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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934

For the Quarterly Period Ended June 30, 2004

Commission File Number: 0-27072

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

Delaware 52-0845822
- ------------------------------ -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

1617 JFK Boulevard, Suite 660, Philadelphia, PA 19103
- ------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)

(215) 988-0080
- ------------------------------------------------------------------------------
(Registrant's telephone number, including area code)

Not Applicable
- ------------------------------------------------------------------------------
(Former name,former address and former fiscal year,if changed since last report)

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


Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).

/X/ Yes // No

45,285,606 shares of common stock were issued and outstanding as of July 28,
2004.





PART I - FINANCIAL INFORMATION

ITEM 1: Financial Statements

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

December 31, June 30,
2003 2004
----------- ----------
(Unaudited)
ASSETS
Current assets:

Cash and cash equivalents $ 3,764 $ 4,464
Short term investments 1,495 4,969
Inventory 2,896 2,623
Accounts and other
receivables 282 156
Prepaid expenses and other current assets 170 245

----------- ----------
Total current assets 8,607 12,457

Property and equipment, net 94 3,357
Patent and trademark rights, net 1,027 988
Investments 408 408
Deferred acquisition costs 1,546 -
Deferred financing costs 393 406
Advance receivable 1,300 1,300
Other assets 29 17
----------- ----------
Total assets $ 13,404 $ 18,933
=========== ==========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

Accounts payable $ 488 $ 598
Accrued expenses 1,119 607
Deferred revenue - 497
Current portion of long-term debt (net of
discounts of $1,536) - 1,130
----------- ----------
Total current liabilities 1,607 2,832
Long-Term Debt-net of current portion and
discounts of $4,533 and $1,811, respectively 2,058 2,055

Commitments and contingencies:
Redeemable Common Stock 491 -

Stockholders' equity:
Common stock 39 44
Additional paid-in capital 123,054 141,845
Treasury stock - at cost (2) (2)
Accumulated deficit (113,843) (127,841)
----------- ----------
Total stockholders' equity 9,248 14,046
----------- ----------
Total liabilities and stockholders' equity $ 13,404 $ 18,933
=========== ==========
See accompanying notes to condensed consolidated financial statements.


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



For the Three months ended
June 30,
-------------------------
2003 2004
--------- ---------
(Unaudited) (Unaudited)
Revenues:

Sales of product, net $ 60 $ 289
Clinical treatment programs 34 42

--------- ---------
94 331

Costs and expenses:

Production/cost of goods sold 37 692
Research and development 855 758
General and administrative 838 1,076
---------- ---------
Total cost and expenses 1,730 2,526

Interest and other income 1 13
Interest expenses (82) (105)
Financing costs (1,972) (3,669)
---------- ---------

Net loss $(3,689) $(5,956)
========== =========




Basic and diluted loss per share $ (.11) $ (.14)
========== ==========

Basic and diluted weighted
average common shares outstanding 33,519,275 43,871,350
========== ==========


See accompanying notes to condensed consolidated financial statements.






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



For the Six months ended
June 30,
-------------------------
2003 2004
--------- ---------
(Unaudited) (Unaudited)
Revenues:

Sales of product, net $ 79 $ 548
Clinical treatment programs 81 91

--------- ---------
160 639

Costs and expenses:

Production/cost of goods sold 155 1,293
Research and development 1,728 1,720
General and administrative 1,505 3,921
---------- ---------
Total cost and expenses 3,388 6,934

Interest and other income 51 24
Interest expenses (82) (206)
Financing costs (2,047) (7,520)
---------- ---------

Net loss $(5,306) $(13,997)
========== =========




Basic and diluted loss per share $ (.16) $ (.33)
========== ==========

Basic and diluted weighted
average common shares outstanding 32,872,905 42,040,412
========== ==========


See accompanying notes to condensed consolidated financial statements.






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

(Unaudited)
For the Six months ended
June 30,
--------------------------
2003 2004
-------- ---------

Cash flows from operating activities:

Net loss $(5,306) $(13,997)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation of property and equipment 43 53
Amortization of patents rights 70 160
Amortization of deferred financing costs 2,030 6,573
Financing costs related to redemption obligation - 686
Stock warrant compensation expense - 1,769

Changes in assets and liabilities:
Inventory (400) 273
Accounts receivable 1,455 125
Deferred Revenue - 497
Prepaid expenses and other current assets (168) (76)
Accounts payable 452 365
Accrued expenses (443) (314)
Other assets 42 14
------- ---------
Net cash used in operations (2,225) (3,872)
------- ---------

Cash flows from investing activities:
Purchase of land and building (19) (143)
Additions to patent rights (161) (121)
Maturity of short term investments 520 1,496
Purchase of short term investments - (4,969)
Deferred acquisition costs (160) -
--------- ---------
Net cash provided by(used in)
investing activities 180 (3,737)
--------- ---------
Cash flows from financing activities:
Proceeds from exercise of stock warrants - 2,911
Proceeds from long-term borrowings 5,426 5,808
Payments on long-term borrowings (440) -
Deferred financing costs (455) (410)
Purchase of treasury stock (83) -
-------- ---------
Net cash provided by financing activities 4,448 8,309
-------- ---------
Net increase in cash and cash equivalents 2,403 700
Cash and cash equivalents at beginning of period 2,256 3,764
-------- ---------
Cash and cash equivalents at end of period $ 4,659 $4,464
======== =========
Supplementary disclosures of cash flow information:
Issuance of common stock for accounts payable $ - $ 255
Issuance of common stock for purchase of building $ - $1,626
Issuance of common stock for debt conversion and
interest payments $ - $6,072

See accompanying notes to condensed consolidated financial statements.





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 included in amendment no. 1 to our annual
report on Form 10-K/A for the year ended December 31, 2003, as filed with the
SEC on March 30, 2004.

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 pro forma disclosures of compensation expense under the
fair value method of SFAS No. 123, "Accounting for Stock-Based Compensation,"
and SFAS No. 148, "Accounting for Stock-Based Compensation- Transition and
Disclosure."

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

June 30,
2003 2004
Risk-free interest rate 5.23% - %
Expected dividend yield - -
Expected lives 2.5 years - years
Expected volatility 63.17% - %


Had compensation cost for the Company's option plans been determined using the
fair value method at the grant dates, the effect on the Company's net loss and
loss per share for the six months ended June 30, 2003 and 2004 would have been
as follows:

(In Thousands)
Six Months Ended
June 30,
----------
2003 2004
------- -------

Net (loss) as reported $(5,306) $(13,997)
Add: Stock based employee
compensation expense
Included in reported net loss,
net of Related tax effects - -

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

Pro forma net loss $(5,580) $(13,997)
======= ========

Basic and diluted loss
per share
As reported $(.16) $(.33)
Pro forma $(.17) $(.33)





Note 3: INVESTMENT IN UNCONSOLIDATED AFFILIATES

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

NOTE 4: INVENTORIES

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

Inventories consist of the following:

June 30, 2004 December 31, 2003
Raw materials-work in process $ 1,729,000 $1,729,000
Finished goods 894,000 1,167,000
------- ----------
$ 2,623,000 $2,896,000
=========== ==========

NOTE 5: REVENUE AND LICENSING FEE INCOME

We executed a Memorandum of Understanding (MOI) in January 2004 with Fujisawa
Deutschland GmbH, ("Fuji") a major pharmaceutical corporation, granting them an
exclusive option for a limited number of months to enter a Sales and
Distribution Agreement with exclusive rights to market Ampligen(R) for ME/CFS in
Germany, Austria and Switzerland. The MOI required us to file the full report on
the results of our AMP 516 Clinical Trial with Fuji by May 31, 2004. If the full
report was not provided to Fuji by May 31, 2004 and Fuji did not wish to
exercise its option, we would have been required to refund one half of the
400,000 Euro fee. We submitted our initial report to Fuji on May 28, 2004 and
received their response requesting additional information, which we provided in
June 2004. The option period ends 12 weeks after the later of Fuji's review of
the full report on the results of our Amp 516 clinical trial and Fuji's meeting
with the trial's principal investigators. We received an initial fee of 400,000
Euros (approximately $497,000 US). If we do not provide them with the full
report by December 31, 2004 and Fuji does not wish to exercise its option, we
will be required to refund the entire fee. If Fuji exercises the option, Fuji
would be required to pay us an additional 1,600,000 Euros upon execution of the
Sales and Distribution agreement, purchase Ampligen(R) exclusively from us and
meet certain annual minimum purchase quotas. We would be required to file an
application with the EMEA for commercial sale of Ampligen(R) for ME/CFS on or
before December 31, 2005. Upon our filing of that application, we would receive
an additional 1,000,000 Euros and, upon approval by the EMEA, an additional
2,000,000 Euros. If we failed to meet the December 31, 2005 filing deadline, we
would be required to return 40% of all payments that we had received from Fuji.
We would be required to sell Ampligen(R) to Fuji at a 20% price discount until
the aggregate amount of the discount reached $1,000,000 Euros (representing 50%
of the initial 2,000,000 fee paid to us on and prior to execution of the
definitive agreement). The foregoing is a summary of the memorandum of
understanding. We cannot assure that we can prepare and issue the AMP 516 report
within the time frames noted or that Fuji will exercise the option or that the
proposed terms of the Sales and Distribution Agreement will not change
materially. The initial fee has been recorded on our balance sheet at June 30,
2004 as deferred 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. The Fuji initial fee of $497,000 has been deferred as of June
30, 2004.

During the periods ending December 31, 2003 and June 30, 2004. The Company did
not receive any grant monies from local, state and or Federal Agencies.

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

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



Note 6: ACQUISITION OF ASSETS OF INTERFERON SCIENCES, INC.

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

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

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

On May 30, 2003, we issued the shares to GP Strategies and the American National
Red Cross. Pursuant to our agreements with ISI and these two creditors, we
registered the foregoing shares for public sale. As of June 30, 2004, GP
Strategies and the American National Red Cross had sold all of their shares.

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


On March 17, 2004, the Company acquired the land and buildings located in New
Brunswick, NJ. The aggregated cost of the land and buildings was approximately
$3,316,000. The cost of the land and buildings was allocated as follows:

Land $ 423,000

Buildings 2,893,000
---------

Total cost $ 3,316,000
===========




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



The following table represents the Unaudited pro forma results of operations as
though the ISI acquisitions had occurred on January 1, 2002.

Six Months Ended June 30,

2003 2004
---- ----
(in thousands except for share data)

Net revenues $ 402 $639
Expenses (6,254) (14,636)
------- -------

Net Loss $(5,852) $(13,997)
======== ========

Basic and diluted loss per share $(.18) $(.33)
------ ------

Weighted average shares outstanding 33,058,557 42,246,462
=========== ===========
- ----------------------------------------------------------------------------


Note 7: DEBENTURE FINANCING


Long term debt consists of the following:

(in thousands)
December 31, 2003June 30,
2004
July 2003 Debenture $ 2,334 $ 600
October 2003 Debenture 4,257 2,071
January 2004 Debenture 3,861
------ ------
Total 6,591 6,532

Less Discounts (4,533) (3,347)
------ ------
Balance 2,058 3,185

Less Current Portion of long-term debt
(net of discounts of $1,536) - (1,130)
------ ------

Total long-term debt $ 2,058 $ 2,055
======= =======



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

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

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

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

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

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

The July 2003 Debentures are convertible at the option of the investors at any
time through July 31, 2005 into shares of our common stock. The conversion price
under the July 2003 Debentures was fixed at $2.14 per share; however, as part of
the new debenture placement closed on October 29, 2003 (see below), the
conversion price under the July 2003 Debentures was lowered to $1.89 per share.
The conversion price is subject to adjustment for anti-dilution protection for
issuance of common stock or securities convertible or exchangeable into common
stock at a price less than the conversion price then in effect. In addition, in
the event that we do not pay the redemption price at maturity, the Debenture
holders, at their option, may convert the balance due at the lower of (a) the
conversion price then in effect and (b) 95% of the lowest closing sale price of
our common stock during the three trading days ending on and including the
conversion date.

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

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

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

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

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

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

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

The January 2004 Debentures are convertible at the option of the investors at
any time through January 31, 2006 into shares of our common stock. The
conversion price under the January 2004 Debentures was fixed at $2.53 per share,
subject to adjustment for anti-dilution protection for issuance of common stock
or securities convertible or exchangeable into common stock at a price less than
the conversion price then in effect. In addition, in the event that we do not
pay the redemption price at maturity, the Debenture holders, at their option,
may convert the balance due at the lower of (a) the conversion price then in
effect and (b) 95% of the lowest closing sale price of our common stock during
the three trading days ending on and including the conversion date. Following
completion of the August 2004 Private Placement (see Note 9 - Subsequent
Events), the conversion price was lowered to $2.08 per share.

There are two classes of July 2009 Warrants received by the Investors: Class A
and Class B. The Class A warrants are to acquire any time from July 26, 2004
through July 26, 2009 an aggregate of up to 395,257 shares of common stock at a
price of $3.29 per share. The Class B warrants are to acquire any time from July
26, 2004 through July 26, 2009 an aggregate of up to 395,257 shares of common
stock at a price of $5.06 per share. On January 27, 2005, the exercise price of
these July 2009 Class A and Class B Warrants will reset to the lesser of their
respective exercise price then in effect or a price equal to the average of the
daily price of the common stock between January 27, 2004 and January 26, 2005.
The exercise price (and the reset price) under the July 2009 Warrants also is
subject to similar adjustments for anti-dilution protection. Notwithstanding the
foregoing, the exercise prices as reset or adjusted for anti-dilution, will in
no event be less than $2.58 per share. Following completion of the August 2004
Private Placement (see Note 9 - Subsequent Events), the exercise price was
lowered to $2.58 per share.

We also issued to the investors Additional Investment Rights pursuant to which
the investors have the right to acquire up to an additional $2,000,000 principal
amount of January 2004 Debentures (the July 2004 Debentures") from us. The July
2004 Debentures are identical to the January 2004 Debentures except that the
conversion price is $2.58. The investors exercised the Additional Investment
Rights on July 13, 2004. Following completion of the August 2004 Private
Placement (see Note 9 - Subsequent Events), the conversion price waslowered to
$2.08 per share.

Pursuant to the terms and conditions of all of the outstanding Debentures
(collectively, the "Debentures"), we have pledged all of our assets, other than
our intellectual property, as collateral, and we are subject to comply with
certain financial and negative covenants.

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

The May 2009 Warrants are to acquire at any time commencing on November 14, 2004
through April 30, 2009 an aggregate of 1,300,000 shares of common stock at a
price of $4.50 per share. On May 14, 2005, the exercise price of these May 2009
Warrants will reset to the lesser of the exercise price then in effect or a
price equal to the average of the daily price of the common stock between May
15, 2004 and May 13, 2005. The exercise price (and the reset price) under the
May 2009 Warrants also is subject to adjustments for anti-dilution protection
similar to those in the other Warrants. Notwithstanding the foregoing, the
exercise price as reset or adjusted for anti-dilution, will in no event be less
than $4.008 per share. This transaction generated a non-cash charge of about
$2,300,000 financing costs in the second quarter of 2004. Following completion
of the August 2004 Private Placement (see Note 9 - Subsequent Events), the
exercise price waslowered to $4.008 per share.

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

As of June 30, 2004, the investors have converted $12,400,329 of debt from the
Debentures issued in March, July and October 2003 and January 2004 into
7,307,440 shares of our common stock. The March Debentures have been fully
converted. The remaining principal balance on the outstanding Debentures is
convertible into shares of our stock at the option of the investors at any time,
through the maturity date. In addition, we have paid $1,300,000 into the
debenture cash collateral account as required by the terms of the October 2003
Debentures. The amounts paid through June 30, 2004 have been accounted for as
advances receivable and are reflected as such on the accompanying balance sheet
as of June 30, 2004. The cash collateral account provides partial security for
repayment of the outstanding Debentures in the event of default.

By agreement with Cardinal Securities, LLC, for general financial advisory
services and in conjunction with the private debenture placements in July and
October 2003 and in January, May and July 2004 (see Note 9 - Subsequent Events),
we paid Cardinal Securities, LLC an investment banking fee equal to 7% of the
investments made by the two Debenture holders and issued to Cardinal the
following common stock purchase warrants: (i) 112,500 exercisable at $2.57 per
share; (ii) 87,500 exercisable at $2.42 per share; and (iii) 100,000 exercisable
at $3.04 per share. The $2.57 warrants expire on July 10, 2008, the $2.42
warrants expire on October 29, 2008 and the $3.04 warrants expire on January 5,
2009. With regard to the exercise of the June 2008 Warrants and issuance of the
May 2009 Warrants, Cardinal received an investment banking fee of 7%, half in
cash and half in shares. With regard to the exercise of the Additional
Investment Rights, the July 2008 and October 2008 Warrants and issuance of the
July 2009 Warrants, Cardinal received an investment banking fee of 7%, 146,980
in cash and 22,703 in shares as well as 50,000 warrants exercisable at $4.07
expiring on July 12, 2009. By agreement with Cardinal, we have registered all of
the foregoing shares and shares issuable upon exercise of the above mentioned
warrants for public sale and we have agreed to register the balance.

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

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

The requisite stockholder approval was obtained at our Annual Meeting of
Stockholders on June 23, 2004. In accordance with EITF 00-19, we revalued this
redemption obligation associated with the beneficial conversion feature and
warrants as of June 23, 2004. We recorded a reduction in the value of the
redemption obligation and financing charge of $260,000 as a result of this
revaluation. In addition, upon receiving the requisite stockholder approval,
this redemption obligation was reclassed as additional paid in capital as of the
date the approval was received or June 23, 2004.

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


Note 8: EXECUTIVE COMPENSATION

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

In October 2003, in recognition of this action as well as Dr. Carter's prior and
on-going efforts relating to product development securing critically needed
financing and the acquisition of a new product line, the Compensation Committee
determined that Dr. Carter be awarded bonus compensation in 2003 consisting of
$196,636 and a grant of 1,450,000 stock warrants with an exercise price of $2.20
per share. This additional compensation was reviewed by an independent valuation
firm and found to be fair and reasonable within the context of total
compensation paid to chief executive officers of comparable biotechnology
companies.

In the quarter ended March 31, 2004, Dr. Carter was awarded an additional bonus
of $99,481 by the Compensation Committee. In addition, The Company recorded a
non-cash stock compensation charge of $1,769,000 during the first quarter 2004
resulting from warrants issued to Dr. Carter in 2003 that vested upon the
execution of the second ISI asset closing on March 17, 2004. This was determined
by subtracting the exercise price from the stock closing price on March 17, 2004
and multiplying the result by the number of warrants.

Note 9- SUBSEQUENT EVENT

On July 13, 2004, the Debenture holders exercised all of the July 2003 and
October 2003 Warrants and the Additional Investment Rights amounting to
approximately $4,198,980 in gross proceeds to the Company. We issued to these
holders warrants (the "June 2009 Warrants") to purchase an aggregate of
1,300,000 shares of common stock.

The June 2009 Warrants are to acquire at any time commencing on January 13, 2005
through June 30, 2009 an aggregate of 1,300,000 shares of common stock at a
price of $3.75 per share. On July 13, 2005, the exercise price of these June
2009 Warrants will reset to the lesser of the exercise price then in effect or a
price equal to the average of the daily price of the common stock between July
14, 2004 and July 12, 2005. The exercise price (and the reset price) under the
June 2009 Warrants also is subject to adjustments for anti-dilution protection
similar to those in the other Warrants. Notwithstanding the foregoing, the
exercise price as reset or adjusted for anti-dilution, will in no event be less
than $3.33 per share. Following completion of the August 2004 Private Placement
(see below), the exercise price was lowered to $3.33 per share. This transaction
is subject to a non-cash financing charge of $1,676,000 to be amortized over the
remaining life of the October 2003 Debentures. The Company agreed to register
the shares issuable upon exercise of the June 2009 Warrants pursuant to
substantially the same terms as the registration rights agreements between the
Company and the holders (see Note 7 - Debenture Financing). Pursuant to this
obligation, the Company has so registered the shares.

On August 5, 2004, the Company closed a private placement with select
institutional investors of approximately 3,617,300 shares of its Common Stock
and warrants to purchase an aggregate of up to approximately 1,085,200 shares of
its Common Stock. Jefferies & Company, Inc. acted as Placement Agent for which
it received a fee and Common Stock Purchase Warrants. The Company raised
approximately $7,524,000 in gross cash proceeds from this private offering.

The Warrant issued to each purchaser is exercisable for up to 30% of the number
of shares of Common Stock purchased by such Purchaser, at an exercise price
equal to $2.86 per share. Each Warrant has a term of five years and is fully
exercisable from the date of issuance.

Pursuant to the Registration Rights Agreement, made and entered into as of
August 5, 2004 (the "Rights Agreement"), the Company has agreed to file with the
Securities and Exchange Commission a registration statement covering resales of
the shares issued to the Purchasers and shares issuable upon the exercise of the
Warrants.

Closing of the August 2004 Private Placement triggered the anti-dilution
provisions of the January 2004 Debentures and the July 2004 Debentures and the
July 2009 Warrants and the June 2009 Warrants. The conversion price adjustment
for the Debentures noted above will result in an adjustment in the third quarter
2004 to the Debenture discount and additional paid-in-capital. Any adjustment to
the Debenture discount will be amortized over the remaining life of the
Debentures. The exercise price adjustment for the above warrants will result in
a non-cash financing adjustment in the third quarter 2004 upon revaluing the
warrants at the new anti-dilution pricing using the Black-Scholes Method.




ITEM 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations.

Special Note Regarding Forward-Looking Statements

Certain statements in this document 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 report 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 report. 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.

Overview

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 became 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 obtain the required regulatory approvals
which will allow the progressive introduction of Ampligen(R) (our proprietary
drug) for treating Myalgic Encephalomyelitis/ Chronic Fatigue Syndrome
("ME/CFS"), HIV, Hepatitis C ("HCV") and Hepatitis B ("HBV") in the U.S.,
Canada, Europe and Japan. Ampligen(R) is currently in the open label portion of
phase III clinical trials in the U.S. for use in treatment of ME/CFS and is in
Phase IIb Clinical Trials in the U.S. for the treatment of newly emerging
multi-drug resistant HIV, and for the induction of cell mediated immunity in HIV
patients that are under control using potentially toxic drug cocktails.

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

We 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.


RISK FACTORS

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

No assurance of successful product development

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

ALFERON N Injection(R). Although ALFERON N Injection(R) is approved for
marketing in the United States for the intralesional treatment of refractory or
recurring external genital warts in patients 18 years of age or older, to date
it has not been approved for other indications. We face many of the risks
discussed above, with regard to developing this product for use to treat other
ailments such as multiple sclerosis and cancer.

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

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

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

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

We began operations in 1966 and last reported net profit from 1985
through 1987. Since 1987, we have incurred substantial operating losses, as we
pursued our clinical trial effort and expanded our efforts in Europe. As of June
30, 2004 our accumulated deficit was approximately $127,841,000. We have not yet
generated significant revenues from our products and may incur substantial and
increased losses in the future. We cannot assure that we will ever achieve
significant revenues from product sales or become profitable. We require, and
will continue to require, the commitment of substantial resources to develop our
products. We cannot assure that our product development efforts will be
successfully completed or that required regulatory approvals will be obtained or
that any products will be manufactured and marketed successfully, or be
profitable.

We may require additional financing which may not be available.

The development of our products will require the commitment of substantial
resources to conduct the time-consuming research, preclinical development, and
clinical trials that are necessary to bring pharmaceutical products to market.
As of June 30, 2004, we had approximately $9,433,000 million in cash and cash
equivalents and short-term investments. We believe that these funds plus 1) the
gross proceeds received from the exercise of warrants and the Additional
Investment Rights of approximately $4,198,980 on July 13, 2004, 2) the gross
proceeds from the August 2004 Private Placement of equity securities on August
5, 2004 of approximately $7,500,000, 3) the projected net cash flow from the
sale of ALFERON N Injection(R) and 4) the proceeds from licensing agreements
should be sufficient to meet our operating cash requirements including debt
service during the next 18 months. We may need to raise additional funds through
additional equity or debt financing or from other sources in order to complete
the necessary clinical trials and the regulatory approval processes and begin
commercializing Ampligen(R) products. There can be no assurances that we will
raise adequate funds from these or other sources, which may have a material
adverse effect on our ability to develop our products.


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

We have limited manufacturing experience and capacity.

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

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

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

We have never produced Ampligen(R) or any other products in large
commercial quantities. Ampligen(R) is currently produced for use in clinical
trials. We must manufacture our products in compliance with regulatory
requirements in large commercial quantities and at acceptable costs in order for
us to be profitable. We intend to utilize third-party manufacturers and/or
facilities if and when the need arises or, if we are unable to do so, to build
or acquire commercial-scale manufacturing facilities. If we cannot manufacture
commercial quantities of Ampligen(R) or enter into third party agreements for
its manufacture at costs acceptable to us, our operations will be significantly
affected. Also, each production lots of Alferon N Injection(R) is subject to FDA
review and approval prior to releasing the lots to be sold. This review and
approval process could take considerable time, which would delay our having
product in inventory to sell. Alferon N Injection(R) has a shelf life of 18
months after having been bottled.

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

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

Our products may be subject to substantial competition.

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

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

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

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

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

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

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

We face an inherent business risk of exposure to product liability
claims in the event that the use of Ampligen(R) or other of our products results
in adverse effects. This liability might result from claims made directly by
patients, hospitals, clinics or other consumers, or by pharmaceutical companies
or others manufacturing these products on our behalf. Our future operations may
be negatively affected from the litigation costs, settlement expenses and lost
product sales inherent to these claims. While we will continue to attempt to
take appropriate precautions, we cannot assure that we will avoid significant
product liability exposure. Although we currently maintain product liability
insurance coverage, there can be no assurance that this insurance will provide
adequate coverage against Ampligen and/or Alferon N Injection product liability
claims. A successful product liability claim against us in excess of Ampligen's
$1,000,000 in insurance coverage; $3,000,000 in aggregate, or in excess of
Alferon's $5,000,000 in insurance coverage; $5,000,000 in aggregate; or for
which coverage is not provided could have a negative effect on our business and
financial condition.

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

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

Uncertainty of health care reimbursement for our products.

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

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

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

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

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

o announcements of the results of clinical trials by us or our competitors;
o adverse reactions to products;
o governmental approvals, delays in expected governmental approvals or
withdrawals of any prior governmental approvals or public or regulatory
agency concerns regarding the safety or effectiveness of our products;
o changes in U.S. or foreign regulatory policy during the period of product
development;
o developments in patent or other proprietary rights, including any third
party challenges of our intellectual property rights;
o announcements of technological innovations by us or our competitors;
o announcements of new products or new contracts by us or our competitors;
o actual or anticipated variations in our operating results due to the level of
development expenses and other factors; o changes in financial estimates by
securities analysts and whether our earnings meet or exceed the estimates; o
conditions and trends in the pharmaceutical and other industries;
new accounting standards; and
o the occurrence of any of the risks described in these "Risk Factors."


Our common stock is listed for quotation on the American Stock Exchange. For the
12-month period ended June 30, 2004, the price of our common stock has ranged
from $1.82 to $5.40. We expect the price of our common stock to remain volatile.
The average daily trading volume of our common stock varies significantly. Our
relatively low average volume and low average number of transactions per day may
affect the ability of our stockholders to sell their shares in the public market
at prevailing prices and a more active market may never develop.

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

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

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

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

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

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


NEW ACCOUNTING PRONOUNCEMENTS

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

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

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("Interpretation No. 46"), that clarifies the
application of Accounting Research Bulletin No. 51, Consolidated Financial
Statements, "to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. Interpretation No. 46 is
applicable immediately for variable interest entities created after January 31,
2003. For variable interest entities created prior to January 31, 2003, the
provisions of Interpretation No. 46 have been deferred to the first quarter of
2004. This Interpretation did not have an effect on our consolidated financial
statements.

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


Disclosure About Off-Balance Sheet Arrangements

Prior to our annual meeting of stockholders in September 2003, we had a limited
number of shares of Common Stock authorized but not issued or reserved for
issuance upon conversion or exercise of outstanding convertible and exercisable
securities such as debentures, options and warrants. Prior to the meeting, to
permit consummation of the sale of the July 2003 Debentures and the related
warrants, Dr. Carter agreed that he would not exercise his warrants or options
unless and until our stockholders approve an increase in our authorized shares
of common stock. For Dr. Carter's waiver of his right to exercise certain
options and warrants prior to approval of the increase in our authorized shares,
we have agreed to compensate Dr. Carter. See "Executive Compensation; Employment
Agreements" in amendment no. 1 to our annual report on Form 10-K for the year
ended December 31, 2003, as filed with the SEC on March 30, 2004, for details
related to how Dr. Carter has been compensated with respect to this matter.

In connection with the debenture agreements, HEB has outstanding letters of
credit of $1,000,000 as additional collateral.

Critical Accounting Policies

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

Revenue

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

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

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

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

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

Patents and Trademarks

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

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

Concentration of Credit Risk

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

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

Concentration of credit risk, with respect to receivables, is limited through
our credit evaluation process. We do not require collateral on our receivables.
Our receivables consist principally of amounts due from wholesale drug companies
as of June 30, 2004.


RESULTS OF OPERATIONS

Three months ended June 30, 2004 versus Three months ended June 30, 2003

Net loss

Our net loss was approximately $5,956,000 for the three months ended June 30,
2004 versus a net loss of $3,689,000 for the same period a year ago. Per share
loss for the three months ended June 30, 2004 was $0.14 per share versus $0.11 a
year earlier for the same period. This year-to-year increase in losses of
$2,267,000 primarily consists of 1) an increase in non-cash financing costs of
$1,697,000 related to our debentures and related securities; 2) an increase in
production/cost of goods sold due to increased Alferon N Injection sales, 3) the
cost of preparing the New Brunswick facility for further production, and 4) an
increase of $238,000 in G&A expenses.

Revenues

Revenues for the three months ended June 30, 2004 were $331,000 as compared to
revenues of $94,000 for the same period in 2003. Revenues from our ME/CFS cost
recovery treatment programs principally underway in the U.S., Canada and Europe
were $42,000 for the three months ended June 30, 2004 versus $34,000 for the
three months ended June 30, 2003. These clinical programs allow us to provide
Ampligen(R) therapy at our cost to severely debilitated ME/CFS patients. Under
this program the patients pay for the cost of Ampligen(R) doses infused. These
costs total approximately $7,200 for a 24-week treatment program.

In addition, revenues for the three months ended June 30, 2004 from sales of
ALFERON N totaled $289,000 versus $60,000 for the same period a year ago. Sales
of Alferon N are anticipated to increase as we have more product available and
intend to expand our marketing/sales programs on an international basis.

Since acquiring the right to manufacture and market Alferon N on March 11, 2003,
we have focused on converting the work-in-progress inventory into finished
goods. This work-in-progress inventory included three production lots totaling
the equivalent of approximately 55,000 vials (doses) at various stages of the
manufacturing process. In August 2003, we released the first lot of product to
Abbott Laboratories for bottling and realized some 21,000 vials of ALFERON N. In
July 2004, we initiated the process of converting the second lot of
approximately 16,000 vials from work-in-progress to finished goods inventory. We
anticipate shipping the lot to Abbott Laboratories for bottling by the end of
the third quarter 2004. Our production and quality control personnel in our
newly acquired New Brunswick, NJ facility are involved in the extensive process
of manufacturing and validation required by the FDA.
A third lot of some 18,000 vials is now in very early stages of production.

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

In August 2003, we entered into a sales and marketing agreement with Engitech,
LLC. to distribute ALFERON N on a nationwide basis. This agreement stipulates
that Engitech deploy a sales force to develop and implement marketing plans
including scientific and educational programs for use in marketing ALFERON N. We
are also negotiating with other contract sales organizations to meet our ALFERON
N sales goals.

We executed a Memorandum of Understanding (MOI) in January 2004 with
Fujisawa Deutschland GmbH, ("Fuji") a major pharmaceutical corporation, granting
them an exclusive option for a limited number of months to enter a Sales and
Distribution Agreement with exclusive rights to market Ampligen(R) for ME/CFS in
Germany, Austria and Switzerland. The MOI required us to file the full report on
the results of our AMP 516 Clinical Trial with Fuji by May 31, 2004. If a full
report was not provided to Fuji by May 31, 2004 and Fuji did not wish to
exercise its option, we would have been required to refund one half of the
400,000 Euro fee paid by Fuji. We submitted our initial report to Fuji on May
28, 2004 and received their response asking for additional information. We
provided additional information to Fuji in June 2004 and any additional
communication has been determined to be conducted via conference call. Fuji's
option period ends 12 weeks after the later of Fuji's review of the full report
on the results of our Amp 516 clinical trial and Fuji's meeting with the trial's
principal investigators. We received an initial fee of 400,000 Euros
(approximately $497,000 US). If we do not provide them with the full report by
December 31, 2004 and Fuji does not wish to exercise its option, we will be
required to refund the entire fee. If Fuji exercises the option, Fuji would be
required to pay us an additional 1,600,000 Euros upon execution of the Sales and
Distribution agreement, purchase Ampligen(R) exclusively from us and meet
certain annual minimum purchase quotas. We would be required to file an
application with the EMEA for commercial sale of Ampligen(R) for ME/CFS on or
before December 31, 2005. Upon our filing of that application, we would receive
an additional 1,000,000 Euros and, upon approval by the EMEA, an additional
2,000,000 Euros. If we failed to meet the December 31, 2005 filing deadline, we
would be required to return 40% of all payments that we had received from Fuji.
We would be required to sell Ampligen(R) to Fuji at a 20% price discount until
the aggregate amount of the discount reached $1,000,000 Euros (representing 50%
of the initial 2,000,000 fee paid to us on and prior to execution of the
definitive agreement). The foregoing is a summary of the memorandum of
understanding. We cannot assure that we can prepare and issue the AMP 516 report
within the time frames noted or that Fuji will exercise the option or that the
proposed terms of the Sales and Distribution Agreement will not change
materially. The initial fee has been recorded on our balance sheet at June 30,
2004 as deferred revenue.

On March 17, 2004, we closed on the acquisition of all of the worldwide rights
of ALFERON N as well as the FDA approved biological production facility in New
Brunswick, New Jersey. We intend to expand our marketing/sales programs on an
international basis.

Production costs/cost of goods sold

Production costs for the three months ended June 30, 2004 and 2003 were $692,000
and $37,000, respectively. These costs reflect approximately $130,000 and
$37,000 for the cost of sales of ALFERON N Injection(R) for the three months
ended June 30, 2004 and 2003. The remaining production costs in 2004 represent
expenditures associated with preparing the New Brunswick facility for additional
production of Alferon N Injection(R). In July 2004, we initiated the process of
converting the second lot of inventory from work-in-progress to finished goods.
We anticipate shipping the lot to Abbott Laboratories for bottling by the end of
the third quarter 2004.

Research and Development costs

Overall research and development direct costs for the three months ended June
30, 2004 were $758,000 as compared to $855,000 during the same period a year
earlier. These costs primarily reflect the direct costs associated with our
effort to develop our lead product, Ampligen(R), as a therapy in treating
chronic diseases and cancers. At this time, this effort primarily consists of
on-going clinical trials involving patients with HIV. The primary reason for the
decrease in research and development costs of $97,000 in the current Quarter
versus the same period a year ago was due to a reduction in costs related to the
AMP 516 ME/CFS study partially offset by increased costs for the AMP 720 HIV
study.

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

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

Clinical data on the primary endpoint exercise treadmill duration was presented
at the 17th International Conference on Anti-viral Research in Tucson, AZ on May
3, 2004. The data showed that patients receiving Ampligen for 40 weeks improved
exercise treadmill performance by a medically and statistically significant
amount compared to the placebo group. Ampligen is also currently in two Phase
IIb studies for the treatment of HIV to overcome multi-drug resistance, virus
mutation and toxicity associated with current HAART therapies. One study, the
AMP-719, is a Salvage Therapy, conducted in the U.S. and evaluating the
potential synergistic efficacy of Ampligen in multi-drug resistant HIV patients
for immune enhancement. The second study, the AMP-720, is a clinical trial
designed to evaluate the effect of Ampligen under Strategic Treatment
Intervention and is also conducted in the U.S. Enrollment in the AMP 719 study
is presently on hold as we devote our efforts on the AMP 720 study.

AMP 516

Over 230 patients have participated in our ME/CFS Phase III clinical trial. A
few remaining patients are completing Stage II of the AMP 516 Phase III
protocol. The dosing of these patients is anticipated to be completed in August
2004.We have completed the randomized placebo controlled phase of this study and
expect to complete data collection and start the data analysis process with the
expectation of filing an NDA (New Drug Application) with the FDA by the end of
2004 and/or the first quarter 2005. 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 720

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

In July 2003, Dr. Blick, a principal investigator in our HIV studies, presented
updated results on our Amp 720 HIV study at the 2nd IAS CONFERENCE ON HIV
PATHOGENESIS AND TREATMENT in Paris France. In this study using Strategic
Treatment Interruption (STI), patients' antiviral HAART regimens are interrupted
and Ampligen(R) is substituted as mono-immunotherapy. Ampligen(R) is an
experimental immunotherapeutic designed to display both antiviral an immune
enhancing characteristics. Prolonged use of Highly Active Antiretroviral Therapy
(HAART) has been associated with long-term, potentially fatal, toxicities. The
clinical study AMP 720 is designed to address these issues by evaluating the
administration of our lead experimental agent, Ampligen(R), a double stranded
RNA drug acting potentially both as an immunomodulator and antiviral. Patients,
who have completed at least nine months of Ampligen(R) therapy, were able to
stay off HAART for a total STI duration with a mean time of 29.0 weeks whereas
the control group, which was also taken off HAART, but not given Ampligen(R),
had earlier HIV rebound with a mean duration of 18.7 weeks. Thus, on average,
Ampligen(R) therapy spared the patients excessive exposure to HAART, with its
inherent toxicities, for more than 11 weeks. As more patients are enrolled, the
related clinical costs will continue to increase with some offset to our overall
expenses due to the diminishing cost of the ME/CFS clinical trial. It is
difficult to estimate the duration or projected costs of these two clinical
trials due to the many variables involved, i.e.: patient drop out rate,
recruitment of clinical investigators, etc. The length of the study and costs
related to our clinical trials cannot be determined at this time as such will be
materially influenced by (a) the number of clinical investigators needed to
recruit and treat the required number of patients, (b) the rate of accrual of
patients and (c) the retention of patients in the studies and their adherence to
the study protocol requirements. Under optimal conditions, the cost of
completing the studies could be approximately $2.0 to $3.0 million. The rate of
enrollment depends on patient availability and on other products being in
clinical trials for the treatment of HIV, as there is competition for the same
patient population. At present, more than 18 FDA approved drugs for HIV
treatment may compete for available patients. The length, and subsequently the
expense of these studies, will also be determined by an analysis of the interim
data, which will determine when completion of the ongoing Phase IIb is
appropriate and whether a Phase III trial be conducted or not. In case a Phase
III study is required; the FDA might require a patient population exceeding the
current one which will influence the cost and time of the trial. Accordingly,
the number of "unknowns" is sufficiently great to be unable to predict when, or
whether, we may obtain revenues from our HIV treatment indications.

General and Administrative Expenses

General and Administrative ("G&A") expenses for the three months ended June 30,
2004 and 2003 were approximately $1,076,000 and $838,000, respectively. The
increase in G&A cost in expenses of $238,000 during this period is primarily due
to higher investment banking fees, directors' fees and public relations expenses
during the current quarter as compared to the same period a year ago.

Other Income/Expense

Interest and other income for the three months ended June 30, 2004 and 2003
totaled $13,000 and $1,000, respectively. The primary reason for the increase in
interest and other income during the current quarter can be attributed to more
cash available for investment purposes versus the same period a year ago. All
funds in excess of our immediate need are invested in short-term high quality
securities.

Interest Expense and Financing Costs

Non-cash financing costs were $3,669,000 for the three months ended June 30,
2004 versus $1,972,000 for the same three months a year ago. Non-cash financing
costs consist of the amortization of debenture closing costs, the amortization
of Original Issue Discounts and the amortization of costs associated with
beneficial conversion features of our debentures and the fair value of the
warrants relating to the Debentures. These charges are reflected in the
Consolidated Statements of Operations under the caption "Financing Costs."

In connection with the redemption obligation recorded in conjunction with the
January 2004 Debentures, we recorded additional financing costs of approximately
$947,000 in the first quarter 2004. In the current quarter, we recorded a
reduction in financing costs of approximately $260,000. Please see Note 7 in the
consolidated financial statements contained herein for more details on these
transactions.

Six months ended June 30, 2004 versus Six months ended June 30, 2003

Net loss

Our net loss was approximately $13,997,000 for the six months ended June 30,
2004 versus a net loss of $5,306,000 for the same period a year ago. Per share
loss for the six months ended June 30, 2004 was $0.33 per share versus $0.16 a
year earlier for the same period. This year-to-year increase in losses of
$8,691,000 consists of an increase in non-cash financing costs of $5,473,000,
relating to our July 2003 Debentures, October 2003 Debentures and January 2004
Debentures (Collectively, the "Debentures") as well as an increase in general
and administrative expenses of $2,416,000 primarily due to an increase in
investment banking and Directors' fees and a non-cash stock compensation charge
of $1,769,000 resulting from warrants issued to Dr. Carter in 2003 that vested
in the first quarter 2004. These warrants vested upon the second ISI asset
closing which occurred on March 17, 2004. See "Executive Compensation" in
amendment no. 1 to our annual report on Form 10-K for the year ended December
31, 2003, as filed with the SEC on March 30, 2004, for details related to how
Dr. Carter has been compensated with respect to this matter. Also contributing
to the increase in loss from year-to-year was an increase in production/cost of
goods sold of $1,138,000 due to an increase in sales of Alferon N Injection and
preparing the New Brunswick facility for further production. This was partially
offset by an increase in revenue of $479,000 when comparing the six months ended
June 30, 2004 and 2003.
Revenues

Revenues for the six months ended June 30, 2004 were $639,000 as compared to
revenues of $160,000 for the same period in 2003. Revenues from our ME/CFS cost
recovery treatment programs principally underway in the U.S., Canada and Europe
were $91,000 for the six months ended June 30, 2004 versus $81,000 for the six
months ended June 30, 2003. These clinical programs allow us to provide
Ampligen(R) therapy at our cost to severely debilitated ME/CFS patients. Under
this program the patients pay for the cost of Ampligen(R) doses infused. These
costs total approximately $7,200 for a 24-week treatment program.

In addition, revenues for the six months ended June 30, 2004 from sales of
ALFERON N totaled $548,000 versus $79,000 for the period of March 11, 2003, the
date we acquired the rights to the Alferon N business from ISI, through June 30,
2003. Sales of Alferon N are anticipated to increase as we have more product
available and intend to expand our marketing/sales programs on an international
basis.

Since acquiring the right to manufacture and market Alferon N on March 11, 2003,
we have focused on converting the work-in-progress inventory into finished
goods. This work-in-progress inventory included three production lots totaling
the equivalent of approximately 55,000 vials (doses) at various stages of the
manufacturing process. In August 2003, we released the first lot of product to
Abbott Laboratories for bottling and realized some 21,000 vials of ALFERON N. In
July 2004, we initiated the process of converting the second lot of
approximately 16,000 vials from work-in-progress to finished goods inventory. We
anticipate shipping the lot to Abbott Laboratories for bottling by the end of
the third quarter 2004. Our production and quality control personnel in our
newly acquired New Brunswick, NJ facility are involved in the process of
manufacturing and validation required by the FDA. A third lot of some 18,000
vials is now in very early stages of production.

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

In August 2003, we entered into a sales and marketing agreement with Engitech,
LLC. to distribute ALFERON N on a nationwide basis. This agreement stipulates
that Engitech deploy a sales force to develop and implement marketing plans
including scientific and educational programs for use in marketing ALFERON N. We
are also negotiating with other contract sales organizations to meet our ALFERON
N sales goals.

We executed a Memorandum of Understanding (MOI) in January 2004 with Fujisawa
Deutschland GmbH, ("Fuji") a major pharmaceutical corporation, granting them an
exclusive option for a limited number of months to enter a Sales and
Distribution Agreement with exclusive rights to market Ampligen(R) for ME/CFS in
Germany, Austria and Switzerland. The MOI required us to file the full report on
the results of our AMP 516 Clinical Trial with Fuji by May 31, 2004. If the full
report was not provided to Fuji by May 31, 2004 and Fuji did not wish to
exercise its option, we would have been required to refund one half of the
400,000 Euro fee. We submitted our initial report to Fuji on May 28, 2004 and
received their response in June 2004 requesting additional information, which we
provided in June 2004. The option period ends 12 weeks after the later of Fuji's
review of the full report on the results of our Amp 516 clinical trial and
Fuji's meeting with the trial's principal investigators. We received an initial
fee of 400,000 Euros (approximately $497,000 US). If we do not provide them with
the full report by December 31, 2004 and Fuji does not wish to exercise its
option, we will be required to refund the entire fee. If Fuji exercises the
option, Fuji would be required to pay us an additional 1,600,000 Euros upon
execution of the Sales and Distribution agreement, purchase Ampligen(R)
exclusively from us and meet certain annual minimum purchase quotas. We would be
required to file an application with the EMEA for commercial sale of Ampligen(R)
for ME/CFS on or before December 31, 2005. Upon our filing of that application,
we would receive an additional 1,000,000 Euros and, upon approval by the EMEA,
an additional 2,000,000 Euros. If we failed to meet the December 31, 2005 filing
deadline, we would be required to return 40% of all payments that we had
received from Fuji. We would be required to sell Ampligen(R) to Fuji at a 20%
price discount until the aggregate amount of the discount reached $1,000,000
Euros (representing 50% of the initial 2,000,000 fee paid to us on and prior to
execution of the definitive agreement). The foregoing is a summary of the
memorandum of understanding. We cannot assure that we can prepare and issue the
AMP 516 report within the time frames noted or that Fuji will exercise the
option or that the proposed terms of the Sales and Distribution Agreement will
not change materially. The initial fee has been recorded on our balance sheet at
June 30, 2004 as deferred revenue.

On March 17, 2004, we closed on the acquisition of all of the worldwide rights
of ALFERON N as well as the FDA approved biological production facility in New
Brunswick, New Jersey. We intend to expand our marketing/sales programs on an
international basis.

Production costs/cost of goods sold

Production costs for the six months ended June 30, 2004 and 2003 were $1,293,000
and $155,000, respectively. These costs reflect approximately $241,000 for the
cost of sales of ALFERON N Injection(R) for the six months ended June 30, 2004.
In addition, costs of sales for Alferon N Injection(R) for the period March 11,
2003 (acquisition date of inventory from ISI) through June 30, 2003 amounted to
$49,000. The remaining production costs represent expenditures associated with
preparing the New Brunswick facility for further production of Alferon N
Injection(R). In July 2004, we initiated the process of converting the second
lot of inventory from work-in-progress to finished goods. We anticipate shipping
this second lot to Abbott Laboratories by the end of the third quarter 2004.

Research and Development costs

Overall research and development direct costs for the six months ended June 30,
2004 were $1,720,000 as compared to $1,728,000 during the same period a year
earlier. These costs primarily reflect the direct costs associated with our
effort to develop our lead product, Ampligen(R), as a therapy in treating
chronic diseases and cancers. At this time, this effort primarily consists of
on-going clinical trials involving patients with HIV.

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

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

Clinical data on the primary endpoint exercise treadmill duration was presented
at the 17th International Conference on Anti-viral Research in Tucson, AZ on May
3, 2004. The data showed that patients receiving Ampligen for 40 weeks improved
exercise treadmill performance by a medically and statistically significant
amount compared to the placebo group. Ampligen is also currently in two Phase
IIb studies for the treatment of HIV to overcome multi-drug resistance, virus
mutation and toxicity associated with current HAART therapies. One study, the
AMP-719, is a Salvage Therapy, conducted in the U.S. and evaluating the
potential synergistic efficacy of Ampligen in multi-drug resistant HIV patients
for immune enhancement. The second study, the AMP-720, is a clinical trial
designed to evaluate the effect of Ampligen under Strategic Treatment
Intervention and is also conducted in the U.S. Enrollment in the AMP 719 study
is presently on hold as we devote our efforts on the AMP 720 study.

AMP 516

Over 230 patients have participated in our ME/CFS Phase III clinical trial. A
few remaining patients are completing Stage II of the AMP 516 Phase III
protocol. The dosing of these patients is anticipated to be completed in August
2004.We have completed the randomized placebo controlled phase of this study and
expect to complete data collection and start the data analysis process with the
expectation of filing an NDA (New Drug Application) with the FDA by the end of
2004 and/or the first quarter 2005. 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 720

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

In July 2003, Dr. Blick, a principal investigator in our HIV studies, presented
updated results on our Amp 720 HIV study at the 2nd IAS CONFERENCE ON HIV
PATHOGENESIS AND TREATMENT in Paris France. In this study using Strategic
Treatment Interruption (STI), patients' antiviral HAART regimens are interrupted
and Ampligen(R) is substituted as mono-immunotherapy. Ampligen(R) is an
experimental immunotherapeutic designed to display both antiviral an immune
enhancing characteristics. Prolonged use of Highly Active Antiretroviral Therapy
(HAART) has been associated with long-term, potentially fatal, toxicities. The
clinical study AMP 720 is designed to address these issues by evaluating the
administration of our lead experimental agent, Ampligen(R), a double stranded
RNA drug acting potentially both as an immunomodulator and antiviral. Patients,
who have completed at least nine months of Ampligen(R) therapy, were able to
stay off HAART for a total STI duration with a mean time of 29.0 weeks whereas
the control group, which was also taken off HAART, but not given Ampligen(R),
had earlier HIV rebound with a mean duration of 18.7 weeks. Thus, on average,
Ampligen(R) therapy spared the patients excessive exposure to HAART, with its
inherent toxicities, for more than 11 weeks. As more patients are enrolled, the
related clinical costs will continue to increase with some offset to our overall
expenses due to the diminishing cost of the ME/CFS clinical trial. It is
difficult to estimate the duration or projected costs of these two clinical
trials due to the many variables involved, i.e.: patient drop out rate,
recruitment of clinical investigators, etc. The length of the study and costs
related to our clinical trials cannot be determined at this time as such will be
materially influenced by (a) the number of clinical investigators needed to
recruit and treat the required number of patients, (b) the rate of accrual of
patients and (c) the retention of patients in the studies and their adherence to
the study protocol requirements. Under optimal conditions, the cost of
completing the studies could be approximately $2.0 to $3.0 million. The rate of
enrollment depends on patient availability and on other products being in
clinical trials for the treatment of HIV, as there is competition for the same
patient population. At present, more than 18 FDA approved drugs for HIV
treatment may compete for available patients. The length, and subsequently the
expense of these studies, will also be determined by an analysis of the interim
data, which will determine when completion of the ongoing Phase IIb is
appropriate and whether a Phase III trial be conducted or not. In case a Phase
III study is required; the FDA might require a patient population exceeding the
current one which will influence the cost and time of the trial. Accordingly,
the number of "unknowns" is sufficiently great to be unable to predict when, or
whether, we may obtain revenues from our HIV treatment indications.


General and Administrative Expenses

General and Administrative ("G&A") expenses for the six months ended June 30,
2004 and 2003 were approximately $3,921,000 and $1,505,000, respectively. The
increase in G&A expenses of $2,416,000 during this period is primarily due to a
non-cash stock compensation charge of $1,769,000 resulting from warrants issued
to Dr. Carter in 2003 that vested in the current quarter. These warrants vested
upon the second ISI asset closing which occurred on March 17, 2004. For
comparative purposes only, excluding the stock compensation charge of 1,769,000
noted above, our G & A expenses were $2,152,000 and $1,505,000 for the six
months ended June 30, 2004, respectively. The primary reason for this increase
in loss of 647,000 can be attributed to higher investment banking, public
relations and Director's fees during the first six months in 2004.

Other Income/Expense

Interest and other income for the six months ended June 30, 2004 and 2003
totaled $24,000 and $51,000, respectively. The primary reason for the decrease
in interest and other income during the first six months in 2004 can be
attributed to lower cash available for investment, a shorter holding period for
investments and lower interest rates versus the same period a year ago. All
funds in excess of our immediate need are invested in short-term high quality
securities.

Interest Expense and Financing Costs

Interest expense and financing costs were $7,726,000 for the six months ended
June 30, 2004 versus $2,129,000 for the same six months a year ago. Non-cash
financing costs consist of the amortization of debenture closing costs, the
amortization of Original Issue Discounts and the amortization of costs
associated with beneficial conversion features of our debentures and the fair
value of the warrants relating to the Debentures. These charges are reflected in
the Consolidated Statements of Operations under the caption "Financing Costs."

In connection with the redemption obligation recorded in conjunction with the
January 2004 Debentures, we recorded additional financing costs of approximately
$947,000 in the first quarter 2004. In the current quarter, we recorded a
reduction in financing costs of approximately $260,000. Please see Note 7 in the
consolidated financial statements contained herein for more details on these
transactions.

Liquidity And Capital Resources

Cash used in operating activities for the six months ended June 30, 2004 was
$3,872,000. Cash provided by financial activities for the six months ended June
30, 2004 amounted to $8,309,000, substantially from proceeds from a debenture
offering (see below) and the exercising of common stock warrants. As of June 30,
2004, we had approximately $9,433,000 million in cash and short-term
investments. We believe that these funds plus 1) the gross proceeds received
from the exercise of warrants and the Additional Investment Rights of
approximately $4,198,980 on July 13, 2004, 2) the gross proceeds from the August
2004 Private Placement of equity securities on August 5, 2004 of approximately
$7,500,000, 3) the projected net cash flow from the sale of ALFERON N
Injection(R) and 4) the proceeds from licensing agreements should be sufficient
to meet our operating cash requirements including debt service during the next
18 months.We may need to raise additional funds through additional equity or
debt financing or from other sources in order to complete the necessary clinical
trials and the regulatory approval processes and begin commercializing
Ampligen(R) products. There can be no assurances that we will raise adequate
funds from these or other sources, which may have a material adverse effect on
our ability to develop our products. Also, we have the ability to curtail
discretionary spending, including some research and development activities, if
required to conserve cash.

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

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

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

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

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

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

The July 2003 Debentures are convertible at the option of the investors at any
time through July 31, 2005 into shares of our common stock. The conversion price
under the July 2003 Debentures was fixed at $2.14 per share; however, as part of
the new debenture placement closed on October 29, 2003 (see below), the
conversion price under the July 2003 Debentures was lowered to $1.89 per share.
The conversion price is subject to adjustment for anti-dilution protection for
issuance of common stock or securities convertible or exchangeable into common
stock at a price less than the conversion price then in effect. In addition, in
the event that we do not pay the redemption price at maturity, the Debenture
holders, at their option, may convert the balance due at the lower of (a) the
conversion price then in effect and (b) 95% of the lowest closing sale price of
our common stock during the three trading days ending on and including the
conversion date.

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

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

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

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

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

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

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

The January 2004 Debentures are convertible at the option of the investors at
any time through January 31, 2006 into shares of our common stock. The
conversion price under the January 2004 Debentures was fixed at $2.53 per share,
subject to adjustment for anti-dilution protection for issuance of common stock
or securities convertible or exchangeable into common stock at a price less than
the conversion price then in effect. In addition, in the event that we do not
pay the redemption price at maturity, the Debenture holders, at their option,
may convert the balance due at the lower of (a) the conversion price then in
effect and (b) 95% of the lowest closing sale price of our common stock during
the three trading days ending on and including the conversion date. Following
completion of the August 2004 Private Placement (see Note 9 - Subsequent Events
to our financial statements attached hereto), the conversion price was lowered
to $2.08 per share.

There are two classes of July 2009 Warrants received by the Investors: Class A
and Class B. The Class A warrants are to acquire any time from July 26, 2004
through July 26, 2009 an aggregate of up to 395,257 shares of common stock at a
price of $3.29 per share. The Class B warrants are to acquire any time from July
26, 2004 through July 26, 2009 an aggregate of up to 395,257 shares of common
stock at a price of $5.06 per share. On January 27, 2005, the exercise price of
these July 2009 Class A and Class B Warrants will reset to the lesser of their
respective exercise price then in effect or a price equal to the average of the
daily price of the common stock between January 27, 2004 and January 26, 2005.
The exercise price (and the reset price) under the July 2009 Warrants also is
subject to similar adjustments for anti-dilution protection. Notwithstanding the
foregoing, the exercise prices as reset or adjusted for anti-dilution, will in
no event be less than $2.58 per share. Following completion of the August 2004
Private Placement (see Note 9 - Subsequent Events to our financial statements
attached hereto), the exercise price was lowered to $2.58 per share.


We also issued to the investors Additional Investment Rights pursuant to which
the investors have the right to acquire up to an additional $2,000,000 principal
amount of January 2004 Debentures (the July 2004 Debentures") from us. The July
2004 Debentures are identical to the January 2004 Debentures except that the
conversion price is $2.58. The investors exercised the Additional Investment
Rights on July 13, 2004. Following completion of the August 2004 Private
Placement (see Note 9 - Subsequent Events to our financial statements attached
hereto), the conversion price was lowered to $2.08 per share.

Pursuant to the terms and conditions of all of the outstanding Debentures
(collectively, the "Debentures"), we have pledged all of our assets, other than
our intellectual property, as collateral, and we are subject to comply with
certain financial and negative covenants.

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

The May 2009 Warrants are to acquire at any time commencing on November 14, 2004
through April 30, 2009 an aggregate of 1,300,000 shares of common stock at a
price of $4.50 per share. On May 14, 2005, the exercise price of these May 2009
Warrants will reset to the lesser of the exercise price then in effect or a
price equal to the average of the daily price of the common stock between May
15, 2004 and May 13, 2005. The exercise price (and the reset price) under the
May 2009 Warrants also is subject to adjustments for anti-dilution protection
similar to those in the other Warrants. Notwithstanding the foregoing, the
exercise price as reset or adjusted for anti-dilution, will in no event be less
than $4.008 per share. This transaction generated a non-cash charge of about
$2,300,000 in financing costs in the second quarter of 2004. Following
completion of the August 2004 Private Placement (see Note 9 - Subsequent Events
to our financial statements attached hereto), the exercise price was lowered to
$4.008 per share.

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

The June 2009 Warrants are to acquire at any time commencing on January 13, 2005
through June 30, 2009 an aggregate of 1,300,000 shares of common stock at a
price of $3.75 per share. On July 13, 2005, the exercise price of these June
2009 Warrants will reset to the lesser of the exercise price then in effect or a
price equal to the average of the daily price of the common stock between July
14, 2004 and July 12, 2005. The exercise price (and the reset price) under the
June 2009 Warrants also is subject to adjustments for anti-dilution protection
similar to those in the other Warrants. Notwithstanding the foregoing, the
exercise price as reset or adjusted for anti-dilution, will in no event be less
than $3.33 per share. Following completion of the August 2004 Private Placement
(see Note 9 - Subsequent Events to our financial statements attached hereto),
the exercise price was lowered to $3.33 per share. This transaction is subject
to a non-cash financing charge $1,676,000 to be amotized over the remaining life
of the October 2003 Debentures.

The Company agreed to register shares issuable upon exercise of the June 2009
Warrnats pursuant to substantially the same terms as the registration rights
agreement between the Company and the holders (See Note 7 - Debenture
Financing). Pursuant to this obligation, the Company has so registered the
shares.

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

As of July 23, 2004, the investors have converted $12,400,329 of debt from the
Debentures issued in March 2003 July 2003, October 2003 and January 2004 into
7,307,440 shares of our common stock. The March Debentures have been fully
converted. The remaining principal balance on the outstanding debentures is
convertible into shares of our stock at the option of the investors at any time,
through the maturity date. In addition, we have paid $1,300,000 into the
debenture cash collateral account as required by the terms of the October 2003
Debentures. The amounts paid through June 30, 2004 have been accounted for as
advances receivable and are reflected as such on the accompanying balance sheet
as of June 30, 2004. The cash collateral account provides partial security for
repayment of our outstanding Debentures in the event of default.

By agreement with Cardinal Securities, LLC, for general financial advisory
services and in conjunction with the private debenture placements in July and
October 2003 and in January, May and July 2004, we paid Cardinal Securities, LLC
an investment banking fee equal to 7% of the investments made by the two
Debenture holders and issued to Cardinal the following common stock purchase
warrants: (i) 112,500 exercisable at $2.57 per share; (ii) 87,500 exercisable at
$2.42 per share; and (iii) 100,000 exercisable at $3.04 per share. The $2.57
warrants expire on July 10, 2008, the $2.42 warrants expire on October 29, 2008
and the $3.04 warrants expire on January 5, 2009. With regard to the exercise of
the June 2008 Warrants and issuance of the May 2009 Warrants, Cardinal received
an investment banking fee of 7%, half in cash and half in shares. With regard to
the exercise of the Additional Investment Rights, the July 2008 and October 2008
Warrants and issuance of the July 2009 Warrants, Cardinal received an investment
banking fee of 7%, 146,980 in cash and 22,703 in shares as well as 50,000
warrants exercisable at $4.07 expiring on July 12, 2009. By agreement with
Cardinal, we have registered all of the foregoing shares and shares issuable
upon exercise of the above mentioned warrants for public sale and we have agreed
to register the balance.

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

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

The requisite stockholder approval was obtained at our Annual Meeting of
Stockholders on June 23, 2004. In accordance with EITF 00-19, we revalued this
redemption obligation associated with the beneficial conversion feature and
warrants as of June 23, 2004. We recorded a reduction in the value of the
redemption obligation and financing charge of $260,000 as a result of this
revaluation. In addition, upon receiving the requisite stockholder approval,
this redemption obligation was reclassed as additional paid in capital as of the
date the approval was received or June 23, 2004.

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

On August 5, 2004, the Company closed a private placement with select
institutional investors of approximately 3,617,300 shares of its Common Stock
and warrants to purchase an aggregate of up to approximately 1,085,200 shares of
its Common Stock. Jefferies & Company, Inc. acted as Placement Agent for which
it received a fee and Common Stock Purchase Warrants. The Company raised
approximately $7,524,000 in gross cash proceeds from this private offering.

The Warrant issued to each purchaser is exercisable for up to 30% of the number
of shares of Common Stock purchased by such Purchaser, at an exercise price
equal to $2.86 per share. Each Warrant has a term of five years and is fully
exercisable from the date of issuance.

Pursuant to the Registration Rights Agreement, made and entered into as of
August 5, 2004 (the "Rights Agreement"), the Company has agreed to file with the
Securities and Exchange Commission a registration statement covering resales of
the shares issued to the Purchasers and shares issuable upon the exercise of the
Warrants.

Closing of the August 2004 Private Placement triggered the anti-dilution
provisions of the January 2004 Debentures and the July 2004 Debentures and the
July 2009 Warrants and the June 2009 Warrants. The conversion price adjustment
for the Debentures noted above will result in an adjustment in the third quarter
2004 to the Debenture discount and additional paid-in-capital. Any adjustment to
the Debenture discount will be amortized over the remaining life of the
Debentures. The exercise price adjustment for the above warrants will result in
a non-cash financing adjustment in the third quarter 2004 upon revaluing the
warrants at the new anti-dilution pricing using the Black-Scholes Method.


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

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

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

On May 30, 2003, we issued the shares to GP Strategies and the American National
Red Cross. Pursuant to our agreements with ISI and these two creditors, we
registered the foregoing shares for public sale. As of June 30, 2004, GP
Strategies and the American National Red Cross had sold all of their shares.

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

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

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

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

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


ITEM 3: Quantitative and Qualitative Disclosures About Market Risk

Excluding obligations to pay us for various licensing related fees, we had
approximately $9,433,000 in cash and cash equivalents and short-term investments
at June 2004. To the extent that our cash and cash equivalents exceed our near
term funding needs, we invest the excess cash in three to six month high quality
interest bearing financial instruments. The Company employs 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.


Item 4: Controls and Procedures

Our management, including the Chairman of the Board (serving as the principal
executive officer) and the Chief Financial Officer, have conducted an evaluation
of the effectiveness of disclosure controls and procedures pursuant to the rules
of the Securities and Exchange Commission. Based on that evaluation, the
Chairman of the Board and the Chief Financial Officer concluded that the
disclosure controls and procedures are effective in ensuring that all material
information required to be filed in this quarterly report has been made known to
them in a timely fashion. There have been no significant changes in internal
controls, or in other factors that could significantly affect internal controls,
subsequent to the date the Chairman of the Board and Chief Financial Officer
completed their evaluation.


Part II - OTHER INFORMATION


Item 1. Legal Proceedings

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

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

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

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


ITEM 2: Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities

During the quarter ended June 30, 2004, the Company issued warrants in private
transactions pursuant to the exemption from registration provided by Section
4(2) of the Securities Act of 1933. For information on the foregoing, see Part
I. Item 2: "Management's Discussion And Analysis Of Financial Condition And
Results Of Operations; Liquidity And Capital Resources."

The Company did not repurchase any of its securities during the quarter ended
June 30, 2004.


ITEM 3: Defaults in Senior Securities

None.

ITEM 4: Submission of Matters to a Vote of Security Holders

At the Company's Annual Meeting of Stockholders on June 23, 2004, stockholders
approved the following:

Total shares voted: 25,978,921 out of 42,363,928 eligible to vote.

Election of Directors:
For Withheld

William A. Carter, M.D. 25,275,037 703,884
Richard C. Piani, Esq. 25,504,979 473,942
Ransom W. Etheridge, Esq. 25,513,939 464,982
William M. Mitchell. Ph.D., M.D. 25,513,547 465,374
Iraj-Eqhbal Kiani, Ph.D. 25,513,547 465,374
Antoni Esteve, Ph.D. 25,517,307 461,614

Ratification of the selection of BDO Seidman, LLP, as independent auditors of
the Company for the year ending December 31, 2004.

For: 25,911,270 Against: 60,449 Abstain: 7,202

Approval of the issuance of 13,686,841 shares of common stock issuable upon
exercise of certain warrants and upon conversion of certain outstanding
debentures and debentures issuable upon exercise of certain rights to comply
with AMEX Company Guide Section 713.

For: 6,493,369* Against: 415,280 Abstain: 18,681 Broker nonvotes: 18,938,489

* Excludes shares owned by the holders of the warrants, debentures and rights
described in the proposal.

Approval of the Hemispherx 2004 Equity Incentive Plan.

For: 6,512,751 Against: 507,991 Abstain: 19,690 Broker nonvotes: 18,938,489

ITEM 5: Other Information

On August 5, 2004, the Company closed a private placement with select
institutional investors of approximately 3,617,300 shares of its Common Stock
and warrants to purchase an aggregate of up to approximately 1,085,200 shares of
its Common Stock. Jefferies & Company, Inc. acted as Placement Agent for which
it received a fee and Common Stock Purchase Warrants. The Company raised
approximately $7,524,000 in gross cash proceeds from this private offering.

The Warrant issued to each purchaser is exercisable for up to 30% of the number
of shares of Common Stock purchased by such Purchaser, at an exercise price
equal to $2.86 per share. Each Warrant has a term of five years and is fully
exercisable from the date of issuance.

Pursuant to the Registration Rights Agreement, made and entered into as of
August 5, 2004 (the "Rights Agreement"), the Company has agreed to file with the
Securities and Exchange Commission a registration statement covering resales of
the shares issued to the Purchasers and shares issuable upon the exercise of the
Warrants.

Closing of the August 2004 Private Placement triggered the anti-dilution
provisions of the January 2004 Debentures and the July 2004 Debentures and the
July 2009 Warrants and the June 2009 Warrants. The conversion price adjustment
for the Debentures noted above will result in an adjustment in the third quarter
2004 to the Debenture discount and additional paid-in-capital. Any adjustment to
the Debenture discount will be amortized over the remaining life of the
Debentures. The exercise price adjustment for the above warrants will result in
a non-cash financing adjustment in the third quarter 2004 upon revaluing the
warrants at the new anti-dilution pricing using the Black-Scholes Method.




ITEM 6: Exhibits and Reports on Form 8K

(a) Exhibits

31.1 Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 from the Company's
Chief Executive Officer

31.2 Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 from the Company's
Chief Financial Officer

32.1 Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 from the Company's
Chief Executive Officer

32.2 Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 from the Company's
Chief Financial Officer

(b)Reports on Form 8-K

Form 8-K filed on June 24, 2004 Form 8-K filed on July 15, 2004 Form 8-K filed
on August 2, 2004 Form 8-K filed on August 6, 2004






SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.


HEMISPHERx BIOPHARMA, INC.


/S/ William A. Carter
---------------------------
William A. Carter, M.D.
Chief Executive Officer & President



/S/ Robert E. Peterson
--------------------------
Robert E. Peterson
Chief Financial Officer


Date: August 10, 2004







EXHIBIT 31.1
CERTIFICATIONS PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002

I, William A. Carter, Chief Executive Officer of Hemispherx Biopharma, Inc. (the
"Registrant"), certify that:

1. I have reviewed this quarterly report on Form 10-QSB of the Registrant;

2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the Registrant as
of, and for, the periods presented in this report;

4. The Registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the Registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;

b. Evaluated the effectiveness of the Registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and

c. Disclosed in this report any change in the Registrant's internal control over
financial reporting that occurred during the Registrant's most recent fiscal
quarter that has materially affected, or is reasonably likely to materially
affect, the Registrant's internal control over financial reporting; and


5. The Registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
Registrant's auditors and the audit committee of the Registrant's board of
directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the Registrant's ability to record, process,
summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal control over
financial reporting.

Date: August 10, 2004


/s/_William A. Carter
------------------------
William A. Carter
Chief Executive Officer





EXHIBIT 31.2

CERTIFICATIONS PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002

I, Robert Peterson, Chief Financial Officer of Hemispherx Biopharma, Inc. (the
"Registrant"), certify that:

1. I have reviewed this quarterly report on Form 10-QSB of the Registrant;

2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the Registrant as
of, and for, the periods presented in this report;

4. The Registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the Registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;

b. Evaluated the effectiveness of the Registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and

c. Disclosed in this report any change in the Registrant's internal control over
financial reporting that occurred during the Registrant's most recent fiscal
quarter that has materially affected, or is reasonably likely to materially
affect, the Registrant's internal control over financial reporting; and


5. The Registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
Registrant's auditors and the audit committee of the Registrant's board of
directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the Registrant's ability to record, process,
summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal control over
financial reporting.

Date: August 10, 2004

/s/ Robert E. Peterson
---------------------------
Robert Peterson
Chief Financial Officer








EXHIBIT 32.1

CERTIFICATION PURSUANT TO
SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Hemispherx Biopharma, Inc. (the
"Company") on Form 10-Q for the fiscal quarter ended JUne 30, 2004 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
William A. Carter, Chief Executive Officer of the Company, certify, pursuant to
18 U.S.C. ss. 1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of
2002, that:

(1) The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.


Date: August 10, 2004

/s/ William A. CArter
------------------------
William A. Carter
Chief Executive Officer






EXHIBIT 32.2

CERTIFICATION PURSUANT TO
SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Hemispherx Biopharma, Inc. (the
"Company") on Form 10-Q for the fiscal quarter ended June 30, 2004 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Robert E. Peterson, Chief Financial Officer of the Company, certify, pursuant to
18 U.S.C. ss. 1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of
2002, that:

(1) The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.


Date: August 10, 2004

/s/ Robert E. Peterson
-------------------
Robert E. Peterson
Chief Financial Officer