Edgar Filing: HEMISPHERX BIOPHARMA INC

As filed with the Securities and Exchange Commission on September 9, 2003

Registration No. 333-_______

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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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 52-0845822

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

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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 P.C.
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 Securities to be Amount to be Offering Price Per Aggregate Offering Amount of
Registered Registered (1) Share Price Registration Fee
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Common Stock 5,903,000(2) $1.915(3) $11,304,245 $ 914.51
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Common Stock 890,000(4) $1.74-$2.57 $ 1,648,625 $ 133.37
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Common Stock 1,098,789 $1.915(3) $ 2,104,181 $ 170.23
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Total Registration Fee $1,218.11
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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
(a) conversion, prepayment or otherwise relating to the registrant's 6%
Senior Convertible Debentures due July 2005 issued in a private placement
on July 10, 2003 and as payment of interest thereon and (b) exercise of
warrants issued by the registrant in the private placement.

(3) Estimated solely for the purpose of computing the registration fee in
accordance with Rules 457(c) of the Securities Act on the basis of $1.915
per share, which was the average of the high and low sales prices of the
shares of common stock of the Registrant reported on the American Stock
Exchange on September 5, 2003.

(4) Represents shares of our common stock issuable upon exercise of warrants
held by selling stockholders.

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 September 9, 2003

HEMISPHERX BIOPHARMA, INC.

7,891,789 Shares of Common Stock

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This prospectus relates to the resale of: 7,891,789 shares of common
stock, which consist of (1) 135% of 2,865,490 shares of common stock issuable
upon the conversion, redemption or other payments relating to our 6% Senior
Convertible Debentures Due July 2005 ("Debentures") and as payment of interest
thereon, 135% of 507,102 shares of common stock issuable upon the exercise of
the related warrants ("July 2008 Warrants") and 135% of 1,000,000 shares of
common stock issuable upon the exercise of warrants issued to the Debenture
holders in June 2003 ("June 2008 Warrants"); (2) 890,000 shares of common stock
issuable upon exercise of other warrants; (3) 1,098,789 shares of common stock
to be sold by certain of the selling stockholders listed on page 55 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 September 2,
2003 was $1.92

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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 September , 2003

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 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 350 patents worldwide,
with over 60 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.

We have 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. We are under
contract to purchase from ISI the balance of ISI's rights to its product as well
as ISI's production facility. We intend to market the ALFERON N Injection(R) in
the United State through sales facilitated via third party marketing agreements.
Additionally, we intend to implement studies testing the efficacy of ALFERON N
Injection(R) in multiple sclerosis and other chronic viral diseases.

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 ..... 7,891,789 Shares

Common stock outstanding
prior to this offerng ........... 37,354,723 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 7,891,789 shares of our common stock offered consist of:

o 135% of 2,865,490 shares of common stock issuable upon the
conversion, redemption or other payments relating to our 6% Senior
Convertible Debentures Due July 2005 ("Debentures") and as payment
of interest thereon;

o 135% of 507,102 shares of common stock issuable upon the exercise of
the related warrants ("July 2008 Warrants");

o 135% of 1,000,000 shares of common stock issuable upon the exercise
of warrants issued to the Debenture holders in June 2003 ("June 2008
Warrants");

o 890,000 shares of common stock issuable upon exercise of other
warrants; and

o 1,098,789 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, 2002, and our
unaudited financial statements for the six months ended June 30, 2002 and June
30, 2003. Operating results for the six months ended June 30, 2003 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2003.

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)
Consolidated
Statements
of Operations Year ended December 31, Six Months Ended
Data: June 30,
---- ---- ---- ---- ---- ---------------------------
1998 1999 2000 2001 2002 2002 2003
---- ---- ---- ---- ---- ---- ----
(unaudited) (unaudited)

Revenues:
Clinical $401 $678 $788 $390 $341 $184 $81
Treatment Programs
License Fees -- -- -- -- 563 563 --
Income
Sale of Product -- -- -- -- -- -- 79
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Total Revenues 401 678 788 390 904 747 160

Cost & Expenses:

Production Costs 155
Research & 4,562 4,737 6,136 9,780 4,946 2,538 1,728
Development
General & 3,753 874 3,695 3,412 2,015 1,680 1,505
Administrative(1)

Total Cost and 8,315 13,458 9,831 9,192 6,961 4,218 3,388
Expenses

Interest and 590 482 572 284 103 67 51
Other Income
Interest Expense -- -- -- -- -- -- (2,100)
Other Expense -- -- (81) (565) (1,470) (718) (29)

Net Loss $(7,324) $(12,298) $(8,552) $(9,083) $(7,424) $(4,122) $(5,306)

Basic and Diluted $(.32) $(.47) $(.29) $(.29) $(.23) $(.13) $(.16)
Loss Per Share

Basic and Diluted 26,830,351 31,443,208 32,079,327
Weighted Average
Shares Outstanding 22,724,913 29,251,846 32,095,776 32,872,905

Other Cash Flow
Data
Cash Used in

Operating $(5,751) $(6,990) $(8,074) $(7,281) $(6,409) $(3,503) $(2,225)
Activities
Capital (151) (251) (171) -- -- -- --
Expenditures

Consolidated Pro Forma for
Statements Asset Acquisition
of Operations Six
Data: Year ended Months
December 31, Ended
2002(4) 2003(4)
------- -------
(unaudited) (unaudited)
Revenues:

Clinical $341 $81
Treatment Programs
License Fees 563 --
Income
Sale of Product 1,926 321
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Total Revenues 2,830 402

Cost & Expenses:

Production Costs 1,505 499
Research & 6,428 1,915
Development
General & 3,921 1,783
Administrative(1)

Total Cost and 11,854 4,197
Expenses

Interest and 103 51
Other Income
Interest Expense 3,160 (1,802)
Other Expense (1,470) (29)

Net Loss $(13,551) $(5,575)

Basic and Diluted $(.40) $(.17)
Loss Per Share

Basic and Diluted 33,641,776
Weighted Average
Shares Outstanding 33,545,557

Balance Sheet Data: Pro Forma Adjustment
December 31, June 30, For Asset Acquisitions
-------------- -------------------- ----------------------
1998 1999 2000 2001 2002 2002 2003(2) (3) 2003(4) (5)
---- ---- ---- ---- ---- ---- ----------- -----------
(unaudited) (unaudited) (unaudited)

Working Capital $12,587 $9,506 $7,554 $7,534 $2,925 $5,256 $5,413 $5,050
Total Assets 16,327 14,168 13,067 12,035 6,040 8,512 10,243 11,444
Shareholders' 15,185 12,657 11,572 10,763 3,630 6,748 6,939 7,152
Equity

(1) General and Administrative expenses include stock compensation expense
totaling $795, $4,618, $397, $673, $132, $0 and $0 for the years ended
December 31, 1998, 1999, 2000, 2001, and 2002 and for the six months ended
June 30, 2002 and 2003, respectively.

(2) For information concerning recent acquisitions of certain assets of
Interferon Sciences, Inc. ("ISI") and related financing see notes 8 and 9
to our consolidated financial statements for the six months ended June 30,
2003 and notes 1 and 16 to our consolidated financial for the year ended
December 31, 2002, contained elsewhere in this prospectus.

(3) In accounting for the March 12, 2003 issuance of $5,426,000 of 6% Senior
Convertible Debentures and related embedded conversion features and
warrant issuances, we recorded debt discounts of approximately $5.4
million, which in effect reduced the carrying value of the debt to zero.
Excluding the application of related accounting standards, our debt
outstanding as of June 30, 2003 totaled approximately $3.4 million. For
additional information refer to note 9 to our consolidated financial
statements for the six months ended June 30, 2003 and note 16 to our
consolidated financial statements for the year ended December 31, 2002,
contained elsewhere in this prospectus.

(4) The unaudited Pro Forma consolidated statements of operations data for the
year ended December 31, 2002 and the six months ended June 30, 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, 2002.

The unaudited Pro Forma consolidated balance sheet data has been prepared
as if the second portion of the acquisition of certain assets of ISI had
occurred on June 30, 2003.

The unaudited pro-forma financial statements give effect to the second
asset acquisition agreement with ISI irrespective of the fact that it
remains unconsummated and is contingent on the ISI stockholders approving
the transaction. For additional information, see the pro forma
consolidated financial statements contained elsewhere in the prospectus.

(5) Does not reflect the issuance of the July 10, 2003 $5,426,000 6% senior
convertible debentures resulting in net cash proceeds to us of $2.9
million, which are non-inclusive of approximately $1.6 million of proceeds
held back contingent upon us acquiring of ISI's facility.

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 form 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, or 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 plans to conduct these additional
studies at this time. Our principal development efforts are currently focused on
Ampligen(R), which has not been approved for commercial use.

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 will be
materially adversely effected.

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 June 30,
2003 our accumulated deficit was approximately $104,000,000. 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.
Based on our current projections, we may need $2.0 million in additional
financing to fund operations and debt service over the next twelve months
subsequent to July 31, 2003. Our projections assume that our debenture holders
do not continue to convert the remaining debt into common stock and that we will
need cash to repay the debt as scheduled. If the debenture holders continue to
periodically convert the debentures into our common stock, we may not need
additional funds. Also, sales of Alferon N Injection(R) could exceed our
projection and reduce the need for additional financing during this period.
Between March and July 2003, we received approximately $8.3 Million in net
proceeds from the sale of both sets of debentures and the exercise of warrants
issued in conjunction with the Debentures due January 2005. The foregoing amount
includes initial gross proceeds of $3.1 Million received from the sale of the
Debentures and July 2008 Warrants. Pursuant to the terms of the Debentures, if
and when we close on the second ISI asset acquisition, we will receive
additional net proceeds of $1.55 Million. As of July 31, 2003, we had
approximately $6.3 Million in cash and short term investments. We believe that
these funds plus 1) the anticipated infusion of approximately $1.55 million in
remaining net proceeds from the Debenture placement and 2) the projected net
cash flow from the sale of ALFERON N Injection(R) should be sufficient to meet
our operating requirement for the next ten 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 effect on our ability to develop our products. In
addition, if we do not timely complete the second ISI asset acquisition, our
financial condition could be materially and adversely affected (see the next
risk factor).

If we do not complete the second Interferon Sciences, Inc. asset acquisition,
our ability to generate revenues from the sale of ALFERON N Injection(R) and our
financial condition will be adversely affected.

In March, 2003 we executed two agreements with Interferon Sciences, Inc.
("ISI") to purchase certain assets of ISI. In the first agreement we acquired
ISI's inventory of ALFERON N Injection(R) and a limited license for the
production, manufacture, use, marketing and sale of this product. Our ability to
generate sustained revenues from sales of this product is dependent, among other
things, on our completing the terms of the second agreement to acquire the
balance of ISI's rights to its product as well as ISI's production facility used
to formulate and purify the drug concentrate of ALFERON N Injection(R). In
addition, pursuant to the terms of the Debentures, we are required to acquire
ISI's facility within 90 days from July 10, 2003 and, unless and until we
acquire the facility, $1,550,000 of the proceeds from the sale of the Debentures
will be held back. The same condition was in the debentures issued in March
2003; however, the holders waived this condition. Consummation of the second
agreement requires, among other things, approval by ISI's stockholders and
certain environmental approvals with regard to the sale of the facility. As of
the date hereof, ISI is preparing the proxy statement for a special meeting of
its stockholders at which approval of the second acquisition will be sought. ISI
has received written environmental approval from the state of New Jersey. Our
failure to complete the acquisition within the 90 day period will be a technical
default of the terms of the Debentures and, absent consent from the Debenture
holders for additional time, most likely would result in our having to redeem
the securities. If we do not receive the additional Debenture funds as planned
and, especially if we are required to redeem the Debentures, our financial
condition would be materially and adversely affected and we would probably have
to reduce or possibly curtail operational spending including some critical
clinical effort. In addition, although we have not yet completed the
acquisition, we issued an aggregate of 581,761 shares to GP Strategies and the
American National Red Cross, two creditors of ISI, as partial consideration for
the acquisition and we may be required to repurchase some or all of these shares
in the future at $1.59 per share (see the risk factor "We have guaranteed the
value of a number of shares issued and to be issued as a result of our
acquisition of assets from Interferon Sciences. If our share price is not above
$1.59 per share 12, 18 or 24 months after the dates of issuance of the
guaranteed shares, our financial condition could be adversely affected" below).
If we do not complete the acquisition, we will look to ISI to pay us the value
of the shares that we issued to these two creditors. No assurance can be given
that we will be able to so recoup the value of these shares.

The limited number of unissued and unreserved authorized shares of Common Stock
severely restricts our ability to raise funds through the sale of our
securities. If our stockholders do not approve an increase in the number of our
authorized shares of common stock, our financial condition most likely would be
adversely affected.

We have 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.
As of September 4, 2003 only approximately 102,000 shares of our authorized
shares of common stock were not issued or reserved for issuance. This does not
include 3,006,650 shares that had been reserved for issuance pursuant to
warrants and options owned by Dr. Carter and 200,000 shares that had been
reserved for issuance pursuant to warrants owned by Cardinal Securities. Dr.
Carter and Cardinal have agreed that they will not exercise their warrants or
options unless and until our stockholders approve an increase in our authorized
shares of common stock. One of the proposals for the annual meeting of our
stockholders to be held in September 2003 is 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 cannot assure you that the Proposal will be
approved. Unless and until we are able to increase the number of authorized
shares of common stock, our ability to raise funds through the sale of common
stock or instruments that are convertible into or exercisable for common stock
will be severely restricted.

his warrants and options. If Dr. Carter elects to continue to hold these
securities, the Committee, again with the assistance of the independent
valuation firm, will determine a formula pursuant to which Dr. Carter would
receive cash ("Stock Appreciation Payments") rather than shares of common stock
should he exercise any of the warrants or options prior to the time, if ever,
adequate authorized but unissued and unreserved shares become available for
issuance upon exercise of his warrants and options. In addition, if the Proposal
does not pass, we have agreed to pledge some of our intellectual property as
collateral for the Value Payment or the Stock Appreciation Payments. The
specific intellectual property to be used as collateral, the valuation of such
collateral and the method of sale or license of such intellectual property in
the event that sale of the collateral is required, would be determined by the
committee, with the assistance of the independent valuation firm. These actions
may result in Dr. Carter being awarded cash or other non-cash related rewards,
which may or will result in the recording of compensation expense by us.

For all of the above reasons, if our stockholders do not approve an
increase in the number of our authorized shares of common stock, our financial
condition most likely would be adversely affected.

We have guaranteed the value of a number of shares issued and to be issued as a
result of our acquisition of assets from Interferon Sciences. If our share price
is not above $1.59 per share 12, 18 or 24 months after the dates of issuance of
the guaranteed shares, our financial condition could be adversely affected.

In March 2003 we issued 487,028 shares to Interferon Sciences and, upon
the consummation of the second Interferon Sciences asset acquisition, we will
issue an additional 487,028 shares to Interferon Sciences. In May 2003 we issued
an aggregate of 581,761 shares to two of Interferon Sciences' creditors. We
anticipate, but cannot assure, that we will close the second Interferon Sciences
asset acquisition sometime between September and October 2003. We have
guaranteed the value of up to 1,430,817 of these shares to be $1.59 per share or
$2,275,000 in the aggregate on the relevant termination dates, which are
inclusive of 424,528 guaranteed unissued shares with respect to the second asset
acquisition agreement with ISI which, to date remains unconsummated. The
termination dates are 24 months after the dates of issuance and delivery of the
guaranteed shares to ISI, 18 months after the date of issuance of the guaranteed
shares to GP Strategies and 12 months after the date of issuance of the
guaranteed shares to the American National Red Cross. The guarantee relates only
to those shares still held by Interferon Sciences and the two creditors on the
applicable termination date. If, within 30 days after the relevant termination
date, holders of the guaranteed shares request that we honor the guarantees, we
will reacquire the holders' remaining guaranteed shares and pay the holders
$1.59 per share. By way of example, assuming that all 1,430,817 shares are still
held on the relevant termination dates, we would be obligated to pay to
Interferon Sciences and these two creditors an aggregate of $2,275,000. The
reported last sale price for our common stock on the American Stock Exchange on
September 2, 2003 was $1.92 per share. If, during the 31 days commencing on the
relevant termination dates, the market price of our stock is not above $1.59 per
share, we most likely would be requested and obligated to pay the guaranteed
amount on the guaranteed shares outstanding on the relevant termination dates.
We believe that the number of guaranteed shares still outstanding on the
relevant termination dates will be a factor of the market price and sales volume
of our common stock during the 24, 18 and 12 month periods prior to the relevant
termination date.

If the holders of the guaranteed shares do not sell a significant amount
of their guaranteed shares prior to the relevant termination dates and the price
of our common stock during the 31 day period commencing on the relevant
termination dates is not above $1.59 per share, we most likely will be required
to repurchase a significant number of guaranteed shares and our financial
condition could be materially and adversely affected.

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. If and when we obtain all
rights to ALFERON N Injection(R), we will 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), Interferon Sciences, Inc. has a patent for
natural alpha interferon produced from human peripheral blood leukocytes and its
production process and has additional patent applications pending. We will
acquire this patent and related patent applications if and when we close on the
second Interferon Sciences asset acquisition. We cannot assure you that any of
these applications will be approved or that our competitors will not seek and
obtain patents regarding the use of our products in combination with various
other agents, for a particular target indication prior to us. If we cannot
protect our patents covering the use of our products for a particular disease,
or obtain additional pending 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 the 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 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 need to enter into
marketing agreements and third party distribution agreements for our products in
order to generate significant revenues and become profitable. To the extent that
we enter into co-marketing or other licensing arrangements, 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 Gentiva
Health Services offers the potential to provide significant marketing and
distribution capacity in the United States while licensing and marketing
agreements with certain foreign firms should

provide an adequate sales force in South America, Africa, United Kingdom,
Australia and New Zealand, Canada, Spain and Portugal.

We cannot assure that our domestic or our 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.

No guaranteed source of required materials.

A number of essential materials are used in the production of ALFERON N
Injection(R), including human white blood cells, and we have a limited number of
sources from which to obtain such materials. 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. If and when we close on the second ISI asset acquisition, we
will acquire their 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.

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 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 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
substantially 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 effect 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 effect 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 effected 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. While we have an employment agreement with Dr. Carter, and have secured
key man life insurance in the amount of $2 million on the life of Dr. Carter,
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 July 31, 2003, the price of our common stock has
ranged from $1.33 to $3.35. 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 September 4, 2003, approximately 1,098,789 shares of our common
stock, constituted "restricted securities" as defined in Rule 144 under the
Securities Act of 1933. All 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 8,346,229 shares issuable (i) upon
conversion of 135% of the Debentures and 100% of the remaining principal balance
on the Debentures due January 2005; (ii) as payment of interest on both sets of
Debentures (including 135% of the interest due on the Debentures); (iii) upon
exercise of 135% of the July 2008 Warrants and the June 2008 Warrants; and (iv)
upon exercise of certain other warrants. 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. Moreover, we anticipate that we will be issuing and registering for
public resale 487,028 shares if and when we close the second ISI asset
acquisition and, possibly, we 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 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
Dr. Carter, our chief executive officer, who already beneficially owns 9.2% 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 and the first two quarters of fiscal 2003 as reported by the AMEX.

COMMON STOCK High Low
---- ---
Year Ended December 31, 2001
First Quarter $5.75 $3.01
Second Quarter 7.15 3.96
Third Quarter 6.85 3.89
Fourth Quarter 5.29 3.41

Year Ended December 31, 2002
First Quarter 4.76 3.45
Second Quarter 3.97 2.50
Third Quarter 2.63 .80
Fourth Quarter 2.86 1.40

Year Ending December 31, 2003
First Quarter 2.20 1.33
Second Quarter 3.15 1.33

On September 2, 2003, the closing sale price of our common stock as
reported on the AMEX was $1.92 per share. As of September 2, 2003, there were
approximately 254 holders of record of our common stock. not including holders
in street name. We estimate that there are some 3,000 holders if you include
shares held in street name.

SELECTED CONSOLIDATED FINANCIAL DATA

Our selected historical consolidated financial information presented as of
December 31, 1998, 1999, 2000, 2001 and 2002 and for each of the five years
ended December 31, 2002 was derived from our audited consolidated financial
statements. Our selected historical consolidated financial information presented
as of June 30, 2002 and 2003 and for the six month periods ended June 30, 2002
and 2003 are unaudited. Operating results for the six months ended June 30, 2003
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2003. 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 Six Months Ended
of Operations Year ended December 31, June 30,
------------------------------------------------------------------- ---------------------------
Data:
1998 1999 2000 2001 2002 2002 2003
---- ---- ---- ---- ---- ---- ----
(unaudited) (unaudited)

Revenues:
Clinical $401 $678 $788 $390 $341 $184 $81
Treatment
Programs
License Fees -- -- -- -- 563 563 --
Income
Sale of Product -- -- -- -- -- -- 79
-----------------------------------------------------------------------------------------------------------
Total Revenues 401 678 788 390 904 747 160

Cost & Expenses:

Production Costs 155
Research & 4,562 4,737 6,136 9,780 4,946 2,538 1,728
Development
General & 3,753 874 3,695 3,412 2,015 1,680 1,505
Administrative(1)

Total Cost and 8,315 13,458 9,831 9,192 6,961 4,218 3,388
Expenses

Interest and 590 482 572 284 103 67 51
Other Income
Interest Expense -- -- -- -- -- -- (2,100)
Other Expense -- -- (81) (565) (1,470) (718) (29)

Net Loss $(7,324) $(12,298) $(8,552) $(9,083) $(7,424) $(4,122) $(5,306)

Basic and $(.32) $(.47) $(.29) $(.29) $(.23) $(.13) $(.16)
Diluted
Loss Per Share

Basic and 26,830,351 31,443,208 32,079,327
Diluted

Weighted Average 22,724,913 29,251,846 32,095,776 32,872,905
Shares
Outstanding

Other Cash Flow
Data
Cash Used in

Operating $(5,751) $(6,990) $(8,074) $(7,281) $(6,409) $(3,503) $(2,225)
Activities
Capital (151) (251) (171) - - - -
Expenditures

Balance Sheet Data:
December 31, June 30,
------------- --------------------
1998 1999 2000 2001 2002 2002 2003(2) (3)
---- ---- ---- ---- ---- ---- -----------
(unaudited) (unaudited)

Working Capital $12,587 $9,506 $7,554 $7,534 $2,925 $5,256 $5,413
Total Assets 16,327 14,168 13,067 12,035 6,040 8,512 10,243
Shareholders' 15,185 12,657 11,572 10,763 3,630 6,748 6,939
Equity

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

In the course of almost three decades, we have established a strong
foundation of laboratory, pre-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 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.

We have obtained from Interferon Sciences, Inc. ("ISI") all of its raw
materials, work-in-progress and finished product ALFERON N Injection, together
with a limited license to sell ALFERON N Injection, 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. We are under contract
to purchase from ISI the balance of ISI's rights to its product as well as ISI's
production facility. We intend to market the ALFERON N Injection in the United
States through sales facilitated via third party marketing agreements.
Additionally, we intend to implement studies testing the efficacy of ALFERON N
Injection in multiple sclerosis and other chronic viral diseases.

Result of Operations

Six months ended June 30, 2003 versus Six Months ended June 30, 2002

During the six months period ended June the 30, 2003, we 1) acquired
certain assets and licensing rights to ALFERON N Injections, 2) privately placed
6% Convertible Debentures due January 2005 with an aggregate maturity value of
$5,426,000 (gross proceeds of $4,650,000) and 3) continued our efforts to
develop Ampligen(R) for the treatment of patients afflicted with ME/CFS and HIV.

Net loss

In the six months period ended June 30, 2003, we recorded $5,306,000 or
$.16 per share in net losses. In the same period in 2002, we had net losses of
$4,122,000 or $.13 per share. The losses in 2003 includes $1,641,000 in non-cash
interest charges relating to our 6% Convertible Debenture issued on March 12,
2003. These non-cash interest charges account for 31% of our six months ended
June 30, 2003 net losses. In addition, our six months to date losses include
$342,000 in expenses relating to our new Alferon division. After adjusting our
2003 year-to-date losses for these two factors, our losses were $3,323,000 in
2003 compared to $4,122,000 in 2002 or a reduction in the amount of $798,000.

Revenues

Revenues were $160,000 in the first six months of 2003 compared to
revenues of $747,000 in the first six months of 2002. Revenues in 2002 included
$563,000 of license fee income. Revenues in 2003 include $81,000 in ME/CFS Cost
Recovery Income, down $103,000 from the six months ended June 30, 2002, and
$79,000 in net sales of ALFERON N Injection(R).

Costs and Expenses

Overall costs and expenses were lower in the six months ended June 30,
2003 by approximately $830,000 compared to the first six months of 2002. Total
costs and expenses in 2003 were $3,388,000 versus $4,218,000 in 2002. In 2003,
our costs consisted of $155,000 for ALFERON N Injection(R) related expenses,
$1,728,000 for Ampligen(R) research and development costs and $1,505,000 for
general and administrative expenses.

Production costs were $155,000 in the first six months of 2003. These
costs reflect approximately $48,000 for the cost of sales of ALFERON N
Injection(R) during the period of April 1, 2003 through June 30, 2003. In
addition, we recorded $107,000 of production costs at the New Brunswick
facility. We ramped up the facility in April, 2003 and started production on
three lots of work in process inventory.

Research and Development costs

Research and Development costs of $1,728,000 in the six months ended June
30, 2003 compared to research and development costs of $2,538,000 in the first
six months of 2002. 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. Ampligen(R) is currently being tested in
a Phase III clinical trial, in the U.S., for use in the treatment of ME/CFS, the
so-called AMP 516 study. Ampligen(R) is also currently in 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(R) 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(R) under Strategic Treatment Intervention and is
also conducted in the U.S. Our research and development direct costs are
$703,000 lower in 2003 due to reduced costs associated with the development of
Ampligen(R) to treat ME/CFS patients. In the first six months of 2002, our
ME/CFS Phase III clinical trial was in full force and effect therefore
increasing our manufacturing and clinical support expenses during that period.

AMP 516

Over 230 patients have participated and/or participating in our ME/CFS
Phase III clinical trial. Approximately 16 patients are still in the clinical
process. We expect to complete the randomized placebo controlled phase of this
study by the first quarter of 2004. At that time we will complete data
collection and start the data analysis process with the expectation of filing an
NDA (New Drug Application) with the FDA by the second quarter 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 719/720

Our efforts in using Ampligen(R) to treat HIV patients currently consist
of conducting two clinical trials. 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 9 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 10 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 that 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.

Production Costs

Alferon N Injection(R)

Since acquiring the right to manufacture and marketing of Alferon N
Injection(R) in March, 2003 we have focused on converting the work-in-progress
inventory into finished products. This work-in-progress inventory included three
production lots totaling approximately 53,000 vials (doses) at various stages of
the manufacturing process. On August 8, 2003 we released the first lot of
finished bulk product to Abbott Laboratories for bottling and packaging and
expect to realize some 21,000 vials of ALFERON N Injection(R) by the middle of
September 2003. Preliminary work has started on completing the second lot of
approximately 17,000 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 trial
lot of some 16,000 vials now in very early stages of production.

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

On August 18, 2003, we entered into a sales and marketing agreement with
Engitech, Inc. to distribute ALFERON N Injection(R) on a nationwide basis.
Engitech, Inc. is to develop and implement marketing plans including extensive
scientific and educational programs for use in marketing ALFERON N Injection(R).

General and Administrative Expenses

General and Administrative expenses were $1,505,000 in 2003, which
includes $154,000 of expenses relating to our new Alferon Division. Excluding
the Alferon expenses, our general and administrative costs were $1,351,000
compared to $1,680,000 of expenses in 2002. This decrease of $329,000 is
primarily due to lower legal expenses and lower public relation costs. In the
six months ended June 30, 2002 we incurred significant legal costs associated
with the Asensio lawsuit and trial. See "Legal Proceeding" for more details.

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 for the year ended ("ftye") 2001. Per share
losses ftye 2002 was 23 cents versus a per share loss of 29 cents ftye 2001.
This year to year decrease in losses of $1,659,000 is 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 have come 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 (approximately $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
were $904,000 compared to revenues of $390,000 in 2001.

Revenues for non-refundable license fees are recognized under the
performance method. This method recognizes revenue to the extent of performance
to date under a licensing agreement. In computing earned revenue, it considers
only the amount of non-refundable cash actually received to date. This method
considers future payments to be contingent and thus ignores the possibility of
future milestone payments when computing the amount of revenue earned in a
current period.

Research and Development costs

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.

Ampligen is currently 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. 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.

AMP 516

In the first quarter of 2003, the AMP 516 clinical trial was fully
enrolled with more than the targeted 230 patients in order to potentially
compensate for "drop outs". 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 in the first or second quarter of 2004.
The date of potential commercial approval depends on whether we receive Fast
Track Status or not by 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.

Expenses related to the ME/CFS Phase III are expected to decrease in 2003
because of fewer patients to be treated as the trial nears completion. The
remaining patients are treated at only a few investigational sites, which makes
data collection and monitoring more cost effective. Accordingly, the estimated
cost for completion of the study and data analysis is estimated to be
approximately $500,000 to $600,000. In the event significant numbers of patients
were to prematurely leave the clinical trial, any potential FDA approval of an
NDA could be indefinitely delayed which would have a materially adverse effect
on our ability to receive potential revenues in the next 2-3 years from this
therapeutic indication.

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

As of December 2002, approximately 55 patients have been enrolled in both
studies combined and they are 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. Under optimal
conditions, the out of pocket cost of completing the studies could be
approximately $3 million. The rate of enrollment depends on patient availability
and on other products being in clinical trials for the treatment of HIV, because
there could be 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 by the FDA, which will decide when
completion of the ongoing Phase IIb is appropriate and whether a Phase III trial
will have to be conducted or not. In case of 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 HIV treatment indications.

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 to be 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 were $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 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 their current 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.

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 $103,000 ftye 2002 compared to $284,000
recorded ftye 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.

Years Ended December 31, 2001 vs. 2000

Net loss

We reported a net loss of approximately $9,083,000 for the year ended
December 31, 2001 versus a net loss of approximately $8,552,000 for the year
2000. The increase in losses of $531,000 in 2001 was basically due to lower
ME/CFS cost recovery treatment revenues and interest income. In addition we
recorded a non-operating, non-cash charge of $485,000 with respect to our
investments in unconsolidated affiliates. This amount represents the unamortized
balance of Goodwill included in the investments. Overall operating expenses in
2001 were $639,000 lower than operating expenses experienced in 2000. Our loss
per share was $0.29 in 2001 and 2000.

Revenues

At this time, (prior to the acquisition of ALFERON N Injection(R)) our
revenues come 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 $788,000 in 2000. In
2001, these revenues declined by $398,000 or 51%. We expected revenues in the
U.S. to decline due to the focus of our clinical resources on conducting and
completing the AMP516 ME/CFS Phase III clinical trial as well as the start up

of the AMP 719 and AMP 720 HIV clinical trials. Revenues from the European cost
recovery treatment programs were lower than expected primarily due to our
European investigators spending a great deal of time in reviewing and analyzing
the clinical data collected in the treatment of some 150 patients in Belgium.
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.

Research and Development Costs

As previously noted, our research and development is primarily directed at
developing our lead product, Ampligen(R), as a therapy for use in treating
various chronic illnesses as well as cancer. In 2000 and 2001, most of this
effort was directed toward conducting and supporting clinical trials involving
patients affected with ME/CFS. Our research and development direct costs were
$5,780,000 in 2001 compared to $6,136,000 spent in 2000. The lower research and
development costs basically reflect the net sum of less costs related to lower
cost recovery treatment revenues and lower expenses related to the ME/CFS
clinical trials offset by increased purchases of polymers and increased expenses
relating to the HIV trials initiated in 2001. As to be expected, costs related
to the cost recovery treatment programs were down approximately $275,000 due to
lower revenues recorded in 2001. Also expenses relating to the ME/CFS Phase III
clinical trial were down some $863,000 in 2001 versus 2000 due to fewer patients
being treated in the cost-intensive segment of the program as the clinical trial
nears completion. This clinical trial is a multicenter, placebo-controlled,
randomized, double blind study to evaluate the efficacy and safety of treating
230 ME/CFS patients with Ampligen(R). These lower costs relating to our ME/CFS
programs were partially offset by an increase in polymer purchase in 2001 in the
amount of $317,000 and an increase due to spending on the new HIV clinical
trials now underway. The polymer purchase increase was needed to boost our on
hand inventory for the production of Ampligen(R). The HIV clinical trials were
initiated to evaluate the use of Ampligen(R) in concert with other antiviral
drugs in treating patients severely afflicted with AIDS. We expect levels of
these clinical trials to continue throughout 2003. (See "business" for more
information on our research and development for programs.)

General and Administrative Expenses

Excluding stock compensation expense, general and administrative expenses
were approximately $2,741,000 in 2001 versus $3,298,000 in 2000. The decrease in
expense is primary due to lower professional fees in 2001. All other general and
administrative expenses were slightly less than recorded in 2000. Stock
compensation expenses were $671,000 or some $274,000 higher than recorded in the
year 2000. 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 fourth quarter of 2001, we recorded a non-cash charge of
$485,000 with respect to our investment in CIMM. The amount represents the
unamortized balance of goodwill included as part of our investment. This was a
result of management's determination that CIMM's operations had not yet evolved
to the point where our full carrying value of its investment could be supported
based on their financial position and operating results.

Other Income/Expense

Interest and other income of $284,000 in 2001 was lower than the $572,000
recorded in 2000. 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 2001.

Liquidity and Capital Resources

Cash used in operating activities for the six months ended June 30, 2003
was $2,225,000. Cash provided by financial activities for six months ended June
30, 2003 amounted to $4,448,000 substantially from proceeds from debentures (see
below). As of June 30, 2003, we had approximately $4,659,000 in cash and cash
equivalents and

short term investments and $52,000 in accounts receivable. We believe that these
funds plus an additional net amount of approximately $4.5 million from the July
10, 2003 Debentures (See notes 9 and 16 to our financial statements for the six
months ended June 30, 2003 and for the year ended December 31, 2003,
respectively, contained elsewhere in this prospectus), the projected revenue
from the acquisition of the ALFERON N Injection(R) business and additional
financing of $2.0 million will be sufficient to meet our operating requirements
including debt service during the twelve months subsequent to June 30, 2003. The
need for additional financing assumes that the debenture holders do not continue
to convert debt into common stock and that we will need cash to repay the debt
as scheduled. If the debenture holders continue to convert debt, we may not need
additional funds. Also, sales of ALFERON N Injection(R) could be greater than
expected which will reduce our need for additional financing during the twelve
months subsequent to June 30, 2003. Also, we have the ability to curtail
discretionary spending, including some research and development activities, if
required to conserve cash. If we do not timely complete the second ISI asset
acquisition, our financial condition could be materially and adversely affected
(see the risk factor "If we do not complete the second Interferon Sciences asset
acquisition, our ability to generate revenues from the sales of ALFERON N
Injection(R) and our financial condition will be adversely affected").

Cash, cash equivalents and short term investments at December 31, 2002
were approximately $2,811,000. Cash used for operating activities in 2002 was
$6,409,000. Additional uses of cash included expenditures of $176,000 for patent
acquisition cost, and $50,000 to acquire 27,500 shares of our stock.

Cash proceeds from financing activities in 2002 were approximately
$961,000. $65,000 was received from stock subscriptions and $946,000 was
received from the issuance of preferred equity certificates of our European
subsidiary.

All clinical trial drug supplies produced in 2002 were fully expensed
although some costs are expected to be recovered under the expanded access cost
recovery programs authorized by FDA and regulatory bodies in other countries.
Our operating cash "burn rate" should decline in 2003 as the AMP 516 ME/CFS
clinical trial nears completion and the cost of European market development
activity is reduced.

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 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.

Also Esteve purchased 1,000,000 Euros of Hemispherx S.A.'s convertible
preferred equity certificates. These securities paid a 7% dividend and were to
be converted into .00114% of the outstanding common stock of Hemispherx S.A.
upon the earlier of the completion of an initial public offering on a European
stock exchange or September 30, 2003. However, at our request, on January 9,
2003, Esteve agreed to convert the preferred equity certificates into shares of
our common stock and, on March 13, 2003, we issued 347,445 shares of our common
stock to Provesan SA, an affiliate of Esteve, in exchange for the 1,000,000
Euros of convertible preferred equity certificates owned by Esteve. We agreed to
register the shares issued to Provesan SA and we have registered these shares
for public sale.

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 anticipated gross 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 will be released to us if,
and only if, we acquired ISI's facility with in a set timeframe. Although we
have not acquired ISI's facility yet, these funds were released (see the
discussion below). 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. Pursuant to the terms and conditions of the March Debentures, we have
pledged all of our assets,

other than our intellectual property, as collateral and are subject to comply
with certain financial and negative covenants, which include but are not limited
to the repayment of principal balances upon achieving certain revenue
milestones.

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 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 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. 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.

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. The investors were the
holders of the March Debentures. 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 is 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.

The July 2008 Warrants received by the investors are to acquire at any
time through July 31, 2008 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 $1.722 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
and exercise of the 2008 Warrants. These shares are registered for public sale
in this prospectus. 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.

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 in this prospectus.

By agreement with Cardinal Securities, LLC, for general financial advisory
services and in conjunction with the July 2003 private debenture offering and
the March 2003 private debenture offering on substantially the same terms to the
same investors, 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
425,000 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 and 200,000 are
exercisable at $2.50 per share. The $1.74 warrants expire on July 10, 2008 and
the other warrants expire on March 12, 2008. By agreement with Cardinal, we have
registered 255,000 shares for public sale in this prospectus. Excluded from this
registration statement, by agreement with Cardinal are the 200,000 shares
issuable upon exercise of the $2.50 warrants. Cardinal agreed to permit us to
free up the shares reserved for issuance upon exercise of these 200,000 warrants
to cover shares issuable upon conversion of the Debentures.

On March 11, 2003, we acquired from Interferon Sciences, Inc. ("ISI"),
ISI's inventory of ALFERON N Injection(R), a pharmaceutical product used for
intralesional treatment of refractory or recurring external genital warts in
patients 18 years of age or older, 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 have registered these shares for public sale in this prospectus.

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, ISI
requests that we honor the guarantee, we will be obligated to reacquire ISI's
remaining guaranteed shares and pay the ISI $1.59 per share. Please see "We have
guaranteed the value of a number of shares issued and to be issued as a result
of our acquisition of assets from Interferon Sciences. If our share price is not
above $1.59 per share 12, 18 or 24 months after the dates of issuance of the
guaranteed shares, our financial condition could be adversely affected" in "Risk
Factors," above.

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 have guaranteed the market
value of all but 62,500 of these shares on terms substantially similar to those
for the initial acquisition of the ISI assets. The termination date for these
guarantees is 18 months after the date of issuance of the guaranteed shares to
GP Strategies, 24 months after the date of issuance and delivery of the
additional 487,028 guaranteed shares to ISI and 12 months after the date of
issuance of the guaranteed shares to the American National Red Cross.

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 registered the foregoing shares for public sale in this prospectus.

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.

(dollars in thousands)
Obligations Expiring by Period
Contractual Obligations -------------------------------------
Total 2003 2004-2005 2006-2007
----- ---- --------- ---------
Operating leases $1,063 $ 279 $ 526 $ 258
====== ====== ====== ======
Total $1,063 $ 279 $ 526 $ 258
====== ====== ====== ======
Convertible Debentures
March 12, 2003 $5,426,000 6% Senior
Convertible Debenture $3,396 $ 750 $2,646 $ 0
====== ====== ====== ======
Total $3,396 $ 750 $2,646 $ 0
====== ====== ====== ======

For information concerning the issuances of March 12, 2003 6% Senior
Convertible Debenture see notes 9 and 16 to our financial statements for the six
months ended June 30, 2003 contained elsewhere in this prospectus.

In connection with the debenture agreements, we have outstanding letters
of credit of $1 million to be used as additional collateral.

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). This
Interpretation elaborates on the existing disclosure requirements for most
guarantees such as standby letters of credit. It also clarifies that at the time
a company issues a guarantee, the company must recognize an liability for the
fair market value of the obligations it assumes under that 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.
The adoption of Interpretation No. 45 did not have an impact on our consolidated
results of operations, financial positions, or cash flows.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
statements No. 4, 44 and 64, Amendment of FASB statement No. 13, and Technical
Corrections" ("SFAS 145"). FASB No. 4 required that gains and losses from
extinguishment of debt that were included in the determination of net income be
aggregated and, if material, be classified as an extraordinary item, net of
related income tax. Effective January 1, 2003, pursuant to SFAS 145, the
treatment of debt is to be included in "Other Income" in the Financial
Statements. Our adoption of SFAS 145 did not have an impact on our financial
position and results of operations.

In January 2003, FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities". ("Interpretation No. 46"), which 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
provision of Interpretation No. 46 are applicable no later than July 1, 2003. We
do not expect this Interpretation to have an effect on the consolidated
financial statements.

In May 2003, FASB issued Statement of Financial Accounting Standards
("SFAS") No. 150 "Accounting for Certain Financial Instruments with
Characteristics of Both Liability and Equity". This

Statement establishes standards for how an issuer classifies and measures in
statement of financial position certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is with its scope as a liability (or assets
in some circumstances) because that financial instrument embodies an obligation.
This statement shall be effective for finical instruments entered into or
modified after May 31, 2003, and otherwise shall be effective at the beginning
of the first interim period beginning after June 15, 2003, except for mandatory
redeemable financial instruments of a nonpublic entity. We do not expect this
Interpretation to have an material effect on the consolidated financial
statements.

Disclosure About Off-Balance Sheet Arrangements

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

In addition, as of June 30, 2003, we have $133,333 in restricted cash
under other letter of credit agreements required by our insurance carrier. We
have 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. As of July 31,
2003, only approximately 104,000 shares of our authorized shares of Common Stock
were not issued or reserved for issuance. This does not include 3,006,650 shares
that had been reserved for issuance pursuant to warrants and options owned by
Dr. Carter and 200,000 shares that had been reserved for issuance pursuant to
warrants owned by the placement agent. Dr. Carter and the placement agent have
agreed that they will not exercise their warrants or options unless and until
our stockholders approve an increase in our authorized shares of common stock.
One of the proposals for the annual meeting of our stockholders to be held in
September 2003 is 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 cannot assure you that the Proposal will be approved. Unless and
until we are able to increase the number of authorized shares of Common Stock,
our ability to raise funds through the sale of Common Stock or instruments that
are convertible into or exercisable for Common Stock will be severely
restricted.

In addition, for Dr. Carter's waiver of his right to exercise certain
options and warrants prior to approval of the Proposal and for the possible
diminution in value of these Options that could result in the event that the
Proposal is not approved, we have agreed to compensate Dr. Carter. Although the
specific method of determining such potential loss has not been determined, it
is anticipated that, in the event that the Proposal is not approved, a committee
of our independent directors, with the assistance of an independent valuation
firm, will determine the monetary value of his warrants and options. The
committee will then give Dr. Carter the choice of turning in his warrants and
options for an amount equal to this determined value (the "Value Payment") or to
continue to hold his warrants and options. If Dr. Carter elects to continue to
hold these securities, the Committee, again with the assistance of the
independent valuation firm, will determine a formula pursuant to which Dr.
Carter would receive cash ("Stock Appreciation Payments") rather than shares of
common stock should he exercise any of the warrants or options prior to the
time, if ever, adequate authorized but unissued and unreserved shares become
available for issuance upon exercise of his warrants and options. In addition,
if the Proposal does not pass, we have agreed to pledge some of our intellectual
property as collateral for the Value Payment or the Stock Appreciation Payments.
The specific intellectual property to be used as collateral, the valuation of
such collateral and the method of sale or license of such intellectual property
in the event that sale of the collateral is required, would be determined by the
committee, with the assistance of the independent valuation firm.

Critical Accounting Policies

Financial Reporting Release No. 60., which was recently released by the
Securities and Exchange Commission, requires all companies to include a
discussion of critical accounting policies or method 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 its respective capitalized cost. In addition,
management's review addresses whether each patent continues to fit into our
strategic business plans.

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.

Quantitative And Qualitative Disclosures About Market Risk

Excluding obligations to pay us for various licensing related fees, we had
approximately $4,659,000 in cash, cash equivalents and short-term investments at
June 30, 2003. 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 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 emerged multi-drug resistant HIV, and for the induction of
cell mediated immunity in HIV patients that are under control using potentially
toxic drug cocktails.

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. This acquisition not withstanding, our primary
focus remains the development of Ampligen(R) for treating ME/CFS and HIV
diseases.

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 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 is protected by more than 350
patents worldwide with over 60 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. 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 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 Unites 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 hospitalization and medical care, 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 late 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, deemed as Amp 516, is to evaluate the safety and efficacy of
Ampligen(R) as a treatment for ME/CFS. As of September 4, 2003 we had 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 has enrolled over 230 ME/CFS patients and is now
fully enrolled. The patients complete a stage I, forty week, double-blind,
randomized, placebo-controlled portion of the clinical trial and then move into
the stage II or the open label treatment portion of the clinical trial. To date
there have been no serious adverse events reported related to the study
medication. The next stage in our program is 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 makes this goal impractical.

Although more potent second generation drugs are under development that
target the reverse transcriptase and protease genes as well as new HIV targets,
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 is suppressed before it can inflict damage to the immune system of
the patient. Based on recent publications (AIDS 2001,15: E19-27 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.

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 studies in
peer-reviewed scientific journals. 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.
We expect enrollment in this clinical trial to accelerate as we recruit more
investigators. The length of this stage of the trial will be determined by an
analysis of the interim results.

Hepatitis C Virus (HCV)

We currently have an informal arrangement with the California Institute of
Molecular Medicine ("CIMM") to collaborate and assist their efforts to replicate
human Kupffer's cells obtained from HCV infected patients. This proprietary CIMM
approach involves the in vitro growth of hepatic macrophages (called Kupffer's
cells) from the failing liver of a patient and reinfusion of the in vitro grown
Kupffer's liver cells into the same patient. The ability to grow HCV in long
term culture that would allow the testing of, potential anti-HCV drugs in vitro
would permit us to conduct and obtain valuable research data in using
Ampligen(R) to treat HCV prior to engaging clinical trials. This would not raise
the question of immunological incompatibility. Testing by CIMM indicates that
their process of Kupffers's cell application in vitro is reproducible (>95%
efficacy) from individual patients. CIMM is also developing a process for
maintaining and propagating Kupffer's cells reproducibly in defined cell
cultures from fine needle liver aspirates from living human volunteers with
potential as patients with failing liver due to a variety of etiologies.

In January 2001 CIMM filed a Notice of Invention with the U.S. Patent
Office. As a result, a patent application entitled "Replication of Human
Kupffer's cells obtained from HCV Infected Patients By Fine Needle Biopsy
Technique", was submitted. This method can potentially salvage critically needed
liver function without major surgery or aggressive medical intervention.

The immediate and potential market for the Kupffer's maintenance and
propagation techniques will be more than 14,000 people in the U.S. actively
seeking a liver transplant. Additional thousands are progressing towards a
failing liver and will soon need transplantation or a successful alternative
method to restore function. Several hundred thousand who have alcoholic
cirrhosis may also benefit from the proprietary process. Medical costs of a
liver transplant are approximately $300,000 and are far beyond the financial
reserves of most families. Reimbursement of these costs by Health Insurance
carriers is problematic at best. We have a 30% equity position in CIMM, which
recently opened a new state-of-the-art research laboratory in Ventura,
California.

We are also 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
late 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 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% 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 and government laboratories for
application to chronic viral and immunological disorders. Research and
development of Oragen(TM) is on hold at this time.

Other Diseases

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.

Other Antiviral/ Immunologic Treatments

After the terrorist acts of September 11, 2001 and the resultant
International concern for bio-terrorism (including smallpox), we filed a
regulatory application with the FDA for permission to conduct a clinical trial,
in the event of smallpox dissemination, using Ampligen(R) therapy as a
treatment. This proposed study was based on an earlier peer reviewed laboratory
study from Yale University in Partnership with the U.S. Military Command at Fort
Detrick, the U.S. Biological defense Specialty Research Center. The result of
this study indicated Ampligen(R) to be promising in a laboratory model of
smallpox.

Based on these and other recent positive results (see below), we have
retained FDA regulatory counsel in Washington, D.C., to advise us on a
commercialization path and to arrange relevant meetings with the FDA.

During the thirty day review period of our clinical application by the
FDA, we became aware of a new ongoing laboratory study of Ampligen(R) in
smallpox at the Riga Medical Institute in Belgium. Our Medical Director had
authorized the Institute to use samples of Ampligen(R) for research purposes
only. The result of this study became available in early 2003. In the interim,
we withdrew our FDA application to review the results of the Belgium study and
incorporate such data into our clinical study design and protocol before
resubmission. Positive new results on Ampligen(R) were thereafter reported by
branches of the U.S. government using animal models of smallpox and new
guidelines on bio-terrorism approvals were established which mandated only
animal studies for full commercialization.

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 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
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 efficacy in laboratory studies. Natural alpha
interferon is also glycosylated (partially covered with sugar molecules). Such
glycosylation is not present on the currently 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 its use 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,

(2) New knowledge about the competitive products in the interferon arena
that we believe imply 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
dramatically 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(R)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.
and is also approved for sale in Mexico, Germany, Singapore and Hong-Kong.

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. This will be done in existing partnership with our strategic partners
including Gentiva Health Services, Biovail Corporation and Esteve Laboratories,
all of which have proven marketing expertise.

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 are to be acquired upon
the closing of the second ISI agreement, which is anticipated to occur in
September or October 2003.

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.

ALFERON N Gel

ALFERON N GEL is a topical (dermatological) Natural Alpha Interferon
preparation in a hydrophilic gel base. This product is still in research and
development.

ALFERON LDO

ALFERON LDO is the 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.

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. In addition, 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 number ME/CFS patients were treated during 2002 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 has 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). 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 continue negotiations with other prospective partners for the marketing
and distribution of Ampligen(R) in other European territories on terms similar
to the Esteve agreement.

MANUFACTURING

We outsource 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. Two manufacturers in the United States are available to
provide the polymers if Ribotech is unable to supply our needs. Sourcing our
needs from other 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
in manufacturing Ampligen(R). The licensing agreement with Bioclones presently
includes South Africa, South America, Ireland, New Zealand and the United
Kingdom.

We currently occupy and use the New Brunswick, New Jersey laboratory and
production facility owned by ISI. We are in the process of acquiring title to
these facilities pursuant to our second asset acquisition agreement with ISI
(see "Management's Discussion and Analysis of Financial Condition and Results of
Operations; Liquidity And Capital Resources" for more details). This facility is
approved by the FDA for the manufacture of Alferon N Injection(R).

Good Manufacturing Practices (GMP) 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 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
Gentiva Health Services

(formerly Olstein 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 area. 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. In South America, the United Kingdom,
Ireland, Africa, Australia, Tasmania, New Zealand, and certain other countries
and territories, we contemplate marketing our product through our relationship
with Bioclones pursuant to the Bioclones Agreement.

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/GYNSs, 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 plan to engage a
contract sales organization in order to build up a nationwide network of
dedicated representatives in the U.S. and Europe. This will be done while
working with our strategic partners including Gentiva Health Services, Biovail
Corporation and Esteve Laboratories.

For more information about our arrangements with Gentiva Health Services,
Bioclones, Esteve and Biovail. See "Research And Development/Collaborative
Agreements" below.

On August 18, 2003, we entered into a sales and marketing agreement with
Engitech, Inc. to distribute Alferon N Injection(R) on a nationwide basis.
Engitech, Inc. is to develop and implement marketing plans including extensive
scientific and educational programs for use in marketing Alferon N Injection(R).

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 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 September 4, 2003, 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. 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 ISI
laboratory and production facility in New Brunswick, New Jersey, which we are
currently using and are in the process of acquiring title to, 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, 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; Capetown, 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 Gentiva to
develop certain marketing and distribution capacity for Ampligen(R) in the
United States. Gentiva is one of the nation's largest home health care companies
with over 400 offices and sixty thousand caregivers nationwide. Pursuant to the
agreement, Gentiva 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. Gentiva 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 the
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 Gentiva or
another major drug distributor. There were no initial fees and subsequent fees
paid under this agreement total $59,000 for services performed.

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 and government 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. 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 their
current 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 out 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 hepatitis C
and HIV viruses. 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). The agreement is terminable by either party if Ampligen(R) is
withdrawn form 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
$16,862,000 in research and development, of which approximately $4,946,000 was
expended in the year ended December 31, 2002. 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 September 4, 2003 we had 32 personnel working on the development of
Ampligen(R) consisting of 16 full time employees, five regulatory/research
medical personnel on a part-time basis, and 11 clinical investigator's. Part
time parties are paid on a per diem or monthly basis. 22 personnel are engaged
in our research, development, clinical, and manufacturing effort. 10 of our
personnel perform regulatory, general administration, data processing, including
bio-statistics, financial and investor relations functions.

In addition to the foregoing personnel, on March 11, 2003, pursuant to our
agreement with ISI, we added personnel from ISI to our payroll consisting of
five part-time and 12 full-time employees.

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.

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 of
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 its requirements,
for planned clinical trials and treatment protocols, through 2004 and possibly
longer after which time it may need to increase its 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 owned by ISI. We are in the process of acquiring title to
these facilities pursuant to our second asset acquisition agreement with ISI.
This acquisition consists 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 production space, 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. 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 March 2003, the law firm of Schnader, Harrison, Segal & Lewis, LLP
filed a complaint in the Court of Common Pleas of Philadelphia County against us
for alleged legal fees in the sum of $65,051. We believe the claim is without
merit and we are defending the claim.

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. 65 Chairman, Chief Executive Officer, and
President

Robert E. Peterson 66 Chief Financial Officer
David R. Strayer, M.D. 57 Medical Director, Regulatory Affairs
Carol A. Smith, Ph.D. 51 Director of Manufacturing and Process
Development

Richard C. Piani 76 Director
William M. Mitchell, M.D. 68 Director
Ransom W. Etheridge 64 Director and Secretary
Eraj Kiani 58 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 Hemispherx in
1978, and has served as: (a) Hemispherx's Chief Scientific Officer since May
1989; (b) the Chairman of Hemispherx's Board of Directors since January 1992;
(c) Hemispherx's Chief Executive Officer since July 1993; (d) Hemispherx's
President since

April, 1995; and (e) a director since 1987. From 1987 to 1988, Dr. Carter served
as Hemispherx's 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
Hemispherx's 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.

CAROL A. SMITH, Ph.D. 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 of Hemispherx 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 Hemispherx in 1993, with respect to
general business strategies for Hemispherx's 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 of Hemispherx since October 1997,
and presently serves as our Secretary. Mr. Etheridge first became associated
with Hemispherx in 1980 when he provided consulting services to Hemispherx and
participated in negotiations with respect to Hemispherx's 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. has been a director of Hemispherx 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 a director of
Hemispherx from 1987 to 1989.

IRAJ E. 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.

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. The principal functions of the Audit
Committee are to recommend our independent auditors, review the scope of their
engagement, consult with the auditors, review the results of their examination,
act as liaison between the Board of Directors and the auditors and review
various company policies, including those relating to accounting and internal
controls.

Executive Committee. The Executive Committee is composed of William A.
Carter, Chief Executive Officer and President, Ransom W. Etheridge, Secretary
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 Ransom
W. Etheridge, Secretary and director, and Richard C. Piani, director. The
Compensation Committee makes recommendations concerning salaries and
compensation for employees of and consultants to Hemispherx.

Compensation of Directors

The existing compensation package was put in place in 2000. Board member
compensation consists of an annual retainer of $35,000 plus $1,000 per meeting
attended. Committee chairmen each receive an additional retainer of $5,000 per
year and committee members each receive an additional retainer of $3,000 per
year. All non-employee directors received some compensation in 2001 for special
project work performed on our behalf. 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, 2002, 2001 and
2000 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

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

William A. Carter 2002 $468,830 -- (8)1,000,000 $25,747
Chairman of the 2001 (4) 456,608 -- (2) 386,650 22,917
Board and CEO 2000 (4) 539,620 -- (5) 100,000 17,672

Robert E. Peterson 2002 $151,055 -- (8) 200,000 --
Chief
Financial 2001 146,880 -- (3) 40,000 --
Officer 2000 145,944 -- -- --

David R. Strayer, M.D. 2002 $178,594 -- (8) 50,000 --
Medical Director 2001 174,591 -- (7) 10,000 --
2000 (6) 172,317 -- -- --

Carol A. Smith, Ph.D. 2002 $128,346 -- (8) 20,000 --
Director of 2001 124,800 -- (7) 10,000 --
Manufacturing 2000 124,800 -- -- --

----------------------
(1) Consists of insurance premiums paid by Hemispherx 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 a bonus of $90,397 paid in 2000. 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 2000 and 2001, and $82,095 in 2002.

(5) Represents warrants to purchase common stock exercisable at $6.25 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
2000, 2001 and 2002.

(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.

The following table sets forth certain information regarding stock
warrants granted during 2002 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 APPRECIATION FOR WARRANTS TERM
WARRANTS FISCAL YEAR EXERCISE PRICE EXPIRATION ------------------------------
NAME GRANTED (1) 2002(2) PER SHARE (3) DATE 5% (4) 10%(4)
------------------------------------------------------------------------------------------------------------------------------

Carter, W.A. 1,000,000 61.6% $2 8/13/07 $1,879,500 $1,969,000
------------------------------------------------------------------------------------------------------------------------------
Peterson, R. 200,000 12.3% $2 8/13/07 $375,900 $393,800
------------------------------------------------------------------------------------------------------------------------------
Smith, C. 20,000 1.2% $2 8/13/07 $37,590 $39,380
------------------------------------------------------------------------------------------------------------------------------
Strayer, D. 50,000 3.1% $2 8/13/07 $93,975 $98,450
------------------------------------------------------------------------------------------------------------------------------

(1) Warrants vest over a period ranging from two to four years.

(2) Total warrants issued to employees in 2002 were 1,622,000.

(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, 2002 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 In-the-Money-
Options at Fiscal Year End Numbers Options At Fiscal Year
End(1) Dollars

Name Shares Value Exercisable Unexercisable Exercisable Unexercisable
Acquired on Realized ($)
Exercise (#)
-------------------------------------------------------------------------------------------------------------------------------

William Carter -- -- 3,552,044(2) 753,334(3) $209,200 $97,500

Robert Peterson -- -- 300,416(4) 103,334(5) 6,300 6,300

David Strayer -- -- 101,666(6) 28,334(7) 3,250 3,250

Carol Smith -- -- 28,457(8) 13,334(9) 1,300 1,300

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

(1) Computation based on $2.13, the December 31, 2002 closing bid price for
the common stock on the American Stock Exchange.

(2) Consists of (i) 250,000 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 to purchase common stock at $8.00 per share expiring September
17, 2004 and 6,666 stock option exercisable at $8.00 per share expiring on
January 3, 2011. Also include 2,768,728 warrants and options held in the
name of Carter Investments, L.C. of which W. A. Carter is 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 January 1,
2008, (v) 465,000 warrants exercisable at $1.75 expiring on June 3, 2005,
(vi) 1, 400,000 warrants exercisable at $3.50 per share expiring on
October 16, 2004 and 73,728 stock options exercisable at $2.71 per share
until exercised.

(3) Consists of (i) 750,000 warrants exercisable at $2.00 per share expiring
on August 13, 2007 and (ii) 3,334 start options exercisable at $4.03 per
share expiring on January 3, 2011.

(4) Consists of (i) 6,666 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) 100,000 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) 100,000 warrants exercisable at $2.00 per share expiring
on August 13, 2007 and (ii) 3,334 stock options exercisable at $4.03 per
share expiring on January 3, 2011.

(6) Consists of (i) 25,000 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) 6,666 stock options exercisable at
$4.08 expiring on January 3, 2011 and (iv) 20,000 stock options
exercisable at $3.50 per share expiring on January 22, 2007.

(7) Consists of 25,000 warrants exercisable at $2.00 per share expiring on
August 13, 2007 and 3,334 stock options exercisable at $4.03 per share
expiring on August 13, 2007.

(8) Consists of (i) 10,000 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) 6,666 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.

(9) Consists of 10,000 warrants exercisable at $2.00 per share and 3,334 stock
options exercisable at $4.03 per share expiring on January 3, 2004.

Equity Compensation Plan Information

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, 2002.

Number of Weighted-average Number of securities
Securities to be Exercise price of Remaining available
issued upon outstanding For future issuance
exercise of Options, warrants under equity
outstanding And rights compensation plans
options, warrants (excluding securities
Plan Category And rights Reflected in column

(a) (b) (c)
Equity compensation plans approved
by security holders: 294,665 $ 3.57 258,293

Equity compensation plans not approved by -- -- --
security holders:
------- ------ -------
Total 294,665 $ 3.57 258,293

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, which provided for his employment until May 8, 2004 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 amended and restated engagement agreement with Robert
E. Peterson dated April 1, 2001 which provides for Mr. Peterson's employment as
our Chief Financial Officer until December 31, 2003 at an annual base salary of
$155,988 per year, subject to annual cost of living increases. In addition, Mr.
Peterson shall receive bonus compensation upon Federal Drug Administration
approval of Ampligen based on the number of years of his employment by us up to
the date of such approval. During 2002, Mr. Peterson also received 200,000
warrants to purchase shares of common stock with an exercise price of $2.00.

1993 Stock Option Plan

Our 1993 Stock Option Plan ("1993 Plan"), provides for the grant of
options for the purchase of up to an aggregate of 138,240 shares of common stock
to our employees, directors, consultants and others whose efforts are important
to the success of Hemispherx. The 1993 Plan is administered by the Compensation
Committee of the board of directors, which has complete discretion to select the
eligible individuals to receive and to establish the terms of option grants. The
1993 Plan provides for the issuance of either non-qualified options or incentive
stock options, provided that incentive stock options must be granted with an
exercise price of not less than fair market value at the time of grant and that
non-qualified stock options may not be granted with an exercise price of less
than 85% of the fair market value at the time of grant. The number of shares of
common stock available for grant under the 1993 Plan is subject to adjustment
for changes in capitalization. This plan terminated as of July 7, 2003. No
options were granted under the 1993 Plan.

1992 Stock Option Plan

Our 1992 Stock Option Plan ("1992 Plan"), provides for the grant of
options for the purchase of up to an aggregate of 92,160 shares of common stock
to our employees, directors, consultants and others whose efforts are important
to the success of Hemispherx. The 1992 Plan is administered by the Compensation
Committee of the board of directors, which has complete discretion to select the
eligible individuals to receive and to establish the terms of option grants. The
1992 Plan provides for the issuance of either non-qualified options or incentive
stock options, provided that incentive stock options must be granted with an
exercise price of not less than fair market value at the time of grant and that
non-qualified stock options may not be granted with an exercise price of less
than 50% of the fair market value at the time of grant. The number of shares of
common stock available for grant under the 1992 Plan is subject to adjustment
for changes in capitalization. This plan expired as of December 3, 2002. No
options were granted under the 1992 Plan.

1990 Stock Option Plan

Our 1990 Stock Option Plan, as amended ("1990 Plan"), provides for the
grant of options to employees, directors, officers, consultants and advisors of
Hemispherx 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 June 30, 2003, options to acquire an
aggregate of 213,451 shares of the common stock 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 full time employees of Hemispherx 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
Hemispherx contributions will vest over one year. In 2002 Hemispherx provided
matching contributions to each employee for up to 6% of annual pay for a total
of $38,000 for all employees.

PRINCIPAL STOCKHOLDERS

The following table sets forth as of September 4, 2003, 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
September 4, 2003. 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 September 4, 2003, 57,080,581 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 Shares Beneficially % Of Share
of Beneficial Owner Owned Beneficially Owned
--------------------------------------------------------------------------------
William A. Carter, M.D. 4,189,607(1) (9.2%)

Robert E. Peterson 300,416(2) *

Ransom W. Etheridge 214,316(3) *
2610 Potters Rd.
Virginia Beach, VA 23452

Richard C. Piani 196,747(4) *
97 Rue Jeans-Jaures
Levaillois-Perret
France 92300

William M. Mitchell, M.D. 175,640(5) *
Vanderbilt University
Department of Pathology
Medical Center North
21st and Garland
Nashville, TN 37232

David R. Strayer, M.D. 87,246(6) *

Carol A. Smith 28,457(7) *

Iraj-Eqhbal Kiani 12,000(8) *
Orange County Immune Institute
18800 Delaware Street
Huntingdon Beach, CA 92648

All directors and executive
officers as a
group (8 persons) 5,204,429 (13.3%)
------------------------
* 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, 2003; (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 April 8, 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 6,666 shares of common stock at $4.03 per share
and expiring on January 3, 2011 (xiv) 250,000 warrants exercisable $2.00
per share on August 13, 2007 and 637,560 shares of common stock.

(2) Includes (i) 13,750 options to purchase common stock at an average
exercise price of $3.50 per share, expiring on January 22, 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 April 14, 2006
(iv) 30,000 warrants to purchase common stock at $5.00 per share, expiring
on February 28, 2009 (v) options to purchase 6,666 shares at $4.03 per
share that expires on January 3, 2011 (vi) 100,000 warrants exercised at
$2.00 per share expiring on November 13, 2007 and (v) 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 and 44,316 shares of common stock.

(4) Includes (i) 20,000 warrants to purchase 25,000 shares of common stock at
$6.50 per share (ii) warrants to purchase 25,000 shares of common stock at
$6.50 per share (iii) 25,000 warrants to purchase at $8.00 per share, all
expiring on September 17, 2004; (iv) 100,000 warrants exercisable at $2.00
per share expiring on August 13, 2007, (v) 8,847 shares of common stock
owned by Mr. Piani (vi) 12,900 shares of common stock owned jointly by Mr.
And Mrs. Piani; and (vii) 5,000 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 on August 13, 2007 and
13, 640 shares of common stock.

(6) 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) 2,500 stock options exercisable at $4.03 per share and
expiring on January 3, 2011 and; (iv) 14,746 shares of common stock.

(7) 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, 10,000 warrants exercisable at $2.00 per share expiring
in August 13, 2007 and options to purchase 6,666 shares of common stock at
$4.03 per share expiring on January 3, 2011.

(8) Consist s 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 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. Richard C. Piani, another of our directors, lives in
Paris, France and assists our European subsidiary in dealings with medical
institutions and the European Medical Evaluation Authority. William M. Mitchell,
M.D., another of our directors, works 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 directors were paid an
aggregate of $170,150 in the year 2002. No individual director was paid in
excess of $60,000.

William A. Carter, our Chief Executive Officer, received an aggregate of
$12,486 in short term advances in 2002 which were repaid as of December 31,
2002. All advances bear interest at 6% per annum. We loaned $60,000 to Ransom W.
Etheridge, a director in November, 2002 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 $33,450 to Carter Realty for the rental of property used by us for
business purposes at various times in 2002. The property is owned by others and
managed by Carter Realty. Carter Realty is owned by Robert Carter, the brother
of William A. Carter.

SELLING STOCKHOLDERS

We are registering all 7,891,789 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
September 4, 2003, based on each selling stockholder's ownership of Debentures
and warrants, and assumes the conversion of all the Debentures, the payment of
all interest in stock and the exercise of all warrants. 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 stockholder, the second column lists the number of shares of
common stock beneficially owned by the selling stockholder as of September 4,
2003, based

on each selling stockholder's ownership of shares of common stock, and does not
assume the conversion of any of the Debentures, the exercise of any warrants 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 7,891,789 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 agreement with them, in which we agreed to
register the resale of 135% of (w) the number of shares of common stock issuable
upon conversion of the Debentures, plus (x) the number of shares of common stock
issuable upon exercise of the related July 2008 Warrants, plus (y) an estimate
of the number of Interest Shares that may be issued to the selling stockholders
as interest payments on the Debentures (assuming interest is paid exclusively in
Interest Shares over the full term of the Debentures, rather than in cash), plus
(z) the number of shares of common stock issuable upon exercise of the June 2008
Warrants. As we stated above, the number of shares that will actually be issued
may be more or less than the 7,891,789 shares being offered by this prospectus.

Under the terms of the Debentures, the related July 2008 Warrants and the
June 2008 Warrants, no selling stockholder who owns Debentures, July 2008
Warrants or June 2008 Warrants may convert such 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 the Debentures which have not been
converted and upon exercise of the related July 2008 Warrants and the June 2008
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 2,471,432(1) 2,951,500 --
---------------------------------------------------------------------------------------------------------
Leonardo L.P. 2,676,071(2) 2,951,500 --
---------------------------------------------------------------------------------------------------------
Interferon Sciences, Inc. 487,028 487,028 --
---------------------------------------------------------------------------------------------------------
The American National Red Cross 314,465 314,465 --
---------------------------------------------------------------------------------------------------------
GP Strategies Corporation 267,296 267,296 --
---------------------------------------------------------------------------------------------------------
Cardinal Securities LLC 455,000(3) 255,000(3) --
---------------------------------------------------------------------------------------------------------
Bridge Ventures, Inc. 430,160(4) 325,000
---------------------------------------------------------------------------------------------------------
Sharon Will 445,000(5) 340,000
---------------------------------------------------------------------------------------------------------

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

(1) Represents (a) up to 1,267,757 shares of common stock issuable upon
conversion of the Debentures, (b) up to 253,551 shares of common stock
issuable upon exercise of the July 2008 Warrants, (c) up to 500,000 shares
of common stock issuable upon exercise of the June 2008 Warrants, and (d)
up to 435,219 shares issuable upon conversion of the Debentures due
January 2005 and (e) 14,905 shares. 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
and Thomas W. Strauss are the sole managing members of C4S& Co., LLC, the
sole managing member of Ramius Capital. As a result, Messrs. Cohen, Stark
and Strauss may be considered beneficial owners of any shares deemed to be
beneficially owned by Ramius Capital. Messrs. Cohen, Stark and Strauss
disclaim beneficial ownership of these shares.

(2) Represents (a) up to 1,267,757 shares of common stock issuable upon
conversion of the Debentures, (b) up to 253,551 shares of common stock
issuable upon exercise of the July 2008 Warrants (c) up to 500,000 shares
of common stock issuable upon exercise of the June 2008 Warrants, (d) up
to 517,777 shares issuable upon conversion of the Debentures due January
2005 and (e) 136,986 shares. 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) In the second column, represents (a) 30,000 shares of common stock issued
to Cardinal, (b) up to 225,000 shares of common stock issuable upon
exercise of warrants owned by Cardinal; 112,500 of which are exercisable
at a price of $1.74 per share and the other 112,500 are exercisable at a
price of $2.57 per share, and (c) 200,000 shares of common stock issuable
upon exercise of additional warrants at an exercise price of $2.50 per
share. The third column consists of all of the foregoing shares other than
the 200,000 shares listed in subparagraph c. The shareholders of Cardinal
are H. David Coherd, Robert Rosenstein and Scott Koch.

(4) In the second column, represents 325,000 shares issuable upon exercise of
warrants exercisable at $1.75 per share expiring on June 30, 2005 and
95,160 shares issuable upon exercise of warrants exercisable at $3.50
expiring on October 15, 2004 owned of record by Bridge Ventures and 10,000
shares issuable upon exercise of warrants exercisable at $10.00 per share
expiring on October 29, 2003 owned by Harris Freedman. The third column
excludes the 95,160 shares at $3.50 per share and the 10,000 shares at
$10.00 per share. The principal shareholders, officers and directors of
Bridge Ventures are Harris Freedman and Annelies Freedman.

(5) In the second column, represents 340,000 shares issuable upon exercise of
warrants exercisable at $1.75 per shares expiring on June 30, 2005 owned
of record by Sharon Will and 105,000 shares issuable upon exercise of
warrants exercisable at $3.50 per share expiring on October 15, 2004 owned
by SAGGI Capital Corp. Sharon Will is the sole shareholder, officer and
director of SAGGI. The third column excludes the shares issuable upon
exercise of the SAGGI warrants.

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 below.

HOW THE SECURITIES 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. 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) 50,000,000 shares of common
stock, $.001 par value; and (ii) 5,000,000 shares of preferred stock, .01 par
value. 37,080,581 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 9.2% 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 P.C., 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 Siedman, LLP, independent certified 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, 2002 and 2001 and for each of the years in the three
year period ended December 31, 2002 included in this prospectus have been so
included in reliance on the report (which contains an explanatory paragraph
relating to substantial doubt about Interferon Sciences, Inc. ability to
continue as a going concern) of Eisner LLP, independent auditors, 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 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 Period Six F-2
Months Ended June 30, 2003
for Hemispherx Biopharma, Inc.
and subsidiaries ("Hemispherx")
(unaudited)

Financials for the Year Ended F-14
December 31, 2000, 2001, and 2002
for Hemispherx

Financials for the Year Ended F-46
December 31, 2001 and 2002 for
Interferon Sciences, Inc. and
subsidiaries ("ISI")

Unaudited Proforma Financial F-75
Statements Related to the
Acquisition of Certain Assets of ISI
by Hemispherx

F-1

HEMISPHERX BIOPHARMA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)

December 31, June 30,
2002 2003
----------- ----------
(Unaudited)

ASSETS

Current assets:

Cash and cash equivalents $ 2,256 $ 4,659
Short Term investments 555 --
Inventory -- 2,167
Other receivables 1,507 52
Prepaid expenses and other current assets 71 239
--------- ---------
Total current assets 4,389 7,117

Property and equipment, net 155 131
Patent and trademark rights, net 995 1,086
Investments in unconsolidated affiliates 408 408
Deferred acquisition costs -- 1,068
Deferred financing costs -- 382
Other assets 93 51
--------- ---------
Total assets $ 6,040 $ 10,243
========= =========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

Accounts payable $ 786 $ 1,404
Accrued expenses 678 300
--------- ---------
Total current liabilities 1,464 1,704
Long-Term Debt-net of current portion -- --

Commitments and contingencies:

Minority interest in subsidiary 946 --
Redeemable Common Stock -- 1,600

Stockholders' equity:

Common stock 33 36
Additional paid-in capital 107,155 111,332
Accumulated other comprehensive income 35 --
Treasury stock - at cost (4,520) (50)
Accumulated deficit (99,073) (104,379)
--------- ---------
Total stockholders' equity 3,630 6,939
--------- ---------
Total liabilities and stockholders' equity $ 6,040 $ 10,243
========= =========

See accompanying notes to condensed consolidated financial statements.

F-2

HEMISPHERX BIOPHARMA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)

For the Six months ended
June 30,
-------------------------
2002 2003
--------- ---------
(Unaudited) (Unaudited)

Revenues:

Sales of product, net $ -- $ 79
Clinical treatment programs 184 81
License fee income 563 --
------------ ------------
747 160

Costs and expenses:

Production/Cost of Gross sold -- 155
Research and development 2,538 1,728
General and administrative 1,680 1,505
------------ ------------
Total cost and expenses 4,218 3,388

Interest and other income 67 51
Interest and related expenses -- (2,129)
Equity in loss of unconsolidated affiliate (40) --
Loss on investment due to impairment (678) --
------------ ------------

Net loss $ (4,122) $ (5,306)
============ ============

Basic and diluted loss per share $ (.13) $ (.16)
============ ============

Basic and diluted weighted
average common shares outstanding 32,079,327 32,872,905
============ ============

See accompanying notes to condensed consolidated financial statements.

F-3

HEMISPHERX BIOPHARMA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

For the Six months ended
June 30,
------------------------
2002 2003
-------- ---------
(Unaudited) (Unaudited)

Cash flows from operating activities:

Net loss $(4,122) $(5,306)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation of property and equipment 47 43
Amortization of patents rights 53 70
Amortization of deferred financing costs -- 2,030
Equity in loss of unconsolidated affiliates 40 --
Loss on investment due to impairment 678
Changes in assets and liabilities:

Inventory -- (400)
Other receivable 66 1,455
Prepaid expenses and other current assets 114 (168)
Accounts payable (281) 452
Accrued expenses (100) (443)
Other assets 2 42
------- -------
Net cash used in operations (3,503) (2,225)
------- -------

Cash flows from investing activities:

Purchase of property and equipment -- (19)
Additions to patent rights (54) (161)
Maturity of short term investments 5,310 520
Purchase of short term investments (2,542) --
Deferred acquisition costs -- (160)
------- -------
Net cash provided by investing activities 2,714 180
------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock 6 --
Proceeds from exercise of warrants 59 --
Proceeds from issuance of preferred
Stock of subsidiary 946 --
Proceeds from long-term borrowings -- 5,426
Payments on long-term borrowings -- (440)
Deferred financing costs -- (455)
Purchase of treasury stock (31) (83)
------- -------
Net cash provided by financing activities 980 4,448
------- -------
Net increase in cash and cash equivalents 191 2,403
Cash and cash equivalents at beginning of period 3,107 2,256
------- -------
Cash and cash equivalents at end of period $ 3,298 $ 4,659
======= =======

See accompanying notes to condensed consolidated financial statements.

F-4

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 contained elsewhere in the prospectus.

NOTE 2: 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 proforma 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:

June 30,
---------------------
2002 2003
---- ----

Risk-free interest rate 5.23% 5.23%
Expected dividend -- --
Expected lives 2.5 years 2.5 years
Expected volatility 63.17% 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 six months ended June 30, 2002 and 2003 would have been
as follows:

Six Months Ended
June 30,
-----------------------
2002 2003
---- ----
(In Thousands)

Net (loss) as reported $(4,122) $(5,306)
Add: Stock based employee
compensation expense
Included in reported net loss,
net of Related tax effects -- --

F-5

Deduct:
Total stock based employee
compensation determined
under fair value method
for all awards, net
of related tax effects (542) (274)

Proforma net loss $(4,664) $(5,580)
Basic and diluted loss
per share
As reported $(.13) $(.16)
Proforma $(.15) $(.17)

Note 3: INVESTMENTS

Investments 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 Hemispherx Biopharma, Inc. common stock from the
treasury. On October 12, 2000, the Company issued an additional 50,000 shares of
Hemispherx Biopharma, Inc. common stock and on March 7, 2001 the Company issued
12,000 more shares of Hemispherx Biopharma, Inc. 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 their current 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:

June 30, 2003
-------------
Raw materials-Work in process $1,993,346
Finished goods 173,684
----------
$2,167,030

Note 5: REVENUE AND LICENSING 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.

F-6

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 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.

During the periods ending December 31, 2002 and June 30, 2003. 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: MINORITY SHAREHOLDER INTEREST

On March 20, 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 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, 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, 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 would
be converted into the common stock of the Company in the event that a European
IPO is not completed by September 30, 2003. The conversion rate is to be 300
shares of the Company'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.

On December 18, 2002, we proposed that Esteve convert its convertible preferred
equity certificates into Company 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.

F-7

On March 13, 2003, we issued 347,445 shares of our common stock to Provesan SA,
an affiliate of Esteve, in exchange for the 1,000,000 Euros of convertible
preferred equity certificates issued to Esteve and any unpaid dividends. We have
registered these shares for public sale by Provesan SA. As a result of the
exchange, minority interest in our 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 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.

Note 7: RECENT ACCOUNTING STANDARDS 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). This Interpretation elaborates
on the existing disclosure requirements for most guarantees such as standby
letters of credit. It also clarifies that at the time a company issues a
guarantee, the company must recognize an liability for the fair market value of
the obligations it assumes under that 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. The
adoption of Interpretation No. 45 did not have an impact on our consolidated
results of operations, financial positions, or cash flows.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB statements No.
4,44 and 64, Amendment of FASB statement No. 13, and Technical Corrections"
("SFAS 145"). FASB No. 4 required that gains and losses from extinguishment of
debt that were included in the determination of net income be aggregated and, if
material, be classified as an extraordinary item, net of related income tax.
Effective January 1, 2003, pursuant to SFAS 145, the treatment of debt is to be
included in "Other Income" in the Financial Statements. The Company's adoption
of SFAS 145 did not have an impact on it's financial position and results of
operations.

In January 2003, FASB issued Interpretation No. 46, "Consolidation of Variable
Interest Entities". ("Interpretation No. 46"), which 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 provision of Interpretation No.
46 are applicable no later than July 1, 2003. We do not expect this
Interpretation to have an effect on the consolidated financial statements.

In May 2003, FASB issued Statement of Financial Accounting Standards ("SFAS")
No. 150 "Accounting for Certain Financial Instruments with Characteristics of
Both Liability and Equity". This Statement establishes standards for how an
issuer classifies and measures in statement of financial position certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is with its scope
as a liability (or assets in some circumstances) because that financial
instrument embodies an obligation. This statement shall be effective for finical
instruments entered into or modified after May 31, 2003, and otherwise shall be
effective at the beginning of the first interim period beginning after June 15,
2003, except for mandatory

F-8

redeemable financial instruments of a nonpublic entity. We do not expect this
Interpretation to have a material effect on the consolidated financial
statements.

Note 8: ACQUISITION OF ASSETS OF INTERFERON SCIENCES, INC.

On March 11, 2003, we acquired from Interferon Sciences, Inc.'s ("ISI")
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, manufacture, use, marketing and sale of this product. As
consideration, we issued 487,028 shares of our common stock and agreed to pay
ISI 6% of the net sales of the product. Pursuant to our agreements with ISI, we
have agreed to register 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, ISI requests that we
honor the guarantee, we will be obligated to reacquire ISI's remaining
guaranteed shares and pay the ISI $1.59 per share for a total of $675,000.
Accordingly, certain shares issued in connection with this transaction are and
will be recorded outside of stockholders' equity.

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. The acquisition of these assets from
ISI is contingent upon ISI shareholder approval. 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 Injection(R), and to pay certain other liabilities to ISI.

We have guaranteed the market value of all but 62,500 of these shares on terms
substantially similar to those for the initial acquisition of the ISI assets.
The termination date for these guarantees is 18 months after the date of
issuance of the guaranteed shares from GP Strategies, 24 months after the date
of issuance and delivery of the additional 487,028 shares to ISI and 12 months
after the date of issuance of the guaranteed shares to the American National Red
Cross. Accordingly, certain shares issued in connection with this transaction
are and will be recorded outside of stockholders' equity.

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
governmental and shareholder approval. The value of these guaranteed shares
totaled $925,000 and are redeemable under certain conditions, accordingly they
are reflected as redeemable common stock and deferred acquisition costs on the
accompanying financial statements as of June 30, 2003.

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

F-9

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

At March 11, 2003
-----------------
Inventory $ 1,840,762

Fair Value of liabilities
Assumed (1,081,041)
-----------
Fair Value of Common Shares
Issued $ 759,720
===========

The above table is subject to further adjustment upon final determination of
estimated fair values as well as the additional accounting for the effects of
the second agreement as described above.

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.

Six Months ended June 30,
----------------------------
2002 2003
---- ----
(in thousands except for share data)

Net revenues $ 1,707 $ 402

Operating 6,956 6,237
---------- ----------
Net loss $ (5,249) (5,835)
========== ==========
Basic and
diluted loss
per share $ (.16) $ (.18)
---------- ----------
Weighted average
Shares
Outstanding 32,566,327 33,058,557
---------- ----------

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
six months ending June 30, 2002 and 2003 would have been 33,053,327 and
33,545,557 resulting in a proforma loss per share as adjusted of $(.16) and
$(.17) for said periods respectively.

Note 9: CONVERTIBLE DEBENTURES

On March 12, 2003, We issued an aggregate of $5,426,000 in principal amount of
6% Senior Convertible Debentures due January 31, 2005 and an aggregate of
743,288 Warrants expiring on March 12, 2008 to two investors in a private
placement for an aggregate gross proceeds of $4,650,000. Pursuant to the terms
of the Debentures, $1,550,000 of the proceeds from the sale of the Debentures
were to be held back to be released to us if, and only if, we acquired ISI's
facility with in a set timeframe. In June 2003 each of the investors
collectively funded the $1,550,000 of the proceeds. Each investor waived the
requirement to perfect a security interest in the building to be acquired. In
addition, each of the investors waived

F-10

the requirement that the company acquire the assets of ISI pursuant to the terms
of the second ISI Asset Purchase Agreement. The 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 proceeding the applicable
interest payment date. Pursuant to the terms and conditions of the Senior
Convertible Debentures, we have pledged all of our assets other than
intellectual property, as collateral and are subject to comply with certain
financial and negative covenants, which include but are not limited to the
repayment of principal balances upon achieving certain revenue milestones.

The Warrants received by these investors are exercisable at any time through
March 12, 2008 to purchase 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 is also subject to similar adjustments
for anti-dilution protection. All of these warrants were exercised in June 2003.

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 registered
these shares.

On July 10, 2003, we issued an aggregate of $5,426,000 in principal amount of 6%
Senior Convertible Debentures due July 31, 2005 and an aggregate of 507,102
Warrants due July 2008 to the same investors who purchased the Debentures due
January 2005 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 have been held back and will be
released to us if, and only if, we acquire ISI's facility with in a set
timeframe. The 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
investors accepted the same collateral as was pledged in the March 12, 2003
transaction.

The 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 Debentures is 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.

The warrants received by the investors are exercisable at any time through July
31, 2008 to purchase 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 $1.72 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 these Debentures and the July 2008 Warrants. If the
registration statement is not filed within the time period required by the
agreement, not declared effective within the time period required by the
agreement

F-11

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 the investors their pro rata share of $ 3,635
for each day any of the above conditions exist with respect to this registration
statement.

On June 25, 2003, in connection with the March 12, 2003 $5,426,000 6%
convertible debentures offering, we issued an additional warrant to each of the
Debenture holders 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) is also
subject to adjustments for anti-dilution protection.

In conjunction with both the March and July 2003 6% convertible debenture
placements we paid Cardinal Securities, the placement agent, an investment
banking fee equal to 7% of the investments made by the two Debenture holders. A
portion of this fee was paid with the issuance of 30,000 shares of our common
stock. Placement agent also received 425,000 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 and 200,000 are exercisable at $2.50 per share. The $1.74
warrants expire on July 10, 2008 and the other warrants expire on March 12,
2008. By agreement with Cardinal Securities, we will register all shares and
warrants for public sale.

As of September 4, 2003 the investors have converted $4,077,500 of the March 12,
2003 Debenture into 2,792,808 shares of common stock. The investors also
exercised the 743,288 warrants issued on March 12, 2003, which produced gross
proceeds of $1,248,724 in operating funds.

The March 12, 2003 issuance of $5,426,000 of 6% Convertible Debentures and
related embedded conversion features 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 instrument,
the Company determined the fair values to be ascribed to detachable warrants
issued with the convertible debentures utilizing the Black-Scholes method.

These pronouncements also provide for fair values of contingent conversion
features of convertible debt securities to be determined when the contingent
conversion price of is less than the market value of the underlying parent
company or subsidiary common stock at the measurement date.

As a result the Company recorded debt discount of approximately $5.4 million
which in effect reduced the carrying value of our debt to zero. These costs are
deferred and charged to interest expense over the life of the debentures. As of
June 30, 2003 the amount of debt discount amortized to interest expense totaled
approximately $2.0 million.

Recorded debt discounts include an Original Issue Discount (OID) of
approximately $554,000 as additional cost of the offering. These costs are also
deferred and expensed as interest over the life of the debentures.

In connection with the debenture agreements, the Company has outstanding letters
of credit of $1 million as additional collateral.

In addition, as of June 30, 2003, the Company has $133,333 in restricted cash
under other letter of credit agreements required by our insurance carrier.

We have 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. As of July 31,
2003, only approximately 104,000 shares of our authorized shares of Common Stock

F-12

were not issued or reserved for issuance. This does not include 3,006,650 shares
that had been reserved for issuance pursuant to warrants and options owned by
Dr. Carter and 200,000 shares that had been reserved for issuance pursuant to
warrants owned by the placement agent. Dr. Carter and the placement agent have
agreed that they will not exercise their warrants or options unless and until
our stockholders approve an increase in our authorized shares of common stock.
One of the proposals for the annual meeting of our stockholders to be held in
September 2003 is 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 cannot assure you that the Proposal will be approved. Unless and
until we are able to increase the number of authorized shares of Common Stock,
our ability to raise funds through the sale of Common Stock or instruments that
are convertible into or exercisable for Common Stock will be severely
restricted.

In addition, for Dr. Carter's waiver of his right to exercise certain options
and warrants prior to approval of the Proposal and for the possible diminution
in value of these Options that could result in the event that the Proposal is
not approved, we have agreed to compensate Dr. Carter. Although the specific
method of determining such potential loss has not been determined, it is
anticipated that, in the event that the Proposal is not approved, a committee of
our independent directors, with the assistance of an independent valuation firm,
will determine the monetary value of his warrants and options. The committee
will then give Dr. Carter the choice of turning in his warrants and options for
an amount equal to this determined value (the "Value Payment") or to continue to
hold his warrants and options. If Dr. Carter elects to continue to hold these
securities, the Committee, again with the assistance of the independent
valuation firm, will determine a formula pursuant to which Dr. Carter would
receive cash ("Stock Appreciation Payments") rather than shares of common stock
should he exercise any of the warrants or options prior to the time, if ever,
adequate authorized but unissued and unreserved shares become available for
issuance upon exercise of his warrants and options. In addition, if the Proposal
does not pass, we have agreed to pledge some of our intellectual property as
collateral for the Value Payment or the Stock Appreciation Payments. The
specific intellectual property to be used as collateral, the valuation of such
collateral and the method of sale or license of such intellectual property in
the event that sale of the collateral is required, would be determined by the
committee, with the assistance of the independent valuation firm. These actions
may result in Dr. Carter being awarded cash or other non-cash related rewards,
which may or will result in the recording of compensation expense by the
Company.

F-13

HEMISPHERX BIOPHARMA, INC.
AND SUBSIDIARIES

Index to Consolidated Financial Statements - 2002

Report of Independent Certified Public Accountants ..................... F-15

Consolidated Balance Sheets at December 31, 2001 and 2002 .............. F-16

Consolidated Statements of Operations for each of the years
in the three-year period ended December 31, 2002 ..................... F-17

Consolidated Statements of Changes in Stockholders' Equity
and Comprehensive (Loss) for each of the years
in the three-year period ended December 31, 2002 ..................... F-18

Consolidated Statements of Cash Flows for each of the years
in the three-year period ended December 31, 2002 ..................... F-19

Notes to Consolidated Financial Statements ........................... F-21

F-14

Report of Independent Certified 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, 2001 and 2002 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, 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 auditing standards generally
accepted in the United States of America. 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, 2001 and 2002 and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2002 in conformity with accounting principles
generally accepted in the United States of America.

/s/ BDO SEIDMAN, LLP

Philadelphia, Pennsylvania
March 13, 2003, except for note 12, which is as of March 31, 2003

F-15

HEMISPHERX BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2001 and 2002
(in thousands)

December 31,
-----------------------
2001 2002
------- -------
ASSETS

Current assets:
Cash and cash equivalents ............................ $ 3,107 $ 2,256
Short term investments (Note 3) ...................... 5,310 555
Other receivables (Note 12) .......................... 8 1,507
Prepaid expenses and
other current assets ................................. 381 71
--------- ---------
Total current assets ................................ 8,806 4,389
Property and equipment, net ......................... 246 155
Patent and trademark rights, net .................... 1,025 995
Investments in unconsolidated affiliates ............ 1,878 408
Other assets ........................................ 80 93
--------- ---------
Total assets ...................................... $ 12,035 $ 6,040
========= =========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable .................................... $ 979 $ 786
Accrued expenses (Note 4) ........................... 293 678
--------- ---------
Total current liabilities ........................ 1,272 1,464
--------- ---------
Commitments and contingencies
(Notes 7,9, 10 and 12)

Minority Interest in subsidiary (Note (5c) ........... -- 946

Stockholders' equity
(Note 5):
Common stock ......................................... 33 33
Additional paid-in capital ........................... 106,832 107,155
Accumulated other comprehensive
income (Note 2i) .................................. 17 35
Accumulated deficit .................................. (91,649) (99,073)
Treasury stock ....................................... (4,470) (4,520)
--------- ---------
Total stockholders' equity ....................... 10,763 3,630
--------- ---------
Total liabilities and
stockholders' equity ............................ $ 12,035 $ 6,040
========= =========

See accompanying notes to consolidated financial statements.

F-16

HEMISPHERX BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For each of the years in the three-year period ended December 31,
2002 (in thousands, except share and per share data)

December 31,
-----------------------------------------
2000 2001 2002
----------- ----------- -----------
Revenue: ......................... $ 788 $ 390 $ 341
License Fee income (Note 9) .... -- -- 563
----------- ----------- -----------
788 390 904
Costs and expenses:
Research and development ...... 6,136 5,780 4,946
General and
administrative ............ 3,695 3,412 2,015
----------- ----------- -----------
Total costs and expenses ....... 9,831 9,192 6,961
Equity loss and write offs of
investments in unconsolidated
affiliates (Note 2c) ............. (81) (565) (1,470)
Interest and other income ........ 572 284 103
----------- ----------- -----------
Net loss ................... $ (8,552) $ (9,083) $ (7,424)
=========== =========== ===========

Basic and diluted loss per share $ (.29) $ (.29) $ (.23)
=========== =========== ===========
Weighted average shares
outstanding ................. 29,251,846 31,433,208 32,085,776
=========== =========== ===========

See accompanying notes to consolidated financial statements.

F-17

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, 2002
(in thousands except share data)

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

Balance at December 31, 1999 27,974,507 $ 28 $ 87,972 $ (310) $ -- $ (74,014) 167,935

Common stock issued 2,393,381 2 9,860 -- -- -- (20,000)

Purchase of equity -- -- 67 -- -- -- (100,000)
investment

Treasury stock purchased -- -- -- -- -- -- 350,800

Treasury stock issued in -- -- 8 -- -- -- (3,089)
settlement of debt

Stock compensation and -- -- 87 310 -- -- --
service expense, net

Registration costs -- -- (10) -- -- -- --

Net comprehensive (loss) -- -- -- -- 34 (8,552) --
---------- ----------- ----------- ----------- ----------- ----------- -------
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 19,000 -- 673 -- -- -- --
compensation expense

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 -- 132 -- -- -- -- --
compensation expense --

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

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

Balance at December 31, 1999 $ (1,019) $ 12,657

Common stock issued 123 9,985

Purchase of equity 551 618
investment

Treasury stock purchased (3,591) (3,591)

Treasury stock issued in 26 34
settlement of debt

Stock compensation and -- 397
service expense, net

Registration costs -- (10)

Net comprehensive (loss) -- (8,518)
----------- -----------

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 -- 673
compensation expense

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 132
compensation expense

Net comprehensive (loss) -- (7,406)
----------- -----------

Balance at December 31, 2002 $ (4,520) $ 3,630
=========== ===========

F-18

HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
for each of the years in the three-year period ended December 31, 2002

(in thousands)

December 31,
-----------------------------
2000 2001 2002
------- ------- -------
Cash flows from operating activities:

Net loss ..................................... $(8,552) $(9,083) $(7,424)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation of property
and equipment .............................. 131 127 91
Amortization of patent and
trademark rights ........................... 356 397 206
Equity loss and write offs of investments
in unconsolidated affiliates ............. 81 565 1,470
Stock compensation and
service expense ........................... 397 673 132
Changes in assets and liabilities:
Other receivables .......................... 15 52 (1,293)
Prepaid expenses
and other current assets .............. (463) 202 104
Accounts payable ........................... 210 (271) (67)
Accrued expenses ........................... (266) 139 385
Security deposits .......................... 17 (82) (13)
------- ------- -------
Net cash used in
operating activities .................... (8,074) (7,281) (6,409)
------- ------- -------
Cash flows from investing activities:

Purchase of property and equipment ........... (171) -- --
Additions to patent and trademark rights ..... (197) (218) (176)
Maturity of short term investments ........... 2,157 4,613 5,293
Purchase of short term investments ........... (4,589) (5,293) (520)
Investments in unconsolidated affiliates ..... (411) (22) (--)
Other investments ............................ (34) -- --
------- ------- -------
Net (used in) cash provided by investing
activities ............................... (3,245) (920) 4,597
------- ------- -------

F-19

(CONTINUED)

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

(in thousands)

December 31,
--------------------------------
2000 2001 2002
------- ------- -------
Cash flows from financing activities:
Proceeds from stock subscriptions and
issuance of common stock, net ........... 2,250 72 $ 65

Proceeds from issuance of preferred\
stock of subsidiary .................... -- -- 946

Proceeds from exercise of
stock warrants ................ 9,985 8,075 --
Purchase of treasury stock ................ (3,591) (560) (50)
------- ------- -------
Net cash provided by
financing activities ................. 8,644 7,587 961
------- ------- -------
Net decrease in cash and
cash equivalents ..................... (2,675) (614) (851)
Cash and cash equivalents at
beginning of year ............. 6,396 3,721 3,107
------- ------- -------
Cash and cash equivalents
at end of year ........................... $ 3,721 $ 3,107 $ 2,256
======= ======= =======
Supplemental disclosures of cash
flow information:

Issuance of treasury stock for
Investment ............................... $ 618 $ -- $ --
======= ======= =======
Issuance of common stock
for accrued expenses ..................... $ 34 $ 91 $ 154
======= ======= =======
Issuance of common stock
for note receivable ...................... $ -- $ 60 $ --
======= ======= =======

See accompanying notes to consolidated financial statements.

F-20

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.

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. The Company also has investments in
unconsolidated affiliates which are accounted for on the equity or cost method
of accounting (see note 2c).

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. As partial
consideration, we issued 487,028 shares of our common stock to ISI. Pursuant to
our agreements with ISI, we are in the process of registering 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 through March 11, 2005
to be $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. This purchase is contingent on us
receiving the appropriate governmental approval. For these assets, we have
agreed to issue to ISI an additional 487,028 shares and to issue 314,465 shares
and 267,296 shares, respectively to two creditors of ISI. The Company will be
required to satisfy other liabilities of ISI which aggregate approximately
$521,000 and which are secured by a lien on ISI's real estate. We have
guaranteed the market value of all but 62,500 of these shares on terms
substantially similar to those for the initial acquisition of the ISI assets.

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

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

F-21

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.

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
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 $2,552,000 and
$1,404,000 at December 31, 2001 and 2002, 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 $5,310,000 and $555,000 at December 31, 2001 and 2002
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

F-22

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
CIMM, representing its 30% interest in CIMM's equity at such date, was not
deemed to be permanently, 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 10. 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 as of December 31, 2001
and 2002. 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 in unconsolidated affiliates also includes an equity investment in
Chronix Biomedical ("Chronix"). Chronix focuses upon the development of
diagnostics for chronic diseases. The initial investment was made in May 31,
2000 through the issuance of 50,000 shares of Hemispherx Biopharma, Inc. common
stock from the treasury. On October 12, 2000 an additional 50,000 shares of
common stock were issued from the treasury for a total investment of
approximately $678,000. During 2001 additional common stock plus cash were given
to Chronix for a total investment at $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 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 their current proposed investment offerings.

F-23

Pursuant to a strategic alliance agreement, the Company provided Chronix with
$250,000 during 2000 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,
-------------------
2001 2002
---- ----
Furniture, fixtures, and equipment $ 1,178 $ 760
Leasehold improvements 96 85
------- -----
Total property and equipment 1,274 845
Less accumulated depreciation 1,028 690
------- -----
Property and equipment, net $ 246 $ 155
======= =====

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 $131,000, $127,000 and $91,000 for 2000, 2001 and 2002,
respectively. In 2002, fully depreciated equipment in the amount of $418,000 and
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 had 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, 2000, 2001 and 2002, the Company decided not to pursue the technology in
certain countries for strategic reasons and recorded charges of $32,000, $38,000
and $5,000, respectively. Amortization expense was $324,000, $359,000 and
$201,000 in 2000, 2001 and 2002, respectively. The accumulated amortization as
of December 31, 2001 and 2002 is $2,096,000 and $1,996,000, respectively.

F-24

(f) Revenue

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.

Under the terms of an 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.

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 payment 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 applies that ratio to total expected revenue. The
amount of revenue recognized is limited to the total non-refundable cash
received to date.

During the periods ending December 31, 2000, 2001 and 2002 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 a
calculation of diluted net loss per share since their effect is antidilutive.

F-25

(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)

On January 1, 1998, the Company adopted SFAS No. 130, Reporting Comprehensive
Income. Statement of Financial Accounting Standards (SFAS) No. 130 establishes
standards for reporting and presentation of the Company's comprehensive (loss)
and its components in a full set of financial statements. 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.
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 January 2003, the Financial Accounting Standards Board (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 to January 31, 2003, the provision of Interpretation No. 46 are
applicable no later than July 1, 2003. The Company does not expect this
Interpretation to have an effect on the consolidated financial statements.

F-26

In August 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligation" ("SFAS 143"), which provides the accounting requirements
for retirement obligation associated with tangible long-lived assets. SFAS 143
requires entities to record the fair value of the liability for an asset
retirement obligation in the period in which it is incurred and is effective for
the Company's 2003 fiscal year. The adoption of SFAS 143 is not expected to have
a material impact on the Company's consolidated results of operations, financial
position or cash flows.

In October 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-lived Assets" ("SFAS 144"). SFAS 144 addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets. This statement supersedes SFAS Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, "
and the accounting and reporting provision of APB Opinion No. 30, "Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
transactions. "This new pronouncement also amends Accounting Research Bulletin
(ARB) No. 51 "Consolidated Financial Statements, "to eliminate the exception to
consolidation for a subsidiary for which control is likely to be temporary. SFAS
144 required that one accounting model be used for long-lived assets to be
disposed of by sale, whether previously held and used or newly acquired and also
broadens the presentation of discontinued operation to include more disposal
transactions. SFAS 144 is effective for fiscal years beginning after December
15, 2001 and interim periods within those fiscal years. Adoption of SFAS 144 on
January 1, 2002, did not have impact on the Company's financial position, cash
flows or results of operation for the year ended December 31, 2002.

In June 2002, the FASB issued Statement No. 146, "Accounting for Cost Associated
with Exit or Disposal Activities" ("SFAS 146"), which addresses financial
accounting and reporting for costs associated with exit or disposal activities,
and nullifies Emerging Task Force (EITF) Issue No. 94-3, "Liability Recognition
for Certain Employee termination Benefits and Other Costs to Exit and Activity
(including Certain Costs Incurred in a Restructuring)" which previously governed
the accounting treatment for restructuring activities. SFAS 146 applies to costs
associated with an exit activity that does not involve an entity newly acquired
in a business combination or with disposal activity covered by SFAS 144. Those
costs include, but are not limited to, the following: (1) termination benefits
provide to current employees that are involuntarily terminated under the terms
of a benefit arrangement that, in substance, is not an ongoing benefit
arrangement or individual deferred-compensation contract,(2) costs to terminate
a contract that is not a capital lease, and (3) costs to consolidated facilities
or relocated employees. SFAS 146 does not apply to costs associated with the
retirement of long-lived assets covered by SFAS 143. SFAS 146 will be applied
prospectively and is effective for exit or disposal activities after December
31, 2002.

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

F-27

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 enhance disclosure requirements of SFAS 148 (See
Note 10).

(m) Research and Development Costs

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

(n) Stock Compensation

The Company applies the intrinsic value method in accordance Accounting
Principles Bulletin (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees" in accounting for stock-based compensation of its employees and,
accordingly, no compensation cost has been recognized for stock purchase
warrants and options issued to employees. Had the Company determined
compensation cost based on the fair value at the grant date for its stock-based
compensation of its employees in accordance with FASB 123 the Company's net loss
would have been increased to the pro forma amounts indicated below:

F-28

(In Thousands except for
per share data)

For the years ended December 31, 2000 2001 2002
-------------------------------- ---- ---- ----

Net loss-as reported $(8,552) $(9,083) $(7,424)

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 (237) (632) (1,085)
------- ------- -------
Net loss - pro forma $(8,789) $(9,715) $(8,509)
======= ======= =======
Basic and diluted loss
per share - as reported $ (.29) $ (.29) $ (.23)
======= ======= =======
Basic and diluted loss
per share - pro forma $ (.30) $ (.31) $ (.27)
======= ======= =======

In 1999, the Company granted 275,000 warrants to employees in recognition of
services performed and services to be performed. The fair value of the stock
purchase warrants granted during 1999 was also determined using the
Black-Scholes option pricing model with a rate of 5.18%, volatility of
135.4%-294.31%, and expected lives of 2 years. These warrants are included in
the 2,633,000 non-public warrants outstanding as of December 31, 2000 as
described in footnote 5 (ii). There were no warrants granted to employees during
2000. During 2001 the Company granted 406,650 warrants to employees. The Company
granted to employees 8,000 options in 2000 and 94,000 options in 2001. See
footnote 5(i). The fair value of stock options and warrants granted during 2001
was determined using Black Scholes Option Pricing Model with a rate of 4.23%,
volatility of 69.7% to 74.9% and expected life of three years. In 2002 1,622,000
warrants were issued to employees in recognition of services performed and
services to be performed. The fair value of the warrants granted during 2002 was
determined using Black Scholes Option Pricing model with a rate of 5.23%,
volatility of 63.17%, and expected life of 2.5 and 4 years. The weighted average
fair value of those options and warrants granted during the years ended December
31, 2002, 2001 and 2000, were estimated as $0.62, $1.57 and $1.09,respectively.

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.

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.

F-29

(3) Short-term investments:

Securities classified as available for sale are summarized below:

(000's omitted)
December 31, 2001
-----------------
Unrealized
Adjusted --------------- Carrying
cost Gains Losses) Value
---- ----- ------- -----
General Motors Commercial Paper $3,977 $ 13 $ -- $3,990
Ford Motors commercial paper 795 1 -- 796
Calamos Mutual Market 521 3 -- 524
------ ------ ----- ------
Total $5,293 $ 17 $ -- $5,310
====== ====== ===== ======

December 31, 2001
-----------------
Unrealized
Adjusted --------------- Carrying
cost Gains Losses) Value
---- ----- ------- -----
Calamos Mutual Market $521 $ 34 $ -- $555
---- ---- ---- ----
Total $521 $ 34 $ -- $555
==== ==== ==== ====

(4) Accrued Expenses

Accrued expenses at December 31, 2001 and 2002 consists of the following:

(000's omitted)
December 31,
-------------
2001 2002
----- ------
Salaries .......................................... $ 85 $ 6
Other Accrued expenses ............................ 208 222
Fees Associated with Litigation Settlement ........ -- 450
------ -------
$ 293 $ 678
====== =======

F-30

(5) 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, 2001 and 2002.

(b) Common Stock and Exercise of Stock Warrants

The Company is authorized to issue 50,000,000 shares of $.001 par value Common
Stock. As of December 31, 2001 and 2002, 32,060,280 and 32,106,972 shares, net
of shares held in the treasury, were outstanding, respectively.

The exercise of stock warrants generated $9,985,000 and $8,075,000 in net
proceeds to the Company in 2000 and 2001, respectively. There were no exercises
during 2002.

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 will 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.

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. We are in the process of
registering these shares for public sale.

F-31

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, minority and subsidiary was transfer 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 that respective
measurement dates. As a result and in accordance with Emerging Issues Task 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:

2000 2001 2002
------------------------------- --------------------------------- ------------------------------
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 294,000 $1.06-6.00 $3.60 218,567 $1.06-6.81 $3.45 306,263 $1.06-4.34 $3.58

Granted 8,000 $3.00-6.81 $4.88 94,000 $4.03 $4.03 - - -

Canceled (76,677) $3.50-4.34 $4.09 (6,304) $4.34-6.81 $5.91 (11,598) $3.00-4.34 $3.71

Exercised (6,756) $1.06-3.50 $2.75 - - - - - -
------- ------- -------

Outstanding, end of year 218,567 $1.06-6.81 $3.45 306,263 $1.06-4.34 $3.58 294,665 $1.06-434 $3.57
======= ======= =======

Exercisable 198,717 $1.06-6.81 $3.48 234,263 $1.06-4.34 $4.67 252,746 $1.06-4.34 $3.50
======= ======= =======

F-32

Weighted average remaining
contractual life (years) 3.83 years 3.57 years 3.68 years
========== ========== ==========

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

Available for future grants 204,440 116,744 170,261
======== ======= ========

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 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.

(ii) Stock warrants

Number of warrants exercisable into shares of common stock

2000 2001 2002
------------------------------- ---------------------------------- -----------------------------
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 14,058,010 $1.75-10.85 $3.90 11,624,168 $1.75-12.00 $4.05 6,927,110 $1.75-16.00 $4.77

Granted 293,800 $6.00-12.00 6.40 856,650 $5.00-16.00 $9.89 1,802,000 $2.00-6.00 $2.07

Canceled (341,017) $2.00-10.85 6.01 (3,396,508) $2.50-4.00 $3.89 (750,000) $3.50-6.00 $3.72

Exercised (2,386,625) $1.75-4.00 4.19 (2,157,200) $1.75-4.00 $3.75 (11,300) $1.75-7.50 $3.30
----------- ----------- --------

F-33

Outstanding, end 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
========== ===== ========= =========

Exercisable 11,624,168 $1.75-12.00 $4.05 6,927,110 $1.75-16.00 $4.77 6,345,810 $1.75-16.00 $3.48
========== ===== ========= =========

Weighted average remaining

contractual life (years) 2.66 years 4.05 years 4.03 years
========== ========== ==========

Years exercisable 2001-2006 2002-2006 2003-2008
========= ========= =========

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

Warrants issued to stockholders

In 2000, 149,807 warrants expired and 147,000 warrants were converted to common
stock. 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 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
7,745,650 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. This extension resulted in a non-cash
charge of approximately $3,097,000. 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 Stock at
$1.75 per share to the parties. In 1999, 290,000, in 2000, 216,500, in 2001,
200,000 and in 2002, 1,300 of these warrants were exercised, leaving a balance
of these warrants of 1,450,200. These warrants expire June 30, 2005.

F-34

In connection with the stock issued in September, 1997, the Company issued
385,067 warrants to several entities to purchase common stock at $4 per share,
149,034 of these warrants were exercised in 1998, 173,300 were exercised in
1999, and 34,333 were exercised in 2000. The remaining 28,400 warrants expired
December 31, 2001.

In the years 2000, 2001 and 2002 the Company issued 293,800, 450,000 and 25,000
warrants, respectively, to investment banking firms for services performed on
behalf of the Company. Accordingly, the company recorded stock compensation
expense of $397,000, $673,000 and $133,000 for the years 2000, 2001 and 2002
respectively. These warrants have various vesting dates and exercise prices
ranging from $4.00 to $16.00 per share. In 2000, 75,000 of these warrants were
exercised. 1,193,800 warrants were outstanding at December 31, 2002. These
warrants are exercisable in five years from the date of issuance.

In 2000 2001 and 2002 the Company had non-public warrants outstanding of
2,633,000 2,254,650 and 3,701,650 respectively. These warrants are exercisable
at rates of $2.50 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 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 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.

(e) Stock Repurchase

On February 19, 1999, the Board of Directors authorized the repurchase of up to
200,000 shares of the Company's common stock on the open market. On February 8,
2000, the Board authorized the repurchase of another 200,000 shares.

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."

(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

F-35

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
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.

(6) Segment and Related Information

The Company operates in one segment, which is the performance of research and
development activities related to Ampligen(R) and other drugs under development.

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

000's omitted)
2000 2001 2002
---- ---- ----
United States $506 $274 $237

Belgium 272 107 74

Other 10 9 30
---- ---- ----
$788 $390 $341
==== ==== ====

F-36

In addition, 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.

(7) 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 subjects 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, 2000, 2001
and 2002 the Company incurred approximately $924,000, $595,000 and $395,000
respectively, of consulting service fees under these agreements. These costs are
charged to research and development expense as incurred.

(8) 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.

Each participant immediately vests in his or her deferred salary contributions,
while Company contributions will vest over one year. In 2000, 2001 and 2002 the
Company provided matching contributions to each employee for up to 6% of annual
pay aggregating $48,000, $48,000 and $38,000 respectively.

(9) 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

F-37

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.

The Company has contractual agreements with two of its officers. The aggregate
annual base compensation under these contractual agreements for 2000, 2001 and
2002 was $686,000, $603,000 and $620,000 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 2000, 2001
and 2002 no performance bonuses 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. One of the
employment agreements provides for bonuses based on gross proceeds received by
the Company from any joint venture or corporate partnering agreement.

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

F-38

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 at 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
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 (See Note 1), the
Company is obligated to pay ISI a 6% royalty on the net sales of the Alferon N
Injection product.

(10) 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
------------ ---------
2003 ................................... $ 279
2004 ................................... 286
2005 ................................... 240
2006 ................................... 193
2007 ................................... 65
--------
Total minimum lease payments ........... $ 1,063
========

Rent expense charged to operations for the years ended December 31, 2000, 2001
and 2002 amounted to approximately $347,000, $294,000 and $307,000 respectively.
The term of the lease for the Rockville, Maryland facility is through June, 2005

F-39

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.

(11) Income Taxes

As of December 31, 2002, the Company has approximately $66,000,000 of federal
net operating loss carryforwards (expiring in the years 2004 through 2022)
available to offset future federal taxable income. The Company also has
approximately $15,000,000 of state net operating loss carryforwards (expiring in
the years 2003 through 2007) 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, 2001 and 2002.

The components of the net deferred tax asset of December 31, 2001 and 2002
consists of the following:

(000,s omitted)

Deferred tax assets: 2001 2002
---- ----

Net operating losses $ 20,790 $ 22,440

Accrued Expenses and Other 21 (16)

Capitalized Research and development costs 4,634 3,763
-------- --------
25,445 26,187

Less: Valuation Allowance 25,445 26,187
-------- --------
Balance $ -0- $ -0-
======== ========

F-40

(12) 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
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 expect to
realize 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.

In March 2003, one of our former law firms filed a complaint in the Court of
Common Pleas of Philadelphia County against us for alleged legal fees in the sum

F-41

of $65,051. We believe the claim is without merit and are defending the matter.

(13) 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. 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 trail protocols as well as performs other scientific work
for us from time to time. For these services, these Directors were paid an
aggregate of $173,500, $144,955 and $170,150 for the years ending December 31,
2000, 2001 and 2002 respectively.

William A. Carter, Chief Executive Officer of the Company, received an aggregate
of $12,486 in short term advances which were repaid as of December 31, 2001. All
advances bare interest at 6% per annum. The 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 $42,775, $57,750 and $33,450 for the years ending December 31, 2000,
2001 and 2002, respectively to Carter Realty for the rent of property used at
various times in 2002 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.

(14) Concentrations of credit risk

Financial instruments, which potentially subject the Company to concentrations
of credit risk, consist principally of cash. 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.

F-42

(15) Quarterly Results of Operation (unaudited)

(in thousand except per share data)

2001
-------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- -------- ------- -------- -------
Revenue 127 $ 101 $ 76 $ 86 $ 390

Costs and expenses 2,676 2,504 2,262 1,750 9,192

Net loss (2,480) (2,343) (2,145) (2,115) (9,083)
------- ------- ------- ------- -------
Basic and diluted
loss per share $ (.08) $ (.08) $ (.07) $ (.07) $ (.29)
------- ------- ------- ------- -------

2002 (1)
-------------------------------------------------------
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)
------- ------- ------- ------- -------

(1) During the fourth quarter of 2002, the Company recorded write offs of
certain investments in unconsolidated affiliates of approximately $688,000. (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)

(16) Debenture Financing

On March 12, 2003, We issued an aggregate of $5,426,000 in principal amount of
6% Senior Convertible Debentures due January 31, 2005 and an aggregate of
743,288 Warrants to two investors in a private placement for aggregate
anticipated gross proceeds of $4,650,000. Pursuant to the terms of the
Debentures, $1,550,000 of the proceeds from the sale of the Debentures have been
held back and will be released to us if, and only if, we acquire ISI's facility
with in a set timeframe. The 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

F-43

business days ending on the third business day immediately preceding the
applicable interest payment date. Pursuant to the terms and conditions of the
Senior Convertible Debentures, we have pledged all of our assets as collateral
and are subject to comply with certain financial and negative covenants, which
include but are not limited to the repayment of principal balances upon
achieving certain revenue milestone.

The 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 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 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 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.

We entered into a registration rights agreement with the investors in connection
with the issuance of the 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 Debenture and upon
exercise of the Warrants. In accordance with this agreement, we filed a
registration statement on form S-3 with the Securities and Exchange Commission.
If the registration statement is 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.

F-44

Interferon Sciences, Inc.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----

Independent Auditors' Report F-46

Financial Statements:

Consolidated Balance Sheets - December 31, 2002 and 2001 F-47

Consolidated Statements of Operations - Years ended
December 31, 2002, 2001 and 2000 F-49

Consolidated Statements of Changes in Stockholders'
Equity Capital Deficiency - Years ended December 31,
2002, 2001 and 2000 F-50

Consolidated Statements of Cash Flows - Years ended
December 31, 2002, 2001 and 2000 F-52

Notes to Consolidated Financial Statements F-53

F-45

INDEPENDENT AUDITOR'S REPORT

The Board of Directors and Stockholders
Interferon Sciences, Inc.

We have audited the accompanying consolidated balance sheets of Interferon
Sciences, Inc. and subsidiary as of December 31, 2002 and 2001 and the related
consolidated statements of operations, changes in stockholders' equity capital
deficiency and cash flows for each of the years in the three-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 audit in accordance with auditing standards generally
accepted in the United States of America. 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 referred to above
present fairly, in all material respects, the consolidated financial position of
Interferon Sciences, Inc. and subsidiary as of December 31, 2002 and 2001 and
the consolidated results of their operations and their consolidated cash flows
for each of the years in the three-year period ended December 31, 2002, in
conformity with accounting principles generally accepted in the United States of
America.

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 three-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 audit of the financial statements referred to
above, we audited Schedule II - Valuation and Qualifying Accounts for 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.

Eisner LLP

New York, New York
June 10, 2003

F-46

INTERFERON SCIENCES, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

December 31,
-----------------------------
2002 2001
---- ----
As Restated
(See Note 4)
ASSETS

Current assets
Cash and cash equivalents $ 378,663 $ 1,184,889
Accounts and other receivables 42,739 123,389
Inventories, net of reserves of $4,678,659
and $5,538,413, respectively 28,489 109,913
Prepaid expenses and other current assets 12,179 17,608
------------ ------------
Total current assets 462,070 1,435,799
------------ ------------
Property, plant and equipment, at cost
Land 140,650 140,650
Buildings and improvements 7,793,242 7,793,242
Equipment 4,920,942 4,920,942
------------ ------------
12,854,834 12,854,834

Less accumulated depreciation (11,173,264) (10,776,342)
------------ ------------
1,681,570 2,078,492
------------ ------------
Patent costs, net of accumulated amortization
of $388,974 and $360,819 132,187 160,342
Other assets 100 10,100
------------ ------------
$ 2,275,927 $ 3,684,733
============ ============

The accompanying notes are an integral part of these
consolidated financial statements.

F-47

INTERFERON SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(continued)

LIABILITIES AND CAPITAL DEFICIENCY
Current liabilities
Accounts payable $ 1,387,462 $ 963,323
Accrued expenses 414,262 350,548
Due to American Red Cross 1,402,870 1,339,338
ISI stock subject to resale agreement
and in-kind services due Metacine 1,700,000 1,700,000
Note payable and amount due GP Strategies 413,745 495,745
Convertible Notes payable, net
of debt discount 281,863
------------- ------------
Total current liabilities 5,600,202 4,848,954
------------- ------------
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- 21,030,405 and 20,308,031
shares, respectively 210,304 203,080
Capital in excess of par value 136,810,618 136,239,499
Accumulated deficit (140,345,197) (137,606,800)
------------- ------------
Total capital deficiency (3,324,275) (1,164,221)
------------- ------------
$ 2,275,927 $ 3,684,733
============= ============

The accompanying notes are an integral part of
these consolidated financial statements.

F-48

INTERFERON SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,

2002 2001 2000
-------- -------- -------
As Restated As Restated
(See Note 4) (See Note 4)

Revenues

ALFERON N Injection $ 1,926,466 $ 1,498,603 $ 1,067,471
Research products and other revenues 1,442
------------ ------------ ------------
Total revenues 1,926,466 1,498,603 1,068,913
------------ ------------ ------------
Costs and expenses
Cost of goods sold and excess/idle

production costs 1,482,006 1,485,962 1,455,929
Research and development 1,514,286 2,286,300 1,533,324
General and administrative 1,818,194 2,646,734 2,306,146
Acquisition of in-process technology 2,341,418
------------ ------------ ------------
Total costs and expenses 4,814,486 8,760,414 5,295,399
------------ ------------ ------------
Loss from operations (2,888,020) (7,261,811) (4,226,486)

Interest income 7,122 108,351 161,835
Interest expense (385,775) (91,469) (87,873)
Equity in loss of Metacine (158,582)
------------ ------------ ------------
Loss before income tax benefit (3,266,673) (7,403,511) (4,152,524)

Income tax benefit:

Gain on sale of state net operating loss
carryovers 528,276 968,553 1,483,861
------------ ------------ ------------
Net loss $ (2,738,397) $ (6,434,958) $ (2,668,663)
============ ============ ============
Basic and diluted net loss per share $ (.13) $ (.33) $ (.22)
============ ============ ============
Weighted average number of
shares outstanding 20,575,948 19,576,312 12,097,252
============ ============ ============

The accompanying notes are an integral part of
these consolidated financial statements.

F-49

INTERFERON SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY CAPITAL DEFICIENCY

Total
Capital in stockholders'
Common stock excess of Accumulated Settlement equity
Shares Amount par value deficit Shares (deficiency)
----------------- -------------- ------------ ------------- --------------

Balance at January 1, 5,327,473 $ 53,275 $129,397,259 $(128,812,179) $ (81,000) $ 557,355
2000, previously stated
Cumulative effect of
restating inventory
reserves, and effect of
correcting cost of
sales, see Note 4 (1,156,000) 309,000 81,000 (766,000)
----------------------------------------------------------------------------------
Balance at January 1, 5,327,473 $ 53,275 $128,241,259 $(128,503,179) $ 0 $ (208,645)
2000, as restated
Net proceeds from 11,635,451 116,354 6,980,595 7,096,949
sale of common stock
Common stock issued as 20,000 200 23,550 23,750
compensation
Common stock issued under 78,914 789 79,409 80,198
Company 401(k) plan
Common stock issued
as payment against
accounts payable 870,000 8,700 (8,700)
Employee stock option 2,050 2,050
compensation
Compensation paid in
cash in settlement of obligation
to issue common stock cash 282,506 282,506
in settlement of obligation
Forgiveness of amount 129,886 129,886
due GP Strategies
Settlement shares sold 382,515 382,515
Net loss, as restated (2,668,663) (2,668,663)
-----------------------------------------------------------------------------------
Balance at 17,931,838 179,318 136,113,070 (131,171,842) 0 5,120,546
December 31, 2000

The accompanying notes are an integral part of
these consolidated financial statements.

F-50

INTERFERON SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY CAPITAL DEFICIENCY
(continued)

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) 0 (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) $ 0 $(3,324,275)

The accompanying notes are an integral part of
these consolidated financial statements.

F-51

INTERFERON SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31,
-----------------------------------------
2002 2001 2000
----------- ----------- -----------
As Restated As Restated
(See Note 4) (See Note 4)

Cash flows from operating activities:
Net loss $(2,738,397) $(6,434,958) $(2,668,663)
Adjustments to reconcile net loss
to net cash used for operating activities:
Depreciation and amortization 425,077 507,507 502,157
Acquisition of in-process research and development 2,341,418
Equity in loss of Metacine 158,582
Gain on settlements of research-related
liabilities (456,998)
Provision for notes receivable 87,500 70,000
Non-cash compensation expense 78,343 128,167 388,504
Debt discount 281,863
Change in operating assets
and liabilities:
Accounts and other receivables 80,650 1,551,409 (1,639,237)
Inventories 81,424 (4,439) (105,474)
Prepaid expenses and other current assets 5,429 (120) 9,530
Accounts payable and accrued expenses 551,385 95,845 (1,497,126)
Amount due to GP Strategies 18,000 29,106 (87,112)
----------- ----------- -----------
Net cash used for operating activities (1,216,226) (1,539,983) (5,484,419)
----------- ----------- -----------
Cash flows from investing activities:
Additions to property, plant and equipment (46,994) (56,967)
Investments in Metacine and other assets (787,500) (170,000)
Reduction of other assets 10,000
----------- ----------- -----------
Net cash provided by (used for)
investing activities 10,000 (834,494) (226,967)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from convertible notes payable 500,000
Net proceeds from sale of common stock 7,096,949
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) 7,096,949
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (806,226) (2,473,916) 1,385,563

Cash and cash equivalents at beginning of year 1,184,889 3,658,805 2,273,242
----------- ----------- -----------
Cash and cash equivalents at end of year $ 378,663 $ 1,184,889 $ 3,658,805
=========== =========== ===========

The accompanying notes are an integral part of
these consolidated financial statements.

F-52

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, 2001 and 2000, domestic sales
totaled $1,926,466, $1,488,897, and $1,046,470, respectively, and foreign sales
totaled zero, $9,706, and $21,001, 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 20.

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 7). 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.

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, 2002, 2001 and 2000
was $396,922, $478,082 and $472,101, 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.

F-53

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.
During 2000, the Company settled amounts owed by the Company on various research
related liabilities at a savings to the Company of approximately $457,000. The
amount was credited against research and development expenses in 2000.

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.

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,
2002 2001 2000
Reported net loss $(2,738,397) $(6,434,958) $(2,668,663)

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) (481,151)

Pro forma net loss (2,832,562) (7,165,242) (3,149,814)

Loss per share
(basic and diluted)
As reported $ (.13) $ (.33) $ (.22)
Pro forma $ (.14) $ (.37) $ (.26)

F-54

During 2002 and 2001, the Company did not grant any stock options. The per
share weighted-average fair value of stock options granted during 2000 was $.88
on the date of grant using the Black Scholes option-pricing model with the
following weighted-average assumptions: expected dividend yield of 0.0%,
risk-free interest rate of 6.1%, expected volatility of 142.4% and an expected
life of 3.0 years.

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, 2001 and 2000, 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
and 2001, the Company has recorded a full valuation allowance for the net
deferred tax asset.

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.

F-55

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 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,
2001 and 2000, the Company had losses from operations of approximately $2.9
million, $7.3 million, and $4.2 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.

F-56

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 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. Restatement

At December 31, 1999, the balance of the inventory reserves has been
increased to eliminate the effect of the $766,000 reversal of inventory
previously written down. This retroactive adjustment results in increasing the
Accumulated Deficit at December 31, 1999 by $766,000 and decreasing inventory
and total assets by the same amount. In addition, a restatement was required to
correct cost of sales and equity in loss of Metacine. The Net Loss and loss per
share for the years ended December 31, 2000 and 2001 have also been similarly
revised as follows:

Year Ended December 31,
2000 2001
---- ----

Net Loss as previously reported $(2,981,672) $(7,249,576)

Effect of reversing inventory write (up) down(1) (71,300) 584,898

Effect of adjusting carrying value of inventory(2) 105,474 4,439

Elimination of adjustments for common stock
held by Red Cross(3) 278,835 (65,713)

Effect of correcting equity in loss of Metacine(4) -- 290,994
----------- -----------
Net Loss as restated $(2,668,663) $(6,434,958)
----------- -----------

Basic and diluted Net Loss per share
as previously stated $ (.25) $ (.37)

Effect of reversing inventory write down -- .03

Effect of adjusting carrying value of inventory .01 --

Elimination of adjustments for common stock
held by Red Cross .02 --

Effect of correcting equity in loss of Metacine -- .01
----------- -----------
Basic and diluted Net Loss per share as restated $ (.22) $ (.33)
=========== ===========

(1) To adjust for reversal of inventory write (up) down.
(2) To adjust the carrying value of inventory for production costs not
capitalized.
(3) To adjust cost of sales for the change in market value of common stock
held by American Red Cross.
(4) To adjust for the equity in the loss of Metacine in excess of the carrying
basis.

F-57

Note 5. 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, 2001 and 2000, the Company
recorded approximately $31,000, $60,000, and $42,000, 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.

Note 6. 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.

F-58

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 7. 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 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

F-59

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.

Note 8. Inventories

Inventories, consisting of material, labor and overhead, are classified as
follows:

December 31,
2002 2001
----------------------
As Restated
(See Note 4)

Finished goods $ 322,518 $ 1,263,696
Work in process 3,052,070 3,052,070
Raw materials 1,332,560 1,332,560
Less reserve for excess inventory (4,678,659) (5,538,413)
----------- -----------
$ 28,489 $ 109,913
=========== ===========

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

F-60

be sold or utilized in clinical trials, giving consideration to historical sales
levels. As a result, inventories at December 31, 2002 and 2001, reflect a
reserve for excess inventory of $4,678,659 and $5,538,413, respectively.

Note 9. Convertible 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. $250,000 of the
convertible notes is due January 31, 2003 and the other $250,000 of the
convertible notes is 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 transaction is subject to approval by the
shareholders of the Company. In the event that shareholder approval is not
obtained, the convertible noteholders could exercise their rights and call a
default making the convertible notes immediately due and payable. In addition,
these notes are convertible into common stock at a beneficial rate. The
beneficial conversion feature is valued at $100,000 and accounted for as debt
discount and is being amortized over the term of the notes.

Note 10. 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 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 and
2001:

Deferred tax assets 2002 2001
------------------- ---- ----

Net operating loss carry-forwards $39,530,000 34,551,000
Tax credit carry-forwards -- 150,000
Inventory reserve 1,872,000 2,114,000
Property and equipment,
principally due to differences
in basis and depreciation 661,000 588,000
In-process technology costs -- 937,000
------------ -----------
Gross deferred tax asset 42,063,000 38,340,000
Valuation allowance (42,063,000) (38,340,000)
------------ -----------
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

F-61

allowance is appropriate. The change in the valuation allowance for 2002 and
2001 was $3,723,000 and $2,411,000, respectively.

Based on the Company's net loss before income taxes in 2002, 2001 and
2000, 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.

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 2002, 2001 and 2000, the Company completed the sale of
approximately $6.5 million, $12 million, and $19 million of its New Jersey tax
loss carryovers and received $0.53 million, $0.97 million, and $1.48 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, 2001 and
2000, respectively.

Note 11. 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:

Number of Weighted-Average
Shares Exercise Price
--------- ----------------

Balance at December 31, 1999 1,887,260 $ .25

Granted 61,710 1.10
Forfeited (2,580) .25
---------
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

F-62

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.

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:

F-63

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, 1999 $ .25 - $77.90 2,567,032
Granted .56 - 1.50 14,631,279
Terminated .25 - 77.90 (90,975)
-------------- ----------
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
==============

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 12. 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. For 2000, the Company's contribution to the
Savings Plan was $124,000, consisting of $43,802 in cash and $80,198 in stock.

F-64

Note 13. Common Stock Compensation and Profit Sharing Plan

Common Stock Compensation Plan

Effective October 1, 1997, the Company adopted the Common Stock
Compensation Plan (the "Stock Compensation Plan"), providing key employees with
the opportunity of receiving the Company's common stock as additional
compensation.

Pursuant to the terms of the Stock Compensation Plan, key employees were
to receive, as additional compensation, a pre-determined amount of the Company's
common stock in three equal installments on October 1, 1998, 1999 and 2000,
provided that the key employees remain in the employ of the Company at each such
installment date. As of October 1, 2000, 1999 and 1998, a deferred compensation
liability of $289,920, $340,821 and $412,344, respectively, was accrued for
these employees based on the common stock market price of October 1, 1997. On
October 1, 2000, 1999 and 1998, the Company paid the compensation in cash in
settlement of the Company's obligation to issue shares of common stock.
Accordingly, cash of $7,414, $2,131, and $25,947, respectively, was paid in
satisfaction of the accrued liability of $289,920, $340,821 and $412,344,
respectively. The difference of $282,506, $338,690, and $386,397 was credited to
additional paid in capital in 2000, 1999 and 1998, respectively.

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. To date, there have been no contributions by the Company
under the Profit Sharing Plan.

Note 14. Related Party Transactions

GP Strategies owns less than 5% of the Company's common stock as of
December 31, 2002. The Company was a party to a management agreement with GP
Strategies, pursuant to which certain legal, financial and administrative
services had been provided by employees of GP Strategies. The management
agreement was terminated on March 27, 2000 (See Note 16).

See Note 16 for information with respect to royalty obligations to GP
Strategies.

F-65

Note 15. Supplemental Statement of Cash Flow Information

The Company paid no income taxes or interest during the three-year period
ended December 31, 2002.

During the years ended December 31, 2002, 2001 and 2000 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.

2000:

The Company issued 870,000 shares of common stock as payment related to
accounts payable (see Note 16).

The Company credited capital in excess of par value for forgiveness of
$129,886 of debt due GP Strategies.

The Company reduced capital in excess of par value and the corresponding
liability by $382,515 for settlement shares sold.

Note 16. 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.

F-66

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 and 2001 was approximately
$1,403,000 and $1,339,000, respectively. 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.

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, $27,937 and $22,500 for the years ended December
31,2002, 2001 and 2000, 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 5 and 6 for information relating to royalties payable to
Hoffmann and the Partnership, respectively.

F-67

Note 17. Quarterly Financial Data (unaudited)

The following summarizes the Company's unaudited quarterly results for
2002 and 2001.

2002 Quarters First Second Third Fourth
----- ------ ----- ------
As Restated(2) As Restated(2) As Restated(2) As Restated(2)

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
----- ------ ----- ------
As Restated(2) As Restated(2) As Restated(2) As Restated(2)

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.

(2) Restatement

2002 Quarters First Second Third

Gross profit (loss) as previously $ (35) $ (245) $ 263
reported
Effect of reversing inventory
write(up) down(a) 252 -- --
Effect of adjusting carrying value of
inventory(b) (32) (8) (49)
Elimination of adjustments for common
stock held by Red Cross(c) 184 104 40

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

Gross profit (loss) as restated $ 369 $ (149) $ 254

=================================

Net loss as previously stated $(1,289) $(1,429) $ (655)
Net effect of gross profit adjustments
from above 404 96 (9)
Effect of correcting equity in loss of
Metacine(d) 112 124 39
Elimination of adjustments for common
stock held by Metacine(e) 80 260 100
Amortization of Debt Discount(f) -- -- (114)

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

Net loss as restated $ (693) $ (949) $ (639)

=================================

Basic and diluted net loss per share
as previously stated $ (0.06) $ (0.07) $(0.03)
Effect of gross profit adjustments 0.02 -- --
Effect of Metacine related adjustments 0.01 0.02 0.01
Effect of amortization of debt discount -- -- (0.01)

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

Basic and diluted net loss per share
as restated $ (0.03) $ (0.05) $(0.03)
=================================

(a) To adjust for reversal of inventory write (up) down.

(b) To adjust the carrying value of inventory for production costs not
capitalized.

(d) To adjust for the equity in the loss of Metacine in excess of the carrying
basis.

(e) To adjust other expenses for the change in market value of common stock
held by Metacine.

(f) To amortize debt discount on convertible notes issued during the year.

F-68

2001 Quarters First Second Third Fourth

Gross profit (loss) as previously
reported $ (270) $ (56) $ (267) $ 81
Effect of reversing inventory
write(up) down(a) 159 116 192 118
Effect of adjusting carrying value of
inventory(b) (15) 53 (19) (14)
Elimination of adjustments for common
stock held by Red Cross(c) 82 (91) 192 (248)

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

Gross profit (loss) as restated $ (44) $ 22 $ 98 $ (63)

==============================================================

Net loss as previously stated $(1,498) $(3,737) $(1,665) $ (350)
Net effect of gross profit adjustments
from above 226 78 365 (144)
Effect of correcting equity in loss of
Metacine(d) -- -- -- 290
Elimination of adjustments for common
stock held by Metacine(e) -- -- 240 (240)

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

Net loss as restated $(1,272) $(3,659) $(1,060) $ (444)

==============================================================

Basic and diluted net loss per share
as previously stated $ (0.08) $ (0.19) $(0.08) $(0.02)
Effect of gross profit adjustments 0.01 -- 0.02 --
Effect of Metacine related adjustments -- -- 0.01 --

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

Basic and diluted net loss per share
as restated $ (0.07) $ (0.19) $(0.05) $(0.02)

==============================================================

(a) To adjust for reversal of inventory write (up) down.

(b) To adjust the carrying value of inventory for production costs not
capitalized.

(d) To adjust for the equity in the loss of Metacine in excess of the carrying
basis).

(e) To adjust other expenses for the change in market value of common stock
held by Metacine.

F-69

Note 18. 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 19. 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 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 20. 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.

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 at $.01 per share and expiring in March 2008.

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, 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

Year ended December 31, 2000
Valuation and qualifying
accounts deducted from assets
to which they apply:
Reserve for excess inventory $6,991,185 $ $ 867,874 $6,123,311

Notes:

Deductions are for the usage of a portion of the reserve for excess inventory.

F-71

Hemispherx Biopharma, Inc.
Unaudited Pro forma Financial Information.

Consolidated Statements of Operations for the year ended December 31, 2002 and
for the six months ended June 30, 2003.

Consolidated Balance Sheet as of June 30, 2003.

The unaudited pro-forma adjustments give effect to the second agreement with ISI
irrespective of the fact that the second acquisition remains unconsummated and
is contingent on the Company receiving the appropriate governmental approval for
the real estate to be acquired and ISI stockholders approving the transaction.

Hemispherx Biopharma, Inc. and Subsidiaries
Unaudited Pro Forma Consolidated Statement of Operations

Year ended December 31, 2002 (4) PRO FORMA
(in thousands, except per share data) (3) PRO FORMA PRO FORMA AS
PRO FORMA AS FURTHER FURTHER
ADJUSTMENTS ADJUSTED ADJUSTMENTS ADJUSTED
(1) (2) FOR FOR FOR FOR
HEMISPHERX INTERFERON FIRST FIRST SECOND SECOND
BIOPHARMA, INC. SCIENCES, INC. ASSET ASSET ASSET ASSET
AND SUBSIDIARIES AND SUBSIDIARY ACQUISITION ACQUISITION ACQUISITION ACQUISITION
---------------- -------------- ----------- ----------- ----------- -----------
2002 2002
---- ----

Revenues:

Sales of product $ -- $ 1,926 $ $ 1,926 $ $ 1,926
Clinical treatment programs 341 341 341
License fee income 563 563 563

------- ------- ------- --------- ------- --------
904 1,926 -- 2,830 -- 2,830
------- ------- ------- --------- ------- --------
Costs and expenses:
Costs of goods sold/idle
Production costs -- 1,482 (37)(a) 1,445 60 (e) 1,505

Research and development 4,946 1,514 (39)(a) 6,421 7 (e) 6,428
General and administrative 2,015 1,818 (34)(a) 3,915 6 (e) 3,921
116 (c)
------- ------- ------- --------- ------- --------

Total cost and expenses 6,961 4,814 6 11,781 73 11,854
------- ------- ------- --------- ------- --------

Interest and other income 103 7 (7)(a) 103 103
Interest and related expenses (386) 386 (a) (1,551) (1,609)(d) (3,160)
(1,551)(b)

Investments in
unconsolidated affiliates (1,470) (1,470) (1,470)
Gain on sale of state net
operating loss carryovers 528 (528)(a) -- --

------- ------- ------- --------- ------- --------
Net loss $(7,424) $(2,739) $(1,706) $ (11,869) $(1,682) $(13,551)
------- ------- ------- --------- ------- --------
Basic and diluted loss per share $ (0.23) $ (0.36) $ (0.40)
------- --------- --------
Basic and diluted weighted
Average common shares outstanding 32,086 487 32,573 1,069 33,642
------- ------- --------- ------- --------

See accompanying notes to consolidated statement of operations

F-72

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 audited consolidated historical statement of operations
of Hemispherx Biopharma, Inc. and subsidiaries for the year ended
December 31, 2002.

(2) Reflects the audited consolidated historical statement of operations
for ISI for the year ended December 31, 2002.

(3) Reflects pro forma adjustments relating to the first acquisition of
certain assets of ISI and the related funding as follows:

(a) Adjustments to reflect the recording of costs related to sales
of product by ISI where values were reduced to zero in years
prior to 2002, the elimination of ISI's net interest expense,
the elimination of ISI's depreciation, and the elimination of
a gain on the sale of a tax loss by ISI as follows:

----------------------------------------
Inventory $(287)
----------------------------------------
Interest expense-net 379
----------------------------------------
Depreciation 397
----------------------------------------
Sale of state net operating
loss carryover (528)
-----
----------------------------------------
Total $( 39)
-----
----------------------------------------

(b) Increase in interest expense resulting from the issuance of
$3.1 million of 6% senior convertible debentures. Interest
expense is inclusive of deferred interest charges resulting
from the Company recording debt discounts of $2.1 million in
recognition of fair values of detachable warrants, contingent
conversion features original issued discount and settlement
costs recorded in connection with the debenture offering.

(c) Increase in general and administrative costs of resulting from
the recognition of 6% royalty charges on the net sales of the
acquired ALFERON N injection product.

(4) Reflects pro forma adjustments relating to the second acquisition of
certain asset of ISI and the related funding as follows:

(d) Increase in interest expense resulting from the issuance of an
additional $1.6 million 6% senior convertible debentures and
additional detachable warrants to purchase 1,000,000 shares of
common stock at $2.40 per share. Interest expense is inclusive
of deferred interest charges resulting from the Company
recording of additional debt discounts of approximately $ 2.8
million in recognition of fair values of additional detachable
warrants, contingent conversion features, original issued
discount and additional settlement costs recorded in
connection with the debenture offering.

(e) Adjustments reflect depreciation expense relating to the
acquired building as result of the second acquisition of
certain assets of ISI.

F-73

Hemispherx Biopharma, Inc. and Subsidiaries
Unaudited Pro Forma Consolidated Statement of Operations

Six Months ended June 30, 2003 (4) PRO FORMA
(in thousands, except per share data) (3) PRO FORMA PRO FORMA AS
PRO FORMA AS FURTHER FURTHER
ADJUSTMENTS ADJUSTED ADJUSTMENTS ADJUSTED
(1) (2) FOR FOR FOR FOR
HEMISPHERX INTERFERON FIRST FIRST SECOND SECOND
BIOPHARMA, INC. SCIENCES, INC. ASSET ASSET ASSET ASSET
AND SUBSIDIARIES AND SUBSIDIARY ACQUISITION ACQUISITION ACQUISITION ACQUISITION
---------------- -------------- ----------- ----------- ----------- -----------
2003 2003
---- ----

Revenues:

Sales of product $ 79 $ 242 $ $ 321 $ $ 321
Clinical treatment programs 81 81 81

------- ------ ------- ------- ----- -------
160 242 402 402
------- ------ ------- ------- ----- -------
Costs and expenses:
Costs of goods sold/idle
Production costs 155 267 47 (a) 469 30 (e) 499

Research and development 1,728 190 (7)(a) 1,911 4 (e) 1,915
General and administrative 1,505 266 (7)(a) 1,779 4 (e) 1,783
15 (c)

------- ------ ------- ------- ----- -------
Total cost and expenses 3,388 723 48 4,159 38 4,197
------- ------ ------- ------- ----- -------

Interest and other income 51 51 51
Interest and related expenses (2,100) (33) 33 (a) (2,100) 298 (d) (1,802)
Other Expenses (29) (29) (29)

Service fee income 115 (115)(a) --
Other income 6 (6)(a) --
Bulk sale of Alferon inventory 1,164 (1,164)(a) --

------- ------ ------- ------- ----- -------
Net loss $(5,306) $ 771 $(1,300) $(5,835) $(260) $(5,575)
------- ------ ------- ------- ----- -------

Basic and diluted loss per share $ (.16) $ (.18) $ (.17)
------- ------- -------
Basic and diluted weighted
Average common shares outstanding 32,873 33,059 487 33,546
------- ------- -------

See accompanying notes to consolidated statement of operations

F-74

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 six
months ended June 30, 2003.

(2) Reflects the unaudited consolidated historical statement of
operations for ISI for the period ended March 11, 2003.

(3) Reflects pro forma adjustments relating to the first acquisition of
certain assets of ISI and the related funding as follows:

-----------------------------------------
Inventory $(109)
-----------------------------------------
Interest expense 33
-----------------------------------------
Depreciation 76
-----------------------------------------
Service fee income (115)
-----------------------------------------
Other income (6)
-----------------------------------------
Extraordinary gain on sale
of Alferon business (1,164)
-----------------------------------------
-----------------------------------------
Total $(1,285)
-----------------------------------------

(b) Increase in interest expense resulting from the issuance of
$3.1 million of 6% senior convertible debentures. Interest
expense is inclusive of deferred interest charges resulting
from the Company recording debt discounts of $2.1 million in
recognition of fair values of detachable warrants, contingent
conversion features and original issued discount and
settlement costs recorded in connection with the debenture
offering.

(c) 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.

(4) Reflects pro forma adjustments relating to the second acquisition of
certain asset of ISI and the related funding as follows:

(d) Decrease in interest expense for the effect of the conversion
of $1.6 million of the 6% senior convertible debentures during
the six months ended June 30, 2003 as it relates to write offs
of debt discounts recognized in connection with the debenture
offering for which we have given effect to on pro forma basis
as if it had occurred during the year ended December 31, 2002.

(e) Adjustments reflect depreciation expense relating to the
acquired building as result of the second acquisition of
certain assets of ISI.

F-75

Hemispherx Biopharma, Inc. and Subsidiaries
Unaudited Pro Forma Consolidated Balance Sheet

PRO FORMA
(2) AS
June 30, 2003 (1) PRO FORMA ADJUSTED
(in thousands) HEMISPHERX ADJUSTMENTS FOR
BIOPHARMA, FOR SECOND SECOND
INC. AND ASSET ASSET
SUBSIDIARIES ACQUISITION ACQUISITION

ASSETS

Current Assets:

Cash and cash equivalents $ 4,659 $ 4,659
Other receivables 52 52
Inventories net of reserves 2,167 2,167
Prepaid and other current assets 239 239
--------- ------- ---------
Total current assets 7,117 7,117
--------- ------- ---------
Property, plant and equipment, net 131 2,269 2,400
Patent and trademark rights, net 1,086 1,086

Investments in unconsolidated affiliates 408 408
Deferred financing costs 382 382
Deferred acquisition costs 1,068 (1,068) -

Other assets 51 51
--------- ------- ---------
Total assets $ 10,243 $ 1,201 $ 11,444
========= ======= =========
LIABILITIES

Current liabilities:

Accounts payable $1,404 $ 363 $1,767
Accrued expenses 300 300
--------- ------- ---------
Total current liabilities 1,704 363 2,067
--------- ------- ---------

Redeemable common stock 1,600 625 2,225
Stockholders' equity :
Common stock 36 36
Additional paid-in capital 111,332 213 111,545
Accumulated deficit (104,379) (104,379)
Treasury stock (50) (50)
--------- ------- ---------

Total stockholders' equity 6,939 213 7,152
--------- ------- ---------
Total liabilities and stockholders' equity $ 10,243 $ 1,201 $ 11,444
========= ======= =========

See accompanying notes to consolidated balance sheet

F-76

NOTES TO UNAUDITED PROFORMA
CONSOLIDATED BALANCE SHEET

The following notes describe the column headings in the unaudited pro-forma
consolidated balance sheet and the pro forma adjustments that have been made to
this balance sheet:

(1) Reflects the unaudited consolidated historic balance sheet of
Hemispherx Biopharma Inc. and subsidiaries as of June 30, 2003.

(2) Reflects pro forma adjustments for the second acquisition of certain
assets of ISI totaling $2.2 million and the assumption of certain
obligations, including those settled via the issuance of shares of
the Company's common stock. A portion of the common shares totaling
$.6 million issued to ISI were redeemable and are reflected as such.

As a result of the agreements, the following table summarizes the estimated fair
values of the assets and liabilities assumed at the acquisition date. (AMOUNTS
IN THOUSANDS)

Second Acquisition
------------------

Building $2,269
Fair Value of Liabilities Assumed (363)
------
Fair Value of Common Shares

Issued $1,906
======

F-77

================================================================================

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 .......................................................
Risk Factors ............................................................
Use of Proceeds .........................................................
Dividend Policy .........................................................
Price Range of Common Stock .............................................
Selected Consolidated ...................................................
Financial Data ..........................................................
Management's Discussion and Analysis of Financial Condition
And Results of Operations .............................................
Our Business ............................................................
Management ..............................................................
Principal Stockholders ..................................................
Certain Relationships and Related Transactions ..........................
Selling Stockholders ....................................................
How the Shares May Be Distributed .......................................
Description of Securities Being Registered ..............................
Legal Matters ...........................................................
Experts .................................................................
Where you can find More information .....................................

7,891,789 SHARES OF

COMMON STOCK

HEMISPHERX BIOPHARMA, INC.

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

PROSPECTUS

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

September ___, 2003

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

================================================================================

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

SEC Filing Fees ............................................ $ 1,218.00
American Stock Exchange Listing Fee* ....................... $17,500.00
Printing and Engraving Expenses* ........................... $ 2,500.00
Accounting Fees and Expenses* .............................. $20,000.00
Legal Fees and Expenses* ................................... $25,000.00
Transfer Agent and Registrar Fees* ......................... $ 1,500.00
Miscellaneous* ............................................. $13,082.00

Total Expenses* ........................................... $80,800.00
==========
---------------
* 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 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.

II-1

(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 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

II-2

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, 2000, we have issued and sold the following securities:

On January 3, 2000, we issued warrants to purchase an aggregate of 100,000
shares of our common stock at an exercise price of $10.00 per share to Larry
Zaslow, Marc Komorsky, Peter Adolph and Paul Michaels. The warrants expire on
December 31, 2005.

On January 13, 2000, 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
and Brookfield Capital. The warrants expire on January 12, 2004.

On June 30, 2000, 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, 2004.

On October 2, 2000, 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 September 30, 2004.

On December 31, 2000, 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 December 31, 2004.

On June 1, 2000, we issued warrants to purchase an aggregate of 100,000 shares
of our common stock at an exercise price of $12.00 per share to Larry Zaslow,
Marc Komorsky, Peter Adolph and Paul Michaels. The warrants expire on May 31,
2005.

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 Pual Michaels.
The warrants expire on April 6, 2005.

II-3

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.

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.

II-4

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
aggregate anticipated 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 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 anticipated 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
is 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. The July
2008 Warrants received by the investors are to acquire at any time through July
31, 2008 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 $1.722 per share). The exercise price (and the
reset price) under the July 2008 Warrants also is subject to similar adjustments
for anti-dilution protection.

On June 25, 2003, we issued to each of the 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.

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 a transaction by an issuer not

II-5

involving a public offering.

By agreement with Cardinal Securities, LLC, for general financial advisory
services and in conjunction with the July 2003 private debenture offering and
the March 2003 private debenture offering on substantially the same terms to the
same investors, 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
425,000 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 and 200,000 are
exercisable at $2.50 per share. The $1.74 warrants expire on July 10, 2008 and
the other warrants expire on March 12, 2008. 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 another 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. 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.

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 Registrant's Common Stock (1)

5.1 Opinion of Silverman Sclar Byrne Shin & Byrne P.C., legal counsel*

10.1 1990 Stock Option Plan (1)

10.2 1992 Stock Option Plan(1)

II-6

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
Registrant and Dr. William A. Carter, dated as of December 3, 1998 (7)

10.71 Amended and Restatement Engagement Agreement by and between the
Company and Robert E. Peterson dated April 1, 2001 (7)

10.8 License Agreement by and between the Registrant and the Johns Hopkins
University, dated December 31, 1980(1)

10.9 Technology Transfer, Patent License and Supply Agreement by and
between the Registrant, Pharmacia LKB Biotechnology Inc., Pharmacio
P-L Biochemicals Inc. and E.I. du Pont de Nemours and Company, dated
November 24, 1987(1)

10.10 Pharmaceutical Use Agreement, by and between the Registrant and Temple
University, dated August 3, 1988(1)

10.11 Assignment and Research Support Agreement by and between the
Registrant, Hahnemann University and Dr. David Strayer, Dr. Isadore
Brodsky and Dr. David Gillespie, dated June 30, 1989(1)

10.12 Agreement between the Registrant and Bioclones (Proprietary) Limited
(1)

10.13 Licensing Agreement with Core BioTech Corp.(1)

10.14 Licensing Agreement with BioPro Corp. (1)

10.15 Licensing Agreement with BioAegean Corp. (1)

10.16 Amendment, dated August 3, 1995, to Agreement between the Registrant
and Bioclones (Proprietary) Limited (contained in Exhibit 10.12)

10.17 Agreement, dated July 16, 1995, between the Registrant, Vernacular
Communications, Inc. Gerald Souham, Mitchell L. Reisman, Craig S.
O'Keefe and Robert C. Conaboy(1)

10.18 Forbearance Agreement dated March 11, 2003, by and between ISI, the
American National Red Cross and the Registrant.(4)

10.19 Forbearance Agreement dated March 11, 2003, by and between ISI, GP
Strategies Corporation and the Registrant.(4)

10.20 Securities Purchase Agreement, dated March 12, 2003, by and among the
Company and the Buyers named therein.(4)

II-7

10.21 Form of 6% Convertible Debenture of the Company due January 2005.(4)

10.22 Form of Warrant for Common Stock of the Company issued with Debenture
due January 2005.(4)

10.23 Registration Rights Agreement, dated March 12, 2003, by and among the
Company and the Buyers named therein.(4)

10.24 Securities Purchase Agreement, dated July 10, 2003, by and among the
Registrant and the Buyers named therein.(5)

10.25 Form of 6% Convertible Debenture of the Registrant due July 2005.(5)

10.26 Form of Warrant for Common Stock of the Registrant issued with
Debentures due July 2005.(5)

10.27 Form of Warrant for Common Stock of the Registrant issued in June
2003.(6)

10.28 Registration Rights Agreement, dated July 10, 2003, by and among the
Registrant and the Buyers named therein.(5)

14.1 Material Foreign Patents(1)

21 Subsidiaries of the Registrant

23.1 Consent of BDO Seidman, LLP, independent certified public accountants.

23.2 Consent to Eisner LLP, independent certified public accountants

23.3 Consent of Silverman Sclar Byrne Shin & Byrne P.C., legal counsel
(included in Exhibit 5.1).

24.1 Powers of Attorney (included in Signature Pages to this Registration
Statement on Form S-3).
-----------------

* To be filed by amendment.

(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 filed on March 13, 2003.

II-8

(5) Incorporated by reference from the exhibits to the Registrant's
Current Report on Form 8-K filed on July 14, 2003.

(6) Incorporated by reference from the exhibits to the Registrant's
Current Report on Form 8-K filed on June 27, 2003.

(7) Incorporated by reference from exhibits to the Registrant's Form
10-Q filed on November 14, 2001.

(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 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

II-9

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.

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 Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of Philadelphia, Commonwealth of Pennsylvania, on the 9th
day of September, 2003.

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.

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints William A. Carter acting alone, his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for such person in his name, place and stead, in any and all capacities, in
connection with the Registrant's Registration Statement on Form S-1 under the
Securities Act of 1933, including, without limiting the generality of the
foregoing, to sign the Registration Statement in the name and on behalf of the
Registrant or on behalf of the undersigned as a director or officer of the
Registrant, and any and all amendments or supplements to the Registration
Statement, including any and all stickers and post-effective amendments to the
Registration Statement, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission and any applicable securities exchange or securities self-regulatory
body, granting unto said attorney-in-fact and agents, each acting alone, full
power and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or their substitutes or substitute, may
lawfully do or cause to be done by virtue hereof.

II-10

Signature Title Date

/s/ William A. Carter, M.D. Chairman of the Board, September 9, 2003
--------------------------------- Chief Executive Officer
William A. Carter, M.D. (Principal Executive) and
Director

/s/ Richard Piani Director September 9, 2003
---------------------------------
Richard Piani

/s/ Robert E. Peterson Chief Financial Officer September 9, 2003
--------------------------------- and Chief Accounting
Robert E. Peterson Officer

/s/ Ransom Etheridge Secretary And Director September 9, 2003
---------------------------------
Ransom Etheridge

/s/ William Mitchell, M.D., Ph.D. Director September 9, 2003
---------------------------------
William Mitchell, M.D., Ph.D.

/s/ Iraj-Eqhbal Kiani, M.D. Director September , 2003
---------------------------------
Iraj-Eqhbal Kiani, M.D.

II-11

Hemispherx Biopharma, Inc.
Form S-1
Index to Exhibits

Exhibit No. Description
-----------------------

21 Subsidiaries of the Registrant.

23.1 Consent of BDO Seidman, LLP, independent certified public accountants.
23.2 Consent of Eisner LLP, independent certified public accountants.