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 September 30, 2003March 31, 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


37,688,903Indicate  by check mark  whether  the  registrant  is an  accelerated  filer (as
defined in Rule 12b-2 of the Exchange Act). / / Yes /X/ No

42,363,928  shares of common stock were issued and  outstanding  as of October 30, 2003.April 26,
2004.





                         PART I - FINANCIAL INFORMATION

ITEM 1:   Financial Statements

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

                                                December 31,    September 30,
                                                    2002March 31,
                                                    2003          2004
                                                 -----------    ----------
                                   (Unaudited)
                              ASSETS
Current assets:

  Cash and cash equivalents                         $ 2,2563,764      $  5,0613,249
  Short term investments                              555            -1,495         3,989
  Inventory                                           -          2,5452,896         2,785
  Accounts and other
  receivables                                           1,507           141282           280
  Prepaid expenses and other current assets             71           309170           139

                                                 -----------    ----------
    Total current assets                              4,389         8,0568,607        10,442

  Property and equipment, net                            155           11294         3,387
  Patent and trademark rights, net                    995         1,0761,027           992
  Investments in unconsolidated affiliates                                           408           408
  Deferred acquisition costs                          1,546            -          1,068
  Deferred financing costs                              -            270393           495
  Advance receivable                                  -            9511,300         1,300
  Other assets                                           93            5129            29
                                                 -----------    ----------
      Total assets                                 $ 6,04013,404      $ 11,99217,053
                                                 ===========    ==========

                LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

  Accounts payable                                  $    786488     $    857424
  Accrued expenses                                     678          8571,119          899
  Deferred revenue                                        -           497
  Current portion of long-term debt (net of
    discounts of $1,330)                                  -           349670
  Redemption obligation                                   -         2,191
                                                 -----------    ----------
    Total current liabilities                          1,464        2,0631,607        4,681
Long-Term Debt-net of current portion -          969and
    discounts of $4,533 and $3,136, respectively       2,058        1,916

Commitments and contingencies:
Minority interest in subsidiary                          946           -
Redeemable Common Stock                                  -        1,600491        1,166

Stockholders' equity:
  Common stock                                            33           3839           42
  Additional paid-in capital                         107,155      117,145
  Accumulated other comprehensive income                  35           -123,054      131,136
  Treasury stock - at cost                               (4,520)         (21)(2)          (2)
  Accumulated deficit                               (99,073)    (109,802)(113,843)    (121,886)
                                                 -----------    ----------
    Total stockholders' equity                         3,630        7,3609,248        9,290
                                                 -----------    ----------
     Total liabilities and stockholders' equity     $ 6,04013,404    $  11,99217,053
                                                 ===========    ==========
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
                                                      September 30,March 31,
                                              -------------------------
                                                 2002            2003            2004
                                               ---------       ---------
                                              (Unaudited)     (Unaudited)
Revenues:

Sales of product, net                           $   -19         $   157259
Clinical treatment programs                         79              3747              49

                                               ---------      ---------
                                                    79             19466             308

Costs and expenses:

CostProduction/cost of Goodsgoods sold                      -               69118             601
Research and development                           1,194             846873             964
General and administrative                         767           1,045667           2,844
                                               ----------     ---------
    Total cost and expenses                      1,961           1,9601,658           4,409

Interest and other income                           23              1050              11
Interest and related expenses                                  -           (3,666)
Equity in loss of unconsolidated affiliate         (32)              -(17)           (101)
Financing costs                                    (58)         (3,851)
                                               ----------     ---------

   Net loss                                    $(1,891)        $(5,422)$(1,617)        $(8,042)
                                               ==========     =========


Basic and diluted loss per share                $  (.06)(.05)         $ (.15)(.20)
                                               ==========     ==========

Basic and diluted weighted
average common shares outstanding             32,093,066       36,830,633
                                               ==========     ==========


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 Nine months ended
                                                      September 30,
                                               -------------------------
                                                  2002            2003
                                               ---------       ---------
                                               (Unaudited)      (Unaudited)
Revenues:

Sales of product, net                           $    -         $   236
Clinical treatment programs                        263             118
License fee income                                 563              -
                                               ---------      ---------
                                                   826             354

Costs and expenses:

Production/Cost of Goods sold                       -              224
Research and development                         3,732           2,574
General and administrative                       2,447           2,550
                                               ----------     ---------
    Total cost and expenses                      6,179           5,348

Interest and other income                           90              61
Interest and related expenses                       -           (5,795)
Equity in loss of unconsolidated affiliate         (72)              -
Loss on investment due to impairment              (678)              -
                                               ----------     ---------

   Net loss                                    $(6,013)       $(10,728)
                                               ==========     =========




Basic and diluted loss per share                $  (.19)         $ (.31)
                                               ==========     ==========

Basic and diluted weighted
average common shares outstanding             32,083,957       34,210,98732,393,754      40,668,478
                                               ==========     ==========


See accompanying notes to condensed consolidated financial statements.




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

                                                        (Unaudited)
                                                  For the NineThree months ended
                                                         September 30,March 31,
                                                  --------------------------
                                                      2002          2003          2004
                                                    --------     ---------

Cash flows from operating activities:

 Net loss                                           $(6,013)     $(10,728)$(1,617)      $(8,042)
 Adjustments to reconcile net loss to net cash
 used in operating activities:
 Depreciation of property and equipment                  69            6222            23
 Amortization of patents rights                          81            9736           134
 Amortization of deferred financing and debt discount costs                _         5,79557         2,905
 Financing costs related to redemption obligation         -           946
 Stock option and warrant compensation and service expense                       132             -         Equity in loss of unconsolidated affiliates             72             -
 Loss on investment due to impairment                   6781,769

Changes in assets and liabilities:
Inventory                                                 -           (926)
Other111
Accounts receivable                                     (4)        1,314(12)            2
Deferred Revenue                                          -           497
Prepaid expenses and other current assets               283          (186)(72)           30
Accounts payable                                        (190)         (575)189            21
Accrued expenses                                       (62)          179
Advance receivavle                                        -          (673)(336)         (118)
Other assets                                             27            4241            -
                                                     -------     ---------
Net cash used in operations                          (4,927)       (5,599)(1,692)       (1,722)
                                                     -------     ---------

Cash flows from investing activities:
Purchase of propertyland and equipmentbuilding                           -            (19)(143)
Additions to patent rights                             (143)          (178)(18)           (99)
Maturity of short term investments                     5,310            520          1,496
Purchase of short term investments                       (837)            -         Deferred acquisition costs                               -           (160)(3,986)
                                                   ---------    ---------
Net cash provided byby(used in)
  investing activities                                 4,330            163502         (2,732)
                                                   ---------    ---------
Cash flows from financing activities:
 Proceeds from issuance of common stock                   6             -
 Proceeds from exercise of stock warrants                59         1,178
 Proceeds from issuance of preferred
 Stock of subsidiary                                    946             -            244
 Proceeds from long-term borrowings                   3,100         4,000
 Payments on long-term borrowings                      (440)           -          7,750
 Deferred financing costs                              -           (687)(268)         (305)
 Purchase of treasury stock                             (50)(49)           -
                                                    --------     ---------
 Net cash provided by (used in) financing activities  961         8,2412,343         3,939
                                                    --------     ---------
Net increase (decrease) in cash and cash equivalents  364         2,8051,153          (515)
Cash and cash equivalents at beginning of period      3,107      $  2,256         3,764
                                                    --------     ---------
Cash and cash equivalents at end of period          $ 3,471        $5,0613,409        $3,249
                                                    ========     =========
Supplementary disclosures of cash flow information:
Issuance of common stock for accounts payable       $    -         $   85
Issuance of common stock for purchase of building   $    -         $1,626
Issuance of common stock for debt conversion and
interest payments                                   $    -         $3,641

See accompanying notes to condensed consolidated financial statements.





                   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-K10-K/A for the year ended  December 31,  2002,2003,  as filed with the
SEC on May 20, 2003.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:

                                           September 30,
                                        2002March 31,
                                        2003     2004
Risk-free interest rate                5.23%       5.23%- %
Expected dividend yield                   -        -
Expected lives                      2.5 years      2.5- years
Expected volatility                   63.17%       63.17%- %


Had  compensation  cost for the Company's option plans been determined using the
fair value method at the grant dates,  the effect on the  Company's net loss and
loss per share for the three  months  ended  March 31,  2003 and nine months ended September 30, 2002 and
20032004 would have
been as follows:

                                            (In Thousands)
                                           Three Months Ended
                                                Nine Months Ended
                                         September 30, September 30,
                                       -----------------------------
                               2002March 31,
                                          --------------------
                                           2003          2002      2003
                               ----        ----        ----      ----2004


Net (loss) as reported                   $(1,891)    $(5,422)    $(6,013)   $(10,728)$(1,617)    $(8,042)
Add: Stock based employee
compensation expense
Included in reported net loss,
net of Related tax effects       -           -                    -           -

Deduct:
Total stock based employee
compensation determined
under fair value method
for all awards, net
of related tax effects                      $(411)       (271)       (137)         (813)
                              ------       -----       -----       ------
                                          -------     -------

Pro forma net loss                       $(2,162)    $(5,559)    $(6,826)   $(11,139)$(1,754)    $(8,042)
                                          =======     =======     =======    ========

Basic and diluted loss
per share
As reported                               $(.06)      $(.15)      $(.19)      $(.31)$(.05)      $(.20)
Pro forma                                 $(.07)      $(.17)$(.05)      $(.20)      $(.33)


 Note 3: INVESTMENT In unconsolidated affiliatesIN UNCONSOLIDATED AFFILIATES

Investments  include  an  initial  equity  investment  of  $290,625  in  Chronix
Biomedical ("Chronix").  Chronix focuses upon the development of diagnostics for
chronic  diseases.  This  initial  investment  was  made in May 31,  2000 by the
issuance of 50,000  shares of Hemispherx  Biopharma,  Inc.the Company's  common stock from the treasury.  On
October 12, 2000, the Company  issued an additional  50,000 shares of Hemispherx Biopharma,  Inc.its common
stock and on March 7, 2001 the Company  issued  12,000 more shares of Hemispherx Biopharma,  Inc.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  their recentits  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:

                                     September 30,March 31, 2004    December 31, 2003
                                      -------------     ----------------
Raw materials-Workmaterials-work in process         $ 2,489,4801,729,000           $1,729,000
Finished goods                          55,571
                                        --------------1,056,000            1,167,000
                                        -----------     ----------------
                                      $ 2,545,0512,785,000           $2,896,000
                                      =============     ================

NOTE 5:  REVENUE AND LICENSING FEE INCOME

On March 20, 2002 our European  Subsidiary  Hemispherx  Biopharma  Europe,  S.A.We  executed  a  Memorandum  of  Understanding  in  January  2004 with  Fujisawa
Deutschland GmbH, ("Hemispherx,  S.A."Fuji") entered  intoa major pharmaceutical corporation,  granting them an
exclusive  option  for  a  limited  number  of  months  to  enter  a  Sales  and
Distribution Agreement with exclusive rights to market Ampligen(R) for ME/CFS in
Germany, Austria and Switzerland. The option period ends 12 weeks after Fuji has
had a chance to review the report on the results of our Amp 516  clinical  trial
and meet with the trial's principal investigators. We received an initial fee of
400,000  Euros  (approximately  $497,000 US). If we do not provide Fuji with the
full report by May 31, 2004 we will be required to repay half of this fee and if
we do not provide them with the report by December 31, 2004, we will be required
to refund the entire fee. If Fuji  exercises the option,  Fuji would be required
to pay us an  additional  1,600,000  Euros  upon  execution  of  the  Sales  and
Distribution  agreement,  purchase  Ampligen(R)  exclusively  from  us and  meet
certain  annual  minimum  purchase  quotas.  We  would  be  required  to file an
application  with Laboratorios  del Dr.  Esteve  S.A.  ("Esteve")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).  Pursuant  toThe  foregoing  is  a  summary  of  the  memorandum  of
understanding.  Although we anticipate  preparing and issuing the AMP 516 report
in the time frame noted, we cannot ensure this will occur. We also cannot ensure
that Fuji will  exercise the option or that the proposed  terms of the Sales and
Distribution Agreement Esteve was granted the exclusive right to market Ampligen(R)in Spain,
Portugal and Andorra for the treatment of Myalgic  Encephalitis/Chronic  Fatigue
Syndrome  ("ME/CFS").  Esteve paid the initial and non refundable fee of 625,000
Euros (approximately $563,000) to Hemispherx S.A. on April 24, 2002.


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

The  agreement  also  requires the licensee to pay of 1,000,000  Euros after FDA
approval of Ampligen(R) for the treatment of ME/CFS and a fee of 1,000,000 after
issuance in Spain of final marketing approval  authorization for Ampligen(R) for
the treatment of ME/CFS.will not change materially.

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

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

This method  requires  the  computation  of a ratio of cost  incurred to date to
total expected costs and then apply that ratio to total  expected  revenue.  The
amount  of  revenue  recognized  is  limited  to the total  non-refundable  cash
received to date. The percentageFuji initial fee of expenses  incurred  to date to total  expected  expenses in
connection with the research and development  project,  exceed the percentage$497,000 has been deferred as of license  fees  received  compared  to total  license  fees to be earned  per the
agreement. Therefore the amount of revenue recognized by the Company was limited
to the total non-refundable cash received to date of approximately $563,000.March
31, 2004.

During the periods ending  December 31, 20022003 and September 30, 2003.March 31, 2004. The Company did
not receive any grant monies from local, state and or Federal Agencies.

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

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



Note 6: MINORITY SHAREHOLDER INTEREST

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

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

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

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

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

The  contingent  conversion  price  was more than the then  market  value of the
parent  company's  or  subsidiaries'  common  stock  at each  of the  respective
measurement dates. As a result and in accordance with Emerging Issues Task Force
(EITF) No. 00-27  "Application  of Issue No. 98-5  (Accounting  for  Convertible
Securities  with  Beneficial  Conversion  Features  or  Contingently  Adjustable
Conversion  Ratios) to Certain  Convertible  Instruments",  the  Company did not
ascribe any value to any contingent conversion feature.


Note 7: RECENT ACCOUNTING STANDARDS AND PRONOUNCEMENTS

In January 2003, FASB issued  Interpretation No. 46,  "Consolidation of Variable
Interest Entities".  ("Interpretation  No. 46"), which clarifies the application
of Accounting Research Bulletin No. 51, "Consolidated  Financial Statements," to
certain entities in which equity investors do not have the  characteristics of a
controlling  financial interest or do not have sufficient equity at risk for the
entity to finance  its  activities  without  additional  subordinated  financial
support from other parties.  Interpretation No. 46 is applicable immediately for
variable interest entities created after January 31, 2003. For variable interest
entities created prior to January 31, 2003, the provision of Interpretation  No.
46 are applicable no later than July 1, 2003. This  Interpretation  did not have
an effect on the consolidated financial statements.

In May 2003, FASB issued Statement of Financial  Accounting  Standards  ("SFAS")
No. 150 "Accounting for Certain Financial  Instruments with  Characteristics  of
Both  Liability and Equity".  This  Statement  establishes  standards for how an
issuer  classifies  and  measures in statement  of  financial  position  certain
financial  instruments with  characteristics  of both liabilities and equity. It
requires that an issuer  classify a financial  instrument that is with its scope
as a  liability  (or  assets  in  some  circumstances)  because  that  financial
instrument embodies an obligation. This statement shall be effective for finical
instruments  entered into or modified after May 31, 2003, and otherwise shall be
effective at the beginning of the first interim period  beginning after June 15,
2003,  except for  mandatory  redeemable  financial  instruments  of a nonpublic
entity. To date, the adoption of this  interpretation  did not have an effect on
the consolidated financial statements.

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


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

Except for  62,500 of the shares  issued to ISI,  we havehad  guaranteed  the market
value of the shares retained by ISI as of March 11, 2005, the termination  date,
to be $1.59 per share. ISI is permitted to periodically  sell certain amounts of
its  shares.  If,  within 30 days  after the  termination  date,  holders of the
guaranteed  shares  request  that we honor  the  guarantee,  we will bewould  have been
obligated to  reacquire  the holders'  remaining  guaranteed  shares and pay the
holders  $1.59 per share for a total of $675,000.  Accordingly,  certain  shares
issued in connection with this transaction are and will bewere initially recorded as redeemable
common stock outside of stockholders' equity. As of March 31, 2004, ISI had sold
the 424,528 guaranteed shares at prices in excess of $1.59 per share.

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

On May 30, 2003, we issued the shares to GP Strategies and the American National
Red Cross.  Pursuant  to our  agreements  with ISI and these two  creditors,  we
have
agreed to registerregistered the foregoing  shares for public sale. The acquisition of the
real  estate  and  machinery  is   contingent   on  our  receiving   appropriate
governmental  and shareholder  approval. The value of these  guaranteed
shares  totaled   $925,000  and  arethese  shares  were  redeemable  under  certain
conditions, accordingly they arewere initially reflected as redeemable common stock
and deferred  acquisition costs on the accompanying financial statementsbalance sheet as of September 30,December 31, 2003. WeAs
of March 31, 2004,  GP Strategies  had sold all of their 267,296  shares and the
American  National  Red Cross had not sold their  314,465  shares.  Additionally
other liabilities  associated with the real estate in the amount of $621,000 had
been recorded as deferred  acquisition  costs.  Upon ISI  stockholder  approval,
which  occurred on March 17, 2004,  substantially  all of the deferred  purchase
price was allocated to real estate.

Additionally,  in March 2004,  we issued  487,028  shares to ISI to complete the
acquisition  of the balance of ISI's rights to market its product as well as its
production  facility  in New  Brunswick,  NJ.  Except for 62,500 of the  487,028
shares  issued to ISI at  closing  of this  second  asset  acquisition,  we have
guaranteed the market value of all but 62,500 of thesethe shares retained by ISI on terms substantially
similar  to  those  for  the  initialguaranteed  shares  issued  to ISI  on  the  first
acquisition of the ISI assets.  As a result,  the liability for ISI redeemable stock
was  $675,000  as of March 31,  2004.  Pursuant  to our  agreement  with ISI, we
registered the foregoing shares for public sale.

On March 17, 2004,  the Company  acquired the land and buildings  located in New
Brunswick,  NJ. The termination  date for  these  guarantees  is 18  months  after  the date of
issuanceaggregated cost of the land and buildings was  approximately
$3,316,000. The cost of the land and buildings was allocated as follows:

                           Land              $   423,000

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

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



As of March 31, 2004 the 314,465 guaranteed shares to GP Strategies,  24 months after the date of
issuance of the additional  487,028 guaranteed shares to ISI and 12 months after
the date of issuance  of the  guaranteed  shares toheld by the American National
Red Cross.Cross had not been sold.  As a result,  the  liability  for this  redeemable
stock was $491,000.

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



As a result of the first agreement,  the following table summarize the estimated
fair values of the assets and liabilities assumed at the acquisition date.
                               At March 11, 2003
                               -----------------
Inventory                       $   1,840,762

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

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


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

                                      NineThree Months ended September 30,
                  -----------------------------
2002Ended March 31,

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

Net revenues                        $  2,473          $ 596


Operating expense    10,244         11,874
                      -----308                    $308
Expenses                            (2,493)                 (8,365)
                                    -------                  ------

Net loss          $  (7,771)       (11,278)
                      =====          ======Loss                           $(2,185)                $(8,057)
                                   ========                 =======

Basic and diluted loss per share     $    (.24)       $  (.33)
                      ------         ------$(.07)                  $(.20)
                                   --------                 -------

Weighted average
Shares
Outstanding      32,570,957      34,697,987
                 ----------      ----------

In giving  effect to the  additional  shares that would be issued as a result of
the second agreement with ISI the weighted average shares
outstanding                       during the
nine months ending  September 30, 2002 and 2003 would have been  33,057,957  and
35,184,987  resulting  in a pro forma loss per share as  adjusted of $ (.24) and
$(.32) for said periods respectively.33,046,092              41,080,579
                                 ===========             ===========
- ----------------------------------------------------------------------------


Note 9: CONVERTIBLE DEBENTURES7: DEBENTURE FINANCING

On March 12, 2003, Wewe issued an aggregate of  $5,426,000 in principal  amount of
6% Senior Convertible  Debentures due January 31, 2005 the ("March(the "March  Debentures") and
an aggregate of 743,288  Warrants expiring on March 12, 2008warrants to two  investors in a private  placement  for
aggregate proceeds of $4,650,000. Pursuant to the terms of the March Debentures,
$1,550,000  of the proceeds from the sale of the March  Debentures  were to have
been held back and  released to us if, and only if, we acquired  ISI's  facility
within a set timeframe. Although we had not acquired ISI's facility, these funds
were released to us in June 2003. The March Debentures were to mature on January
31, 2005 with interest at 6% per annum, payable quarterly in cash or, subject to
satisfaction  of certain  conditions,  common stock.  Any shares of common stock
issued to the investors as payment of interest were valued at 95% of the average
closing  price of the common stock  during the five  consecutive  business  days
ending on the third business day immediately  preceding the applicable  interest
payment date.  Pursuant to the terms and conditions of the March Debentures,  we
pledged all of our assets, other than our intellectual  property,  as collateral
and were subject to comply with certain financial and negative covenants,  which
include  but was  not  limited  to the  repayment  of  principal  balances  upon
achieving certain revenue milestones.

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

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

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

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

On July 10, 2003, we issued an aggregate of $5,426,000 in principal amount of 6%
Senior  Convertible  Debentures due July 31, 2005 (the "July Debentures") and an
aggregate of 507,102  Warrants (the "July 2008  Warrants") to the same investors
who  purchased  the March  12,  2003  Debentures,  in a  private  placement  for
aggregate anticipated gross proceeds of $4,650,000. Pursuant to the terms of the
July Debentures, $1,550,000 of the proceeds from the sale of the July Debentures
were to have  been  held  back and towill be  released  to us if,  and only if, we
acquireacquired  ISI's facility  with  inwithin a set  timeframe.  In June  2003  each of the
investors  collectively  funded the  $1,550,000  and waived the  requirementAlthough we had not acquired
ISI's  facility,  these  funds were  released  to perfect a security interestus in the building to be acquired. In addition, each of
the investors  waived the requirement that the company acquire the assets of ISI
pursuant to the terms of the second ISI Asset Purchase Agreement.October  2003.  The July
Debentures  mature on JanuaryJuly 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
proceedingpreceding  the  applicable  interest  payment  date.  Pursuant  to the terms and
conditions of the Senior  ConvertibleJuly Debentures,  we have pledged all of our assets, other than our
intellectual  property,  as  collateral  and arewere subject to comply with certain
financial and negative covenants, which include butcovenants.

The July  Debentures are  not limited
toconvertible at the repaymentoption of principal   balances  upon  achieving   certain  revenue
milestones.the investors at any time
through  July 31, 2005 into shares of our common  stock.  The  conversion  rate isprice
under the July Debentures was fixed at $1.46$2.14 per shareshare;  however, as part of the
debenture placement closed on October 29, 2003 (see below), the conversion price
under the July Debentures was lowered to $1.89 per share.  The conversion  price
is subject to adjustment  for  anti-dilution  protection.protection  for issuance of common
stock or securities  convertible  or  exchangeable  into common stock at a price
less than the conversion price then in effect.

The July 2008 Warrants received by the investors,  also received  Warrants  exercisableas amended, are to acquire at
any time  commencing  on July 26, 2004 through  March 12,
2008 to purchaseJanuary 31, 2009 an aggregate of
743,288507,102 shares of common stock at a price of $1.68$2.46 per share.  On March 12,July 10, 2004,
the exercise  price of thethese July 2008  Warrants will reset to the lesser of the
exercise price then in effect or a price equal to the average of the daily price
of the common stock between March 13,July 11, 2003 and March
11,July 9, 2004 (but in no event less
than $1.176$2.14 per share).  The exercise  price (and the reset price) under the July
2008  Warrants  also  is  subject  to  similar   adjustments  for  anti-dilution
protection.

AllWe entered into a Registration Rights Agreement with the investors in connection
with  the  issuance  of these warrants were exercised in June 2003.the July  Debentures  and the July  2008  Warrants.  The
Registration Rights Agreement requires that we register on behalf of the holders
the shares of common  stock  issuable  upon  conversion  of the  Debentures,  as
interest  shares  under  the  Debentures  and upon  exercise  of the  July  2008
Warrants. These shares have been registered for public sale.

On June 25, 2003,  in  connection  withwe issued to each of the March 12, 2003  $5,426,000  6%
convertible  debentures offering, we issued an additionalDebenture  holders a
warrant to each of(collectively,  the Debenture  holders"June 2008 Warrants") to acquire at any time through
June 25, 2008 an aggregate of 500,000 shares of common stock at a price of $2.40
per share. On June 25, 2004, the exercise price of these June 2008 Warrants will
reset to the lesser of the exercise price then in effect or a price equal to the
average of the daily price of the common  stock  between  June 26, 2003 and June
24, 2004 (but in no event less than $1.68 per share.)  The  exercise  price (and the reset  price) is also
subject to adjustments for anti-dilution protection.

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

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

The warrants  received by the investors are exercisable at any time through July
31, 2008 to purchase an aggregate  of 507,102  shares of common stock at a price
of $2.46 per share.  On July 10,  2004,  the  exercise  price of these July 2008
Warrants  will  reset to the  lesser of the  exercise  price then in effect or a
price equal to the average of the daily price of the common  stock  between July
11,  2003 and July 9, 2004  (but in no event  less than  $1.72 per  share).  The  exercise  price (and
the reset price) under the JulyJune 2008 warrantsWarrants also is subject to similar adjustments for
anti-dilution protection.

We entered into registration  rights agreementsprotection similar to those in the July 2008 Warrants. Pursuant to
our agreement with the investors in connection
with the issuance of the March  debentures  and warrants and the July  debenture
and warrants.  The registration  rights agreement  required thatDebenture holders, we registerhave registered the shares of common stock issuable upon  conversion of the  debentures,  shares for
interest  accrued and
upon exercise of the warrants  issued in March,these June and
July. In accordance  with the  agreement,  we have  registered  these shares2008 Warrants for public sale.

On October 29, 2003, we issued an aggregate of $4,142,357 in the principal amount of
6% Senior Convertible Debentures due October 31, 2005 (the "October Debentures")
and an aggregate of 410,134  Warrants (the "October 2008 Warrants") in a private
placement for aggregate  anticipated  gross proceeds of $3,550,000
($3,275.000 net of expenses).$3,550,000.  Pursuant to
the terms of the October Debentures, $1,550,000 of the proceeds from the sale of
the  October  Debentures  have been held back and will be released to us if, and
only if, we  acquired  ISI's  facility  within 90 days of October  29,  2003 and
provide  a  mortgage  on the  facility  as  further  security  for  the  October
Debentures. The debenture holders extended the deadline to 90 days after January
26, 2004. The October Debentures mature on October 31, 2005 and bear interest at
6% per annum,  payable  quarterly in cash or, subject to satisfaction of certain
conditions,  common stock. Any shares of common stock issued to the investors as
payment of interest  shall be valued at 95% of the average  closing price of the
common  stock  during the five  consecutive  business  days  ending on the third
business  day  immediately  preceding  the  applicable  interest  payment  date.
Pursuant to the terms and conditions of the October  Debentures,  we pledged all
of our assets,  other than our  intellectual  property,  as collateral  and were
subject to comply with certain financial and negative covenants.

Upon completing the sale of the October  Debentures,  we received  $3,275,000 in
net proceeds consisting of $1,725,000 (net) from the October DebentureDebentures and $1,550,000
that washad been withheld from the July debentures.Debentures.  As noted above,  $1,550.000$1,550,000 of
the proceeds from the October  Debenure  proceeds  have beenDebentures  were held back pending our completing
the  acquisition  of the ISI facility.facility and our  mortgaging  that  facility to the
debentureholders.
On March 17, 2004, we closed on the  acquisition of all of the worldwide  rights
of Alferon N as well as the FDA approved  biological  production facility in the
New Brunswick,  New Jersey,  from ISI. As a result,  the proceeds held back from
the October  Debenture  amounting to $1,550,000  were released to the Company in
April 2004. As required by the Debentures,  we are in the process of providing a
mortgage on the facility as further security for the Debentures.

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

The October 2008 Warrants, as amended,  received by the investors are to acquire
at any time  commencing  on July 26, 2004 through October 31, 2008April 30, 2009 an aggregate of
410,134  shares of common  stock at a price of $2.32 per share.  On October  29,
2004, the exercise price of these October 2008 Warrants will reset to the lesser
of the  exercise  price  then in effect or a price  equal to the  average of the
daily price of the common  stock  between  October 29, 2003 and October 27, 2004
(but in no event less than $1.624$2.19 per share).  The exercise  price (and the reset
price) under the October 2008  Warrants  also is subject to similar  adjustments
for anti-dilution protection.

As of October 28, 2003,  the  investors  had  converted  $4,427,580 of debt into
3,032,589  shares of our common stock.  The remaining  principal  balance on the
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 $1.3
million  ($951,000  paid through  September  30, 2003) into the  debenture  cash
collateral  account as required by the terms of the  October  Debentures.  These
amounts have been accounted for as advances receivable and are reflected as such
on the accompanying  balance sheet as of September 30,2003.  The cash collateral
account provides partial security for repayment of the March,  July and October,
2008 debentures in the event of default.

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

As of January 26,  2004,  with  respect to the July and October  20082003  Debenture
Amendments,  specifically,  the extension of time of the  investor's  ability to
exercise  warrants,  the Company  revalued the July and October  2003  warrants,
using the Black  Scholes  Method.  This  revaluation  resulted  in an  increased
adjustment to Debenture  discounts of $282,000,  reflected as additional paid in
capital,  and an  adjustment  to the  amortization  of  Debenture  discounts  of
approximately $77,000,  reflected in financing costs, for the three months ended
March 31, 2004.

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

The January 2004  Debentures  are  convertible at the option of the investors at
any time  through  January  31,  2006  into  shares  of our  common  stock.  The
conversion  price under the January 2004 Debentures is fixed at $2.53 per share,
subject to adjustment for anti-dilution  protection for issuance of common stock
or securities convertible or exchangeable into common stock at a price less than
the conversion price then in effect.

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

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

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

As of April 26, 2004, the investors have converted  $11,902,610 of debt from the
March,  July and October  Debentures into 7,073,234  shares of our common stock.
The March Debentures have been fully converted.  The remaining principal balance
on the  remaining  debentures  is  convertible  into  shares of our stock at the
option of the investors at any time, through the maturity date. In addition,  we
have paid $1,300,000  into the debenture cash collateral  account as required by
the terms of the October  Debentures.  The amounts paid  through  March 31, 2004
have been accounted for as advances  receivable and are reflected as such on the
accompanying  balance sheet as of March 31, 2004.  The cash  collateral  account
provides partial security for repayment of the July and October 2003 and January
2004 Debentures in the event of default.

By agreement  with  Cardinal  Securities,  LLC, for general  financial  advisory
services and in conjunction with both the March  and July  2003 6%  convertibleprivate debenture placements in March, July
and  October  2003 and in January  2004,  we paid  the placement agent,  Cardinal  Capital,Securities,  LLC an
investment  banking fee equal to 7% of the investments made by the two Debenture
holders.holders and issued to Cardinal  certain  warrants.  A portion of thisthe  investment
banking  fee was paid with the  issuance of 30,000  shares of our common  stock.
Placement  agentCardinal  also received  425,000612,500  warrants to purchase  common  stock,  of which
112,500 are exercisable at $1.74 per share, 112,500 are exercisable at $2.57 per
share,  and  200,000 are  exercisable at $2.50 per share,  87,500 are  exercisable at
$2.42  per share and  100,000  are  exercisable  at $3.04 per  share.  The $1.74
warrants  expire on July 10, 2008, the $2.57 and the other$2.50 warrants  expire on March
12, 2008.2008, the $2.42  warrants  expire on October 30, 2008 and the $3.04 warrants
expire on January 5, 2009. By agreement  with Cardinal,  Capital,  we have  registered all
shares andissuable upon exercise of the warrants for public sale.

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

The March 2003, July 2003, October 2003, private  debenture
offering,  we paid Cardinal an investments  banking fee of $245,000 and Cardinal
will receive 87,500 five year warrants to purchase an aggregate of 87,500 shares
at an exercise price of $2.42 per share.

The  March,  2008 and the July,  2008January 2004 debenture issuances of
$5,426,000,  $5,426,000,  $4,142,357, and $5,426,000,$4,000,000,  respectively,  and the  October 29,  2003  issuance  of  $4,142,357
debentures and related embedded conversion features and warrant
issuances,  were  accounted for in  accordance  with EITF 98-5:  Accounting  for
convertible  securities  with  beneficial  conversion  features  or  contingency
adjustable conversion and with EITF No. 00-27:  Application of issue No. 98-5 to
Certain  convertible  instrument, theinstruments.  The Company determined the fair values to be
ascribed to detachable warrants issued with the convertible debentures utilizing
the Black-Scholes method.

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

As a result, the Company recorded debt discounts of approximately $9.0$11.8 and $2.9
million  for the 2003 and 2004  debenture  issuances,  respectively,  which,  in
effect,  reduced the carrying  value of our debt. As debt is converted to zero.common
stock,  the remaining  unamortized  debt  discount is charged to finance  costs.
These costs arewere  initially  deferred and charged to interest expensefinance costs over the life
of the debentures.  As of September 30, 2003,March 31, 2004, the amount of debt discount  amortized
to interest expensefinance cost totaled approximately $5.4$10.2 million.

Recorded debt discounts on these  debentures  include an Original Issue Discount
("OID") ofCosts  associated  with the financings  aggregated  approximately  $1.3 million as additional cost of the offerings.million.
These costs are also deferred and expensed as interestfinance costs over the life of the
debentures.

Excluding the application of related  accounting  standards,  ourand remaining debt
discounts of $4.4 million,  the Company's  outstanding debt as of September 30,March 31, 2004
totaled $7.1 million with $2.0 million maturing in 2004 and the balance in 2005.

Section 713 of the American Stock Exchange  ("AMEX") Company Guide provides that
the Company must obtain  stockholder  approval before  issuance,  at a price per
share below market value, of common stock, or securities convertible into common
stock,  equal to 20% or more of its  outstanding  common  stock  (the  "Exchange
Cap"). Taken separately,  the July 2003, totaled $4.9 million.

InOctober 2003 and January 2004 Debenture
transactions  do not  trigger  Section  713.  However,  the AMEX has  taken  the
position  that  the  three  transactions  should  be  aggregated  and,  as such,
stockholder  approval is required for the issuance of common stock for a portion
of the potential  exercise of the warrants and  conversion of the  Debentures in
connection with the debenture agreements,January 2004 Debentures. The amount of potential shares that
the Company has outstanding letterscould exceed the Exchange Cap amounted to  approximately  1,299,000.
In accordance with EITF 00-19,  Accounting For Derivative Financial  Instruments
Indexed  to and  Potentially  Settled in a  Company's  Own  Stock,  the  Company
recorded  on  January  26,  2004,  a  redemption   obligation  of  credit  totaling $1 millionapproximately
$1,244,000.  This liability represents the fair market value of the warrants and
beneficial conversion feature related to the 1,299,000 shares.

In addition, in accordance with EITF 00-19, the Company revalued this redemption
obligation  associated with the beneficial conversion feature and warrants as of
March 31, 2004.  The Company  recorded an additional  redemption  obligation and
finance  charge of  $947,000  as a result of this  revaluation.  If the  Company
obtains  stockholder  approval,  the  Company's  redemption  obligation  will be
recorded as additional collateral.  In  addition,  as of
September  30,  2003,paid in capital on the Company has $200,000 in  restricted  cash under other
letter of credit agreements required by our insurance carrier.date approval is received.

Note 10: AUTHORIZED SHARES:


On July 31, 2003, we had  approximately  104,000 shares of our authorized shares
of Common  Stock  that were not issued or  reserved  for  issuance.  In order to
accommodate  the shares needed for the July  Debenture,  Dr.  Carter,  our Chief
Executive  Officer and Cardinal Capital,  the placement agent,  agreed that they
would not exercise their  warrants or options unless and until our  stockholders
approved  an increase in our  authorized  shares of common  stock (see note 11).
This action  freed up  3,206,650  shares.  One of the  proposals  for the annual
meeting of our stockholders  that was held in September 2003 was an amendment to
our  certificate of  incorporation  to increase the authorized  shares of common
stock from 50,000,000 to 100,000,000 (the  "Proposal").  We could not be assured
that the Proposal would be approved.

Our  stockholders  approved an amendment to our corporate  charter at the Annual
Stockholder  meeting  held in  Philadelphia,  PA on  September  10,  2003.  This
amendment increased our authorized shares from 50,000,000 to 100,000,000.  As of
September 30, 2003, we have issued and outstanding  shares  totaling  37,654,543
and 16,393,990  shares reserved for use upon the conversion of the debenture and
the exercise of outstanding warrants and options.


Note 11:8: EXECUTIVE COMPENSATION

In order to facilitate the Company's  need to obtain  financing and prior to our
shareholdersstockholders  approving an amendment  to our  corporate  charter to mergeincrease the
number of  authorized  shares,  Dr. Carter agreed to waive his right to exercise
certain  warrants  and  options  unless and until our  shareholderstockholders  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 current  quarter
resulting  from  warrants  issued to Dr.  Carter in 2003  that  vested  upon the
execution of the second ISI asset closing on March 17, 2004. This was determined
by subtracting the exercise price from the stock closing price on March 17, 2004
and multiplying the result by the number of warrants.

Note 9- SUBSEQUENT EVENT

On May 14,  2004,  we issued to the  debentureholders  warrants  to  purchase an
aggregate of 1,300,000 shares ("the May 2009 Warrants"). In consideration of the
foregoing,  the debentureholders  exercised the June 2008 warrants. As a result,
we issued an  aggregate  of  1,000,000  shares and  received  gross  proceeds of
approximately $2,400,000.

The May 2009  warrants  are to acquire at any time,  commencing  on November 14,
2004 through April 30, 2009, an aggregate of 1,300,000 shares of common stock at
a price of $4.50 per share.  On May 14, 2005,  the  exercise  price of these May
2009 Warrants will reset to the lesser of the exercise price then in effect or a
price equal to the average of the daily  price of the common  stock  between May
15,  2004 and May 13,  2005 (but in no event  less than $4.008 per  share).  The
exercise price (and the reset price) under the May 2009 Warrants also is subject
to  adjustments  for  anti-dilution  projection  similar  to those in the  other
warrants.

In addition,  the debentureholders  agreed to amend the provisions of all of the
outstanding warrants and debentures  (including the debentures issuable pursuant
to the AIR) to limit the maximum  amount of funds that the holders could receive
in lieu of shares  upon  conversion  of the  debentures  and/or  exercise of the
warrants  in the  event  that the  Exchange  Cap was  reached  to  119.9% of the
conversion  price of the relevant  debentures and 19.9% of the relevant  warrant
exercise price.

These  transactions  could  result  in us  recording  an  additional  redemption
obligation  for the reasons  discussed  in Note 7 and will result in  additional
financing charges beginning in the second quarter of 2004.


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 use our proprietary drug,  Ampligen(R),
to treat  diseases for which adequate  treatment is not  available.  We seek the
required regulatory  approvals which will allow the progressive  introduction of
Ampligen(R) for Myalgic  Encephalomyelitis/Chronic  Fatigue Syndrome ("ME/CFS"),
HIV, Hepatitis C ("HCV") and Hepatitis B ("HBV") in the U.S., Canada, Europe and
Japan.  Ampligen(R) is currently in the open label portion of phase III clinical
trials in the U.S.  for use in  treatment of ME/CFS and is in Phase IIb clinical
trialsdevelopment in the U.S. for the treatment of newly emerged  multi-drug  resistantpatients with HIV and for the induction of
cell mediated  immunity in HIV patients that are under control using potentially
toxic drug cocktails.infection.

In March, 2003, we acquired from Interferon Sciences Inc. ("ISI"),  all of ISI's
raw materials,  work-in-progress and finished product of Alferon N Injection(R),
together with a limited license for the production,  manufacture, use, marketing
and sale of the  product.  Alferon N  Injection(R)  [interferon  alfa- n3 (human
derived)] is a natural alpha  interferon that has been approved by the U.S. Food
and Drug  Administration  ("FDA")  for  commercial  sale  for the  intralesional
treatment of refractory or recurring external genital warts in patients 18 years
of age or older.  We intendhave begun to market  this  product  in the  United  StateStates
through sales  facilitated via third party marketing  agreements.  InWe are in the
future, we expect
to implementprocess of implementing studies,  beyond those conducted by ISI, for testing the
potential  treatment  of  HIV,  Hepatitis  C and  other  indications,  including
multiple sclerosis.  This  acquisition  not  withstanding,  our primary focus remains the
development of Ampligen(R) for treating ME/CFS and HIV diseases.

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



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

We were  reincorporated  in Delaware and changed our name to HEM  pharmaceutical
Corp.,  in 1991 and to  Hemispherx  Biopharma,  Inc. in June 1995. We have three
domestic  subsidiaries  consisting  of BioPRo  Corp.,  BioAgen  Corp.,  and Core
BioTech  Corp.,  all  of  which  are  incorporated  in  Delaware.   Our  foreign
subsidiaries include Hemispherx Biopharma, Inc. Europe N.V./S.A.  established in
Belgium in 1998 and Hemispherx  Biopharma,  Inc. Europe S.A. ("Hemispherx S.A.")
incorporated in Luxembourg 2002.


                                  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, or if ever,  Ampligen(R) or our other products will
be generally available for commercial sale for any indication. Generally, only a
small percentage of potential  therapeutic  products are eventually  approved by
the U.S. Food and Drug Administration ("FDA") for commercial sale.

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

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

All of our drugs and associated  technologies  other than ALFERON N Injection(R)
are  investigational  and must receive prior regulatory  approval by appropriate
regulatory  authorities for general use and are currently legally available only
through  clinical  trials  with  specified  disorders.  At  present,  ALFERON  N
Injection(R) is only approved for the  intralesional  treatment of refractory or
recurring  external  genital warts in patients 18 years of age or older.  Use of
ALFERON N Injection(R) for other indications will require  regulatory  approval.
In this regard,  Interferon  Sciences,  Inc. ("ISI"),  the company from which we
obtained our rights to ALFERON N Injection(R), conducted clinical trials related
to use of ALFERON N  Injection(R)  for treatment of HIV and Hepatitis C. In both
instances, the FDA determined that additional studies were necessary in order to
fully  evaluate the efficacy of ALFERON N  Injection(R)  in the treatment of HIV
and Hepatitis C diseases.  We have no  obligation or immediate  plans to conduct
these additional studies at this time. Our principal development efforts are currently
focused on Ampligen(R), which has not been approved for commercial use.

Our  products,  including  Ampligen(R),  are subject to extensive  regulation by
numerous  governmental  authorities in the U.S. and other countries,  including,
but not limited to, the FDA in the U.S., the Health Protection Branch ("HPB") of
Canada, and the European Medical Evaluation Agency ("EMEA") in Europe. Obtaining
regulatory  approvals  is a  rigorous  and  lengthy  process  and  requires  the
expenditure  of  substantial  resources.  In order to  obtain  final  regulatory
approval  of a new  drug,  we  must  demonstrate  to  the  satisfaction  of  the
regulatory  agency that the product is safe and  effective for its intended uses
and  that  we are  capable  of  manufacturing  the  product  to  the  applicable
regulatory  standards.  We  require  regulatory  approval  in  order  to  market
Ampligen(R)  or any other  proposed  product  and  receive  product  revenues or
royalties. We cannot assure you that Ampligen(R) will ultimately be demonstrated
to be safe or efficacious.  In addition, while Ampligen(R) is authorized for use
in clinical  trials in the United States and other  countries,  we cannot assure
you that  additional  clinical trial  approvals will be authorized in the United
States or in other  countries,  in a timely  fashion or at all,  or that we will
complete these clinical trials. If Ampligen(R) or one of our other products does
not receive  regulatory  approval in the U.S. or elsewhere,  our operations most
likely will be materially adversely effected.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 September 30, 2003March 31, 2004,
our accumulated deficit was approximately  $110,000,000.$121,866,000.  We have not yet generated significant
revenues from our products and may incur substantial and increased losses in the
future.  We cannot  assure that we will ever achieve  significant  revenues from
product sales or become  profitable.  We require,  and will continue to require,
the  commitment  of  substantial  resources to develop our  products.  We cannot
assure that our product  development  efforts will be successfully  completed or
that required regulatory approvals will be obtained or that any products will be
manufactured and marketed successfully, or be profitable.

We may require additional financing which may not be available.

The  development  of our products  will require the  commitment  of  substantial
resources to conduct the time-consuming research,  preclinical development,  and
clinical trials that are necessary to bring  pharmaceutical  products to market.
Based on our current  projections,  we may need $2.0 million
in additional financing to fund operations and debt service over the next twelve
months  subsequent  to  September  30,  2003.  Our  projections  assume that our
debenture  holders do not  continue  to convert the  remaining  debt into common
stock  and  that we will  need  cash to  repay  the  debt as  scheduled.  If the
debenture  holders  continue to  periodically  convert the  debentures  into our
common  stock,  we may not need  additional  funds.  Also,  sales of  Alferon  N
Injection(R)  could  exceed our  projection  and reduce the need for  additional
financing  during this period.  Between  March and the end of October  2003,  we
received  approximately $10.3 million in net proceeds from the sale of all three
sets of debentures and the exercise of warrants  issued in conjunction  with the
Debentures due January 2005. Pursuant to the terms of the October Debentures, if
and  when we  close  on the  second  ISI  asset  acquisition,  we  will  receive
additional  net  proceeds of $1.55  million.  As of September  30, 2003,March 31, 2004, we had approximately  $5.1$7,238,000  million in cash and short termcash
equivalents and short-term investments.  We believe that these funds plus 1) the
initial netgross  proceeds  received  from the  exercising  of  warrants  of  approximately
$1.7 million from
October  Debenture  placement,$2,400,000, 2) the release of the remaining $1.55 million in
net  proceeds  from  the  July  Debentures,   3)  the  anticipated infusion of approximately $1.55$1,550,000 million in remaining net
proceeds  from the October  Debentures  and 4)in April 2004, 3) the projected net cash
flow from the sale of ALFERON N Injection(R)  and 4) the proceeds from licensing
agreements  and/or the  expected  infusion of  $2,000,000  in proceeds  from our
investors  exercising  their AIR should be sufficient to meet our operating requirement forcash
requirements  including debt service  during the next 12 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.

In addition,  if weIf  stockholders  do not  timely completeapprove the  second ISI asset  acquisition,issuance of certain  shares of our common
stock upon conversion of our debentures and exercise of related  warrants at our
2004 annual stockholders'  meeting, a portion of the debentures may no longer be
convertible,  certain of the  warrants  will not be  exercisable  and we will be
required to pay the holders in cash the  difference  between the  conversion  or
exercise  price  and the  market  price  in lieu of  shares.  As a  result,  our
financial condition could be materially and
adversely affected (see the next risk factor).

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

In March, 2003 we executed two agreements with Interferon Sciences, Inc.The  American  Stock  Exchange  ("ISI"AMEX")  has taken the  position  that the July
Debenture, October Debenture and January 2004 Debenture transactions and the May
2009 Warrant  transactions  should be aggregated and, as such, under AMEX rules,
stockholder  approval is required  for our issuance of a  significant  number of
shares pursuant to purchase  certain  assets of ISI. In the first  agreement  we acquired  ISI's
inventory of ALFERON N Injection(R)  and a limited  license for the  production,
manufacture,  use,  marketing and sale of this product.  Our ability to generate
sustained revenues from sales of this product is dependent,  among other things,
on our  completing  the termsexercise of the second  agreementwarrants and conversion of the Debentures
(see Note 7 to acquire the balance of
ISI's  rights  to its  product  as well as  ISI's  production  facility  used to
formulate and purify the drug  concentrate of ALFERON N Injection(R)unaudited  financial  statements in Part I, Item 1 above). If
we are
unable  to  generate  sustained  revenues  fromstockholders  do not  approve  the  saleissuance  of this  product,such  shares at our financial condition could be materially and adversely affected.

In  addition,  pursuant to terms2004 annual
stockholders' meeting, a portion of the October  Debentures,debentures may no longer be convertible,
certain of the warrants will not be  exercisable  and we will be required to pay
the holders the lesser of (a) the difference  between (X) the  conversion  price
(with regard to the  debentures)  and/or the exercise  price (with regard to the
warrants)  and (Y) the market  price of our shares or (b) 119.9% of the relevant
conversion  price,  with regard to the  debentures  and/or 19.9% of the relevant
warrant exercise price, in lieu of shares. At present, the market price is above
the conversion  price of all of the debentures and the exercise price of all but
one series of warrants.  If we are required to acquire  ISI's  facility  within 90 days from  October 29, 2003 and,  unless and
until we acquire the  facility,  $1,550,000pay cash rather than issue shares
upon conversion of the proceeds from the salea material amount of the
October  Debentures  will be held  back.  The  same  condition  was in the  July
Debentures  and in the  debentures issued in March 2003;  however,  the holders
waived this condition in both  debentures.  Consummationand/or exercise of the second agreement
requires,  among  other  things,  approval  by ISI's  stockholders  and  certain
environmental  approvals with regard to the salea material
number of  the facility. As of the date
hereof, ISI has filed with the Securities and Exchange  Commission a preliminary
proxy statement for a special  meeting of its  stockholders at which approval of
the second  acquisition will be sought.  ISI has received written  environmental
approval from the state of New Jersey.

Due to ongoing delays on the part of ISI, on September 23, 2003, we commenced an
action against ISI in Delaware seeking specific  performance and declaratory and
injunctive relief related to the first and second asset acquisition  agreements.
Our  primary  objectives  are  to  compel  ISI  to  complete  the  second  asset
acquisition  and to prevent ISI from  terminating  the second asset  acquisition
agreement due to the passage of time. For more  information on this action,  see
"Legal  Proceedings"  in "Our  Business"  below.  It is possible  that that this
lawsuit could further delay the closing of the second asset acquisition.

In addition, pursuant to the agreements, we have been paying certain expenses of
ISI.  Given  ISI's  precarious  financial  condition,  if we stop  making  these
payments, ISI could declare bankruptcy. This would most likely further delay and
possibly jeopardize a closing under the second asset purchase agreement.

Our  failure to  complete  the  acquisition  within the 90 day period  will be a
technical  default of the terms of the October  Debentures  and,  absent consent
from the holders of these  debentures  for  additional  time,  most likely would
result  in our  having  to  redeem  the  securities.  If we do not  receive  the
additional  funds from the October  Debentures as planned and,  especially if we
are  required to redeem  these  debentures,warrants,  our  financial  condition  would be  materially  and  adversely
affected  and we would  probably  have to  reduce or
possibly curtail  operational  spending including some critical clinical effort.
In addition,  although we have not yet completed the  acquisition,  we issued an
aggregate  of 581,761  shares to GP  Strategies  and the  American  National Red
Cross, two creditors of ISI, as partial consideration for the acquisition and we
may be required to repurchase some or all of these shares in the future at $1.59
per share  (see the risk  factor  "We have  guaranteed  the value of a number of
shares  issued and to be issued as a result of our  acquisition  of assets  from
Interferon  Sciences.  If our share price is not above $1.59 per share 12, 18 or
24 months after the dates of issuance of the  guaranteed  shares,  our financial
condition  could  be  adversely  affected"  below).  If we do not  complete  the
acquisition,  we will  look to ISI to pay us the  value  of the  shares  that we
issued to these two creditors. No assurance can be given that we will be able to
so recoup the value of these shares.affected.

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

In March 20032004, when we consummated the second ISI asset  acquisition,  we issued
487,028  shares to Interferon  Sciences  and, upon the
consummation of the second Interferon Sciences asset acquisition,  we will issue
an additional  487,028 shares to Interferon  Sciences.ISI. In May 2003 we issued an aggregate of 581,761  shares to
two of Interferon  Sciences'ISIs' creditors.  We
anticipate, but cannot assure, that we will close the second Interferon Sciences
asset acquisition sometime prior to the end of December 2003.  We have guaranteed the value of up to 1,430,817all but 62,500 of these
shares to be $1.59 per share or $2,275,000
in the  aggregate  on the relevant  termination dates,  which are  inclusive of
424,528 guaranteed  unissued shares with respect to the second asset acquisition
agreement with ISI which, to date remains unconsummated.dates. As of October 29, 2003,
1,312,817March 31,
2004 738,993 of the 1,430,817guaranteed  shares have not been sold. The termination dates
are 24 months after the dates of issuance and delivery of the guaranteed  shares
to ISI  18  months  after  the date of  issuance  of the  guaranteed  shares to GP
Strategies and 12 months after the date of issuance of the guaranteed  shares to the
American  National Red Cross.  The guarantee  relates only to those shares still
held by Interferon  SciencesISI and the two  creditorsAmerican  National Red Cross on the  applicable  termination
date.  If, within 30 days after the relevant  termination  date,  holders of the
guaranteed  shares request that we honor the  guarantees,  we will reacquire the
holders' remaining guaranteed shares and pay the holders $1.59 per share. By way
of example,  assuming  that all remaining  1,312,817738,993  shares are still held on the
relevant termination dates, we would be obligated to pay to Interferon  SciencesISI $675,000 and these two  creditors an  aggregate of  $2,087,380.the
American  National  Red Cross  $500,000.  The  reported  last sale price for our
common  stock on the  American  Stock  Exchange  on November 14, 2003April 26, 2004 was $2.65$4.32 per
share. If, during the 31 days commencing on the relevant  termination dates, the
market price of our stock is not above $1.59 per share,  we most likely would be
requested and obligated to pay the guaranteed  amount on the  guaranteed  shares
outstanding  on the relevant  termination  dates.  We believe that the number of
guaranteed shares still outstanding on the relevant  termination dates will be a
factor of the market  price and sales  volume of our common  stock during the 24 18
and 12 month periods prior to the relevant termination date.

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

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

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

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

To date,  no consistent  policy has emerged  regarding the breadth of protection
afforded by pharmaceutical and biotechnology  patents. There can be no assurance
that new patent applications  relating to our products or technology will result
in patents being issued or that, if issued,  such patents will afford meaningful
protection  against  competitors  with  similar  technology.   It  is  generally
anticipated that there may be significant  litigation in the industry  regarding
patent  and  intellectual   property  rights.   Such  litigation  could  require
substantial  resources  from  us and we may not  have  the  financial  resources
necessary to enforce the patent  rights that we hold.  No assurance  can be made
that our patents will provide  competitive  advantages  for our products or will
not be successfully  challenged by  competitors.  No assurance can be given that
patents do not exist or could not be filed which would have a materially adverse
effect on our ability to develop or market our products or to obtain or maintain
any competitive  position thethat 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 need to enter intoare 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.  To the extent that we enter
into co-marketing or other licensing  arrangements,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 Gentiva  Health
ServicesAccredo  offers the  potential to provide significantsome
marketing and  distribution  capacity in the United States while licensing and  marketing  agreements with
certain  foreign firmsBioclones  (Proprietary),  Ltd , Biovail  Corporation and  Laboratorios  Del Dr.
Esteve  S.A.  should  provide an adequatea sales  force in South  America,  Africa,  United
Kingdom, Australia and New Zealand, Canada, Spain and Portugal.

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

No guaranteed sourceThere 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, and we have a limited number of
sources from which to obtain such materials.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.  If and whenIn March 2004 we close on the second ISI asset acquisition,  we
will acquire theiracquired 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 beinghaving 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 substantially  higher  than that of the  competitive
recombinant alpha and beta interferon products.

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

Possible  side effects  from the use of  Ampligen(R)  or ALFERON N  Injection(R)
could adversely effectaffect 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 effectaffect 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  effectedaffected from the  litigation  costs,  settlement  expenses and lost
product  sales  inherent to these  claims.  While we will continue to attempt to
take appropriate  precautions,  we cannot assure that we will avoid  significant
product  liability  exposure.  Although we currently  maintain product liability
insurance  coverage,  there can be no assurance that this insurance will provide
adequate  coverage  against  product  liability  claims.  A  successful  product
liability claim against us in excess of our $1,000,000 in insurance  coverage or
for which coverage is not provided could have a negative  effect on our business
and financial condition.

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

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

Uncertainty of health care reimbursement for our products.

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

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

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

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

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

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

Our common stock is listed for quotation on the American Stock Exchange. For the
12-month  period ended OctoberMarch 31, 2003,2004,  the price of our common stock has ranged
from $.74$1.33 to $3.35.$4.85. 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 are
sold in the public market.

As of  October 30,  2003,April  26,  2004,  approximately  1,098,789801,623  shares  of our  common  stock,
constituted  "restricted securities" as defined in Rule 144 under the Securities
Act of 1933.  AllSubstantially  all of these shares wereare  registered  herein or in a
prior  registration  statement pursuant to agreements between us and the holders
of these shares. In addition,  we have registered 6,993,00112,006,977 shares issuable (i)
upon conversion of approximately  135% of the Debentures  issued in January 2004
(the "January 2004 Debentures"), the October Debentures, the July Debentures and
100%the January 2004 Debentures issuable upon exercise of AIR (issued in conjunction
with the remaining  principal balance on the Debentures due January  2005;2004  Debentures);  (ii) as payment of 135% of the interest on
all of the  Debentures;  (iii) upon exercise of 135% of the 2009 Warrants issued
in conjunction with the January 2004 Debentures,  the October 2008 Warrants, the
July 2008  Warrants and the June 2008  Warrants;  and  (iv) upon  exercise of certain
other warrants and stock options.options and (v) shares issued to certain  suppliers and
service providers.  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 will be  registering  3,671,599  shares
issuable (i) upon the conversion of  approximately  135% of the principal of the
October  2005  debentures  as well  135% of the  interest  on the  October  2005
debentures  and  135% of the  October  2005  debenture  warrants.  Moreover,  we
anticipate  that we will be issuing and  registering  for public resale  487,028
shares if and when we close the second ISI asset acquisition.  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 shareholderstockholder  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 12.9%12.1% 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.


NewNEW ACCOUNTING PRONOUNCEMENTS

In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
Pronouncementsand 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"),  whichthat  clarifies  the
application  of  Accounting  Research  Bulletin No. 51,  "ConsolidatedConsolidated  Financial
Statements",  toStatements,  "to certain  entities  in which  equity  inventorsinvestors  do not have the
characteristiccharacteristics  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
provisionprovisions of  Interpretation  No. 46 are applicable
no later than July 1, 2003.have been deferred to the first quarter of
2004. This  Interpretation No. 46 did not have an effect on theour consolidated  financial
statements.

In May  2003,  the FASB  issued  Statement of Financial  Accounting  Standards  ("SFAS")  No.  150,  "Accounting  for  Certain
Financial  Instruments  with  Characteristics  of Both  Liabilityboth  Liabilities  and Equity"
("SFAS  150").  This  Statement  establishes  standards for howSFAS 150  requires  an  issuer  classifies  and  measures in statement  of  financial  positionto  classify  certain  financial
instruments,  with  characteristics  of both liabilitiessuch as mandatory  redeemable shares and equity. It
requires that an issuer  classify a financial  instrument thatobligations to repurchase
the issuers  equity  shares,  as  liabilities.  The  guidance is with its scope
as a  liability  (or an assets in some  circumstances)  because  that  financial
instrument  embodies  an  obligation.  This  statement  shall be  effective  for
financial  instruments  entered into or modified aftersubsequent to May 31, 2003, and
is otherwise
shall be  effective at the beginning of the first interim  period beginning after June
15, 2003,  except for  mandatorily  redeemable  financial  instruments of a
nonpublic entity. To date, the adoption of these  Interpretation2003. SFAS 150 did not have an effectimpact 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 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 consolidatedlesser 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
statements.institution and place investments with financial institutions evaluated as being
credit  worthy,  or in short-term  money  markets,  which are exposed to minimal
interest  rate and credit risks.  At times,  we have bank deposits and overnight
repurchase agreements that exceed federally insured limits.

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


RESULTS OF OPERATIONS

Three months ended September 30, 2003March 31, 2004 versus Three months ended September
30, 2002March 31, 2003

Net loss

Our net losses  ofloss was  approximately  $5,422,000  or $.15 per  share$8,042,000 for the three months ended September  30, 2003March 31,
2004 versus a net loss of  $1,617,000  for the same period a year ago. Per share
loss for the three  months ended March 31, 2004 was $0.20 per share versus $0.05
a year  earlier for the same  period.  This  year-to-year  increase in losses of
$6,425,000 is primarily consistsdue to non-cash  financing costs of $2,934,000 in non-cash
interest  charges related to our March,  2005 debentures and $389,000 related$3,851,000  relating
to  our  July  2005  debentures.  Excluding these non cash charges,Debentures,   October  Debentures  and  January  2004  Debentures
(Collectively, the "Debentures") as well as a non-cash stock compensation charge
of $1,769,000  resulting from warrants  issued to Dr. Carter in 2003 that vested
in the current  quarter.  These warrants vested upon the execution of the second
ISI asset closing on March 17, 2004. 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.  In addition,  our loss during the
current period includes $606,000 in operating losses relating to our new Alferon
division.  The  operating  loss for the period March 11, 2003 through  March 31,
2003  for our  Alferon  division  amounted  to  $170,000.  These  three  factors
represent  77% of our net loss for the three months  ended March 31,  2004.  For
comparative  purposes,  excluding  our March 31,  2004  losses  for these  three
factors,  our losses were  $1,766,000$1,816,000  for the three months ended March 31, 2004
compared  to  operating$1,447,000  for the same period in 2003 after  adjustment  for the
Alferon  division losses or an increase of $1,882,000  in 2002.approximately  $369,000.  The operating losses of $1,766,000  include $328,000 relatedprimary
reason for the increase was attributed to our acquired Alferon
N Injection(R) operations.higher general  corporate  legal costs
and director's fees.

Revenues

Revenues for the three months ended September 30,March 31, 2004 were  $308,000 as compared to
revenues of $66,000 for the same period in 2003.  Revenues  from our ME/CFS cost
recovery treatment programs  principally underway in the U.S., Canada and Europe
were $49,000 for the three  months  ended March 31, 2004 versus  $47,000 for the
three months ended March 31, 2003.  These clinical  programs allow us to provide
Ampligen(R) therapy at our cost to severely  debilitated ME/CFS patients.  Under
this program the patients pay for the cost of Ampligen(R)  doses infused.  These
costs total approximately $7,200 for a 24-week treatment program.

In  addition,  revenues  for the three months ended March 31, 2004 from sales of
ALFERON N totaled  $259,000  versus  $19,000 for the 20-day  period of March 11,
2003,  were $194,000  including
$157,000the date we  acquired  the  rights to the  Alferon N  business  from the net  salesISI,
through March 31, 2003. Sales of Alferon N Injection(R).  Sales in 2002  were
$79,000 from sales of Ampligen(R) related to our cost recovery clinical program.
Sales of  Ampligen(R)  are expected  to decline as the AMP 516 ME/CFS  clinical
trial near  completion.  Sales of Alferon  N(R) are  expectedanticipated to increase as we produceare
producing more product and our marketing/sales programs getare underway.

Research and  Development  costs of $846,000 in the three months ended September
30, 2003  compared to research and  development  costs of $1,194,000 in the same
three months of 2002. These costs primarily  reflect the direct costs associated
with our  effort to  develop  our lead  product,  Ampligen(R),  as a therapy  in
treating  chronic  diseases and cancers.  At this time,  this effort consists of
conducting clinical trials involving patients with ME/CFS and patients with HIV.
Our research  and  development  costs are $348,000  lower in 2003 due to reduced
costs  associated with the development of Ampligen(R) to treat ME/CFS  patients.
In the three months  ended  September  30,  2002,  our ME/CFS Phase III clinical
trial was in full force  therefore  increasing  our  manufacturing  and clinical
support  expenses  during that period.  The Amp 516 trial is nearing  completion
with far fewer patients enrolled.

General and Administrative ("G&A") expenses were approximately $1,045,000 during
the three months ended September 30, 2003. Excluding the expenses related to our
new Alferon division totaling $416,000 our G&A expenses were $628,000  inclusive
of a $197,000 bonus granted by the Board to Dr. Carter,  compared to $767,000 in
expenses for the same period in 2002.  This  reduction  of  $139,000,  basically
resulted from lower legal and public relations expenses.


Nine months ended September 30, 2003 versus Nine Months ended June 30, 2002

During the nine months period ended  September the 30, 2003, we have 1) acquired
certain assets and patent rights to ALFERON N Injection(R)  2) privately  placed
the March,  2008 and the July, 2008 6% convertible  debentures with an aggregate
maturity value of $10,852,000  (gross  proceeds of $9,300,000)  and 3) continued
our efforts to develop  Ampligen(R) for the treatment of patients afflicted with
ME/CFS and HIV, 4) activated  the New Brunswick  production  facility to process
doses of Alferon N and 5) produced  21,000 doses of Alferon now in the final FDA
approval process.

In the nine months period ended  September 30, 2003, we recorded  $10,728,000 or
$.31 per share in net losses.  In the same period in 2002,  we had net losses of
$6,013,000 or $.19 per share. The losses in 2003 includes $5,795,000 in non-cash
interest  charges  relating to our March,  2005,and  July,  2005 6%  convertible
debentures. These non-cash interest charges account for 54% of our net losses in
the nine month period ended  September 30, 2003. In addition,  our losses during
this period include $671,000 in expenses  relating to our new Alferon  division.
Solely for comparison purposes, excluding our 2003 losses for these two factors,
our losses were $4,262,000 in 2003 compared to $6,013,000 in 2002 or a reduction
in the amount of $1,751,000.

Revenues  were $354,000 in the first nine months of 2003 compared to revenues of
$826,000 in the first nine months of 2002. Revenues in 2002 included $563,000 of
license fee income which was not repeated  during this period in 2003.  Revenues
in 2003  include  $118,000 in ME/CFS Cost  Recovery  Income and  $236,000 in net
sales of ALFERON N.

Overall  costs and expenses  were lower in the nine months ended  September  30,
2003 by approximately  $836,000 compared to the first nine months of 2002. Total
costs and expenses in 2003 were $5,348,000  versus  $6,179,000 in 2002. In 2003,
our costs  consisted of $895,000 for ALFERON N  Injection(R)  related  expenses,
$2,574,000 for  Ampligen(R)  research and  development  costs and $1,879,000 for
general and administrative  expenses,  which includes a bonus of $197,000 issued
to Dr. Carter in the quarter  ending  September 30, 2003 for services  performed
during 2001 and 2002.

Production  costs were  $224,000 in the first nine  months of 2003.  These costs
reflect  approximately  $117,000 for the cost of sales of ALFERON N Injection(R)
during the period of April 1, 2003 through  September 30, 2003. In addition,  we
recorded $107,000 of production costs at the New Brunswick  facility.  We ramped
up the facility in April,  2003 and started  production on three lots of work in
process inventory.

Research and Development  costs of $2,574,000 in the nine months ended September
30, 2003 compared to research and  development  costs of $3,732,000 in the first
nine months of 2002.  These costs primarily  reflect the direct costs associated
with our  effort to  develop  our lead  product,  Ampligen(R),  as a therapy  in
treating  chronic  diseases and cancers.  At this time,  this effort consists of
conducting clinical trials involving patients with ME/CFS and patients with HIV.
Our research and  development  direct costs are $1,158,000  lower in 2003 due to
reduced costs  associated  with the  development  of Ampligen(R) to treat ME/CFS
patients.  In the first nine months of 2002, our ME/CFS Phase III clinical trial
was in full force and effect therefore increasing our manufacturing and clinical
support expenses during that period.

Over 230 patients have participated and/or participating in our ME/CFS Phase III
clinical trial.  Approximately  16 patients are still in the randomized phase of
the clinical process.  We expect to complete the randomized  placebo  controlled
phase of this study by the first  quarter of 2004. At that time we will complete
data  collection  and start the data analysis  process with the  expectation  of
filing an NDA (New Drug Application) with the FDA by the second quarter of 2004.
As with any  experimental  drug being tested for use in treating human diseases,
the FDA must approve the testing and clinical protocols employed and must render
their  decision  based on the safety  and  efficacy  of the drug  being  tested.
Historically  this is a long and costly  process.  Our  ME/CFS AMP 516  clinical
study is a Phase III study, which based on favorable results,  will serve as the
basis for us to file a new drug application with the FDA. The FDA review process
could take 18-24 months and result in one of the following  events;  1) approval
to market  Ampligen(R)  for use in treating  ME/CFS  patients,  2) required more
research,  development,  and  clinical  work,  3)  approval to market as well as
conduct more testing, or 4) reject our application. Given these variable, we are
unable to project when  material net cash inflows are expected to commence  from
the sale of Ampligen(R).

Our efforts in using  Ampligen(R)  to treat HIV  patients  currently  consist of
conducting  two  clinical   trials.   In  July  2003,  Dr.  Blick,  a  principal
investigator  in our HIV studies,  presented  updated results on our Amp 720 HIV
study at the 2nd IAS  CONFERENCE  ON HIV  PATHOGENESIS  AND  TREATMENT  in Paris
France. In this study using Strategic Treatment  Interruption  (STI),  patients'
antiviral  HAART  regimens are  interrupted  and  Ampligen(R)  is substituted as
mono-immunotherapy. Ampligen(R) is an experimental immunotherapeutic designed to
display both  antiviral an immune  enhancing  characteristics.  Prolonged use of
Highly Active Antiretroviral Therapy (HAART) has been associated with long-term,
potentially fatal, toxicities. The clinical study AMP 720 is designed to address
these issues by evaluating the administration of the Company's lead experimental
agent,  Ampligen(R),  a double stranded RNA drug acting  potentially  both as an
immunomodulator and antiviral. Patients, who have completed at least 9 months of
Ampligen(R) therapy, were able to stay off HAART for a total STI duration with a
mean time of 29.0 weeks  whereas  the  control  group,  which was also taken off
HAART, but not given  Ampligen(R),  had earlier HIV rebound with a mean duration
of 18.7  weeks.  Thus,  on  average,  Ampligen(R)  therapy  spared the  patients
excessive  exposure to HAART,  with its  inherent  toxicities,  for more than 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 that a Phase III study is required; the FDA might require a patient
population  exceeding the current one which will  influence the cost and time of
the trial.  Accordingly,  the number of "unknowns" is  sufficiently  great to be
unable to predict when, or whether, the Company may obtain revenues from its HIV
treatment indications.

Since acquiring the right to manufacture and marketing ofmarket Alferon N inon 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  54,00055,000 vials (doses) at various stages of the
manufacturing  process.  OnIn August 8, 2003, we released the first lot of product to
Abbott  Laboratories  for bottling and realized  some 21,000 vials of ALFERON N.
Which are now in the final  review  process.  Preliminary  work has  started on  completing  the  second lot of  approximately
17,00016,000 vials. Our production and quality control personnel in theour newly acquired
New   Brunswick,   NJ  facility  are  involved  in  the  extensive   process  of
manufacturing  and  validation  required  by the FDA.  Plans  are  underway  for
completing  the  third lot of some  16,00018,000  vials  now in very  early  stages of
production.

Our  marketing  and sales plan for ALFERON N consists  of  engaging  sales force
contract  organizations  and  supportingsupplementing  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  ofon
recurring  external  generalgenital  warts in patients of age 18 or older and to assist
primary prescriberprescribers in expanding their practice.

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

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

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



Production costs/cost of goods sold

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

Research and Development costs

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

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

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

General and Administrative expensesExpenses

General and Administrative ("G&A") were  $2,550,000  duringexpenses for the ninethree months ended September 30,March 31,
2004 and 2003 which includes $671,000were  approximately  $2,844,000  and $667,000,  respectively.  The
increase in G&A expenses of expenses relating to
our new Alferon  Division.  Excluding the Alferon  expenses,  our G&A costs were
$1,879,000 compared to $2,447,000 of expenses in 2002. This Decrease of $568,000$2,177,000  during this period is primarily due to Lower Legal Expensesa
non-cash stock compensation charge of $1,769,000  resulting from warrants issued
to Dr. Carter in 2003 that vested in the current quarter.  These warrants vested
upon the execution of the second ISI asset closing on March 17, 2004. Aside from
the expenses  related to our Alferon division  totaling  $265,000 and $58,000 in
2004 and 2003,  respectively,  and the non-cash stock compensation  charge noted
above,  our G&A expenses were $810,000 for the three months ended March 31, 2004
as compared to $609,000 during the same three months in 2003. The primary reason
for the increase in G&A costs of $201,000  was  attributable  to higher  general
corporate legal costs and directors' fees in the current quarter.

Other Income/Expense

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

Interest Expense and Financing Costs

Interest  expense and financing costs were $3,952,000 for the three months ended
September  30,  2002 we  incurred  significant  legalMarch 31, 2004 versus  $75,000  for the same three  months a year ago.  Non-cash
financing  costs consist of the  amortization  of debenture  closing costs,  the
amortization  of  Original  Issue  Discounts  and  the   amortization  of  costs
associated  with beneficial  conversion  features of our debentures and the Asensio lawsuit and trial.  See "Legal  Proceeding"fair
value of the warrants relating to the Debentures. These charges are reflected in
the Consolidated  Statements of Operations under the caption  "Financing Costs."
In connection  with the redemption  obligation  recorded in connection  with the
January 2004 Debentures, we recorded additional financing costs of approximately
$947,000.  Please see Note 7 in the consolidated  financial statements contained
herein for more details.

LIQUIDITY AND CAPITAL RESOURCESdetails on these transactions.


Liquidity And Capital Resources

Cash used in operating  activities for the ninethree months ended September 30, 2003March 31, 2004 was
$4,926,000.$1,722,000.  Cash  provided by financial  activities  for ninethe three months ended
September  30, 2003March 31, 2004  amounted  to  $7,568,000$3,939,000,  substantially  from  proceeds  from debenturesa
debenture  offering  (see  below).  As of September  30,  2003,March 31, 2004,  we had  approximately
$5,100,000$7,238,000  million in cash and  cash  equivalents and short term investments and $141,000
in accounts  receivable.short-term  investments.  We believe that these
funds plus 1) the gross  proceeds  received  from the  exercising of warrants of
approximately $2,400,000, 2) the infusion of approximately $1,550,000 million in
remaining  net  proceeds  of
approximately  $3.2 million from the  recently placed  debentures due October  31,
2005  (inclusive  of the  $1.55  million  of  proceeds  held  back  pending  the
acquisition of the ISI facility),Debentures  in April  2004,  3) the
projected  revenuenet cash flow from the acquisitionsale of
the  ALFERON  N  Injection(R)  business,  and additional  financing4) the
proceeds from licensing agreements and/or the expected infusion of $2.0 million
will$2,000,000 in
proceeds  from our investors  exercising  their AIR should be sufficient to meet
our  operating  cash  requirements  including  debt  service  during the twelve  months  subsequent  to  September  30,  2003.  The need for
additional  financing  assumes  that the  debenture  holders do not  continue to
convert  debt into common  stock and that we will need cash to repay the debt as
scheduled.  If the debenture  holders  continue to convert debt, we may not need
additional  funds.  Also, salesnext 12
months.  Sales of ALFERON N  Injection(R)  could be greater than expected  which
will reducewould improve our need for additional  financingcash position during the next twelve months  subsequent to September  30, 2003.months. Also, we have the
ability  to  curtail  discretionary   spending,   including  some  research  and
development activities, if required to conserve cash.  If we do not timely  complete  the second ISI asset
acquisition,  our financial condition could be materially and adversely affected
(see the risk factor "If we do not complete the second Interferon Sciences asset
acquisition,  our  ability  to  generate  revenues  from the sales of  ALFERON N
Injection(R) and our financial condition will be adversely affected").

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

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. Pursuant to the terms of the March Debentures,
$1,550,000  of the proceeds from the sale of the March  Debentures  were to have
been held back and  released to us if, and only if, we acquired  ISI's  facility
within a set timeframe. Although we had not acquired ISI's facility, these funds
were released to us in June 2003. The March Debentures were to mature on January
31, 2005 with interest at 6% per annum, payable quarterly in cash or, subject to
satisfaction  of certain  conditions,  common stock.  Any shares of common stock
issued to the investors as payment of interest were valued at 95% of the average
closing  price of the common stock  during the five  consecutive  business  days
ending on the third business day immediately  preceding the applicable  interest
payment date.  Pursuant to the terms and conditions of the March Debentures,  we
pledged all of our assets, other than our intellectual  property,  as collateral
and were subject to comply with certain financial and negative covenants,  which
include  but was  not  limited  to the  repayment  of  principal  balances  upon
achieving certain revenue milestones.

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

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

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

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

On July 10, 2003, we issued an aggregate of $5,426,000 in principal amount of 6%
Senior  Convertible  Debentures due July 31, 2005 (the "July Debentures") and an
aggregate of 507,102  Warrants (the "July 2008  Warrants") to the same investors
who  purchased  the March  12,  2003  Debentures,  in a  private  placement  for
aggregate anticipated gross proceeds of $4,650,000. Pursuant to the terms of the
July Debentures, $1,550,000 of the proceeds from the sale of the July Debentures
were to have  been  held  back and will be  released  to us if,  and only if, we
acquired  ISI's facility  with inwithin a set  timeframe.  Although we havehad not acquired
ISI's  facility,  yet, these  funds were  released  (see the  discussion  below).to us in October  2003.  The MarchJuly
Debentures  mature on JanuaryJuly 31, 2005 and bear  interest at 6% per annum,  payable
quarterly in cash or,  subject to  satisfaction  of certain  conditions,  common
stock. Any shares of common stock issued to the investors as payment of interest
shall be valued at 95% of the average  closing  price of the common stock during
the five consecutive  business days ending on the third business day immediately
preceding  the  applicable  interest  payment  date.  Pursuant  to the terms and
conditions of the MarchJuly Debentures,  we have pledged all of our assets, other than our
intellectual  property,  as  collateral  and arewere subject to comply with certain
financial and negative covenants, which include but are not limited
to  the  repayment  of  principal   balances  upon  achieving   certain  revenue
milestones.

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

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

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

On July 10, 2003, we issued an aggregate of $5,426,000 in principal amount of 6%
Senior  Convertible  Debentures due July 31, 2005 (the "July Debentures") and an
aggregate of 507,103  Warrants (the "July 2008  Warrants") to the same investors
who  purchased  the March  12,  2003  Debentures,  in a  private  placement  for
aggregate anticipated gross proceeds of $4,650,000. Pursuant to the terms of the
July Debentures, $1,550,000 of the proceeds from the sale of the July Debentures
were to have  been  held  back and will be  released  to us if,  and only if, we
acquired ISI's  facility with in a set timeframe.  Although we have not acquired
ISI's facility yet, these funds were released (see the  discussion  below).  The
July  Debentures  mature on July 31,  2005 and bear  interest  at 6% per  annum,
payable  quarterly in cash or, subject to  satisfaction  of certain  conditions,
common  stock.  Any shares of common stock issued to the investors as payment of
interest shall be valued at 95% of the average closing price of the common stock
during the five  consecutive  business  days  ending on the third  business  day
immediately preceding the applicable interest payment date.covenants.

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

The July 2008 Warrants received by the investors,  as amended, are to acquire at
any time  commencing  on July 26, 2004 through  JulyJanuary 31, 20082009 an aggregate of
507,103507,102 shares of common stock at a price of $2.46 per share.  On July 10, 2004,
the exercise  price of these July 2008  Warrants will reset to the lesser of the
exercise price then in effect or a price equal to the average of the daily price
of the common stock between July 11, 2003 and July 9, 2004 (but in no event less
than $1.722$2.14 per share).  The exercise  price (and the reset price) under the July
2008  Warrants  also  is  subject  to  similar   adjustments  for  anti-dilution
protection.

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

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

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

Upon completing the sale of the October  debentures,Debentures,  we received  $3,275.000$3,275,000 in
net proceeds consisting of $1,725.000$1,725,000 from the October debenturesDebentures and $1,550.000$1,550,000
that had been withheld from the July 2005  debentures.Debentures.  As noted above,  $1,550.000$1,550,000 of
the proceeds from the October  2008 denture  proceeds have beenDebentures  were held back pending our completing
the  acquisition  of the ISI facility.facility and our  mortgaging  that  facility to the
debentureholders.  On March 17, 2004, we closed on the acquisition of all of the
worldwide rights of Alferon N as well as the FDA approved biological  production
facility in the New Brunswick,  New Jersey,  from ISI. As a result, the proceeds
held back from the October  Debenture  amounting to $1,550,000  were released to
the Company in April 2004. As required by the Debentures,  we are in the process
of providing a mortgage on the facility as further  security for the Debentures.

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

The October 2008 Warrants, as amended,  received by the investors are to acquire
at any time  commencing  on July 26, 2004 through October 31, 2008April 30, 2009 an aggregate of
410,134  shares of common  stock at a price of $2.32 per share.  On October  29,
2004, the exercise price of these October 2008 Warrants will reset to the lesser
of the  exercise  price  then in effect or a price  equal to the  average of the
daily price of the common  stock  between  October 29, 2003 and October 27, 2004
(but in no event less than $1.624$2.19 per share).  The exercise  price (and the reset
price) under the October 2008  Warrants  also is subject to similar  adjustments
for anti-dilution protection.

As of October 28, 2003,  the  investors  had  converted  $4,427,580 of debt into
3,032,589  shares of our common stock.  The remaining  principal  balance on the
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 $1.3
million  ($951,000  paid through  September  30, 2003) into the  debenture  cash
collateral  account as required by the terms of the  October  Debentures.  These
amounts have been accounted for as advances receivable and are reflected as such
on the accompanying  balance sheet as of September 30,2003.  The cash collateral
account provides partial security for repayment of the March,  July and October,
2008 debentures in the event of default.

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

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

The January 2004  Debentures  are  convertible at the option of the investors at
any time  through  January  31,  2006  into  shares  of our  common  stock.  The
conversion  price under the January 2004 Debentures is fixed at $2.53 per share,
subject to adjustment for anti-dilution  protection for issuance of common stock
or securities convertible or exchangeable into common stock at a price less than
the conversion price then in effect.

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

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

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

As of April 26, 2004, the investors have converted  $11,902,610 of debt from the
March,  July and October  Debentures into 7,073,234  shares of our common stock.
The March Debentures have been fully converted.  The remaining principal balance
on the  remaining  debentures  is  convertible  into  shares of our stock at the
option of the investors at any time, through the maturity date. In addition,  we
have paid $1,300,000  into the debenture cash collateral  account as required by
the terms of the October  Debentures.  The amounts paid  through  March 31, 2004
have been accounted for as advances  receivable and are reflected as such on the
accompanying  balance sheet as of March 31, 2004.  The cash  collateral  account
provides partial security for repayment of the July and October 2003 and January
2004 Debentures in the event of default.

By agreement  with  Cardinal  Securities,  LLC, for general  financial  advisory
services and in conjunction with the July 2003 private debenture offeringplacements in March, July
and  the MarchOctober  2003 private  debenture  offering on substantially  the same terms,and in January  2004,  we paid  Cardinal  Securities,  LLC an
investment  banking fee equal to 7% of the investments made by the two Debenture
holders and issued to Cardinal  certain  warrants.  A portion of the  investment
banking  fee was paid with the  issuance of 30,000  shares of our common  stock.
Cardinal  also received  425,000612,500  warrants to purchase  common  stock,  of which
112,500 are exercisable at $1.74 per share, 112,500 are exercisable at $2.57 per
share,  and 200,000 are  exercisable at $2.50 per share,  87,500 are  exercisable at
$2.42  per share and  100,000  are  exercisable  at $3.04 per  share.  The $1.74
warrants  expire on July 10, 2008, the $2.57 and the other$2.50 warrants  expire on March
12, 2008.2008, the $2.42  warrants  expire on October 30, 2008 and the $3.04 warrants
expire on January 5, 2009. By agreement  with Cardinal,  we have  registered 455,000all
warrants and underlying shares for public sale.

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

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

The Company  anticipates  receiving  stockholder  and Exchange  approval for the
issuance of the shares in excess of the  Exchange  limit.  However,  the Company
cannot ensure it will obtain the proper approval from both parties.

In connection  with the debenture  offering,agreements,  we paid Cardinal an  investment  banking feehave  outstanding  letters of
$245,000 and Cardinal
will receive 87,500 five year warrants to purchase an aggregatecredit of 87,500 shares
at an exercise price of $2.42 per share.$1 million as additional collateral.

On March  11,  2003,  we  acquired  from  Interferon  Sciences,  Inc.  ("ISI"),ISI,  ISI's  inventory  of  ALFERON  N
Injection(R),  a  pharmaceutical  product  used for  intralesional  treatment of
refractory  or recurring  external  genital warts in patients 18 years of age or
older, and a limited license for the production, manufacture, use, marketing and
sale of this product. As partial consideration,  we issued 487,028 shares of our
common stock to ISIISI.  Pursuant to our  agreements  with ISI, we have  registered
these shares for public sale.  ISI has sold all of these shares.  We also agreed
to pay ISI 6 % of the net sales of ALFERON N Injection(R).

Except for 62,500 of the shares  issued to ISI,  we have  guaranteed  the market
value of the shares retained by ISI as of March 11, 2005, the termination  date,
to be $1.59 per share. ISI is permitted to periodically  sell certain amounts of
its shares.  If, within 30 days after the termination date, ISI requests that we
honor  the  guarantee,  we  will  be  obligated  to  reacquire  ISI's  remaining
guaranteed  shares  and  pay  the ISI  $1.59  per  share.  Please  see "We  have
guaranteed  the value of a number of shares  issued and to be issued as a result
of our acquisition of assets from Interferon Sciences. If our share price is not
above  $1.59 per share 12, 18 or 24 months  after the dates of  issuance  of the
guaranteed shares, our financial condition could be adversely affected" in "Risk
Factors," above.

On March 11, 2003, we also entered into an agreement to purchase from ISI all of
its rights to the product and other assets related to the product including, but
not limited to, real estate and machinery.  For these assets, we agreed to issue
to ISI an  additional  487,028  shares and to issue  314,465  shares and 267,296
shares,  respectively  to The  American  National  Red Cross  and GP  Strategies
Corporation,  two creditors of ISI. We have  guaranteed  the market value of all
but 62,500 of these shares to be $1.59 per share on terms  substantially  similar  to those for the  initial acquisition of the ISI assets.termination  date.  The
termination date for these guarantees is 18 months after the date of issuance of
the guaranteed shares to GP Strategies, 24 months after the date of issuance and
delivery of the additional
487,028 guaranteed shares to ISI and 12 months after the date of
issuance of the  guaranteed  shares to the American  National  Red Cross.  These
stockholders are permitted to periodically sell certain amounts of their shares.
If, within 30 days after the respective  termination  date, one or more of these
stockholders  requests  that we honor the  guarantee,  we will be  obligated  to
reacquire their remaining guaranteed shares and pay them $1.59 per share. Please
see "We have  guaranteed the value of a number of shares issued and to be issued
as a result of our acquisition of assets from Interferon Sciences.  If our share
price is not above  $1.59 per share 12 or 24 months  after the dates of issuance
of the guaranteed shares, our financial  condition could be adversely  affected"
in "Risk Factors," above.

We also  agreed  to  satisfy  other  liabilities  of ISI  which are 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 have
registered  the  foregoing  shares  for  public  sale.  In connection  withAs of March 31,  2004 GP
Strategies  had sold all of its shares and the  debenture  agreements,  we have  outstanding  lettersAmerican  National Red Cross has
not sold any of credit of $1 million as additional collateral.

In addition, as of September 30, 2003, we have $200,000 in restricted cash under
other letter of credit agreements  required by our insurance  carrier.their 314,465 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 a such as debentures,  options and warrants. Prior to the meeting, to
permit consummation of the sale of the July 2005  Debentures and the related warrants,
Dr. Carter agreed that he would not exercisedexercise 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. (referSee "Executive Compensation; Employment Agreements" in
amendment  no. 1 to note 11: Executive compensation)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.

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.

On May 13,  2004,  we issued to the  debentureholders  warrants  to  purchase an
aggregate of 1,300,000 shares ("the May 2009 Warrants"). In consideration of the
foregoing,  the debentureholders  exercised the June 2008 warrants. As a result,
we issued an  aggregate  of  1,000,000  shares and  received  gross  proceeds of
approximately $2,400,000.

The May 2009  warrants  are to acquire at any time,  commencing  on November 14,
2004 through April 30, 2009, an aggregate of 1,300,000 shares of common stock at
a price of $4.50 per share.  On May 14, 2005,  the  exercise  price of these May
2009 Warrants will reset to the lesser of the exercise price then in effect or a
price equal to the average of the daily  price of the common  stock  between May
15,  2004 and May 13,  2005 (but in no event less than  $4.008 per  share).  The
exercise price (and the reset price) under the May 2009 Warrants also is subject
to  adjustments  for  anti-dilution  projection  similar  to those in the  other
warrants.

In addition,  the debentureholders  agreed to amend the provisions of all of the
outstanding warrants and debentures  (including the debentures issuable pursuant
to the AIR) to limit the maximum  amount of funds that the holders could receive
in lieu of shares  upon  conversion  of the  debentures  and/or  exercise of the
warrants  in the  event  that the  Exchange  Cap was  reached  to  119.9% of the
conversion  price of the relevant  debentures and 19.9% of the relevant  warrant
exercise price.
These  transactions  could  result  in us  recording  an  additional  redemption
obligation  for the reasons  discussed  in Note 7 and will result in  additional
financing charges beginning in the second quarter of 2004.

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 $5,100,000$7,238,000 in cash and cash equivalents and short termshort-term investments
at September,  2003.March 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 the Asensio's false and defamatory
statements. The complaint further alleged that Asensio defamed and disparaged us
in furtherance of a manipulative, deceptive and unlawful short-selling scheme in
August and September,  1998. In 1999,  Asensio filed an answer and  counterclaim
alleging  that in response to  Asensio's  strong sell  recommendation  and other
press  releases,  we made  defamatory  statements  about Asensio.  We denied the
material  allegations of the counterclaim.  In July 2000, following dismissal in
federal court for lack of subject matter jurisdiction, we transferred the action
to the Pennsylvania State Court. In March 2001, the defendants  responded to the
complaints as amended and a trial  commenced on January 30, 2002. A jury verdict
disallowed the claims  against the  defendants for defamation and  disparagement
and the court granted us a directed verdict on the counterclaim. On July 2, 2002
the  Court  entered  an  order  granting  us a new  trial  against  Asensio  for
defamation and disparagement. Thereafter, Asensio appealed the granting of a new
trial. This appeal is now pending in the Superior Court of Pennsylvania.

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

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

In March 2003, the law firm of Schnader,  Harrison,  Segal & Lewis, LLP
filed a complaint in the Court of Common Pleas of Philadelphia County against us
for alleged legal fees in the sum of $65,051. This claim was settled for $12,000
and dismissed.

On September 16, 2003, we filed and subsequently  served and moved for expedited
proceedings  on, a  complaint  filed in the  Court Of  Chancery  of the State of
Delaware,   New  Castle  County,  against  ISI.  The  Complaint  seeks  specific
performance,  and  declaratory  and  injunctive  relief related to the first and
second asset acquisition agreements with ISI.  Specifically,  we allege that ISI
has delayed its  performance  pursuant to the agreements  and, as a result,  the
second  asset  purchase  did  not  close  within  180  days  of the  date of the
agreements.  Paragraph 7.7 of the second asset  purchase  agreement  states that
either party to the agreement may terminate the agreement if there is no closing
within 180 days of the date of the agreement.  We request that the Court require
ISI to  specifically  perform its  obligations  under the  agreement  or, in the
alternative,  that  paragraph  7.7 of the agreement be eliminated or reformed to
eliminate ISI's ability to terminate pursuant to that paragraph. We also request
that  ISI,  as a result  of its  conduct,  not be  permitted  to  terminate  the
agreements pursuant to paragraph 7.7 or due to the passage of time. At a hearing
held on September  29, 2003,  the Court set a trial of our case for January 6-7,
2004 and  accepted the  agreement  of the parties  pursuant to which the date on
which ISI may exercise its  termination  right is extended until no earlier than
two weeks following trial. In response to our complaint,  ISI has filed a motion
to dismiss.

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

During the quarter  ended September 30, 2003 and subsequent thereto,March 31,  2004,  the Company  issued  debentures  and
warrants in private  transactions  pursuant to the exemption  from  registration
provided by Section 4(2) of the Securities Act of 1933. In addition, the Company
made certain changes to its Debentures and related warrants.  For information on
these  issuances,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
March 31, 2004.


ITEM 3:   Defaults in Senior Securities

None.

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

We  held  our  annual  meeting  of  stockholders  on  September  10,  2003.  For
information  related to this meeting,  see our current  report on Form 8-K dated
September 12, 2003.None.

ITEM 5:   Other Information

NoneAs noted in Part I, on May 14, 2004, we issued to the holders of our  debentures
warrants to purchase an aggregate of 1,300,000 shares ("the May 2009 Warrants").
In consideration of the foregoing, the debentureholders  exercised our June 2008
warrants (for an aggregate of 1,000,000  shares) and we received  gross proceeds
of  $2,400,000.  For a description  of the May 2009 Warrants  please see Part I,
ITEM 2: "Management's Discussion and Analysis of Financial Condition and Results
of Operations; Liquidity And Capital Resources."

In addition,  the debentureholders  agreed to amend the provisions of all of the
outstanding  debentures  (including  the debentures  issuable  pursuant to their
Additional Investement Rights) 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.


ITEM 6:   Exhibits and Reports on Form 8K

(a)  Exhibits

                  10.1 Form of Warrant for Common Stock issued on
                  May 14, 2004

                  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 July 14, 2003
Form 8-K/A  (amending 8-K filed on March 31,13, 2003)filed August 13, 2003March 26, 2004 Form 8-K
filed on September  12, 2003March 15, 2004 Form 8-K filed on September 24, 2003 Form 8-K filed
on October 30, 2003January 27, 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
                                     ---------------------------
                                     Date: November 18, 2003              William A. Carter, M.D.
                                     Chief Executive Officer & President



                                     /S/ Robert E. Peterson
                                     --------------------------
                                     Date: November 18, 2003              Robert E. Peterson
                                     Chief Financial Officer


Date: May 14, 2004







                                                                    EXHIBIT 31.1

CERTIFICATIONCERTIFICATIONS PURSUANT OT RULE 13A-14TO SECTION 302 OF THE SECURITIES AND EXCHANGESARBANES-OXLEY ACT OF 19342002

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-Q10-QSB of the Registrant;

2. Based on my knowledge, this  quarterly 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 quarterly report;

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

4. The  registrant'sRegistrant's  other  certifying  officersofficer(s)  and I are  responsible  for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rule 13a-14)Rules 13a-15(e) and 15d-15(e)) for the registrantRegistrant and we have;

a)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,Registrant,  including  its
     consolidated  subsidiaries,  is made  known to us by  others  within  those
     entities,  particularly  during the  period in which  this  quarterly report is being
     prepared;

b)b.   Evaluated the  effectiveness  of the registrant'sRegistrant's  disclosure  controls and
     procedures  as of a date  within  90 days  prior to
              filing date of this quarterly report (the "Evaluation Date"); and  c)            Presentedpresented  in  this quarterly  report  our  conclusions   about  the
     effectiveness of the disclosure  controls and procedures,  based
              on our evaluation as of the Evaluation Date;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'sRegistrant's other certifying  officersofficer(s) and I have disclosed,  based on
our most recent evaluation ,of internal control over financial reporting,  to the
registrant'sRegistrant's  auditors  and the audit  committee  of registrant'sthe  Registrant's  board of
directors (or persons performing the equivalent function)functions):

a)a.   All  significant  deficiencies  and  material  weaknesses  in the design or
     operation of internal controlscontrol over financial reporting which couldare reasonably
     likely to adversely  affect the  registrant'sRegistrant's  ability to record,  process,
     summarize and report financial datainformation; and

have
          identified for the  registrant's  auditors any material  weaknesses in
          internal controls; and

b)b.   Any fraud,  whether or not  material,  that  involves  management  or other
     employees who have a significant role in the registrant'sRegistrant's  internal controls: and

6.   The  registrant's  other  certifying  officers and I have indicated in this
     quarterly report whether or not there were significant  changes in internal
     controls  or in other  factors  that could  significantly  affect  internal
     controls  subsequent to the date of our most recent  evaluation,  including
     any corrective actions with regard to significant deficiencies and material
     weakness.control
     over financial reporting.

Date:  November 18, 2003May 14, 2004


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





                                                                    EXHIBIT 31.2

CERTIFICATIONCERTIFICATIONS PURSUANT OT RULE 13A-14TO SECTION 302 OF THE SECURITIES AND EXCHANGESARBANES-OXLEY ACT OF 19342002

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

1. I have reviewed this quarterly report on Form 10-Q10-QSB of the Registrant;

2. Based on my knowledge, this  quarterly 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 quarterly report;

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

4. The  registrant'sRegistrant's  other  certifying  officersofficer(s)  and I are  responsible  for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rule 13a-14)Rules 13a-15(e) and 15d-15(e)) for the registrantRegistrant and we have;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,Registrant,  including  its
     consolidated  subsidiaries,  is made  known to us by  others  within  those
     entities,  particularly  during the  period in which  this  quarterly report is being
     prepared;

b.   Evaluated the  effectiveness  of the registrant'sRegistrant's  disclosure  controls and
     procedures  as of a date within 90 days prior to
                  filing date of this quarterly report (the "Evaluation Date");
                  and  c.                Presentedpresented  in  this quarterly  report  our  conclusions   about  the
     effectiveness of the disclosure  controls and procedures,  based
                  on our evaluation as of the Evaluation Date;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'sRegistrant's other certifying  officersofficer(s) and I have disclosed,  based on
our most recent evaluation ,of internal control over financial reporting,  to the
registrant'sRegistrant's  auditors  and the audit  committee  of registrant'sthe  Registrant's  board of
directors (or persons performing the equivalent function)functions):

a.   All  significant  deficiencies  and  material  weaknesses  in the design or
     operation of internal controlscontrol over financial reporting which couldare reasonably
     likely to adversely  affect the  registrant'sRegistrant's  ability to record,  process,
     summarize and report financial data  and  have  identified  for  the  registrant's
                  auditors any material weaknesses in internal controls;information; and

b.   Any fraud,  whether or not  material,  that  involves  management  or other
     employees who have a significant role in the registrant'sRegistrant's  internal controls: and

6.   The  registrant's  other  certifying  officers and I have indicated in this
     quarterly report whether or not there were significant  changes in internal
     controls  or in other  factors  that could  significantly  affect  internal
     controls  subsequent to the date of our most recent  evaluation,  including
     any corrective actions with regard to significant deficiencies and material
     weakness.control
     over financial reporting.

Date:  November 18, 2003May 14, 2004

                                            /s/Robert E. Peterson
                                            -------------------------------------------------
                                            Robert E. 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  September 30, 2003March 31, 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.


2539:Date: May 14, 2004

                                                     /s/William A. Carter
                                                     -----------------------
                                                     William A. Carter
                                                     Chief Executive Officer
                                                November 18, 2003






                                                                   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  September 30, 2003March 31, 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.


2572:Date: May 14, 2004

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



November 18, 2003