008 Warrants for public sale.

On October 29, 2003, we issued an aggregate of $4,142,357 in principal amount of
6% Senior Convertible Debentures due October 31, 2005 (the "October Debentures")
and an aggregate of 410,134 Warrants (the "October 2008 Warrants") in a private
placement for aggregate anticipated gross proceeds of $3,550,000. Pursuant to
the terms of the October Debentures, $1,550,000 of the proceeds from the sale of
the October Debentures have been held back and will be released to us if, and
only if, we acquired ISI's facility within 90 days of October 29, 2003 and
provide a mortgage on the facility as further security for the October
Debentures. The debenture holders have extended the deadline to 90 days after
January 26, 2004. The October Debentures mature on October 31, 2005 and bear
interest at 6% per annum, payable quarterly in cash or, subject to satisfaction
of certain conditions, common stock. Any shares of common stock issued to the
investors as payment of interest shall be valued at 95% of the average closing
price of the common stock during the five consecutive business days ending on
the third business day immediately preceding the applicable interest payment
date.

F-20

$1,550,000 of the proceeds from the October Debentures have been held back
pending our completing the acquisition of the ISI facility.

The October 2008 Warrants, as amended, received by the investors are to acquire
at any time commencing on July 26, 2004 through April 30, 2009 an aggregate of
410,134 shares of common stock at a price of $2.32 per share. On October 29,
2004, the exercise price of these October 2008 Warrants will reset to the lesser
of the exercise price then in effect or a price equal to the average of the
daily price of the common stock between October 29, 2003 and October 27, 2004
(but in no event less than $2.19 per share). The exercise price (and the reset
price) under the October 2008 Warrants also is subject to similar adjustments
for anti-dilution protection.

We entered into a Registration Rights Agreement with the investors in connection
with the issuance of the October Debentures and the October 2008 Warrants. The
Registration Rights Agreement requires that we register on behalf of the holders
the shares of common stock issuable upon conversion of the October Debentures,
as interest shares under the October Debentures and upon exercise of the 2008
Warrants. If, subject to certain exceptions, sales of all shares required to be
registered cannot be made pursuant to the registration statement, then we will
be required to pay to the investors their pro rata share of $3,635 for each day
such conditions exist.

On January 26, 2004, we issued an aggregate of $4,000,000 in principal amount of
6% Senior Convertible Debentures due January 31, 2006 (the "January 2004
Debentures"), an aggregate of 790,514 warrants (the "2009 Warrants") and 158,103
shares of common stock, and Additional Investment Rights (to purchase up to an
additional $2,000,000 principal amount of January 2004 Debentures commencing in
six months) in a private placement for aggregate anticipated net proceeds of
$3,695,000. The January 2004 Debentures mature on January 31, 2006 and bear
interest at 6% per annum, payable quarterly in cash or, subject to satisfaction
of certain conditions, common stock. Any shares of common stock issued to the
investors as payment of interest shall be valued at 95% of the average closing
price of the common stock during the five consecutive business days ending on
the third business day immediately preceding the applicable interest payment
date. Commencing six months after issuance, the Company is required to start
repaying the then outstanding principal amount under the January 2004 Debentures
in monthly installments amortized over 18 months in cash or, at the Company's
option, in shares of common stock. Any shares of common stock issued to the
investors as installment payments shall be valued at 95% of the average closing
price of the common stock during the 10-day trading period commencing on and
including the eleventh trading day immediately preceding the date that the
installment is due.

F-21

There are two classes of July 2009 warrants received by the Investors: Class A
and Class B. The Class A warrants are to acquire any time from July 26, 2004
through July 26, 2009 an aggregate of up to 395,257 shares of common stock at a
price of $3.29 per share. The Class B warrants are to acquire any time from July
26, 2004 through July 26, 2009 an aggregate of up to 395,257 shares of common
stock at a price of $5.06 per share. On January 27, 2005, the exercise price of
these July 2009 Class A and Class B Warrants will reset to the lesser of their
respective exercise price then in effect or a price equal to the average of the
daily price of the common stock between January 27, 2004 and January 26, 2005
(but in no event less than $2.58 per share with regard to the Class A warrants
and $3.54 per share with regard to the Class B warrants). The exercise price
(and the reset price) under the July 2009 Warrants also is subject to similar
adjustments for anti-dilution protection.

The Company also issued to the investors Additional Investment Rights pursuant
to which the investors have the right to acquire up to an additional $2,000,000
principal amount of January 2004 Debentures from the Company. These Debentures
are identical to the January 2004 Debentures except that the conversion price is
$2.58. The Additional Investment Rights are exercisable commencing on July 26,
2004 (the "Trigger" date) for a period of 90 days from the Trigger Date or 90
days from the date which the registration statement registering the shares
issuable upon the conversion of the January 2004 Debentures to be issued
pursuant to the Additional Investment Rights is declared effective, whichever is
longer.

The Company entered into a Registration Rights Agreement with the investors in
connection with the issuance of the January 2004 Debentures (including any
Debentures issued pursuant to the Additional Investment Rights), the shares, and
the January 2009 Warrants. The Registration Rights Agreement requires that the
Company register on behalf of the investors the shares issued to the investors
and 135% of the shares issuable upon conversion of the Debentures (including
payment of interest thereon) and upon exercise of the January 2009 Warrants. If
the Registration Statement containing these shares is not filed within the time
period required by the agreement, not declared effective within the time period
required by the agreement or, after it is declared effective and subject to
certain exceptions, sales of all shares required to be registered thereon cannot
be made pursuant thereto, then we will be required to pay to the investors their
pro rata share of $3,635 for each day any of the above conditions exist with
respect to this Registration Statement.

By agreement between the Company and the investors, the date upon which all
warrants previously issued to the investors may become exercisable is now July
26, 2004 and the exercise periods of these warrants have been extended
accordingly.

By agreement with Cardinal Securities, LLC, for general financial advisory
services and in conjunction with the private debenture placements in March, July
and October 2003 and in January 2004, we paid Cardinal Securities, LLC an
investment banking fee equal to 7% of the investments made by the two Debenture
holders and issued to Cardinal certain warrants. A portion of the investment
banking fee was paid with the issuance of 30,000 shares of our common stock.
Cardinal also received 612,500 warrants to purchase common stock, of which
112,500 are exercisable at $1.74 per share, 112,500 are exercisable at $2.57 per
share, 200,000 are exercisable at $2.50 per share, 87,500 are exercisable at
$2.42 per share and 100,000 are exercisable at $3.04 per share. The $1.74
warrants expire on July 10, 2008, the $2.57 and $2.50 warrants expire on March
12, 2008, the $2.42 warrants expire on October 30, 2008 and the $3.04 warrants
expire on January 25, 2009. By agreement

F-22

with Cardinal, we have registered 542,500 shares for public sale and have agreed
to register the balance.

In connection with the debenture agreements, we have outstanding letters of
credit of $1 Million as additional collateral.

As of December 31, 2003, the investors have converted $6,595,000 of debt from
the March and July Debentures into 4,334,916 shares of our common stock. The
March Debentures have been fully converted. The remaining principal balance on
the remaining debentures is convertible into shares of our stock at the option
of the investors at any time, through the maturity date. In addition, we have
paid $1,300,000 into the debenture cash collateral account as required by the
terms of the October Debentures. The amounts paid through December 31, 2003 have
been accounted for as advances receivable and are reflected as such on the
accompanying balance sheet as of December 31, 2003. The cash collateral account
provides partial security for repayment of the July and October 2003 and January
2004 Debentures in the event of default.

The March, July, and October 2003 debenture issuances of $5,426,000, $5,426,000,
and $4,142,357, respectively, and warrant issuances, were accounted for in
accordance with EITF 98-5: Accounting for convertible securities with beneficial
conversion features or contingency adjustable conversion and with EITF No.
00-27: Application of issue No. 98-5 to Certain convertible instruments. The
Company determined the fair values to be ascribed to detachable warrants issued
with the convertible debentures utilizing the Black-Scholes method.

As a result, the Company recorded debt discounts of approximately $11.8 million
for the 2003 debenture issuances which, in effect, reduced the carrying value of
our debt. As debt is converted to common stock, the remaining unamortized debt
discount is charged to finance costs. These costs were initially deferred and
charged to finance costs over the life of the debentures. As of December 31,
2003, the amount of debt discount amortized to finance cost totaled
approximately $7.3 million.

Costs associated with the financings aggregated approximately $1.3 million.
These costs are also deferred and expensed as finance costs over the life of the
debentures.

Excluding the application of related accounting standards, and remaining debt
discounts of $4.5 million, the Company's outstanding debt as of December 31,
2003 totaled $6.6 million and is due during 2005.

(8) Stockholders' Equity

(a) Preferred Stock

The Company is authorized to issue 5,000,000 shares of $.01 per value preferred
stock with such designations, rights and preferences as may be determined by the
board of directors. There were no preferred shares issued and outstanding at
December 31, 2002 and 2003.

(b) Common Stock

.. On July 31, 2003, we had approximately 104,000 shares of our $.001 authorized
shares of $.001 par value Common Stock that were not issued or reserved for
issuance. In order to accommodate the shares needed for the July Debenture, Dr.
Carter, our Chief Executive Officer and Cardinal Capital, the placement agent,
agreed that they would not exercise their warrants or options unless and

F-23

until our stockholders approved an increase in our authorized shares of common
stock (see note 11). This action freed up 3,206,650 shares. One of the proposals
for the annual meeting of our stockholders that was held in September 2003 was
an amendment to our certificate of incorporation to increase the authorized
shares of common stock from 50,000,000 to 100,000,000 (the "Proposal"). We could
not be assured that the Proposal would be approved.

Our stockholders approved an amendment to our corporate charter at the Annual
Shareholder meeting held in Philadelphia, PA on September 10, 2003. This
amendment increased our authorized shares from 50,000,000 to 100,000,000.

As of December 31, 2002 and 2003, 32,106,972 and 39,067,134 shares, net of
shares held in the treasury, were outstanding, respectively.

On March 20, 2002 our European Subsidiary Hemispherx Biopharma Europe, S.A.
("Hemispherx, S.A.") entered into a Sales and Distribution agreement with
Laboratorios del Dr. Esteve S.A. ("Esteve"). Pursuant to the terms of the
Agreement, Esteve was granted the exclusive right to market Ampligen(R) in Spain
Portugal and Andorra for the treatment of Myalgic Encephalitis/Chronic Fatigue
Syndrome ("ME/CFS"). In addition to other terms and other projected payments,
Esteve paid an initial and non refundable fee of 625,000 Euros (approximately
$563,000) to Hemispherx S.A. on April 24, 2002 as the first part of a series of
milestone based payments.

During March 2002, Hemispherx Biopharma Europe, S.A. (Hemispherx S.A.) was
authorized to issue up to 22,000,000 Euros of seven percent (7%) convertible
preferred securities. Such securities will be guaranteed by the parent company
and will be converted into a specified number of shares of Hemispherx S.A.
pursuant to the securities agreement. Conversion is to occur on the earlier of
an initial public offering of Hemispherx S.A. on a European stock exchange or
September 30, 2003.

Esteve purchased 1,000,000 Euros of Hemispherx Biopharma Europe S.A.'s
convertible preferred equity certificates on May 23, 2002. During 2002, the
terms and conditions of these securities were changed so that these preferred
equity certificates could be converted into the common stock of Hemispherx
Biopharma, Inc. (HEB) in the event that a European IPO is not completed by
September 30, 2003. The conversion rate is to be 300 shares of Hemispherx
Biopharma, Inc.'s common shares for each 1,000 Euro convertible preferred
certificate. As a result the Company recorded approximately $946,000 as minority
interest in subsidiary on its balance sheet at December 31, 2002.

On December 18, 2002, we proposed that Esteve convert their convertible
preferred equity certificates into Hemispherx common stock pursuant to the terms
of the agreement and all unpaid dividends at the market price on that conversion
date. On January 9, 2003, Esteve accepted our proposal and we registered these
shares for public sale.

On March 13, 2003, we issued 347,445 shares of our common stock to Provesan SA,
an affiliate of Esteve S.A., in exchange for 1,000,000 Euros of convertible
preferred equity certificates and any unpaid dividends. As a result of the
exchange, the minority interest in subsidiary was transferred to stockholders'
equity on such date.

The contingent conversion price was more than the then market value of the
parent company's or subsidiaries' common stock at each of the respective
measurement dates. As a result and in accordance with Emerging Issues Task

F-24

Force (EITF) No. 00-27 "Application of Issue No. 98-5 (Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios) to Certain Convertible Instruments", the Company
did not ascribe any value to any contingent conversion feature.

(d) Common Stock Options and Warrants

(i) Stock Options

The 1990 Stock Option Plan provides for the grant of options to purchase up to
460,798 shares of the Company's Common Stock to employees, directors, and
officers of the Company and to consultants, advisors, and other persons whose
contributions are important to the success of the Company. The recipients of
options granted under the 1990 Stock Option Plan, the number of shares to be
converted by each option, and the exercise price, vesting terms, if any,
duration and other terms of each option shall be determined by the Company's
board of directors or, if delegated by the board, its Compensation Committee. No
option is exercisable more than 10 years and one month from the date as of which
an option agreement is executed. These shares become vested through various
periods not to exceed four years from the date of grant. The option price
represents the fair market value of each underlying share of Common Stock at the
date of grant, based upon the public trading price.

Information regarding the options approved by the Board of Directors under the
1990 Stock Option Plan is summarized below:

2001 2002 2003
------------------------------ ----------------------------- -----------------------------

Weighted Weighted Weighted
Average Average Average
Option Exercise Option Exercise Option Exercise
Shares Price Price Shares Price Price Shares Price Price
------ ----- ----- ------ ----- ----- ------ ----- -----

Outstanding,
beginning of
year 218,567 $1.06-6.81 $3.45 306,263 $1.06-4.34 $3.58 294,665 $1.06-4.34 $3.50

Granted 94,000 $4.03 $4.03 -- -- -- 200,000 $2.75 $2.75

Canceled

(6,304) $4.34-6.81 $5.91 (11,598) $3.00-4.34 $3.71 (61,531) $3.80-4.03 $3.97

Exercised -- -- -- -- -- -- -- -- --

Outstanding,
end of year 306,263 $1.06-4.34 $3.58 294,665 $1.06-4.34 $3.57 433,134 $1.06-4.34 $3.10
======= ======= =======

Exercisable 234,263 $1.06-4.34 $4.67 252,746 $1.06-4.34 $3.50 433,134 $1.06-4.34 $3.10
======= ======= =======
Weighted
average
remaining
contractual 3.57 3.68 3.37
----- ----- -----
life (years) years years years
===== ===== =====

Exercised in
current and
prior years
(37,791) (37,791) (37,791)
======= ======= =======

Available for
future grants 116,744 128,342 -0-
======= ======= =======

In December 1992, the Board of Directors approved the 1992 Stock Option Plan
(the 1992 Stock Option Plan) which provides for the grant of options to

F-25

purchase up to 92,160 shares of the Company's Common Stock to employees,
directors, and officers of the Company and to consultants, advisers, and other
persons whose contributions are important to the success of the Company. The
recipients of the options granted under the 1992 Stock Option Plan, the number
of shares to be covered by each option, and the exercise price, vesting terms,
if any, duration and other terms of each option shall be determined by the
Company's board of directors. No option is exercisable more than 10 years and
one month from the date as of which an option agreement is executed. To date, no
options have been granted under the 1992 Stock Option Plan.

The Company's 1993 Employee Stock Purchase Plan (the 1993 Purchase Plan) was
approved by the board of directors in July 1993. The outline of the 1993
Purchase Plan provides for the issuance, subject to adjustment for capital
changes, of an aggregate of 138,240 shares of Common Stock to employees.

The 1993 Purchase Plan is administered by the Compensation Committee of the
board of directors. Under the 1993 Purchase Plan, Company employees are eligible
to participate in semi-annual plan offerings in which payroll deductions may be
used to purchase shares of Common Stock. The purchase price for such shares is
equal to the lower of 85% of the fair market value of such shares on the date of
grant or 85% of its fair market value of such shares on the date such right is
exercised. There have been no offerings under the 1993 Purchase Plan to date and
no shares of Common Stock have been issued thereunder.

During 2003, the Company issued options to acquire 200,000 shares to its general
counsel under the 1990 plan for services rendered. As a result, the Company
charged operating expenses in the amount of $237,000.

(ii) Stock warrants

Number of warrants exercisable into shares of common stock

2001 2002 2003
-------------------------------- -------------------------------- -------------------------------
Weighted Weighted Weighted
Average Average Average
Option Exercise Option Exercise Option Exercise
Shares Price Price Shares Price Price Shares Price Price
------ ----- ----- ------ ----- ----- ------ ----- -----

Outstanding
beginning of
year 11,624,168 $1.75-12.00 $4.05 6,927,110 $1.75-16.00 $4.77 7,967,810 $1.75-16.00 $3.18

Granted 856,650 $5.00-16,00 $9.89 1,802,000 $2.00-6.00 $2.07 4,623,024 $1.68-2.57 $2.32

Canceled (3,396,508) $2.50-4.00 $3.89 (750,000) $3.50-6.00 $3.72 (276,000) $4.00-10.00 $6.54

Exercised (2,157,200) $1.75-4.00 $3.75 (11,300) $1.75-7.50 $3.30 (812,038) $1.68-1.75 $1.69
---------- --------- ----------

Outstanding
end of year 6,927,110 $1.75-16.00 $4.77 7,967,810 $1.75-16.00 $3.18 11,502,796 $1.74-16.00 $3.57
========== ========= ==========

Exercisable 6,927,110 $1.75-16.00 $4.77 6,345,810 $1.75-16.00 $3.48 8,635,560 $1.74-16.00 $4.11
========== ========= ==========

Weighted
average
remaining
contractual
life (years) 4.05 years 4.03 years 4.04 years
========== ========== ==========

Years
exercisable 2002-2006 2003-2008 2004-2008
========= ========= =========

F-26

The following table summarizes information about stock warrants outstanding at
December 31, 2003:

Exercise price range Total

$1.74-$5.00 $6.00-$9.00 $10.00-$16.00 $1.74-$16.00
----------- ----------- ------------- ------------

Outstanding warrants
Number outstanding 9,545,346 1,357,450 600,000 11,502,796
Weighted average remaining
contractual life(years)
4.84 1.51 1.46 4.04
Weighted average exercise price $2.56 $6.77 $12.33 $3.57
Exercisable warrants
Number outstanding 6,678,110 1,357,450 600,000 8,635,560
Weighted average exercise price $2.70 $6.77 $12.33 $4.11

Certain of the stock warrants outstanding are subject to adjustments for stock
splits and dividends.

Warrants issued to stockholders

At December 31, 2000, there were 305,160 warrants remaining. In 2001, 73,000
were converted to common stock. At December 31, 2001 there were 232,160 warrants
remaining. In 2002, 10,000 were converted to common stock. At December 31, 2002
and 2003 there were 222,160 warrants remaining. These warrants have an exercise
price of $3.50 per share and expire in October 2004.

Other stock warrants

In addition, the Company has other issued warrants outstanding - totaling
11,280,636 which consists of the following:

In November 1994, the Company granted Rule 701 Warrants to purchase an aggregate
of 2,080,000 shares of Common Stock to certain officers and directors. These
Warrants are exercisable at $3.50 per share and, if not exercised, were to
expire in September, 1999. On February 19, 1999 the Board of Directors extended
the expiration date for three more years. In 1999 235,000 warrants were
exercised and 5,000 warrants were exercised in 2000. At December 31, 2000, there
were 1,840,000 Rule 701 warrants remaining. In 2001 20,000 of these warrants
expired, leaving a balance of 1,820,000 in warrants outstanding at December 31,
2001. During 2002, 420,000 warrants expired and the Company extended the
expiration date of the remaining balance of 1,400,000 for a period of five years
to now expire on September 30, 2007. These stock warrants have an exercise price
of $3.50. In accordance with FASB Interpretation No. 44, Accounting for Certain
Transactions involving Stock Compensation, no compensation expense was
recognized as the exercise price at the extension date exceeded the fair value
of the underlying common stock.

In May 1995, the Company and certain officers, directors and shareholders
entered into a standby finance agreement pursuant to which the parties agreed to
provide an aggregate of $5,500,000 in financing to the Company during 1995 in
the event that existing and additional financing was insufficient to cover the
cash needs of the Company through December 31, 1996. In exchange, the Company
issued warrants to purchase an aggregate of 2,750,000 shares of Common

F-27

Stock at $1.75 per share to the parties. In 1999, 290,000, in 2000, 216,500, in
2001, 200,000, 2002, 1,300 and in 2003 35,000 of these warrants were exercised,
leaving a balance of these warrants of 1,415,200. These warrants expire June 30,
2005.

In the years 2001, 2002 and 2003, the Company issued 450,000, 25,000 and no
warrants, respectively, exclusive of warrants issued in connection with the
Company's 2003 Debenture issuances (see below), to investment banking firms for
services performed on behalf of the Company. Accordingly, the Company recorded
stock compensation of 637,000, 133,000 and none for the years 2001, 2002 and
2003, respectively. These warrants have various vesting dates and exercisable
prices ranging from $4.00 to $16.00 per share. 1,193,800 warrants were
outstanding at December 31, 2002. In 2003, 225,000 of these warrants expired
leaving a balance of 968,800 warrants at December 31, 2003. These warrants are
exercisable in five years from the date of issuance.

In 2001, 2002 and 2003 the Company had non-public warrants outstanding of
2,254,650, 3,701,650 and 5,100,650 respectively. These warrants are exercisable
at rates of $2.20 to $10.00 per share of common stock. The exercise price was
equal to the fair market value of the stock on the date of grant. During 2003
the company granted 1,450,000 warrants to employees with an exercise price of
$2.20 for services performed and 51,000 warrants expired. During 2002, the
Company granted 1,777,000 warrants to employees for services performed. These
warrants have a weighted average exercise price of $2.07 per share, and have
been included in the pro-forma loss calculation in note 2(n). During 2001,
370,000 of the non public warrants were exercised and 415,000 expired without
being exercised. 2,254,650 of the non-public warrants were outstanding at
December 31, 2001. During 2002, none of these warrants were exercised and
750,000 expired. 3,701,650 of the non-public warrants were outstanding at
December 31, 2002. During 2002 the Company also extended the expiration date of
322,000 of these warrants for a period of five years to now expire in the years
ending 2007 and 2008. These stock warrants have exercise prices ranging from
$3.50 to $4.00 In accordance with FASB Interpretation No. 44, Accounting for
Certain Transactions involving Stock Compensation, no compensation expense was
recognized as the exercise price at the extension date exceeded the fair value
of the underlying common stock.

In 2003 the company issued warrants to acquire 3,173,024 shares in connection
with the financing of the purchase of the assets of Interferon Sciences, Inc.
During 2003, 777,038 of these warrants were exercised leaving a balance of
2,395,986 at December 31, 2003.

(e) Stock Repurchase

The Company's repurchases of shares of common stock are recorded as "Treasury
Stock" and result in a reduction of "Stockholders' equity." When treasury shares
are reissued, the Company uses a first-in, first-out method and the excess of
repurchase cost over reissuance price is treated as a reduction of "Additional
paid-in capital." At December 31, 2003 there were 443 shares in the treasury.
During 2003 most of the then existing treasury shares were either re-issued or
retired.

(f) Rights offering

On November 19, 2002, the Board of Directors of Hemispherx Biopharma, Inc. (the
"Company") declared a dividend distribution of one Right for each outstanding
share of Common Stock to stockholders of record at the close of business on
November 29, 2002 (the "Record Date"). Each Right entitles the

F-28

registered holder to purchase from the Company a unit consisting of one
one-hundredth of a share (a "Unit") of Series A Junior Participating Preferred
Stock, par value $.01 per share (the "Series A Preferred Stock") at a Purchase
Price of $30.00 per Unit, subject to adjustment. The description and terms of
the Rights are set forth in a Rights Agreement (the "Rights Agreement") between
the Company and Continental Stock Transfer & Trust Company, as Rights Agent.

Initially, the Rights are attached to all Common Stock certificates
representing shares then outstanding, and no separate Rights Certificates will
be distributed. Subject to certain exceptions specified in the Rights Agreement,
the Rights will separate from the Common Stock and a Distribution Date will
occur upon the earlier of (i) 10 days following a public announcement that a
person or group of affiliated or associated persons (an "Acquiring Person") has
acquired beneficial ownership of 15% or more (or 20% or more for William A.
Carter, M.D.) of the outstanding shares of Common Stock (the "Stock Acquisition
Date"), other than as a result of repurchases of stock by the Company or certain
inadvertent actions by institutional or certain other stockholders or (ii) 10
business days (or such later date as the Board shall determine) following the
commencement of a tender offer or exchange offer that would result in a person
or group becoming an Acquiring Person. Until the Distribution Date, (i) the
Rights will be evidenced by the Common Stock certificates and will be
transferred with and only with such Common Stock certificates, (ii) new Common
Stock certificates issued after the Record Date will contain a notation
incorporating the Rights Agreement by reference and (iii) the surrender for
transfer of any certificates for Common Stock outstanding will also constitute
the transfer of the Rights associated with the Common Stock represented by such
certificate. Pursuant to the Rights Agreement, the Company reserves the right to
require prior to the occurrence of a Triggering Event (as defined below) that,
upon any exercise of Rights, a number of Rights be exercised so that only whole
shares of Preferred Stock will be issued.

(9) Segment and Related Information

The Company operates in one segment, which performs research and development
activities related to Ampligen(R) and other drugs under development, and sales
and marketing of Alferon(R).

F-29

The following table presents revenues by country based on the location of the
use of the product services.

(000's omitted)
2001 2002 2003
---- ---- ----
United States ..................... $274 $237 $655
Belgium ........................... 107 74 2
Other ............................. 9 30 --
---- ---- ----
$390 $341 $657
==== ==== ====

In addition, in 2002, the Company recorded License Fee Income in the amount of
$563,000 from a Company located in Europe. The Company employs an insignificant
amount of net property and equipment in its foreign operations.

(10) Research, Consulting and Supply Agreements

In December, 1999, the Company entered into an agreement with Biovail
Corporation International ("Biovail"). Biovail is an international full service
pharmaceutical company engaged in the formulation, clinical testing,
registration and manufacture of drug products utilizing advanced drug delivery
systems. Biovail is headquartered in Toronto, Canada. The agreement grants
Biovail the exclusive distributorship of the Company's product in the Canadian
territories subject to certain terms and conditions. In return, Biovail agrees
to conduct certain pre-marketing clinical studies and market development
programs, including without limitation, expansion of the Emergency Drug Release
Program in Canada with respect to the Company' products. Biovail agrees to work
with the Company in preparing and filing of a New Drug Submission with Canadian
Regulatory Authorities. Biovail invested $2.25 million in Hemispherx equity at
prices above the then current market price and agreed to make further payments
based on reaching certain regulatory milestones. The Agreement requires Biovail
to penetrate certain market segments at specific rates in order to maintain
market exclusivity.

The Company has entered into agreements for consulting services, which are
performed at medical research institutions and by medical and clinical research
individuals. The Company's obligation to fund these agreements can be terminated
after the initial funding period, which generally ranges from one to three years
or on an as-needed monthly basis. During the year ending December 31, 2001, 2002
and 2003 the Company incurred approximately $595,000, $395,000 and $389,000
respectively, of consulting service fees under these agreements. These costs are
charged to research and development expense as incurred.

(11) 401(K) Plan

The Company has a defined contribution plan, entitled the Hemispherx Biopharma
Employees 401(K) Plan and Trust Agreement (the 401(K) Plan). Full time employees
of the Company are eligible to participate in the 401(K) Plan following one year
of employment. Subject to certain limitations imposed by federal tax laws,
participants are eligible to contribute up to 15% of their salary (including
bonuses and/or commissions) per annum. Participants' contributions to the 401(K)
Plan may be matched by the Company at a rate determined annually by the Board of
Directors.

F-30

Each participant immediately vests in his or her deferred salary contributions,
while Company contributions will vest over one year. In 2001, 2002 and 2003 the
Company provided matching contributions to each employee for up to 6% of annual
pay aggregating $48,000, $38,000 and $34,000 respectively.

(12) Royalties, License, and Employment Agreements

The Company also has entered into a licensing agreement with a group of
individuals and Hahnemann University relating to their contributions to the
development of certain compounds, including Ampligen(R), and to obtain exclusive
information and regulatory rights relating to these compounds. Under this
agreement, the Company will pay 2% of net sales proceeds of Ampligen(R) not to
exceed an aggregate amount of $6 million per year through 2005.

In August 1988, the Company entered into a pharmaceutical use license agreement
with Temple University (the Temple Agreement). In July, 1994, Temple terminated
the Temple Agreement. In November 1994, the Company filed suit against Temple in
the Superior Court of the State of Delaware seeking a declaratory judgment that
the agreement was unlawfully terminated by Temple and therefore remained in full
force and effect. Temple filed a separate suit against the Company seeking a
declaratory judgment that its agreement with the Company was properly
terminated. These legal actions have now been settled. Under the settlement, the
parties have entered into a new pharmaceutical use license agreement (New Temple
Agreement) that is equivalent in duration and scope to the previous license.
Under the terms of the New Temple Agreement, Temple granted the Company an
exclusive world-wide license for the term of the agreement for the commercial
sale of Oragen products using patents and related technology held by Temple,
which license is exclusive except to the extent Temple is required to grant a
license to any governmental agency or non-profit organization as a condition of
funding for research and development of the patents and technology licensed to
the Company.

In October 1994, the Company entered into a licensing agreement with Bioclones
(Propriety) Limited (SAB/Bioclones) with respect to co-development of various
RNA drugs, including Ampligen(R), for a period ending three years from the
expiration of the last licensed patents. The licensing agreement provides
SAB/Bioclones with an exclusive manufacturing and marketing license for certain
southern hemisphere countries (including certain countries in South America,
Africa and Australia as well as the United Kingdom and Ireland (the licensed
territory). In exchange for these marketing and manufacturing rights, the
licensing agreement provides for: (a) a $3 million cash payment to the Company,
all of which was received during the year ended December 31, 1995; (b) the
formation and issuance to the Company of 24.9% of the capital stock of Ribotech,
Ltd., a company which developed and operates a new manufacturing facility that
produces raw material components of Ampligen(R) and (c) royalties of 6% to 8% of
net sales of the licensed products in the licensed territories as defined, after
the first $50 million of sales. SAB/Bioclones will be granted a right of first
refusal to manufacture and supply to the Company licensed products for not less
than one third of its world-wide sales of Ampligen(R), excluding SAB/Bioclones
related sales. In addition, SAB/Bioclones will have the right of first refusal
for oral vaccines in the licensed territory. In 2000, the Company paid to
Ribotech a total of $500,000 for the current and future purchases and delivery
of polymers. Of the $500,000 advanced in 2000, a balance of $390,000 was
included in other assets in 2000 and was used for purchases of polymers in 2001.
In 2002, $262,000 was paid to Ribotech for delivery of Polymers.

In October 1994, the Board of Directors granted a director of the Company the
right to receive 3% of gross proceeds of any licensing fees received by the
Company pursuant to the SAB/Bioclones licensing agreement, a fee of .75% of

F-31

gross proceeds in the event that SAB Bioclones makes a tender offer for all or
substantially all of the Company's assets, including a merger, acquisition or
related transaction, and a fee of 1% on all products manufactured by SAB
Bioclones. The Company may prepay in full its obligation to provide commissions
within a ten year period.

On March 20, 2002, our European subsidiary Hemispherx Biopharma Europe, S.A.
("Hemispherx S.A.") entered into a sales and Distribution agreement with
Laboratories Del Dr. Esteve S.A. ("Esteve"). Pursuant to the terms of the
agreement, Esteve was granted the exclusive right to market Ampligen(R) in
Spain, Portugal and Andorra for the treatment of Myalgic/Chronic Fatigue
Syndrome ("ME/CFS"). In addition to other terms and other projected payments,
Esteve paid an initial and non-refundable fee of 625,000 Euros (approximately
$563,000) to Hemispherx S.A. on April 24, 2002. Esteve is to pay a fee of
1,000,000 Euros after U.S. Food and Drug Administration approval of Ampligen(R)
for the treatment of ME/CFS and a fee of 1,000,000 Euros upon Spain's approval
of the final marketing authorization for using Ampligen(R) for the treatment of
ME/CFS.

In connection with the two agreements entered into with ISI, the Company is
obligated to pay ISI a 6% royalty on the net sales of the Alferon N Injection
product.

The Company has contractual agreements with two of its officers. The aggregate
annual base compensation under these contractual agreements for 2001, 2002 and
2003 was $603,000, $620,000 and $637,000 respectively. In addition, certain of
these officers are entitled to receive performance bonuses of up to 25% of the
annual base salary (in addition to the bonuses described below). In 2001 and
2002 no performance bonuses were granted. In 2003, bonuses of $266,100 were
granted. In 2001, certain officers were granted warrants and options to purchase
426,650 shares of Common Stock at $4.01 per share. In 2002, certain officers
were granted warrants and option to purchase 1,220,000 shares of common stock at
$2.00 - $4.03 per share. In 2003, the Chief Executive Officer of the Company was
granted warrants to purchase 1,450,000 shares of common stock at $2.20 per
share. The Chief Executive Officer's employment agreement provides for bonuses
based on gross proceeds received by the Company from any joint venture or
corporate partnering agreement.

In order to facilitate the Company's need to obtain financing and prior to our
shareholders approving an amendment to our corporate charter to merge the number
of authorized shares, Dr. Carter, the Company's Chief Executive Officer, agreed
to waive his right to exercise certain warrants and options unless and until our
shareholder approved an increase in our authorized shares of Common Stock.

In October 2003, in recognition of this action as well as Dr. Carter's prior and
on-going efforts relating to product development securing critically needed
financing and the acquisition of a new product line, the Compensation Committee
determined that Dr. Carter be awarded bonus compensation in 2003 consisting of
$196,636 and a grant of 1,450,000 stock warrants with an exercise price of $2.20
per share. This additional compensation was reviewed by an independent valuation
firm and found to be fair and reasonable within the context of total
compensation paid to chief executive officers of comparable biotechnology
companies. These warrants vest upon the earlier of the second ISI Asset closing
or the filing by the Company with the U.S. Food and Drug Administration of a new
drug application. Upon the occurrence of either of these events, the Company
will expense the intrinsic value, if any, of the warrants.

F-32

(13) Leases

The Company has several noncancelable operating leases for the space in
which its principal offices are located and certain office equipment.

Future minimum lease payments under noncancelable operating leases are as
follows:
(000's omitted)
Year ending Operating
December 31, leases
------------ ---------
2004 .................................. 286
2005 .................................. 240
2006 .................................. 193
2007 .................................. 65
----
Total minimum lease payments ........... $784
====

Rent expense charged to operations for the years ended December 31, 2001, 2002
and 2003 amounted to approximately $294,000, $307,000 and $266,000 respectively.
The term of the lease for the Rockville, Maryland facility is through June, 2005
with an average rent of $8,000 per month, plus applicable taxes and charges. The
term of the lease for the Philadelphia, Pennsylvania offices is through April,
2007 with an average rent of $15,000 per month, plus applicable taxes and
charges.

(14) Income Taxes

As of December 31, 2003, the Company has approximately $73,000,000 of federal
net operating loss carryforwards (expiring in the years 2004 through 2024)
available to offset future federal taxable income. The Company also has
approximately $17,000,000 of state net operating loss carryforwards (expiring in
the years 2004 through 2008) available to offset future state taxable income.
The utilization of certain state net operating loss carryforwards may be subject
to annual limitations.

Under the Tax Reform Act of 1986, the utilization of a corporation's net
operating loss carryforward is limited following a greater than 50% change in
ownership. Due to the Company's prior and current equity transactions, the
Company's net operating loss carryforwards may be subject to an annual
limitation generally determined by multiplying the value of the Company on the
date of the ownership change by the federal long-term tax exempt rate. Any
unused annual limitation may be carried forward to future years for the balance
of the net operating loss carryforward period.

Deferred income taxes reflect the net tax effects of temporary differences
between carrying amounts of assets and liabilities for financial reporting
purposes and the carrying amounts used for income tax purposes. In assessing the
realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. The realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which temporary
differences representing net future deductible amounts become deductible. Due to
the uncertainty of the Company's ability to realize the benefit of the deferred
tax asset, the deferred tax assets are fully offset by a valuation allowance at
December 31, 2002 and 2003.

F-33

The components of the net deferred tax asset of December 31, 2002 and 2003
consists of the following:
(000,s omitted)
Deferred tax assets: 2002 2003
-------- --------
Net operating losses $ 22,440 $ 24,700
Accrued Expenses and Other (16) 12
Capitalized Research and development costs 3,763 2,825
-------- --------
26,187 27,537

Less: Valuation Allowance (26,187) (27,537)
-------- --------
Balance $ -0- $ -0-
======== ========

(15) Contingencies

On September 30, 1998, we filed a multi-count complaint against Manuel P.
Asensio, Asensio & Company, Inc. ("Asensio"). The action included claims of
defamation, disparagement, tortuous interference with existing and prospective
business relations and conspiracy, arising out of the Asensio's false and
defamatory statements. The complaint further alleged that Asensio defamed and
disparaged us in furtherance of a manipulative, deceptive and unlawful
short-selling scheme in August and September, 1998. In 1999, Asensio filed an
answer and counterclaim alleging that in response to Asensio's strong sell
recommendation and other press releases, we made defamatory statements about
Asensio. We denied the material allegations of the counterclaim. In July 2000,
following dismissal in federal court for lack of subject matter jurisdiction, we
transferred the action to the Pennsylvania State Court. In March 2001, the
defendants responded to the complaints as amended and a trial commenced on
January 30, 2002. A jury verdict disallowed the claims against the defendants
for defamation and disparagement and the court granted us a directed verdict on
the counterclaim. On July 2, 2002 the Court entered an order granting us a new
trial against Asensio for defamation and disparagement. Thereafter, Asensio
appealed the granting of a new trial. This appeal is now pending in the Superior
Court of Pennsylvania.

In June 2002, a former ME/CFS clinical trial patient and her husband filed a
claim in the Superior Court of New Jersey, Middlesex County, against us, one of
our clinical trial investigators and others alleging that she was harmed in the
ME/CFS clinical trial as a result of negligence and breach of warranties. We
believe the claim is without merit and we are defending the claim against us
through our product liability insurance carrier.

In June 2002, a former ME/CFS clinical trial patient in Belgium filed a claim in
Belgium, against Hemispherx Biopharma Europe, NV/SA, our Belgian subsidiary, and
one of our clinical trial investigators alleging that she was harmed in the
Belgium ME/CFS clinical trial as a result of negligence and breach of
warranties. We believe the claim is without merit and we are defending the claim
against us through our product liability insurance carrier.

In July 2002, we filed suit in the United States District Court for the Eastern
District of Pennsylvania against our insurance company seeking (1) a judicial
order declaring our rights and the obligations of our insurance carrier under
the insurance policy our insurance carrier sold to us (2) monetary damage for

F-34

breach of contract resulting from our insurance carrier refusal to fully defend
us in connection with the Asensio litigation (3) monetary damages to compensate
us for our insurance carrier breach of its fiduciary duty faith and dealing and
(4) monetary damages, interest, cost, and attorneys fees to compensate us for
violation of the Pennsylvania Bad Faith Statute. On March 31, 2003 we settled
our outstanding claim with our insurance carrier for $1,500,000 relating to
reimbursement of expenses in connection with our Asensio law suits. We realized
approximately $1,050,000 of this amount after payment of expenses related to the
settlement. Such amount was recorded during the fourth quarter 2002 as a
reduction in General and Administrative expenses in our statement of operations.

On September 16, 2003, HEB filed and subsequently served and moved for expedited
proceedings on, a complaint filed in the Court Of Chancery of the State of
Delaware, New Castle County, against ISI. The Complaint seeks specific
performance, and declaratory and injunctive relief related to the Inventory and
Asset Purchase Agreements with ISI. Specifically, HEB alleges that ISI has
delayed its performance pursuant to the Inventory and Asset Purchase Agreement
and, as a result, the Asset Purchase Agreement did not close within 180 days of
the date of the execution of the agreements. Paragraph 7.7 of the Asset Purchase
Agreement states that either party to the agreement may terminate the agreement
if there is no closing within 180 days of the date of the agreement. HEB
requested that the Court require ISI to specifically perform its obligations
under the agreement or, in the alternative, that paragraph 7.7 of the agreement
be eliminated or reformed to eliminate ISI's ability to terminate pursuant to
that paragraph. HEB also requested that ISI, as a result of its conduct, not be
permitted to terminate the Asset Purchase Agreement pursuant to paragraph 7.7 or
due to the passage of time. At a hearing held on September 29, 2003, the Court
set a trial of the case for January 6-7, 2004 which has been postponed at the
request of both parties until March 4-5, 2004. The parties have agreed that
neither party shall have the right to terminate the Asset Purchase Agreement
pursuant to paragraph 7.7 until the date which is at least two weeks following
trial, and only then, unless the Court has ruled, upon five days written notice
to the other party.

The current court date of March 4 and 5, 2004 will be rescheduled to allow for
the ISI shareholders to meet on March 9, 2004 as now scheduled. The results of
the Shareholders Meeting and subsequent actions of ISI management will determine
if we proceed with this lawsuit.

(16) Related Party Transactions

We have employment agreements with certain of our executive officers and have
granted such officers and directors of the Company options and warrants to
purchase common stock of the Company, as discussed in Notes 2(n) and 9.

A director of the Company, is an attorney in private practice, who has rendered
corporate legal services to us from time to time, for which he has received fees
and options to purchase Company stock valued at $237,000 using the Black Scholes
pricing model and recorded as stock compensation expense. A Director of the
Company, lives in Paris, France and assists our European subsidiaries in their
dealings with medical institutions and the European Medical Evaluation
Authority. A Director of the Company, assists us in establishing clinical trial
protocols as well as performs other scientific work for us from time to time.
For these services, these Directors were paid an aggregate of $144,955, $170,150
and $100,100 for the years ending December 31, 2001, 2002 and 2003 respectively.

Through November 2002, William A. Carter, Chief Executive Officer of the
Company, received an aggregate of $12,106 in short term advances which were
repaid as of December 31, 2002. All advances bore interest at 6% per annum. The

F-35

Company loaned $60,000 to, a Director of the Company in November, 2001 for the
purpose of exercising 15,000 class A redeemable warrants. This loan bears
interest at 6% per annum.

We paid $57,750, $33,450 and $18,800 for the years ending December 31, 2001,
2002 and 2003, respectively to Carter Realty for the rent of property used at
various times in years 2001, 2002 and 2003 by us. The property is owned by
others and managed by Carter Realty. Carter Realty is owned by Robert Carter,
the brother of William A. Carter.

(17) Concentrations of credit risk

Financial instruments, which potentially subject the Company to concentrations
of credit risk, consist principally of cash, cash equivalents and investments.
The Company places its cash with high-quality financial institutions. At times,
such amount may be in excess of Federal Deposit Insurance Corporation insurance
limits of $100,000.

(18) Quarterly Results of Operation (unaudited)
(in thousand except per share data)

2003 (1)
--------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
-------- -------- -------- -------- --------
Revenue $ 66 $ 94 $ 194 $ 303 $ 657

Costs and expenses 1,658 1,730 1,960 2,561 7,909

Net loss (1,617) (3,689) (5,422) (4,042) (14,770)
-------- -------- -------- -------- --------
Basic and diluted
loss per share $ (.05) $ (.11) $ (.15) $ (.11) $ (.42)
-------- -------- -------- -------- --------

(1) During the fourth quarter 2003, the Company recorded stock compensation of
$237,000.

2002 (2)
-------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -------
Revenues and license
fee income $ 613 $ 134 $ 79 $ 78 $ 904

Costs and expenses 2,121 2,097 1,961 782 6,961

Net loss (1,488) (2,634) (1,891) (1,411) (7,424)
------- ------- ------- ------- -------
Basic and diluted
loss per share $ (.05) $ (.08) $ (.06) $ (.04) $ (.23)
------- ------- ------- ------- -------

(2) During the fourth quarter of 2002, the Company recorded write offs of
certain investments in unconsolidated affiliates of approximately $688,000.

F-36

(See note 2(c)). Additionally, during the fourth quarter of 2002, the Company
recorded as a reduction of general and administrative expenses, an amount of
$1,050,000 representing the net settlement with its insurance carrier. (See Note
12)

F-37

HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)

December 31, March 31,
2003 2004
--------- ----------
(Unaudited)
ASSETS
Current assets:

Cash and cash equivalents $ 3,764 $ 3,249
Short term investments 1,495 3,989
Inventory 2,896 2,785
Accounts and other
receivables 282 280
Prepaid expenses and other current assets 170 139
--------- ---------
Total current assets 8,607 10,442

Property and equipment, net 94 3,387
Patent and trademark rights, net 1,027 992
Investments 408 408
Deferred acquisition costs 1,546 --
Deferred financing costs 393 495
Advance receivable 1,300 1,300
Other assets 29 29
--------- ---------
Total assets $ 13,404 $ 17,053
========= =========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable $ 488 $ 424
Accrued expenses 1,119 899
Deferred Revenue -- 497
Current portion of long-term debt -- 670
Other Current Liability -- 2,191
--------- ---------
Total current liabilities 1,607 4,681
Long-Term Debt-net of current portion 2,058 1,916

Commitments and contingencies:
Redeemable Common
Stock 491 1,909

Stockholders' equity:
Common stock 39 42
Additional paid-in capital 123,054 130,393
Treasury stock - at cost (2) (2)
Accumulated deficit (113,843) (121,886)
--------- ---------
Total stockholders' equity 9,248 8,547
--------- ---------
Total liabilities and stockholders' equity $ 13,404 $ 17,053
========= =========

See accompanying notes to condensed consolidated financial statements.

F-38

HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)

For the Three months ended
March 31,
2003 2004
------------ ------------
(Unaudited) (Unaudited)
Revenues:
Sales of product, net $ 19 $ 259
Clinical treatment programs 47 49
------------ ------------
66 308
Costs and expenses:

Production/cost of goods sold 118 601
Research and development 873 964
General and administrative 667 2,844
------------ ------------
Total cost and expenses 1,658 4,409

Interest and other income 50 11
Interest expenses (17) (101)
Financing costs (58) (3,851)
------------ ------------
Net loss $ (1,617) $ (8,042)
============ ============
Basic and diluted loss per share $ (.05) $ (.20)
============ ============
Basic and diluted weighted
average common shares outstanding 32,393,754 40,668,478
============ ============

See accompanying notes to condensed consolidated financial statements.

F-39

HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)

For the Three months ended
--------------------------
March 31,
2003 2004
------- -------
Cash flows from operating activities:

Net loss $(1,617) $(8,042)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation of property and equipment 22 23
Amortization of patents rights 36 134
Amortization of deferred financing costs 57 3,851
Stock warrant compensation expense -- 1,769

Changes in assets and liabilities:

Inventory -- 111
Accounts receivable (12) 2
Deferred Revenue -- 497
Prepaid expenses and other current assets (72) 30
Accounts payable 189 21
Accrued expenses (336) (118)
Other assets 41 --
------- -------
Net cash used in operations (1,692) (1,722)
======= =======

Cash flows from investing activities:
Purchase of land and building -- (1,689)
Deferred acquisition costs -- 1,546
Additions to patent rights (18) (99)
Maturity of short term investments 520 1,496
Purchase of short term investments -- (3,986)
------- -------
Net cash provided by(used in)
investing activities 502 (2,732)
------- -------
Cash flows from financing activities:
Proceeds from exercise of stock warrants -- 244
Proceeds from long-term borrowings 3,100 4,000
Payments on long-term borrowings (440) --
Deferred financing costs (268) (305)
Purchase of treasury stock (49) --
------- -------
Net cash provided by (used in) financing activities 2,343 3,939
------- -------

Net increase (decrease) in cash and cash equivalents 1,153 (515)
Cash and cash equivalents at beginning of period 2,256 3,764
------- -------
Cash and cash equivalents at end of period $ 3,409 $ 3,249
======= =======
Supplementary disclosures of cash flow information:
Issuance of common stock for accounts payable $ -- $ 85
Issuance of common stock for purchase of building $ -- $ 1,626
Issuance of common stock for debt conversion and
interest payments $ -- $ 3,641

See accompanying notes to condensed consolidated financial statements.

F-40

HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: BASIS OF PRESENTATION

The accompanying consolidated financial statements include the accounts of
Hemispherx BioPharma, Inc., a Delaware corporation and its subsidiaries. All
significant intercompany accounts and transactions have been eliminated.

In the opinion of management, all adjustments necessary for a fair presentation
of such consolidated financial statements have been included. Such adjustments
consist of normal recurring items. Interim results are not necessarily
indicative of results for a full year.

The interim consolidated financial statements and notes thereto are presented as
permitted by the Securities and Exchange Commission (SEC), and do not contain
certain information which will be included in our annual consolidated financial
statements and notes thereto.

These consolidated financial statements should be read in conjunction with our
consolidated financial statements for the year ended December 31, 2003.

NOTE 2: STOCK BASED COMPENSATION

The Company provides pro forma disclosures of compensation expense under the
fair value method of SFAS No. 123, "Accounting for Stock-Based Compensation,"
and SFAS No. 148, "Accounting for Stock-Based Compensation- Transition and
Disclosure."

The weighted average assumptions used for the period presented are as follows:

March 31,
----------------------
2003 2004
---- ----
Risk-free interest rate 5.23% - %
Expected dividend yield - -
Expected lives 2.5 years - years
Expected volatility 63.17% - %

Had compensation cost for the Company's option plans been determined using the
fair value method at the grant dates, the effect on the Company's net loss and
loss per share for the three months ended March 31, 2003 and 2004 would have
been as follows:

F-41

(In Thousands)
Three Months Ended
March 31,
--------------------------
2003 2004
------- ---------
Net (loss) as reported $(1,617) $ (8,042)
Add: Stock based employee
compensation expense
Included in reported net loss,
net of Related tax effects -- --

Deduct:
Total stock based employee
compensation determined
under fair value method
for all awards, net
of related tax effects (137) --
------- ---------
Pro forma net loss $(1,754) $ (8,042)
======= =========
Basic and diluted loss
per share
As reported $ (.05) $ (.20)
Pro forma $ (.05) $ (.20)

Note 3: INVESTMENT IN UNCONSOLIDATED AFFILIATES

Investments include an initial equity investment of $290,625 in Chronix
Biomedical ("Chronix"). Chronix focuses upon the development of diagnostics for
chronic diseases. This initial investment was made in May 31, 2000 by the
issuance of 50,000 shares of the Company's common stock from the treasury. On
October 12, 2000, the Company issued an additional 50,000 shares of its common
stock and on March 7, 2001 the Company issued 12,000 more shares of its common
stock from the treasury to Chronix for an aggregate equity investment of
$700,000. The percentage ownership in Chronix is approximately 5.4% and is
accounted for under the cost method of accounting. During the quarter ended
December 31, 2002, we recorded a non cash charge of $292,000 with respect to our
investment in Chronix. This impairment reduces our carrying value to reflect a
permanent decline in Chronix's market value based on its then proposed
investment offerings.

NOTE 4: INVENTORIES

The Company uses the lower of first-in, first-out ("FIFO") cost or market method
of accounting for inventory.

Inventories consist of the following:

March 31, 2004 December 31, 2003
-------------- -----------------
Raw materials-work in process $ 1,729,000 $1,729,000
Finished goods 1,056,000 1,167,000
----------- ----------
$ 2,785,000 $2,896,000
=========== ==========

NOTE 5: REVENUE AND LICENSING FEE INCOME

We executed a Memorandum of Understanding in January 2004 with Fujisawa
Deutschland GmbH, ("Fuji") a major pharmaceutical corporation, granting them an
exclusive option for a limited number of months to enter a Sales and
Distribution Agreement with exclusive rights to market Ampligen(R) for ME/CFS in
Germany, Austria and Switzerland. The option period ends 12 weeks after Fuji has
had a chance to review the report on the results of our Amp 516 clinical trial
and meet with the trial's principal investigators. We received

F-42

an initial fee of 400,000 Euros (approximately $497,000 US). If we do not
provide Fuji with the full report by May 31, 2004 we will be required to repay
half of this fee and if we do not provide them with the report by December 31,
2004, we will be required to refund the entire fee. If Fuji exercises the
option, Fuji would be required to pay us an additional 1,600,000 Euros upon
execution of the Sales and Distribution agreement, purchase Ampligen(R)
exclusively from us and meet certain annual minimum purchase quotas. We would be
required to file an application with the EMEA for commercial sale of Ampligen(R)
for ME/CFS on or before December 31, 2005. Upon our filing of that application,
we would receive an additional 1,000,000 Euros and, upon approval by the EMEA,
an additional 2,000,000 Euros. If we failed to meet the December 31, 2005 filing
deadline, we would be required to return 40% of all payments that we had
received from Fuji. We would be required to sell Ampligen(R) to Fuji at a 20%
price discount until the aggregate amount of the discount reached $1,000,000
Euros (representing 50% of the initial 2,000,000 fee paid to us on and prior to
execution of the definitive agreement). The foregoing is a summary of the
memorandum of understanding. Although we anticipate preparing and issuing the
AMP 516 report in the time frame noted, we cannot ensure this will occur. We
also cannot ensure that Fuji will exercise the option or that the proposed terms
of the Sales and Distribution Agreement will not change materially.

Revenues for non-refundable license fees are recognized under the Performance
Method-Expected Revenue. This method considers the total amount of expected
revenue during the performance period, but limits the amount of revenue
recognized in a period to total non-refundable cash received to date. This
limitation is appropriate because future milestone payments are contingent on
future events.

Upon receipt, the upfront non-refundable payment is deferred. The non-refundable
upfront payments plus non-refundable payments arising from the achievement of
defined milestones are recognized as revenue over the performance period based
on the lesser of (a) percentage of completion or (b)non-refundable cash earned
(including the upfront payment).

This method requires the computation of a ratio of cost incurred to date to
total expected costs and then apply that ratio to total expected revenue. The
amount of revenue recognized is limited to the total non-refundable cash
received to date. The Fuji initial fee of $497,000 has been deferred as of March
31, 2004.

During the periods ending December 31, 2003 and March 31, 2004. The Company did
not receive any grant monies from local, state and or Federal Agencies.

Revenue from the sale of Ampligen(R) under cost recovery clinical treatment
protocols approved by the FDA is recognized when the treatment is provided to
the patient.

Revenues from the sale of product are recognized when the product is shipped, as
title is transferred to the customer. The Company has no other obligation
associated with its products once shipment has occurred.

Note 6: ACQUISITION OF ASSETS OF INTERFERON SCIENCES, INC.

F-43

Except for 62,500 of the shares issued to ISI, we had guaranteed the market
value of the shares retained by ISI as of March 11, 2005, the termination date,
to be $1.59 per share. ISI is permitted to periodically sell certain amounts of
its shares. If, within 30 days after the termination date, holders of the
guaranteed shares request that we honor the guarantee, we would have been
obligated to reacquire the holders' remaining guaranteed shares and pay the
holders $1.59 per share for a total of $675,000. Accordingly, certain shares
issued in connection with this transaction were initially recorded as redeemable
common stock outside of stockholders' equity. As of March 31, 2004, ISI had sold
the 424,528 guaranteed shares at prices in excess of $1.59 per share.

On March 11, 2003, we also entered into an agreement to purchase from ISI all of
its rights to the product and other assets related to the product including, but
not limited to, real estate and machinery. For these assets, we agreed to issue
to ISI an additional 487,028 shares and to issue 314,465 shares and 267,296
shares, respectively to The American National Red Cross and GP Strategies, two
creditors of ISI, to continue to pay royalties of 6% on net sales of Alferon N
and other consideration, e.g., paying off a third creditor and paying a real
estate tax liability.

On May 30, 2003, we issued the shares to GP Strategies and the American National
Red Cross. Pursuant to our agreements with ISI and these two creditors, we
registered the foregoing shares for public sale. The value of these guaranteed
shares totaled $925,000 and these shares were redeemable under certain
conditions, accordingly they were initially reflected as redeemable common stock
and deferred acquisition costs on the balance sheet as of December 31, 2003. As
of March 31, 2004, GP Strategies had sold all of their 267,296 shares and the
American National Red Cross had not sold their 314,465 shares. Additionally
other liabilities associated with the real estate in the amount of $621,000 had
been recorded as deferred acquisition costs. Upon ISI stockholder approval,
which occurred on March 17, 2004, substantially all of the deferred purchase
price was allocated to real estate.

Additionally, in March 2004, we issued 487,028 shares to ISI to complete the
acquisition of the balance of ISI's rights to market its product as well as its
production facility in New Brunswick, NJ. Except for 62,500 of the 487,028
shares issued to ISI at closing of this second asset acquisition, we have
guaranteed the market value of the shares retained by ISI on terms substantially
similar to those for the guaranteed shares issued to ISI on the first
acquisition of ISI assets. As a result, the liability for ISI redeemable stock
was $675,000 as of March 31, 2004. Pursuant to our agreement with ISI, we
registered the foregoing shares for public sale.

On March 17, 2004, the Company acquired the land and buildings located in New
Brunswick, NJ. The aggregated cost of the land and buildings was approximately
$3,316,000. The cost of the land and buildings was allocated as follows:

Land $ 423,000

Buildings 2,893,000
-----------
Total cost $ 3,316,000
===========

As of March 31, 2004 the 314,465 guaranteed shares held by the American National
Red Cross had not been sold. As a result, the liability for this redeemable
stock was $491,000.

We accounted for these transactions as a Business Combination under Statement of
Financial Accounting Standards ("SFAS") No. 141 Accounting for Business
Combinations.

F-44

The following table represents the Unaudited pro forma results of
operations as though the ISI acquisitions had occurred on January 1, 2002.

Three Months Ended March 31,
-------------------------------
2003 2004
------------ ------------
(in thousands except for share data)

Net revenues $ 308 $ 308
Expenses (2,493) (8,365)
------------ ------------
Net Loss $ (2,185) $ (8,057)
============ ============
Basic and diluted loss per share $ (.07) $ (.20)
------------ ------------
Weighted average shares outstanding 33,046,092 41,080,579
============ ============

Note 7: DEBENTURE FINANCING

On March 12, 2003, we issued an aggregate of $5,426,000 in principal amount of
6% Senior Convertible Debentures due January 2005 (the "March Debentures") and
an aggregate of 743,288 warrants to two investors in a private placement for
aggregate proceeds of $4,650,000. Pursuant to the terms of the March Debentures,
$1,550,000 of the proceeds from the sale of the March Debentures were to have
been held back and released to us if, and only if, we acquired ISI's facility
within a set timeframe. Although we had not acquired ISI's facility, these funds
were released to us in June 2003. The March Debentures were to mature on January
31, 2005 with interest at 6% per annum, payable quarterly in cash or, subject to
satisfaction of certain conditions, common stock. Any shares of common stock
issued to the investors as payment of interest were valued at 95% of the average
closing price of the common stock during the five consecutive business days
ending on the third business day immediately preceding the applicable interest
payment date. Pursuant to the terms and conditions of the March Debentures, we
pledged all of our assets, other than our intellectual property, as collateral
and were subject to comply with certain financial and negative covenants, which
include but was not limited to the repayment of principal balances upon
achieving certain revenue milestones.

The March Debentures were convertible at the option of the investors at any time
through January 31, 2005 into shares of our common stock. The conversion price
under the March Debentures was fixed at $1.46 per share, subject to adjustment
for anti-dilution protection for issuance of common stock or securities
convertible or exchangeable into common stock at a price less than the
conversion price then in effect.

We entered into a Registration Rights Agreement with the investors in connection
with the issuance of the March Debentures and the Warrants. The Registration
Rights Agreement requires that we register the shares of common stock issuable
upon conversion of the Debentures, as interest shares under the Debentures and
upon exercise of the Warrants. In accordance with this agreement, we have
registered these shares for public sale.

F-45

As of December 31, 2003 the investors had converted the $5,426,000 principal of
the March Debentures into 3,716,438 shares of our common stock. The total
imputed interest on these Debentures was $111,711 of which $17,290 was paid in
cash and $94,421 was paid by the issuance of 39,080 shares of common stock. The
investors exercised the 743,288 warrants in July 2003 which produced proceeds in
the amount of $1,248,724

On July 10, 2003, we issued an aggregate of $5,426,000 in principal amount of 6%
Senior Convertible Debentures due July 31, 2005 (the "July Debentures") and an
aggregate of 507,102 Warrants (the "July 2008 Warrants") to the same investors
who purchased the March 12, 2003 Debentures, in a private placement for
aggregate anticipated gross proceeds of $4,650,000. Pursuant to the terms of the
July Debentures, $1,550,000 of the proceeds from the sale of the July Debentures
were to have been held back and will be released to us if, and only if, we
acquired ISI's facility within a set timeframe. Although we had not acquired
ISI's facility, these funds were released to us in October 2003. The July
Debentures mature on July 31, 2005 and bear interest at 6% per annum, payable
quarterly in cash or, subject to satisfaction of certain conditions, common
stock. Any shares of common stock issued to the investors as payment of interest
shall be valued at 95% of the average closing price of the common stock during
the five consecutive business days ending on the third business day immediately
preceding the applicable interest payment date. Pursuant to the terms and
conditions of the July Debentures, we pledged all of our assets, other than our
intellectual property, as collateral and were subject to comply with certain
financial and negative covenants.

On June 25, 2003, we issued to each of the March 12, 2003 Debenture holders a
warrant (collectively, the "June 2008 Warrants") to acquire at any time through
June 25, 2008 an aggregate of 500,000 shares of common stock at a price of $2.40
per share. On June 25, 2004, the exercise price of these June 2008 Warrants will
reset to the lesser of the exercise price then in effect or a price equal to the
average of the daily price of the common stock between June 26, 2003 and June
24, 2004 (but in no event less than $1.68 per share). The exercise price (and
the reset price) under the June 2008 Warrants also is subject to adjustments for
anti-dilution protection similar to those in the July 2008 Warrants. Pursuant to
our agreement with the Debenture

F-46

holders, we have registered the shares issuable upon exercise of these June 2008
Warrants for public sale.

On October 29, 2003, we issued an aggregate of $4,142,357 in principal amount of
6% Senior Convertible Debentures due October 31, 2005 (the "October Debentures")
and an aggregate of 410,134 Warrants (the "October 2008 Warrants") in a private
placement for aggregate anticipated gross proceeds of $3,550,000. Pursuant to
the terms of the October Debentures, $1,550,000 of the proceeds from the sale of
the October Debentures have been held back and will be released to us if, and
only if, we acquired ISI's facility within 90 days of October 29, 2003 and
provide a mortgage on the facility as further security for the October
Debentures. The debenture holders extended the deadline to 90 days after January
26, 2004. The October Debentures mature on October 31, 2005 and bear interest at
6% per annum, payable quarterly in cash or, subject to satisfaction of certain
conditions, common stock. Any shares of common stock issued to the investors as
payment of interest shall be valued at 95% of the average closing price of the
common stock during the five consecutive business days ending on the third
business day immediately preceding the applicable interest payment date.
Pursuant to the terms and conditions of the October Debentures, we pledged all
of our assets, other than our intellectual property, as collateral and were
subject to comply with certain financial and negative covenants.

Upon completing the sale of the October Debentures, we received $3,275,000 in
net proceeds consisting of $1,725,000 from the October Debentures and $1,550,000
that had been withheld from the July Debentures. As noted above, $1,550,000 of
the proceeds from the October Debentures were held back pending our completing
the acquisition of the ISI facility and our mortgaging that facility to the
debentureholders. On March 17, 2004, we closed on the acquisition of all of the
worldwide rights of Alferon N as well as the FDA approved biological production
facility in the New Brunswick, New Jersey, from ISI. As a result, the proceeds
held back from the October Debenture amounting to $1,550,000 were released to
the Company in April 2004. As required by the Debentures, we are in the process
of providing a mortgage on the facility as further security for the Debentures.

The October Debentures are convertible at the option of the investors at any
time through October 31, 2005 into shares of our common stock. The conversion
price under the October Debentures is fixed at $2.02 per share, subject to
adjustment for anti-dilution protection for issuance of common stock or
securities convertible or exchangeable into common stock at a price less than
the conversion price then in effect. In addition, in the event that we do not
pay the redemption price at maturity, the Debenture holders, at their option,
may convert the balance due at the lower of (a) the conversion price then in
effect and (b) 95% of the lowest closing sale price of our common stock during
the three trading days ending on and including the conversion date.

F-47

of all shares required to be registered cannot be made pursuant to the
registration statement, then we will be required to pay to the investors their
pro rata share of $3,635 for each day such conditions exist.

As of January 26, 2004, with respect to the July and October 2003 Debenture
Amendments, specifically, the extension of time of the investor's ability to
exercise warrants, the Company revalued the July and October 2003 warrants,
using the Black Scholes Method. This revaluation resulted in an increased
adjustment to Debenture discounts of $282,000, reflected as additional paid in
capital, and an adjustment to the amortization of Debenture discounts of
approximately $77,000, reflected in financing costs, for the three months ended
March 31, 2004.

On January 26, 2004, we issued an aggregate of $4,000,000 in principal amount of
6% Senior Convertible Debentures due January 31, 2006 (the "January 2004
Debentures", an aggregate of 790,514 warrants (the "2009 Warrants") and 158,103
shares of common stock, and Additional Investment Rights (to purchase up to an
additional $2,000,000 principal amount of January 2004 Debentures commencing in
six months) ("AIR") in a private placement for aggregate anticipated net
proceeds of $3,695,000. The January 2004 Debentures mature on January 31, 2006
and bear interest at 6% per annum, payable quarterly in cash or, subject to
satisfaction of certain conditions, common stock. Any shares of common stock
issued to the investors as payment of interest shall be valued at 95% of the
average closing price of the common stock during the five consecutive business
days ending on the third business day immediately preceding the applicable
interest payment date. Commencing six months after issuance, the Company is
required to start repaying the then outstanding principal amount under the
January 2004 Debentures in monthly installments amortized over 18 months in cash
or, at the Company's option, in shares of common stock. Any shares of common
stock issued to the investors as installment payments shall be valued at 95% of
the average closing price of the common stock during the 10-day trading period
commencing on and including the eleventh trading day immediately preceding the
date that the installment is due. Pursuant to the terms and conditions of the
January 2004 Debentures, we pledged all of our assets, other than our
intellectual property, as collateral and were subject to comply with certain
financial and negative covenants.

There are two classes of July 2009 warrants received by the Investors: Class A
and Class B. The Class A warrants are to acquire any time from July 26, 2004
through July 26, 2009 an aggregate of up to 395,257 shares of common stock at a
price of $3.29 per share. The Class B warrants are to acquire any time from July
26, 2004 through July 26, 2009 an aggregate of up to 395,257 shares of common
stock at a price of $5.06 per share. On January 27, 2005, the exercise price of
these July 2009 Class A and Class B Warrants will reset to the lesser of (x)
their respective exercise price then in effect or (y) the greater of a price
equal to the average of the daily price of the common stock between January 27,
2004 and January 26, 2005 or $2.58 per share with regard to the Class A warrants
or $3.54 per share with regard to the Class B Warrants. The exercise price (and
the reset price) under the July 2009 Warrants also is subject to similar
adjustments for anti-dilution protection. Notwithstanding the foregoing, the
exercise price of the Class A warrants as adjusted for anti-dilution, will in no
event be less than $2.58 per share.

The Company also issued to the investors Additional Investment Rights ("AIR")
pursuant to which the investors have the right to acquire up to an additional
$2,000,000 principal amount of January 2004 Debentures from the Company. These
Debentures are identical to the January 2004 Debentures except that the
conversion price is $2.58. The AIR are exercisable commencing on July 26,

F-48

2004 (the "Trigger" date) for a period of 90 days from the Trigger Date or 90
days from the date which the registration statement registering the shares
issuable upon the conversion of the January 2004 Debentures to be issued
pursuant to the AIR is declared effective, whichever is longer.

The Company entered into a Registration Rights Agreement with the investors in
connection with the issuance of the January 2004 Debentures (including any
Debentures issued pursuant to the AIR), the shares, and the January 2009
Warrants. Pursuant to the Registration Rights Agreement the Company registered
on behalf of the investors the shares issued to the investors and 135% of the
shares issuable upon conversion of the Debentures (including payment of interest
thereon) and upon exercise of the January 2009 Warrants. If the Registration
Statement containing these shares had not been filed within the time period
required by the agreement, had not declared effective within the time period
required by the agreement or, after it was declared effective and subject to
certain exceptions, sales of all shares required to be registered thereon cannot
be made pursuant thereto, then we would have been required to pay to the
investors their pro rata share of $3,635 for each day any of the above
conditions exist with respect to this Registration Statement.

As of April 26, 2004, the investors have converted $11,902,610 of debt from the
March, July and October Debentures into 7,073,234 shares of our common stock.
The March Debentures have been fully converted. The remaining principal balance
on the remaining debentures is convertible into shares of our stock at the
option of the investors at any time, through the maturity date. In addition, we
have paid $1,300,000 into the debenture cash collateral account as required by
the terms of the October Debentures. The amounts paid through March 31, 2004
have been accounted for as advances receivable and are reflected as such on the
accompanying balance sheet as of March 31, 2004. The cash collateral account
provides partial security for repayment of the July and October 2003 and January
2004 Debentures in the event of default.

In connection with the debenture agreements, we have outstanding letters of
credit of $1 Million as additional collateral.

The March 2003, July 2003, October 2003, and January 2004 debenture issuances of
$5,426,000, $5,426,000, $4,142,357, and $4,000,000, respectively, and warrant
issuances, were accounted for in accordance with EITF 98-5: Accounting for
convertible securities with beneficial conversion features or contingency
adjustable conversion and with EITF No. 00-27: Application of issue No. 98-5 to
Certain convertible instruments. The Company determined the fair values to be
ascribed to detachable warrants issued with the convertible debentures utilizing
the Black-Scholes method.

As a result, the Company recorded debt discounts of approximately $11.8 and $2.9
million for the 2003 and 2004 debenture issuances, respectively, which, in
effect, reduced the carrying value of our debt. As debt is converted to

F-49

common stock, the remaining unamortized debt discount is charged to finance
costs. These costs were initially deferred and charged to finance costs over the
life of the debentures. As of March 31, 2004, the amount of debt discount
amortized to finance cost totaled approximately $10.2 million.

Costs associated with the financings aggregated approximately $1.3 million.
These costs are also deferred and expensed as finance costs over the life of the
debentures.

Excluding the application of related accounting standards, and remaining debt
discounts of $4.4 million, the Company's outstanding debt as of March 31, 2004
totaled $7.1 million with $2.0 million maturing in 2004 and the balance in 2005.

Section 713 of the American Stock Exchange ("AMEX") Company Guide provides that
the Company must obtain stockholder approval before issuance, at a price per
share below market value, of common stock, or securities convertible into common
stock, equal to 20% or more of its outstanding common stock (the "Exchange
Cap"). Taken separately, the July 2003, October 2003 and January 2004 Debenture
transactions do not trigger Section 713. However, the AMEX has taken the
position that the three transactions should be aggregated and, as such,
stockholder approval is required for the issuance of common stock for a portion
of the potential exercise of the warrants and conversion of the Debentures in
connection with the January 2004 Debentures. The amount of potential shares that
the Company could exceed the Exchange Cap amounted to approximately 1,299,000.
In accordance with EITF 00-19, Accounting For Derivative Financial Instruments
Indexed to and Potentially Settled in a Company's Own Stock, the Company
recorded on January 26, 2004, a redemption obligation of approximately
$1,244,000. This liability represents the fair market value of the warrants and
beneficial conversion feature related to the 1,299,000 shares.

In addition, in accordance with EITF 00-19, the Company revalued this redemption
obligation associated with the beneficial conversion feature and warrants as of
March 31, 2004. The Company recorded an additional redemption obligation and
finance charge of $947,000 as a result of this revaluation. If the Company
obtains stockholder approval, the Company's redemption obligation will be
recorded as additional paid in capital on the date approval is received.

Note 8: EXECUTIVE COMPENSATION

In order to facilitate the Company's need to obtain financing and prior to our
stockholders approving an amendment to our corporate charter to increase the
number of authorized shares, Dr. Carter agreed to waive his right to exercise
certain warrants and options unless and until our stockholders approved an
increase in our authorized shares of Common Stock.

In the quarter ended March 31, 2004, Dr. Carter was awarded an additional bonus
of $99,481 by the Compensation Committee. In addition, The Company recorded a
non-cash stock compensation charge of $1,769,000 during the current quarter
resulting from warrants issued to Dr. Carter in 2003 that vested upon the
execution of the second ISI asset closing on March 17, 2004. This was

F-50

determined by subtracting the exercise price from the stock closing price on
March 17, 2004 and multiplying the result by the number of warrants.

Note 9 - SUBSEQUENT EVENT

On May 14, 2004, we issued to the debentureholders warrants to purchase an
aggregate of 1,300,000 shares ("the May 2009 Warrants"). In consideration of the
foregoing, the debentureholders exercised the June 2008 warrants. As a result,
we issued an aggregate of 1,000,000 shares and received gross proceeds of
approximately $2,400,000.

The May 2009 warrants are to acquire at any time, commencing on November 14,
2004 through April 30, 2009, an aggregate of 1,300,000 shares of common stock at
a price of $4.50 per share. On May 14, 2005, the exercise price of these May
2009 Warrants will reset to the lesser of the exercise price then in effect or a
price equal to the average of the daily price of the common stock between May
15, 2004 and May 13, 2005 (but in no event less than $4.008 per share). The
exercise price (and the reset price) under the May 2009 Warrants also is subject
to adjustments for anti-dilution projection similar to those in the other
warrants.

In addition, the debentureholders agreed to amend the provisions of all of the
outstanding warrants and debentures (including the debentures issuable pursuant
to the AIR) to limit the maximum amount of funds that the holders could receive
in lieu of shares upon conversion of the debentures and/or exercise of the
warrants in the event that the Exchange Cap was reached to 119.9% of the
conversion price of the relevant debentures and 19.9% of the relevant warrant
exercise price.

These transactions could result in us recording an additional redemption
obligation for the reasons discussed in Note 7 and will result in additional
financing charges beginning in the second quarter of 2004.

F-51

Interferon Sciences, Inc.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Page
----

Report of Independent Registered Public Accounting Firm F-53

Financial Statements:

Consolidated Balance Sheet - December 31, 2003 F-54

Consolidated Statements of Operations - Years ended
December 31, 2003 and 2002 F-55

Consolidated Statements of Changes in
Capital Deficiency - Years ended December 31, 2003 and 2002 F-56

Consolidated Statements of Cash Flows - Years ended
December 31, 2003 and 2002 F-57

Notes to Consolidated Financial Statements F-58

F-52

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
Interferon Sciences, Inc.

We have audited the accompanying consolidated balance sheet of
Interferon Sciences, Inc. and subsidiary (the "Company") as of December 31, 2003
and the related consolidated statements of operations, changes in capital
deficiency and cash flows for each of the years in the two-year period ended
December 31, 2003. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the financial statements enumerated above present
fairly, in all material respects, the consolidated financial position of
Interferon Sciences, Inc. and subsidiary as of December 31, 2003 and the
consolidated results of their operations and their consolidated cash flows for
each of the years in the two-year period ended December 31, 2003, in conformity
with U.S. generally accepted accounting principles.

In connection with our audits of the financial statements referred to
above, we audited Schedule II -- Valuation and Qualifying Accounts for 2003 and
2002. In our opinion, this schedule, when considered in relation to the
financial statements taken as a whole, presents fairly, in all material
respects, the information stated therein.

On March 17, 2004, the Company completed the sale of its remaining
fixed and intangible assets and certain liabilities were assumed by the
purchaser (See Note 1).

Eisner LLP

New York, New York
March 18, 2004

F-53

INTERFERON SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
DECEMBER 31,2003

Proforma
------------
(unaudited)*

ASSETS
Current assets
Cash and cash equivalents $ 848,573 $ 848,573
Investment - available for sale 1,665,636
Other receivables 49,700 49,700
Notes receivable, net 371,063 371,063
Prepaid expenses and other current assets 18,782 18,782
----------- -----------
Total current assets 1,288,118 2,953,754
----------- -----------
Property, plant and equipment, at cost
Land 140,650
Buildings and improvements 7,793,242
Equipment 4,920,942
-----------
12,854,834

Less accumulated depreciation (11,566,022)
-----------
1,288,812
-----------
Patent costs, net of accumulated amortization
of $415,104 106,057

Other assets 11,350 11,350
----------- ------------
$ 2,694,337 $ 2,965,104
=========== ============
LIABILITIES AND CAPITAL DEFICIENCY
Current liabilities
Accounts payable $ 528,689 $ 528,689
Accrued expenses 51,834 51,834
Obligations subject to closing of sale of assets:
Due to American Red Cross 1,434,636
Note payable and amount due GP Strategies 422,745
Past due real estate taxes 643,729
Convertible Notes payable 285,000 285,000
----------- ------------
Total current liabilities 3,366,633 865,523
----------- ------------
Commitments

Capital deficiency
Preferred stock, par value $.01 per share;
authorized - 5,000,000 shares; none
issued and outstanding
Common stock, par value $.01 per share;
authorized - 55,000,000 shares; issued and
outstanding - 37,339,286 shares 373,393 373,393
Capital in excess of par value 136,970,283 136,970,283
Accumulated deficit (138,015,972) (135,244,095)
------------ ------------
Total capital(deficiency) equity (672,296) 2,099,581
------------ ------------
$ 2,694,337 $ 2,965,104
============= ============

* The proforma balance sheet assumes the sale of certain assets to Hemispherx
Biopharma had taken place on December 31, 2003 (See Note 7).

The accompanying notes are an integral part of these consolidated financial
statements.

F-54

INTERFERON SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS

YEARS ENDED DECEMBER 31,
2003 2002
------------ ------------

Revenue
Sales - ALFERON N Injection, net $ 241,637 $ 1,926,466
Bulk sale of remaining Alferon
inventory and license fee 1,149,112
Royalty income 31,000
------------ ------------
Total revenue 1,421,749 1,926,466
------------ ------------
Costs and expenses

Cost of goods sold and excess/idle
production costs 267,054 1,482,006
Research and development 176,091 1,514,286
General and administrative 1,431,911 1,818,194
------------ ------------
Total costs and expenses 1,875,056 4,814,486
------------ ------------
Loss from operations before other (453,307) (2,888,020)
income (expense)

Interest income 26,520 7,122
Interest expense (306,741) (385,775)
Service fee income 560,101
Gain on Metacine settlement 1,550,000
Gain on sale of securities 444,337
Gain on settlement of liability 228,913
------------ ------------
Income (loss) before income tax benefit 2,049,823 (3,266,673)

Income tax benefit
Gain on sale of state net operating loss
carryovers 279,402 528,276
------------ ------------
Net income (loss) $ 2,329,225 $ (2,738,397)
============ ============
Basic net income (loss) per share $ .07 $ (.13)
============ ============
Diluted net income (loss) per share $ .04 $ (.13)
(potential common shares limited to ============= ============
authorized shares available)

As if adjusted for authorized shares, diluted net income (loss) per share
(potential common shares not limited to authorized shares
available) $ .03 $ (.13)
============ ============
Weighted average number of
shares outstanding - basic 33,737,263 20,575,948
============ ============
Weighted average number of shares outstanding
- diluted (potential common shares limited to
authorized shares available) 55,000,000 20,575,948
============ ============
As if adjusted for authorized shares, weighted average number of shares
outstanding (potential common shares not limited to authorized shares
available) 83,237,263 20,575,948
============ ============

The accompanying notes are an integral part of these consolidated financial
statements.

F-55

INTERFERON SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN CAPITAL DEFICIENCY

Capital in Total
Common stock excess of Accumulated (capital
Shares Amount par value deficit deficiency)
---------------------------- ----------- ------------- ------------

Balance at January 1, 2002 20,308,031 203,080 136,239,499 (137,606,800) (1,164,221)

Common stock issued under Company 401(k) plan 722,374 7,224 71,119 78,343
Fair value of warrants issued with
convertible notes and value of
beneficial conversion feature 500,000 500,000
Net loss (2,738,397) (2,738,397)
-----------------------------------------------------------------------------

Balance at December 31, 2002 21,030,405 210,304 136,810,618 (140,345,197) (3,324,275)

Net proceeds from sale of common stock
and warrants 15,000,000 150,000 1,000 151,000
Common stock issued under Company 401(k) plan 308,881 3,089 18,665 21,754
Common stock issued to Metacine for settlement
of obligation 1,000,000 10,000 140,000 150,000
Net income 2,329,225 2,329,225
-----------------------------------------------------------------------------

Balance at December 31, 2003 37,339,286 $373,393 $ 136,970,283 $(138,015,972) $(672,296)

The accompanying notes are an integral part of these consolidated financial
statements.

F-56

INTERFERON SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,

2003 2002
----------- -----------
Cash flows from operating activities:
Net income (loss) $ 2,329,225 $(2,738,397)
Adjustments to reconcile net income (loss) to
net cash used for operating activities:
Receipt of shares of Hemispherx Biopharma, Inc.
for Alferon inventory and assumption of
certain liabilities (1,149,112)
Gain on sale of securities (444,337)
Gain on Metacine settlement (1,550,000)
Depreciation and amortization 418,888 425,077
Gain on settlement of liability (228,913)
Stock-based compensation expense 21,754 78,343
Debt discount 218,137 281,863
Amortization of interest income (7,313)
Change in operating assets and liabilities:
Accounts and other receivables (6,961) 80,650
Inventories 6,564 81,424
Prepaid expenses and other current assets (6,603) 5,429
Accounts payable and accrued expenses 91,244 551,385
Amount due to GP Strategies 9,000 18,000
----------- -----------
Net cash used for operating activities (298,427) (1,216,226)
----------- -----------
Cash flows from investing activities:
Proceeds from sale of investment 1,207,337
Additions to notes receivable (375,000)
Reduction of other assets 10,000
----------- -----------
Net cash provided by investing activities 832,337 10,000
----------- -----------
Cash flows from financing activities:
Proceeds from convertible notes payable 100,000 500,000
Repayment of convertible notes payable (315,000)
Proceeds from loans and advances 250,000
Repayment of loans and advances (250,000)
Net proceeds from sale of common stock and warrants 151,000
Repayment of note payable to GP Strategies (100,000)
----------- -----------
Net cash (used for) provided by financing
activities (64,000) 400,000
----------- -----------
Net increase (decrease) in cash and cash equivalents 469,910 (806,226)

Cash and cash equivalents at beginning of year 378,663 1,184,889
----------- -----------
Cash and cash equivalents at end of year $ 848,573 $ 378,663
=========== ===========

The accompanying notes are an integral part of these consolidated financial
statements.

F-57

INTERFERON SCIENCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Organization and Business

Until March 11, 2003, Interferon Sciences, Inc. (the "Company" or "ISI")
was a biopharmaceutical company that operated in a single segment and was
engaged in the study, manufacture, and sale of ALFERON(R) N Injection, a highly
purified, multispecies, natural source alpha interferon product. ALFERON(R) N
Injection has been approved by the United States Food and Drug Administration
("FDA") for the treatment of certain types of genital warts and been studied for
its potential use in the treatment of HIV, hepatitis C, and other indications.
For the years ended December 31, 2003 and 2002, domestic sales totaled $241,637
and $1,926,466, respectively, and there were no foreign sales. All identifiable
assets are located in the United States.

On March 11, 2003, the Company sold all its inventory related to ALFERON N
Injection and granted a license to sell the product to Hemispherx Biopharma,
Inc. ("HEB"). In exchange for the inventory and license, the Company received
424,528 shares of HEB common stock with a guaranteed value of $675,000, an
additional 62,500 shares of HEB common stock without a guaranteed value, and
future royalties equal to 6% of the net sales of ALFERON N Injection. In
addition, HEB assumed approximately $408,000 of the Company's payables and
various other commitments. On March 11, 2003, the Company and HEB entered into
another agreement, which was consummated on March 17, 2004, pursuant to which
the Company sold to HEB, the Company's real estate property, plant, equipment,
furniture and fixtures, rights to ALFERON N Injection and all of its patents,
trademarks and other intellectual property related to its natural alpha
interferon business. In exchange, the Company received 424,528 shares of HEB
common stock with a guaranteed value of $ 675,000, an additional 62,500 shares
of HEB common stock without a guaranteed value and future royalties equal to 6%
of the net sales of all products sold containing natural alpha interferon. The
fair value of HEB common stock received was approximately $ 1,666,000. In
addition, approximately $2.5 million of the Company's indebtedness which
encumbered its assets was repaid by HEB. Prior to the completion of this
transaction, HEB funded certain operating costs of the Company's facility such
as insurance, heat, light, air conditioning and equipment maintenance (See Note
7).

Note 2. Summary of Significant Accounting Policies

Cash and cash equivalents -- The Company considers all highly liquid
instruments with maturities of three months or less from purchase date to be
cash equivalents.

Property, plant and equipment -- Property, plant and equipment are carried
at cost. Major additions and improvements are capitalized while maintenance and
repairs, which do not extend the lives of the assets, are expensed.

Depreciation -- The Company provides for depreciation and amortization of
plant and equipment following the straight-line method over the estimated useful
lives of such assets as follows:

Class of Assets Estimated Useful Lives
--------------- ----------------------
Buildings and Improvements 15 to 30 years
Equipment 5 to 10 years

Depreciation expense for the years ended December 31, 2003 and 2002 was
$392,758 and $396,922, respectively.

Patent costs -- The Company capitalized costs to obtain patents and
licenses. Patent costs are amortized over 17 years or their estimated economic
useful life, if shorter, on a straight-line basis. To the extent the value of a
patent is determined to be impaired, the related net capitalized cost
attributable to the impaired value is expensed.

F-58

Revenue recognition -- Title passes to the customer at the shipping point
and revenue is therefore recognized when the product is shipped. The Company has
no other obligation associated with its products once shipment has occurred.

Royalty revenue recognition -- Revenue from royalties is recognized
ratably over the royalty period based on periodic reports submitted by the
royalty obligor.

Research and Development Costs -- Research and development are expensed
when incurred. The types of costs included in research and development are:
salaries, supplies, clinical costs, facility costs and depreciation. All of
these expenditures were for Company sponsored research and development programs.

Inventories -- Inventories, consisting of raw materials, work in process
and finished goods, are stated at the lower of cost or market on a FIFO basis.
Inventory in excess of the Company's estimated usage requirements is written
down to its estimated net realizable value. Inherent in the estimates of net
realizable value is management estimates related to the Company's future
manufacturing schedules, customer demand, possible alternative uses and ultimate
realization of potentially excess inventory. On March 11, 2003, the Company sold
all of its inventory to HEB (See Note 7).

Long-Lived Assets -- The Company reviews long-lived assets and certain
identifiable intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the assets. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the estimated fair value of the assets. Assets to
be disposed of are reported at the lower of the carrying amount or estimated
fair value less costs to sell.

Stock option plan -- The Company accounts for its stock-based compensation
to employees and members of the Board of Directors in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations. As such,
compensation is recorded on the date of issuance or grant as the excess of the
current market value of the underlying stock over the purchase or exercise
price. Any deferred compensation is amortized over the respective vesting
periods of the equity instruments, if any. The Company has adopted the
disclosure provisions of Statement of Financial Accounting Standards No. 123
("SFAS No. 123"), "Accounting for Stock-Based Compensation," and Statement of
Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation
- Transition and Disclosure," which was released in December 2002 as an
amendment of SFAS 123. The following table illustrates the effect on net loss
and loss per share if the fair value based method had been applied to all
awards.

Year Ended December 31,
2003 2002
Reported net income (loss) $2,329,225 $(2,738,397)

Stock-based employee compensation expense
included in reported net income (loss), net
of related tax effects -- --

Stock based employee compensation determined
under the fair value based method,
net of related tax effects -- (94,165)

Pro forma net income (loss) $2,329,225 (2,832,562)

Net income (loss) per share basic
As reported $ .07 $ (.13)
Pro forma $ .07 $ (.14)

Net income (loss) per share diluted (potential
common shares limited to
authorized shares available)
As reported $ .04 $ (.13)
Pro forma $ .04 $ (.14)

F-59

Net income (loss) per share, as if adjusted
for authorized shares,
diluted (potential common shares not
limited to authorized shares available)

As reported $ .03 $ (.13)
Pro forma $ .03 $ (.14)

During 2003 and 2002, the Company did not grant any stock options. All
remaining employee stock options expired on December 31, 2003.

Net Income (Loss) Per Share -- Basic net income (loss) per share has been
computed using the weighted average number of shares of common stock of the
Company outstanding for each period presented. For 2003, the dilutive effect of
stock options and other potential common shares is included in the calculation
of diluted net income per share using the treasury stock method. For 2002, stock
options and other potential common shares are not included in the calculation of
net loss per share as the effect would be anti-dilutive. Potential common shares
at December 31, 2002 were:

Stock options - 1,908,075
Warrants - 66,069,569
2003 2002
---------- ----------
Weighted average shares used to compute
basic EPS 33,737,263 20,575,948

Effect of potential common shares limited
to authorized shares available 21,262,737 0
---------- ----------
Weighted average shares - diluted 55,000,000 20,575,948
========== ==========
Effect of potential common shares not limited
to authorized shares available 49,500,000 0
---------- ----------
As if adjusted for authorized shares, weighted
average shares - diluted 83,237,263 20,575,948
========== ==========

Use of Estimates in the Preparation of Financial Statements -- The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, and disclosure of contingent assets and liabilities, at the date of
the financial statements, and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those estimates.

Income taxes -- Income taxes are accounted for under the asset and
liability method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and for operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in the results of
operations in the period that includes the enactment date. At December 31, 2003
and 2002, the Company has recorded a full valuation allowance for the net
deferred tax asset.

Recently Issued Accounting Standards

In April 2002, the FASB issued SFAS No. 145, "Rescission of FAS
Statements 4, 44 and 64, Amendment of FAS Statement 13 and Technical
Corrections." SFAS No. 145 eliminates Statement 4 (and Statement 64, as it
amends Statement 4), which required gains and losses from extinguishment of debt
to be aggregated and, if material, classified as an extraordinary item, and
thus, also the exception to applying Opinion 30 is eliminated as well. This
statement is effective for fiscal years beginning after May 2002 for the
provisions related to the rescission of Statements 4 and 64 and for all
transactions entered into beginning May 2002 for the provision related to the
amendment of Statement 13. The adoption of SFAS No. 145 did not have a material
impact on its results of operations or financial position.

F-60

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
associated with Exit or Disposal Activities." SFAS No. 146 requires recording
costs associated with exit or disposal activities at their fair values when a
liability has been incurred. Under previous guidance, certain exit costs were
accrued upon management's commitment to an exit plan. The Company adopted SFAS
No. 146 on January 1, 2003. The adoption of SFAS No. 146 did not have a material
impact on its results of operations or financial position.

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement No.
133 on Derivative Instruments and Hedging Activities." Among other things, this
Statement requires that contracts with comparable characteristics be accounted
for similarly and clarifies under what circumstances a contract with an initial
net investment meets the characteristics of a derivative. SFAS No. 149 is
effective July 1, 2003. The Company does not expect this pronouncement to have a
material impact on its results of operations or financial condition.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS
No. 150 establishes standards for classifying and measuring certain financial
instruments with characteristics of both liabilities and equity. SFAS No. 150
has a variety of effective dates. The Company does not expect this pronouncement
to have a material impact on its results of operations or financial condition.

Effective January 1, 2003, the Company adopted the recognition and
measurement provisions of FASB Interpretation No. 45 ("Interpretation 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." This interpretation elaborates
on the disclosures to be made by a guarantor in interim and annual financial
statements about the obligations under certain guarantees. Interpretation 45
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The initial recognition and initial measurement
provisions of this interpretation are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002. The Company does not
currently provide significant guarantees on a routine basis. As a result, this
interpretation has not had a material impact on the Company's financial
statements.

In December 2003, the FASB issued FASB Interpretation No. 46 (revised
December 2003) ("Interpretation 46"), "Consolidation of Variable Interest
Entities." Application of this interpretation is required in the Company's
financial statements for interests in variable interest entities that are
considered to be special-purpose entities for the year ended December 31, 2003.
The Company determined that it does not have any arrangements or relationships
with special-purpose entities. Application of Interpretation 46 for all other
types of variable interest entities is effective March 31, 2004.

Interpretation 46 addresses the consolidation of business enterprises to
which the usual condition (ownership of a majority voting interest) of
consolidation does not apply. This interpretation focuses on controlling
financial interests that may be achieved through arrangements that do not
involve voting interests. It concludes that in the absence of clear control
through voting interests, a company's exposure (variable interest) to the
economic risks and potential rewards from the variable interest entity's assets
and activities are the best evidence of control. If an enterprise holds a
majority of the variable interests of an entity, it would be considered the
primary beneficiary. The primary beneficiary is required to include assets,
liabilities and the results of operations of the variable interest entity in its
financial statements. The adoption of FIN 46 did not have an impact on the
financial position or operations of the Company.

Note 3. Operations

As of December 31, 2003, the Company sold all of the shares of HEB common
stock and received net proceeds of $1,207,337, resulting in a gain of $ 444,337,
which is included in the consolidated statement of operations for the year ended
December 31, 2003.

On October 17, 2003, ISI and Amphioxus Cell Technologies, Inc. ("ACT"), a
development stage company, entered into a non-binding letter of intent pursuant
to which ISI (or a wholly owned subsidiary of ISI) will acquire ACT. ACT is a
biotechnology company that applies liver biology solutions to problems in drug
discovery and human therapeutics. The shareholders of ACT will receive preferred
stock of

F-61

ISI, convertible into a number of common shares of ISI equal to 75% of the fully
diluted capitalization of ISI (see Note 8).

In December, 2003, the Company settled a liability resulting in a gain of
$ 228,913, which is included in the consolidated statement of operations for the
year ended December 31, 2003.

At December 31, 2003, the Company had approximately $849,000 of cash and
cash equivalents, with which to support future operating activities and to
satisfy its financial obligations as they become payable.

The Company has experienced significant operating losses since its
inception in 1980. As of December 31, 2003, the Company had an accumulated
deficit of approximately $138.0 million. For the years ended December 31, 2003
and 2002, the Company had net income of approximately $2.3 million and incurred
a net loss of approximately $2.7 million, respectively. Based on the Company's
current cash position, the proceeds from the sale of the 487,028 shares of HEB
Common Stock, estimates of expenses, and the timing of repayment to creditors,
management believes that the Company has sufficient resources to enable the
Company to continue operations through March 31, 2005. However, actual results
may differ materially from such estimate, and no assurance can be given that
additional funding will not be required sooner than anticipated or that such
additional funding, whether from financial markets or from other sources, will
be available when needed or on terms acceptable to the Company. Insufficient
funds will require the Company to curtail or terminate operations.

Note 4. Agreement with GP Strategies Corporation

Pursuant to an agreement dated March 25, 1999, GP Strategies Corporation
("GP Strategies") loaned the Company $500,000 (the "GP Strategies Debt"). In
return, the Company granted GP Strategies (i) a first mortgage on the Company's
real estate, (ii) a two-year option (which has expired) to purchase the
Company's real estate, provided that the Company has terminated its operations
and a certain liability to the American Red Cross (the "Red Cross") has been
repaid, and (iii) a two-year right of first refusal (which has expired) in the
event the Company desires to sell its real estate. In addition, the Company
issued GP Strategies 500,000 shares (the "GP Shares") of common stock and
five-year warrant (the "GP Warrant") to purchase 500,000 shares of common stock
at a price of $1 per share. The GP Shares and GP Warrant were valued at $500,000
and recorded as a financing cost and amortized over the original period of the
GP Strategies Debt in 1999. Pursuant to the agreement, the Company has issued a
note to GP Strategies representing the GP Strategies Debt, which note was
originally due on September 30, 1999 (but extended to June 30, 2001) and bears
interest, payable at maturity, at the rate of 6% per annum. In addition, at that
time, the Company negotiated a subordination agreement with the Red Cross
pursuant to which the Red Cross agreed that its lien on the Company's real
estate is subordinate to GP Strategies' lien. On March 27, 2000, the Company and
GP Strategies entered into an agreement pursuant to which (i) the GP Strategies
Debt was extended until June 30, 2001 and (ii) the Management Agreement between
the Company and GP Strategies was terminated and all intercompany accounts
between the Company and GP Strategies (other than the GP Strategies Debt) in the
amount of approximately $130,000 were discharged which was recorded as a credit
to capital in excess of par value. On August 23, 2001, the Company and GP
Strategies entered into an agreement pursuant to which the GP Strategies Debt
was extended to March 15, 2002. During 2001, the Company paid GP Strategies
$100,000 to reduce the GP Strategies Debt. In addition, in January 2002, the
Company paid GP Strategies $100,000 to further reduce the GP Strategies Debt. In
connection with the Asset Sale Transactions (as hereafter defined, see Note 7),
the Company, HEB and GP Strategies entered into an agreement pursuant to which
GP Strategies agreed to forbear from exercising its rights until May 31, 2003
and GP Strategies agreed to accept HEB common stock with a guaranteed value of
$425,000 in full settlement of all the Company's obligations to GP Strategies.
On June 2, 2003, HEB delivered the HEB common stock to GP Strategies in
accordance with HEB's obligation under the terms of the forbearance agreement.
However the forbearance agreement provided that in addition to the issuance by
HEB of the HEB common stock to GP Strategies, HEB was obligated to register the
HEB common stock for resale and any shares of HEB shares received by GP
Strategies which remain unsold after November 30, 2004 may be put to HEB at a
price of $ 1.59 per share.

The GP Strategies obligations were legally extinguished by HEB on June
2, 2003. The Asset Sale Transaction with HEB closed on March 17, 2004. If the
transaction had

F-62

not closed, HEB would have had a claim against ISI for the satisfaction of the
GP Strategies obligations. For accounting purposes, these transactions were
treated as integral parts of the Asset Sale Transactions and accordingly, the
obligations remained on the balance sheet until the closing of the transaction
on March 17, 2004, at which time the amount of such obligations will be
recognized as extinguished for accounting purposes.

Note 5. Agreement with the Red Cross

The Company obtained human white blood cells used in the manufacture of
ALFERON N Injection from several sources, including the Red Cross pursuant to a
supply agreement dated April 1, 1997 (the "Supply Agreement"). As of November
23, 1998, the Company owed the Red Cross approximately $1.46 million plus
interest at the rate of 6% per annum accruing from April 1, 1998 (the "Red Cross
Liability") for white blood cells purchased pursuant to the Supply Agreement.

Pursuant to an agreement dated November 23, 1998, the Company granted the
Red Cross a security interest in certain assets to secure the Red Cross
Liability, issued to the Red Cross 300,000 shares of common stock and agreed to
issue additional shares at some future date as requested by the Red Cross to
satisfy any remaining amount of the Red Cross Liability. The Red Cross agreed
that any net proceeds received by it upon sale of such shares would be applied
against the Red Cross Liability. In January 1999, the Company granted the Red
Cross a security interest (the "Security Interest") in, among other things, the
Company's real estate, equipment inventory, receivables, and New Jersey net
operating loss carryovers to secure repayment of the Red Cross Liability, and
the Red Cross agreed to forbear from exercising its rights under the Supply
Agreement, including with respect to collecting the Red Cross Liability until
June 30, 1999 (which was subsequently extended until December 31, 1999). On
December 29, 1999, the Company, the Red Cross and GP Strategies entered in an
agreement pursuant to which the Red Cross agreed that until September 30, 2000
it would forbear from exercising its rights under (i) the Supply Agreement,
including with respect to collecting the Red Cross Liability, and (ii) the
Security Interest. In connection with the Asset Sale Transactions (see Note 7),
the Company, HEB and the Red Cross entered into an agreement pursuant to which
the Red Cross agreed to forbear from exercising its rights until May 31, 2003
and the Red Cross agreed to accept HEB common stock with a guaranteed value of
$500,000 in full settlement of all of the Company's obligations to the Red
Cross. On June 2, 2003, HEB delivered the HEB common stock to the Red Cross in
accordance with HEB's obligation under the terms of the forbearance agreement.
However the forbearance agreement provided that in addition to the issuance by
HEB of the HEB common stock to the Red Cross, HEB was obligated to register the
HEB common stock for resale and any shares of HEB shares received by the Red
Cross which remain unsold after May 31, 2004 may be put to HEB at a price of $
1.59 per share.

The Red Cross Liability was legally extinguished by HEB on June 2, 2003.
The Asset Sale Transaction with HEB closed on March 17, 2004. If the transaction
had not closed, HEB would have had a claim against ISI for the satisfaction of
the Red Cross Liability. For accounting purposes, these transactions were
treated as integral parts of the Asset Sale Transactions and accordingly, the
obligations remained on the balance sheet until the closing of the transaction
on March 17, 2004, at which time the amount of such obligations will be
recognized as extinguished for accounting purposes.

Note 6. Agreement with Metacine, Inc.

On July 28, 2000, the Company acquired an option for $100,000 to purchase
certain securities of Metacine, Inc. ("Metacine"), a company engaged in research
using dendritic cell technology.

On August 29, 2003, the Company and Metacine entered into an agreement
pursuant to which the Company relinquished all rights to the shares and warrants
of Metacine

F-63

held by the Company and issued Metacine 1,000,000 shares of the Company's common
stock and Metacine relieved the Company of its $1,700,000 obligation to
Metacine. In addition, Metacine retained the 2,000,000 shares of the Company's
common stock issued on April 9, 2001. The issuance of the 1,000,000 shares
(valued at $.05 per share which was the closing price of the Company's common
stock on August 29, 2003) and the Company's agreement to allow Metacine to
retain the 2,000,000 shares previously issued (valued at $.05 per share which
was the closing price of the Company's common stock on August 29, 2003) was
recorded as a credit to the Company's equity of $150,000 which resulted in a
gain of $1,550,000 and is shown on the consolidated statements of operations for
the year ended December 31, 2003 as a gain on Metacine settlement.

Note 7. Agreement with Hemispherx Biopharma, Inc. ("HEB")

On March 11, 2003, the Company executed two agreements with HEB to sell
certain assets of the Company (the two asset sale transactions are hereinafter
jointly referred to as the "Asset Sale Transactions" and individually referred
to as the "First Asset Sale" and the "Second Asset Sale") and consummated the
First Asset Sale.

In the first agreement with HEB (the "First Asset Sale Agreement"), the
Company sold all of its inventory related to ALFERON N Injection(R) (the
"Product") and granted a three-year license for the production, manufacture,
use, marketing and sale of the Product in the United States.

For these assets, the Company:

(i) received 424,528 shares of HEB common stock (the "HEB Common Stock")
which had a Guaranteed Value (as defined in the First Asset Sale
Agreement) of $675,000;

(ii) received an additional 62,500 shares of HEB Common Stock without a
Guaranteed Value; and

(iii) will receive a royalty equal to 6% of the net sales of the Product.

In addition, HEB assumed $408,000 of ISI payables and certain other
obligations related to the Product. The consummation of the First Asset Sale
Agreement resulted in a gain of $1,149,112, which is included in the
consolidated statement of operations for the year ended December 31, 2003.

ISI received a service fee until October 31, 2003 for providing certain
transitional services. Such service fee is shown on the consolidated statements
of operations for the year ended December 31, 2003 as service fee income in the
amount of $560,101. As of December 31, 2003, the Company sold all 487,028 shares
of HEB Common Stock and realized net proceeds of $1,207,000, resulting in a gain
of $ 447,337, which is included in the consolidated statement of operations for
the year ended December 31, 2003.

In the second agreement with the Company (the "Second Asset Sale
Agreement"), which was consummated on March 17, 2004, the Company sold to HEB
all of its rights to the Product and other assets related to the natural alpha
interferon business including, but not limited to, real estate, machinery and
equipment. For these assets, the Company:

(i) received 424,528 shares of HEB Common Stock which has a Guaranteed
Value (as defined in the Second Asset Sale Agreement) of $675,000;

(ii) received an additional 62,500 shares of HEB Common Stock without a
Guaranteed Value; and

(iii) will receive a royalty equal to 6% of the net sales of any products
containing natural alpha interferon sold by HEB (or a Marketing Partner,
as defined in the Second Asset Sale Agreement).

The Second Asset Sale Agreement obligates HEB to register the 487,028
shares of HEB Common Stock, sets periodic limits on the number of these shares
that may be sold and requires HEB to pay the Company an amount equal to the
product received by multiplying (i) the number of guaranteed shares remaining
unsold on March 17, 2006, and (ii) $ 1.59. The remaining guaranteed shares will
then be returned to HEB.

In addition, HEB satisfied the Company's obligations to (i) the American
Red Cross in the amount of $1,435,000, (ii) GP Strategies Corp. in the amount of
$423,000, and (iii) MD Sass in the amount of $644,000 (for unpaid local property
taxes and water and sewer charges).

F-64

Note 8. Note Receivable - Agreement with Amphioxus Cell Technologies, Inc.
("Amphioxus" or "ACT")

On March 20, 2003, the Company entered into a collaterialized note
agreement, as amended (the "Note") with Amphioxus to advance up to $500,000.
Pursuant to the Note, the Company advanced $375,000 as of December 31, 2003. The
Note is due on March 19, 2004, bears interest at the rate of 10% per annum and
is collaterialized by all of the assets of Amphioxus. In addition, the Company
received a warrant, exercisable until March 2008, to purchase for $100,000, an
aggregate of 20% of the common stock of Amphioxus on a fully diluted basis. The
warrant is valued at $15,000, is prorated based on the amount of monies advanced
and is amortized as interest income over the term of the Note.

On October 17, 2003, ISI and Amphioxus Cell Technologies, Inc. entered
into a non-binding letter of intent pursuant to which ISI (or a wholly owned
subsidiary of ISI) will acquire ACT. The shareholders of ACT will receive
preferred stock (the "ACT Preferred Stock") of ISI, convertible into a number of
common shares of ISI equal to 75% of the fully diluted capitalization of ISI.
The ACT Preferred Stock will be convertible at the option of the holder at any
time, and subject to mandatory conversion if, prior to the date which is two
years after the merger, the sum of the proceeds received from (i) the sale of
the assets of ISI at the date of merger, and (ii) common equity capital raised
at a pre-money valuation in excess of $10 million, exceed $2.5 million.

Certain debt (the "ACT Debt") aggregating approximately $2.9 million that
is currently owed to shareholders of ACT will continue as secured non-interest
bearing debt of ISI, upon completion of the merger. The ACT Debt will be
non-interest bearing and repayable by ISI on the fourth anniversary of the date
of the merger, subject to accelerated payment of 25% of the net after tax
profits of ACT over $1 million on a cumulative basis. The ACT Debt shall be
fully payable upon a change of control of ISI (excluding the transactions
whereby the ACT stockholders convert the ACT Preferred Stock). In addition, the
ACT Debt shall also be repaid to the extent of the net proceeds from the sale of
any equity securities of ISI exceeding $8 million. In addition, certain
additional debt aggregating approximately $200,000 owed to a shareholder of ACT
will be repayable on the fifth anniversary of the date of the merger.

In addition, preferred stock (the "Junior Preferred Stock") held by a
shareholder of ACT will continue as non-accruing preferred stock in the face
amount of $2 million, senior in right of preference as to dividends and
distributions in liquidation to the ACT Preferred Stock and common stock of ISI.
The Junior Preferred Stock will be repayable by ISI on the fourth anniversary of
the date of the merger, subject to accelerated payment from 25% of the net after
tax profits of ISI available after payment of the ACT Debt. The Junior Preferred
Stock will also be subject to reset upon the following conditions: the
redemption value and liquidation preference of Junior Preferred Stock shall be
increased if either the market capitalization of ISI or the amount to be paid by
any third party for ISI values the common stock and any other equity securities
or debt convertible into equity securities at (i) greater than $25 million, in
which case the Junior Preferred Stock shall be increased to $2.75 million, or
(ii) greater than $35 million, in which case the Junior Preferred Stock shall be
increased to $3.5 million (each a "Reset Event"). If not sooner redeemed and
paid, the Junior Preferred Stock shall be fully redeemed and retired (subject
only to the prior payment of the ACT Debt) at any time upon a change of control
of the surviving company (excluding the transaction whereby the ACT stockholders
convert their ACT Preferred Stock), or to the extent of the net proceeds from
the sale of any equity securities of ISI exceeds $10.9 million.

In addition, on the merger date, three officers of ISI have agreed to
grant ISI the option to terminate their employment agreements in exchange for
(i) a one-year consulting agreement at the rate of $4,000 per month, (ii) common
stock or options exercisable into approximately 1.25% of ISI and (iii) an amount
by which 10% of the proceeds from the sale of certain assets of ISI exceed
$200,000.

The Letter of Intent is subject to the execution of definitive documents
and final due diligence.

F-65

Note 9. Equity Transaction

In March 2003, the Company sold 15,000,000 shares of its common stock in a
private placement transaction to an investor for $150,000. In connection with
this private placement, the Company also sold, for $1,000, 15,000,000 warrants
exercisable (subject to shareholder approval) at $0.01 per share and expiring in
March 2008.

Note 10. Notes Payable

In August 2002, the Company completed a private placement of $500,000 of
convertible notes to accredited investors. Each note is convertible into the
Company's common stock at a price of $.05 per share (subject to adjustment to
70% of the market price of the Company's common stock under certain
circumstances) and bears interest at the rate of 10% per annum. A $250,000
convertible note was due January 31, 2003 and the other $250,000 of the
convertible notes were due December 31, 2003. For each $100,000 principal amount
of notes issued, the investors received warrants to purchase an additional 10.2
million shares of the Company's common stock exercisable at $.01 per share. The
warrants were valued at $400,000 and are amortized as interest expense over the
terms of the respective notes. The conversion of the convertible notes and the
exercise of the warrants are subject to approval of a sufficient number of
authorized common shares by the shareholders of the Company. The terms of the
notes, as amended, include the Company obtaining stockholder approval by April
30, 2004 to increase its authorized shares so that the number of authorized but
unissued common shares is at least 200% of the number of common shares issuable
on conversion of the notes and exercise of the warrants. Failure to obtain
stockholder approval for the increase in the authorized number of shares and to
file with the Delaware Secretary of State an amendment to the Company's
Certificate of Incorporation, on or before April 30, 2004 to increase its
authorized shares, would require the Company to make cash payments to each
warrant holder, for each 30-day period such approval has not been obtained,
equal to the difference between the exercise price and volume weighted average
market price (for that 30-day period) for all warrants not exercisable because
of the failure to obtain the approval. Further the note holders have
registration rights whereby, for the period commencing April 30, 2004 but no
later than August 7, 2005, upon written request from at least 50% of the holders
of the shares issuable upon the exercise of the warrants, the Company is to file
a registration statement within 30 days and have such registration statement
declared effective 90 days thereafter, to register the common shares underlying
the convertible notes and warrants. The Company's failure to file a registration
statement or have one declared effective by the required dates would result in
the Company paying liquidated damages to each of the above note-holders in an
amount equal to 2% per month for each 30 day period or part thereof, a
registration station was not filed. In addition, these notes are convertible
into common stock at a beneficial rate. The beneficial conversion feature was
valued at $100,000 and accounted for as debt discount and was amortized over the
term of the notes. The $250,000 note due on January 31, 2003 was repaid in full
(including accrued interest) in November 2003. The $250,000 notes due December
31, 2003 remain unpaid.

In June and July 2003, the Company received an aggregate of $100,000 and
issued convertible notes payable to private investors. The notes are due June
30, 2004 and bear interest at the rate of 6% per annum. Each note is convertible
into the Company's common stock at a price of $.06 per share (which exceeded the
closing price of the Company's common stock on the date of issuance). During
August and September 2003, the Company repaid an aggregate of $65,000 of such
notes.

Note 11. Income Taxes

As a result of the loss allocation rules contained in the Federal income
tax consolidated return regulations, approximately $5,600,000 of net federal
operating loss carryforwards, which expire from 2004 to 2006, are available to
the Company upon ceasing to be a member of GP Strategies's consolidated return
group in 1991. In addition, the Company has net federal operating loss
carryforwards for periods subsequent to May 31, 1991, and through December 31,
2003 of approximately $107,000,000 that expire from 2006 to 2022. In addition,
the Company had state net operating loss carryforwards of approximately
$31,000,000 that expire from 2005 to 2010.

F-66

The Company believes that the events culminating with the closing of its Common
Stock Private Offering on November 6, 2000 may result in an "ownership change"
under Internal Revenue Code, Section 382, with respect to its stock. The Company
believes that as a result of the ownership change, the future utility of its
pre-change net operating losses may be significantly limited. Further, the
issuance of 51,000,000 warrants in August 2002 could also result in an ownership
change and further limit use of the net operating losses carried forward.

The tax effects of temporary differences that give rise to deferred tax
assets and liabilities consist of the following as of December 31, 2003:

Deferred tax assets
-------------------

Net operating loss carryforwards $40,072,000
Property and equipment,
principally due to differences
in basis and depreciation 735,000
----------
Gross deferred tax asset 40,807,000
Valuation allowance (40,807,000)
-----------
Net deferred taxes $ --
===========

A valuation allowance is provided when it is more likely than not that
some portion of the deferred tax asset will not be realized. The Company has
determined, based on the Company's history of annual net losses, that a full
valuation allowance is appropriate. The decrease in the valuation allowance in
2003 was $1,256,000.

The Company participates in the State of New Jersey's corporation business
tax benefit certificate transfer program (the "Program"), which allows certain
high technology and biotechnology companies to transfer unused New Jersey net
operating loss carryovers to other New Jersey corporation business taxpayers.
During 1999, the Company submitted an application to the New Jersey Economic
Development Authority (the "EDA") to participate in the Program and the
application was approved. The EDA then issued a certificate certifying the
Company's eligibility to participate in the Program and the amount of New Jersey
net operating loss carryovers the Company has available to transfer. Since New
Jersey law provides that net operating losses can be carried over for up to
seven years, the Company may be able to transfer its New Jersey net operating
losses from the last seven years. The Program requires that a purchaser pay at
least 75% of the amount of the surrendered tax benefit.

During 2003 and 2002, the Company completed the sale of approximately $3.5
million and $6.5 million of its New Jersey tax loss carryovers and received
approximately $0.28 and $0.53 million, which were recorded as a tax benefit from
gains on sale of state net operating loss carryovers on its Consolidated
Statement of Operations in 2003 and 2002, respectively.

Note 12. Common Stock, Stock Options, Warrants and Other Shares Reserved

The Company has a stock option plan (the "Plan"), which authorizes a
committee of the Board of Directors to grant options, to purchase shares of
Common Stock, to officers, directors, employees and consultants of the Company.
Pursuant to the terms of the Plan, no option may be exercised after 10 years
from the date of grant. The Plan permits options to be granted at a price not
less than 85% of the fair market value, however, the options granted to date
have been at fair market value of the common stock at the date of the grant.

Employee stock option activity for options under the Plan during the
periods indicated is as follows:

F-67

Number of Weighted-Average
Shares Exercise Price
---------- ----------------
Balance at January 1, 2002 1,930,621 .28

Forfeited (22,546) .41
----------
Balance at December 31, 2002 1,908,075 .27

Forfeited (1,908,075) .27
----------
Balance at December 31, 2003 -0- --
----------

At December 31, 2003, there were no stock options outstanding.

Information regarding all Options and Warrants

Changes in options and warrants outstanding during the years ended
December 31, 2003 and 2002 and options and warrants exercisable and shares
reserved for issuance at December 31, 2003 are as follows:

The following table includes all options and warrants including employee
options (which are discussed above).

Price Range Number of
Per Share Shares
--------------------- ----------
Outstanding at January 1, 2002 .25 - 36.00 17,027,154
Warrants Issued .01 - .01 51,000,000
Terminated .25 - 36.00 (49,510)
--------------------- ----------
Outstanding at December 31, 2002 .01 - 1.50 67,977,644
Warrants Issued .01 - .01 15,000,000
Terminated .25 - 1.25 (1,908,075)
--------------------- ----------

Outstanding at December 31, 2003 .01 - 1.50 81,069,569
==========
Exercisable:

December 31, 2003 .66 - 1.50 15,069,569
==========
Shares reserved and to be reserved for issuance:

December 31, 2003 81,069,569
==========

Options and warrants outstanding and exercisable, and shares reserved for
issuance, at December 31, 2003, include 500,000 shares under a warrant agreement
with GP Strategies. The warrants are priced at $1.00 per share and expire on
March 25, 2004.

Options and warrants outstanding and exercisable, and shares reserved for
issuance, at December 31, 2003, include 11,635,451 shares under warrant
agreements with the purchasers of a 2000 private offering. The warrants are
priced at $1.50 per share and expire on April 17, 2005.

Options and warrants outstanding and exercisable, and shares reserved for
issuance, at December 31, 2003, include 2,934,118 shares under a warrant
agreement to purchase 1,467,059 units. Each unit consists of a share of common
stock and a warrant to purchase an additional share of common stock at a price
of $1.50 per share, exercisable at a price of $.66 per unit. The units were
issued as compensation for services rendered to the Company in the 2000 private
offering and expire on April 17, 2005.

Options and warrants outstanding and shares reserved for issuance, at
December 31, 2003, include 51,000,000 shares under warrant agreements (subject
to shareholder approval) with the purchasers of the convertible notes. The
warrants are exercisable at $.01 per share upon shareholder approval and expire
in 2007.

F-68

Options and warrants outstanding and shares reserved for issuance, at
December 31, 2003, include 15,000,000 shares under a warrant agreement (subject
to shareholder approval) with an investor. The warrants are exercisable at $.01
per share upon shareholder approval and expire in March 2008.

Note 13. Savings Plan

The ISI Savings Plan (the "Savings Plan") permits pre-tax contributions to
the Savings Plan by participants pursuant to Section 401(k) of the Internal
Revenue Code of up to 15% of base compensation. The Company will match up to the
6% level of the participants' eligible contributions. The Savings Plan matches
40% in cash and 60% in the Company's common stock up to the 6% level. For 2003,
the Company's contribution to the Savings Plan, which was fully vested, was
$32,000, consisting of $10,000 in cash and $22,000 in stock. For 2002, the
Company's contribution to the Savings Plan was $131,000, consisting of $53,000
in cash and $78,000 in stock. In August 2003, the Savings Plan was terminated.

Note 14. Profit Sharing Plan

The Company has a Profit Sharing Plan (the "Profit Sharing Plan")
providing key employees and consultants with an opportunity to share in the
profits of the Company. The Profit Sharing Plan is administered by the Company's
Compensation Committee.

Pursuant to the terms of the Profit Sharing Plan, the Compensation
Committee, in its sole discretion, based upon the significance of the employee's
contributions to the operations of the Company, selects certain key employees
and consultants of the Company who are entitled to participate in the Profit
Sharing Plan and determines the extent of their participation. The amount of the
Company's profits available for distribution to the participants (the
"Distribution Pool") is the lesser of (a) 10% of the Company's income before
taxes and profit sharing expense and (b) an amount equal to 100% of the base
salary for such year of all the participants in the Profit Sharing Plan.

The Compensation Committee may require as a condition to participation
that a participant remain in the employ of the Company until the end of the
fiscal year for which payment is to be made. Payments required to be made under
the Profit Sharing Plan must be made within 10 days of the filing of the
Company's tax return. Through December 31, 2003, there have been no
contributions by the Company under the Profit Sharing Plan.

Note 15. Supplemental Statement of Cash Flow Information

The Company paid no income taxes or interest during the two-year period
ended December 31, 2003, except for $32,718 of interest paid in 2003.

During the years ended December 31, 2003 and 2002, the following non-cash
financing and investing activities occurred:

2003:

The Company issued 1,000,000 shares of common stock to Metacine for the
settlement of an obligation.

2002:

None

Note 16. Fair Value of Financial Instruments

The carrying values of financial instruments, including cash and cash
equivalents, notes and other receivables, accounts payable, accrued expenses and
notes payable approximate fair values, because of the short term nature or
interest rates that approximate current rates.

F-69

Note 17. Quarterly Financial Data (unaudited)

The following summarizes the Company's unaudited quarterly results for 2003 and
2002.

2003 Quarters First Second Third Fourth
--------- -------- ------- --------
Thousands of dollars except per share data

Revenue $ 1,391 $ -- $ 14 $ 16
Gross profit 1,124 -- 14 16
Net income (loss) 684 (227) 1,125 747
Basic net income (loss)
per share 0.03 (0.01) 0.03 0.02
Diluted net income (loss)
per share 0.01 (0.01) 0.02 0.01

2002 Quarters First Second Third Fourth
--------- -------- ------- --------
Thousands of dollars except per share data

Revenues $ 784 $ 176 $ 687 $ 279
Gross profit (loss) (1) 369 (149) 254 (30)
Net loss (493) (949) (639) (457)
Basic and diluted net loss
per share (.03) (.05) (.03) (.02)

(1) Gross profit (loss) is calculated as revenue less cost of goods sold and
excess/idle production costs.

F-70

INTERFERON SCIENCES, INC. AND SUBSIDIARY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

Additions
Balance at Charged to Balance at
Beginning Costs, Provisions End of
Description Of Period and Expenses Deductions(a) Period
----------- ---------- ----------------- ------------- ----------

Year ended December 31, 2003
Valuation and qualifying
accounts deducted from assets
to which they apply:
Reserve for excess inventory $4,678,659 $ $4,678,659 $ --

Year ended December 31, 2002
Valuation and qualifying
accounts deducted from assets
to which they apply:
Reserve for excess inventory $5,538,413 $ $ 859,754 $4,678,659

Notes:

(a) Deductions are for the usage of a portion of the reserve for excess
inventory.

F-71

Interferon Sciences, Inc.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------

Page
----
Report of Independent Registered Public Accounting Firm F-73

Financial Statements:

Consolidated Balance Sheet - December 31, 2002 F-74

Consolidated Statements of Operations - Years ended
December 31, 2002 and 2001 F-75

Consolidated Statements of Changes in Stockholders'
Capital Deficiency - Years Ended
December 31, 2002 and 2001 F-76

Consolidated Statements of Cash Flows - Years ended
December 31, 2002 and 2001 F-77

Notes to Consolidated Financial Statements F-78

F-72

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
Interferon Sciences, Inc.

We have audited the accompanying consolidated balance sheet of Interferon
Sciences, Inc. and subsidiary as of December 31, 2002 and the related
consolidated statements of operations, changes in stockholders' capital
deficiency and cash flows for each of the years in the two-year period ended
December 31, 2002. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). These standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements enumerated above
present fairly, in all material respects, the consolidated financial position of
Interferon Sciences, Inc. and subsidiary as of December 31, 2002 and the
consolidated results of their operations and their consolidated cash flows for
each of the years in the two-year period ended December 31, 2002, in conformity
with U.S. generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 3 to the
financial statements, the Company has experienced a significant net losses in
each of the years in the two-year period ended December 31, 2002 and at
December 31, 2002, has a capital deficiency and a negative working capital
position. These factors raise substantial doubt about its ability to continue as
a going concern. Management's plans in regard to these matters are also
described in Note 3. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.

In connection with our audits of the financial statements referred to
above, we audited Schedule II - Valuation and Qualifying Accounts for 2002 and
2001. In our opinion, this schedule, when considered in relation to the
financial statements taken as a whole, presents fairly, in all material
respects, the information stated therein.

Eisner LLP

New York, New York
June 10, 2003

F-73

INTERFERON SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 2002

ASSETS
Current assets
Cash and cash equivalents $ 378,663
Accounts and other receivables 42,739
Inventories, net of reserves of $4,678,659 28,489
Prepaid expenses and other current assets 12,179
-------------
Total current assets 462,070
-------------
Property, plant and equipment, at cost
Land 140,650
Buildings and improvements 7,793,242
Equipment 4,920,942
-------------
12,854,834

Less accumulated depreciation (11,173,264)
-------------
1,681,570
-------------
Patent costs, net of accumulated amortization
of $388,974 132,187
Other assets 100
-------------

$ 2,275,927
=============

LIABILITIES AND CAPITAL DEFICIENCY
Current liabilities
Accounts payable $ 1,387,462
Accrued expenses 414,262
Due to American Red Cross 1,402,870
ISI stock subject to resale agreement
and in-kind services due Metacine 1,700,000
Note payable and amount due GP Strategies 413,745
Convertible Notes payable, net of debt discount 281,863
-------------
Total current liabilities 5,600,202
-------------
Commitments

Capital deficiency
Preferred stock, par value $.01 per share;
authorized - 5,000,000 shares; none
issued and outstanding Common stock, par value
$.01 per share; authorized - 55,000,000 shares;
21,030,405 shares issued and outstanding 210,304
Capital in excess of par value 136,810,618
Accumulated deficit (140,345,197)
-------------
Total capital deficiency (3,324,275)
-------------
$ 2,275,927
=============

The accompanying notes are an integral part of these consolidated financial
statements.

F-74

INTERFERON SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,

2002 2001
------------ ------------
Revenues
ALFERON N Injection $ 1,926,466 $ 1,498,603
Research products and other revenues
------------ ------------
Total revenues 1,926,466 1,498,603
------------ ------------
Costs and expenses
Cost of goods sold and excess/idle
production costs 1,482,006 1,485,962
Research and development 1,514,286 2,286,300
General and administrative 1,818,194 2,646,734
Acquisition of in-process technology 2,341,418
------------ ------------
Total costs and expenses 4,814,486 8,760,414
------------ ------------
Loss from operations (2,888,020) (7,261,811)

Interest income 7,122 108,351
Interest expense (385,775) (91,469)
Equity in loss of Metacine (158,582)
------------ ------------
Loss before income tax benefit (3,266,673) (7,403,511)

Income tax benefit:
Gain on sale of state net operating loss
carryovers 528,276 968,553
------------ ------------
Net loss $ (2,738,397) $ (6,434,958)
============ ============
Basic and diluted net loss per share $ (.13) $ (.33)
============ ============
Weighted average number of
shares outstanding 20,575,948 19,576,312
============ ============

The accompanying notes are an integral part of these consolidated financial
statements.

F-75

INTERFERON SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' CAPITAL DEFICIENCY

Total
Capital in stockholders'
Common stock excess of Accumulated equity
Shares Amount par value deficit (deficiency)
------------------------- ----------- ------------ --------------

Balance at 17,931,838 179,318 136,113,070 (131,171,842) 5,120,546
December 31, 2000

Common stock 2,000,000 20,000 (20,000)
issued to Metacine
Common stock issued 50,000 500 12,780 13,280
as compensation
Common stock issued 323,949 3,239 106,095 109,334
under Company 401(k) plan
Proceeds from exercise 2,244 23 538 561
of common stock options
Employee stock option compensation 5,553 5,553
Settlement shares sold 21,463 21,463
Net loss, as restated (6,434,958) (6,434,958)
-----------------------------------------------------------------------------------
Balance at December 31, 2001 20,308,031 203,080 136,239,499 (137,606,800) (1,164,221)

Common stock issued 722,374 7,224 71,119 78,343
under Company 401(k) plan
Fair value of warrants issued with
convertible notes and value of
beneficial conversion feature 500,000 500,000
Net loss (2,738,397) (2,738,397)
------------------------------------------------------------------------------------
Balance at December 31, 2002 21,030,405 $ 210,304 $ 136,810,618 $(140,345,197) $ (3,324,275)

The accompanying notes are an integral part of these consolidated financial
statements.

F-76

INTERFERON SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31,
------------------------------
2002 2001
----------- -----------

Cash flows from operating activities:
Net loss $(2,738,397) $(6,434,958)
Adjustments to reconcile net loss
to net cash used for operating activities:
Depreciation and amortization 425,077 507,507
Acquisition of in-process research and development 2,341,418
Equity in loss of Metacine 158,582
Provision for notes receivable 87,500
Non-cash compensation expense 78,343 128,167
Debt discount 281,863
Change in operating assets
and liabilities:
Accounts and other receivables 80,650 1,551,409
Inventories 81,424 (4,439)
Prepaid expenses and other current assets 5,429 (120)
Accounts payable and accrued expenses 551,385 95,845
Amount due to GP Strategies 18,000 29,106
---------- ----------
Net cash used for operating activities (1,216,226) (1,539,983)
---------- ----------

Cash flows from investing activities:
Additions to property, plant and equipment (46,994)
Investments in Metacine and other assets (787,500)
Reduction of other assets 10,000
---------- ----------
Net cash provided by (used for)
investing activities 10,000 (834,494)
---------- ----------
Cash flows from financing activities:
Proceeds from convertible notes payable 500,000

Repayment of note payable to GP Strategies (100,000) (100,000)
Proceeds from exercise of common stock options 561
---------- ----------
Net cash provided by (used for) financing activities 400,000 (99,439)
---------- ----------
Net increase (decrease) in cash and cash equivalents (806,226) (2,473,916)

Cash and cash equivalents at beginning of year 1,184,889 3,658,805
---------- ----------
Cash and cash equivalents at end of year $ 378,663 $1,184,889
========== ==========

The accompanying notes are an integral part of these consolidated financial
statements.

F-77

INTERFERON SCIENCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Organization and Business

Interferon Sciences, Inc. (the "Company") is a biopharmaceutical company
that operates in a single segment and is engaged in the study, manufacture, and
sale of pharmaceutical products based on its highly purified, multispecies,
natural source alpha interferon ("Natural Alpha Interferon"). The Company's
ALFERON(R) N Injection (Interferon Alfa-n3) product has been approved by the
United States Food and Drug Administration ("FDA") for the treatment of certain
types of genital warts and the Company has studied its potential use in the
treatment of HIV, hepatitis C, and other indications. Alferon N Injection is
sold principally in the United States, however, a portion is sold in foreign
countries. For the years ended December 31, 2002 and 2001, domestic sales
totaled $1,926,466 and $1,488,897, respectively, and foreign sales totaled zero
and $9,706, respectively. All identifiable assets are located in the United
States.

Subsequent to December 31, 2002, the Company sold its inventory and
granted a license to its products to Hemispherx Biopharma, Inc. See Note 18.

Integrated Commercialization Solutions, Inc. ("ICS"), a subsidiary of
AmerisourceBergen Corporation, is the sole United States distributor of ALFERON
N Injection. ICS distributes ALFERON N Injection to a limited number of
wholesalers throughout the United States.

Note 2. Summary of Significant Accounting Policies

Principles of consolidation -- The consolidated financial statements
include the operations of the Company and Interferon Sciences Development
Corporation ("ISD"), its wholly owned subsidiary. All significant intercompany
transactions and balances have been eliminated. The transactions and balances of
Metacine, Inc. are being accounted for under the equity method (see Note 6). The
losses of Metacine from April 9, 2001, the date of the Company's acquisition of
an 82% equity interest in Metacine through December 31, 2001, have been
reflected in the accompanying statement of operations as equity in loss of
Metacine to the extent of the Company's carrying value of the investment in
Metacine. At December 31, 2001, the carrying value was written down to $-0-.

Cash and cash equivalents -- The Company considers all highly liquid
instruments with maturities of three months or less from purchase date to be
cash equivalents.

Depreciation -- The Company provides for depreciation and amortization of
plant and equipment following the straight-line method over the estimated useful
lives of such assets as follows:

Class of Assets Estimated Useful Lives
--------------- ----------------------
Buildings and Improvements 15 to 30 years
Equipment 5 to 10 years

F-78

Depreciation expense for the years ended December 31, 2002 and 2001 was
$396,922 and $478,082, respectively.

Patent costs -- The Company capitalizes costs to obtain patents and
licenses. Patent costs are amortized over 17 years on a straight-line basis. To
the extent a patent is determined to be worthless, the related net capitalized
cost is immediately expensed.

Revenue recognition -- Title passes to the customer at the shipping point
and revenue is therefore recognized when the product is shipped. The Company's
product is also tested by its quality control department prior to shipment. The
Company has no other obligation associated with its products once shipment has
occurred.

Research and Development Costs - Research and development are expensed
when incurred. The types of costs included in research and development are:
salaries, supplies, clinical costs, facility costs and depreciation. All of
these expenditures were for Company sponsored research and development programs.

Stock option plan - The Company accounts for its stock-based compensation
to employees and members of the Board of Directors in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations. As such,
compensation is recorded on the date of issuance or grant as the excess of the
current market value of the underlying stock over the purchase or exercise
price. Any deferred compensation is amortized over the respective vesting
periods of the equity instruments, if any. The Company has adopted the
disclosure provisions of Statement of Financial Accounting Standards No. 123
("SFAS No. 123"), "Accounting for Stock-Based Compensation," and Statement of
Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation
- Transition and Disclosure," which was released in December 2002 as an
amendment of SFAS 123. The following table illustrates the effect on net loss
and loss per share if the fair value based method had been applied to all
awards.

F-79

Year Ended December 31,
2002 2001
Reported net loss $(2,738,397) $(6,434,958)

Stock-based employee
compensation expense
included in reported net loss,
net of related tax effects -- --

Stock based employee
compensation determined under
the fair value based method,
net of related tax effects (94,165) (730,284)

Pro forma net loss (2,832,562) (7,165,242)

Loss per share
(basic and diluted)
As reported $ (.13) $ (.33)
Pro forma $ (.14) $ (.37)

During 2002 and 2001, the Company did not grant any stock options.

Loss per share -- Basic loss per share (EPS) are based upon the weighted
average number of common shares outstanding during the period. Diluted EPS are
based upon the weighted average number of common shares outstanding during the
period assuming the issuance of common shares for all dilutive potential common
shares outstanding. At December 31, 2002 and 2001, the Company's options
and warrants outstanding are anti-dilutive and therefore basic and diluted EPS
are the same.

Use of Estimates in the Preparation of Financial Statements - The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, and disclosure of contingent assets and liabilities, at the date of
the financial statements, and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those estimates.

Income taxes - Income taxes are accounted for under the asset and
liability method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and for operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in the results of
operations in the period that includes the enactment date. At December 31, 2002
the Company has recorded a full valuation allowance for the net deferred tax
asset.

F-80

Recently Issued Accounting Standards

In June 2001, the FASB issued SFAS No. 141, Business Combinations, ("SFAS
No. 141") and SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS No.
142"). SFAS No. 141 requires that the purchase method of accounting be used for
all business combinations. SFAS No. 141 specifies criteria that intangible
assets acquired in a business combination must meet to be recognized and
reported separately from goodwill. SFAS No. 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead tested for impairment at least annually in accordance with the
provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets
with estimable useful lives be amortized over their respective estimated useful
lives to their estimated residual values, and reviewed for impairment in
accordance with SFAS No. 121 and subsequently, SFAS No. 144 after its adoption.

The Company adopted the provisions of SFAS No. 141 as of July 1, 2001, and
SFAS No. 142 as of January 1, 2002.

Upon adoption of SFAS No. 142, the Company was required to reassess the
useful lives and residual values of all intangible assets acquired, and make any
necessary amortization period adjustments by the end of the first interim period
after adoption. If an intangible asset was identified as having an indefinite
useful life, the Company would be required to test the intangible asset for
impairment in accordance with the provisions of SFAS No. 142 within the first
interim period. Impairment is measured as the excess of carrying value over the
fair value of an intangible asset with an indefinite life. Any impairment loss
would be measured as of the date of adoption and recognized as the cumulative
effect of a change in accounting principle in the first interim period.

As of the date of adoption of SFAS No. 142, the Company does not have any
goodwill and has unamortized identifiable intangible assets of approximately
$160,000, all of which is subject to the transition provisions of SFAS No. 142.

In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets ("SFAS No. 144"). SFAS No. 144
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets. This Statement requires that long-lived assets be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If the carrying
amount of an asset exceeds its estimated future cash flows, an impairment charge
is recognized by the amount by which the carrying amount of the asset exceeds
the fair value of the asset. SFAS No. 144 requires companies to separately
report discontinued operations and extends that reporting to a component of an
entity that either has been disposed of (by sale, abandonment, or in a
distribution to owners) or is classified as held for sale. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. The Company adopted SFAS No. 144 on January 1, 2002.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FAS Statements
4, 44 and 64, Amendment of FAS Statement 13 and Technical Corrections." SFAS No.
145 eliminates Statement 4 (and Statement 64, as it amends Statement 4), which
required gains and losses from extinguishment of debt to be aggregated and, if
material, classified as an extraordinary item, and thus, also the exception to
applying Opinion 30 is eliminated as well. This statement is effective for
fiscal years beginning after May 2002 for the provisions related to the
rescission of Statements 4 and 64 and for all transactions entered into
beginning May 2002 for the provision related to the amendment of Statement 13.
The

F-81

Company does not expect that the adoption of SFAS No. 145 will have a material
impact on its results of operations or financial position.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
associated with Exit or Disposal Activities." SFAS No. 146 requires recording
costs associated with exit or disposal activities at their fair values when a
liability has been incurred. Under previous guidance, certain exit costs were
accrued upon management's commitment to an exit plan. The Company is required to
adopt SFAS No. 146 on January 1, 2003. The Company does not expect the adoption
of SFAS No. 146 will have a material impact on its results of operations or
financial position.

In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure," an amendment to SFAS No.
123, "Accounting for Stock-Based Compensation." Provisions of this statement
provide two additional alternative transition methods: modified prospective
method and retroactive restatement method, for an entity that voluntary changes
to the fair value based method of accounting for stock-based employee
compensation. The statement eliminates the use of the original SFAS No. 123
prospective method of transition alternative for those entities that change to
the fair value based method in fiscal years beginning after December 15, 2003.
It also amends the disclosure provisions of SFAS No. 123 to require prominent
annual disclosure about the effects on reported net income in the Summary of
Significant Accounting Policies and also requires disclosure about these effects
in interim financial statements. These provisions are effective for financial
statements for fiscal years ending after December 15, 2002. Accordingly, the
Company adopted the applicable disclosure requirements of this statement for
year-end reporting. The transition provisions of this statement apply upon the
adoption of the SFAS No. 123 fair value based method. The Company did not change
its method of accounting for employee stock-based compensation from the
intrinsic method to the fair value based alternative.

Note 3. Operations

The Company has experienced significant operating losses since its
inception in 1980. As of December 31, 2002, the Company had an accumulated
deficit of approximately $140 million. For the years ended December 31, 2002 and
2001, the Company had losses from operations of approximately $2.9 million and
$7.3 million, respectively. Also, the Company has limited liquid resources.
These factors raise substantial doubt about the Company's ability to continue as
a going concern. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty. Although the
Company received FDA approval in 1989 to market ALFERON N Injection in the
United States for the treatment of certain genital warts, the Company has had
limited success in generating revenue from the sale of ALFERON N Injection to
date.

During the year ended December 31, 2002, the Company generated $1,926,466
in revenue from the sale of ALFERON N Injection and received $528,276 from the
sale of the Company's New Jersey net operating tax loss carryovers. In addition,
the Company completed a private placement of $500,000 of convertible notes to
accredited investors. At December 31, 2002, the Company had approximately
$379,000 of cash and cash equivalents, with which to support future operating
activities and to satisfy its financial obligations as they become payable.

On March 11, 2003, the Company sold all its inventory related to its
ALFERON N Injection product and granted a three-year license to sell the product
to Hemispherx Biopharma, Inc. ("HEB"). In exchange for the inventory and
license, the Company received HEB common stock with a guaranteed value of
$675,000, an additional 62,500 shares of HEB common stock without a guaranteed
value, and a royalty equal to 6% of the net sales of ALFERON N Injection. The
HEB common stock will be subject

F-82

to selling restrictions. In addition, HEB assumed approximately $400,000 of the
Company's payables and various other commitments. The Company and HEB also
entered into another agreement pursuant to which the Company will sell to HEB,
subject to regulatory approval, the Company's real estate property, plant,
equipment, furniture and fixtures, rights to ALFERON N Injection and all of its
patents, trademarks and other intellectual property related to its natural alpha
interferon business. In exchange, the Company will receive $675,000 of HEB
common stock with a guaranteed value, an additional 62,500 shares of HEB common
stock without a guaranteed value and a royalty equal to 6% of the net sales of
all products sold containing natural alpha interferon. HEB will assume
approximately $2.3 million of the Company's indebtedness that currently
encumbers its assets. In addition, HEB will fund the operating costs of the
Company's facility pending the completion of this transaction. In the event the
Company does not obtain regulatory approval prior to September 12, 2003, either
the Company or HEB may terminate the agreement and not complete the transaction.

Based on the Company's sale to HEB, estimates of revenue, expenses, and
the timing of repayment of creditors, management believes that the Company has
sufficient resources to enable the Company to continue operations until the
third quarter of 2003. However, actual results, may differ materially from such
estimate, and no assurance can be given that additional funding will not be
required sooner than anticipated or that such additional funding, whether from
financial markets or from other sources, will be available when needed or on
terms acceptable to the Company. Insufficient funds will require the Company to
terminate operations.

Note 4. Agreements with Hoffmann-LaRoche

F. Hoffmann-La Roche Ltd. and Hoffmann-LaRoche, Inc. (collectively,
"Hoffmann") have been issued patents covering human alpha interferon in many
countries throughout the world. In 1995, the Company obtained a non-exclusive
perpetual license from Hoffmann (the "Hoffmann Agreement") that grants the
Company the worldwide rights to make, use, and sell, without a potential patent
infringement claim from Hoffmann, any formulation of Natural Alpha Interferon.
The Hoffmann Agreement permits the Company to grant marketing rights with
respect to Natural Alpha Interferon products to third parties, except that the
Company cannot grant marketing rights with respect to injectable products in any
country in which Hoffmann has patent rights covered by the Hoffmann Agreement
(the "Hoffmann Territory") to any third party not listed on a schedule of
approximately 50 potential marketing partners without the consent of Hoffmann,
which consent cannot be unreasonably withheld.

Under the terms of the Hoffmann Agreement, the Company is obligated to pay
Hoffmann an aggregate royalty on net sales (as defined) of Natural Alpha
Interferon products by the Company in an amount equal to (i) 8% of net sales in
the Hoffmann Territory, and 2% of net sales outside the Hoffmann Territory of
products manufactured in the Hoffmann Territory, up to $75,000,000 of net sales
in any calendar year and (ii) 9.5% of net sales in the Hoffmann Territory, and
2% of net sales outside the Hoffmann Territory of products manufactured in the
Hoffmann Territory, in excess of $75,000,000 of net sales in any calendar year,
provided that the total royalty payable in any calendar year shall not exceed
$8,000,000. For the years ended December 31, 2002 and 2001, the Company recorded
approximately $31,000 and $60,000, in royalty expenses to Hoffmann,
respectively. The Hoffmann Agreement can be terminated by the Company on 30 days
notice with respect to the United States patent, any individual foreign patent,
or all patents owned by Hoffmann. If the Hoffmann Agreement is terminated with
respect to the patents owned by Hoffmann in a specified country, such country is
no longer included in the Hoffmann Territory. Accordingly, the Company would not
be permitted to market any formulation of alpha interferon in such country.

F-83

Note 5. Research and Development Agreement with Interferon Sciences Research
Partners, Ltd.

In 1984, the Company organized ISD to act as the sole general partner of
Interferon Sciences Research Partners, Ltd., a New Jersey limited partnership
(the "Partnership"). The Company and the Partnership entered into a development
contract whereby the Company received substantially all of the net proceeds
($4,414,475) of the Partnership's public offering of limited partnership
interests. The Company used the proceeds to perform research, development and
clinical testing on behalf of the Partnership for the development of ALFERON Gel
containing recombinant interferon.

In connection with the formation of the Partnership, ISD agreed to make
additional cash contributions for purposes of continuing development of ALFERON
Gel if the Partnership exhausted its funds prior to development of such product.
ISD is wholly dependent upon the Company for capital to fund such commitment.
The Partnership exhausted its funds during 1986, and the Company contributed a
total of $1,997,000 during the period from 1986 to 1990, for the continued
development of ALFERON Gel. In 1987, the Company filed a Product License
Application with the FDA for approval to market ALFERON Gel. In February 1990,
the FDA indicated that additional process development and clinical trials would
be necessary prior to approval of ALFERON Gel. The Company believed, at that
time, that the costs to complete the required process development and clinical
trials would be substantial, and there could be no assurance that the clinical
trials would be successful.

As a result of the above events, in 1992, the Company withdrew its FDA
Product License Application for ALFERON Gel containing recombinant interferon.
In place of single species recombinant interferon, previously ALFERON Gel's
active ingredient, the Company commenced, in 1992, further development of
ALFERON Gel using the Company's natural source multi-species alpha interferon
("ALFERON N Gel"). However, at the present time, the Company is not actively
pursuing development of ALFERON N Gel and the Company does not have an
obligation to provide additional funding to the Partnership. Assuming successful
development and commercial exploitation of ALFERON N Gel, which to date has not
occurred, the Company may be obligated to pay the Partnership royalties equal to
4% of the Company's net sales of ALFERON N Gel and 15% of revenues received from
sublicensing ALFERON N Gel.

Note 6. Agreement with Metacine, Inc.

On July 28, 2000, the Company acquired for $100,000 an option to purchase
certain securities of Metacine, Inc. ("Metacine"), a company engaged in research
using dendritic cell technology, on the terms set forth below.

On April 9, 2001, the Company exercised its option to acquire an 82%
equity interest in Metacine. Pursuant to the agreement, as amended, the Company
received 700,000 shares of Metacine common stock and a five-year warrant to
purchase, at a price of $12.48 per share, 282,794 shares of Metacine common
stock in exchange for $300,000 in cash, an obligation to pay Metacine $
1,850,000 and $250,000 of services to be rendered by the Company by June 30,
2002. In addition, the Company issued Metacine 2,000,000 shares of the Company's
common stock. The agreement contains certain restrictions on the ability of
Metacine to sell the Company's shares and provides for the Company to make cash
payments ("Deficiency Payments") to Metacine to the extent Metacine has not
received from the sale of the Company's common stock, cumulative net proceeds of
$1,850,000 by September 30, 2002 or $400,000 of net proceeds per quarter
beginning with the period ending September 30, 2001 and $250,000 for the quarter
ending September 30, 2002. On October 4, 2001, the Company made a Deficiency
Payment to Metacine in the amount of $400,000 for the quarter ending September
30, 2001. The Company has not made the remainder of the Deficiency Payments in
the aggregate amount of $1,450,000. If Metacine sells all of the 2,000,000
shares received and the cumulative proceeds from the sales and any Deficiency
Payments are less than $1,850,000, the Company may issue to Metacine additional
shares of common stock at

F-84

the Company's full discretion. These additional shares would be treated in the
same manner as the original 2,000,000 shares. In the event that cumulative net
proceeds to Metacine from the sale of the Company's common stock exceed
$1,850,000, any Deficiency Payments previously made by the Company ($400,000
through December 31, 2002) would be repaid to the Company to the extent these
proceeds exceed $1,850,000. All additional proceeds beyond the $1,850,000 and
repayment of Deficiency Payments, if any, would be for the benefit of Metacine.
The Company was required to put in escrow 100,000 Metacine shares to secure its
obligations to render $250,000 of services to Metacine and 462,500 Metacine
shares to secure its potential obligations to make Deficiency Payments. Since
the Company has not made $1,450,000 in Deficiency Payments and has not rendered
$250,000 of services to Metcine, Metacine could request 462,500 Metacine shares
currently held in escrow to satisfy the Company's past due obligations.

Although the Company is the majority owner of Metacine, the Company must,
on many matters, vote its shares of Metacine common stock in the same proportion
as votes cast by the minority stockholders of Metacine, except for certain
matters with respect for which the Company has protective rights. In accordance
with EITF Issue No. 96-16, Investor's Accounting for an Investee When the
Investor has a Majority of the Voting Interest but the Minority Shareholder or
Shareholders have Certain Approval or Veto Rights, the minority holders have
substantive participating rights which include controlling the selection,
termination and setting of compensation for Metacine management who are
responsible for implementing policies and procedures, making operating and
capital decisions (including establishing budgets) for Metacine and most other
ordinary operating matters, and therefore, the Company does not control
Metacine. In addition, the Company only has one representative on a board of
directors consisting of three directors. Accordingly, the acquisition is being
accounted for under the equity method.

Of the $2.5 million consideration paid for Metacine, $2,341,418 was
recorded as a charge for the acquisition of in-process research and development
("IPR&D") in 2001. The charge was recorded as the acquisition of IPR&D as
Metacine's primary asset is technology that has not reached technological
feasibility and has no alternative uses. The in-process research and development
expenses relate to a patent portfolio consisting of six issued patents, eight
pending patents and four invention disclosures related to the use of dendritic
cells for the treatment of various diseases. While the patent portfolio, when
viewed as a whole, represented a new approach to the treatment of various
diseases utilizing cell therapy, the six issued patents had no independent
commercial value. While the Company did not engage the services of an
independent appraiser to assess the fair value of the purchased in process
research and development, it considered the following factors: (i) any product
or process utilizing dendritic cells as a treatment for any disease would
regulated by the FDA and therefore would require extensive clinical testing
prior to the time any revenue would be generate from the sale of a product or
process, (ii) the cost of such clinical trials would be in excess of $
50,000,000, (iii) it would take between seven to ten years to complete such
clinical trials, (iv) there could be no assurance that even if Metacine could
obtain the funding required to complete the clinical trials (which was well
beyond Metacine's capability at the time Metacine acquired rights to the patent
portfolio), that the clinical trials would have shown the product or process
tested to be safe and effective. The Company's $1,850,000 obligation to
Metacine, less the $400,000 Deficiency Payment made in October 2001, has been
recorded as a current liability at December 31, 2002 and 2001. The $250,000 of
services to be provided has also been recorded as a current liability. Services
rendered to Metacine to date were immaterial and as such, the liability remained
unchanged at December 31, 2002 and 2001. The investment has been further reduced
to zero at December 31, 2001, by the Company's equity in the loss of Metacine of
$158,582 for the period from April 9, 2001 through December 31, 2001.

On April 1, 2003, the license granted by the University of Pittsburgh to
Metacine covering Metacine's technology was terminated due to non-payment by
Metacine.

Accordingly, the Company's has not reflected its share of its equity in
the losses in Metacine for the years ended December 31, 2002 and 2001 in the
amounts of $274,846 and $290,994, respectively.

The Company is currently in discussions with Metacine with respect to a
full settlement of the Company's obligations to Metacine.

F-85

Note 7. Inventories

At December 31, 2002 inventories, consisting of material, labor and
overhead, are classified as follows:

Finished goods $ 322,518
Work in process 3,052,070
Raw materials 1,332,560
Less reserve for excess inventory (4,678,659)
-----------
$ 28,489
===========

Finished goods inventory consists of vials of ALFERON N Injection,
available for commercial and clinical use either immediately or upon final
release by quality assurance.

In light of the results of the Company's Phase 3 studies of ALFERON N
Injection in HIV and HCV-infected patients, the Company has recorded a reserve
against its inventory of ALFERON N Injection to reflect its estimated net
realizable value. The reserve was a result of the Company's assessment of
anticipated near-term projections of product to be sold or utilized in clinical
trials, giving consideration to historical sales levels. As a result,
inventories at December 31, 2002 reflect a reserve for excess inventory of
$4,678,659.

Note 8. Convertible Notes Payable

Note 9. Income Taxes

As a result of the loss allocation rules contained in the Federal
income tax consolidated return regulations, approximately $5,900,000 of net
federal operating loss carryforwards, which expire from 2003 to 2006, are
available to the Company upon ceasing to be a member of GP Strategies's
consolidated return group in 1991. In addition, the Company has net federal
operating loss carryforwards for periods

F-86

subsequent to May 31, 1991, and through December 31, 2002 of approximately
$104,000,000 that expire from 2006 to 2022. In addition, the Company had state
net operating loss carryforwards of approximately $32,000,000 that expire from
2005 to 2009.

The Company believes that the events culminating with the closing of its
Common Stock Private Offering on November 6, 2000 may result in an "ownership
change" under Internal Revenue Code, Section 382, with respect to its stock. The
Company believes that as a result of the ownership change, the future utility of
its pre-change net operating losses may be significantly limited. Further, the
issuance of 51,000,000 warrants in August 2002 could also result in an ownership
change and further limit use of the net operating losses carried forward.

The tax effects of temporary differences that give rise to deferred tax
assets and liabilities consist of the following as of December 31, 2002:

Deferred tax assets 2002
------------------- ------------
Net operating loss carry-forwards $ 39,530,000
Tax credit carry-forwards --
Inventory reserve 1,872,000
Property and equipment,
principally due to differences
in basis and depreciation 661,000
In-process technology costs --
------------
Gross deferred tax asset 42,063,000
Valuation allowance (42,063,000)
------------
Net deferred taxes $ --
============

A valuation allowance is provided when it is more likely than not that
some portion of the deferred tax asset will not be realized. The Company has
determined, based on the Company's history of annual net losses, that a full
valuation allowance is appropriate. The change in the valuation allowance for
2002 was $3,723,000.

Based on the Company's net loss before income taxes in 2002 and 2001, the
Company would have recorded a tax benefit. During each of these years, the
Company recorded increases in the valuation allowance due to uncertainty
regarding the realization of deferred taxes that reduced the Company's expected
income tax benefit to zero in these years.

F-87

During 2002 and 2001, the Company completed the sale of approximately $6.5
million and $12 million, of its New Jersey tax loss carryovers and received
$0.53 million and $0.97 million, which were recorded as a tax benefit from gains
on sale of state net operating loss carryovers on its Consolidated Statement of
Operations in 2002 and 2001, respectively.

Note 10. Common Stock, Stock Options, Warrants and Other Shares Reserved

Employee stock option activity for options under the Plan during the
periods indicated is as follows:

Number of Weighted-Average
Shares Exercise Price
------ --------------

Balance at December 31, 2000 1,946,390 .28

Exercised (2,244) .25
Forfeited (13,525) .35
---------
Balance at December 31, 2001 1,930,621 .28

Forfeited (22,546) .41
---------
Balance at December 31, 2002 1,908,075 .27

At December 31, 2002, the exercise prices and weighted-average remaining
contractual life of outstanding options were:

Number of
Options Life
------- ----

$ .25 - $1.00 1,854,475 1 year
$1.01 - $1.25 53,600 1 year

At December 31, 2002, the number of options exercisable was 1,908,075, and
the weighted-average exercise price of those options was $.27.

F-88

FASB Interpretation No. 44 provides guidance for applying APB Opinion No.
25, "Accounting for Stock Issued to Employees" ("FIN 44"). It applies
prospectively to new awards, exchanges of awards in a business combination,
modifications to outstanding awards, and changes in grantee status on or after
July 1, 2000, except for provisions related to repricings and the definition of
an employee that apply to awards issued after December 15, 1998. The Company has
evaluated the financial impact of FIN 44 and has determined that the repricing
of employee stock options on October 27, 1999 falls within the guidance of FIN
44. On October 27, 1999, the Company repriced 429,475 stock options to $.25 per
share. On July 1, 2000, the implementation date of FIN 44, 352,823 shares of the
429,475 shares were fully vested (exercisable) and the closing price of the
Company's common stock on such date was $1.63 per share. Beginning on and after
July 1, 2000, the Company is required to record compensation expense on the
repriced vested options only when the market price exceeds $1.63 per share and
only on the amount in excess of $1.63 per share. For the repriced unvested stock
options, the intrinsic value measured at the July 1, 2000 effective date that is
attributable to the remaining vesting period will be recognized over that future
period. The unvested stock options at July 1, 2000 (76,652) were fully vested on
January 1, 2001. On December 31, 2002, the closing price of the Company's common
stock was $.05 per share and accordingly, under FIN 44, no compensation expense
was recorded on the repriced fully vested stock options of July 1, 2000 and on
the repriced unvested stock options of July 1, 2000.

Information regarding all Options and Warrants

Changes in options and warrants outstanding during the years ended
December 31, 2002, 2001 and 2000, and options and warrants exercisable and
shares reserved for issuance at December 31, 2002 are as follows:

The following table includes all options and warrants including employee
options (which are discussed above).

Price Range Number of
Per Share Shares
----------------- -------------
Outstanding at December 31, 2000 .25 -- 48.00 17,107,336
Exercised .25 (2,244)
Terminated .25 -- 48.00 (77,938)
----------------- -------------
Outstanding at December 31, .25 -- 36.00 17,027,154
Warrants Issued .01 -- .01 51,000,000
Terminated .25 -- 36.00 (49,510)
----------------- -------------
Outstanding at December 31, 2002 .01 -- 1.50 67,977,644
=================
Exercisable:

December 31, 2002 .25 -- 1.50 16,977,644
=================
Shares reserved for issuance:
December 31, 2002 67,977,644
==============

F-89

Options and warrants outstanding and exercisable, and shares reserved for
issuance at December 31, 2002, include 500,000 shares under a warrant agreement
with GP Strategies. The warrants are priced at $1.00 per share and expire on
March 25, 2004.

Options and warrants outstanding and exercisable, and shares reserved for
issuance at December 31, 2002, include 11,635,451 shares under warrant
agreements with the purchasers of a 2000 private offering. The warrants are
priced at $1.50 per share and expire on April 17, 2005.

Options and warrants outstanding and exercisable, and shares reserved for
issuance at December 31, 2002, include 2,934,118 shares under a warrant
agreement to purchase 1,467,059 units. Each unit consists of a share of common
stock and a warrant to purchase an additional share of common stock at a price
of $1.50 per share, exercisable at a price of $.66 per unit. The units were
issued as compensation for services rendered to the Company in the 2000 private
offering and expire on April 17, 2005.

Options and warrants outstanding and shares reserved for issuance, at
December 31, 2002, include 51,000,000 shares under warrant agreements (subject
to shareholder approval) with the purchasers of the convertible notes. The
warrants are exercisable at $.01 per share upon shareholder approval and expire
in 2007.

Note 11. Savings Plan

The ISI Savings Plan (the "Savings Plan") permits pre-tax contributions to
the Savings Plan by participants pursuant to Section 401(k) of the Internal
Revenue Code of up to 15% of base compensation. The Company will match up to the
6% level of the participants' eligible contributions. The Savings Plan matches
40% in cash and 60% in the Company's common stock up to the 6% level. For 2002,
the Company's contribution to the Savings Plan, which was fully vested, was
$131,000, consisting of $52,657 in cash and $78,343 in stock. For 2001, the
Company's contribution to the Savings Plan was $176,000, consisting of $66,666
in cash and $109,334 in stock.

F-90

Note 12. Profit Sharing Plan

The Compensation Committee may require as a condition to participation
that a participant remain in the employ of the Company until the end of the
fiscal year for which payment is to be made. Payments required to be made under
the Profit Sharing Plan must be made within 10 days of the filing of the
Company's tax return. To date, there have been no contributions by the Company
under the Profit Sharing Plan.

Note 13. Supplemental Statement of Cash Flow Information

The Company paid no income taxes or interest during the two-year period
ended December 31, 2002.

During the years ended December 31, 2002 and 2001 the following non-cash
financing and investing activities occurred:

2002:
None

2001:
The Company issued 2,000,000 shares, with a guaranteed value of
$1,850,000, of common stock and committed to provide $250,000 of services to be
rendered by the Company to Metacine (see Note 7).

The Company reduced capital in excess of par value and the corresponding
liability by $21,463 for settlement shares sold.

F-91

Note 14. Commitments

The Company obtained human white blood cells used in the manufacture of
ALFERON N Injection from several sources, including the Red Cross pursuant to a
supply agreement dated April 1, 1997 (the "Supply Agreement"). The Company will
not need to purchase more human white blood cells until such time as production
of crude alpha interferon is resumed. Under the terms of the Supply Agreement,
the Company was obligated to purchase a minimum amount of human white blood
cells each month through March 1999 (the "Minimum Purchase Commitment"), with an
aggregate Minimum Purchase Commitment during the period from April 1998 through
March 1999 in excess of $3,000,000. As of November 23, 1998, the Company owed
the Red Cross approximately $1.46 million plus interest at the rate of 6% per
annum accruing from April 1, 1998 (the "Red Cross Liability") for white blood
cells purchased pursuant to the Supply Agreement.

Pursuant to an agreement dated November 23, 1998, the Company granted the
Red Cross a security interest in certain assets to secure the Red Cross
Liability, issued to the Red Cross 300,000 shares of common stock and agreed to
issue additional shares at some future date as requested by the Red Cross to
satisfy any remaining amount of the Red Cross Liability. The Red Cross agreed
that any net proceeds received by it upon sale of such shares would be applied
against the Red Cross Liability and that at such time as the Red Cross Liability
was paid in full, the Minimum Purchase Commitment would be deleted effective
April 1,1998 and any then existing breaches of the Minimum Purchase Commitment
would be waived. In January 1999 the Company granted the Red Cross a security
interest (the "Security Interest") in, among other things, the Company's real
estate, equipment inventory, receivables, and New Jersey net operating loss
carryovers to secure repayment of the Red Cross Liability, and the Red Cross
agreed to forbear from exercising its rights under the Supply Agreement,
including with respect to collecting the Red Cross Liability until June 30, 1999
(which was subsequently extended until December 31, 1999). On December 29, 1999,
the Company, the Red Cross and GP Strategies entered in an agreement pursuant to
which the Red Cross agreed that until September 30, 2000 it would forbear from
exercising its rights under (i) the Supply Agreement, including with respect to
collecting the Red Cross Liability, and (ii) the Security Interest. In
connection with the Asset Sale Transactions, the Company, HEB and the Red Cross
entered into a similar agreement pursuant to which the Red Cross agreed to
forbear from exercising its rights until May 31, 2003 and the Red Cross agreed
to accept HEB common stock with a guaranteed value of $500,000 in full
settlement of all of the Company's obligations to the Red Cross. Under the terms
of such agreement, if HEB does not make such payment, the Red Cross has the
right to sell the Company's real estate.

During 1999, the Red Cross sold 27,000 of the Settlement Shares and sold
the balance of such shares (273,000 shares) during the first quarter of 2000. As
a result, the net proceeds from the sales of the Settlement Shares, $33,000 in
1999 and $368,000 in 2000, were applied against the liability to the Red Cross.
The remaining liability to the Red Cross included in accounts payable on the
consolidated balance sheet at December 31, 2002 was approximately $1,403,000. On
October 30, 2000, the Company issued an additional 800,000 shares to the Red
Cross. The net proceeds from the sale of such shares by the Red Cross will be
applied against the remaining liability of $1,403,000 owed to the Red Cross.
However, there can be no assurance that the net proceeds from the sale of such
shares will be sufficient to extinguish the remaining liability owed the Red
Cross.

F-92

Pursuant to an agreement dated March 25, 1999, GP Strategies loaned the
Company $500,000. In return, the Company granted GP Strategies (i) a first
mortgage on the Company's real estate, (ii) a two-year option (which has
expired) to purchase the Company's real estate, provided that the Company has
terminated its operations and the Red Cross Liability has been repaid, and (iii)
a two-year right of first refusal (which has expired) in the event the Company
desires to sell its real estate. In addition, the Company issued GP Strategies
500,000 shares of Common Stock and a five-year warrant to purchase 500,000
shares of Common Stock at a price of $1 per share. The common stock and warrants
issued to GP Strategies were valued at $500,000 and recorded as a financing cost
and amortized over the original period of the GP Strategies Debt in 1999.
Pursuant to the agreement, the Company has issued a note to GP Strategies
representing the GP Strategies Debt, which note was originally due on September
30, 1999 (but extended to June 30, 2001) and bears interest, payable at
maturity, at the rate of 6% per annum. In addition, at that time the Company
negotiated a subordination agreement with the Red Cross pursuant to which the
Red Cross agreed that its lien on the Company's real estate is subordinate to GP
Strategies' lien. On March 27, 2000, the Company and GP Strategies entered into
an agreement pursuant to which (i) the GP Strategies Debt was extended until
June 30, 2001 and (ii) the Management Agreement between the Company and GP
Strategies was terminated and all intercompany accounts between the Company and
GP Strategies (other than the GP Strategies Debt) in the amount of approximately
$130,000 were discharged which was recorded as a credit to capital in excess of
par value. On August 23, 2001, the Company and GP Strategies entered into an
agreement pursuant to which the GP Strategies Debt was extended to March 15,
2002. During 2001, the Company paid GP Strategies $100,000 to reduce the GP
Strategies Debt. In addition, in January 2002, the Company paid GP Strategies
$100,000 to further reduce the GP Strategies Debt. Interest expense accrued to
GP Strategies was $18,000 and $27,937 for the years ended December 31, 2002 and
2001, respectively. In connection with the Asset Sale Transactions, the Company,
HEB and GP Strategies entered into a similar agreement pursuant to which GP
Strategies agreed to forbear from exercising its rights until May 31, 2003 and
GP Strategies agreed to accept HEB common stock with a guaranteed value of
$425,000 in full settlement of all the Company's obligations to GP Strategies.
Under the terms of such agreement, if HEB does not make such payment, GP
Strategies has the right to sell the Company's real estate.

As consideration for the transfer to the Company of certain licenses,
rights and assets upon the formation of the Company by GP Strategies, the
Company agreed to pay GP Strategies royalties of $1,000,000, but such payments
will be made only with respect to those years in which the Company has income
before income taxes, and will be limited to 25% of such income. Through December
31, 2002, the Company has not generated income before taxes and therefore has
not accrued or paid royalties to GP Strategies.

See Notes 4 and 5 for information relating to royalties payable to
Hoffmann and the Partnership, respectively.

F-93

Note 15. Quarterly Financial Data (unaudited)

The following summarizes the Company's unaudited quarterly results for 2002 and
2001.

2002 Quarters First Second Third Fourth
------------- ------------- -------------- -------
Thousands of dollars except per share data

Revenues $ 784 $ 176 $ 687 $ 279
Gross profit (loss)(1) 369 (149) 254 (30)
Net loss (693) (949) (639) (457)
Basic and diluted net loss per share (.03) (.05) (.03) (.02)

2001 Quarters First Second Third Fourth
------------- ------------- -------------- -------
Thousands of dollars except per share data

Revenues $ 371 $ 344 $ 459 $ 325
Gross profit (loss)(1) (44) 22 98 (63)
Net loss (1,272) (3,659) (1,060) (444)
Basic and diluted net loss per share (.07) (.18) (.05) (.02)

(1) Gross profit (loss) is calculated as revenue less cost of goods sold and
excess/idle production costs.

F-94

Note 16. Fair Value of Financial Instruments

The carrying values of financial instruments, assuming the Company
continues as a going concern, including cash and cash equivalents, accounts
receivable, accounts payable, accrued expenses and note payable approximate fair
values, because of the short term nature or interest rates that approximate
current rates.

Note 17. Agreement with Mayo

In April 2001, the Company entered into a technology license agreement
with Mayo Foundation for Medical Education and Research ("Mayo") under which the
Company obtained certain technology rights. The Company has committed to fund
approximately $400,000 of costs related to a clinical trial beginning in
December 2001 and which is currently expected to take at least two years from
the date hereof to complete. The Company paid Mayo $100,000 related to this
clinical trial in 2001, incurred $101,565 in 2002 and will owe other amounts
upon the completion of certain parts of the trial, with the last payment due
upon receipt of the final written report on the trial. The Company can terminate
this agreement up to 60 days after receipt of this report. After expiration of
this ability to terminate, the Company must issue 25,000 shares of the Company's
common stock to Mayo and must pay milestone payments upon certain regulatory or
other events and royalties on future sales, if any. In addition, the Company
paid $60,000 to Mayo related to the agreement in 2001. Under the terms of the
Asset Sales

F-95

Transactions, the Company's right to continue this agreement and the obligation
owed to Mayo was transferred to HEB. The Company did not generate any revenues
from this agreement for each of the three years ended December 31, 2002.

Note 18. Subsequent Event

On March 11, 2003, the Company sold all its inventory related to its
ALFERON N Injection product and granted a license to sell the product to
Hemispherx Biopharma, Inc. ("HEB"). In exchange for the inventory and license,
the Company received HEB common stock with a guaranteed value of $675,000, an
additional 62,500 shares of HEB common stock without a guaranteed value, and a
royalty equal to 6% of the net sales of ALFERON N Injection. The HEB common
stock will be subject to selling restrictions. In addition, HEB assumed
approximately $400,000 of the Company's payables and various other commitments.
The Company and HEB also entered into another agreement pursuant to which the
Company will sell to HEB, subject to regulatory approval, the Company's real
estate property, plant, equipment, furniture and fixtures, rights to ALFERON N
Injection and all of its patents, trademarks and other intellectual property
related to its natural alpha interferon business. In exchange, the Company will
receive $675,000 of HEB common stock with a guaranteed value, an additional
62,500 shares of HEB common stock without a guaranteed value and a royalty equal
to 6% of the net sales of all products sold containing natural alpha interferon.
HEB will assume approximately $1.5 million of the Company's indebtedness that
currently encumbers its assets. In addition, HEB will fund the operating costs
of the Company's facility pending the completion of this transaction. In the
event the Company does not obtain regulatory approval prior to September 12,
2003, either the Company or HEB may terminate the agreement and not complete the
transaction.

F-96

INTERFERON SCIENCES, INC. AND SUBSIDIARY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

Additions
Balance at Charged to Balance at
Beginning Costs, Provisions End of
Description Of Period and Expenses Deductions(a) Period
----------- ---------- ----------------- ------------- ----------

Year ended December 31, 2002
Valuation and qualifying
accounts deducted from assets
to which they apply:
Reserve for excess inventory $5,538,413 $ $ 859,754 $4,678,659

Year ended December 31, 2001
Valuation and qualifying
accounts deducted from assets
to which they apply:
Reserve for excess inventory $6,123,311 $ $ 584,898 $5,538,413

Notes:

Deductions are for the usage of a portion of the reserve for excess inventory.

F-97

Unaudited Pro Forma Condensed Consolidated Statement of Operations

On March 11, 2003 the Company executed two agreements with Interferon Sciences,
Inc. ("ISI") to purchase certain of its assets.

In the first agreement with ISI, the Company effectively acquired the operations
of ISI including its inventory of Alferon N Injection(R), and a limited license
for the production, manufacture use, marketing and sale of this product. This
transaction was completed on March 11, 2003. For these assets, the Company:

i) Issued 487,028 shares of its common stock, and

ii) Agreed to pay ISI 6% of the net sales of the Product

The Company also is required to pay ISI a service fee and pay certain of ISI's
obligation related to the product.

In the second agreement with ISI, effectively an asset acquisition, ISI agreed
to sell to the Company all of ISI's rights to the product and other assets
related to the product including, but not limited to, real estate and machinery.
This transaction was completed on March 17, 2004. For these assets, the Company:

i) Issued on March 17, 2004 an additional 487,028 shares of its common
stock; and will

ii) Continue to pay ISI 6% of the net sales of the product

The following unaudited pro forma consolidated statement of operations of the
Company for the year ended December 31, 2003 presents the results of the Company
assuming the above-mentioned two agreements between the Company and ISI had
occurred on January 1, 2003.

The unaudited pro forma consolidated statement of operations should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements of the
Company, including the notes thereto. The pro forma data is for informational
purposes only and may not necessarily reflect the Company's results of
operations for the year ended December 31, 2003 had the Company consummated the
two agreements on January 1, 2003.

F-98

Hemispherx Biopharma, Inc. and Subsidiaries
Unaudited Pro Forma Consolidated Statement of Operations
Year Ended December 31, 2003
(in thousands, except per share data)

(4)
(3) Pro Forma Pro Forma
Pro Forma Pro Forma Further As Further
(1) (2) Adjustments as Adjusted Adjustment Adjusted
Hemispherx Interferon For First For First For Second For Second
Biopharma, Inc. Sciences, Inc. Asset Asset Asset Asset
And Subsidiaries And Subsidiary Acquisition Acquisition Acquisition Acquisition
---------------- -------------- ----------- ----------- ----------- -----------
2003 2003

Revenues:
Sales of $ 509 $ 242 $ $ 751 $ $ 751
product
Clinical
treatment
programs 148 -- -- 148 -- 148
------ ------ -------- -------- ------- ------
Total Revenues
657 242 -- 899 899
------ ------ -------- -------- ------- ------
Costs and
expenses:
Production
costs/Cost of
Goods Sold 502 267 47 (a) 816 60 (d) 876
Research and
development 3,150 176 (7)(a) 3,319 8 (d) 3,327
General and
administrative 4,257 1,432 (1,144)(a) 4,545 8 (d) 4,553
Royalty Expense
45 (b) 45 45

------ ------ -------- -------- ------- ------
Total cost and
expenses 7,909 1,875 (1,059) 8,725 76 8,801
------ ------ -------- -------- ------- ------

F-99

Interest and
other income 80 27 (27)(a) 80 80
Interest
Expense and (68)(c)
Financing Costs (7,598) (307) 307 (a) (7,666) (7,666)
Gain on sale
of securities
444 (444)(a) -- --
Metacine
Settlement 1,550 (1,550)(a) -- --
Gain on
settlement of
liability
229 (229)(a) -- --
Service fee
income 560 (560)(a) -- --
Other income (a)
31 (31) -- --
Bulk sale of
Alferon
inventory 1,149 (1,149)(a) -- --
Gain on
sale of NOL
279 (279)(a) -- --

-------- -------- --------- -------- ------- -------
Net loss $(14,770) $ 2,329 $ (2,971) $(15,412) $ (76) (15,488)
-------- -------- --------- -------- ------- -------

Basic and
diluted loss
per share $ (.42) $ (.43) $ (.43)
-------- -------- --------
Basic and
diluted
weighted
Average common
shares
outstanding
35,235 35,327 36,056
-------- -------- ------- --------

See accompanying notes to consolidated statement of operations

F-100

NOTES TO UNAUDITED PROFORMA
CONSOLIDATED STATEMENT OF OPERATIONS

The following notes describe the column headings in the unaudited pro forma
consolidated statement of operations and the pro forma adjustments that have
been made to this statement:

(1) Reflects the unaudited consolidated historical statement of
operations of Hemispherx Biopharma, Inc. and subsidiaries for the
year ended December 31, 2003.

(2) Reflects the unaudited consolidated historical statement of
operations for ISI for the year ended December 31, 2003.

(3) Reflects pro forma adjustments relating to the first acquisition on
March 11, 2003 of certain assets of ISI and the related funding as
follows:

(a) Adjustments to reflect the following:

Production cost related to sales of product by ISI are based
on the Company's cost of inventory purchased from ISI in the
First Asset Acquisition. A portion of the Company's total cost
of the net assets was allocated to inventory in accordance
with FASB 141.

ISI debt was not assumed by the Company, interest on the debt
has been eliminated.

The ISI building was acquired in the Second Asset Acquisition.
Depreciation expense related to the building has been included
for the First Asset Acquisition adjustments. The depreciation
of the building, based on the cost of the Second Asset
Acquisition, is recorded in entry 4(e) below.

Service fee income paid to ISI by the Company, the gain on the
bulk sale of the Alferon inventory to the Company and the
Metacine settlement have been eliminated.

General and administrative expenses beyond March 11, 2003 have
been eliminated because ISI's general and administrative
expenses subsequent to that date are not related to the
Alferon business. All expenses related to the Alferon business
subsequent to March 11, 2003 have been included in the
Company's historical results for the period from March 11,
2003 through December 31, 2003.

Gains from sale of securities, settlement of liability and sale of NOL have been
eliminated.

F-101

Production
Cost / Cost
of Sold Goods R&D G&A Other Total
============================== ========== ============ ============= =============== ===============

Inventory $(109) $(109)
------------------------------ ---------- ------------ ------------- --------------- ---------------
Interest expense $307 307
------------------------------ ---------- ------------ ------------- --------------- ---------------
Interest income (27) (27)
------------------------------ ---------- ------------ ------------- --------------- ---------------
Depreciation 62 $7 $7 76
------------------------------ ---------- ------------ ------------- --------------- ---------------
Service fee income (560) (560)
------------------------------ ---------- ------------ ------------- --------------- ---------------
Other income (31) (31)
------------------------------ ---------- ------------ ------------- --------------- ---------------
Bulk sale of Alferon
inventory (1,149) (1,149)
------------------------------ ---------- ------------ ------------- --------------- ---------------
Gain on sale at securities (444) (444)
------------------------------ ---------- ------------ ------------- --------------- ---------------
Gain on settlement of
liability (229) (229)
------------------------------ ---------- ------------ ------------- --------------- ---------------
Gain on sale of NOL (279) (279)
------------------------------ ---------- ------------ ------------- --------------- ---------------
G&A after March 11, 2003 1,137 1,137
------------------------------ ---------- ------------ ------------- --------------- ---------------
Metacine Settlement -- -- -- (1,550) (1,550)
------------------------------ ---------- ------------ ------------- --------------- ---------------
Totals $(47) $7 $1,144 $(3,962) $(2,858)
============================== ========== ============ ============= ============-== ===============

(b) Increase in general and administrative costs resulting from the
recognition of 6% royalty charges on the net sales of the acquired
ALFERON N injection product.

(c) Increase in interest for period from January 1, 2003 through March
11, 2003 for issuance of 6% Senior Convertible Debentures on March
12, 2003.

(4) Reflects pro forma adjustments relating to the second acquisition of
certain assets of ISI as follows:

(d) Adjustments reflect depreciation expense relating to the acquired
building as result of the second acquisition of certain assets of
ISI.

F-102

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

No dealer, salesman or any other person is authorized to give any information or
to represent anything not contained in this prospectus. You must not rely on any
unauthorized information or representations. This prospectus is an offer to sell
these securities and it is not a solicitation of an offer to buy these
securities in any state where the offer or sale is not permitted. The
information contained in this Prospectus is current only as of this date.

TABLE OF CONTENTS

Page

Prospectus Summary ....................................................... 2

Risk Factors ............................................................. 6
Use of Proceeds .......................................................... 15
Dividend Policy .......................................................... 15
Price Range of Common Stock .............................................. 16
Selected Consolidated
Financial Data ........................................................... 16
Management's Discussion and
Analysis of Financial Condition
And Results of Operations ................................................ 19
Our Business ............................................................. 39
Management ............................................................... 55
Executive Compensation ................................................... 59
Principal Stockholders ................................................... 64
Certain Relationships and
Related Transactions ..................................................... 67
Selling Stockholders ..................................................... 67
How the Shares May
Be Distributed ........................................................... 70
Description of Securities
Being Registered ......................................................... 72
Legal Matters ............................................................ 74
Experts .................................................................. 74
Where you can find
More information ......................................................... 74
Financial Statements ..................................................... F-1

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

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

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

11,732,107 SHARES OF

COMMON STOCK

HEMISPHERX BIOPHARMA, INC.

----------

PROSPECTUS

----------

July _, 2004

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

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

SEC Filing Fees $ 1,419 00
American Stock Exchange Listing Fee* $22,500 00
Printing and Engraving Expenses* $13,500 00
Accounting Fees and Expenses* $20,000 00
Legal Fees and Expenses* $20,000 00
Transfer Agent and Registrar Fees* $ 1,500 00
Miscellaneous* $ 3,080 00
----------

Total Expenses* $ 82,000

----------
* Estimated.

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

The Registrant's Amended and Restated Certificate of Incorporation provides that
the Registrant shall indemnify to the extent permitted by Delaware law any
person whom it may indemnify thereunder, including directors, officers,
employees and agents of the Registrant. Such indemnification (other than an
order by a court) shall be made by the Registrant only upon a determination that
indemnification is proper in the circumstances because the individual met the
applicable standard of conduct. Advances for such indemnification may be made
pending such determination. In addition, the Registrant's Amended and Restated
Certificate of Incorporation eliminates, to the extent permitted by Delaware
law, personal liability of directors to the Registrant and its stockholders for
monetary damages for breach of fiduciary duty as directors.

The Registrant's authority to indemnify its directors and officers is governed
by the provisions of Section 145 of the Delaware General Corporation Law, as
follows:

(a) A corporation shall have the power to indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than action by or in the right of
the corporation) by reason of the fact that he is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by the
person in connection with such action, suit or proceeding if he acted in
good faith and in a manner he reasonably believed to be in or not opposed
to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo contendere
or its equivalent, shall not, of itself, create a presumption that the
person did not act in good faith and in a

II-1

manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that the person's conduct was
unlawful.

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

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

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

(e) Expenses (including attorneys' fees) incurred by an officer or director in
defending a civil or criminal action, suit or proceeding may be paid by
the corporation in advance of the final disposition or such action, suit
or proceeding upon receipt of an undertaking by or on behalf of such
director or officer to repay such amount if it shall ultimately be
determined that such person is not entitled to be indemnified by the
corporation as authorized in this section. Such expenses incurred by
former directors and officers and other employees and agents may be so
paid upon such terms and conditions, if any, as the corporation deems
appropriate.

(f) The indemnification and advancement of expenses provided by, or granted
pursuant to, the other subsections of this section shall not be deemed
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any by, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in
such person's official capacity and as to action in another capacity while
holding such office.

(g) A corporation shall have power to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent
of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against any
liability asserted against such person and incurred by such person in any
such capacity, or arising out of his status as such, whether or not the
corporation would have the power to indemnify such person against such
liability under this section.

(h) For purposes of this section, references to the "corporation" shall
include, in addition to the resulting corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued,
would have had the power and

II-2

authority to indemnify its directors, officers, and employees or agents,
so that any person who is or was a director, officer, employee or agent of
such constituent corporation, or is or was serving at the request of such
constituent corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other
enterprise, shall stand in the same position under this section with
respect to the resulting or surviving corporation as such person would
have with respect to such constituent corporation if its separate
existence had continued.

(i) For purposes of this section, references to "other enterprises" shall
include employee benefit plans, references to "fines" shall include any
excise taxes assessed on a person with respect to any employee benefit
plan, and references to "serving at the request of the corporation" shall
include any service as a director, officer, employee, or agent with
respect to any employee benefit plan, its participants or beneficiaries,
and a person who acted in good faith and in a manner such person
reasonably believed to be in the interest of the participants and
beneficiaries of any employee benefit plan shall be deemed to have acted
in a manner "not opposed to the best interests of the corporation" as
referred to in this section.

(j) The indemnification and advancement of expenses provided by, or granted
pursuant to, this section shall, unless otherwise provided when authorized
or ratified, continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.

(k) The Court of Chancery is hereby vested with exclusive jurisdiction to hear
and determine all actions for advancement of expenses or indemnification
brought under this section, or under any bylaw, agreement, vote of
stockholders or disinterested directors, or otherwise. The Court of
Chancery may summarily determine a corporation's obligation to advance
expenses (including attorneys' fees).

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

Since January 1, 2001, we have issued and sold the following securities:

On February 23, 2001, we issued warrants to purchase an aggregate of 100,000
shares of our common stock of which 188,325 are exercisable at $6.00 per share
and 188,325 are exercisable at $9.0 per share to William A. Carter. The warrants
expire on February 22, 2006.

On April 6, 2001, we issued warrants to purchase an aggregate of 400,000 shares
of our common stock of which 100,000 are exercisable at $10.00 per share,
100,000 are exercisable at $12.00 per share and 100,000 are exercisable at
$16.00 per share to Larry Zaslow, Marc Komorsky, Peter Adolph and Paul Michaels.
The warrants expire on April 6, 2005.

On April 30, 2001, we issued warrants to purchase an aggregate of 30,000 shares
of our common stock at an exercise price of $5.00 per share to Robert Peterson.
The warrants expire on April 30, 2006.

On April 30, 2001, we issued warrants to purchase an aggregate of 25,000 shares
of our common stock at an exercise price of $ 6.00 per share to Robert Lau. The
warrants expire on April 30, 2005.

On July 1, 2001, we issued warrants to purchase an aggregate of 25,000 shares of
our common stock at an exercise price of $6.00 per share to Robert Lau. The
warrants expire on June 30, 2005.

On January 2, 2002, we issued warrants to purchase an aggregate of 25,000 shares
of our common stock at an exercise price of $6.00 per share to Robert Lau. The
warrants expire on April 30, 2005.

On May 1, 2002, we issued warrants to purchase an aggregate of 12,000 shares of
our common stock at an exercise price of $3.86 per share to Iraj Kiani. The
warrants expire on April 30, 2005.

II-3

On September 3, 2003, we issued warrants to purchase an aggregate of 150,000
shares of our common stock at an exercise price of $2.00 per share to Michael
Burrows. The warrants expire on August 1, 2005.

On September 3, 2002, we issued warrants to purchase an aggregate of 5,000
shares of our common stock at an exercise price of $2.00 per share to Cheri
Kaufman. The warrants expire on August 13, 2007.

On September 3, 2002, we issued warrants to purchase an aggregate of 50,000
shares of our common stock at an exercise price of $2.00 per share to David
Strayer. The warrants expire on December 31, 2007.

On September 3, 2002, we issued warrants to purchase an aggregate of 40,000
shares of our common stock at an exercise price of $2.00 per share to Josephine
Dolhancryk. The warrants expire on August 13, 2007.

On September 3, 2002, we issued warrants to purchase an aggregate of 200,000
shares of our common stock at an exercise price of $2.00 per share to Robert
Peterson. The warrants expire on August 13, 2007.

On September 3, 2002, we issued warrants to purchase an aggregate of 20,000
shares of our common stock at an exercise price of $2.00 per share to Carol
Smith. The warrants expire on August 13, 2007.

On September 3, 2002 we issued warrants to purchase an aggregate of 100,000
shares of our common stock at an exercise price of $2.00 per share to Ransom
Etheridge. The warrants expire on August 13, 2007.

On September 3, 2002, we issued warrants to purchase an aggregate of 100,000
shares of our common stock at an exercise price of $2.00 per share to William
Mitchell. The warrants expire on August 13, 2007.

On September 13, 2002, we issued warrants to purchase an aggregate of 100,000
shares of our common stock at an exercise price of $2.00 per share to Richard
Piani. The warrants expire on August 13, 2007.

On September 3, 2002, we issued warrants to purchase an aggregate of 1,000,000
shares of our common stock at an exercise price of $2.00 per share to William A.
Carter . The warrants expire on August 13, 2007. 250,000 warrants are
exercisable immediately, 500,000 are exercisable after two years, 250,000 are
exercisable after three years and all are exercisable after four years.

The issuance of these securities was deemed to be exempt from registration under
the Securities Act in reliance on Section 4(2) of the Securities Act as a
transaction by an issuer not involving a public offering.

On March 12, 2003, we issued an aggregate of $5,426,000 in principal amount of
6% Senior Convertible Debentures due March 2005 (the "March Debentures") and an
aggregate of 743,288 warrants to two investors in a private placement for gross
proceeds of $4,650,000. The March Debentures mature on January 31, 2005 and bear
interest at 6% per annum, payable quarterly in cash or, subject to satisfaction
of certain conditions, common stock. Any shares of common stock issued to the
investors as payment of interest shall be valued at 95% of the average closing
price of the common stock during the five consecutive business days ending on
the third business day immediately preceding the applicable interest payment
date. The March Debentures are convertible at the option of the investors at any
time through January 31, 2005 into shares of our common stock. The conversion
price under the March Debentures is fixed at $1.46 per share, subject to
adjustment for anti-dilution protection for issuance of common stock or
securities convertible or exchangeable into common stock at a price less than
the conversion price then in effect. The above-mentioned Warrants issued to the
debenture holders are to acquire at any time

II-4

through March 12, 2008 an aggregate of 743,288 shares of common stock at a price
of $1.68 per share. On March 12, 2004, the exercise price of the Warrants will
reset to the lesser of the exercise price then in effect or a price equal to the
average of the daily price of the common stock between March 13, 2003 and March
11, 2004 (but in no event less than $1.176 per share). The exercise price (and
the reset price) under the Warrants also is subject to similar adjustments for
anti-dilution protection.

On July 10, 2003, we issued an aggregate of $5,426,000 in principal amount of 6%
Senior Convertible Debentures due July 31, 2005 (the "July Debentures") and an
aggregate of 507,102 Warrants (the "July 2008 Warrants") to the above investors
in a private placement for aggregate gross proceeds of $4,650,000. The July
Debentures mature on July 31, 2005 and bear interest at 6% per annum, payable
quarterly in cash or, subject to satisfaction of certain conditions, common
stock. Any shares of common stock issued to the investors as payment of interest
shall be valued at 95% of the average closing price of the common stock during
the five consecutive business days ending on the third business day immediately
preceding the applicable interest payment date. The July Debentures are
convertible at the option of the investors at any time through July 31, 2005
into shares of our common stock. The conversion price under the July Debentures
was fixed at $2.14 per share, subject to adjustment for anti-dilution protection
for issuance of common stock or securities convertible or exchangeable into
common stock at a price less than the conversion price then in effect. However,
as part of the debenture placement funded on October 29, 2003 (see below), the
conversion price under the July Debentures was lowered to $1.89 per share. The
July 2008 Warrants, as amended, received by the investors are to acquire at any
time commencing on July 26, 2004 through January 31, 2009 an aggregate of
507,102 shares of common stock at a price of $2.46 per share. On July 10, 2004,
the exercise price of these July 2008 Warrants will reset to the lesser of the
exercise price then in effect or a price equal to the average of the daily price
of the common stock between July 11, 2003 and July 9, 2004. The exercise price
(and the reset price) under the July 2008 Warrants also is subject to similar
adjustments for anti-dilution protection. Notwithstanding the foregoing, the
exercise price as reset or adjusted for anti-dilution, will in no event be less
than $2.14 per share

On June 25, 2003, we issued to each of the debenture holders a warrant (the
"June 2008 Warrant"). Each June 2008 Warrants is exercisable at any time through
December 25, 2008 to acquire an aggregate of 500,000 shares of common stock at a
price of $2.40 per share. On June 25, 2004, the exercise price of these June
2008 Warrants will reset to the lesser of the exercise price then in effect or a
price equal to the average of the daily price of the common stock between June
26, 2003 and June 24, 2004 (but in no event less than $1.68 per share). The
exercise price (and the reset price) under the June 2008 Warrants also is
subject to adjustments for anti-dilution protection similar to those in the July
2008 Warrants.

On October 29, 2003, we issued an aggregate of $4,142,357 in principal amount of
6% Senior Convertible Debentures due October 31, 2005 (the "October Debentures")
and an aggregate of 410,134 warrants to two investors in a private placement for
aggregate gross proceeds of $3,550,000. The October Debentures mature on October
31, 2005 and bear interest at 6% per annum, payable quarterly in cash or,
subject to satisfaction of certain conditions, common stock. Any shares of
common stock issued to the investors as payment of interest shall be valued at
95% of the average closing price of the common stock during the five consecutive
business days ending on the third business day immediately preceding the
applicable interest payment date. The October Debentures are convertible at the
option of the investors at any time through October 31, 2005 into shares of our
common stock. The conversion price under the October Debentures is fixed at
$2.02 per share, subject to adjustment for anti-dilution protection for issuance
of common stock or securities convertible or exchangeable into common stock at a
price less than the conversion price then in effect. The above-mentioned
Warrants issued to the debenture holders, as amended, are to acquire at any time
commencing on July 26, 2004 through April 30, 2009 an aggregate of 410,134
shares of common stock at a price of $2.32 per share. On October 29, 2004, the
exercise price of the Warrants will reset to the lesser of the exercise price
then in effect or a price equal to the average of

II-5

the daily price of the common stock between October 29, 2003 and October 27,
2004. The exercise price (and the reset price) under the Warrants also is
subject to similar adjustments for anti-dilution protection. Notwithstanding the
foregoing, the exercise price as reset or adjusted for anti-dilution, will in no
event be less than $2.19 per share.

On January 26, 2004, we issued an aggregate of $4,000,000 in principal amount of
6% Senior Convertible Debentures due January 31, 2006 (the "January 2004
Debentures"), additional investment rights to purchase an additional $2,000,000
principal amount of January 2004 Debentures, 158,103 shares of common stock and
an aggregate of 790,514 warrants to two investors in a private placement for
aggregate gross proceeds of $4,000,000. The January 2004 Debentures mature on
January 31, 2006 and bear interest at 6% per annum, payable quarterly in cash
or, subject to satisfaction of certain conditions, common stock. Any shares of
common stock issued to the investors as payment of interest shall be valued at
95% of the average closing price of the common stock during the five consecutive
business days ending on the third business day immediately preceding the
applicable interest payment date. The January 2004 Debentures are convertible at
the option of the investors at any time through January 31, 2006 into shares of
our common stock. The conversion price under the January 2004 Debentures is
fixed at $2.53 per share, subject to adjustment for anti-dilution protection for
issuance of common stock or securities convertible or exchangeable into common
stock at a price less than the conversion price then in effect. Commencing on
July 26, 2004, we are required to start repaying the then outstanding principal
amount under the Debentures in monthly installments amortized over 18 months in
cash or, at our option, in shares of common stock. Any shares of common stock
issued to the Investors as installment payments shall be valued at 95% of the
arithmetic average Weighted Average Price (as defined in the Debentures) of the
common stock during the 10-day trading period commencing on and including the
eleventh trading day immediately preceding the date that the installment is due.
There are two classes of warrants received by the Investors; class A and class
B. The class A warrants are to acquire at any time from July 26, 2004 through
July 26, 2009 an aggregate of up to 395,257 shares of common stock at a price of
$3.29 per share. The class B warrants are to acquire at any time from July 26,
2004 through July 26, 2009 an aggregate of up to 395,257 shares of common stock
at a price of $5.06 per share. On January 27, 2005, the exercise price of these
July 2009 Class A and Class B Warrants will reset to the lesser of (x) their
respective exercise price then in effect or (y) the greater of a price equal to
the average of the daily price of the common stock between January 27, 2004 and
January 26, 2005 or $2.58 per share with regard to the Class A warrants or $3.54
per share with regard to the B Warrants. The exercise price (and the reset
price) under the July 2009 Warrants also is subject to similar adjustments for
anti-dilution protection. Notwithstanding the foregoing, the exercise price of
the Class A warrants as adjusted for anti-dilution, will in no event be less
than $2.58 per share.

On May 14, 2004, in consideration for the Debenture holders' exercise of all of
the June 2008 Warrants, we issued to the holders warrants (the "May 2009
Warrants") to purchase an aggregate of 1,300,000 shares of our common stock. We
issued 1,000,000 shares and received gross proceeds of $2,400,000 from the
exercise of the June 2008 Warrants.

The May 2009 Warrants are to acquire at any time commencing on November 14, 2004
through April 30, 2009 an aggregate of 1,300,000 shares of common stock at a
price of $4.50 per share. On May 14, 2005, the exercise price of these May 2009
Warrants will reset to the lesser of the exercise price then in effect or a
price equal to the average of the daily price of the common stock between May
15, 2004 and May 13, 2005. The exercise price (and the reset price) under the
May 2009 Warrants also is subject to adjustments for anti-dilution protection
similar to those in the other Warrants. Notwithstanding the foregoing, the
exercise price as reset or adjusted for anti-dilution, will in no event be less
than $4.008 per share.

On July 13, 2004, the Debenture holders exercise of all of the July 2003 and
October 2003 Warrants and the Additional Investment Rights. As a result, we
issued an aggregate of 917,236 shares and $2,000,000

II-6

in principal amount of 6% Senior Convertible Debentures due January 31, 2006
(identical to the January 2004 Debentures, except that the conversion price is
$2.58. We issued to these holders warrants (the "June 2009 Warrants") to
purchase an aggregate of 1,300,000 shares of common stock.

The June 2009 Warrants are to acquire at any time commencing on January 13, 2005
through June 30, 2009 an aggregate of 1,300,000 shares of common stock at a
price of $3.75 per share. On July 13, 2005, the exercise price of these June
2009 Warrants will reset to the lesser of the exercise price then in effect or a
price equal to the average of the daily price of the common stock between July
14, 2004 and July 12, 2005. The exercise price (and the reset price) under the
June 2009 Warrants also is subject to adjustments for anti-dilution protection
similar to those in the other Warrants. Notwithstanding the foregoing, the
exercise price as reset or adjusted for anti-dilution, will in no event be less
than $3.33 per share.

The issuance of the foregoing debentures and the warrants was deemed to be
exempt from registration under the Securities Act in reliance on Section 4(2) of
the Securities Act as transactions by an issuer not involving a public offering.

By agreement with Cardinal Securities, LLC, for general financial advisory
services and in conjunction with the private debenture placements in July and
October 2003 and in January, May and July 2004, we paid Cardinal Securities, LLC
an investment banking fee equal to 7% of the investments made by the two
Debenture holders and issued to Cardinal the following common stock purchase
warrants: (i) 112,500 exercisable at $2.57 per share; (ii) 87,500 exercisable at
$2.42 per share; and (iii) 100,000 exercisable at $3.04 per share. The $2.57
warrants expire on July 10, 2008, the $2.42 warrants expire on October 30, 2008
and the $3.04 warrants expire on January 5, 2009. With regard to the exercise of
the June 2008 Warrants and issuance of the May 2009 Warrants, Cardinal received
an investment banking fee of 7%, half in cash and half in shares. With regard to
the exercise of the Additional Investment Rights, the July 2008 and October 2008
Warrants and issuance of the July 2009 Warrants, Cardinal received an investment
banking fee of 7%, $146,980 in cash and 22,703 is shares, as well as, 50,000
warrants exercisable at $4.07 expiring on July 12, 2009. The issuance of the
shares and warrants was deemed to be exempt from registration under the
Securities Act in reliance on Section 4(2) of the Securities Act as a
transaction by an issuer not involving a public offering.

On March 11, 2003, we issued 427,028 shares of our common stock to Interferon
Sciences, Inc. ("ISI") as partial consideration for the acquisition of certain
assets of ISI. Pursuant to a second asset acquisition agreement with ISI to
purchase additional assets of ISI, on May 30, 2003, we issued an aggregate of
581,761 shares to GP Strategies and the American National Red Cross, two
creditors of ISI. On March 17, 2004, pursuant to the second asset acquisition
agreement, we issued an additional 427,028 shares of our common stock to ISI as
partial consideration for the acquisition of certain assets of ISI. The issuance
of these shares was deemed to be exempt from registration under the Securities
Act in reliance on Section 4(2) of the Securities Act as a transaction by an
issuer not involving a public offering.

In September 2003, in recognition of this action as well as Dr. Carter's prior
and on-going efforts relating to product development securing critically needed
financing and the aqcuisition of a new product line, the Compensation Committee
determined that Dr. Carter be awarded bonus compensation in 2003 consisting of
$196,636 and a grant of 1,450,000 stock warrants with an exercise price of $2.20
per share. This additional compensation was reviewed by an independent valuation
firm and found to be fair and reasonable within the context of total
compensation paid to chief executive officers of comparable biotechnology
companies. The issuance of these securities was deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act as a transaction by an issuer not involving a public offering.

II-7

In September, 2003, our Board of Directors approved a new compensation plan.
Each non-employee director is to be compensated in 50% cash and 50% stock
beginning on January 1, 2003. The stock compenstaion plan covers a ten year
period not to exceed 1,000,000 shares. As of June 30, 2004, an aggregate of
77,551 shares has been issued to three non-employee directors pursuant to this
plan.

On November 4, 2003, the board of directors granted 200,000 options to Ransom
Etheridge pursuant to the 1990 Stock Option Plan. These options are exercisable
at $2.75 per share and expire on December 4, 2013. The issuance of these
securities was deemed to be exempt from registration under the Securities Act in
reliance on Section 4(2) of the Securities Act as a transaction by an issuer not
involving a public offering.

In the period of December, 2003 through July 26, 2004, we issued 117,149 shares
for payment of fees due eight service providers. The issuance of these
securities was deemed to be exempt from registration under the Securities Act in
reliance on Section 4(2) of the Securities Act as a transaction by an issuer not
involving a public offering.

On June 23, 2004, the shareholders approved the Company's 2004 Equity Incentive
Plan this plan authorizes the Board of Directors to grant non-qualified and
incentive stock options, stock appreciation rights, restricited stock and other
stock awards to officers, key employees, consultants and advisors of the
Company. A maximum of 8,000,000 shares of stock is reserved for use under this
plan. Unless sooner terminated, this equity plan will continue in effect for 10
years. On June 23, 2004 the Board of Directors authorized a grant of 50,000
options to the Copany's Chief Financial Officer pursuant to the terms of his
employment agreement.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) Exhibits.

Exhibit No. Description
-----------------------

2.1 First Asset Purchase Agreement dated March 11, 2003, by and between the
Registrant and ISI(4)

2.2 Second Asset Purchase Agreement dated March 11, 2003, by and between
the Registrant and ISI.(4)

3.1 Amended and Restated Certificate of Incorporation of Registrant, as
amended, along with Certificates of Designations, Rights and
Preferences of Series A1, A2, B and C Preferred Stock, as amended (1)

3.2 By-laws of Registrant, as amended (1)

3.3 Certificate of Designations of Series D Preferred Stock (2)

3.4 Certificate of Correction to Certificate of Designations of Series D
Preferred Stock (2)

3.5 Certificate of Designations of Series E Preferred Stock (3)

4.1 Specimen certificate representing our Common Stock (1)

4.2 Rights Agreement, dated as of November 19, 2002, between the Company
and Continental Stock Transfer & Trust Company. The Right Agreement
includes the Form of Certificate of

II-8

Designation, Preferences and Rights of the Series A Junior
Participating Preferred Stock, the Form of Rights Certificate and the
Summary of the Right to Purchase Preferred Stock.(10)

4.3 Form of 6% Convertible Debenture of the Company issued in March
2003.(4)

4.4 Form of Warrant for Common Stock of the Company issued in March
2003.(4)

4.5 Form of Warrant for Common Stock of the Company issued in June 2003.(5)

4.6 Form of 6% Convertible Debenture of the Company issued in July 2003.(6)

4.7 Form of Warrant for Common Stock of the Company issued in July 2003.(6)

4.8 Form of 6% Convertible Debenture of the Company issued in October
2003.(8)

4.9 Form of Warrant for Common Stock of the Company issued in October
2003.(8)

4.10 Form of 6% Convertible Debenture of the Company issued in January
2004.(9)

4.11 Form of Warrant for Common Stock of the Company issued in January
2004.(9)

4.12 Form of Additional Investment Rights to acquire debentures issued in
January 2004(9)

4.12 Form of Warrant for Common Stock of the Company issued in May 2004.(11)

5.1 Opinion of Silverman Sclar Shin & Byrne PLLC, legal counsel

10.1 1990 Stock Option Plan (1)

10.2 1992 Stock Option Plan (1)

10.3 1993 Employee Stock Purchase Plan (1)

10.4 Form of Confidentiality, Invention and Non-Compete Agreement (1)

10.5 Form of Clinical Research Agreement (1)

10.6 Form of Collaboration Agreement (1)

10.7 Amended and Restated Employment Agreement by and between the Company
and Dr. William A. Carter, dated as of December 3, 1998 (7)

10.8 Amended and Restatement Engagement Agreement by and between the Company
and Robert E. Peterson dated April 1, 2001 (7)

10.9 License Agreement by and between the Company and The Johns Hopkins
University, dated December 31, 1980 (1)

10.10 Technology Transfer, Patent License and Supply Agreement by and between
the Company, Pharmacia LKB Biotechnology Inc., Pharmacia P-L
Biochemicals Inc. and E.I. du Pont de Nemours and Company, dated
November 24, 1987 (1)

10.11 Pharmaceutical Use Agreement, by and between the Company and Temple
University, dated August 3, 1988 (1)

10.12 Assignment and Research Support Agreement by and between the Company,
Hahnemann University and Dr. David Strayer, Dr. lsadore Brodsky and Dr.
David Gillespie, dated June 30, 1989 (1)

10.13 Lease Agreement between the Company and Red Gate Limited Partnership,
dated November 1, 1989, relating to the Company's Rockville, Maryland
facility (1)

10.14 Agreement between the Company and Bioclones (Proprietary) Limited (1)

10.15 Amendment, dated August 3, 1995, to Agreement between the Company and
Bioclones (Proprietary) Limited (contained in Exhibit (10.14)

10.16 Licensing Agreement with Core BioTech Corp.(1).

10.17 Licensing Agreement with BioPro Corp. (1)

10.18 Licensing Agreement with BioAegean Corp. (1)

10.19 Forbearance Agreement dated March 11, 2003, by and between ISI, the
American National Red Cross and the Company.(1)

10.20 Forbearance Agreement dated March 11, 2003, by and between ISI, GP
Strategies Corporation and the Company.(4)

10.21 Securities Purchase Agreement, dated March 12, 2003, by and among the
Company and the Buyers named therein.(4)

10.22 Registration Rights Agreement, dated March 12, 2003, by and among the
Company and the

II-9

Buyers named therein.(4)

10.23 Agreement with Esteve. (1)

10.24 Agreement with Gentiva Health Services. (1)

10.25 Agreement with Biovail Corporation International. (1)

10.26 Securities Purchase Agreement, dated July 10, 2003, by and among the
Company and the Buyers named therein.(6)

10.27 Registration Rights Agreement, dated July 10, 2003, by and among the
Company and the Buyers named therein.(6)

10.28 Securities Purchase Agreement, dated October 29, 2003, by and among the
Company and the Buyers named therein.(8)

10.29 Registration Rights Agreement, dated October 29, 2003, by and among the
Company and the Buyers named therein.(8)

10.30 Securities Purchase Agreement, dated January 26, 2004, by and among the
Company and the Buyers named therein.(9)

10.31 Registration Rights Agreement, dated January 26, 2004, by and among the
Company and the Buyers named therein.(9)

10.32 Memorandum of Understanding with Fujisawa.

10.33 Engagement Agreement by and between the company and Robert E. Peterson
dated June 23, 2004.*

10.34 Hemispherx 2004 Equity Incentive Plan.(12)

14.1 Material Foreign Patents(1)

21 Subsidiaries of the Registrant *

23.1 Consent of BDO Seidman, LLP, independent registered public accountants.

23.2 Consent of Eisner, LLP, independent registered public accountants.

23.2 Consent of Silverman Sclar Shin & Byrne PLLC, legal counsel (included
in Exhibit 5.1).

24.1 Powers of Attorney (included in Signature Pages to this Registration
Statement on Form S-1).*

----------
* Previously filed.

(1) Incorporated by reference from the Registrant's Registration Statement on
Form S-1 (Registration No. 33-93314) declared effective by the Securities and
Exchange Commission on November 2, 1995.

(2) Incorporated by reference from the Registrant's Registration Statement on
Form S-1 (Registration No. 333-8941) declared effective by the Securities and
Exchange Commission on September 16, 1996.

(3) Incorporated by reference from the Registrant's Registration Statement on
Form S-1 (Registration No. 333-24983) declared effective by the Securities and
Exchange Commission on April 18, 1997.

(4) Incorporated by reference from the exhibits to the Registrant's Current
Report on Form 8-K (No. 1-13441) filed on March 13, 2003.

(5) Incorporated by reference from the exhibits to the Registrant's Current
Report on Form 8-K (No. 1-13441) filed on June 27, 2003.

II-10

(6) Incorporated by reference from the exhibits to the Registrant's Current
Report on Form 8-K (No. 1-13441) filed on July 14, 2003.

(7) Incorporated by reference from exhibits to the Registrant's Form 10-Q for
the quarter ended September 30, 2001 (No. 1-13441) filed on November 14, 2001.

(8) Incorporated by reference from the exhibits to the Registrant's Current
Report on Form 8-K (No. 1-13441) filed on October 30, 2003.

(9) Incorporated by reference from the exhibits to the Registrant's Current
Report on Form 8-K (No. 1-13441) filed on January 27, 2004.

(10) Incorporated by reference from the exhibits to the Registrant's
Registration Statement on Form 8-A (No. 0-27072) filed on November 20, 2002.

(11) Incorporated by reference from exhibits to the Registrant's Form 10-Q for
the quarter ended March 31, 2004 (No. 1-13441) filed on May 14, 2004.

(12) Incorporated by reference from Appendix A to the Registrant's Definitive
Schedule 14A (proxy statement) for the 2004 Annual Meeting of Stockholders (No.
1-13441) filed on May 20, 2004.

(b) Financial Statements Schedules.

None.

ITEM 17. UNDERTAKINGS

(a) Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Securities Act") may be permitted to directors,
officers and controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the opinion of
the SEC such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of an action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.

(b) The undersigned Registrant hereby undertakes:

(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to include any
prospectus required by Section 10(a)(3) of the Securities Act;

(2) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to reflect in the
prospectus any facts or events arising after the effective date of the
registration statement (or the most recent post-effective amendment thereof)
which, individually or in the aggregate, represent a fundamental change in the
information set forth in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or

II-11

high end of the estimated maximum offering range may be reflected in the form of
prospectus filed with the SEC pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.

(3) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to include any material
information with respect to the plan of distribution not previously disclosed in
the registration statement or any material change to such information in the
registration statement;

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

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

(6) That, for purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.

(c) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934, as amended, that is incorporated by reference
in the Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.

II-12

SIGNATURES

Pursuant to the requirement of the Securities Act of 1933, this Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this Amendment No. 1 to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized in the City of Philadelphia, Commonwealth of
Pennsylvania, on the 28th day of July, 2004.

HEMISPHERX BIOPHARMA, INC.
---------------------------
(Registrant)

By: /s/ William A. Carter, M.D.
-------------------------------------------------
William A. Carter, M.D., Chief Executive Officer

Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities indicated
on the dates indicated.

Signature Title Date
--------- ----- ----

/s/ William A. Carter, M.D. Chairman of the Board, Chief July 28, 2004
-------------------------------- Executive Officer (Principal
William A. Carter, M.D. Executive) and Director

* Director July 28, 2004
--------------------------------
Richard C. Piani

* Chief Financial Officer and July 28, 2004
-------------------------------- Chief Accounting Officer
Robert E. Peterson

* Secretary, General Counsel July 28, 2004
-------------------------------- And Director
Ransom W. Etheridge

* Director July 28, 2004
--------------------------------
William M. Mitchell, M.D., Ph.D.

*By: /s/ William A. Carter, M.D.
----------------------------
William A. Carter, M.D.,
Attorney-in-Fact

II-13

Hemispherx Biopharma, Inc.
Amendment No. 1 to Form S-1
Index to Exhibits

Exhibit No. Description
----------- -----------

5.1 Opinion of Silverman Sclar Shin & Byrne PLLC, legal counsel

23.1 Consent of BDO Seidman, LLP, independent registered public
accountants.

23.2 Consent of Eisner LLP, independent registered public accountants.