As filed with the Securities and Exchange Commission on April 11, 1997
Registration No. _________

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

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

----------

FORM S-1

REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

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HEMISPHERx BIOPHARMA, INC.
(Name of Issuer in its charter)

Delaware
(State or other jurisdiction of incorporation or organization)

_____________
(Primary Standard Industrial Classification Code Number)

52-0845822
(I.R.S. Employee Identification No.)

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1617 JFK Boulevard
Philadelphia, Pennsylvania 19103
(215) 988-0080
(Address and telephone number of principal executive offices
and principal place of business)

----------

William A. Carter, M.D., Chief Executive Officer
Hemispherx Biopharma, Inc.
1617 JFK Boulevard
Philadelphia, Pennsylvania 19103
(215) 988-0080
(Name, address and telephone number of agent for service)

Copies of all communications to:
Michael H. Freedman, Esq.
Silverman, Collura, Chernis & Balzano, P.C.
381 Park Avenue South, Suite 1601
New York, New York 10016
(212) 779-8600

Approximate date of proposed sale to the public: As soon as practicable
after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box: [X]

CALCULATION OF REGISTRATION FEE

=============================================================================================================
Proposed Proposed
Maximum Maximum
Title of Each Class of Amount to Offering Price Aggregate Amount of
Securities to be Registered Be Registered(1) Per Share(2) Offering Price Registration Fee
=============================================================================================================

Warrants and Stock Options(3) 310,544 -- -- --
=============================================================================================================

Common Stock(4) 2,500,000 $2.91 $7,275,000 $2,204.55
=============================================================================================================
Common Stock(5) 640,475 $2.91 $1,863,782 $564.78
=============================================================================================================
TOTAL 3,451,019 $2.91 $9,138,782 $2,769.33

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

(1) Includes such additional number of shares as may become issuable by reason
of anti-dilution provisions pursuant to Rule 416.

(2) Common Stock price per share calculated pursuant Rule 457(c) of the
Securities Act of 1933, as amended.

(3) Warrants and stock options held by Selling Securityholders.

(4) Common Stock underlying Series E Preferred Stock held by Selling
Securityholders.

(5) Common Stock underlying warrants held by Selling Securityholders.

Pursuant to Rule 429, this Registration Statement also incorporates
securities originally registered on Form S-1, File No. 33-03314, declared
effective on November 2, 1995.

Pursuant to Rule 429, this Registration Statement withdraws from
registration 1,850,748 shares of Common Stock underlying Series D Preferred
Stock which were registered on Form S-1, File No. 333-08941, declared effective
on September 16, 1996.

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

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

HEMISPHERx BIOPHARMA, INC.
Cross-Reference Sheet to Prospectus on Form S-1
Furnished Pursuant to Item 501(b) of Regulation S-K

Item From S-1 Caption Location in Prospectus
- ---- ---------------- ----------------------
1. Forepart of the Registration Outside Front Cover Page
Statement and Outside Front
Cover Page of Prospectus

2. Inside Front and Outside Back Cover Inside Front Cover Page
Pages of Prospectus Outside Front Cover Page

3. Summary Information, Risk Prospectus Summary; Selected
Factors and Ratio of Earnings Financial Data; Risk Factors
to Fixed Charges

4. Use of Proceeds Use of Proceeds

5. Determination of Offering Price Not Applicable

6. Dilution Not Applicable

7. Selling Securityholders Resales by Selling Securityholders

8. Plan of Distribution Cover Page; Resales by Selling
Securityholders

9. Description of Securities Description of Securities;
to be Registered Shares Eligible for Future Sale

10. Interest of Named Experts Experts and Legal Matters
and Counsel

11. Information with Respect to Business; Description of
the Registrant Securities; Financial Statements;
Selected Financial Data;
Management's Discussion
and Analysis of Financial
Condition and Results of
Operations; Certain Transactions;
Management; Price Range of Common
Stock; Dividends; Principal
Shareholders

12. Disclosure of Commission Not Applicable
Position on Indemnification
for Securities Act Liabilities

iii

[TO BE INSERTED ALONG LEFTHAND SIDE OF PROSPECTUS COVER PAGE]

[RED HERRING LEGEND]

Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of any offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any State.

PROSPECTUS
DATED APRIL __, 1997 SUBJECT TO COMPLETION

HEMISPHERx BIOPHARMA, INC.

310,544 WARRANTS AND STOCK OPTIONS
640,475 SHARES OF COMMON STOCK UNDERLYING WARRANTS
2,500,000 SHARES OF COMMON STOCK UNDERLYING SERIES E PREFERRED STOCK
6,213,000 SHARES OF COMMON STOCK UNDERLYING CLASS A REDEEMABLE WARRANTS
462,000 UNITS UNDERLYING A UNIT PURCHASE OPTION
462,000 SHARES OF COMMON STOCK UNDERLYING UNITS INCLUDED IN THE OPTION
462,000 CLASS A REDEEMABLE WARRANTS UNDERLYING UNITS INCLUDED IN THE OPTION
462,000 SHARES OF COMMON STOCK UNDERLYING
CLASS A REDEEMABLE WARRANTS INCLUDED IN THE OPTION

This Prospectus relates to the possible resale by certain selling
securityholders ("Selling Securityholders") of up to (i) 310,544 warrants and
stock options ("C Warrants"); (ii) 179,931 shares of Common Stock underlying
warrants ("R Warrants"); (iii) 150,000 shares of Common Stock underlying
warrants ("Series E Warrants"); and (iv) 2,500,000 shares of Common Stock,
underlying Series E Preferred Stock, $.01 par value ("Series E Preferred") of
Hemispherx Biopharma, Inc. ("Company"), and other securities as follows: (i)
310,544 shares of Common Stock underlying C Warrants which were registered in
the Company's registration statement declared effective September 16, 1996; (ii)
6,213,000 shares of the Company's Common Stock, underlying the Company's Class A
Redeemable Warrants ("Class A Warrants"). One Class A Warrant and one share of
Common Stock comprise the Company's Units ("Units") and Bridge Units ("Bridge
Units") which were registered in the Company's initial public offering dated
November 2, 1995 ("IPO"); (ii) 462,000 Units underlying an Underwriter's Unit
Purchase Option ("Option") issued pursuant to the IPO; (iii) 462,000 shares of
Common Stock underlying Units included in the Option; (iv) 462,000 Class A
Warrants underlying the Units included in the Option; and (v) 462,000 shares of
Common Stock underlying Class A Warrants underlying the Units included in the
Option. The C Warrants, R Warrants, Series E Warrants, Class A Warrants, Option,
Series E Preferred and all Common Stock lying thereunder, respectively, are
collectively referred to herein as "Securities".

This Prospectus also withdraws from registration 1,850,748 shares of Common
Stock underlying the Company's Series D Preferred Stock, $.01 par value,
previously registered in the Company's registration statement declared effective
September 16, 1996.

The Selling Securityholders may sell their Securities from time to time, in
market transactions, in negotiated transactions, through the writing of options,
or a combination of such methods of sale, at fixed prices which may be changed,
at market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices. The Selling Securityholders
may effect such transactions by selling their Securities to or through
broker-dealers, and such broker-dealers may receive compensation in the form of
discounts, concessions or commissions from the Selling Securityholders and/or
the purchasers of such Securities for whom such broker-dealer may act as agents
or to whom they may sell as principals, or both (which compensation as to a
particular broker-dealer might be in excess of customary commissions.) The
Company has agreed to bear all expenses in connection with the registration of
the Securities to which this Prospectus relates.

The Company's Common Stock and Class A Warrants are quoted on the Nasdaq
SmallCap Market System ("Nasdaq") under the symbols HEMX and HEMXW,
respectively. On April 4, 1997 the last sale price of the Common Stock and Class
A Warrants as reported on Nasdaq was $2.875 and $.75, respectively.

THESE SECURITIES ARE HIGHLY SPECULATIVE. THEY INVOLVE A HIGH DEGREE OF RISK.
THEY SHOULD BE PURCHASED ONLY BY PERSONS WHO CAN AFFORD TO SUSTAIN A TOTAL LOSS
OF THEIR ENTIRE INVESTMENT (SEE "RISK FACTORS")

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.

The date of this Prospectus is April__, 1997

ADDITIONAL INFORMATION

With respect to the securities offered hereby, the Company has filed with
the principal office of the Securities and Exchange Commission (the
"Commission") in Washington, D.C., a Registration Statement on Form S-1 under
the Securities Act of 1933, as amended. For purposes hereof, the term
"Registration Statement" means the original Registration Statement and any and
all amendments thereto. This Prospectus does not contain all of the information
set forth in the Registration Statement and the exhibits thereto, to which
reference hereby is made. Each statement made in this Prospectus concerning a
document filed as an exhibit to the Registration Statement is not necessarily
complete and is qualified in its entirety by reference to such exhibit for a
complete statement of its provisions. The Company is subject to the
informational requirements of the Securities Exchange Act of 1934 (the "Exchange
Act") and in accordance therewith files reports and other information with the
Commission. Any interested party may inspect the Registration Statement and its
exhibits and other reports and information filed by the Company with the
Commission without charge, or obtain a copy of all or any portion thereof, at
prescribed rates, at the public reference facilities of the Commission at its
principal office at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549. The Registration Statement and exhibits may also be
inspected at the Commission's regional offices at Northwestern Atrium Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511, and at 7
World Trade Center, Suite 1300, New York, New York 10048.

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements and Notes thereto
appearing elsewhere or incorporated by reference elsewhere in this Prospectus,
including information under "Risk Factors". See "Glossary of Terms" for the
definition of certain terms used in this Prospectus.

THE COMPANY

Hemispherx BioPharma, Inc. (the "Company") is a biopharmaceutical company
using nucleic acid technologies to develop therapeutic products for the
treatment of viral diseases and certain cancers. Nucleic acid compounds
represent a new class of pharmaceutical products that are designed to act at the
molecular level for the treatment of human disease. The Company's drug
technology utilizes specifically-configured ribonucleic acid ("RNA"). One of the
Company's double stranded RNA drug products, trademarked Ampligen, a parenteral
drug product, is in advanced human clinical development for various therapeutic
indications. Based on the results of pre-clinical studies and clinical trials,
the Company believes that Ampligen may have broad-spectrum anti-viral and
anti-cancer activities. Over 300 patients have received Ampligen in clinical
trials authorized by the U.S. Food and Drug Administration ("FDA") at over
twenty clinical trial sites across the United States, representing the
administration of more than 40,000 doses of this drug. Sales on a pre-approval,
cost recovery basis have been initiated in Belgium and are expected to start in
Canada during the second Quarter of 1997. The Company is presently exploring
additional distributor relationships for Europe and the United States to set the
stage for wider market penetration. SAB/Bioclones, the Company's partner in
certain countries, is initiating trials of Ampligen in South Africa and
Australia.

Ampligen is being developed clinically for use in treating three anti-viral
indications: chronic hepatitis B virus ("HBV") infection (Phase I/II clinical
trial), human immunodeficiency virus ("HIV") associated disorders (Phase II),
and myalgic encephalomyelitis, also know as chronic fatigue syndrome ("ME/CFS")
(Phase II/III). The Company's business strategy is designed around seeking the
required regulatory approvals which will allow the progressive introduction of
Ampligen for HIV and ME/CFS followed by HBV in the U.S., Canada, Europe and
Japan. Ampligen has also received Orphan Drug designation from the FDA for four
indications (AIDS, renal cell carcinoma, chronic fatigue syndrome and invasive
malignant melanoma). The Company is also developing a second generation RNA drug
technology, termed Oragen compounds, which the Company believes offers the
potential for broad spectrum antiviral activity by oral administration.

The World Health Organization ("WHO") estimates that there are
approximately 300 million chronic carriers of HBV worldwide. More than 40% of
the persistently infected persons who survive to adulthood will die from
cirrhosis, liver cancer, or some other consequence of their infection. In the
U.S. alone, there are an estimated 1.25 million carriers. HBV is one of several
viruses that cause human hepatitis, or inflammation of the liver. The Company
has been conducting a Phase I/II clinical trial of Ampligen in the U.S. for the
treatment of chronic HBV infection at Stanford University and the University of
Pennsylvania. A significant reduction in viral components and improvement in
liver function was noted during the course of the Phase I/II clinical trial to
date and the drug has been generally well tolerated. At present,
interferon-alpha is the only approved product for the treatment of this disease;
however, 60% to 75% of patients with chronic HBV ultimately fail to respond to
interferon-alpha. The global sales of interferon are presently estimated at more
than $1 billion, largely for its use in liver infections.

The Centers for Disease Control ("CDC") has estimated that approximately
one million people in the U.S. are infected with HIV, excluding patients who
have progressed to fully symptomatic AIDS. The WHO has estimated that 30 to 40
million people will be infected with HIV worldwide by the year 2000. The Company
is currently conducting a Phase II clinical trial of Ampligen in the U.S. for
the treatment of HIV infection. The drug technology is designed to enhance the
patient's own immune system, thereby fighting the invasive viral agent more
effectively and resulting in more durable long term benefits.

ME/CFS is a condition recently recognized by the CDC and characterized by
unexplained fatigue or chronic illness for six months or longer for which no
cause has been identified after a thorough medical work-up. Although the CDC is
presently conducting studies to more exactly determine the rate of incidence of
ME/CFS, the CDC's latest estimate of the prevalence rate of this disease in the
U.S. is in excess of 500,000 cases. The Company has entered into an agreement
with a Canadian pharmaceutical firm pursuant to which the Canadian company will
provide various services in connection with the distribution of Ampligen on a
cost recovery basis as authorized under the Canadian emergency drug release
program. Presently the Company is receiving revenues from sales of Ampligen to
patients in an open label clinical trial being conducted in Belgium. The Company
is currently discussing open-label and placebo controlled trials with the FDA.
The Company is unaware of any other new drugs which are under development for
treatment of ME/CFS. Today, ME/CFS accounts for a significant portion of people
entering chronic disability status, especially in the western U.S. Thus, this
presently untreatable illness constitutes a significant impact on the overall
cost of health care.

The Company also has clinical experience with Ampligen in patients with
certain cancers, including renal cell carcinoma (kidney cancer) and metastatic
malignant melanoma. Based on estimates prepared by the American Cancer Society,
the Company anticipates that approximately 25,000 new cases of renal cell
carcinoma will be diagnosed in the U.S. in 1996. The Company was authorized by
the FDA, in the U.S., and the HPB, in Canada, to initiate a Phase II/III
clinical trial of Ampligen in renal cell carcinoma patients. The HPB has
authorized the Company to charge patients for the cost of the Ampligen
administered to renal cell patients in the context of clinical trials. Based on
estimates prepared by the American Cancer Society, the Company anticipates that
approximately 34,000 new cases of malignant melanoma will be diagnosed in the
U.S. in 1996. Data from the American Cancer Society and the World Health
Organization indicate that both the incidence and mortality from malignant
melanoma are rising steadily among white populations throughout the world. In
the past decade, the incidence of melanoma has increased faster than that of any
other cancer except lung cancer in women.

In March 1997, the Company sold 5,000 shares of Series E Preferred at
$1,000 per share in a private transaction pursuant to Regulation D of the
Securities Act of 1933, as amended ("Securities Act") and Rule 506 promulgated
thereunder. The proceeds from such offering were used to retire all outstanding
shares of the Company's Series D Preferred Stock.

In July 1996, the Company sold 6,000 shares of Series D Preferred Stock at
$1,000 per share in a private transaction pursuant to Regulation D of the
Securities Act and Rule 506 promulgated thereunder. The Company filed a
registration statement on Form S-1, which was declared effective by the
Commission on September 16, 1996, registering 2,427,275 Shares underlying the
Series D Preferred Stock and 890,543 shares of Common Stock underlying certain
other warrants and options.

In November 1995, the Company sold 5,313,000 Units at $3.50 per Unit in its
initial public offering. Each Unit consists of one share of Common Stock and one
Class A Warrant.

In February 1996, the Company entered into an agreement with Rivex Pharma,
Inc., a Canadian-based pharmaceutical company ("Rivex"), pursuant to which Rivex
will provide various services in connection with the exclusive distribution of
Ampligen in Canada on an emergency drug release basis. Under the terms of this
agreement, the Company will supply and Rivex will purchase as much Ampligen as
necessary to satisfy Rivex's customers at a mutually agreed upon cost. In
return, Rivex will retain the exclusive right to distribute Ampligen in Canada.

In October 1994, the Company entered into an agreement with Bioclones
Proprietary Limited ("Bioclones"), a biopharmaceutical company which is
associated with The South African Breweries Limited ("SAB" and, together with
Bioclones, "SAB/Bioclones") with respect to codevelopment of various RNA drugs,
including Ampligen, for which the Company has previously obtained international
patent protection. The licensing agreement, as amended (the "SAB Agreement")
provides that the Company will provide SAB/Bioclones with an exclusive
manufacturing and marketing license for certain Southern hemisphere countries
(including certain countries in South America) as well as the United Kingdom,
Ireland, Africa, Australia, Tasmania, New Zealand and certain other countries
and territories. In exchange for these marketing and distribution rights, the
SAB Agreement provides for: (a) a $3 million cash payment to the Company,
payable in installments upon the occurrence of certain milestones, including the
transfer of certain technical documents which have already been transferred; (b)
the formation and issuance to the Company of 24.9% of the capital stock of a
company which is developing and operating a new manufacturing facility for RNA
drugs constructed by SAB/Bioclones; and (c) royalties on all sales of the
Company's product in the licensed territories after the first $50 million of
sales. In addition, SAB/Bioclones has agreed to use reasonable efforts to pursue
the marketing approval of Ampligen for hepatitis B in Australia, South Africa,
Brazil, and the United Kingdom, as well as to perform (at its own expense) a
phase III study of Ampligen for chronic HBV infection in South Africa, which
clinical study is to be performed pursuant to U.S. FDA good clinical practice
and good laboratory practice ("GLP") guidelines and standards. SAB/Bioclones
will be granted a right of first refusal to manufacture and supply to the
Company the drug product required for not less than one-third of its world-wide
sales of Ampligen (after deducting SAB/Bioclones-related sales). To date, the
Company has received approximately $3,000,000 pursuant to the SAB Agreement.

In September 1994, the Company formed three subsidiaries and granted
licenses to the subsidiaries for the purpose of developing its technology for
ultimate sale into certain non-pharmaceutical specialty consumer markets, such
as the tobacco market, the market for skincare products and the market for
diagnostic devices. The Company intends to issue equity in one of such
subsidiaries and has granted options to certain of its officers and directors.
See "Business--Subsidiary Companies." No assurance can be given that any of
these companies will be able to complete testing in these areas, develop any
products or successfully produce and market any products in the targeted
specialty consumer markets.

The Company's corporate headquarters are located at 1617 JFK Boulevard,
Philadelphia, Pennsylvania 19103. The Company's telephone number is (215)
988-0080.

As of March 19, 1997
Securities Outstanding(1)(2)(3) Common Stock 16,353,086
Class A Warrants 6,313,000
Series E Preferred 5,000

Risk Factors AN INVESTMENT IN THE SECURITIES OFFERED
HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS".

Nasdaq Symbols
for Common Stock HEMX
for Class A Warrants HEMXW

(1) Excludes: (i) 460,798 shares of Common Stock reserved for issuance pursuant
to the Company's 1990 Stock Option Plan under which options to purchase
234,953 shares have been granted; (ii) 92,160 shares of Common Stock
reserved for issuance pursuant to the Company's 1992 Stock Option Plan
under which no options or other rights to purchase shares have been
granted; (iii) 138,240 shares of Common Stock reserved for issuance
pursuant to the Company's 1993 Employee Stock Purchase Plan pursuant to
which no rights to purchase shares have been granted; (iv) 3,213,797 shares
of Common Stock reserved for issuance pursuant to certain outstanding
warrants with an average weighted exercise price of $3.53; (v) 2,080,000
warrants to purchase Common Stock of the Company issued to officers,
directors and consultants of the Company in reliance upon Rule 701 of the
Securities Act, at an exercise price of $3.50 per share ("Rule 701
Warrants"); (vi) 2,750,000 warrants to purchase Common Stock at an exercise
price of $1.75 per share issued in accordance with the terms of the 1995
Standby Financing Agreement; (vii) 462,000 Units underlying the Option,
462,000 shares of Common Stock underlying the Units included in the Option,
462,000 Class A Warrants underlying the Option, and 462,000 shares of
Common Stock underlying the Class A Warrants underlying the Units included
in the Option. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Management--1992 Stock Option Plan,"
"--1990 Stock Option Plan" and "--Employee Stock Purchase Plan,"
"Description of Securities--Warrants"

(2) Does not include 6,313,000 shares of Common Stock issuable upon the
exercise of the Class A Warrants at an exercise price of $4.00 per share.

(3) Does not include 2,500,000 shares of Common Stock reserved for issuance
upon conversion of the Series E Preferred.

SUMMARY FINANCIAL INFORMATION
(in thousands, except share and per share data)

The data set forth below should be read in conjunction with the
Consolidated Financial Statements, related Notes and other financial information
included or incorporated by reference elsewhere in this Prospectus.

December 31,
------------------------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- -------

Consolidated Statements
of Operations Data:
Revenues
Research and Development $ -- $ 48 $ 76 $ 66 $ 32
License fee -- -- 100 2,900 --
------- ------- ------- ------- -------
Total Revenues -- 48 176 2,966 32
Cost and expenses:
Research and development 4,734 2,119 1,638 1,029 1,902
General and administrative 2,825 3,347 2,618 2,880 3,024
------- ------- ------- ------- -------
Total costs and expenses 7,559 5,466 4,256 3,909 4,926
Debt conversion expenses -- (1,215) (10) (149) --
Net interest income (expense) (322) (1,069) (1,043) (748) 339
------- ------- ------- ------- -------
Net loss $(7,881) $(7,702) $(5,133) $(1,840) $(4,555)
======= ======= ======= ======= =======
Net loss per share -- -- $ (.44)(1) $ (.13)(1) $ (.29)
Weighted average
number of shares outstanding
used in computing
net loss per share -- -- 11,536,276(1) 14,199,701(1) 15,718,316

December 31, 1996
-----------------
Consolidated Balance Sheet Data:
Current assets $ 5,385
Current liabilities 1,146
Total assets 6,999
Long-term obligations 0
Accumulated deficit (48,243)
Stockholders' equity 5,853

(1) Computed on a proforma basis described in Note 2(e) to the Consolidated
Financial Statements.

RISK FACTORS

AN INVESTMENT IN THE SECURITIES OFFERED HEREBY IS HIGHLY SPECULATIVE,
INVOLVES A HIGH DEGREE OF RISK AND SHOULD BE MADE ONLY BY INVESTORS WHO CAN
AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. PROSPECTIVE PURCHASERS, PRIOR TO
MAKING AN INVESTMENT DECISION, SHOULD CAREFULLY CONSIDER, ALONG WITH OTHER
MATTERS REFERRED TO HEREIN, THE FOLLOWING RISK FACTORS:

Dependence on Ampligen; Non-Exclusive Right to Manufacture of Ampligen;
Expiration of Patents.

The Company's principal development efforts are currently focused on
Ampligen. While most clinical trials of Ampligen have to date produced favorable
results, additional trials sponsored by the Company are planned, and no
assurance can be given that the drug will ultimately be demonstrated to be safe
or efficacious. In addition, while Ampligen has been authorized for use in
clinical trials in the United States and other countries, no assurance can be
given that additional clinical trials approvals will be authorized in the United
States or in other countries in a timely fashion or at all or that such clinical
trials will be completed by the Company. The Company has never commercially
introduced a product, and no assurance can be given that commercialization of
Ampligen in any countries where Ampligen may be approved will prove successful.
In addition, the Company does not have exclusive rights to manufacture Ampligen.
Competitors of the Company are currently able to manufacture Ampligen. The
Company believes, however, that its extensive patent estate may hinder such
competitors from testing and developing Ampligen for particular indications
since the Company has patented the use of Ampligen for many disease indications.
The Company further believes that the available market for non-patented disease
indications for Ampligen which might be available to competitors is minimal
since the Company believes, based on laboratory tests, that Ampligen may not be
effective against such disease indications; however, no assurances can be given.
Willful infringement of the Company's patents by a competitor could result in
significant monetary damages to the Company in the event that such infringement
was not enjoined by a court of law. See "Business - Patent Rights."
Nevertheless, in the event that the Company's patent protection is not adequate
for all relevant disease indications, competitors might be able to test, develop
and commercialize Ampligen. Additionally, as a result of the Company's
dependence on Ampligen, the failure to demonstrate the drug's safety and
efficacy in planned clinical trials, to conduct the planned clinical trials, to
obtain additional approvals for the drug or to successfully commercialize the
drug would have a materially adverse effect on the Company.

No Assurance of Regulatory Approval; Government Regulation.

The Company's research, preclinical development, clinical trials, and the
manufacturing and marketing of its products are subject to extensive regulation
by numerous governmental authorities in the U.S. and other countries, including,
but not limited to, the Food and Drug Administration ("FDA") in the U.S. and the
Health Protection Branch of Canada's Department of Health and Welfare ("HPB"), a
federal regulatory agency in Canada. None of the Company's products has been
approved for commercial sale by the FDA, the HPB or any other foreign regulatory
authority and the Company does not expect to achieve profitable operations
unless Ampligen receives FDA approval and is commercialized successfully. In
order to obtain FDA

approval of a new drug product for an indication, the Company must demonstrate
to the satisfaction of the FDA that such product is safe and effective for its
intended uses and that the Company is capable of manufacturing the product to
the applicable regulatory standards. The process of obtaining FDA and other
required regulatory approvals (including those of the HPB) is rigorous and
lengthy and has required and will continue to require the expenditure of
substantial resources. There can be no assurance that the Company will be able
to obtain the necessary regulatory approvals. Unsatisfactory clinical trial
results, clinical trials not conducted in accordance with applicable protocol
requirements and/or delays in obtaining regulatory approvals would prevent the
marketing of products developed by the Company, and pending the receipt of such
approvals, the Company will not receive product revenues or royalties.

Pharmaceutical products and their manufacture are subject to continued
review following regulatory approval, and later discovery of previously unknown
problems may result in the imposition of restrictions on such products or their
manufacture, including withdrawal of the products from the market. Failure to
comply with applicable regulatory requirements could, among other things, result
in fines, suspension of regulatory approvals, operating restrictions and
criminal prosecution. The Company cannot predict the extent to which current or
future government regulations might have a materially adverse effect on the
production, marketing and sale of the Company's products. Such regulations may
delay or prevent clinical trials, regulatory approval, and the manufacture or
marketing of the Company's potential products. In addition, such regulation may
impose costly procedures upon the Company's activities or furnish a competitive
advantage to other companies more experienced in regulatory affairs than the
Company and may deplete the Company's liquidity and capital resources. See
"Business - Government Regulation."

Additional Financing Requirements.

The development of the Company's products has required and will continue to
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 and to establish commercial-sale
production and marketing capabilities. Based on its current operating plan, the
Company anticipates that projected cash flow from operations and currently
available financing arrangements will be sufficient to meet the Company's
capital requirements for approximately 10 months from the date of this
Prospectus. It is not expected that the Company's current cash flow will be
sufficient to enable the Company to complete the necessary clinical trials or
regulatory approval process for Ampligen for any indication or, if any such
approval were obtained, to begin manufacturing or marketing Ampligen on a
commercial basis. Accordingly, the Company may need to raise substantial
additional funds through additional equity or debt financing, collaborative
arrangements with corporate partners, off balance sheet financing or from other
sources in order to complete the necessary clinical trials and the regulatory
approval processes and begin commercializing its products. If adequate funds are
not available from operations, as is anticipated, and if the Company is not able
to secure additional sources of financing on acceptable terms, the Company's
business will be materially adversely affected.

Moreover, because of the Company's long-term capital requirements, it may
seek to access the public equity market whenever conditions are favorable, even
if it does not have an immediate need for additional capital at that time. There
can be no assurance that any additional funding will be available to the Company
on terms acceptable to the Company, if at all. 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. The Company may also need additional funding earlier than
anticipated, and the Company's cash requirements in general may vary materially
from those now planned, for reasons including, but not limited to, changes in
the Company's 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 the Company's
clinical trials as to which cost recovery from participants has been approved.

Uncertainty Regarding Patents and Proprietary Rights.

The Company's success will depend, in large part, on its ability to obtain
patent protection for its products and to obtain and preserve proprietary
information and trade secrets. The Company does not have exclusive rights to the
manufacture of Ampligen. Consequently, the Company's ability to obtain exclusive
rights for the commercial sale of Ampligen is subject to the Company's
acquisition of enforceable patents covering the use of the drug for a particular
indication. The Company has been issued certain patents on the use of Ampligen
alone and Ampligen in combination with certain other drugs for the treatment of
human immunodeficiency virus ("HIV"). The Company has also been issued a patent
on the use of Ampligen in combination with certain other drugs for the treatment
of chronic hepatitis B virus ("HBV") and chronic hepatitis C virus ("HCV") and a
patent which affords protection on the use of Ampligen in patients with myalgic
encephalomyetis, also know as chronic fatigue syndrome ("ME/CFS"). To date, the
Company has not been issued any patents in the U.S. for the use of Ampligen as
monotherapy for HBV or for any of the cancers which the Company has sought to
target. The Company's applications for U.S. patents for the use of Ampligen as
monotherapy for HBV and in the treatment of renal cell carcinoma and lung cancer
are currently pending, although no assurances can be given that any of such
applications will be approved. No assurances can be given that competitors will
not seek and obtain patents regarding the use of Ampligen in combination with
various other agents (including AZT) for a particular target indication prior to
the Company. Although the Company's license to manufacture Ampligen is
non-exclusive, the Company believes that the existence of the Company's
treatment indication patents precludes a competitor from selling an identical or
similar product for the same treatment indication without infringing upon the
Company's issued patents. No assurance can be given, however, that the Company's
patent protection will be adequate to prevent the entry into the market of
competitors for all of the Company's treatment indications.

The Company has been unable to secure Orphan Drug designation from the FDA
for treatment of HBV in the U.S. In the event that the Company is unable to
obtain adequate patent protection for the indication, it would be unable to
maintain a competitive advantage over other drug manufacturers which could enter
the market immediately.

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. Accordingly, there can be no assurance
that patent applications relating to the Company's 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 other intellectual property rights and that such litigation
could consume substantial resources of the

Company. No assurance can be given that the Company's patents will provide
competitive advantages for its products or will not be successfully challenged
or circumvented by its competitors. No assurance can be given that patents do
not exist or could not be filed which would have a materially adverse effect on
the Company's ability to market its products or to obtain or maintain any
competitive position the Company may achieve with respect to its products. The
Company's patents also may not prevent others from developing competitive
products using related technology. Other companies obtaining patents covering
products or processes useful to the Company may bring infringement actions
against the Company. There can be no assurance that the Company will have the
financial resources necessary to enforce patent rights it may hold. As a result,
the Company may be required to obtain licenses from others to develop,
manufacture or market its products. There can be no assurance that the Company
would be able to obtain any such licenses on commercially reasonable terms, if
at all. The Company licenses certain patents and proprietary information from
third parties, some of which patents and proprietary information may have been
developed with government grants under circumstances where the government
maintained certain rights with respect to the patents/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 the Company's license. Certain of the
Company's know-how and technology is not patentable, particularly the procedures
for the manufacture of the Company's drug product which are carried out
according to standard operating procedure manuals. To protect its rights, the
Company has since 1991 required employees and consultants to enter into
confidentiality agreements with the Company. There can be no assurance that
these agreements will not be breached, that the Company would have adequate and
enforceable remedies for any breach, or that any trade secrets of the Company
will not otherwise become known or be independently developed by competitors.
See "Business - Patent Rights."

Disputes and Legal Proceedings Related to Patent Rights.

The Company's ownership of one of its patents for the use of Ampligen for
the treatment of HIV is the subject of a dispute. Vanderbilt University has
advised the Company of its position that employees of the University were the
inventors of the patent at issue. The Company does not believe the University's
position to have merit, and if the University filed a claim against the Company,
the Company would vigorously defend against such an action. If such a claim were
filed and if such a claim were found to have merit, the loss of the patent at
issue would not have a materially adverse effect on the Company's long range
business since the University would be able to limit or prevent only the
Company's use of Ampligen in combination with AZT in the treatment of HIV. In
the event that the University obtained ownership of the disputed patent, the
University could license a third entity to sell Ampligen for a specific
combinational treatment. However, without the Company's consent, the Company
believes that the commercialization process by a third party would require
substantial expenditure to repeat clinical trials and establish a new
manufacturing protocol acceptable to regulatory agencies and would require a
license from the Company for the use of Ampligen as a component of the
combinational requirement. Furthermore, the loss of this patent would not affect
the Company's ability to market Ampligen as a monotherapy for HIV which
treatment the Company has tested and expects to continue to develop. See
"Business - Patent Rights" and "Business - Legal Proceedings."

History of Losses; Future Profitability Uncertain.

The Company began operations in 1966 and has reported net profit only from
1985 through 1987. Since 1987, the Company has incurred substantial operating
losses and as of December 31, 1996, the Company's accumulated deficit was
approximately $48 million. The Company has not generated significant revenues
from its products and could incur substantial and increased losses over the next
several years. Such losses may fluctuate significantly from quarter to quarter.
There can be no assurance that the Company will ever achieve significant
revenues from product sales or become profitable. The Company's ability to
achieve profitable operations is dependent, in large part, on successfully
developing products, obtaining regulatory approvals on a timely basis, and
making the transition from a research and development firm to an organization
producing commercial products or entering into joint ventures or other licensing
arrangements. No assurance can be given that the Company's product development
efforts will be successfully completed, required regulatory approvals will be
obtained, any products will be manufactured and marketed successfully, or
profitability will be achieved. See "Selected Financial Data," "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

No Assurance of Successful Product Development.

The development of new pharmaceutical products is subject to a number of
significant risks. Potential products that appear to be promising at an early
stage of research or development may not reach the market for a number of
reasons. Potential products 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 rights of third parties. The Company's
products are in various stages of clinical and pre-clinical development; each
will need to progress through further clinical studies and appropriate
regulatory approval processes before any such products can be marketed. Ampligen
is not expected to be generally available for commercial sale for any indication
for at least the next several years, if at all. Generally, only a small
percentage of potential therapeutic products are eventually approved by the FDA
for commercial sale. The transition from limited production of pre-clinical and
clinical research quantities to production of commercial quantities of the
Company's 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 the Company's efforts 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. See
"Business."

Limited Manufacturing Experience and Capacity.

Ampligen is currently produced only in limited quantities for use in its
clinical trials. To be successful, the Company's products must be manufactured
in commercial quantities in compliance with regulatory requirements and at
acceptable costs. Although the Company has entered into an agreement with
Bioclones Proprietary, Ltd. ("Bioclones"), a biopharmaceutical company which is
associated with South African Breweries, Ltd. (together with Bioclones,
"SAB")(the "SAB Agreement") which provides for the construction of a new
commercial manufacturing facility by a company which is 24.9% owned by the
Company, no assurance can be given as to the timing of such construction, and
therefore the Company may continue to be

dependent on third parties for a considerable portion of the manufacturing and
production process. A pilot facility in South Africa is being expanded to
provide a limited supply of Ampligen raw material. While the Company believes
that construction of the commercial facility will begin in 1997, the
construction is dependent upon the regulatory status of Ampligen in various
global markets, and no assurance can be given with respect to when, and if,
construction will occur. To the extent the Company is involved in the production
process, the Company's current facilities are not adequate for the production of
its proposed products for large-scale commercialization, and the Company
currently does not have adequate personnel to conduct commercial-scale
manufacturing. The Company intends to utilize third-party facilities if and when
the need arises or, if it is unable to do so, to build or acquire
commercial-scale manufacturing facilities. The Company will need to comply with
regulatory requirements for such facilities, including those of the FDA and HPB
pertaining to Good Manufacturing Practices ("GMP") regulations. There can be no
assurance that such facilities can be used, built, or acquired on commercially
acceptable terms, that such facilities, if used, built, or acquired, will be
adequate for the Company's long-term needs. Moreover, 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 manufacture may affect the chemical structure of
Ampligen and other such RNA drugs, as well as their safety and efficacy. Changes
in methods of manufacture, including commercial scale-up, can, among other
things, require new clinical studies and affect orphan drug status,
particularly, market exclusivity rights, if any, under the Orphan Drug Act. See
"Business - Manufacturing" and "Business - Government Regulation."

Lack of Marketing Experience and Capacity.

The Company currently has limited marketing or sales capability and does
not expect to establish a significant direct sales capability for at least the
next several years. To the extent that the Company determines not, or is unable,
to enter into marketing agreements or third party distribution agreements for
its products, significant additional resources will be required to develop a
sales force and distribution organization. Pursuant to the SAB Agreement, the
corporate partner will be responsible for fielding an adequate sales force in
South America, Africa, United Kingdom, Australia and New Zealand. Nevertheless,
there can be no assurance that the Company will be able to establish such
arrangements, under the SAB Agreement or otherwise, on terms acceptable to the
Company, if at all, or that the cost of establishing such arrangements will not
exceed any product revenues, or that such arrangements will be successful. To
the extent that the Company enters into co-marketing or other licensing
arrangements, any revenues received by the Company will be dependent on the
efforts of third parties, and there can be no assurance that such efforts will
be successful. See "Business Marketing."

Rapid Technological Change and Substantial Competition.

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 the Company, as well as substantial marketing, financial and managerial
resources, and represent significant competition for the Company. Acquisition
of, or investments in, competing companies by large pharmaceutical companies
could increase such

competitors' financial, marketing and other resources. There can be no assurance
that developments by others will not render the Company's products or
technologies obsolete or noncompetitive or that the Company will be able to keep
pace with technological developments. Competitors have developed or are in the
process of developing technologies that are, or in the future may be, the basis
for competitive products. Some of these products may have an entirely different
approach or means of accomplishing similar therapeutic effects to products being
developed by the Company. These competing products may be more effective and
less costly than the Company's products. In addition, conventional drug therapy,
surgery and other more familiar treatments will offer competition to the
Company's products. Furthermore, many of the Company's competitors have
significantly greater experience than the Company in pre-clinical testing and
human clinical trials of pharmaceutical products and in obtaining FDA, HPB and
other regulatory approvals of products. Accordingly, the Company's competitors
may succeed in obtaining FDA and HPB product approvals more rapidly than the
Company. If any of the Company's products receive regulatory approvals for any
indication and the Company commences commercial sales of its products, it will
also be competing with respect to manufacturing efficiency and marketing
capabilities, areas in which it has no experience. The Company's competitors may
possess or obtain patent protection or other intellectual property rights that
prevent, limit or otherwise adversely affect the Company's ability to develop or
exploit its products. See "Business - Competition."

Dependence upon Qualified and Key Personnel.

Because of the specialized nature of the Company's business, the Company's
success will depend, among other things, on its ability to attract and retain
qualified management and scientific personnel. Competition for such personnel is
intense. There can be no assurance that the Company will be able to continue to
attract or retain such persons. The Company currently depends upon the services
of Dr. William A. Carter, its President, Chief Executive Officer and Chairman of
the Board, Robert E. Peterson, its Chief Financial Officer and Dr. Carol A.
Smith, the Company's Director of Manufacturing and Process Development. Certain
key individuals upon whom the Company currently depends, including but not
limited to the Company's Medical Director, Dr. David Strayer, are not employees
of the Company, but instead are employees of an institution with whom the
Company has a collaborative at will arrangement. R. Douglas Hulse, Chief
Operating Officer, is an employee of The Sage Group and serves in his position
under a written agreement. In addition, Dr. Smith and Mr. Peterson do not have
written employment agreements with the Company. The continued availability to
the Company of the services of these individuals is subject to the policies of
the institution which employs them; any change in such policies may have an
adverse effect upon the Company's continued retention of the services of these
individuals. While the Company has an employment agreement with Dr. William A.
Carter, and has secured key man life insurance in the amount of $2 million on
the life of Dr. Carter, the loss of Dr. Carter or other key personnel or of the
services of such employees of collaborators or the failure to recruit additional
personnel as needed could have a materially adverse effect on the Company's
ability to achieve its objectives. See "Business" and "Management."

Dependence on Third Parties.

The Company's strategy for research, development and commercialization is
to rely in part upon collaborative arrangements with third parties in
appropriate circumstances. The Company's strategy has led it to enter into
various arrangements with universities, research

groups, licensors and others. The Company is dependent on a number of important
arrangements with third parties. In particular, the Company utilizes the
services of employees of and regularly makes use of certain equipment and
facilities at Hahnemann University and has obtained certain of its technology
for Oragen products through a license with Temple University. There can be no
assurance that the Company will be able to negotiate additional third party
arrangements or continue any existing arrangements on terms acceptable to the
Company, if at all, or that key researchers upon whom the Company is dependent
will continue to be associated with such universities and/or to work on the
Company's products. The loss of any such existing arrangement or key researcher
could have a materially adverse effect on the Company. The Company may seek a
significant portion of its future capital requirements from arrangements with
pharmaceutical companies or others pursuant to arrangements under which, among
other things, the Company would receive payment for certain research and
development activities in exchange for future royalty payments. There can be no
assurance that any such arrangements will be established on a basis acceptable
to the Company, if at all, or if established, will be scientifically or
commercially successful. The failure to achieve such arrangements on
satisfactory terms could have a materially adverse effect on the Company. The
Company is dependent upon certain third party suppliers for key components of
its proposed products and for substantially all of the production process. The
failure to continue arrangements with such third parties or obtain satisfactory
substitute arrangements could have a materially adverse effect on the Company.
See "Business - Employees and Consultants" and Management - Employment
Agreements."

Impact of Potential Nasdaq Delisting on Marketability of Securities;
Broker-Dealer Sales of the Company's Securities.

The Company's Common Stock and Class A Warrants trade on Nasdaq. The NASD
has rules which establish criteria for the initial and continued listing of
securities on Nasdaq. Under the rules for initial listing, a company must have
at least $4,000,000 in total assets, at least $2,000,000 in total stockholders'
equity, and a minimum bid price of $3.00 per share. For continued listing on
Nasdaq, a company must maintain at least $2,000,000 in total assets, at least
$1,000,000 in shareholders' equity, and a minimum bid price of $1.00 per share.
As of December 31, 1996, the Company had approximately $6,999,000 in total
assets and approximately $5,853,000 in total shareholders' equity.

If the Company were to continue to incur operating losses, it might be
unable to maintain the standards for continued listing and the listed securities
could be subject to delisting from Nasdaq. If the Company's securities are
delisted, trading in the delisted securities could thereafter be conducted on
the NASD Bulletin Board or in the over-the-counter market in what is commonly
referred to as the "pink sheets." If this were to occur, an investor would find
it more difficult to dispose of the Company's securities or to obtain accurate
quotations as to the price of the Company's securities and it could have an
adverse effect on the coverage of news concerning the Company. In addition, if
the Company's securities were delisted, they would be subject to a rule that
imposes additional sales practice requirements on broker-dealers who sell such
securities to persons other than established customers and accredited investors
(accredited investors are generally persons having net worth in excess of
$1,000,000 or annual income exceeding $200,000, or $300,000 together with a
spouse). For transactions covered by this rule, the broker-dealer must make a
special suitability determination for the purchaser and must have received the
purchaser's written consent to the transaction prior to sale, as well as
disclosing certain information concerning the risks of purchasing low-priced
securities on the market for such securities. Consequently, delisting, if it
occurred, would adversely affect the ability of

broker-dealers to sell the Company's securities and would make subsequent
financing more difficult.

In order for the Company's securities to be included for trading on Nasdaq,
there must exist market makers and specialists, respectively, to support trading
in such securities. As of the date of this Prospectus, several brokerage firms,
sufficient to satisfy the requirements of Nasdaq are engaged in market making
activities with respect to the securities. There is no obligation on the part of
the brokerage firm to continue to act as market makers. In the event that the
market makers and specialists cease to function as such, public trading in the
securities will be adversely affected or may cease entirely.

Product Liability Exposure.

The Company faces an inherent business risk of exposure to product
liability claims in the event that the use of its products results in adverse
effects. Such liability might result from claims made directly by patients,
hospitals, clinics or other consumers, or by pharmaceutical companies or others
manufacturing such products on behalf of the Company. While the Company will
continue to attempt to take appropriate precautions, there can be no assurance
that it will avoid significant product liability exposure. The Company currently
maintain worldwide product liability insurance coverage. See "Business -
Ampligen Safety Profile."

Uncertainty of Health Care Reimbursement and Potential Legislation.

The Company's ability to successfully commercialize its 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. The Company
cannot predict what, if any, legislation will ultimately be adopted or the
impact of such legislation on the Company. Reimbursement from government
agencies may become more restricted in the future. The Company also understands
that there is increasing political pressure in Canada to limit health care
costs; no assurances can be given that the legislative or regulatory results, if
any, of such pressure will not have an adverse impact on the Company.
Furthermore, there can be no assurance that third party insurance companies will
allow the Company to charge and receive payments for its products sufficient to
realize an appropriate return on its investment in product development. The
Company's potential products represent a new mode of therapy, and the Company
expects that the costs associated with purchasing and administering its products
will be substantial. There can be no assurance that the Company's proposed
products, if successfully developed, will be considered cost effective to
third-party payors, that reimbursement will be available or, if available, that
the timing and amount of such payors' reimbursement will not adversely affect
the Company's ability to sell its products on a profitable basis.

Legal Proceedings

In February 1991, Vanderbilt University advised the Company of its position
that University employees were the inventors of an issued U.S. patent regarding
the use of Ampligen in combination with various other agents (including AZT) for
the treatment of HIV infection.

While the Company intends to vigorously prosecute or defend against any
potential litigation described above, no assurance can be given as to the
ultimate outcome or the Company's costs in bringing or defending the potential
litigation. See "Risk Factors - Disputes and Legal Proceedings Related to Patent
Rights" and "Business - Legal Proceedings."

Hazardous Materials.

The Company's business involves the controlled use of hazardous materials,
carcinogenic chemicals and various radioactive compounds. Although the Company
believes that its 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, the Company could be held liable for any
damages that result, and any such liability could be significant. The Company
does not maintain insurance coverage against such liabilities. The Company is
also subject to a variety of laws and regulations relating to occupational
health and safety, environmental protection, hazardous substance control, and
waste management and disposal. The failure to comply with any of such
regulations could subject the Company to, among other things, third party damage
claims, civil penalties and criminal liability.

Possible Volatility of Stock Price.

The stock market in general and biotechnology and pharmaceutical stocks in
particular have from time to time experienced significant price and volume
fluctuations that may be unrelated to the operating performance of particular
companies. The market price of the Securities, like the stock prices of many
publicly traded biotechnology and smaller pharmaceutical companies, may be
highly volatile. Announcements of technological innovations, regulatory matters
or new commercial products by the Company or its competitors, developments or
disputes concerning patent or proprietary rights, publicity regarding actual or
potential medical results relating to products under development by the Company
or its competitors, regulatory developments in both the U.S. and foreign
countries, public concern as to the safety of pharmaceutical products, economic
and other external factors, and period-to-period fluctuations in financial
results, may have a significant impact on the market price of the Securities.

Shares Eligible for Future Sale; Registration Rights.

Approximately 9,467,968 outstanding shares of the Company's Common Stock
are restricted securities, as that term is defined in Rule 144 promulgated under
the Securities Act ("Rule 144"). Absent registration under the Securities Act or
the availability of an exemption under the Securities Act, the sale of such
shares is subject to Rule 144. In general, under Rule 144, subject to the
satisfaction of certain other conditions, a person, including an affiliate of
the Company, who has beneficially owned restricted shares of Common Stock for at
least two years is entitled to sell, within any three-month period, a number of
shares that does not exceed the greater of 1% of the total number of outstanding
shares of the same class, if the Common Stock is quoted on NASDAQ or a stock
exchange, the average weekly trading volume during the four calendar weeks
preceding the sale. A person who presently is not and who has not been an
affiliate of the Company for at least three months immediately preceding the
sale and who has beneficially owned the shares of Common Stock for at least
three years is entitled to sell such

shares under Rule 144(k), without regard to any of the volume limitations
described above. There are approximately 5,722,664 Rule 144(k) restricted shares
currently outstanding. In addition, the Company has issued warrants to purchase
2,080,000 shares of Common Stock ("Rule 701 Warrants") in reliance upon the
provisions of Rule 701 of the Securities Act, pursuant to which, in certain
circumstances, such Rule 701 Warrants may be sold. Certain holders of Common
Stock have executed lock up agreements with the Company. The sale, or
availability for sale, of substantial amounts of the Company's securities in the
public market subsequent to this Prospectus, including the securities issued
pursuant to Rule 144, Rule 701 or otherwise, could adversely affect the market
price of the Common Stock and could impair the Company's ability to raise
additional capital through the sale of its equity securities or debt financing.
The availability of Rule 144 and Rule 701 to the holders of restricted
securities of the Company would be conditioned on, among other factors, the
availability of certain public information concerning the Company. See
"Description of Securities."

Current Prospectus and State Registration Required to Exercise Class A
Warrants.

The Class A Warrants may not be exercised by the holders thereof unless at
the time of exercise a registration statement covering the shares of Common
Stock issuable upon exercise of the Class A Warrants is effective and such
shares of Common Stock have been registered under the Securities Act and
qualified, or deemed to be exempt, under the securities laws of the states of
residence of the respective holders of such Class A Warrants. While the Class A
Warrants are being registered herewith, there can be no assurance, however, that
such registration statement will remain current or that such Class A Warrants
will be properly qualified under applicable state securities laws, the failure
of which may result in the exercise of the Class A Warrants and the resale or
other disposition of Common Stock issued upon such exercise becoming unlawful.
See "Description of Securities -- Class A Redeemable Warrants."

Potential Adverse Effect of Redemption of Class A Warrants.

The Class A Warrants may be redeemed by the Company at any time commencing
two years from the date of this Prospectus and ending five years from the date
of this Prospectus, at a redemption price of $.05 per Class A Warrant upon 30
days' prior written notice provided the closing bid price of the Common Stock on
Nasdaq (or another national securities exchange) for 20 consecutive trading days
ending within 10 days of the notice of redemption equals or exceeds $9.00 per
share subject to adjustment. Redemption of the Class A Warrants could force the
holders to exercise the Class A Warrants and pay the exercise price at a time
when it may be disadvantageous for the holders to do so, to sell the Class A
Warrants at the then current market price when they might otherwise wish to hold
the Class A Warrants, or to accept the redemption price, which is likely to be
substantially less than the market value of the Class A Warrants at the time of
redemption. See "Description of Securities -- Class A Warrants."

Exercise of Class A Warrants and Warrants May Have Dilutive Effect on
Market.

The Class A Warrants issued in connection with the IPO will provide, during
their term, an opportunity for the holder to profit from a rise in the market
price, of which there is no assurance, with resulting dilution in the ownership
interest in the Company held by the then present stockholders. Holders of the
Class A Warrants and Warrants most likely would exercise the Class A Warrants
and Warrants and purchase the underlying Common Stock at a time when the Company
may be able to obtain capital by a new offering of securities on terms more

favorable than those provided by such Class A Warrants and Warrants, in which
event the terms on which the Company may be able to obtain additional capital
would be affected adversely.

Adverse Consequences Associated with Substantial Shares of Common Stock
Reserved for Issuance Pursuant to Outstanding Warrants, Options and Conversion
of the Series E Preferred.

The Company has reserved an aggregate of up to 18,015,750 shares of Common
Stock for issuance upon exercise of the Class A Warrants, warrants, stock
options and upon conversion of the Series E Preferred. Holders of these Class A
Warrants, warrants, options and Series E Preferred are likely to exercise and
convert them when, in all likelihood, the Company could obtain additional
capital on terms more favorable than those provided by such convertible
securities. Furthermore, while the convertible securities are outstanding, they
may adversely affect the terms on which the Company could obtain additional
capital. Should a significant portion of such convertible securities be
exercised, the resulting increase in the amount of the Common Stock in the
public market may have the effect of reducing the market price thereof.

Conflicts of Interest.

All of the members of the Company's Scientific Advisory Board are employed
other than by the Company and may have commitments to or consulting or advisory
contracts with other entities (which may include competitors of the Company)
that may limit their availability to the Company. While each member of the
Company's Scientific Advisory Board does execute a non-disclosure and
non-competition agreement with respect to proprietary data that he or she
receives from the Company, there can be no assurance that these agreements will
absolutely protect the Company from the results of such data being revealed,
accidentally or otherwise, by a member of its Scientific Advisory Board. See
"Business - Scientific Advisory Board."

Absence of Dividends.

The Company intends to retain future earnings, if any, to provide funds for
the operations of its business and, accordingly, does not anticipate paying any
dividends on its Common Stock in the reasonably foreseeable future. See
"Dividends."

CAPITALIZATION

The following table sets forth the capitalization of the Company at
December 31, 1996. This table should be read in conjunction with the
Consolidated Financial Statements and related Notes appearing elsewhere in this
Prospectus.

December 31, 1996
-----------------
(in thousands except
share data)
(unaudited)

Notes Payable and Stockholder Loans
(including accrued related interest) $ 0

Stockholders' equity (deficit):

Preferred Stock, $.01 par value, 5,000,000 shares authorized;
5,000 issued and outstanding **

Common Stock, $.001 par value, 50,000,000 shares authorized;
16,160,205 issued and outstanding 16

Additional paid-in capital 54,080

Accumulated deficit (48,243)

Total stockholders' equity 5,853

Total capitalization 5,853

- ----------
** Less than $100

SELECTED FINANCIAL DATA
(in thousands, except share and per share data)

The selected financial data should be read in conjunction with the
Consolidated Financial Statements as of December 31, 1995 and 1996 and for each
of the years in the three year period ended December 31, 1996, the related notes
and the independent auditors' report. The consolidated statements of operations
data for the years ended December 31, 1992 and 1993, and the consolidated
balance sheet data at December 31, 1992, 1993 and 1994 are derived from audited
Consolidated Financial Statements not included in this Prospectus.

December,31
----------------------------------------------------------------------------------

1992 1993 1994 1995 1996
------------ ------------ ------------ ------------ ------------

Consolidated Statements of
Operations Data:
Revenues
Research and Development $ -- $ 48 $ 76 $ 66 $ 32
License fee -- -- 100 2,900 --
------------ ------------ ------------ ------------ ------------
Total Revenues -- 48 176 2,966 32
Cost and expenses:
Research and development 4,734 2,119 1,638 1,029 1,902
General and administrative 2,825 3,347 2,618 2,880 3,024
------------ ------------ ------------ ------------ ------------
Total costs and expenses 7,559 5,466 4,256 3,909 4,926
Debt conversion expenses -- (1,215) (10) (149) --
Net interest income (expense) (322) (1,069) (1,043) (748) 339
------------ ------------ ------------ ------------ ------------
Net loss $ (7,881) $ (7,702) $ (5,133) $ (1,840) $ (4,554)
============ ============ ============ ============ ============
Net loss per share
Weighted average -- -- $ (.44)(1) $ (.13)(1) $ (.29)
Number of shares outstanding
used in computing net loss per
share (1) -- -- 11,536,276(1) 14,199,701(1) 15,718,136

(1) Computed on a proforma basis described in Note 2(e) to the Consolidated
Financial Statements.

December 31,
----------------------------------------------------------------------------------

1992 1993 1994 1995 1996
------------ ------------ ------------ ------------ ------------

Consolidated Balance
Sheet Data:
Current assets $ 2,282 $ 6 $ 64 $ 11,354 $ 5,385
Current liabilities 2,750 10,599 13,043 8,279 1,146
Total assets 4,415 1,916 1,651 12,700 6,999
Long-term obligations 6,950 30 --- --- ---
Redeemable preferred stock 2,536 2,866 3,238 --- ---
Accumulated deficit (28,869) (36,571) (41,704) (43,544) (48,243)
Stockholders' equity (deficit) $ (7,821) $ (11,579) $ (14,630) $ 4,421 $ 5,853

PRICE RANGE OF COMMON STOCK

The Company's Common Stock and Class A Warrants are traded on the National
Association of Securities Dealers Automated Quotation System ("Nasdaq") under
the symbols HEMX and HEMXW, respectively. The Company's Units, each Unit
consisting of one share of Common Stock and one Class A Warrant (the "Units"),
traded on Nasdaq during the period from November 2, 1995 to August 16, 1996, at
which time it was delisted. The Company's Common Stock and Class A Warrants were
listed for trading on Nasdaq on July 12, 1996. The following table sets forth
the high and low bid prices for the Company's Units for the periods indicated as
reported by the NASDAQ. On April 4, 1997, the high and low bid price for the
Common Stock was $2.90625 and $2.8125, respectively. The high and low bid price
for the Class A Warrants on such date was $.71875 and $.71875, respectively.

UNITS (HEMXU)
High Low
---- ---
Time Period:

November 2, 1995 through
December 31, 1995
$ 8.62 $ 2.00

January 1, 1996 through
March 31, 1996
3.68 1.750

April 1, 1996 through
June 30, 1996
6.12 2.687

July 1, 1996 through
August 15, 1996 (Trading 4.18 2.188
ceased on August 16, 1996)

COMMON STOCK (HEMX)
High Low
---- ---
Time Period:

July 15, 1996 through
September 30, 1996
$ 5.1 $ 1.625

October 1, 1996 through
December 31, 1996
4.81 2.063

WARRANTS (HEMXW)
High Low
---- ---
Time Period:

July 15, 1996 through
September 30, 1996
$ 1.875 $ 0.500

October 1, 1996 through
December 31, 1996
1.813 0.625

On March 19, 1997, there were approximately 355 holders of record of the
Company's Common Stock. The number of record holders do not include holders
whose securities are held in street name.

The Company has never paid any dividends on its Common Stock. It is
management's intention not to declare or pay dividends on the Common Stock, but
to retain earnings, if any, for the operation and expansion of the Company's
business.

DIVIDENDS

The Company does not currently pay dividends on its Common Stock. It is
management's intention not to declare or pay dividends on the Common Stock, but
to retain earnings, if any, for the operation and expansion of the Company's
business.

The holders of its Series E Preferred Shares are entitled to certain
dividend payments upon declaration by the Company's Board of Directors.

USE OF PROCEEDS

The Company intends to utilize the proceeds received from the exercise of
the C Warrants, R Warrants and Series E Warrants of $2,608,659 if all such
warrants are exercised in full, for general corporate and working capital
purposes. There can be no assurance that any of the C Warrants, R Warrants and
Series E Warrants will be exercised. The foregoing represents the Company's best
estimate of its use of proceeds generated from the possible exercise of C
Warrants, R Warrants and Series E Warrants based upon the current state of its
business operations, its current plans and current economic and industry
conditions. Any changes in the use of proceeds will be made at the sole
discretion of the Board of Directors of the Company.

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

The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and related notes contained elsewhere in
this Prospectus.

GENERAL

The Company was incorporated in Maryland in 1966 under the name HEM
Research, Inc. and originally served as a supplier of research support products.
The Company's business was redirected in the early 1980's to the development of
nucleic acid pharmaceutical technology and the commercialization of RNA drugs.
The Company was reincorporated in Delaware and changed its name to HEM
Pharmaceuticals Corp. in 1991 and to Hemispherx BioPharma, Inc. in June 1995.
The Company has three subsidiaries-BioPro Corp., BioAegean Corp. and Core
BioTech Corp., all of which were incorporated in Delaware in 1994. The Company
has reported net profit only from 1985 through 1987. Since 1987, the Company has
incurred substantial operating losses. Prior to completing an Initial Public
Offering ("IPO") in November 1995, the Company financed operations primarily
through the private placement of equity and debt securities, equipment lease
financing, interest income and revenues from licensing and royalty agreements.

The IPO completed in November 1995 produced net proceeds of approximately
$16,000,000. These funds plus the conversion of $3,447,000 in redeemable
preferred stock to equity at the time of the IPO improved stockholders equity by
some $19,000,000. The cash proceeds from the IPO were used to retire debt and
other liabilities and establish a fund for future operations.

The consolidated financial statements include the financial statements of
Hemispherx BioPharma, Inc. and its three wholly-owned subsidiaries, BioPro
Corp., BioAegean Corp. and Core BioTech Corp. which were incorporated in
September 1994 for the purpose of developing technology for ultimate sale into
certain nonpharmaceutical specially consumer markets. All significant
intercompany balances and transactions have been eliminated in consolidation.

During fiscal 1994 and 1995, the Company focused on negotiating and
executing the SAB Agreement, exploring potential partnerships to pursue
additional clinical trials with special emphasis on the HBV disease indication,
restructuring certain of its outstanding debt, conducting the 1994 Common Stock
Financing and the Bridge Financing and completing its IPO. In 1996, the Company
reviewed and restructured the Ampligen manufacturing process. Second sources

were established to procure raw materials, lyophilization services and release
testing. In the areas of research and clinical efforts, the Company established
with the FDA a roadmap of research and clinical studies to be completed. These
studies include animal toxicity and clinical studies in HIV and CFS. One HIV
clinical study was approved by the FDA and started in late 1996. Certain animal
toxicity studies began. In addition, the Company shipped the initial inventory
of Ampligen to Canada to use in its cost recovery program there.

The Company expects to continue its research and clinical efforts for the
next several years with some benefit of certain revenues from cost recovery
programs, notably in Canada and Belgium. Beginning in October, 1993, limited
revenues were initiated in Belgium from sales under the cost recovery provision
for conducting clinical tests in ME/CFS. The Company expects to continue
incurring losses over the next several years due to clinical costs which are
only partially offset by revenues and potential licensing fees. Such 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 revenues.

Results of Operations

Years Ended December 31, 1996 v. 1995

The Company reported a net loss of $4,554,489 in 1996 versus a loss of
$1,839,840 in 1995. Several factors contributed to the increased loss of
$2,714,649.

Revenues were down $2,933,866 for 1996 as 1995 included $2,900,000 of
licensing fees recorded in connection with SAB/Bioclones agreement. Research and
development costs increased $873,665 in 1996 due primarily to increased efforts
on the Canadian and Belgium clinical programs. General and administrative
expenses of $3,023,590 in 1996 reflect the benefit of a one time gain in the
amount of $318,757 resulting from the forgiveness of certain lease obligations
in connection with the restructuring of the Company's principal office lease.
Excluding this one time gain, general and administrative expenses in 1996
exceeded related expenses in 1995 by $461,904. This increase can mostly be
attributed to stock compensation expense of $634,344 and certain consulting
fees.

Debt conversion costs of $149,384 and interest expense of $843,148 incurred
in 1995 did not recur in 1996 due the fact that all the associated debt was
converted or repaid in 1995. Interest income increased by $243,497 due to the
earnings on the remaining IPO funds and funds from the issuance of preferred
stock.

Years Ended December 31, 1995 vs. 1994

The Company reported revenues of $2,965,910 in 1995 versus $175,758 in
1994. In 1995, the Company received and recognized $2,900,000 in licensing fees
resulting from the SAB/Bioclones agreements as compared to $100,000 in 1994.
Revenues from cost recovery clinical trials were $65,910 in 1995 versus $75,758
in 1994. Net losses of $1,839,840 were incurred in 1995 versus losses of
$5,133,051 in 1994. The year to year improvement of $3,293,211 consisted of: (1)
$2,790,152 in higher revenues primarily due to the licensing fees received from
the SAB Agreement; (2) $609,107 or 37% in lower research and development

costs as a result of the winddown and completion of certain clinical trials; (3)
higher general and administrative costs of $262,681 or 10% basically due to
increased legal and professional fees associated with various legal matters and
the Company's IPO efforts; (4) $138,884 in higher debt conversion expense
relating to certain debt restructuring that took place in April, 1995; and (5)
lower net interest expense in the amount of $295,517 or 28% due to the paydown
of certain notes from the proceeds of the IPO.

Years ended December 31, 1994 versus 1993

In 1994, the Company's net loss was $5,133,051 as compared to a net loss of
$7,702,050 in 1993. The $2,568,999 improvement resulted from increased revenues
of $127,758, reduced research and development costs of $481,127, reduced general
and administrative costs of $729,714, reduced conversion expense of $1,204,000
and reduced net interest expense of $26,400.

The Company had revenues of $48,000 in 1993 compared to $175,758 in 1994.
In 1994 the Company received $100,000 in licensing fees in accordance with the
terms of the SAB Agreement. Additionally, cost recovery revenues from the
Belgium clinical trials increased by approximately $29,000. Operating expenses
declined 22% in 1994 as compared to 1993, primarily as a result of reduced
research costs and efforts to correspondingly downsize the general and
administrative costs. Research and development costs declined approximately
$481,000 or 23% primarily due to the completion of certain clinical trial
efforts. General and administrative expenses declined approximately $730,000 or
22% as a result of restructuring and downsizing the Company's overhead to
support the needs of the Company and reduced research and development activity.
This restructuring in the fall of 1993 produced lower wages and salaries,
telephone expense, travel and other expenses in 1994. In addition, in 1993 the
Company incurred debt conversion expenses of $1,214,500 as a result of the
conversion of certain debt to equity.

Liquidity and Capital Resources

As of December 31, 1996 the Company had $5,279,429 in cash and cash
equivalents. This cash plus anticipated interest income, licensing fees, and
revenues from product sales in Canada and Belgium in 1997 should be sufficient
to cover the Company's cash needs in 1997. However, because of the Company's
long-term requirements, it may seek to access public equity market whenever
conditions are favorable, even if it does 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. The Company may also need
additional funding earlier than anticipated, and the Company's cash requirements
in general may vary materially from those now planned, for reasons including,
but not limited to, changes in the Company's 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 the Company's clinical trials as to which cost recovery from
participants has been approved.

At December 31, 1996, the Company had accounts payable and accrued current
liabilities of approximately $1,146,390.

Net cash used by the Company for operating activities amounted to
approximately $1,952,145 in 1994, $1,939,219 in 1995 and $6,097,906 in 1996.

In March, 1997, the Company used the services of an investment banking firm
to privately place $5 million of Series E Preferred. The proceeds from this
placement were used to retire the $5 million balance of Series D Convertible
Stock issued in July of 1996.

The Company has incurred and will continue to incur substantial research
and development costs and manufacturing costs. In addition, if the Company
receives regulatory clearance for the commercial sale of its products, the
Company will incur substantial expenditures to develop its manufacturing, sales,
marketing and distribution capabilities to the extent such functions are not
supplied by third parties. The Company will require substantial additional funds
for these purposes through additional equity and/or debt financings,
collaborative arrangements with corporate partners or from other sources. No
assurances can be given that such additional funds will be available for the
Company to finance its development on acceptable terms, if at all. If adequate
funds are not available from additional sources of financing, the Company's
business will be materially adversely affected and the Company may not be able
to continue operations. "See Business -- Company Strategy" and "Risk Factors."

The Company's future capital requirements will depend on many factors,
including scientific progress in its research, drug discovery and development
programs, the magnitude of these programs, the length and expense of
pre-clinical and clinical trials, the time and costs involved in seeking
regulatory approvals, the costs involved in filing, prosecuting and enforcing
patent claims, competing technological and market developments, changes in the
existing collaborative research relationships, the ability of the Company to
establish product development arrangements, the cost of manufacturing scale-up
and effective commercialization activities and arrangements. The failure by the
Company to obtain regulatory approval for any product will preclude its
commercialization. There can be no assurance that necessary regulatory approvals
will be obtained. See "Risk Factors" and "Business -- Government Regulation."

Pursuant to the terms of the SAB Agreement, the Company has received an
aggregate of $3,000,000 through December 31, 1996.

New Accounting Pronouncements

The Company adopted the provisions of FASB No. 121, "Accounting for the
Impairment of Long-Term Assets and for Long-Lived Assets to Be Disposed Of," on
January 1, 1996. This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future undiscounted net cash
flows expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying

amount or fair value less costs to sell. Adoption of this Statement did not have
a material impact on the Company's financial position, results of operations, or
liquidity.

On January 1, 1996, the Company also adopted FASB No. 123, "Accounting for
Stock- Based Compensation," which permits entities to recognize as expense over
the vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, FASB No. 123 also allows entities to continue to apply the
provisions of APB No. 25 and provide pro forma net income and pro forma earnings
per share disclosures for employee stock options grants made in 1995 and future
years as if the fair-value-based method defined in FASB No. 123 had been
applied. The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure provisions of FASB No. 123.

BUSINESS
General

Hemispherx BioPharma, Inc. ("HEMX" or the "Company") is a biopharmaceutical
company using nucleic acid technologies to develop therapeutic products for the
treatment of viral diseases and certain cancers. Nucleic acid compounds
represent a new class of pharmaceutical products that are designed to act at the
molecular level for the treatment of human disease. The Company's drug
technology utilizes specifically-configured ribonucleic acid ("RNA"). One of the
Company's double stranded RNA drug products, trademarked Ampligen(R), a
parenteral drug product, is in advanced human clinical development for various
therapeutic indications. Based on the results of pre-clinical studies and
clinical trials, the Company believes that Ampligen may have broad-spectrum
anti-viral and anti-cancer activities. Over 300 patients have received Ampligen
in clinical trials authorized by the U.S. Food and Drug Administration ("FDA")
at over twenty clinical trial sites across the United States, representing the
administration of more than 40,000 doses of this drug. Sales on a pre-approval,
cost recovery basis have been initiated in Belgium and are expected to start in
Canada during the second quarter of 1997. HEMX is presently exploring additional
distributor relationships for Europe and the United States to set the stage for
wider market penetration. SAB/Bioclones, the Company's partner in certain
countries, is initiating trials of Ampligen in South Africa and Australia, and
is exploring clinical sites in the United Kingdom.

Ampligen is being developed clinically for use in treating three anti-viral
indications: chronic hepatitis B virus ("HBV") infection (Phase I/II), human
immunodeficiency virus ("HIV") associated disorders (Phase II), and myalgic
encephalomyelitis, also known as chronic fatigue syndrome ("ME/CFS") (Phase
II/III). The Company's business strategy is designed around seeking the required
regulatory approvals which will allow the progressive introduction of Ampligen
for HIV and ME/CFS followed by HBV in the U.S., Canada, Europe and Japan.
Ampligen has received Orphan Drug designation from the FDA for four indications
(AIDS, renal cell carcinoma, chronic fatigue syndrome and invasive malignant
melanoma). The Company is also developing a second generation RNA drug
technology, termed Oragen compounds, which the Company believes offers the
potential for broad spectrum antiviral activity by oral administration.

The World Health Organization ("WHO") estimates that there are
approximately 300 million chronic carriers of HBV worldwide. More than 40% of
the persistently infected persons who survive to adulthood will die from
cirrhosis, liver cancer, or some other consequence of their infection. In the
U.S. alone, there are an estimated 1.25 million carriers. HBV is one of several
viruses that cause human hepatitis, or inflammation of the liver. The Company
conducted a Phase I/II clinical trial of Ampligen in the U.S. for the treatment
of chronic HBV infection at Stanford University and the University of
Pennsylvania. A significant reduction in viral components and improvement in
liver function was noted during the course of the Phase I/II clinical trial and
the drug has been generally well tolerated. At present, interferon-alpha is the
only approved product for the treatment of this disease; however, 60% to 75% of
patients with chronic HBV ultimately fail to respond to interferon-alpha. The
global sales of interferon are presently estimated at more than $1 billion,
largely for its use in liver infections.

The Centers for Disease Control ("CDC") has estimated that approximately
one million people in the U.S. are infected with HIV, excluding patients who
have progressed to fully symptomatic AIDS. The WHO has estimated that 30 to 40
million people will be infected with HIV worldwide by the year 2000. The Company
is currently conducting a Phase II clinical trial of Ampligen in the U.S. for
the treatment of HIV infection. The drug is designed to enhance the patient's
own immune system, thereby fighting the invasive viral agent more effectively
and resulting in more durable long term benefits.

ME/CFS is a condition recently recognized by the CDC and characterized by
unexplained fatigue or chronic illness for six months or longer for which no
cause has been identified after a thorough medical work-up. Although the CDC is
presently conducting studies to more exactly determine the rate of incidence of
ME/CFS, the CDC's latest estimate of the prevalence rate of this disease in the
U.S. is in excess of 500,000 cases. The Company has entered into an agreement
with a Canadian pharmaceutical firm pursuant to which the Canadian company will
provide various services in connection with the distribution of Ampligen on a
cost recovery basis as authorized under the Canadian emergency drug release
program. Presently the Company is receiving revenues from sales of Ampligen to
patients in an open label clinical trial being conducted in Belgium. The Company
is currently discussing open-label and placebo controlled trials with the FDA.
The Company is unaware of any other new drugs which are under development for
treatment of ME/CFS. Today, ME/CFS accounts for a significant portion of people
entering chronic disability status in the U.S. Thus, this presently untreatable
illness constitutes a significant impact on the overall cost of health care.
Accordingly, the estimate U.S. market for an effective treatment of ME/CFS is in
excess of $1 billion annually.

The Company also has clinical experience with Ampligen in patients with
certain cancers, including renal cell carcinoma (kidney cancer) and metastatic
malignant melanoma. Based on estimates prepared by the American Cancer Society,
the Company estimates that approximately 25,000 new cases of renal cell
carcinoma were diagnosed in the U.S. in 1996. Based on estimates prepared by the
American Cancer Society, the Company believes that approximately 34,000 new
cases of malignant melanoma were diagnosed in the U.S. in 1996. Data from the
American Cancer Society and the World Health Organization indicate that both the
incidence and mortality from malignant melanoma are rising steadily among white
populations throughout the world. In the past decade, the incidence of melanoma
has increased faster than that of any other cancer except lung cancer in women.

The Company was incorporated in Maryland in August 1966 under the name HEM
Research, Inc. and originally served as a supplier of research support products.
The Company was redirected in the early eighties to the development of nucleic
acid pharmaceutical technology and the commercialization of RNA drugs. HEM was
reincorporated in Delaware and changed its name to HEM Pharmaceuticals Corp. in
January 1991. In June, 1995, the Company became Hemispherx BioPharma, Inc. The
Company's principal executive offices are located at One Penn Center, 1617 JFK
Boulevard, Philadelphia, Pennsylvania 19103. The Company's telephone number is
(215) 988-0080, and its WEB site is HTTP// WWW.HEMISPHERX.COM.

The Products

Nucleic Acid Pharmaceuticals

The Company believes that nucleic acid compounds represent a potential new
class of pharmaceutical products that are designed to act at the molecular level
for the treatment of human disease. There are two forms of nucleic acid:
deoxyribonucleic acid ("DNA") and ribonucleic acid ("RNA"). DNA is a group of
naturally occurring molecules found in chromosomes, the cell's genetic
machinery. RNA is a group of naturally occurring informational molecules which
orchestrate a cell's behavior and which regulate the action of groups of cells,
including the cells which comprise the body's immune system. RNA directs the
production of proteins and regulates certain cell activities including the
activation of otherwise dormant cellular defenses against viruses and tumors. To
date, the Company has focused its efforts on developing two classes of RNA
pharmaceuticals, Ampligen, a high molecular weight double-stranded intravenous
drug, and Oragen, low molecular weight single-stranded drugs intended for oral
administration.

Although there are many competitive approaches to anti-viral and
anti-cancer therapies, the Company has taken an approach which it believes
appears to hold a great deal of promise. By activating the human body's immune
system through naturally occurring immune pathways, the Company's lead drug
compound Ampligen is designed to avoid many of the pitfalls of other anti-viral
drugs. Moreover, the Company believes that the broad-spectrum action of Ampligen
greatly increases the probability of success. HEM has chosen markets which are
not only sizeable and growing, but in disease areas for which there are
presently no known cures.

The Company's business strategy is designed around seeking the required
regulatory approvals which will allow the progressive introduction of Ampligen
for HIV and ME/CFS followed by HBV in the U.S., Canada, Europe and Japan. There
can be no assurance of regulatory approvals for any of such disorders. Ampligen,
however, has received Orphan Drug designation (see "Business - Government
Regulations") from the FDA for four indications (AIDS, chronic fatigue syndrome,
renal cell carcinoma and malignant melanoma). The Company is also developing a
second generation RNA drug technology, termed Oragen compounds, which the
Company believes offers the potential for broad spectrum antiviral activity by
oral administration. In addition the Company has commenced development of
certain clinical laboratory diagnostic products known as Diagen products. In
December, 1996, the Company announced receipt of Diagen Patents in ten (10)
European countries.

Ampligen

Ampligen is a high molecular weight RNA drug which is administered
intravenously. Based on the results of clinical trials to date, the Company
believes that Ampligen may have the potential to address significant medical
needs where current treatment methods are inadequate or non-existent.

The preliminary results of the Company's animal and human tests indicate
that Ampligen may have both broad-spectrum anti-viral and anti-cancer
activities. To date, Ampligen has been given to over 300 patients in the
clinical trials authorized by the U.S. Food and Drug Administration at over 20
clinical trial sites in the United States under effective Investigational New
Drug (IND) applications. In addition, clinical trials are currently ongoing in
Belgium and Houston, Texas. The following table summarizes the primary
indications and the current clinical trial regulatory status of Ampligen in the
U.S.
FDA-AUTHORIZED
INDICATION THERAPEUTIC TARGETS CLINICAL TRIALS*
- ---------- ------------------- ----------------
Antiviral Chronic HBV (hepatitis B virus) Phase I/II(1)
HIV Phase II(2)
ME/CFS (chronic fatigue
syndrome) Phase II/III(3)

Anti-Cancer Renal Cell Carcinoma Phase II/III(4)
Melanoma (skin cancer) Phase II(5)

* The foregoing chart is qualified in its entirety by reference to more
detailed information included elsewhere in this document. See
"Business--Government Regulation" for a description of the FDA regulatory
approval process.

(1) A Phase I/II study was authorized by the FDA. This study has been partially
enrolled with patients, and is currently on hold pending ongoing
discussions with a potential corporate partner.

(2) A FDA-authorized Phase I and two Phase II clinical trials of Ampligen for
HIV infection have been completed; one Phase II trial studied Ampligen as
monotherapy and the second used Ampligen in combination with AZT. A Phase
II study utilizing Ampligen in a population of largely asymptomatic HIV
carriers was recently initiated in Houston, Texas.

(3) The Company has completed a Phase I/II study and a second Phase II clinical
trial of Ampligen in ME/CFS under FDA authorizations. Recently the Company
presented an open label expanded access Phase II study to the FDA for
review and approval as well as a new Phase II/III study in ME/CFS. The
Company is currently working with the FDA with respect to the design of
these studies. In addition, a Phase II study is ongoing in Belgium.

(4) A FDA-authorized Phase I/II study of Ampligen in cancer, including
patients with renal cell carcinoma, has been completed. The Company has
received authorization from the FDA to initiate a Phase II/III study of
Ampligen in patients with metastatic renal cell carcinoma. At present, the
Company does not anticipate devoting significant Company resources to the
funding of this study, and, accordingly, a date for initiating this study
has not been determined.

(5) Patients with metastatic melanoma have been treated with Ampligen as
monotherapy under a FDA-authorized Phase I/II open-label study of Ampligen
in cancer. The FDA has authorized the Company to conduct a Phase II trial
of Ampligen in melanoma. The Company is seeking a corporate partner to
assist in conducting this trial.

The Company believes that Ampligen has been generally well tolerated in
more than 15,000 patient treatment weeks with a low incidence of clinical
toxicity, particularly given the life threatening diseases being treated.
Clinical experience with Ampligen now totals 311 patients, of whom 171 patients
have received Ampligen for six months or more. Of these patients, 117 have
received Ampligen for one year or more; 63 patients have received Ampligen for
two years or more; and 22 patients have received Ampligen for periods in excess
of three years. A mild flushing reaction has been observed in approximately 15%
of patients treated in the Company's various studies. This reaction is
occasionally accompanied by erythema, a tightness of the chest, tachycardia,
anxiety, shortness of breath, subjective reports of "feeling hot," sweating and
nausea. The reaction is usually infusion-rate related and may generally be
controlled by slowing the infusion rate. Other adverse side effects include
liver enzyme level elevations, diarrhea, itching, urticaria (swelling of the
skin), bronchospasm, transient hypotension, photophobia, rash, bradycardia,
transient visual disturbances, arrhythmias, decreases in platelets and white
blood cells 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.

Oragen Drugs

Oragen drugs are low molecular weight RNA compounds which the Company
believes, by virtue of their small size and molecular stability, have the
potential for becoming the first oral, broad-spectrum nucleic acid treatments
for various viral diseases such as HIV infection and chronic HBV infection. The
technology for these nucleicacid products is licensed to the Company for
commercial use on an exclusive basis from Temple University, subject to certain
limited exceptions. To date, a number of compounds have been developed.

Initial studies indicated that these drugs may withstand enzymatic
destruction, an important factor in order for compounds to enter the blood
stream in an intact form. Results from in vitro studies conducted in
collaboration with the National Institute of Allergy and Infectious Diseases
indicate that Oragen products may inhibit HBV infection, and in vitro studies
conducted in collaboration with the National Cancer Institute and the University
of Mainz, Germany, indicate that Oragen products may inhibit HIV infections. One
compound, Oragen 0004, has shown inhibition of HBV multiplication in vitro and
another, Oragen 0044, has demonstrated activity against HIV in vitro studies
performed by Temple University. These two Oragen compounds have been produced in
quantities which the Company believes are sufficient to perform animal
toxicology testing. Experiments with mice at the University of Toronto indicate
that Oragen drugs may protect against mouse hepatitis virus. There has been no
human clinical testing of

Oragen products to date. There can be no assurance that human clinical testing,
if initiated, will yield results consistent with those achieved in vitro or
animal testing.

The Company believes that Oragen drugs may exert anti-viral activity
through two intracellular mechanisms. First, they may activate the intracellular
"latent" RNase-L to degrade viral RNA. Second, they inhibit the HIV replication
enzyme, reverse transcriptase, by binding to a different site on the enzyme from
that bound by conventional anti-HIV compounds such as AZT. The Company's belief
in the potential effects of these compounds is based, in part, on the
collaborative in vitro experiments performed with the National Cancer Institute
referred to above. Certain in vitro experiments performed at Vanderbilt
University indicate that certain human immune cells can be protected from cell
death caused by HIV infection by treatment with Oragen drugs. Under sponsorship
of the National Institutes for Allergy and Infectious Diseases, in vitro studies
at Georgetown University also demonstrated that Oragen drugs may inhibit the
replication of human HBV. In each of the in vitro studies, no substantial cell
toxicity was observed at concentrations which inhibit the applicable virus.

The Company believes Oragen drugs work at a different stage of the
anti-viral and anti-cancer response chain than Ampligen and therefore may be
effective in disorders where the activity of Ampligen is limited. The Company
also believes that Oragen drugs can potentially be engineered to trigger
specific responses in immune cells based on in vitro tests. Significant
additional testing will be required in order to determine whether the Company's
beliefs regarding Oragen drugs can be transformed into viable human therapeutic
products.

The following table shows the Company's past and present pre-clinical
studies of Oragen compounds. Except as otherwise noted, the studies have been
conducted under collaborative arrangements pursuant to which the Company
supplies quantities of the drug to the third party institution for testing, and
that institution assigns all of the commercial rights to the studies to the
Company and funds the research costs.

Target Programs Potential Market Applications Collaborators

Human Immunodeficiency Treatment of HIV National Cancer Institute
Temple University(1)(2)
Vanderbilt University(1)
University of Mainz,
Germany(1)
Hepatitis B Virus (HBV) Treatment of HBV National Institute of
Allergy
and Infectious Diseases
Georgetown University
Mouse Hepatitis Virus Treatment of Hepatitis C University of Toronto(1)
Herpes Simplex Virus Treatment of Herpes Infectious Medical College of
Type 1 and 2 Pennsylvania(1)
Juntendo University

Tokyo, Japan

Poliovirus/Respiratory Childhood Viral Diseases Howard University
Syncytial virus Solid tumors Treatment of various types Temple University(1)(2)
of cancer and Allegheny/
Hahnemann University

(1) Funding provided by the Company. In all other cases, funding provided by
the institution.
(2) The Company was notified in July 1994 that Temple believed the Company was
in breach of its licensing agreement and therefore the agreement was being
terminated. The Company and Temple University settled this dispute in
December 1996 and the licensing agreement was re-instated.

Diagnostic Diagen Products

Patents and Proprietary Rights

The Company has filed more than 380 patent applications involving
chemistry, processes, biological insights and specific target-oriented
compositions of matter worldwide covering its RNA technology, including 30
filings with the U.S. Patent Trademark Office and more than 350 corresponding
foreign patent applications in other countries, such as members of the European
Patent Convention, Japan, South Korea, Australia. There can be no assurance that
the Company's patent applications will result in the issuance of patents. The
Company's policy is to file patent applications on a worldwide basis to protect
technology, inventions, and improvements that are considered important to the
development of its business. The Company has, as a matter of policy, sought
patent protection in each of the three major geographic markets: the United
States, Europe, and the Pacific Rim. The Company also relies upon trade secrets,
know-how, continuing technological innovation and licensing opportunities to
develop and maintain its competitive position. Of the patent applications filed
worldwide, over 230 have been issued (including 13 in the United States).

Within the 13 patents issued or accepted for issuance in the United States,
seven include claims which afford patent protection for RNA treatment in HIV
disease; one affords patent

protection for RNA treatment of Myalgic Encephalomyelitis/Chronic Fatigue
Syndrome, two affords patent protection for RNA treatment/diagnosis of hepatitis
infection, and three affords patent protection in other areas.

In addition, the Company has filed patent applications for diagnostic
applications resulting from insights and discoveries made by its employees and
consultants relating to RNA nucleic acid structure and 2-5A biochemistry, which
the Company believes may be applicable to the development and commercialization
of various drugs that may operate by augmentation of cellular antiviral
defenses.

The license agreement with Temple University covering the Oragen Compounds
presently includes 8 issued U.S. patents and 29 issued foreign patents as well
as 24 patent applications in process.

The patent positions of biopharmaceutical and biotechnology firms,
including the Company, are generally uncertain and involve complex legal and
factual questions. Consequently, even though the Company is currently
prosecuting many patent applications with the U.S. and foreign patent offices,
the Company does not know how many of its applications will result in the
issuance of any patents or, of patents which are issued, whether they will
provide significant proprietary protection or will be circumvented or
invalidated. Since patent applications in the United States are maintained in
secrecy until patents issue, and since publication of discoveries in the
scientific or patent literature tend to lag behind actual discoveries by several
months, The Company cannot be certain that it was the first creator of all
inventions covered by pending patent applications or that it was the first to
file patent applications for all such inventions. Competitors or potential
competitors may have filed applications for, and may obtain, additional patents
and proprietary rights relating to, compounds or processes competitive with
those of the Company. Accordingly, there can be no assurance that the Company's
patent applications will result in patents being issued or that if issued the
patents will afford protection against competitors with similar technology; nor
can there be any assurance that others will not obtain patents that the Company
would need to license or circumvent. The Company is aware of a claim by
Vanderbilt University regarding the use of RNA combined with azidothymidine
(AZT) in the treatment of a certain human disease (HIV infection). The Company
does not believe this claim to have merit. The Company has used RNA with AZT in
some of its clinical programs.

There can be no assurance that the Company's patents or those of its
competitors, if issued, would be upheld by a court of competent jurisdiction.
The Company also relies upon unpatented trade secrets, and no assurance can be
given that others will not independently develop substantially equivalent
proprietary information and techniques or otherwise gain access to the Company's
trade secrets or disclose such technology, or that the Company can meaningfully
protect its right to unpatented trade secrets.

The Company requires it employees, consultants, members of the Scientific
Advisory Board, outside scientific collaborators and sponsored researchers and
other advisors to execute confidentiality agreements upon the commencement of
employment or consulting relationships with the Company. These agreements
provide that all confidential information developed or made known to the
individual during the course of the individual's relationship with the Company
be kept confidential and not disclosed to third parties except in specific
circumstances. In the case of employees, the agreements provide that all
inventions conceived by the individual shall be the exclusive property of the
Company. There can be no assurance, however, that these agreements will provide
meaningful protection or adequate remedies for the Company's trade secrets in
the event of unauthorized use or disclosure of such information.

Manufacturing

Drug intermediates used in the production of Ampligen are currently
manufactured from raw materials by Pharmacia Biotech, a division of
Pharmacia-Upjohn, a major multinational pharmaceutical company. The
intermediates are analyzed by the Company for compliance with specifications and
then transferred to another contractor where the Ampligen drug intermediates are
mixed under defined conditions to prepare a freeze-dried form of Ampligen. HEM
provides a representative to supervise and monitor procedures and is the owner
of all proprietary information used to generate its Ampligen intermediates. The
Company also plans to phase in the manufacture of raw materials for Ampligen by
its corporate partner Bioclones Proprietary Limited ("Bioclones") a
biopharmaceutical company associated with The South African Breweries Ltd.
("SAB" and together with Bioclones, "SAB/Bioclones"), from a facility in South
Africa. Critical contract relationships are covered by long term non-compete
provisions as well as customary non-public disclosure terms. In each case the
final product is tested by the Company to determine drug product compliance with
a set of technical specifications. Upon meeting these specifications, the
product is transferred to HEM and dosage units are then prepared at HEM's
Rockville, Maryland, manufacturing facility. Pharmacia has a minor equity
interest in the Company. The Company's plan is to source raw materials for its
lead products on a worldwide basis. At present, Oragen compounds used for the
Company's pre-clinical testing are produced at the University of Konstanz,
Germany.

Marketing

The Company intends to design its marketing strategy to reflect the
differing health care systems around the world, and the different marketing and
distribution systems that are used to supply pharmaceutical products to those
systems. In the United States, the Company expects that, subject to receipt of
regulatory approval, Ampligen will be used in three medical arenas: physicians'
offices or clinics, the hospital and the home setting. The Company currently
plans to use a service provider in the home infusion (non-hospital) segment of
the U.S. market to execute direct marketing activities, conduct physical
distribution of product and handle billings and collections. Accordingly, the
Company is developing marketing plans to facilitate the product distribution and
medical support for indications, if and when they are approved, in each

arena. The Company believes that this approach will facilitate the generation of
revenues without incurring the substantial costs associated with a sales force.
Furthermore, management believes that the approach will enable the Company to
retain many options for future marketing strategies.

In February, 1996, the Company entered into an agreement with Rivex Pharma
Inc. (a Canadian-based pharmaceutical company "Rivex"), pursuant to which Rivex
will provide various services in connection with the marketing and exclusive
distribution of Ampligen in Canada on an emergency drug release basis. Under the
terms of this agreement, the Company will supply and Rivex will purchase as much
Ampligen as necessary to satisfy Rivex's customers at a mutually agreed upon
cost. In return, Rivex will retain the exclusive right to market and distribute
Ampligen in Canada. The Company expects Rivex to have patients in this program
beginning in the second quarter of 1997.

In Europe, the Company plans to adopt a country-by-country and, in certain
cases, an indication-by-indication marketing strategy due to the heterogeneity
of governmental regulations and alternative distribution systems in these areas.
The Company also plans to adopt an indication-by-indication strategy in Japan.
Subject to receipt of regulatory approval, the Company plans to seek strategic
partnering arrangements with pharmaceutical companies to facilitate product
introductions in these areas. No assurances can be given that any such
arrangement will be entered into on terms acceptable to the Company. The
relative prevalence of people suffering from target indications for Ampligen
varies significantly by geographic region, and the Company intends to adjust its
clinical and marketing planning to reflect the special needs of each area. The
Company does not currently anticipate devoting significant resources to the
establishment of an in-house sales force in the near term. In countries in South
America, the United Kingdom, Ireland, Africa, Australia, Tasmania, New Zealand,
and certain other countries and territories, the Company contemplates marketing
its products through its relationship with SAB/Bioclones pursuant to the SAB
Agreement.

The Company is also developing a set of clinical laboratory diagnostic
products, trademarked Diagen products, that are designed to assist physicians in
identifying patients for the Company's RNA drug therapies and to assist in their
clinical management thereafter. The Company believes that the availability of
such tests may lead to improved patient care and increased market penetration by
the Company's therapeutic products, if and when such products are available for
commercial sale, although the Company does not anticipate deriving significant
revenues directly from the commercial sale of Diagen products. These tests are
at an early stage of development and the Company has received limited royalties
in 1994 from its licensed reference laboratory in Texas. The Diagen products
would have to go through a regulatory process for diagnostic product clearance
applicable to medical devices prior to commercial sale. In some cases, use in
clinical trials may require FDA clearances. See "Business" Government
Regulation" below. The Company's objective is to license these potential
products to a diagnostic company. The Company has granted rights to certain of
the patents related to the Diagen products to one of its subsidiaries. See
"Business--Subsidiary Companies."

Research and Development/Collaborative Agreements

Based on its current operating plan, the Company anticipates that the net
cash and cash equivalents on hand of $5.3 million, together with the anticipated
receipt of limited revenues from the sales of Ampligen, will be sufficient to
meet the Company's capital requirements through 1997. It is not expected that
this will be sufficient to enable the Company to complete the necessary clinical
trials or regulatory approval process for Ampligen for any indication or, if any
such approval were obtained, to begin manufacturing or marketing Ampligen on a
commercial basis. Accordingly, the Company will need to raise substantial
additional funds through additional equity or debt financing, collaborative
arrangements with corporate partners, off balance sheet financing or from other
sources in order to complete the necessary clinical trials and the regulatory
approval processes and begin commercializing its products. If adequate funds are
not available from operations, as is anticipated, and if the Company is not able
to secure additional sources of financing on acceptable terms, the Company's
business will be materially adversely affected.

As part of its research and development activities, the Company has entered
into various collaborative and sponsored research agreements with researchers,
universities and government agencies. The Company believes that these agreements
provide the Company with access to physicians and scientists with expertise in
the fields of clinical medicine, virology, molecular biology, biochemistry,
immunology and cellular biology.

The Company has entered into the following collaborative agreements
regarding its products:

In October, 1994, the Company entered into an agreement with Bioclones/SAB
(the "SAB Agreement") with respect to co-development of various RNA drugs,
including Ampligen, for which the Company has previously obtained international
patent protection. The SAB Agreement provides that the Company will provide
SAB/Bioclones with an exclusive manufacturing and marketing license for certain
Southern hemisphere countries (including all countries in South America) as well
as the United Kingdom, Ireland, Africa, Australia, Tasmania, New Zealand, and
certain other countries and territories. In exchange for these marketing and
distribution rights, the SAB Agreement provides for: (a) a $3 million cash
payment to the Company; (b) the formation and issuance to the Company of 24.9 %
of the capital stock of a company to develop and operate a new manufacturing
facility for RNA drugs to be constructed by SAB/Bioclones, and (c) royalties on
all sales of the Company's products in the licensed territories. In addition,
SAB/Bioclones agreed to use its best efforts to pursue the marketing approval of
Ampligen for HBV in Australia, South Africa, Brazil, and the United Kingdom, as
well as to perform (at its

own expense) a phase III study of Ampligen in chronic HBV infection in South
Africa, which clinical study is to be performed pursuant to U.S. FDA good
clinical practice and good laboratory practice guidelines and standards.
SAB/Bioclones will be granted a right of first refusal to manufacture and supply
to the Company the drug product required for not less than one-third of its
world-wide sales of Ampligen (after deducting SAB/Bioclones-related sales) and
will also be granted a right of first refusal for the manufacture and marketing
of any of the Company's other RNA drugs in the licensed territories. According
to its most recent annual report, SAB is a multinational holding company
investing in and taking management responsibility for a portfolio of business in
beer and beverages retailing, hotels and the manufacture of certain mass market
consumer goods, together with strategic investments in businesses which support
its mainstream interests. By September 30, 1995, the Company had received
$3,000,000 in proceeds from SAB, in accordance with the terms of the SAB
Agreement. SAB notified the Company that it had initiated manufacturing of test
amounts of the licensed product as a significant step towards the new
manufacturing facility and design thereof. SAB is traded on the NYSE as American
Depository Receipts (ADRs).

In February, 1996, the Company entered into an agreement with Rivex Pharma,
Inc., a Canadian-based pharmaceutical company which grants Rivex an exclusive
marketing and distribution rights for Ampligen in Canada. In exchange, Rivex is
committed to purchase Ampligen from the Company. Rivex is also committed to
perform regulatory compliance functions necessary for marketing approvals in
Canada.

The Company has a clinical pharmacology unit at Hahnemann University
Hospital (now part of the Allegheny Health Education and Research Foundation and
known as Allegheny University Hospitals - Hahnemann Division) in Philadelphia.
This clinical pharmacology unit has performed studies on Ampligen metabolism in
the body, and initiates clinical trials at the Phase I/II level. The Company
also plans to use this unit for its initial clinical studies of Oragen drugs,
subject to receipt of necessary clinical approvals.

The Company does not own its own research and development or drug discovery
laboratories. Instead, employees of the Company's collaborators conduct those
functions at the laboratories of their employers. The Company has a
long-standing relationship with the Hahneman Division of Allegheny University
Hospitals (Allegheny/Hahnemann), to provide laboratory support in conjunction
with licensing arrangements and financial support from the Company. No
assurances can be given that such relationship will continue on terms
advantageous to the Company or at all.

In June 1989, the Company entered into an assignment and research support
agreement with Allegheny/Hahnemann and Dr. David Strayer, Dr. Isadore Brodsky
and Dr. David Gillespie who is now deceased (the "Scientist Group"). Dr. Strayer
is the Company's Medical Director. Prior to the execution of the
Allegheny/Hahnemann Agreement, Allegheny/Hahnemann and the Scientist Group had
participated in the clinical testing of Ampligen. In an effort to obtain the
benefits of the Scientist Group's future contributions to the development of
Ampligen and obtain exclusive rights to certain proprietary and regulatory
rights relating to Ampligen, the Company,

Allegheny/Hahnemann and the Scientist Group entered into the Allegheny/Hahnemann
Agreement, which provides (i) for the assignment by Allegheny/Hahnemann and the
Scientist Group to the Company of all of their respective rights in certain
proprietary information which was then owned or subsequently developed and the
exclusive and perpetual right to apply for any patents, trademarks or copyrights
relating to the proprietary information; (ii) for the payment by the Company to
Allegheny/Hahnemann (and the sharing by Allegheny/Hahnemann and the Scientist
Group on such terms as they determine) of a royalty of 2% of net sales proceeds
(up to a maximum royalty of $6 million per year) on all Ampligen sold by the
Company or any entity licensed by the Company after the date of the grant by the
FDA of the first NDA for Ampligen through January 1, 2005; (iii) for the payment
by the Company to Allegheny/Hahnemann of $ 162,000 for certain scientific
consultative support services to be performed by the Scientist Group during the
first year of the Allegheny/Hahnemann Agreement; (iv) for the payment by the
Company to Allegheny/Hahnemann of certain incremental amounts for scientific
consultative support services to be rendered by the Scientist Group subsequent
to the first year of the Allegheny/Hahnemann Agreement; (v) that either party
may terminate the scientific consultative support services of the Scientist
Group (and the Company's obligations to pay for those services) on 90 days'
notice; and (vi) that all rights to discovery and inventions resulting from the
Allegheny/Hahnemann Agreement are to be the exclusive property of the Company.
The Company has not made any incremental payments to Allegheny/Hahnemann on
account of scientific consultative support services rendered by any member of
the Scientist Group pursuant to the Allegheny/Hahnemann Agreement for any period
subsequent to September 30,1992.

The Company has entered into an at-will arrangement with
Allegheny/Hahnemann University, and Dr. Strayer, among others, pursuant to which
the services of Dr. Strayer, among others, are made available to the Company in
return for monthly salary subsidization payments made by the Company to the
University. The aggregate amount of these monthly payments is presently $14,896.

In August 1988, the Company entered into a pharmaceutical use license
agreement with Temple University (the "Temple Agreement"). Under the terms of
the Temple Agreement, Temple granted the Company an exclusive world-wide license
for the term of the agreement for the commercial sale of Oragen products using
patents and related technology held by Temple, which license is exclusive except
to the extent Temple is required to grant a license to any governmental agency
or non-profit organization as a condition of funding for research and
development of the patents and technology licensed to the Company. The rights to
such patents and related technology had previously been assigned to Temple by
various parties, including Dr. Robert J. Suhadolnik, an employee of Temple. The
Temple Agreement provides (i) for the payment by the Company to Temple of 4% of
net sales of Oragen products the active ingredients of which consist entirely of
products, processes or uses claimed by Temple's patents and 2% of net sales of
Oragen products some, but not all, of the active ingredients of which consist of
products, processes or uses claimed by Temple's patents; (ii) that the Company
must seek all necessary approvals for the commercial sale of Oragen products;
(iii) that the Company must file an application for

marketing approval for at least one licensed product with the FDA or a foreign
counterpart on or before August 3, 1996; (iv) for the funding of specified
research payments by the Company; and (v) that the Company shall have an
exclusive option to negotiate for a period of six months the terms of an
exclusive license for the commercial sale of any future related technology with
respect to which Temple shall hold a patent. The Temple Agreement expires upon
the expiration of the last licensed patent, unless sooner. terminated by mutual
consent, upon the failure by the Company to pay any required royalties or upon
any material breach of the agreement. Dr. Suhadolnik, as well as his laboratory,
will derive income and financial support from any royalties paid by the Company.
The Company was notified by Temple in July 1994 that it believed the Company was
in breach of the Temple Agreement and that Temple believed that the Temple
Agreement was terminated. The Company filed a lawsuit seeking a declaratory
judgement that the Temple Agreement remains in full force and effect and seeking
monetary damages. Temple has filed a motion to dismiss this lawsuit and in
January 1995, Temple filed a separate litigation against the Company seeking
declaratory judgment that the Temple Agreement has been lawfully terminated,
together with an award of costs, including attorney fees. The Company and the
University entered a settlement agreement in December, 1996 which resolves all
issues and reinstates the licensing rights.

In May 1992, the Company entered into a letter agreement to provide
research payments to Dr. Werner E. Muller at the University of Mainz for various
exclusive 20-year licensing arrangements including certain technologies for
genetic manipulation of the 2-5A pathway. The Company believes that the research
billing conducted by Dr. Muller will provide general knowledge with respect to
the manipulation of the cellular mechanism by which Ampligen works.

In addition to the arrangements with Temple University and Hahnemann
University described above, the Company has two types of collaborative research
arrangements. First, the Company has entered into "sponsored research
arrangements" with various institutions which provide for the payment by the
Company of specified financial support to the institutions which conduct the
research . Second, the Company has entered into "collaborative arrangements"
pursuant to which the institution conducts studies of the Company's products at
the institution's expense and gives the Company exclusive commercial rights to
research results. The Company provides its drugs to these institutions free of
charge. Collaborative research arrangements provide that the proprietary
knowledge is the sole property of the Company but permit the collaborator, after
a specified time period, to publish the results of its research in scientific
medical journals. The Company has research agreements with the National
Institute for Allergy and Infectious Diseases on the use of Ampligen and Oragen
products in the treatment of HBV infection and various herpes and respiratory
viruses and Hahnemann University on the biochemical and molecular activities of
RNA. Other collaborators include the following entities or scientists therefrom:
the National Cancer Institute, Harvard University Medical School, Yale
University Medical School, Vanderbilt University, University of Pittsburgh,
Howard University, Cornell University, Georgetown University, Stanford
University, University of Pennsylvania, Medical College of Pennsylvania,
University of California at Davis and the Uniformed Services University for the
Health Sciences. International collaborations include scientists from Konstanz
University

(Germany), University of Mainz (Germany), University of Toronto (Canada) and
Juntendo University (Japan).

The Company intends to continue to engage in such collaborative and
sponsored research with selected institutions. There can be no assurance,
however, that the Company will be able to maintain its existing collaborative
arrangements or enter into new collaborative arrangements.

Competition

Competition in the development and marketing of therapeutic drugs for human
diseases is intensely competitive. Many different approaches are being developed
for management of the diseases targeted by the Company. In addition to drug
therapy, companies are promoting biological and hormonal therapies, prophylactic
and therapeutic vaccines and surgery. These approaches, however, may have
limited utility and some are often associated with toxicity, including
life-threatening side-effects.

Most FDA-approved anti-viral drugs appear to directly inhibit the viruses
by interfering with their replication (so-called reverse transcriptase or
protease inhibitors). Their mechanisms of action do not seem to stimulate the
production of immune cells to attack or scavenge the disease-causing agents.
Interferon therapy does act by an immune mechanism and has been approved by the
FDA for the treatment of chronic HBV; durable effects, however, are seen in only
a minority of treated subjects and the side-effects are substantial. Interferon
has thus far not been demonstrated to be efficacious in HIV, ME/CFS and the
primary tumors (other than melanoma) and indications targeted by the Company.
The newer anti-HIV drugs may reduce the level of HIV in the plasma by
approximately 99%; however, the dramatic effects are often transitory.

Below is a list of certain compounds which appear directly competitive with
the Company's products:

HIV Infection. The principal treatments for HIV are AZT, DDI, DDC, D4T and
3TC. A group of newer compounds, termed protease inhibitors, share the problems
of rapid viral mutation, multi-drug resistance, etc., but may cause a more
dramatic transient drop in amount of HIV present in the blood stream. No immune
based drugs have been approved to date, and there is a paucity of clinical
developmental research on vaccines due to the problem of rapid viral mutations.

HBV. Treatments include interferon-alpha, thymosin and 3TC. Only interferon
alpha has proven effective in rigorous clinical tests, and less than 20% of
patients have a durable response. Also, interferon's side effects are
substantial and may curtail patient use and physician acceptability,
particularly in the major Asian markets.

ME/CFS. The FDA has not approved any drugs specifically for this disorder.
Physicians typically prescribe analgesics psychotropic and anti-inflammatory
drugs to combat and palliate

the symptoms without addressing the underlying immunologic damage or the herpes
virus proliferation.

Renal Cell Carcinoma. Interleukin 2 may be an extremely toxic product often
requiring immediate access to a critical care unit if used according to
manufacturer's recommendations (Chiron/Cetus).

Malignant Melanoma. Interferon alpha was recently approved by the FDA;
however, the percentage of responses is small, and a significant percentage of
relapses are expected. Treatment costs with Interferon often exceed $10,000 per
year.

There are several publicly held companies that place emphasis on nucleic
acid technology. Each is outlined below from publicly available documents filed
with the SEC.

Gilead Sciences, Inc. (Foster City, California; GILD/Nasdaq). Gilead is
developing nucleotide technologies and is pursuing pre-clinical and clinical
development of a number of product candidates.

ISIS Pharmaceuticals, Inc. (Carlsbad, California; ISIP/Nasdaq). This
company, founded in 1989, has devoted substantially all of its resources to
research, drug discovery and development programs. In July, 1995, ISIS 2922 was
in Phase III clinical trials to treat CMV-induces retinitis in AIDS patients,
ISIS 2105 was in Phase II trials to treat genital warts, and Phase II trials
were planned for ISIS 2302 for treatment of a variety of inflammatory diseases.

The Company anticipates that it will face increased competition in the
future as new products enter the market and advanced technologies become
available. There can be no assurance that existing products or new products
developed by the Company's competitors will not be more effective than any that
may be developed by the Company. Competitive products may render the Company's
technology and products obsolete or noncompetitive prior to the Company's
recovering research, development or commercialization expenses incurred with
respect to any such products.

Most of the Company's existing or potential competitors have substantially
greater financial, technical and human resources than the Company. In addition,
many of these competitors have significantly greater experience than the Company
in undertaking research, preclinical studies and human clinical trials of new
pharmaceutical products, obtaining FDA and other regulatory approvals, and
manufacturing and marketing such products. Accordingly, the Company's
competitors may succeed in commercializing the products more rapidly or more
effectively than the Company.

The Company's competitive position also depends upon its ability to attract
and retain qualified personnel, obtain patent protection or otherwise develop
proprietary products or processes, and secure sufficient capital resources for
the often substantial period between technological conception and commercial
sales.

Subsidiary Companies

In September 1994, the Company incorporated three wholly-owned
subsidiaries--BioPro Corp. ("BioPro"), Core BioTech Corp. ("Core BioTech"), and
BioAegean Corp. ("BioAegean")--in the State of Delaware.

The purpose of BioPro is to commercialize tobacco-related products. BioPro
intends to develop methods to utilize RNA technology in conjunction with certain
tobacco and cigarette filter products to provide cleaner tobacco products. The
technology is based in part on recent unpublished experiments in laboratory
animals conducted at the University of California, Davis, which suggest that the
Company's RNA drugs may prevent certain aspects of lung fibrosis under certain
experimental conditions. In September, 1994, the Company granted an exclusive
worldwide license and/or sub-license to certain of its patents and assigned
certain other patents to BioPro (the "BioPro License ") for a term of three
years, which term will automatically be extended for a term of 15 years in the
event that BioPro provides evidence that it has commercialized one or more of
the patents. BioPro has agreed that it will not develop any product or
technology which may be deemed therapeutic and has granted a right of first
refusal to the Company with respect to any technology which it may develop or
acquire. BioPro has the right to grant sublicenses subject to the requirement
that its sublicensees agree to non-competition arrangements with the Company.
The Company has agreed that it will not develop any technology related to the
business of BioPro and has granted BioPro a right of first refusal with respect
to any technology it may develop with respect to the business of BioPro. The
Company is developing a business plan and will continue to seek corporate
partners in 1997.

The purpose of Core BioTech is to commercialize the Company's diagnostic
oriented patents which provide RNA technology to detect certain difficult to
diagnose viral diseases such as ME/CFS and other immuno-dysfunctional conditions
through strategically located central reference laboratories. In September,
1994, the Company granted an exclusive worldwide license and/or sub-license to
certain of its patents and assigned certain other patents to Core BioTech (the
"Core BioTech License") for a term of three years, which term will automatically
be extended for a term of 15 years in the event that Core BioTech provides
evidence that it has commercialized one or more of the patents. Core BioTech has
agreed that it will not develop any product or technology which may be deemed
therapeutic and has granted a right of first refusal to the Company with respect
to any technology which it may develop or acquire. Core BioTech has the right to
grant sublicenses subject to the requirement that its sublicensees agree to
non-competition arrangements with the Company. The Company has agreed that it
will not develop any technology related to the business of Core BioTech and has
granted Core BioTech a right of first refusal with respect to any technology it
may develop with respect to the business of Core BioTech.

In June 1995, the directors of BioAegean approved the private placement of
1,000,000 shares of common stock at $1.00 per share which is expected to occur
in 1997. In addition, the directors of BioAegean issued 10-year options to
purchase an aggregate of 1,200,000 shares of

common stock of BioAegean at an exercise price of $1.00 per share (the
"BioAegean Options") to its officers and directors. The BioAegean Options are
conditional upon the recipient's agreement to serve BioAegean as needed for at
least 24 months unless fully incapacitated. William A. Carter, M.D., Chairman,
President and Chief Executive Officer of the Company, serves as Chairman, Chief
Executive Officer and a Director of BioAegean and received 300,000 BioAegean
Options. R. Douglas Hulse, Chief Operating Officer of the Company, serves as
Chief Operating Officer of BioAegean and received 50,000 BioAegean Options.
Peter Rodino, III, a director and Secretary of the Company, serves as
Vice-Chairman, Secretary, Corporate Counsel and a director of BioAegean and
received 150,000 BioAegean Options. Robert Peterson serves as Chief Financial
Officer of both the Company and BioAegean and received 50,000 BioAegean Options.
Sharon Will, Vice President of Investor Relations and Corporate Communications
for the Company, serves as Vice President of Marketing for BioAegean and
received 150,000 BioAegean Options. Harris Freedman serves as Vice President for
Strategic Alliances for both the Company and BioAegean and received 150,000
BioAegean Options. Richard Piani, a director of the Company, serves as a
director and the Advisor for European Affairs of BioAegean and received 50,000
BioAegean Options. Gerald Kay serves as a director for both the Company and
BioAegean and received 50,000 BioAegean Options. BioAegean's remaining director,
Jerome Belson, a principal shareholder of the Company, received 50,000 BioAegean
Options. The Company is presently exploring strategic alliances with recognized
skin care companies which currently market certain products to diminish the
effects of photoaging and UV-light on the skin.

Government Regulation

Overview. Regulation by governmental authorities in the U.S. and foreign
countries is and will be a significant factor in the manufacture and marketing
of the Company's proposed products and in its ongoing research and product
development activities. All of the Company's proposed products and products of
its ongoing research and product development activities will require regulatory
clearances prior to commercialization. In particular, human new drug products
are subject to rigorous preclinical and clinical testing as a condition of
clearances by the FDA and by similar authorities in foreign countries. The
lengthy process of seeking these approvals, and the ongoing process of
compliance with applicable statutes and regulations, has required and will
continue to require the expenditure of substantial resources. Any failure by the
Company or its collaborators or licensees to obtain, or any delay in obtaining,
regulatory approvals could materially adversely affect the marketing of any
products developed by the Company and its ability to receive product or royalty
revenue.

The Company is also subject to various federal, state and local laws,
regulations and recommendations relating to such matters as safe working
conditions, laboratory and manufacturing practices, the experimental use of
animals and the use of and disposal of hazardous or potentially hazardous
substances, including radioactive compounds and infectious disease agents, used
in connection with the Company's research work. The Company believes that its
Rockville, Maryland manufacturing and quality assurance/control facility is in
substantial compliance with all material regulations applicable to these
activities.

U.S. Regulatory Process. Before a new drug product may be sold commercially
in the U.S. and other countries, clinical trials of the product must be
conducted and results submitted to the appropriate regulatory agencies as part
of the approval process. The Company's therapeutic and diagnostic products are
subject to regulation in the U.S. under the Food, Drug and Cosmetic Act (the
"FDC Act"). Ampligen and other RNA drugs will be reviewed as new drugs by the
FDA's Center for Drug Evaluation and Research ("CDER"). The process includes:

(1) Drug Products. The steps required before a non-biological drug product
may be marketed in the U.S. include (a) conducting appropriate pre-clinical
laboratory and animal tests, (b) submitting to the FDA an application for an
Investigational New Drug ("IND"), which must become effective before human
clinical trials may commence, (c) conducting well-controlled human clinical
trials which establish the safety and efficacy of the drug product, (d) filing a
New Drug Application ("NDA") with the FDA, and (e) obtaining FDA approval of the
NDA prior to any commercial sale or shipment of the drug. In addition to
obtaining FDA approval for each indication to be treated with each product, each
domestic drug manufacturing establishment must register with the FDA, list its
drug products with the FDA, comply with current Good Manufacturing Practices
("GMP") requirements and be subject to inspections by the FDA. Foreign
manufacturing establishments also must comply with GMP requirements, and are
subject to periodic inspection by the FDA or by local authorities under
agreement with the FDA.

Pre-clinical tests include formulation development, laboratory evaluation
of product chemistry and animal studies to assess the potential safety and
efficacy of the product formulation. Drug products must be manufactured in
accordance with GMP requirements and pre-clinical tests must be conducted in
accordance with the FDA regulations regarding Good Laboratory Practices. The
results of the pre-clinical tests are submitted to the FDA as part of the IND
and are reviewed by the FDA prior to authorizing the sponsor to conduct clinical
trials in human subjects. Unless the FDA objects to an IND, the IND will become
effective 30 days following its receipt by the FDA. There is no certainty that
submission of an IND will result in FDA authorization to commence clinical
trials or that authorization of one phase of a clinical trial will result in
authorization of other phases or that clinical trials will result in FDA
approval. Clinical trials may be placed on hold by the FDA at any time for a
variety of reasons, particularly if safety or design concerns exist.

(2) Clinical Testing Requirements. Clinical trials involve the
administration of the investigational drug product to human subjects. Clinical
trials typically are conducted in three phases and are subject to detailed
protocols. Each protocol indicating how the clinical trial will be conducted
must usually be submitted for review to the FDA as part of the IND. The FDA's
review of a study protocol does not necessarily mean that, if the study is
successful, it will constitute proof of efficacy or safety. Further, each
clinical study must usually be conducted under the auspices of an independent
Institutional Review Board ("IRB") established pursuant to FDA regulations. The
IRB considers, among other factors, ethical concerns, informed consent
requirements, and the possible liability of the hospital conducting the trials.
The FDA or IRB may require changes in a protocol both prior to and after the
commencement of a trial. There is no assurance that the IRB or FDA will permit a
study to go forward or, once started, to be completed.

The three phases of clinical trials are generally conducted sequentially,
but they may overlap. In Phase I, the initial introduction of the drug into
humans, the drug is tested for safety, side effects, dosage tolerance,
metabolism and clinical pharmacology. Phase I testing for an indication
typically takes at least one year to complete. Phase II involves controlled
tests in a larger but still limited patient population to determine the efficacy
of the drug for specific indications, to determine optimal dosage and to
identify possible side effects and safety risks. Phase II testing for an
indication typically takes at least from one and one-half to two and one-half
years to complete. If preliminary evidence suggesting effectiveness has been
obtained during Phase II evaluations, expanded Phase III trials are undertaken
to gather the additional information about effectiveness and safety that is
needed to evaluate the overall benefit-risk relationship of the drug and to
provide an adequate basis for physician labeling. Phase III studies for an
indication generally take at least from two and one-half to five years to
complete. There can be no assurance that Phase I, Phase II or Phase III testing
will be completed successfully within any specified time period, if at all, with
respect to any of the Company's products that have not yet completed any such
testing. Nor can there be any assurance that completion of clinical testing will
result in FDA approval. Furthermore, the FDA may suspend clinical trials at any
time if the patients are believed to be exposed to a significant health risk.
Phase III or other clinical studies may be conducted after rather than before
approval under certain circumstances. For example, the FDA may determine under
its accelerated approval regulations that earlier studies, involving the use of
surrogate markers rather than clinical outcomes, may establish an adequate basis
for drug product approval, providing that the sponsor agrees to conduct an
additional study after approval to verify and describe the clinical benefit of
the drug. These and other similar regulations, however, are often limited to
drug products that are intended to treat serious or life-threatening diseases,
especially those diseases for which there are no alternative therapies, or that
provide meaningful therapeutic benefit to patients over existing treatments. The
Company believes that Ampligen may be eligible for review under the FDA's
"accelerated approval" or other similar regulations for certain indications;
however, the Company has not decided whether to seek such accelerated or other
similar approval and no assurances can be given that such accelerated or other
similar approval, if sought, will be granted for any indication pursuant to such
regulations.

In the case of drugs for life-threatening diseases, the initial human
testing is generally done on patients rather than on healthy volunteers. Because
these patients are already afflicted with the target disease, it is possible
that such studies may provide results traditionally obtained in Phase II trials.
These trials are referred to as Phase I/II trials.

Reports of results of the pre-clinical studies and clinical trials for
non-biological drugs are submitted to the FDA in the form of an NDA for approval
of the marketing and commercial shipment. The NDA also includes information
pertaining to the preparation of drug substances, analytical methods, drug
product formulation, details on the manufacture of finished product as well as
proposed product packaging and labeling. Submission of an NDA does not assure
FDA approval for marketing. The application review process generally takes two
to three years to complete, although reviews of treatments for cancer and other
life-threatening diseases may be accelerated or expedited. However, the process
may take substantially longer if, among other

things, the FDA has questions or concerns about the safety and/or efficacy of a
product. In general, the FDA requires at least two properly conducted, adequate
and well-controlled clinical studies demonstrating efficacy with sufficient
levels of statistical assurance. However, additional information may be
required. For example, the FDA also may request long-term toxicity studies or
other studies relating to product safety or efficacy. Notwithstanding the
submission of such data, the FDA ultimately may decide that the application does
not satisfy its regulatory criteria for approval. Finally, the FDA may require
additional clinical tests following NDA approval to confirm product safety and
efficacy (Phase IV clinical tests).

Among the requirements for product approval is the requirement that
prospective manufacturers conform to the FDA's GMP standards. In complying with
GMP standards, manufacturers must continue to expend time, money and effort in
production, recordkeeping and quality control to ensure that the product meets
applicable specifications and other requirements. The FDA periodically inspects
drug manufacturing facilities in order to ensure compliance with applicable GMP
requirements. Failure to so comply subjects the manufacturer to possible FDA
action, such as the suspension of manufacturing, seizure of the product, or
voluntary recall of a product.

The product testing and approval process is likely to take a substantial
number of years and involves the expenditure of substantial resources. There can
be no assurance that any approval will be granted on a timely basis, or at all.
The FDA also may require post-marketing testing and surveillance to monitor the
record of the product and continued compliance with regulatory requirements.
Upon approval, a drug may only be marketed for the approved indications in the
approved dosage forms and at the approved dosages. Adverse experiences with the
product must be reported to the FDA. The FDA also may require the submission of
any lot of the product for inspection and may restrict the release of any lot
that does not comply with FDA standards, or may otherwise order the suspension
of manufacture, recall or seizure. Product approvals may be withdrawn if
compliance with regulatory standards is not maintained or if problems concerning
safety or efficacy of the product occur following approval.

In addition to applicable FDA requirements, the Company is subject to
foreign regulatory authorities governing clinical trials and drug sales. Whether
or not FDA approval has been obtained, approval of a product by the comparable
regulatory authorities of foreign countries must be obtained prior to the
commencement of marketing of the product in those countries. The approval
process varies from country to country and the time required may be longer or
shorter than that required for FDA approval.

(3) Orphan Drug Status. Under the Orphan Drug Act, the FDA may designate
drug products as orphan drugs if they are intended to treat a rare disease or
condition, which is defined as a disease or condition that affects less than
200,000 persons in the U.S., or if there is no reasonable expectation of
recovery of the costs of research and development from sales in the U.S.
Provided certain conditions are met, orphan drug status confers upon the sponsor
certain tax credits for amounts expended on clinical trials prior to May 31,
1997, as well as marketing exclusivity for seven years following FDA approval of
the product. Marketing

exclusivity means that the FDA cannot approve another version of the same
product for the same use for seven years after approval of the first product.
However, the FDA can still approve a different drug for the same use or the same
drug for a different use. The FDA regulations implementing the Orphan Drug Act
define what drugs are the "same" for purposes of the seven year market
exclusivity provisions. The Company has been advised that nucleic acids and
other complex drugs may present potentially difficult orphan drug issues under
these regulations. The Company cannot predict how these provisions will be
implemented with respect to its RNA products and competitive drugs. Certain
benefits of orphan drug status are only available upon obtaining FDA approval
for marketing. For example, orphan drug exclusivity only vests in the same
designated product that is first to receive FDA marketing approval. In 1993,
Ampligen was designated as an orphan drug by the FDA for the clinical
indications of AIDS and renal cell carcinoma. The Company does not believe that
the former designation extends to HIV disease which has not progressed to AIDS.
In December 1993, the FDA designated Ampligen as an orphan drug for the clinical
indications of invasive malignant melanoma and chronic fatigue syndrome. The FDA
denied a request by the Company to designate Ampligen as an orphan drug for
chronic active HBV infection. There is no assurance that any future products
will receive orphan drug designation, or that the benefits currently available
from such designations for Ampligen will not hereafter be amended or eliminated.
Various legislative proposals have from time to time been introduced in Congress
to modify various provisions of the Orphan Drug Act. Currently, Congress has
considered legislation that would amend the Orphan Drug Act and may limit the
scope of marketing exclusivity. The tax credit provisions expired on December
31, 1994 and were renewed by Congress in 1996.

(4) Diagnostic Products. The Company's potential Diagen diagnostic products
also must receive FDA clearance prior to any commercial marketing. The FDC Act
regulates most in vitro diagnostic products as medical devices, and provides for
two clearance mechanisms. Certain products may qualify for a Section 510(k)
procedure, under which the manufacturer gives the FDA a premarket notification
("510(k) Notice") of the manufacturer's intent to commence marketing the
product. The manufacturer must establish that the product to be marketed is
"substantially equivalent" to another legally marketed product which is subject
to a 510(k) Notice or was commercially marketed prior to May 28, 1976 and is not
subject to premarket application ("PMA") requirements. In some cases, a 510(k)
Notice must include data from human clinical studies. Normally, marketing may
commence when the FDA issues an order to the manufacturer finding the product to
be "substantially equivalent." If the product does not qualify for the 510(k)
procedure, the manufacturer must file a PMA which includes results of extensive
clinical and nonclinical tests demonstrating that the product is both safe and
effective. The PMA process requires more intensive testing than the 510(k)
procedure, involves a significantly longer FDA review process, and usually
requires review by an FDA scientific advisory committee. Approval of a PMA
allowing commercial sale of a product requires that its safety and effectiveness
be demonstrated through human clinical studies, usually conducted under an
Investigational Device Exemption ("IDE"). Some diagnostic products may be
clinically tested without an FDA approved IDE. It is unknown at this time
whether an IDE will be required in order to clinically test Diagen products. In
responding to a PMA, the FDA may grant marketing approval, request additional
information or deny the application if it determines that the application does
not

satisfy its regulatory approval criteria. There can be no assurance that
investigational or marketing approvals or clearances for Diagen products will be
granted to the Company.

Canadian Regulatory Process. The regulatory approval process in Canada of
pre-clinical and clinical trials, manufacturing and sales of drugs, registration
of establishments which manufacture biologics, compliance with GMP requirements
and periodic inspection by the Health Protection Bureau ("HPB") of the Canadian
Department of Health and Welfare, which serves as the federal drug agency in
Canada, is in general similar to that in the United States.

(a) Investigational New Drug Application. Before conducting clinical
trials of a new drug in Canada, a company must submit an IND application to
the HPB containing various information about the drug. In November 1992,
the HPB approved the Company's INDs to conduct open-label and controlled
clinical trials of Ampligen for ME/CFS. There is no assurance that the HPB
will accept data obtained from those clinical trials in any submission of
the Company to the HPB to market Ampligen in Canada or that such data, if
accepted, will result in the approval of Ampligen for sale in Canada. The
HPB may place clinical trials on hold at any time if safety concerns exist.

(b) New Drug Submission. Before marketing or selling a new drug in
Canada, the Company must submit a New Drug Submission ("NDS") to the HPB
and receive a notice of compliance from the HPB to sell the drug. The NDS
includes information describing the new drug, including its proper name,
the proposed name under which the new drug will be sold, the specifications
of the new drug, the methods of manufacturing, processing and packaging the
new drug, the controls applicable to these operations, the tests conducted
to establish the safety of the new drug, the tests to be applied to control
the potency, purity, stability and safety of the new drug, the results of
clinical trials and the effectiveness of the new drug when used as
intended. Submission of an NDS does not assure HPB approval of a new drug
for sale. If it determines the NDS meets the requirements of Canada's Food
and Drugs Act and Regulations, the HPB will issue a notice of compliance
for the new drug.

The HPB may deny approval of an NDS if applicable regulatory criteria are
not satisfied or may require additional testing. Product approvals may be
withdrawn if compliance with regulatory standards is not maintained or if
problems occur after the drug reaches the market. The HPB may require testing
and surveillance programs to monitor the new drug once commercialized.
Non-compliance with applicable requirements can result in fines and other
penalties, including product seizures and criminal prosecutions.

Among the requirements for product approval in Canada is the requirement
that a prospective manufacturer conform to the HPB's GMP and good laboratory
practices ("GLP") standards. Before manufacturing a biologic, a manufacturer
must have a license from the HPB that is specific to the site of manufacture.
The HPB periodically inspects the drug manufacturing site in order to ensure
compliance with Canada's Food and Drugs Act and Regulations and GMP and GLP
requirements. If there is a safety concern, the HPB, apart from other sanctions,
can suspend the manufacture of the product.

Certain provinces in Canada have the ability to determine whether the costs
of a drug sold within such province will be reimbursed by a provincial
government health plan by listing drugs on formularies. These provincial
formularies may affect the prices of drugs and the volume of drugs sold within
provinces. The Patented Medicines Prices Review Board has the ability to assess
whether the price of a patented medicine is excessive and, if determined to do
so, the Board has the ability to require the patent owner to reduce the price of
the patented medicine, to reduce the price of another patented medicine or to
remit money to the government.

Proposals have recently been made that, if implemented, would significantly
change Canada's drug approval system. Proposals include establishing a separate
agency for drug regulation and modeled on European Community agencies. It is
uncertain whether drugs such as the Company's would be evaluated by this
separate agency, and the Company is unable to predict the impact, if any, on the
transfer of regulatory responsibility from the HPB to the separate agency. The
Company is unable to predict whether these proposals will be implemented or, if
implemented, the effect thereof on the Company.

Employees

As of January 31, 1997 the Company had 14 full-time employees. Of these
employees 9 were engaged in the Company's research, development, manufacturing,
regulatory affairs or pre- clinical testing, and 5 employees performed general
administrative functions including financial matters and investor relations. In
addition, on an as needed basis 8 individuals employed at academic institutions
serve as consultants or independent contractors to the Company. Such persons are
paid pursuant to licensing agreements with 2 universities. There are 29
additional individuals who serve or have served as part-time consultants or
independent contractors to the Company. In addition, to the individuals
throughout the United States from time to time are retained by the Company as
independent contractors, either on a per diem or monthly basis. The Company
believes that it has been successful in attracting skilled and experienced
scientific personnel; however, competition for such personnel is intense and
there can be no assurance that the Company will be able to attract and retain
necessary qualified employees and/or consultants in the future. None of the
Company's employees are covered by collective bargaining agreements.

Recent Developments

In March, 1997, The Company sold 5,000 shares of Series E Comvertible
Preferred Stock at $1,000 per share in a private offering pursuant to Regulation
D of the Securities Act and Rule 506 promulgated thereunder. The proceeds of
this placement were used to retire the convertible preferred stock (Series D),
which was placed under Regulation D filing with the SEC during 1996. As a result
of this transaction in 1997, the Company will incur a $1.2 million stock
compensation expense, however, this will have no effect on the net equity of the
company as it will be offset by an increase in additional paid-in capital.

In January 1997, the Company began a Phase II clinical trial in Texas
treating HIV infected patients with Ampligen. The trial, approved by the FDA,
will study the effect of Ampligen on viral load, or burden, in HIV patients with
CD4 levels over 400 cells/mm who are not being treated with any other HIV
medications. The principal investigator in the trial, Dr. Patricia Salvato,
specializes in the treatment of individuals with HIV infection. Dr. Salvato is a
Clinical Associate Professor at the University of Texas Health Science Center,
and has participated in prior clinical trials of Ampligen for various chronic
viral diseases including HIV and CFS.

In December, 1996 the Company and Temple University settled their legal
disputes regarding the license agreement between the parties covering the Oragen
drugs. The parties signed the documents required to consummate their settlement,
which includes a worldwide license for the commercial sale of Oragen products
based on patents and related technology held by Temple. This agreement was
originally executed in 1988. In 1994, Temple terminated the agreement, which
caused the company to file legal action to re-instate the 1988 agreement.

In November, 1996, the Company announced that it will significantly expand
the enrollment of patients in Ampligen treatment programs in Belgium. This
expansion was at the request of the Belgium Investigator.

On October 15, 1996, results of a Belgium clinical study were presented at
the annual scientific meeting of the American Association for Chronic Fatigue
Syndrome (AACFS) evidencing that Ampligen produced significant physical and
cognitive improvements among patients suffering from Chronic Fatigue Syndrome.
The study was presented by Kenny De Meirleir, M.D., Ph.D. from the University of
Brussels, and by David S. Strayer, M.D., Professor of Medicine at Allegheny
University, PA, and Medical Director for the Company.

In September, 1996, Helix BioPharma Corp. (Helix) informed the Company that
it had confirmed the elegibility of Ampligen under Canada's Emergency Drug
Release Program to be made available in Canada to sufferers of HIV, Renal
Cancer, and Chronic Fatigue Syndrome. The Company thereupon shipped an initial
inventory of Ampligen to Helix and is in the process of producing further
supplies of Ampligen for Helix.

In July 1996, the Company unbundled its public stock unit (consisting of
one share of Common Stock and one Warrant to purchase Common stock). The Common
shares (HEMX), Warrants (HEMXW) as well as Units (HEMXU) are now separately
traded on NASDQ. The unit (HEMXU) ceased trading in August, 1996.

On July 3, 1996, the Company issued and sold 6,000 shares of Series D
Convertible Preferred Stock ('the Preferred Stock") at $1,000 per share for an
aggregate total of $6,000,000. The proceeds, net of issuance costs, realized by
the Company were $5,395,885. In addition to the issuance of the Preferred Stock,
the Company issued to the buyer Warrants to purchase 100,000 shares of Common
Stock at the strike price of $4.00 per share.

In June, 1996, R. Douglas Hulse joined the Company as Chief Operating
Officer (COO). Mr. Hulse serves as Executive Director of The Sage Group, a
healthcare consulting firm specializing in pharmaceutical and biotechnology
business development and strategic planning. In his role as COO, Mr. Hulse
serves as global coordinator interacting with various distributors and corporate
partners while insuring an adequate supply of drug for the Company's expected
commercial sales and expanded clinical programs.

In April, 1996, SAB/Bioclones reported significant accomplishments in South
Africa in fulfillment of their licensing agreement. Pilot production runs of raw
materials for use in manufacturing Ampligen were completed and are being tested
for conformity to Company specifications. SAB/Bioclones are negotiating with two
manufacturers to formulate the drug and to produce 200ml infusion bottles (400mg
Ampligen) for use in clinical trials. Discussions also are underway with
clinical investigators to identify suitable participants for a controlled study
of Ampligen in chronic active hepatitis B. Clinical investigators then will be
selected and patients enrolled for studies. SAB/Bioclones has further reported
interest among Hepatologists to additionally evaluate Ampligen in the treatment
of hepatitis C.

The Company resolved a long standing legal suit with a former note holder
of the Company. The litigation had been simultaneously pursued by the parties in
both the Federal Court of Eastern Pennsylvania as well as in the State Court of
Florida in Palm Beach County. The noteholder also filed a motion for a
preliminary injunction in the Pennsylvania court to enjoin the Company from
disbursing the proceeds of a public offering in the amount of $5.8 million,
which motion was granted in November, 1995. On February 15, 1996. the Company
reached an agreement to settle this matter. Terms and conditions of the
settlement included payment of $6,450,000 to the noteholder to cover the note
balance and legal expenses. The noteholder and related parties are to maintain
certain Warrants that were granted prior to the lawsuit. Other Warrants granted
to the noteholder in the note restructuring in 1994 were relinquished. The funds
under this settlement were paid on March 21, 1996. Mutual releases were executed
which completed the settlement of the litigation.

In February, 1996, the Company entered into an agreement with Helix
BioPharma, a Canadian based pharmaceutical and biochemical and biomedical
company to jointly develop the Company's lead product for certain viral
disorders and diseases of immunological dysregulation. Helix BioPharma is the
parent company of Rivex Pharma, Inc. with which the Company has an agreement for
marketing and distribution services in Canada. Helix BioPharma, headquartered in
Richmond, British Columbia, is developing, licensing, marketing and distributing
biomedical and pharmaceutical products and services principally to the Canadian
markets.

appealed from these orders before the United States Court of Appeals for the
Ninth Circuit. In January, 1996, the Court of Appeals denied their appeal and
sustained the Company's position. On the basis of the Court of Appeals favorable
decision, the Company believes the lawsuit is over with no material effect on
the Company.

Properties

The Company leases and occupies a total of approximately 18,850 square feet
of laboratory and office space in two states. The corporate headquarters in
Philadelphia, Pennsylvania are located in a suite of offices of approximately
15,000 square feet. The pharmacy, packaging, quality assurance and quality
control laboratories, as well as additional office space, are located in
Rockville, Maryland. These facilities occupy approximately 3,850 square feet,
approximately 2,000 of which are dedicated to the packaging and quality control
product release functions. The Company believes that its Rockville facilities
will meet its production requirements, including sufficient quantities of
Ampligen for planned clinical trials, through 1997, at which time it may need to
increase its manufacturing capacity either through third parties or by building
or acquiring commercial-scale facilities.

In addition, the Company has entered into the SAB Agreement, which provides
the Company with 24.9 % of the capital stock of a company to develop and operate
a new manufacturing facility to be financed by SAB/Bioclones. Manufacturing at
the pilot facility commenced in 1996. The Company expects that manufacturing at
the commercial facility will commence in 1998, although no assurance can be
given that this will occur.

Legal Proceedings

The Company is subject to claims and legal actions that arise in the
ordinary course of their business. Management believes that the ultimate
liability, if any, with respect to these claims and legal actions will not have
a material effect on the financial position or results of operations of the
Company.

In March 1995, the Company instituted a declaratory judgment action against
the February 1992 noteholder of a $5 million convertible note and a second
defendant in the United State District Court for the Eastern District of
Pennsylvania ("the Pennsylvania action") to declare as void, set aside, and
cancel the February 1992 convertible note between the Company and the noteholder
("the Note"). In addition, the noteholder instituted suit against the Company on
the Note in the Circuit Court of the 15th Judicial District in and for Palm
Beach County, Florida, seeking judgment on the note, plus attorneys fees, costs
and expenses; in August 1995, this action was stayed by the Florida Court
pending the outcome of the Pennsylvania action. The noteholder also filed a
motion for a preliminary injunction in the Pennsylvania court to enjoin the
Company from disbursing the proceeds of a public offering in the amount of $5.8
million, which motion was granted in November, 1995. On February 15, 1996, the
Company reached an agreement to settle this matter. Terms and conditions of the
settlement include payment of $6,450,000 to the noteholder to cover the unpaid
note balance and legal expenses. The

noteholder and related parties returned approximately 282,000 Common Stock
Purchase Warrants that were granted prior to the lawsuit. Other Warrants granted
to the noteholder in the note restructuring in 1994 were relinquished. The funds
under this settlement were paid on March 21, 1996. Mutual releases were executed
which completed the settlement of the litigation.

In November 1994, the Company filed suit against Temple University
("Temple") in the Superior Court of the State of Delaware ("Superior Court")
seeking a declaratory judgment that the Temple Agreement remains in full force
and effect and seeking monetary damages in excess of $10 million for Temple's
alleged breach of its obligations of good faith and fair dealing and certain
terms of the Temple Agreement. Temple filed a motion to dismiss this lawsuit
upon the grounds of lack of personal jurisdiction. In January 1995, Temple filed
separate litigation against the Company in the Court of Common Pleas of
Philadelphia County seeking declaratory judgment that the Temple Agreement has
been lawfully terminated as of July 1, 1994, together with an award of costs
including attorney fees, in bringing the action. The Company and Temple settled
their dispute in December, 1996, dropping all litigation and reinstating the
1988 license agreement.

The Company was a defendant in a lawsuit instituted in 1991 by participants
in a double-blind placebo-controlled clinical trial of Ampligen therapy for
ME/CFS. The plaintiffs alleged that the Company or its alleged agents promised
them that they would receive Ampligen after the placebo-controlled study at no
cost for periods ranging from "until marketable" to "for life. " Plaintiffs
sought compensatory and punitive damages. The court granted the Company's
motions for summary judgment upon all claims alleged by the plaintiffs in this
case. The plaintiffs have appealed from these orders before the United States
Court of Appeals for the Ninth Circuit. In January 1996, the Court of Appeals
denied their appeal and sustained the Company's position. On the basis of the
Court of Appeals favorable decision, the Company believes the lawsuit is
concluded with no current or future material effect on the Company's financial
position.

Scientific Advisory Board

The Company established its Scientific Advisory Board in March 1991. The
Scientific Advisory Board consists of individuals who the Company believes have
particular expertise in immunology, virology, pharmacology, cancer therapeutics,
biochemistry and related fields. These individuals advise the Company about
present and long-term scientific planning, research and development. The
Scientific Advisory Board holds annual meetings as required by the clinical
studies in progress by the Company. In addition, individual Scientific Advisory
Board members sometimes consult with, and meet informally with, employees of the
Company on a more frequent basis. All members of the Scientific Advisory Board
are employed by employers other than the Company and may have commitments to, or
consulting and/or advisory agreements with, other entities, including potential
competitors of the Company, that may limit their availability to the Company.
The time spent by Scientific Advisory Board members on the Company's affairs
varies. Although individual members of the Scientific Advisory Board may devote
significant time and energy to the affairs of the Company, no member is expected
to devote more than a small portion of his time to the Company. Members of the
Scientific

Advisory Board are compensated at a rate of $1,500 per meeting attended or day
devoted to Company affairs. In addition, Doctors Cheng and Brodsky have been
granted options to acquire 4,608 and 5,253 shares of Common Stock, respectively,
at exercise prices of $4.34 and $1.06 per share, respectively. As described
elsewhere herein, Dr. Brodsky is a party to the Hahnemann Agreement, pursuant to
which he is entitled to receive certain royalties from the Company with respect
to sales of Ampligen. See "Business - Research and Development, Licensing and
Collaboration Agreements."

The following information is furnished with respect to members of the
Scientific Advisory Board:

NAME POSITIONS INSTITUTION
- ---- --------- -----------

Isadore Brodsky, M.D. Professor of Medicine and Head, Medical College of
Division of Hematology/Oncology Pennsylvania and Hahnemann
University, School of Medicine,
Philadelphia, Pennsylvania

Yung-Chi Cheng, Ph.D. Director, Developmental Therapeutics/ Yale University School of
Chemotherapy Program Medicine, New Haven, Connecticut

Professor of Pharmacology and Yale University Center, New Haven
Comprehensive Internal Medicine Center, New Haven, Connecticut

Clyde Crumpacker, M.D. Professor of Medicine Harvard Medical School,
Boston, Massachusetts
Physician Harvard Medical School,
Brigham & Women's Hospital,
Beth Israel Hospital, Boston,
Massachusetts

Robert A. Good, Ph.D. Distinguished Professor Departments of Pediatrics
and M.D., D.Sc. Microbiology, University
of South Florida, Tampa,
Florida

Physician-in-Chief All Children's Hospital,
St. Petersburg, Florida

James Greene, Ph.D. Associate Professor of Biology Catholic University,
Washington, D.C.

Anthony L. Komaroff, M.D.,
Ph.D. Professor of Medicine, Harvard Medical School,
Chief, Division of General Medicine Brigham & Women's
Hospital,
Boston, Massachusetts

William Mitchell, M.D.,
Ph.D Professor of Pathology Vanderbilt School of
Medicine,
Nashville, Tennessee

Phillip Roane, Ph.D. Associate Professor of Howard University,
Microbiology Washington, D.C.

Kenny DeMeirleir, M.D.,
Ph.D. Professor of Medicine Vrije Universiteit,
Brussels, Belgium

Data Safety Monitoring Board

Because the Company periodically conducts placebo-controlled clinical
studies in chronic incurable diseases, it has designated a Data Safety
Monitoring Board comprised of independent physicians, scientists and patient
advocates. During the conduct of a placebo-controlled clinical trial (i.e.
involving the use of placebo for certain patients involved in the trial), the
Data Safety Monitoring Board meets at pre-determined intervals to evaluate the
safety, efficacy and/or ethical implications of a placebo-controlled trial.
Members of the Data Safety Monitoring Board are compensated at a rate of $1,500
per meeting attended. Members are not allowed to hold stock in the Company.

The following are members of the Data Safety Monitoring Board:

NAME POSITIONS INSTITUTION
- ---- --------- -----------

Robert A. Good, M.D., Distinguished Professor Departments of Pediatrics and
Ph.D., D.Sc. Microbiology, University of South Florida,
Tampa, Florida
Physician-in-Chief All Children's Hospital,
St. Petersburg, Florida

Lewis Marshall, M.D. Associate Professor of Medicine Howard University College of
Medicine, Washington, D.C.
Chief, Infectious Diseases Providence Hospital,
Washington, D.C.
Chief, Infectious Diseases Columbia Hospital for Women,
Washington, D.C.
The Rev. Daniel Paul
Matthews D.D. Rector Parish of Trinity Church,
Wall Street, New York

Kenny DeMeirleir, M.D.,
Ph.D. Professor of Medicine Vrije Universiteit,
Brussels, Belgium

MANAGEMENT

Directors, Executive Officers and Key Employees

The directors, executive officers, key employees and advisors of the
Company are as follows:

Name Age Position
---- --- --------
William A. Carter, M.D. 59 Chairman, Chief Executive Officer,
President

R. Douglas Hulse 53 Chief Operating Officer

Robert E. Peterson 60 Chief Financial Officer

Harris Freedman 63 Vice President, Corporate Communications

Sharon D. Will 38 Vice President, Investor Relations

Peter W. Rodino III 43 Director, Secretary

Cedric C. Philipp 74 Director, Associate Secretary, Special
Advisor to the Board/International

Richard C. Piani 70 Director

David R. Strayer, M.D. 51 Medical Director, Director of Regulatory
Affairs

Carol A. Smith, Ph.D. 45 Director of Manufacturing and Process
Development

Josephine M. Dolhancryk 34 Treasurer, Assistant Secretary

Executive Officers

William A. Carter, M.D., the co-inventor of Ampligen, joined the Company in
1978, and has served as (a) the Company's Chief Scientific Officer since May
1989, (b) the Chairman of the Company's Board of Directors since January 1992
(c) the Company's Chief Executive Officer since July 1993, (d) the Company's
President since April, 1995, and (e) a director since 1987. From 1987 to 1988,
Dr. Carter served as the Company's Chairman. Dr. Carter was a leading

innovator in the development of human interferon for a variety of treatment
indications including various viral diseases and cancer. In this context, he
received the first FDA approval to initiate clinical trials on a beta interferon
product manufactured in the U.S. under his supervision. From 1985 to October
1988, Dr. Carter served as the Company's Chief Executive Officer and Chief
Scientist. He received his M.D. degree from Duke University and underwent his
post-doctoral training at the National Institutes of Health and Johns Hopkins
University. Dr. Carter also serves as Professor of Neoplastic Diseases at
Hahnemann University, a position he has held since 1980. He is also Director of
Clinical Research for Hahnemann University's Institute for Cancer and Blood
Diseases. Dr. Carter has served as a professor at Johns Hopkins School of
Medicine, Hahnemann University and the State University of New York at Buffalo.

R. Douglas Hulse was named Chief Operating Officer on June 1, 1996. Since July
1995, he had been Special Advisor for Licensing and New Product Development to
the Company's Board of Directors. Since 1995 he has served as Executive Director
of The Sage Group, a health care consulting firm specializing in pharmaceutical
and biotechnology business development and strategic planning. Between 1991 and
1994, Mr. Hulse was Vice President of Business Development for Enzon, Inc., a
biopharmaceutical company with proprietary drug delivery technologies, and from
1986 to 1991, Mr. Hulse served as an independent financial and business
development consultant to various biotechnology companies. He was President and
CEO of i-STAT Corporation, a manufacturer of medical biosensors, from 1984 to
1986 and Vice President of Strategic Planning for Engelhard Corporation from
1982 to 1984. Mr. Hulse held several executive positions with Halcon
International, Inc., a leading chemical company, from 1968 to 1982. Mr. Hulse
received Masters degrees in Industrial Management and Chemical Engineering
Practice from M.I.T. and a Bachelors degree in Chemistry from Princeton
University.

Robert E. Peterson has served as Chief Financial Officer of the Company since
April 1993 and served as an independent financial advisor to the Company from
1989 to April 1993. Mr. Peterson has also served since 1990 as Vice President of
the Omni Group, Inc., a business consulting group based in Tulsa, Oklahoma.
During the period 1983 through 1992, Mr. Peterson was self-employed as a
financial consultant to businesses in various industries. Mr. Peterson was Vice
President and Chief Financial Officer of Pepsico Foods International from 1979
to 1983 and responsible for financial management of this multinational operating
unit with approximately $500 million in annual revenues. Mr. Peterson is a
graduate of Eastern New Mexico University.

Harris Freedman has served as Vice President for Strategic Alliances since
August 1994 and has been a private venture capitalist and business consultant
for more than the past five years. He is the Secretary of Bridge Ventures, Inc.
("Bridge Ventures") and SMACS Holding Corp., both of which are private venture
capital companies, positions he has held for more than five years. His business
experience has encompassed developing significant business contacts and acting
as an officer or director of several companies in the pharmaceutical, health
care and entertainment fields. Mr. Freedman was Vice President of U.S. Alcohol
Testing of America, Inc., from August 1990 to February 1991. Additionally, he
was Vice President--East Coast Marketing for

MusicSource U.S.A., Inc. from October 1992 to January 1994. Mr. Freedman
attended New York University from 1951 to 1954.

Sharon D. Will has been Vice President for Corporate Communications and Investor
Relations since November 1994. Prior to that time, she was a registered sales
representative and Senior Vice President for Institutional Sales at Westfield
Financial Corporation from September 1994 to October 1994. She was a registered
sales representative with Marsh Block Corporation from July 1994 to September
1994. From October 1993 to July 1994 she served as a registered sales
representative at Seaboard Securities Corp. From October 1991 to present, Ms.
Will has been President of Worldwide Marketing Inc. a manufacturers'
representative of various companies selling to the retail trade markets. Ms.
Will was the National Sales Manager of Innovo, Inc., a domestic manufacturer of
textiles, from October 1989 to November 1991. She attended Baylor College as an
undergraduate for two years with a primary focus on chemistry.

Peter W. Rodino III has served as a director of the Company since July 1994 and
Secretary of the Company since November 1994. He had previously served on the
Company's Board of Directors from 1987 to 1989. From 1988 through the present he
has served as Managing Partner of the law firm Rodino and Rodino, which
primarily deals in corporate, commercial, insurance, real estate, environmental,
bankruptcy and immigration law. He was a partner in the law firm of Rodino and
Scalera, Inc. from 1988 to 1991. He has served as Chairman of the Board of
Directors of the Foundation Health Plan of New Jersey, an IPA/HMO providing
health care services, from 1983 to 1988 and as a Director of Columbus Hospital
from 1986 to 1990. Mr. Rodino earned a B.S. in Business Administration from
Georgetown University in 1973 and a J.D. from Seton Hall University School of
Law in 1976.

Cedric C. Philipp has served as a director of the Company since July 1994 and as
Special Advisor for International Marketing since 1993. He is President of
Philipp Pharmaceutical Marketing, a consulting firm which he founded in 1987.
From 1957 to 1987, he was with Wyeth International, a division of American Home
Products, during which time he served in various capacities in international
marketing and sales, most recently as Executive Assistant to the President. Mr.
Philipp received his A.B. degree from Columbia College and later attended
Columbia Law School and the Graduate School of Princeton University.

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

degree from Faculte de Droit, Paris Sorbonne and a Business Administration
degree from Ecole des Hautes Etudes Commerciales, Paris.

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

Key Employees

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

Josephine M. Dolhancryk joined the Company in 1990 as Office Manager, was
promoted to Executive Assistant to the Chairman of the Board and Chief Executive
Officer in 1991 and Assistant Secretary, Treasurer and Executive Administrator
in 1995. From 1989 to 1990 Ms. Dolhancryk was President of Medical/Business
Enterprises. Ms. Dolhancryk was employed by Children's Hospital of Philadelphia
from 1984 to 1989, where she also served as research coordinator on a drug study
from 1986 to 1988. Ms. Dolhancryk attended Saint Joseph's University and
Delaware County College.

Board Committees

The Board of Directors maintains an Executive Committee consisting of
William A. Carter and Peter W. Rodino III, which makes recommendations to
management regarding general business matters of the Company; a Compensation
Committee consisting of Peter W. Rodino III and Richard C. Piani, which makes
recommendations concerning salaries and compensation for employees of and
consultants to the Company; an Audit Committee consisting of Cedric C. Philipp,
which reviews the results and scope of the audit and other services provided by
independent auditors; and a Strategic Planning Committee consisting of William
A. Carter, Peter W. Rodino III and Cedric C. Philipp, which makes
recommendations to the Board of priorities in the application of the Company's
financial assets and human resources in the fields of research, marketing and
manufacturing.

Compensation of Directors

During the fourth quarter of fiscal 1995, each non-employee directors
received $3,750 as compensation for serving on the Board of Directors or any
committee thereof. Certain non-employee directors receive compensation as
consultants to the Company and have been granted options to purchase Common
Stock under the Company's 1990 Stock Option Plan and Rule 701 Warrants to
purchase Common Stock of the Company. All of the directors are reimbursed for
their expenses incurred in attending meetings of the Board of Directors and its
committees. Currently, non-management directors receive an annual retainer of
$15,000 and receive $600 for each Board or committee meeting they attend and
will be reimbursed for out of pocket expenses incurred in attending meetings.
The Company believes such payments are necessary in order for the Company to
attract and retain qualified outside directors.

In addition, in October 1994, the Board of Directors granted to Cedric C.
Philipp, a director of the Company and Special Advisor to the Board for
International Marketing, the right to receive 3% of the gross proceeds of any
licensing fees and prepaid royalties received by the Company pursuant to the SAB
Agreement and a fee of .75% of gross proceeds in the event that SAB/Bioclones
makes a tender offer for all or substantially all of the Company's assets,
including a merger, acquisition or related transaction, and 1% of all products
manufactured by SAB/Bioclones. The Company may prepay in full the obligation to
provide commissions up to $1,050,000 within a ten year period. These rights were
granted to Mr. Philipp in exchange for his services in the negotiation of the
SAB Agreement and his services in connection with various marketing and
licensing opportunities for the Company. In addition, the Company further agreed
to provide a monthly retainer of $2,000 to Mr. Philipp in exchange for
consulting services related to general pharmaceutical and international
marketing services and remuneration for corporate alliances which are
principally introduced by Mr. Philipp. Mr. Philipp has been paid $128,000
pursuant to these arrangements through December 31, 1996.

In June 1995, the Board of Directors of BioAegean, a subsidiary of the
Company, issued an aggregate of 550,000 BioAegean Options at an exercise price
of $1.00 per share to Dr. William A. Carter, Cedric C. Philipp and Peter Rodino,
III, directors of the Company.

In October and November 1994, the Company granted an aggregate of 1,480,000
Rule 701 Warrants to purchase shares of Common Stock at $3.50 per share to Dr.
Carter, Mr. Philipp and Mr. Rodino, directors of the Company, and Maryann
Charlap Azzato a former director of the Company. See "Certain Transactions."

In 1994 and 1993 the Company issued shares of Series C Preferred Stock at
$5.00 per share to certain directors in various transactions including certain
sales of Series C Preferred Stock and conversion of certain debt. See "Certain
Transactions."

Executive Compensation

Summary Compensation Table. The following table sets forth certain
information with respect to the compensation of the Company's Chief Executive
Officer and the other most highly compensated executive officers of the Company
for the fiscal year ended December 31, 1996.

EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE

Name and Other Annual Restricted Stock Option All other
Principal Position Year Salary Compensation($)(1) Awards($) Awards Compensation($)(2)
- ------------------ ---- ------ ------------------ --------- ------ ------------------

William A. Carter 1996 $ 400,522(3) -- -- -- 7,778
Chairman of the Board 1995 363,420(3) -- -- 300,000(5) 7,778
Chief Executive Officer 1994 363,420(3) -- -- 1,400,000(6) 7,778

Robert E. Peterson 1996 128,000 -- -- 50,000(7) --
Chief Financial Officer(4) 1995 120,000 -- -- 50,000(8) --
1994 110,000 -- -- -- --

Sharon Will 1996 126,000 -- -- -- --
Vice President 1995 125,000 -- -- 50,000(8) --
1994 -- -- -- 200,000(9) --

David R. Strayer, M.D 1996 130,427(11) -- -- -- --
Medical Director 1995 115,083 -- -- -- --
1994 -- -- -- --

Harris Freedman 1996 126,000 -- -- -- --
Vice President 1995 112,500 -- -- 150,000(8) --
1994 -- -- -- 400,000(10) --

(1) The Company makes available certain non-monetary benefits to its officers
with a view to attracting and retaining qualified personnel and
facilitating job performance. The Company considers such benefits to be
ordinary and incidental business costs and expenses. The aggregate value of
such benefits, which cannot be precisely ascertained but which is less than
10% of the cash compensation of each of the above-named executive officers,
is not included in the table.
(2) Consists of insurance premiums paid by the Company with respect to term
life insurance for the benefit of the named executive officer.
(3) Includes $63,000 paid to Dr. Carter by Hahnemann University where he serves
as a professor.

(4) Mr. Peterson joined the Company in April 1993 and is paid on a fee basis.
(5) BioAegean Options to purchase 300,000 shares of common stock of BioAegean
Corp., a subsidiary of the Company, at $1.00 per share, which were granted
in May 1995 (the "BioAegean Options").
(6) Rule 701 Warrants to purchase Common Stock at $3.50 per share granted in
October 1994. These Rule 701 Warrants vest in 1/3 increments over a 36
month period. Rule 701 Warrants are warrants which were issued to officers,
directors and consultants of the Company in reliance upon Rule 701 of the
Securities Act.
(7) Warrants to purchase Common Stock at $3.50 purchase granted in March 1996.
(8) BioAegean Options.
(9) Rule 701 Warrants to purchase common stock at $3.50 per share granted in
November 1994.
(10) Rule 701 Warrants to purchase common stock at $3.50 per share granted in
August 1994.
(11) Includes $80,427 paid to Dr. Strayer by Hahneman University.

Year End Option Table. The following table sets forth certain information
regarding the stock options held as of December 31, 1996 by the individuals
named in the above Summary Compensation Table.

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

Securities Underlying Value of Unexercised
Unexercised Options at In-the-Money-Options
Fiscal Year End(#) at Fiscal Year End (9)
Shares Acquired Value ----------------------------- ---------------------------
Name on Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- ------ --------------- ------------ ----------- ------------- ----------- -------------

William A. Carter --- --- 1,473,021(1) 766,667(2) 245,000 ---
Robert E. Peterson ___ ___ 10,368(3) 103,456(4) --- ---
Sharon Will ___ ___ 513,333(5) 216,667(6) 190,000 ---
Harris Freedman ___ ___ 989,827(7) 283,333(8) 182,500 ---

- ----------
(1) Includes (i) 933,333 currently exercisable Rule 701 Warrants to purchase
Common Stock at $3.50 per share; (ii) 73,728 stock options to purchase
Common Stock at $3.50 per share; (iii) 960 warrants to purchase Common
Stock at $3.50 per share; and (iv) warrants to purchase 465,500 shares of
Common Stock at $1.75 per share.
(2) Includes 300,000 BioAegean Options, for which there is no public market,
and 466,667 Rule 701 Warrants.
(3) Stock options to purchase Common Stock at $4.34 per share.
(4) Includes 50,000 BioAegean Options, 50,000 warrants to purchase Common Stock
at $3.50 per share and 3,456 stock options exercisable at $4.34 per share.
(5) Includes 133,333 currently exercisable Rule 701 Warrants and 380,000
warrants to purchase Common Stock at $1.75 per share.
(6) Includes 150,000 BioAegean Options and 66,667 Rule 701 Warrants.
(7) Includes (i) 266,667 Rule 701 Warrants currently exercisable; (ii) 292,161
warrants to purchase common stock at $3.50 per share; (iii) 365,000
warrants to purchase Common Stock at $1.75 per share; and (iv) 66,000 Class
A Warrants to purchase Common Stock at $4.00 per share.
(8) Includes 133,333 Rule 701 Warrants and 150,000 BioAegean Options.
(9) Computation based on $2.25, the December 31, 1996 closing price for the
Common Stock.

Option Grant Table. The following table sets forth certain information
regarding options granted during the fiscal year ended December 31, 1996 by the
Company to the individuals named in the above Summary Compensation Table:

OPTION GRANTS IN LAST FISCAL YEAR

% of Total
Options
Options Granted to
Granted Employees in Exercise Price Expiration
Name (#) Fiscal Year $/Share Date
- ---- -------- ----------- ------------- ----------
Robert E. Peterson 50,000 17% $3.50 3/1/06

Employment Agreements

The Company entered into an employment agreement with Sharon Will providing
for her employment as Vice President for Corporate Communications and Investor
Relations on November 1, 1994. The agreement provides for Ms. Will to be
employed for a one-year term (which was extended to three years in July 1995) at
a base salary of $120,000 and provides for termination of the agreement upon
certain circumstances including termination by the Company or Ms. Will on 14
days written notice or the sale of Ms. Will's stock in the Company. Pursuant to
the agreement, Ms. Will was granted Rule 701 Warrants to purchase 200,000 shares
of Common Stock of the Company at $3.50 per share. Ms. Will's agreement provides
that she shall devote 60% of her business time, attention and energies to the
Company during regular business hours. In the event that Ms. Will's employment
is terminated for any reason other than breach of contract, she shall be
entitled to receive accrued and unpaid compensation plus an additional three
months' compensation.

The Company entered into an employment agreement with Harris Freedman
providing for Mr. Freedman's employment as Vice President for Strategic
Alliances on August 1, 1994. The agreement provides for Mr. Freedman to be
employed for a one year term (which was extended to three years in July 1995) at
a base salary of $120,000 and provides for termination of the agreement upon
certain circumstances including termination by the Company or Mr. Freedman on 14
days written notice or the sale of Mr. Freedman's stock in the Company. Pursuant
to the agreement, Mr. Freedman was granted Rule 701 Warrants to purchase 400,000
shares of Common Stock of the Company at $3.50 per share. Mr. Freedman's
agreement provides that he shall devote 30% of his business time, attention and
energies to the Company during regular business hours. In the event that Mr.
Freedman's employment is terminated for any reason other than breach of
contract, he shall be entitled to receive accrued and unpaid compensation plus
an additional three months' compensation.

The Company entered into an amended and restated employment agreement with
Dr. William A. Carter, dated as of July 1, 1993 and as amended in July 1995,
which provides for his employment until May 8, 2001 at an initial base annual
salary of $295,832, subject to annual cost of living increases. In addition, Dr.
Carter may receive an annual performance bonus of up to 25% of his base salary,
in the sole discretion of the Board of Directors. Dr. Carter will not
participate in any discussions concerning the determination of his annual bonus.
Dr. Carter is also entitled to an incentive bonus of 0.5% of the gross proceeds
received by the Company from any joint venture or corporate partnering
arrangement, up to an aggregate maximum incentive bonus of $250,000 for all such
transactions. It is contemplated that Dr. Carter will be entitled to this
incentive bonus upon receipt of the gross proceeds from the SAB Agreement (as
defined in "Certain Transactions"). Dr. Carter's agreement also provides that he
shall be paid his base salary and benefits through May 8, 1996 if he is
terminated without "cause," as that term is defined in the agreement. Pursuant
to his original agreement, as amended on August 8, 1991, Dr. Carter was granted
options to purchase 73,728 shares of the Company's Common Stock at an exercise
price of $2.71 per share.

1992 Stock Option Plan

The Company's 1992 Stock Option Plan (the "1992 Plan"), provides for the
grant of options for the purchase of up to an aggregate of 92,160 shares of
Common Stock to the Company's employees, directors, consultants and others whose
efforts are important to the success of the Company. The 1992 Plan is
administered by the Compensation Committee of the Board of Directors, which has
complete discretion to select the eligible individuals to receive and to
establish the terms of option grants. The 1992 Plan provides for the issuance of
either non-qualified options or incentive stock options, provided that incentive
stock options must be granted with an exercise price of not less than fair
market value at the time of grant and that non-qualified

stock options may not be granted with an exercise price of less than 50% of the
fair market value at the time of grant. The number of shares of Common Stock
available for grant under the 1992 Plan is subject to adjustment for changes in
capitalization. To date, no options have been granted under the 1992 Plan.

1990 Stock Option Plan

The Company's 1990 Stock Option Plan, as amended (the "1990 Plan"),
provides for the grant of options to employees, directors, officers, consultants
and advisors of the Company for the purchase of up to an aggregate of 460,798
shares of Common Stock. The plan is administered by the Compensation Committee
of the Board of Directors, which has complete discretion to select eligible
individuals to receive and to establish the terms of option grants. The number
of shares of Common Stock available for grant under the 1990 Plan is subject to
adjustment for changes in capitalization. As of December 31, 1996, options to
acquire an aggregate of 234,953 shares of the Common Stock were outstanding
under the 1990 Plan.

401(K) Plan

In December 1995, the Company established a defined contribution plan,
effective January 1, 1995, the Hemispherx Biopharma employees 401(K) Plan and
Trust Agreement (the "401(K) Plan"). All full time employees of the company are
eligible to participate in the 401(K) Plan following one year of employment.
Subject to certain limitations imposed by federal tax laws, participants are
eligible to contribute up to 15% of their salary (including bonuses and/or
commissions per annum. Participants' contributions to the 401(K) Plan may be
matched by the Company at a rate determined annually by the Board of Directors.
Each participant immediately vests in his or her deferred salary contributions,
while Company contributions will vest over one year. In 1996 the Company
provided matching contributions to each employee for up to 6% of annual pay or
$31,580.

Compensation Committee Interlocks and Insider Participation

During the fiscal year ended December 31, 1996, the members of the
Company's Compensation Committee were William A. Carter, Peter W. Rodino III,
and E. Gerald Kay. Dr. Carter is an officer of the Company. The Company's
Compensation Committee currently consists of Peter W. Rodino III and Richard C.
Piani. The following transactions describe certain relationships between the
Company and present and former members of the Compensation Committee:

In May 1995, Dr. Carter and certain other individuals and entities entered
into a 1995 Standby Financing Agreement with the Company pursuant to which they
were collectively obligated to invest during 1995 an aggregate of $5,500,000 in
the Company in the event the Company was unable to secure alternative financing
and the Board of Directors determined that the sale of securities to such
persons was advisable (the "1995 Standby Financing Agreement"). In exchange for
entering into the 1995 Standby Financing Agreement, the Company issued to each
of the parties ten-year warrants to purchase 50,000 shares of the Company's
Common Stock at an exercise price of $1.75 per share for each $100,000 of
standby financing obligation assumed by the party, resulting in warrants to
purchase an aggregate of 2,750,000 shares of Common Stock. In September 1995,
the parties to the 1995 Standby Financing Agreement, including Dr. Carter,
agreed to extend their obligations through December 31, 1996.

In June 1995, the directors of BioAegean Corp., a subsidiary of the
Company, issued 10-year options to purchase an aggregate of 1,000,000 shares of
common stock of BioAegean at an exercise price of $1.00 per

share (the "BioAegean Options") to its officers and directors. The BioAegean
Options are conditional upon the recipient's agreement to serve BioAegean as
needed for at least 24 months unless fully incapacitated. William A. Carter,
M.D., serves as Chairman, Chief Executive Officer and a Director of BioAegean
and received 300,000 BioAegean Options. Peter W. Rodino III serves as
Vice-Chairman, Secretary, Corporate Counsel and a director of BioAegean and
received 150,000 BioAegean Options. R. Douglas Hulse serves as Chief Operating
Officer of BioAegean and received 50,000 BioAegean Options. Richard C. Piani
serves as a director and the Advisor for European Affairs of BioAegean and
received 50,000 BioAegean Options.

In March 1995, the Company received an interest-free loan from William A.
Carter in the amount of $35,000. In March 1995, the Company repaid the loan from
Dr. Carter.

In February 1995, the Company issued notes in the aggregate principal
amount of $600,000 in connection with the Tisch/Tsai Restructuring (as defined
below). The notes were secured by a pledge by Dr. Carter of 112,925 shares of
Series C Preferred Stock and 240,756 shares of Common Stock. The notes have been
paid off and the shares are being returned.

Limitation of Liability and Indemnification Matters

As permitted by the Delaware General Corporation Law ("DGCL"), the Company
has adopted provisions in its Amended and Restated Certificate of Incorporation
which eliminate the personal liability of its directors to the Company and its
stockholders for monetary damages for breach of the directors' fiduciary duties
in certain circumstances and which require the Company to indemnify its
directors, officers and other agents, by Bylaw, agreement, vote of directors or
stockholders or otherwise, to the fullest extent permitted by law.

The Company has entered into separate indemnification agreements with its
directors and its officers. These agreements require, among other things, the
Company to indemnify directors and officers against certain liabilities that may
arise by reason of their status or service as directors and officers and to
advance their expenses incurred as a result of any proceeding against them as to
which they could be indemnified. The Company believes that these provisions in
its Amended and Restated Certificate of Incorporation and the indemnification
agreements are necessary to attract and retain qualified persons as directors
and officers. See "Business--Legal Proceedings".

Security Ownership of Certain Beneficial
Owners and Management
---------------------

The following table sets forth, as of March 19, 1997, the record and
beneficial ownership of Common Stock of the Company by each officer and
director, all officers and directors as a group, and each person known to the
Company to own beneficially or of record five percent or more of the outstanding
shares of the Company:

Shares
Officers, Directors and Beneficially Percent of Shares
Principal Stockholders Owned Beneficially Owned (1)
- ---------------------- ----- ----------------------

William A. Carter 3,733,255(2) 21.0%
R. Douglas Hulse 172,500(3) 1.0%
Robert E. Peterson 110,368(4) *
Harris Freedman 1,285,328(5) 7.4%
Sharon D. Will 613,333(6) 3.6%
Peter W. Rodino III 31,765(7) *
Cedric C. Philipp 36,333(8) *
Richard C. Piani 18,063(9) *
David R. Strayer, M.D. 18,745 *
Josephine Dolhancryk 50,820(10) *
Jerome Belson 1,684,600(11) 9.7%
Belson Enterprises, Inc.
495 Broadway
New York, NY 10012

All directors, 6,051,765 30.6%
executive officers
as a group (9 persons)

*Less than 1%

(1) For purposes of this table, a person or group of persons is deemed to have
"beneficial ownership" of any shares of Common Stock which such person has
the right to acquire such shares within 60 days of March 19, 1997. For
purposes of computing the percentage of outstanding shares of Common Stock
held by each person or group of persons named above, any security which
such person or persons has or have the right to acquire within such date is
deemed to be outstanding but is not deemed to be outstanding for the
purpose of computing the percentage ownership of any other person. Except
as indicated in the footnotes to this table and pursuant to applicable
community property laws, the Company believes based on information supplied
by such persons, that the persons named in this table have sole voting and
investment power with respect to all shares of Common Stock which they
beneficially own.

(2) Includes irrevocable proxies to vote 1,205,000 shares of Common Stock on
all matters that come before the stockholders of the Company until such
time as (i) the Company shall have achieved a market capitalization of
$300,000,000 or greater for at least 20 consecutive days of trading in the
public markets or (ii) the Company shall have received a bona fide offer
for acquisition or merger, the net

effect of which, if consummated, would be to establish a market
capitalization of the Company of not less than $300,000,000. This proxy
shall be terminated upon the sale of such shares in an arm's length public
sale. Also includes (i) an option to purchase 73,728 shares of Common Stock
from the Company at an exercise price of $2.71 per, (ii) warrants to
purchase 960 shares of Common Stock at an exercise price of $3.50 per
share, (iii) Rule 701 Warrants to purchase 933,333 shares of Common Stock
at a price of $3.50 per share (does not include 466,667 which are
non-exercisable); and (iv) warrants to purchase 465,000 shares of Common
Stock at $1.75 per share issued in connection with the 1995 Standby
Financing Agreement. Dr. Carter has pledged 112,925 shares of Series C
Preferred and 240,756 shares of Common Stock to the Tisch/Tsai Entities as
security for the repayment of the $660,000 note executed in March 1995. The
note has been paid off and the shares are being returned.

(3) Includes 172,500 warrants to purchase Common Stock exercisable at $3.50 per
share held by The Sage Group, of which Mr. Hulse is an Executive Director.
Does not include 100,000 warrant to purchase Common Stock at $1.75 per
share and 217,500 options to purchase Common Stock at $3.50 per share.

(4) Consists of 10,368 options to purchase Common Stock at an exercise price of
$4.34 per share and 100,000 warrants to purchase Common Stock at an
exercise price of $3.50 per share.

(5) Includes (i) 80,000 shares of Common Stock held by SMACS Holding Corp. of
which Mr. Freedman is an officer; (ii) 58,000 shares of Common Stock held
by Bridge Ventures,Inc. of which Mr. Freedman is an officer, (iii) 50,000
shares of Common Stock held by Bridge Ventures Defined Benefit Plan, of
which Mr. Freedman is Trustee; (iv) warrants to purchase 292,161 shares of
Common Stock at an exercise price of $3.50 per share owned of record by
Bridge Ventures, Inc.; (v) warrants to purchase 365,000 shares of Common
Stock which are exercisable at $1.75 per share issued in connection with
the 1995 Standby Financing Agreement owned of record by Bridge Ventures,
Inc.; (vi) 266,667 Rule 701 Warrants to purchase Common Stock of the
Company at an exercise price of $3.50 (does not include 133,333 which are
non-exercisable); (vii) 86,000 Class A Warrants, 40,000 of which are owned
by SMACS Holding Corp. and 46,000 of which are owned by Bridge Ventures,
Inc; and (viii) 37,500 shares of Common Stock underlying Series E
Preferred. Bridge Ventures, Inc. has given an irrevocable proxy to vote its
58,000 shares to William A. Carter on the same terms as the proxy described
in Note 2.

(6) Includes Rule 701 Warrants to purchase 133,333 shares of Common Stock at an
exercise price of $3.50 per share (does not include 66,667 which are
non-exercisable). Also includes 100,000 shares of Common Stock owned of
record by Worldwide Marketing, a company for which Ms. Will serves as
President. Also includes 380,000 warrants to purchase Common Stock of the
Company at an exercise price of $1.75. Worldwide Marketing has given an
irrevocable proxy to vote its shares to William A. Carter on the same terms
as the proxy described in Note 2.

(7) Includes Rule 701 Warrants to purchase 13,333 shares of Common Stock at
$3.50 per share (does not include 6,667 which are non-exercisable).

(8) Includes (i) Rule 701 Warrants to purchase 13,333 shares of Common Stock at
$3.50 per share (does not include 6,667 which are non-exercisable); (ii)
options to purchase 20,000 shares of Common Stock

at $3.50 per share; and (iii) 2,000 shares of Common Stock and 1,000 Class
A Warrants owned by the Cedric C. Philipp and Sue Jones Philipp Trust, of
which Mr. Philipp and his wife are Trustees.

(9) Includes options to purchase 4,608 shares of Common Stock at an exercise
price of $4.34 and 4,608 shares of Common Stock owned of record by Mr.
Piani's wife.

(10) Consists of options to purchase 820 shares of Common Stock at an exercise
price of $3.80 and 50,000 Warrants to purchase Common Stock at an exercise
price of $3.50 per share.

(11) Includes 392,000 Class A Warrants, of which (i) 25,000 are owned of record
by Mr. Belson's wife; and (ii) 27,000 are owned of record by The Jerome
Belson Foundation, of which Mr. Belson is Trustee. Also includes (i) 45,000
shares of Common Stock owned of record by The Jerome Belson Foundation;
(ii) 125,000 shares of Common Stock underlying Series E Preferred; and
(iii) warrants to purchase 550,000 shares of Common Stock at $1.75 per
share owned of record by Belson Enterprises, Inc. of which Mr. Belson is an
officer.

RESALES BY SELLING SECURITYHOLDERS

This Prospectus relates to the proposed resale by the Selling
Securityholders of the Securities. The following table sets forth as of March
19, 1997 certain information with respect to the persons for whom the Company is
registering the Securities for sale to the public except as footnoted below.
None of such persons has had a material relationship with or has held any
position or office with the Company or any of its affiliates within three years,
other than as footnoted below (see "Certain Transactions"). The Company will not
receive any of the proceeds from the sale of the Securities. If the C Warrants,
R Warrants and Series E Warrants are exercised, the Company would receive
$2,608,659.

Names of Selling Securities Beneficially Securities Offered
Security Holders Owned Prior to March, 1997 By Beneficial Owner
- ---------------- -------------------------- -------------------
Seymour Cohn(1) 239,616 239,616
Myron Cherry(2) 20,000 20,000
Charles Moore(3) 84,608 84,608
Maurice Schlang(4) 276,864 276,864
Julian & Eunice Cohen
Investments LP(5) 1,536 1,536
Sidney Stoneman(5) 1,536 1,536
Michael C. Burrows(5) 3,072 3,072
Frank B. Carr(5) 1,536 1,536
Michael J. Dubilier(5) 6,145 6,145
Keys Foundation(5) 6,145 6,145
Maryann Charlap(5) 10,554 10,554
Lloyd DeVos(5) 1,536 1,536
William A. Carter(5)(6) 960 960
Maryann Charlap & Abraham E
Ostrovsky & Paul E. Charlap,
Trust(5) 1,275 1,275
Myron Cherry(5) 1,636 1,636
FLF Associates(7) 72,000 72,000
Gerald Tsai(7) 43,200 43,200
Lincoln Trust(7) 28,800 28,800
Joseph C. Roselle(8) 25,000 25,000
Joseph Giamanco(8) 137,500 137,500
Bost & Co. FBO Fairfax
County Public Schools(8) 250,000 250,000
Topworks & Co. FBO Montgomery
County Employee Retirement
System(8) 250,000 250,000
Ell & Co. FBO AT&T
Investment Management Corp.(8) 750,000 750,000
Lindemann Capital Partners, LP(8) 150,000 150,000
Jerome Belson(8) 125,000 125,000
Bridge Ventures, Inc.(8)(9) 37,500 37,500
Alan Howard(8) 25,000 25,000
Michael Lauer(8) 30,000 30,000

Lancer Offshore, Inc.(8) 345,000 345,000
Lancer Partners, LP(8) 325,000 325,000
Lancer Voyage Fund(8) 50,000 50,000
John Bendall(10) 50,000 50,000
Hermitage Capital(10) 150,000 150,000

(1) Represents (i) a C Warrant to purchase 119,808 shares of Common Stock
exercisable during the four year period commencing November 2, 1995, at an
exercise price of $10.85 per share; and (ii) the Common Stock underlying said C
Warrant.

(2) Represents (i) a C Warrant to purchase 5,000 shares of Common Stock
exercisable at any time commencing November 1, 1994 and expiring December 31,
1998, at an exercise price of $3.50 per share; (ii) a C Warrant to purchase
5,000 shares of Common Stock exercisable at any time commencing March 20, 1995
and expiring March 31, 1999, at an exercise price of $3.50 per share; and (iii)
the Common Stock underlying said C Warrants.

(3) Represents (i) two C Warrants to purchase 20,000 shares of Common Stock
each, exercisable during the five year period commencing November 2, 1995, at an
exercise price of $2.00 per share; (ii) a stock option to purchase 2,304 shares
of Common Stock exercisable during the ten year period commencing April 16,
1996, at an exercise price of $4.34 per share; and (iii) the Common Stock
underlying said C Warrants.

(4) Represents (i) a C warrant to purchase 120,000 shares of Common Stock
exercisable during the five year period commencing November 2, 1995, at an
exercise price of $2.00 per share; (ii) a stock option to purchase 18,432 shares
of Common Stock exercisable during the ten year period commencing January 25,
1995, at an exercise price of $4.34 per share; and (iii) the Common Stock
underlying said C Warrants.

(5) Represents shares of Common Stock underlying R Warrants exercisable during
the four year period commencing December 31, 1993, at an exercise price of $3.50
per share.

(6) Dr. Carter is the President and Chief Executive Officer of the Company.

(7) Represents shares of Common Stock underlying R Warrants exercisable during
the five year period commencing December 30, 1992, at an exercise price of $2.00
per share.

(8) Represents shares of Common Stock underlying Series E Preferred.

(9) Harris Freedman, a Company Vice President, is an officer of Bridge Ventures,
Inc.

(10) Represents Series E Warrants to purchase shares of Common Stock at an
exercise price of $3.00 per share during the three year period commencing March
1, 1997.

The Selling Securityholders may effect the sale of their Securities from
time to time in transactions (which may include block transactions) in the
over-the-counter market, in negotiated transactions, through the writing of
options on the Securities, or a combination of such methods of sale, at fixed
prices which may be changed, at market prices prevailing at the time of sale, or
at negotiated prices.

The Company is not aware of any agreements, undertakings or arrangements
with any Underwriters or broker-dealers regarding the sale of their securities
in the United States, nor to the Company's knowledge is

the sale of Securities on behalf of the Selling Securityholders in the United
States. The Selling Securityholders may effect such transactions by selling the
Securities, as applicable, directly to purchasers or to or through
broker-dealers which may act as agents or principals. Such broker-dealers may
receive compensation in the form of discounts, concessions or commissions from
the Selling Securityholders, and/or the purchasers of their Securities, as
applicable, for which such broker-dealers may act as agents or to whom they sell
as principal, or both (which compensation as to a particular broker-dealer might
be in excess of customary commissions). The Selling Securityholders and any
broker-dealers that act in connection with the sale of their Securities might be
deemed to be "underwriters" within the meaning of Section 2(11) of the
Securities Act.

The Company has notified the Selling Securityholders of the prospectus
delivery requirements for sales made pursuant to this Prospectus and that, if
there are material changes to the stated plan of distribution, a post-effective
amendment with current information would need to be filed before offers are made
and no sales could occur until such amendment is declared effective. The Company
has agreed with one Selling Securityholder to promptly prepare, file with the
Commission and obtain effectiveness of any such post-effective amendment.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In March 1997, Bridge Ventures, Inc. purchased 75 shares of Series E
Preferred at $1,000 per share in a private offering pursuant to Rule 506 the
Securities Act and Regulation D promulgated thereunder. Harris Freedman, the
Company's Vice President, is an officer of Bridge Ventures, Inc.

In May 1996, the Company entered into two agreements with The Sage Group.
Under the first agreement, R. Douglas Hulse will serve as Chief Operating
Officer of the Company. In exchange, The Sage Group will receive from the
Company; (i) a monthly retainer of $10,000 starting June 1, 1996, replacing the
$5,000 monthly retainer provided in the June 1995 agreement; and (ii) options to
purchase 250,000 shares of the Company's Common Stock at an exercise price of
$3.50 per share. Under the second agreement, The Sage Group agreed to introduce
the Company to and assist the Company in negotiations with certain foreign
distribution partners. In exchange, The Sage Group will receive from the
Company; (i) a bonus payment of $500,000 if total sales of Ampligen in Canada
and Europe exceed $10 million for 1996 and 1997 combined; and (ii) options to
purchase 140,000 shares of the Company's Common Stock at an exercise price $3.50
per share. R. Douglas Hulse, Chief Operating Officer of the Company, is an
Executive Director of the Sage Group.

In March and October 1996, William A. Carter assigned and transferred an
aggregate of 60,000 warrants to purchase Common Stock, at $1.75 per share, to
three outside parties that had loaned the Company money in 1995. These loans
were repaid in 1995. The assigned warrants are subject to a lockup agreement.

In March 1996, Harris Freedman assigned and transferred 160,000 warrants to
purchase Common Stock at $1.75 per share to Sharon Will, an officer of the
Company and one other shareholder. These warrants are subject to a lockup
agreement.

In March 1996, the Compensation Committee of the Board of Directors
approved a grant of 250,000 warrants to purchase common stock at an exercise
price of $3.50 per share to Michael C. Burrows. This grant was made in
accordance with a Letter Agreement dated January 15, 1996, in which Mr. Burrows
agreed to provide consulting services to the Company for twenty four months. Mr.
Burrows served as Director of the Company in past years.

In March 1996 the Compensation Committee of the Board of Directors approved
grants of 50,000 warrants to purchase common stock at an exercise price of $3.50
per share to each of Robert E. Peterson, CFO and Josephine Dolhancryk, Assistant
Secretary of the Company. Such warrants are not exercisable for a period of one
year from issuance.

In March 1995, the Company instituted a declaratory judgment action against
a February noteholder, Seymour Cohn, of a $5,000,000 convertible note and a
secured defendant in United States District Court for the Eastern District of
Pennsylvania to declare as void, set aside, and cancel the February 1992
convertible note between the Company and Mr. Cohn (the "Note"). In addition, Mr.
Cohn instituted suit against the Company on the Note in the Circuit Court of the
15th Judicial District in and for Palm Beach County, Florida, seeking judgment
on the Note, plus attorney fees, costs and expenses; in August 1995, this action
was stayed by the Florida Court pending the outcome of the Pennsylvania action.
Mr. Cohn also filed a motion for a preliminary

injunction in the Pennsylvania court to enjoin the Company from disbursing the
proceeds of a public offering in the amount of $5.8 million, which motion was
granted November, 1995. On February 15, 1996, the Company reached an agreement
to settle this matter. Terms and conditions of the settlement include payment of
$6,450,000 to Mr. Cohn to cover the unpaid balance Note balance, legal expenses
and the retention of certain warrants granted prior to the lawsuit. The funds
under this settlement were paid on March 21, 1996. Mutual releases were executed
which completed the settlement of the litigation.

In January 1996, the Company engaged the Research Works, Inc. to produce
four research reports with respect to the securities of the Company over a 13
month period. In exchange for this service, the Company granted 60,000 warrants
to the Research Works, Inc. exercisable at $4.00 per share.

In January 1996, the Company entered into a one year consulting agreement
with Millenium International Communications, Ltd. ("Millenium"). The
consideration for such services is $120,000, to be paid by the Company in either
monthly payments or balloon payments, in the Company's discretion. Millenium
shall consult with and render advice to the Company specifically concerning
strategic planning, public relations and other related matters. The President of
Millenium, David C. Drescher is related to Steve Drescher, a former director of
the Company.

In December 1995, the Company retained the law firm of Akin, Gump, Strauss,
Hauer & Feld, LLP (the "Akin Group") to provide general legal counsel, advice
and representation. Initially, the Akin Group will represent the Company in
matters pertaining to the Food and Drug Administration ("FDA"). The agreement
includes incentive payments for obtaining FDA approval of Ampligen for HIV
Disease treatment.

In November 1995, the Company sold 5,313,000 Units of securities through an
initial public offering. Each Unit consists of one share of Common Stock and one
Class A Warrant.

In August 1995, in connection with the settlement of a lawsuit brought by a
former employee of the Company against the Company and David Fries, a former
director of the Company, the Company, Dr. Fries, the Canaan Entities and Dr.
William A. Carter, President, Chairman and CEO of the Company, entered into an
agreement pursuant to which the Company has agreed to reimburse Dr. Fries for
expenses in the amount of $50,000 incurred in connection with such litigation.
As part of such agreement, the parties agreed to mutual releases of certain
claims for expenses and damages arising out of the litigation or arising in
connection with Dr. Fries' service as a director of the Company. The payment of
$50,000 to Dr. Fries is evidenced by an interest-free promissory note pursuant
to which the final payment is due on or before November 15, 1995. The note was
assigned to the Canaan Entities.

In June 1995, the Company entered into an agreement with The Sage Group
pursuant to which The Sage Group has agreed to introduce the Company to and
assist the Company in negotiations with certain prospective distribution
partners listed in the agreement. In exchange, The Sage Group will receive from
the Company: (i) a monthly retainer of $5,000 which began accruing July 1, 1995
and (ii) at The Sage Group's option, a percentage of the proceeds, up to an
aggregate of $150,000, from the Company's first distribution agreement with a
partner listed in the agreement or the sum of $125,000 from such agreement. In
connection with this agreement, the Company will also issue to The Sage Group
options to purchase 100,000 shares of the

Company's Common Stock at an exercise price of $1.75 per share. R. Douglas
Hulse, Chief Operating Officer of the Company, is an Executive Director of The
Sage Group.

In May 1995, William A. Carter, M.D., President, Chairman and CEO of the
Company, Bridge Ventures, Sharon Will, a Vice President of the Company,
Associated Funding Services, Inc., Jerome Belson, a director of one of the
Company's subsidiaries and a principal shareholder and E. Gerald Kay, a former
director of the Company, entered into a 1995 Standby Financing Agreement with
the Company pursuant to which they are collectively obligated to invest during
1995 an aggregate of $5,500,000 in the Company in the event the Company is
unable to secure alternative financing and the Board of Directors determines
that the sale of securities to such persons is advisable. In exchange for
entering into the 1995 Standby Financing Agreement, the Company issued to each
of the parties ten-year warrants to purchase 50,000 shares of the Company's
Common Stock at an exercise price of $1.75 per share for each $100,000 of
standby financing obligation assumed by the party, resulting in warrants to
purchase an aggregate of 2,750,000 shares of Common Stock. In September 1995,
the parties agreed to extend their obligations under the 1995 Standby Financing
Agreement through December 31, 1996. Harris Freedman, a Vice President of the
Company, and his wife are officers of Bridge Ventures. Gerald Brauser is
President of Associated Funding Services, Inc.

In June 1995, the Board of Directors of BioAegean Corp, a subsidiary of the
Company, issued an aggregate of 1,200,000 BioAegean Options at an exercise price
of $1.00 per share to its officers and directors, including certain officers and
directors of the Company. In consideration for the BioAegean Options, the
recipients agreed to serve BioAegean's needs for at least 24 months unless fully
incapacitated. William A. Carter, M.D., Chairman, President and Chief Executive
Officer of the Company, serves as Chairman, Chief Executive Officer and a
Director of BioAegean and received 300,000 BioAegean Options. Peter W. Rodino
III, a director and Secretary of the Company, serves as Vice-Chairman,
Secretary, Corporate Counsel and a director of BioAegean and received 150,000
BioAegean Options. R. Douglas Hulse serves as Chief Operating Officer of the
Company and BioAegean and received 50,000 BioAegean Options. Robert Peterson
serves as Chief Financial Officer of both the Company and BioAegean and received
50,000 BioAegean Options. Sharon Will, Vice President of Investor Relations and
Corporate Communications for the Company, serves as Vice President of Marketing
for BioAegean and received 150,000 BioAegean Options. Harris Freedman serves as
Vice President for Strategic Alliances for both the Company and BioAegean and
received 150,000 BioAegean Options. Richard C. Piani, a director of the Company,
serves as a director and the Advisor for European Affairs of BioAegean and
received 50,000 BioAegean Options. E. Gerald Kay served as a director for both
the Company and BioAegean and received 50,000 BioAegean Options. BioAegean's
remaining director, Jerome Belson, a principal stockholder of the Company,
received 50,000 BioAegean Options.

In March 1995, the Company issued the Original Brauser Note, to Gerald A.
Brauser in the principal amount of $200,000. The Original Brauser Note also
provided for the issuance of warrants to purchase 50,000 shares of the Company's
Common Stock at $1.75 per share. In May 1995, the Company restructured the
Original Brauser Note and issued the New Brauser Note to Mr. Brauser in the
amount of $100,000 along with warrants to purchase 25,000 shares of the
Company's Common Stock at $1.75 per share. As part of the restructuring, Mr.
Brauser agreed to (i) purchase 100,000 shares of Common Stock with $50,000 of
the Original Brauser Note and (ii) apply $50,000 of the Original Brauser Note
towards a Bridge Loan in connection with the Bridge Financing. The New Brauser
Note of $100,000 and the $50,000 Bridge Loan have been paid off. In connection
with both the Original Brauser Note and the New Brauser Note, Bridge Ventures
agreed

to permit the Company to collateralize these notes with the Company's patent
estate, which collateral had previously been granted to Bridge Ventures. Bridge
Ventures further guaranteed the Original Brauser Note with certain publicly
traded common stock, which guarantee was released by Mr. Brauser in connection
with the restructuring. Harris Freedman, a Vice President of the Company, and
his wife are both officers of Bridge Ventures.

In March and April 1995, in connection with the Bridge Financing, the
Company issued Bridge Notes to certain lenders in the aggregate principal amount
of $1,500,000, including a Bridge Note in the amount of $250,000 to Stephen
Drescher and a Bridge Note in the amount of $150,000 to Jerome Belson.
Additionally, in connection with the Bridge Loans, the Company has issued
options to purchase 166,665 Bridge Units at $.50 per Bridge Unit to Mr. Drescher
and options to purchase 100,000 Bridge Units at $.50 per Bridge Unit to Jerome
Belson. In July 1995, Mr. Drescher assigned the $250,000 Bridge Note and his
options to purchase 166,665 Bridge Units to certain other investors. Mr.
Drescher is a former director of the Company and presently serves as the
Director of Corporate Finance at Monroe Parker, one of the Underwriters. Jerome
Belson is a principal shareholder and director of BioAegean, a subsidiary of the
Company.

In March 1995, the Company received interest-free loans from William A.
Carter and Harris Freedman in the amounts of $35,000 and $12,000, respectively.
In March 1995, the Company repaid the loan from Dr. Carter. In April 1995, the
Company repaid the loan from Mr. Freedman.

In December 1992 and February 1993, the Company issued to the Tisch/Tsai
Entities, in a private placement, promissory notes in the aggregate principal
amount of $2,400,000 due on April 30, 1994, and warrants to purchase an
aggregate of 36,864 shares of the Company's Common Stock or 40,000 shares of
Series C Preferred Stock at an exercise price of the (i) $13.02 or $12.00 per
share, respectively or (ii) the per share price of Common Stock in the initial
public offering. The warrants expire on December 31, 1997. One-half of the
principal amount of the notes and one-half of the warrants were purchased by FLF
Associates. James S. Tisch, a former director of the Company, is a principal of
FLF Associates. The remaining half of the principal amount of the note and
one-half of the warrants were purchased by Gerald Tsai, Jr. and Lincoln Trust
Company, Custodian FBO Gerald Tsai, Jr. Mr. Tsai is a former director of the
Company. Interest on the notes is payable quarterly at an annual rate of 12% (6%
prior to May 1, 1993).

In February 1995, the Company entered into a settlement agreement with the
Tisch/Tsai Entities to restructure the December 1992 and February 1993
promissory notes in the aggregate principal amount of $2,400,000 and settle
certain threatened claims made by the Tisch/Tsai Entities against the Company
(the "Tisch/Tsai Restructuring"). This debt restructuring consisted of (i) the
repayment by the Company of $1,200,000 in principal, (ii) the issuance of
replacement notes in the aggregate principal amount of $600,000 to the
Tisch/Tsai Entities which notes are due on the earlier of the closing of a
public offering or May 28, 1996 and bear interest at the rate of 8% per annum,
which interest is payable in quarterly installments from an interest reserve
established by the Company, (iii) the conversion of $600,000 of principal into
172,414 shares of Series C Preferred Stock at the rate of $3.48 per share, (iv)
the amendment and restatement of certain warrants issued in connection with the
original notes in order to increase the number of shares of stock issuable
thereunder by 64,000 shares to provide for warrants to purchase a total of
144,000 shares of Common Stock at an exercise price of $2.00 per share, which
warrants are exercisable until December 31, 1997, and (v) the

release by all parties of any claims. The replacement notes were secured by a
pledge by Dr. William A. Carter, President, Chief Executive Officer and Chairman
of the Company, of 112,925 shares of Series C Preferred Stock and 240,756 shares
of Common Stock. In March, 1996 the notes were repaid and the shares of stock
are being returned.

In November 1994, the Company restructured a $100,000 note issued in June
1993 to Myron Cherry (the "Cherry Note"), a stockholder, pursuant to which the
repayment date of the principal amount of the Cherry Note was extended to the
closing date of the Company's initial public offering and the accrued but unpaid
interest subsequent to September 30, 1993 was converted into Common Stock of the
Company at a price of $5.43 per share. Pursuant to the restructuring, in the
event that the Company's initial public offering was not completed by February
28, 1995, the principal amount would be repaid by the Company or Bridge Ventures
Inc. by March 6, 1995. In addition, the Company issued to Mr. Cherry 5,000
immediately exercisable warrants with an exercise price of $3.50 per share and
Bridge Ventures agreed that the unpaid principal on the Cherry Note would be
collateralized by the Company's patents on the same terms as the Bridge
Financing arranged by Bridge Ventures. In March 1995, the Company and Mr. Cherry
agreed to extend the maturity of the promissory note from March 1, 1995 to March
31, 1995. During this extended period, the Company agreed to pay 8% interest and
grant Mr. Cherry a warrant to purchase 5,000 shares of Common Stock exercisable
at $3.50. The Company further agreed to either register all of Mr. Cherry's
2,770 shares of Common Stock and 10,000 warrants to purchase Common Stock in
connection with this Public Offering or reduce the exercise price of Mr.
Cherry's warrants to $1.75 per share. Because Mr. Cherry has not advised the
Company of his election, the Company has reduced the exercise price of his
warrants to $1.75 per share. As of July, 1995, the Company has repaid the entire
principal amount of the Note, including accrued interest. Harris Freedman, a
Vice President of the Company, and his wife are officers of Bridge Ventures.

In October and November 1994, the Company granted Rule 701 Warrants to
purchase 20,000 shares of Common Stock at $3.50 per share to Cedric C. Philipp
and Peter Rodino III, directors of the Company and Maryann Charlap Azzato and E.
Gerald Kay, former directors of the Company. In addition, the Company granted
the following Rule 701 Warrants to purchase shares of Common Stock at $3.50 per
share: 1,400,000 warrants to William A. Carter; 200,000 warrants to Sharon Will,
Vice President of Investor Relations and Corporate Communications; and 400,000
warrants to Harris Freedman, Vice President for Strategic Alliances.

From July 1994 to November 1994, the Company completed a private placement
in which it sold 2,050,000 shares of Common Stock to certain accredited
investors for an aggregate consideration of $1,025,000 (the "1994 Common Stock
Financing"). In connection with the private placement, Bridge Ventures
introduced a number of investors and lenders to the Company. Harris Freedman,
Vice President of the Company, and his wife are officers of Bridge Ventures. In
conjunction with the 1994 Common Stock Financing, the Company agreed to
collateralize certain of its patents until the earlier of the effectiveness of
the initial public offering or the consummation of corporate alliances or
licensing arrangement which provide sufficient operating capital and clinical
development support to the Company. Pursuant to the agreement with Bridge
Ventures in connection with the 1994 Common Stock Financing, Messrs. Philipp,
Rodino and Kay were elected to the Board of Directors. Purchasers of 1,950,000
of the shares of Common Stock issued pursuant to the 1994 Common Stock Financing
executed irrevocable proxies naming William A. Carter, the Company's President,

Chief Executive Officer and Chairman, as proxy, with full power to vote their
shares on all matters to be voted on by the stockholders of the Company until
the achievement by the Company of a market capitalization of $300,000,000 or
greater under certain circumstances or the receipt by the Company of a bona fide
offer for acquisition or merger, the net effect of which, if consummated, would
be to establish a market capitalization of at least $300,000,000.

In October 1994, in connection with the 1994 Common Stock Financing, the
Company sold 50,000 shares of Common Stock at a price of $.50 per share to
Stephen J. Drescher, a former director of the Company, 80,000 shares of Common
Stock to the Belfort Family Trust, of which Mr. Drescher serves as Trustee, at a
price of $.50 per share and 50,000 shares of Common Stock at a price of $.50 per
share to Jerome Belson, a director of BioAegean. Mr. Drescher also received
300,000 warrants in connection with general consulting services. In addition, in
October 1994, the Company received a certain loan in the aggregate principal
amount of $150,000 from the Belfort Family Trust. In March 1995, the loan was
repaid without interest from the proceeds from the Bridge Loans. In October
1995, the Belfort Family Trust sold 80,000 shares of Common Stock to Carol
Schiller at a price of $2.00 per share.

In October 1994, the Company entered into an agreement with Bioclones
Proprietary Limited ("Bioclones"), a biopharmaceutical company which is
associated with The South African Breweries Limited ("SAB"). In connection with
the execution of SAB Agreement, the Company granted Cedric C. Philipp, a
Director of the Company, an option to purchase 20,000 shares of Common Stock at
$3.50 per share. In addition, in October 1994, the Board of Directors granted to
Mr. Philipp, a director of the Company and Special Advisor to the Board for
International Marketing, the right to receive 3% of the gross proceeds of any
licensing fees and prepaid royalties received by the Company pursuant to the SAB
Agreement and a fee of .75% of gross proceeds in the event that SAB/Bioclones
makes a tender offer for all or substantially all of the Company's assets,
including a merger, acquisition or related transaction. In addition, the Company
further agreed to provide a monthly retainer of $2,000 to Mr. Philip in exchange
for consulting services and remuneration for corporate alliances which are
principally introduced by Mr. Philipp. Mr. Philipp has been paid $90,000 to date
in connection with these arrangements.

In September 1994, Maryann Charlap Azzato, formerly Vice President of
Investor Relations and Corporate Communications and the former Vice Chairman and
director of the Company, entered into an agreement with Lloyd DeVos, a
stockholder, former director and holder of a note in the principal amount of
$100,000 (the "DeVos Note") in order to settle a lawsuit filed against the
Company and William A. Carter by Mr. DeVos in the United States District Court
for the Southern District of New York alleging breach of contract, conversion
and certain violations of the federal securities laws in connection with the
issuance of the DeVos Note. Pursuant to the settlement agreement, principal and
interest on the DeVos Note were repaid by Ms. Azzato as well as certain expenses
incurred by Mr. DeVos in the approximate amount of $2,600 and 1,536 shares of
Common Stock of the Company were transferred to Mr. DeVos by Ms. Azzato in
exchange for the assignment to Ms. Azzato by Mr. DeVos of the right to repayment
by the Company of the DeVos Note and warrants to purchase 1,667 share of Series
C Preferred Stock. In addition, certain options to purchase 6,912 shares of
Common Stock of the Company previously issued to Mr. DeVos were delivered to Mr.
DeVos. In

exchange for the above agreement, Mr. DeVos, the Company and William A. Carter
executed mutual releases of all claims and Mr. DeVos dismissed the suit.

In September 1994, the Company incorporated three wholly-owned subsidiaries
- - BioPro Corp. ("BioPro"), Core BioTech, Corp. ("Core BioTech") and BioAegean
Corp. - in Delaware. In September 1994, the Company granted exclusive worldwide
licenses and/or sublicenses to certain of its patents and assigned certain other
patents to BioPro (the "BioPro License"), Core BioTech (the "CoreBiotech
License") and BioAegean (the "BioAegean License"). Bridge Ventures, which has
rights in the Company's patents pursuant to the collateralization of such
patents in connection with the 1994 Common Stock Financing, agreed to release
its rights in the licensed or assigned patents. Harris Freedman, the Vice
President for Strategic Alliances for the Company and BioAegean, and his wife
are officers of Bridge Ventures.

In May 1994, the Company entered into an agreement to borrow $100,000 from
Bridge Ventures for 60 days in exchange for warrants to purchase 92,160 shares
of Common Stock at $3.50 per share. In August 1994, the $100,000 loan was
converted to 200,000 shares of Common Stock and warrants to purchase 200,000
shares of Common Stock at an exercise price of $3.50 per share. Bridge Ventures
transferred 150,000 of its shares of Common Stock to Gerald Kay, a former
director of the Company. In addition, Bridge Ventures received a $50,000
consulting fee for general business and financial consulting services rendered
from January 1994 to July 1994, which it converted into 100,000 shares of Common
Stock as part of the 1994 Common Stock Financing. Harris Freedman, the Company's
Vice President, and his wife are officers of Bridge Ventures. Pursuant to the
agreement with Bridge Ventures, Messrs. Kay, Philipp and Rodino were elected to
the Board of Directors. In November 1994, each of Bridge Ventures and Gerald Kay
sold 50,000 shares of Common Stock at a price of $.50 per share to Worldwide
Marketing. Sharon Will, an officer of the Company, is President of Worldwide
Marketing.

In April 1994, William A. Carter, the Company's Chairman and Chief
Executive Officer, purchased 20,000 shares of Series C Preferred Stock at $5.00
per share. Also Maryann Charlap Azzato purchased 30,000 shares of Series C
Preferred Stock at $5.00 per share and agreed to purchase an additional 10,000
shares at $5.00 per share.

In May 1994, Maryann Charlap Azzato guaranteed payment of two promissory
notes in the aggregate amount of $76,000 payable by the Company representing
payments due in connection with the Temple Agreement (the "Temple Notes"). In
return for the guarantee, the Company assigned all rights, patents and related
technology in the Company's Oragen and Diagen products to Ms. Azzato, which
rights will revert to the Company upon repayment of the principal on the Temple
Notes, 12% interest, and Ms. Azzato's fees and expenses which are expected to be
paid from the proceeds of this Public Offering. The Company also received a
right of first refusal with respect to the sale or assignment by Ms. Azzato of
this technology.

In January 1994, William A. Carter, the Company's Chairman and Chief
Executive Officer, sold an aggregate of 122,880 shares of Common Stock at $3.26
per share for an aggregate price of $400,000 to Michael Dubilier, Keys
Foundation, Canaan Venture Limited Partnership ("Canaan Venture"), Canaan
Venture Offshore Limited Partnership, C.V. ("Canaan Offshore"), James Tisch and
an unaffiliated individual. Using the proceeds of this sale, Dr. Carter
purchased 80,000 shares of Series C Preferred Stock at $5.00 per share from the
Company. In addition, Maryann Charlap Azzato purchased 3,600 shares of Series C
Preferred Stock

at $5.00 for an aggregate price of $18,000, representing her remaining
commitment under the 1993 Standby Financing Agreement.

DESCRIPTION OF SECURITIES

The Company is authorized to issue up to 50,000,000 shares of Common Stock,
$.001 par value per share, and 5,000,000 shares of Preferred Stock, $.01 par
value per share ("Preferred Stock").

Common Stock

As of March 19, 1997, there were 16,353,086 shares of Common Stock
outstanding and held of record by approximately 355 stockholders, not including
shares of Common Stock held in street name. These outstanding common shares
include 30,550 shares of Common Stock contained in outstanding Units. The
holders of Common Stock are entitled to one vote per share on all matters to be
voted on by stockholders, and stockholders have no rights to cumulative votes in
the election of directors. Subject to prior dividend rights and preferences of
holders of shares of Preferred Stock, if any, holders of Common Stock are
entitled to receive such dividends as may be declared by the Board of Directors
from funds legally available therefor. Upon liquidation or dissolution of the
Company, subject to prior liquidation rights of holders of Preferred Stock, if
any, the assets of the Company available for distribution to stockholders will
be distributed ratably among the holders of Common Stock. The holders of Common
Stock have no preemptive or other subscription rights and there are no
conversion or redemption or sinking fund provisions with respect to such shares.
All of the outstanding shares of Common Stock are fully paid and nonassessable
and the shares of Common Stock sold by the Company in this offering will be
fully paid and nonassessable.

Preferred Stock

As of March 19, 1997, there were 5,000 shares of Series E Preferred issued
and outstanding. These preferred shares are convertible into Common Stock.

The Board of Directors are authorized, without further action or vote of
the stockholders, to issue up to 4,500,000 shares of Preferred Stock in one or
more series and to fix the rights, preferences, privileges and restrictions,
including the dividend rights, conversion rights, voting rights, rights and
terms of redemption, redemption price or prices, liquidation preferences and the
number of shares constituting any series or the designations of such series. The
Company has no present plans to issue any shares of Preferred Stock. Issuance of
Preferred Stock, which may be accomplished through a public offering, a private
placement or otherwise may dilute the voting power of holders of Common Stock,
may render more difficult the removal of current management, even if such
removal may be in the stockholders' best interest, and may have the effect of
delaying, deferring or preventing a change in control of the Company.

Warrants

In connection with various debt financings and other agreements, the
Company has issued warrants to acquire an aggregate of up to 6,425,297
(exclusive of Class A Warrants) shares of Common Stock at a weighted average
exercise price of $2.93 per share. In addition, the Company issued Rule 701
Warrants to the Company's directors and certain officers in October and November
1994, to purchase an aggregate of

2,080,000 shares of Common Stock at $3.50 per share. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Certain Transactions." All of these warrants, except for (i) the Rule 701
Warrants which vest in 1/3 increments over 36 months and (ii) the 100,000
warrants which may be issued to The Sage Group which vest upon the occurrence of
certain conditions, are currently exercisable by the holders.

Class A Redeemable Warrants

As of March 19, 1997, there were 6,313,000 Class A Redeemable Warrants (the
"Class A Warrants") outstanding. The Class A Warrants (including the Class A
Warrants included in 30,550 outstanding Units and 1,000,000 Bridge Units) were
issued pursuant to an agreement, dated November 2, 1995 (the "Warrant
Agreement"), between the Company and Continental Stock Transfer and Trust
Company (the "Warrant Agent"). The following discussion of certain terms and
provisions of the Class A Warrants is qualified in its entirety by reference to
the detailed provisions of the Warrant Agreement.

Each Class A Warrant represents the right of the registered holder to
purchase one share of Common Stock at an exercise price equal to $4.00, subject
to adjustment (the "Purchase Price"). The Class A Warrants will be entitled to
the benefit of adjustments in the Purchase Price and in the number of shares of
Common Stock and/or other securities deliverable upon the exercise thereof in
the event of a stock dividend, stock split, reclassification, reorganization,
consolidation, merger or the issuance of Common Stock or options to purchase
Common Stock at a price below the Purchase Price then in effect. The Company has
the right to reduce the Purchase Price or increase the number of shares of
Common Stock issuable upon the exercise of the Class A Warrants.

Unless previously redeemed, the Class A Warrants may be exercised at any
time commencing November 2, 1996 and prior to the close of business on November
2, 2000 (the "Expiration Date"). On and after the Expiration Date, the Class A
Warrants become wholly void and of no value. The Company may, upon 30 days
written notice to all holders of the Class A Warrants, reduce the exercise price
or extend the Expiration Date of all outstanding Class A Warrants for such
increased period of time as it may determine. The Class A Warrants may be
exercised at the office of the Warrant Agent.

The Company has the right at any time after November 2, 1997 to redeem the
Class A Warrants at a price of $.05 each, by written notice mailed 30 days prior
to the redemption date to each Class A Warrant holder at his address as it
appears on the books of the Warrant Agent. Such notice shall only be given
within 10 days following any period of 20 consecutive trading days during which
the high closing bid price of the shares of Common Stock (if then traded on the
Nasdaq or on a national securities exchange) exceeds $9.00, subject to
adjustments for stock dividends, stock splits and the like. If the Class A
Warrants are called for redemption, they must be exercised prior to the close of
business on the date prior to the date of any such redemption or the right to
purchase the applicable shares of Common Stock will lapse.

No holder, as such, of Class A Warrants shall be entitled to vote or
receive dividends or be deemed the holder of shares of Common Stock for any
purpose whatsoever until such Class A Warrants have been duly exercised and the
Purchase Price has been paid in full.

If required, the Company will file a new registration statement with the
Commission with respect to the securities underlying the Class A Warrants prior
to the exercise of the Class A Warrants and deliver a prospectus with respect to
such securities to all Class A Warrant holders as required by Section 10(a)(3)
of the Securities Act. See "Risk Factors--Current Prospectus and State `Blue
Sky' Registration Required to Exercise the Redeemable Warrants."

Units

Pursuant to the IPO in November 1995, the Company registered and issued
5,313,000 Units. Each Unit consists of one share of Common Stock and one Class A
Warrant. On July 12, 1996, the Units were de- coupled into their component
parts. On August 16, 1996, the Company voluntarily delisted the Units. As of
March 19, 1997 there were 30,550 Units outstanding.

Bridge Units

In connection with the Bridge Loans, the Company issued to the holders of
the Bridge Loans Bridgeholders Options to purchase 1,000,000 Bridge Units at an
exercise price of $.50 per Bridge Unit. Each Bridge Unit originally contained
one share of Common Stock, one Class A Warrant and one Class B Redeemable
Purchase Warrant (collectively, the "Class B Warrants"). The Company and the
purchasers amended the Bridge Units to eliminate the Class B Warrants such that
each Bridge Unit contains one share of Common Stock and one Class A Warrant. The
Company registered the Bridgeholder Options and the securities underlying them
in the IPO. The Class A Warrants included in the Bridge Units are identical to
the Class A Warrants offered by the Company in the IPO. All holders of
Bridgeholder Options have exercised the options at an exercise price of $.50 per
Bridge Unit. The Bridge Units and the securities contained therein are not
transferable until the earlier of 13 months from November 2, 1995 or at such
earlier date as may be permitted by the Company. The Bridge Units were
de-coupled into their component parts on July 12, 1996, along with the Units.

Rule 701 Warrants

In October 1994, the Company issued 2,080,000 warrants to purchase Common
Stock at $3.50 per share pursuant to Rule 701 under the Securities Act ("Rule
701 Warrants") to certain officers and employees of the Company. These Rule 701
Warrants vest in 1/3 increments over a thirty six month period and are
exercisable until September 30, 1999. In the event that the number of Rule 701
Warrants issued by the Company exceeds the aggregate monetary limits set forth
under Rule 701, the number of Rule 701 Warrants issued to the holders will be
reduced pro rata and the remaining warrants will not be subject to the
provisions of Rule 701. See "Shares Eligible for Future Sales and Registration
Rights."

Delaware Law and Certain Charter and By-Law Provisions

The Company will be subject to the provisions of Section 203 of the General
Corporation Law of Delaware. Section 203 prohibits a publicly-held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless, among other
exceptions, the business combination is approved by (i) the Board of Directors
prior to the date the interested stockholder obtained such status or

(ii) the holders of two-thirds of the outstanding shares of each class or series
of stock entitled to vote generally in the election of directors, not including
those shares owned by the interested stockholder. A "business combination"
includes mergers, asset sales and other transactions resulting in a financial
benefit to the interested stockholder. Subject to certain exceptions, an
"interested stockholder" is a person who, together with affiliates and
associates, owns, or within three years did own, 15% or more of the
corporation's voting stock.

The Company's By-Laws contain a provision whereby a stockholder of the
Company may nominate an individual or individuals for election to the Board of
Directors only if such nomination is made in writing (i) at least ninety days in
advance of the Company's annual meeting of stockholders or (ii) within seven
days following notice of a special meeting of stockholders for the election of
directors. Accordingly, it will be more difficult for stockholders, including
those holding a majority of the outstanding shares, to force an immediate change
in the composition of the Board of Directors.

The Company's Certificate of Incorporation contains certain provisions
permitted under the General Corporation Law of Delaware relating to the
liability of directors. The provisions eliminate a director's liability for
monetary damages for a breach of fiduciary duty, except in certain circumstances
involving wrongful acts, such as the breach of a director's duty of loyalty or
acts or omissions which involve intentional misconduct or a knowing violation of
law. The Company's Certificate of Incorporation also contains provisions to
indemnify its directors and officers to the fullest extent permitted by the
General Corporation Law of Delaware. The Company has entered into
indemnification agreements with its current directors and certain of its
executive officers. These agreements have the practical effect in certain cases
of eliminating the ability of stockholders to collect monetary damages from such
individuals. The Company believes that these provisions and agreements have
assisted the Company in attracting and retaining qualified individuals to serve
as directors and officers.

Transfer Agent and Registrar

The transfer agent and registrar for the Company's Common Stock, Class A
Warrants and Units is Continental Stock Transfer and Trust Company, 2 Broadway,
New York, New York 10004.

Nasdaq Quotation

The Company's Common Stock and Warrants trade on Nasdaq under the trading
symbols HEMX and HEMXW, respectively.

Shares Eligible for Future Sale and Registration Rights

The Company has 16,353,086 shares of Common Stock outstanding as of March
19, 1997. In addition, the Company has 234,953 stock options and 15,280,797
warrants outstanding. Other than 5,313,000 shares of Common Stock and 5,313,000
Class A Warrants contained in the IPO Units, all of the Company's shares of
Common Stock, options and warrants were issued in private transactions not
involving a public offering and, therefore, are treated as "restricted
securities" subject to the restrictions of Rule 144 under the Securities Act.

Approximately 9,467,968 shares of the Company's Common Stock are restricted
securities as that term is defined in Rule 144 promulgated under the Securities
Act. Approximately 3,594,720 of such shares have

been beneficially owned for at least two years and therefore can be sold
pursuant to Rule 144. In general, under Rule 144, subject to the satisfaction of
other conditions, a person, including an affiliate of the Company, who has
beneficially owned restricted shares of Common Stock for at least two years is
entitled to sell, within any three month period, a number of shares that does
not exceed the greater of 1% of the total number of outstanding shares of the
same class or if the Common Stock is quoted on a stock exchange, the average
monthly trading volume during the four calendar weeks preceding the sale.

There are approximately 5,722,664 shares subject to Rule 144(k)
restrictions. Generally, under Rule 144(k), subject to the satisfaction of
certain other conditions, a person who is presently not and who has not been an
affiliate of the Company for at least three months immediately preceding the
sale and who has beneficially owned the shares of Common Stock for at least
three years is entitled to sell such shares without regard to any volume
limitations.

Prior to the IPO, the Company entered into lock up agreements with certain
shareholders. These lock up agreements ranged from eighteen (18) months to
thirty six (36) months. As of March 19, 1997, approximately 3,167,809 shares of
Common Stock remained locked up. The lock-up agreements expire as follows: (i)
265,421 shares on May 2, 1997; (ii) 1,941,225 shares on November 2, 1997; and
(iii) 961,163 shares on November 2, 1998.

LEGAL MATTERS

The validity of the securities offered hereby will be passed upon for the
Company by Silverman, Collura, Chernis & Balzano P.C., New York, New York.

EXPERTS

The consolidated financial statements of Hemispherx Biopharma, Inc. and
subsidiaries as of December 31, 1995 and 1996, and for each of the years in the
three year period ended December 31, 1996, have been included herein and in the
registration statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.

ADDITIONAL INFORMATION

The Company is subject to the reporting requirements of the Exchange Act.
The Company has filed with the Commission a post-effective amendment to the
Registration Statement on Form S-1 (including any amendments thereto, the
"Registration Statement") under the Securities Act. This Prospectus does not
contain all of the information set forth in the Registration Statement and the
exhibits and schedules thereto. For further information with respect to the
Company and the Common Stock, reference is made to the Registration Statement,
and the exhibits and schedules thereto. Statements contained in this Prospectus
as to the contents of any contract or any other document are not necessarily
complete and, in each instance, reference is made to the copy of such contract
or document filed as an exhibit to the Registration Statement. The Registration
Statement and the exhibits and the schedules thereto filed with the Commission
may be inspected, without charge, at the public reference facilities maintained
by the Commission at Room 1024, Judiciary Plaza, 450

Fifth Street, N.W. Washington, D.C. 20549, and at the Commission's Regional
Offices at 7 World Trade Center, 13th Floor, New York, New York 10048 and
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such material may also be obtained upon written
request from the Public Reference Section of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates.

GLOSSARY OF TERMS

25A: 2", 5" oligoadenylate; a short polymer of ribonucleic
acid containing the base adenine.

25A Synthetase: A set of specific enzymes that join together certain
building blocks, termed nucleotides, to form 2-5A;
2-5A synthetase must be activated by a
double-stranded RNA molecule.

AIDS: Acquired Immunodeficiency Syndrome; a disease caused
by HIV infection due to the progressive decline in
the body's immune system leading to fatal infections
or malignancies.

Analogue: A chemical compound with a structure similar to that
of another compound, but differing from it in respect
to a certain component.

Antiviral: Destroying viruses or suppressing their replication.

CD4: A certain type of immune cell which protects the body
against foreign organisms such as bacteria and
viruses.

Controlled Study: A clinical trial in which patients are divided into
two groups, one of which receives the drug being
tested, and the second of which receives either a
saline solution (see definition of "Placebo") or
another drug purported to be clinically beneficial in
the treatment of the indication in question. In
trials where the second group receives saline
solution, the study is referred to as
"placebo-controlled". In trials where the second
group receives a drug purported to be beneficial, the
study is referred to as "active-controlled".

Cytokine: Proteins released by a cell population on contact
with a stimulus, which act as intracellular
mediators.

Double-Blind: Refers to a study where neither the patient nor the
treating physician knows whether the patient is being
administered with drug or placebo.

Enzyme: A protein that accelerates a chemical reaction of
other substances in the body.

FDA: Food and Drug Administration; the United States
governmental agency with authority for drug approval.

Good Laboratory
Practice (GLP): Federal regulations which govern the generation of
laboratory data in a manner that is acceptable to the
FDA in its review of ongoing studies and New Drug
Applications (NDA) for marketing approval.

HIV: Human-immunodeficiency virus; the virus which causes
AIDS.

Interferon: IFN; A family of proteins that exert anti-viral
activity; interferons also have immune regulatory and
anti-tumor activities. IFN can be classified into
three distinct classes termed alpha, beta or gamma.

Interleukin: A group of protein factors, produced by immune cells.

In vitro: Refers to studies taking place within an artificial
environment such as a test tube.

In vivo: Refers to studies taking place within a living body.

Lymphokine: Antiviral and anticancer products, such as
interferon, produced by certain types of blood cells.

Macrophage: A blood cell which ingests foreign substances.

Multicenter: Refers to a trial conducted at more than one clinical
site.

Oncogene: Refers to genes with the capacity to cause production
or growth of a tumor.

Open-Label: Refers to a study where both the patient and the
treating physician know the identity of the drug
which is being administered.

Placebo: A dummy treatment administered to the control group
in a controlled clinical trial in order to
distinguish the specific and nonspecific effects of
the experimental treatments.

Placebo-Controlled: Refers to a trial in which a portion of the patients
receive a drug and a portion of the patients receive
a placebo, and the activity of the drug is compared
to the activity of the placebo.

Protein Kinase: Refers to an enzyme which can modify other protein
factors leading to inhibition of viral replication or
tumor cell growth.

Randomized: Refers to a procedure where the treatment that a
patient will receive (i.e. the active drug or a
placebo) is determined by chance.

Ribonuclease: Any enzyme that decomposes ribonucleic acids, such as
viral RNA.

Ribonuclease L: A specific ribonuclease that is present in human
cells, but dormant (inactive) until activated by 2-5A
or Oragen drugs.
Transitory
Response: A tumor response which is characterized by the
subsequent recurrence of disease (notwithstanding the
continuation of treatment) after a limited period of
time.

HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements

Page
----

Independent Auditors' Report ............................................. F-2

Consolidated Balance Sheets at December 31, 1995 and 1996 ................ F-3

Consolidated Statements of Operations for each of the years in the
three-year period ended December 31, 1996 ............................... F-4

Consolidated Statements of Stockholders' Equity for each of the years in
the three-year period ended December 31, 1996 ........................... F-5

Consolidated Statements of Cash Flows for each of the years in the
three-year period ended December 31, 1996 ............................... F-6

Notes to Consolidated Financial Statements ............................... F-8

F-1

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
Hemispherx BioPharma, Inc.:

We have audited the accompanying consolidated balance sheets of Hemispherx
BioPharma, Inc. and subsidiaries (the Company) as of December 31, 1995 and 1996,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material re- spects, the financial position of Hemispherx
BioPharma, Inc. and subsidiaries as of December 31, 1995 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996 in conformity with generally accepted
accounting principles.

February 14, 1997
Philadelphia, Pennsylvania

F-2

HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1995 and 1996

December 31,
----------------------------
1995 1996
------------ ------------

ASSETS
Current assets:
Cash and cash equivalents ..................... $ 11,291,167 $ 5,279,429
Prepaid expenses and
other current assets (Note 11) .............. 62,742 105,341
------------ ------------
Total current assets ....................... 11,353,909 5,384,770
Property and equipment, net .................... 53,953 83,475
Patent and trademarks rights, net .............. 1,245,092 1,502,816
Security deposits .............................. 46,564 28,323
------------ ------------
Total assets ............................... $ 12,699,518 $ 6,999,384
============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .............................. $ 1,095,637 $ 598,078
Accrued expenses (Note 5) ..................... 2,263,096 548,312
Notes payable (Note 3) ........................ 4,920,000 --
------------ ------------
Total current liabilities .................. 8,278,733 1,146,390

Commitments and contingencies
(Notes 3, 6, 8, 9, 10, 11, 12 and 14)

Stockholders' equity (Notes 6 and 7):
Preferred stock .............................. -- 50
Common stock ................................. 15,581 16,160
Additional paid-in capital ................... 47,949,530 54,080,171
Accumulated deficit .......................... (43,544,326) (48,243,387)
------------ ------------
Total stockholders' equity ................. 4,420,785 5,852,994
------------ ------------
Total liabilities and stockholders' equity . $ 12,699,518 $ 6,999,384
============ ============

See accompanying notes to consolidated financial statements.

F-3

HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For each of the years in the three-year period ended December 31, 1996

December 31,
--------------------------------------------
1994 1995 1996
------------ ------------ ------------

Revenues:
Research and development ............... $ 75,758 $ 65,910 $ 32,044
License fees ........................... 100,000 2,900,000 --
------------ ------------ ------------
Total revenues ...................... 175,758 2,965,910 32,044
------------ ------------ ------------
Costs and expenses:
Research and development ............... 1,637,769 1,028,662 1,902,327
General and administrative (Notes 10 ) . 2,617,762 2,880,443 3,023,590
------------ ------------ ------------
Total cost and expenses ............. 4,255,531 3,909,105 4,925,917
Debt conversion expense ................. (10,500) (149,384) --
Interest income ......................... 25,091 95,887 339,384
Interest expense (Note 14) .............. (1,067,869) (843,148) --
------------ ------------ ------------
Net loss ............................ $ (5,133,051) $ (1,839,840) $ (4,554,489)
============ ============ ============

Pro forma net loss per share (Note 2(e)):
Pro forma weighted average shares
outstanding .......................... 11,536,276 14,199,701 15,718,136
============ ============ ============
Pro forma net loss per share ........ $ (.44) $ (.13) $ (.29)
============ ============ ============

See accompanying notes to consolidated financial statements.

F-4

HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity(Deficit)
For each of the years in the three-year period ended December 31, 1996

Preferred Common
stock stock Preferred Common Preferred Common
subscribed subscribed stock stock stock stock
shares shares shares shares subscribed subscribed
------------ ------------ ------------ ------------ ------------ ------------

Balance at December 31, 1993 .. 517,512 28,026 810,029 5,133,986 $ 4,093,733 $ 30,227
Preferred stock subscribed .... 130,000 -- -- -- 650,000 --
Debt to preferred/common
stock conversion ............. 3,600 300,000 -- 2,770 28,500 150,000
Redeemable preferred stock
dividend ..................... -- -- -- -- -- --
Warrants issued in connection
with imputed and forgiven in-
terest charges ............... -- -- -- -- -- --
Issuance of stock purchase war-
rants, net ................... -- -- -- -- -- --
Common stock subscribed ........ -- 1,750,000 -- -- -- 875,000
Stock options exercised ....... -- 4,926 -- -- -- 6,104
Net loss ...................... -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1994 .. 651,112 2,082,952 810,029 5,136,756 4,772,233 1,061,331
Redeemable preferred stock
dividend ..................... -- -- -- -- -- --
Debt to preferred stock
dividend ..................... -- -- 172,414 -- -- --
Warrants issued in connection
with imputed and forgiven
interest charges ............. -- -- -- -- -- --
Preferred stock subscribed ..... 10,000 -- -- -- 50,000 --
Debt to common stock
conversion ................... -- 100,000 -- -- -- 50,000
Issuance of common stock
certificates ................. -- (2,182,952) -- 2,182,952 -- (1,111,331)
Issuance of Preferred Stock
certificates ................. (626,112) -- 626,112 -- --
Convert Redeemable to Common ... -- -- -- 343,879 -- --
Convert Preferred to Common .... (35,000) -- (1,608,555) 1,807,088 (350,000) --
Issuance of Common Stock,
net of issuance cost ......... -- -- -- 5,313,000 -- --
Warrants Exercised ............. -- -- -- 797,917 -- --
Net Loss ....................... -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1995 .. -- -- -- 15,581,592 -- --
Warrants Exercised ............. -- -- -- 202,083 -- --
Preferred Stock Issued ......... -- -- -- 6,000 -- --
Preferred Stock Converted ...... -- -- (1,000) 376,530 -- --
Stock Option Compensation ...... -- -- -- -- -- --
Net loss ....................... -- -- -- -- -- --
Preferred Dividends ............ -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1996 .. -- -- 5,000 16,160,205 -- --
============ ============ ============ ============ ============ ============

"C" Common stock
--------------------------- Common
.001 Additional stock Total
Preferred Par paid-in Accumulated subscriptions stockholders'
stock value capital deficit receivable equity(deficit)
------------ ------------ ------------ ------------ ------------ ------------

Balance at December 31, 1993 .. $ 7,200,017 $ 5,133 $ 13,663,169 $(36,571,435) $ -- $(11,579,156)
Preferred stock subscribed .... -- -- -- -- -- 650,000
Debt to preferred/common
stock conversion ............. -- 3 1,382 -- -- 179,885
Redeemable preferred stock
dividend ..................... -- -- (372,552) -- -- (372,552)
Warrants issued in connection
with imputed and forgiven in-
terest charges ............... -- -- 631,583 -- -- 631,583
Issuance of stock purchase war-
rants, net ................... -- -- 112,500 -- -- 112,500
Common stock subscribed ........ -- -- -- -- -- 875,000
Stock options exercised ....... -- -- -- -- -- 6,104
Net loss ...................... -- -- -- (5,133,051) -- (5,133,051)
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1994 .. 7,200,017 5,136 14,036,082 (41,704,486) -- (14,629,687)
Redeemable preferred stock
dividend ..................... -- -- (314,873) -- -- (314,873)
Debt to preferred stock
dividend ..................... 749,383 -- -- -- -- 749,383
Warrants issued in connection
with imputed and forgiven
interest charges ............. -- -- 572,681 -- -- 572,681
Preferred stock subscribed ..... -- -- -- -- -- 50,000
Debt to common stock
conversion ................... -- -- -- -- -- 50,000
Issuance of common stock
certificates ................. -- 2,183 1,109,148 -- -- --
Issuance of Preferred Stock
certificates ................. 4,472,233 -- -- -- -- --
Convert Redeemable to Common ... -- 344 3,552,863 -- -- 3,553,207
Convert Preferred to Common .... (12,421,633) 1,807 12,769,826 -- -- --
Issuance of Common Stock,
net of issuance cost ......... -- 5,313 15,825,644 -- -- 15,830,957
Warrants Exercised ............. -- 798 398,159 -- -- 398,957
Net Loss ....................... -- -- -- (1,839,840) -- (1,839,840)
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1995 .. -- 15,581 47,949,530 (43,544,326) -- 4,420,785
Warrants Exercised ............. -- 202 100,839 -- -- 101,041
Preferred Stock Issued ......... 60 -- 5,395,825 -- -- 5,395,885
Preferred Stock Converted ...... (10) 377 (367) -- -- --
Stock Option Compensation ...... -- -- 634,344 -- -- 634,344
Net loss ....................... -- -- -- (4,554,489) -- (4,554,489)
Preferred Dividends ............ -- -- -- (144,572) -- (144,572)
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1996 .. $ 50 $ 16,160 $ 54,080,171 $(48,243,387) $ -- $ 5,852,994
============ ============ ============ ============ ============ ============

See accompanying notes to consolidated financial statements.

F-5

HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated Statements of Cash
Flows for each of the years in the three-year period ended December 31, 1996
Increase (Decrease) in Cash and Cash Equivalents

December 31,
-----------------------------------------
1994 1995 1996
----------- ----------- -----------

Cash flows from operating activities:
Net loss ............................................. $(5,133,051) $(1,839,840) $(4,554,489)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation of property
and equipment ...................................... 115,061 54,000 56,958
Amortization of patent rights ....................... 256,341 222,000 90,935
Issuance of stock purchase warrants ................. 112,500 -- --
Imputed interest charges ............................ 150,000 41,360 --
Debt conversion expense ............................. 10,500 149,384 --
Write-off of patent rights .......................... 285,190 100,017 41,156
Stock option compensation expense ................... -- -- 634,344
Gain on disposal of property and equipment .......... 17,197 -- --
Changes in assets and liabilities:
Prepaid expenses and other current assets .......... (1,506) (59,985) (42,599)
Accounts payable ................................... 661,732 (1,156,084) (497,559)
Accrued expenses ................................... 1,565,450 547,561 (1,844,893)
Security deposits .................................. 8,441 2,368 18,241
----------- ----------- -----------
Net cash used in
operating activities ............................ (1,952,145) (1,939,219) (6,097,906)
----------- ----------- -----------
Cash flows from investing activities:
Purchase of property and equipment ................... (40,000) (3,625) (86,480)
Proceeds from disposal of property and equipment ..... 11,000 -- --
Additions to patent rights ........................... (351,470) (132,689) (389,815)
----------- ----------- -----------
Net cash used in investing activities ............ $ (380,470) $ (136,314) (476,295)
----------- ----------- -----------

(CONTINUED)

See accompanying notes to consolidated financial statements.

F-6

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

December 31,
-----------------------------------------
1994 1995 1996
----------- ----------- -----------

Cash flows from financing activities:
Proceeds from issuance of preferred stock ............ $ -- $ -- $ 5,395,885
Proceeds from shareholder loans ...................... 925,910 35,000 --
Proceeds from notes payable .......................... 35,000 1,762,000 --
Payments on notes payable ............................ (80,000) (1,837,000) --
Payments on stockholder notes ........................ (10,000) (2,860,911) (4,920,000)
Principal payments under capital lease obligation .... (6,923) (23,308) --
Proceeds from exercise of stock options .............. -- -- --
Common stock subscription proceeds ................... 875,000 -- --
Preferred stock subscription proceeds ................ 650,000 -- --
Proceeds from issuance of common stock ............... -- 18,595,000 --
Stock issuance costs ................................. -- (2,764,043) --
Proceeds from exercise of stock warrants ............. -- 398,957 101,040
Dividends paid on preferred stock .................... -- -- (14,463)
----------- ----------- -----------
Net cash provided by
financing activities ............................ 2,388,987 13,305,695 562,463
----------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents ................................ 56,372 11,230,162 (6,011,738)
Cash and cash equivalents at beginning of period ...... 4,633 61,005 11,291,167
----------- ----------- -----------
Cash and cash equivalents at end of period ............ $ 61,005 $11,291,167 $ 5,279,429
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for interest ............... $ -- $ 186,503 $ 3,999
=========== =========== ===========

Supplemental disclosure of noncash investing activities:
Debt to equity conversion ............................ $ 100,000 $ 799,383 $ --
Accounts payable and accrued expenses to
equity conversion ................................... 74,104 50,000 --
Forgiveness of interest .............................. 458,333 572,681 --
Preferred stock to equity conversion ................. $ -- $ 3,238,334 $ 899,314

See accompanying notes to consolidated financial statements.

F-7

HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1996

(1) Business

Hemispherx BioPharma, Inc. and subsidiaries (the Company), formerly known as HEM
Pharmaceuticals Corp., is a pharmaceutical company using nucleic acid
technologies to develop therapeutic products for the treatment of viral diseases
and certain cancers. The Company's drug technology uses specially-configured
ribonucleic acid (RNA). The Company's double-stranded RNA drug product,
trademarked Ampligen, is in human clinical development for various therapeutic
indications. The efficacy and safety of Ampligen is being developed clinically
for three anti-viral indications: myalgic encephalomyelitis, also known as
chronic fatigue syndrome (ME/CFS) (Phase II clinical trial completed and Phase
II/III clinical trial authorized); human immunodeficiency virus associated
disorders (Phase II clinical trial); and chronic hepatitis B virus infection
(Phase I/II clinical trial in process). The Company also has clinical experience
with Ampligen in patients with certain cancers including renal cell carcinoma
(kidney cancer) and metastatic malignant melanoma.

The consolidated financial statements include the financial statements of
Hemispherx BioPharma, Inc. and its three wholly-owned subsidiaries BioPro Corp.,
BioAegean Corp. and Core BioTech Corp. which were incorporated in September 1994
for the purpose of developing technology for ultimate sale into certain
non-pharmaceutical specialty consumer markets. All significant intercompany
balances and transactions have been eliminated in consolidation.

In November, 1995, the Company completed an initial public offering (IPO) of
5,313,000 units of Hemispherx BioPharma, Inc. resulting in net proceeds of
approximately $15.8 million. Each unit consists of one share of the Company's
Common Stock and one Class A Redeemable Warrant, exercisable for one share of
Common Stock at $4.00 per share. These Class A Redeemable Warrants are subject
to redemption two years from November 2, 1995 at $.05 per warrant in the event
that the closing bid price of the Company's Common Stock exceeds $9.00 for a
specified time period. In connection with the IPO, the underwriter was granted
an option to purchase 462,000 units at $5.775 per unit.

The accompanying consolidated financial statments have been prepared on a going
concern basis which assumes the continuity of operations and the realization of
assets and liabilities in the ordinary course of business.

Since 1987, the Company has incurred substantial operating losses and could
incur losses over the next several years. The Company's cash requirements have
exceeded its resources due to its expenditures for research and development,
obtaining regulatory approvals, fees and expenses to prosecute and maintain its
patent estate, fees and expenses related to the initial public offering ("IPO")
and various general and administrative expenses. The Company's ability to
achieve profitable operations is dependent on successfully developing products,
obtaining regulatory approvals on a timely basis and making the transition from
a research and development firm to an organization producing commercial products
or entering into agreements for product commercializations. The Company will
need to produce income from cost recovery clinical trials in Canada and Belgium
and raise funds through equity or debt financings, collaborative arrangements
with corporate partners, off-balance sheet financing or from other sources. The
Company's ability to raise additional capital or increase income from cost
recovery programs will be a factor in the Company's successful development of
it's products. In the event that the proceeds from the cost recovery clinical
trials are delayed or that additional financing is not available in 1997, the
Company believes that it can restructure operations to minimize

F-8

HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1995 and 1996

cash expenditures, locate a partner to share development costs and maintain the
operation and protect the value of its various patent rights.

(2) Summary of Significant Accounting Policies

(a) Cash and Cash Equivalents

Cash equivalents consist of money market, bank certificates of deposit, and
overnight repurchase agreements collateralized by money market securities with
original maturities of less than three months, with both a cost and fair value
of $11,291,167 and $5,279,429 at December 31, 1995 and 1996, respectively.

(b) Property and Equipment

Property and equipment consist of furniture, fixtures, office equipment,
leasehold improvements and vehicles recorded at cost. Depreciation and
amortization is computed using the straight-line method over the estimated
useful lives of the respective assets, ranging from five to seven years.

Property and equipment held under capital leases are amortized on the
straight-line method over the shorter of the lease term or the estimated useful
life of the asset.

Accumulated depreciation and amortization as of December 31, 1995 and 1996 is
$545,956 and $602,914, respectively.

Patents and trademarks are stated at cost (primarily legal fees) and are
amortized using the straight-line method over ten years. The Company reviews its
patents and trademarks periodically to determine whether they have continuing
value. Such review includes an analysis of the patent and trademark's ultimate
revenue and profitability potential on an undiscounted cash flow basis to
support the realizability of its respective capitalized cost. In addition,
management's review addresses whether the patent and trademark continues to fit
into the Company's strategic business plans. During the years ended December 31,
1995 and 1996, the Company decided not to renew patents in certain countries and
has recorded $100,017 and $41,156 respectively, relating to the expense of
writing off these patents as a charge to research and development. Accumulated
amortization as of December 31, 1995 and 1996 is $903,769 and $795,117,
respectively. In addition the Company wroteoff $240,743 of fully amortized
patents and trademarks during 1996.

F-9

HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1995 and 1996

(d) Revenue

Revenue is recognized immediately for nonrefundable license fees when agreement
terms require no additional performance on the part of the Company. Revenue from
research and development is recognized when earned.

(e) Proforma Net Loss Per Share

Upon the closing of the IPO of common stock, all shares of Series A, B and C
Preferred Stock (Preferred Stock) converted into Common Stock. Proforma net loss
per share for the years ended December 31, 1994 and 1995 are calculated by
dividing net loss by the weighted average number of common shares outstanding
during the period after giving effect for Common Stock equivalents arising from
stock options and warrants and Preferred Stock assumed converted to Common
Stock. Pursuant to the requirements of the Securities and Exchange Commission,
Common Stock and Common Stock equivalents issued by the Company during the
twelve months immediately preceding the IPO have been included in the
calculation of the shares used in the calculation of pro forma net loss per
share (using the treasury stock method and the public offering price). The
following table sets forth the calculation of the total number of shares used in
the computation of pro forma net loss per share.

Year ended December 31,
------------------------------------
1994 1995 1996
---------- ---------- ----------

Weighted average common shares outstanding ....... 9,475,642 10,341,163 15,718,136

Incremental shares assumed to be outstanding
related to common stock, stock options and warrants
granted and convertible preferred stock based on
the treasury stock method ......................... 2,060,634 3,858,538 --
---------- ---------- ----------

Weighted average common and common stock
quiva lent shares used in computation of proforma
net loss per common share ......................... 11,536,276 14,199,701 15,718,136
========== ========== ==========

(f) Accounting for Income taxes

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

F-10

HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1995 and 1996

(g) Sales of Subsidiary Stock

The Company intends to account for any sales of its subsidiaries' stock as
capital transactions. However, as of December 31, 1995 and 1996, the Company
owned 100% of each subsidiaries stock.

(h) New Accounting Pronouncements

The Company adopted the provisions of FASB No. 121, "Accounting for the
impairment of Long-Term Assets and for Long-Lived Assets to Be Disposed Of," on
January 1, 1996. This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circunstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future undiscounted net cash
flows expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell. Adoption of this Statement did not have a material impact on the
Company's financial position, results of operations, or liquidity.

On January 1, 1996, the Company also adopted FASB No. 123, "Accounting for
Stock-Based Compensation," which permits entities to recognize as expense over
the vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, FASB No. 123 also allows entities to continue to apply the
provisions of APB No. 25 and provide pro forma net income and pro forma earnings
per share disclosures for employee stock options grants made in 1995 and future
years as if the fair-value-based method defined in FASB No. 123 had been
applied. The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure provisions of FASB No. 123.

(i) Use of estimates

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.

(3) Notes Payable

Notes payable at December 31, 1995 consisted of a February, 1992 convertible
note with detachable warrants due February 26, 1995, interest payable quarterly
at 12% per annum, as amended, in the amount of $4,920,000. This note was paid in
1996 (Note 14).

F-11

HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1995 and 1996

(4) Stock-Based Compensation

In 1996, the Company granted 350,000 stock purchase warrants to certain
key employees in recognition of services performed and services to be
performed. The per share weighted average fair value of the stock purchase
warrants granted during 1996 was determined using the Black-Scholes option
pricing model with the following weighted average assumptions: expected
dividend yield of zero, risk free interest rate of 6.02%, volitility
39.71%, and an expected life of two years.

The Company applies APB Opinion No. 25 in accounting for stock-based
cpmpensation of its employees and, accordingly, no compensation cost has
been recognized for stock purchase warrants issued to employees in the
financial statements. Had the Company determined compensation cost based
on the fair value at the grant date for its stock-based compensation of
its employees the Company's net loss would have been increased to the pro
forma amount indicated below:

1996
-----------
Net loss As reported $(4,554,489)
Pro forma (4,782,722)

There was no stock-based compensation for employees in 1994 and 1995.

(5) Accrued Expenses

Accrued expenses at December 31, 1995 and 1996 consists of the following:

December 31,
----------------------------
1995 1996
---------- ----------
Deferred rent ........................... $ 228,189 $ --
Accrued payroll and benefits ............ 144,047 126,296
Accrued interest (Note 14) .............. 898,733 --
Accrued professional fees (Note 14) ..... 727,996 162,719
Accrued taxes, dividends, and other .... 264,131 259,297
---------- ----------
$2,263,096 $ 548,312
========== ==========

(6) Stockholders' Equity

(a) Common Stock

The Company is authorized to issue 50,000,000 shares of $.001 par value Common
Stock. The Company declared a 1:2.17015 reverse stock split and change in par
value from the original $.01 par value to $.001 on shares of the Company's
Common Stock effective June 29, 1994. On November 30, 1994, the Company effected
a 2:1 forward stock split. On June 5, 1995 the Company changed its name to
Hemispherx BioPharma, Inc.

F-12

HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1995 and 1996

The accompanying consolidated financial statements reflect for all periods
presented the effect of the 1:2.17015 reverse stock split, 2:1 forward stock
split, and a change in par value to $.001 per common share.

(b) Common Stock Options and Warrants

(i) Stock Options

The 1990 Stock Option Plan provides for the grant of options to purchase up to
460,798 shares of the Company's Common Stock to employees, directors, and
officers of the Company and to consultants, advisors, and other persons whose
contributions are important to the success of the Company. The recipients of
options granted under the 1990 Stock Option Plan, the number of shares to be
converted by each option, and the exercise price, vesting terms, if any,
duration and other terms of each option shall be determined by the Company's
board of directors or, if delegated by the board, its Compensa- tion Committee.
No option is exercisable more than 10 years and one month from the date as of
which an option agreement is executed. These shares become vested through
various periods not to exceed four years from the date of grant. Certain shares
become vested upon the underwritten public offering concluded by the Company in
November, 1995. The option price represents the fair market value of each
underlying share of Common Stock at the date of grant, as determined by the
Company's board of directors.

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

December 31
-------------------
Option
price 1995 1996
---------- ------- -------
Outstanding, beginning of year....... $ .11-4.34 285,620 232,830
Granted.............................. 3.50-4.34 0 2,123
Canceled............................. .11-4.34 (52,790) 0
---------- ------- -------
Outstanding, end of year............. $1.07-4.34 232,830 234,953
========== ======= =======
Exercisable.......................... 165,244 215,161
======= =======
Exercised in prior years............. (10,576) (10,576)
======= =======
Available for future grants.......... 217,392 215,269
======= =======

The outstanding options include the right to purchase 45,344 shares of the
Company's Common Stock at $3.50 per share.

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

F-13

HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1995 and 1996

The Company's 1993 Employee Stock Purchase Plan (the 1993 Purchase Plan) was
approved by the board of directors in July 1993. The outline of the 1993
Purchase Plan provides for the issuance, subject to adjustment for capital
changes, of an aggregate of 138,240 shares of Common Stock to employees. The
1993 Purchase Plan will be administered by the Compensation Committee of the
board of directors. Under the 1993 Purchase Plan, Company employees will be
eligible to participate in semi-annual plan offerings in which payroll
deductions may be used to purchase shares of Common Stock. The purchase price
for such shares will be equal to the lower of 85% of the fair market value of
such shares on the date of grant or 85% of its fair market value of such shares
on the date such right is exercised. There have been no offerings under the 1993
Purchase Plan to date and no shares of Common Stock have been issued thereunder.

(ii) Warrants

The warrants outstanding at December 31, 1996, related to the issuance of former
notes payable and shareholder notes payable (Note 3) which were exercisable in
either Common Stock, Series B or Series C Preferred Stock and subject to certain
antidilution adjustments. Upon completion of the IPO, these warrants became
exercisable only in Common Stock.

Common Stock
---------------------
Exercise Number of
Price Shares Expiration
------- -------- ----------
Notes payable:

February 1992 5 years
convertible note (see Note 14) ..... $10.85 119,807 from
" " " ..... $2.00 160,000 IPO date
Stockholders notes:
Stockholders...................... $3.50 292,160 Oct. 1999
Stockholder....................... $3.50 300,000 Oct. 1999
Stockholders...................... $3.50 35,830 Dec. 1997
Stockholders...................... $2.00 144,000 Dec. 1997
Stockholder....................... $1.75 75,000 Mar. 2000
Stockholder....................... $3.50 10,000 Mar. 1999
---------
Subtotal: 1,136,797
=========

(iii) Other Warrants

In addition, the Company has issued other warrants outstanding - totalling
14,184,000 which consists of the following:

In November, 1994, the Company granted Rule 701 Warrants to purchase an
aggregate of 2,080,000 shares of Common Stock to certain officers and directors.
These Warrants are exercisable at $3.50 per share and, if not exercised, expire
in September, 1999.

From February through April 1995, the Company executed Bridge Loan Agreements
and promissory notes with 17 accredited lenders totaling $1,500,000. These notes
required interest at 8% per annum

F-14

HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1995 and 1996

and were paid on the closing date of the IPO. Interest has been imputed at 12%
and is recognized as interest expense and additional paid in capital in 1995 to
reflect the issuance of additional warrants to reflect the reduction in
interest. Such agreements also included various affirmative and negative
covenants. As additional consideration, the lenders had options to purchase
1,000,000 bridge units issuable upon the effective date of the IPO at an
exercise price of $.50 for a period of five years. Management believes these
sales are a good measure of fair value because they represent the only notable
third-party sales of Common Stock in 1994 and 1995, prior to the IPO. Such
exercise price is estimated to be at fair market value at the date of issuance
based on the then recent sales of securities to third-parties. Each bridge unit
consists of one share of Common Stock and one Class A Redeemable Common Stock
Purchase Warrant exercisable at $4.00 per share. 797,917 units were exercised in
1995 and 202,083 were exercised in 1996 at $.50 per Warrant.

in May, 1995, the Company and certain officers, directors and shareholders
entered into a standby finance agreement pursuant to which the parties agreed to
provide an aggregate of $5,500,000 in financing to the Company during 1995 in
the event that existing and additional financing was insufficient to cover the
cash needs of the Company through December 31, 1995. In exchange, the Company
issued warrants to purchase an aggregate of 2,750,000 shares of Common Stock at
$1.75 per share to the parties. In September, 1995, the parties to this standby
agreement agreed to extend their obligations through December 31, 1996.

In June 1995, the Company entered into an agreement with The Sage Group whereby,
in return for identifying certain distribution partners, The Sage Group will
receive certain percentages of the proceeds from the first distribution
agreement arising from such identification. In addition, the Company will pay to
The Sage Group a monthly retainer and has given warrants to purchase 100,000
shares of Common Stock at an exercise price of $1.75 share. In May, 1996,
additional warrants to purchase 140,000 shares of Common Stock were issued at an
exercise price of $3.50.

In connection with the IPO completed on November 7, 1995, the Company sold
5,313,000 units. Each unit consisted of one share of common stock and one Class
A Redeemable Warrant exercisable at $4.00 per share.

Also, as part of the underwriting agreement, the underwriter received warrants
to purchase 462,000 shares of common stock at $5.775 per share as well as
462,000 Class A Redeemable Warrants to purchase common stock at $6.60 per share.
These warrants expire five years from the date of the IPO.

1,877,000 warrants have been granted to other parties, stockholders and
employees for services performed. These warrants are exercisable at rates of
$2.50 to $4.00 per warrant.

(iv) Subsidiary Warrants

In May 1995, the officers and directors of BioAegean Corp. were elected and
approved. The board of directors approved the issuance of 6,000,000 shares of
Common Stock, of which 1,000,000 shares are to be offered for sale to certain
investors at $1.00 per share. In addition, the directors approved options for
directors and officers totaling 1,200,000 shares at an exercise price of $1.00.
In consideration for licensing certain patents, the board authorized 1,000,000
shares of common stock to be issued to Hemispherx BioPharma, Inc., options for
an additional 1,000,000 shares of common stock at the lesser

F-15

HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1995 and 1996

of the initial public offering price of BioAgean Corp. or $5.00 per share and
10,000 shares of Preferred stock to Hemispherx BioPharma, Inc. Only the common
stock shares of Hemispherx BioPharma, Inc have been issued as of December 31,
1995 and 1996.

The Company has granted certain rights to the debtholders to have their
securities registered under the Act. The Company believes the warrants have a
value which is not material for purposes of the financial statements and
accordingly, no value has been attributed to these warrants in the accompa-
nying consolidated financial statements.

(7) Series D Convertible Preferred Stock

On July 3, 1996 the Company issued and sold 6,000 shares of Series D Convertible
Preferred Stock ("the Preferred Stock") at $1,000 per share for an aggregate
total of $6,000,000. The proceeds, net of issuance costs, realized by the
Company were $5,395,885. In addition to the issuance of the Preferred Stock, the
Company issued to the buyer Warrants ("the Warrants") to purchase 100,000 shares
of Common Stock at the strike price of $4.00 per share.

The Preferred Stock earns dividends at the rate of $50 per annum per share as
declared by the Board of Directors of the Corporation. The dividends are
cumulative and payable quarterly commencing October 1, 1996 in cash or common
stock at the election of the Company. In October, 1996, the Preferred
Shareholder converted 1,000 shares of Series D Convertible Preferred stock into
376,530 shares of common stock.

On September 16, 1996 the Company's registration statement registering the
common stock underlying the Preferred Stock and the Warrants was declared
effective by the SEC.

(8) Research, Consulting and Supply Agreements

The Company has entered into various clinical research agreements for the
purpose of undertaking clinical evaluations of the safety and efficacy of
Ampligen. The Company's obligation under these agreements is primarily dependent
on the number of actual patients enrolled in the study. During the years ending
December 31, 1994, 1995 and 1996, the Company incurred approximately $247,000,
$179,000 and $179,000 respectively, of research fees under these agreements.

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

F-16

HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1995 and 1996

Temple is required to grant a license to any govrenmental agency or non-profit
organization as a condition of funding for research and development of the
patents and technology licensed to the Company. (Note 14).

The Company has entered into agreements for consulting services which are
performed at certain institutions and by certain individuals. The Company's
obligation to fund these agreements can generally be terminated after the
initial funding period, which generally ranges from one to three years or on an
as-needed monthly basis. During the years ending December 31, 1994, 1995 and
1996, the Company incurred approximately $130,000, $87,000, and $188,000
respectively, of consulting fees under these agreements.

In 1987, the Company entered into an agreement (the "Supply Agreement") to
purchase $2.7 million of compounds used in the manufacture of Ampligen which
expired in December 1992. Pursuant to the terms of the Supply Agreement, the
Company agreed to pay royalties of .5% of net sales, subject to certain minimum
and maximum requirements, for 5 years to the supplier of raw materials for the
manufacture of Ampligen.

In September 1995, the Company entered into an agreement with Rivex Pharma Inc.,
("Rivex"), pursuant to which Rivex will provide various services in connection
with the marketing and exclusive distribution of Ampligen in Canada on an
emergency drug release basis. Under the terms of this agreement, the Company
will supply and Rivex will purchase as much Ampligen as necessary to satisfy
Rivex's customers at a mutually agreed upon cost. In return, Rivex will retain
the exclusive right to market and distribute Ampligen in Canada.

(9) 401(K) Plan

In December 1995, the Company established a defined contribution plan, effective
January 1, 1995, the Hemispherx BioPharma Employees 401(K) Plan and Trust
Agreement (the 401(K) Plan). All full time employees of the Company are eligible
to participate in the 401(K) Plan following one year of employment. Subject to
certain limitations imposed by federal tax laws, participants are eligible to
contribute up to 15% of their salary (including bonuses and/or commissions) per
annum. Participants' contributions to the 401(K) Plan may be matched by the
Company at a rate determined annually by the Board of Directors. Each
participant immediately vests in his or her deferred salary contributions, while
Company contributions will vest over one year. In 1995 the Company provided
matching contributions to each employee for up to 6% of annual pay or $25,500.
The Company also absorbed the cost of employee contributions of $25,500. In 1996
the Company provided matching contributions to each employee for up to 6% of
annual pay or $31,580.

(10) Vendor Agreements

On February 20, 1996, the Company entered into an agreement to amend the lease
for its principal office. For a payment of $85,000 all outstanding rent and
charges accrued through December 31, 1995 were forgiven by the landlord. The
term of the lease was extended through April 30, 2000 with an average rent of
$14,507 per month, plus applicable taxes and charges. Note 12, leases, reflects
these new terms. As result of this settlement and the amended lease the Company
recorded a $318,757

F-17

HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1995 and 1996

credit adjustment in earnings due to the reduction in accrued and deferred rent
liabilities. The credit is reflected as a reduction of general and
administrative expenses.

(11) Royalties, License, and Employment Agreements

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

As described in Note 8, the Company has agreed to pay royalties under the Temple
Agreement and to its supplier of raw materials.

The Company has contractual agreements with four of its officers. The aggregate
annual base compensation under these contractual agreements for 1994, 1995, 1996
is $576,000, $540,000 and $589,552 respectively. In addition, certain of these
officers are entitled to receive performance bonuses of up to 25% of the annual
base salary (in addition to the bonuses described below). Pursuant to the
employment agreements, certain officers were granted options under the 1990
Stock Option Plan to purchase an aggregate of 82,942 shares of the Company's
Common Stock at exercise prices ranging from $2.72-$4.34 and Rule 701 Warrants
to purchase 2,000,000 shares of Common Stock at $3.50 per share. One of the
employment agreements provides for bonuses based on gross proceeds received by
the Company from any joint venture or corporate partnering agreement.

In October 1994, the Company entered into a licensing agreement with Bioclones
(Propriety) Limited (SAB/Bioclones) with respect to codevelopment of various RNA
drugs, including Ampligen, for a period ending three years from the expiration
of the last licensed patents. The licensing agreement provides SAB/Bioclones
with an exclusive manufacturing and marketing license for certain southern
hemisphere countries (including certain countries in South America, Africa and
Australia) as well as the United Kingdom and Ireland (the licensed territory).
In exchange for these marketing and manufacturing rights, the licensing
agreement provides for: (a) a $3 million cash payment to the Company, all of
which was recorded during the year ended December 31, 1995; (b) the formation
and issuance to the Company of 24.9% of the capital stock of Ribotech, a company
which developes and operates a new manufactur- ing facility by SAB/Bioclones,
and (c) royalties of 6% to 8% of net sales of the licensed products in the
licensed territories as defined, after the first $50 million of sales.
SAB/Bioclones will be granted a right of first refusal to manufacture and supply
to the Company licensed products for not less than one-third of its world-wide
sales of Ampligen, excluding SAB/Bioclones-related sales. In addition,
SAB/Bioclones will have the right of first refusal for oral vaccines in the
licensed territory. Prepaid expenses and other current assets, as of December
31, 1996, includes a $47,370 receivable from Ribotech.

In October 1994, the Board of Directors granted a director of the Company the
right to receive 3% of gross proceeds of any licensing fees received by the
Company pursuant to the SAB licensing agreement, a fee of .75% of gross proceeds
in the event that SAB makes a tender offer for all or sub- stantially all of the
Company's assets, including a merger, acquisition or related transaction, and a
fee

F-18

HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1995 and 1996

of 1% on all products manufactured by SAB. The Company may prepay in full its
obligation to provide commissions within a ten year period.

On December 5, 1995, the Company retained the law firm of Akin, Gump, Strauss,
Hauer & Feld, L.L.P. (Akin, Gump) to provide general legal counsel, advise and
representation with respect to various United States regulatory agencies.
Initially, Akin, Gump will provide representation before the Food and Drug
Administration (FDA). In addition, the agreement allows for incentive payments
for obtaining a letter from the FDA evidencing Ampligen's approvability for HIV
disease treatment.

(12) Leases

The Company has several noncancelable operating leases for the space in which
its principal offices are located and certain office equipment. See Note 10
above.

Future minimum lease payments under noncancelable operating leases are as
follows:

Year ending Operating
December 31, leases
------------ ------
1997................................................... $ 271,793
1998................................................... 280,413
1999................................................... 292,146
2000................................................... 91,517
----------
Total minimum lease payments........................ $ 935,869
==========

Rent expense charged to operations for the years ended December 31, 1994, 1995
and 1996 amounted to approximately $173,000, $289,000 and $286,000 respectively.
The Company recognized rent expense on a straight-line basis over the lease
term, and the difference between rent expense on a straight-line basis and the
base rental was deferred and included in accrued expenses at December 31, 1995.

(13) Income Taxes

At December 31, 1996, the Company had available net operating loss carryforwards
of approximately $44,600,000 for Federal and state income tax which expire over
various years through 2011. In addition, for Federal income tax purposes, the
Company has approximately $6,900 of unused investment and job tax credits
available to offset future taxes, if any, expiring 1998 through 1999.

The expiration dates of the net operating loss carryforwards are as follows:

Expiration Tax loss
date carryforwards
---- -------------
1999....................................................... $ 130,974
2003....................................................... 1,773,967
2004....................................................... 5,402,521
2005....................................................... 3,534,484

F-19

HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1995 and 1996

2006........................................................ 8,749,039
Thereafter.................................................. 24,982,813
-----------
$44,573,798
===========

If certain substantial changes in ownership should occur there would be an
annual limitation on the amount of tax attribute carryforwards which can be
utilized in the future.

The Company has provided a valuation allowance against all of its deferred tax
assets.

(14) Contingencies

The Company was a defendant in a lawsuit instituted in 1991 by participants in a
double-blind placebo-controlled clinical trial of Ampligen therapy for ME/CFS.
The plaintiffs alleged that the Company or its alleged agents promised them that
they would receive Ampligen after the placebo-controlled study at no cost for
periods ranging from "until marketable" to "for life." Plaintiffs sought
compensatory and punitive damages. The court granted the Company's motions for
summary judgment upon all claims alleged by the plaintiffs in this case. The
plaintiffs have appealed from these orders before the United States Court of
Appeals for the Ninth Circuit. In January 1996, the Court of Appeals denied
their appeal and sustained the Company's position. On the basis of the Court of
Appeals favorable decision, the Company believes the lawsuit will not have a
material effect on the Company.

In February 1991, a university advised the Company of its position that
employees of the university were the inventors of an issued U.S. patent
regarding the use of Ampligen in combination with various other agents
(including AZT) for the treatment of HIV infection. As issued, this patent names
the Company's Chief Executive Officer as sole inventor and the Company as sole
assignee. The university has demanded that the patent be reissued naming the
university's employees as inventors and the university as assignee. The Company
has refused to take such action. No formal claim has been filed by the
university. If such claim were filed and if such claim were found to have merit,
the loss of the patent at issue would not have a materially adverse effect on
the Company's long-range business since the university would only be able to
limit and/or prevent the Company's use of Ampligen in combina- tions with AZT in
the treatment of HIV.

In August 1988, the Company entered into a pharmaceutical use license agreement
with Temple Universuty. Under the terms of the agreement, Temple granted the
Company an exclisive world-wide license for the commercial sale of Oragen
products using patents and related technology held by Temple until the last to
expire of any releted petents then or thereafter issued. In July 1994, Temple
treminated the agreement. In November,1998, the Company filed suit against
Temple in the Superior Court of the state of Delaware seeking a declaratory
judgement that the agreement was unlawfully terminated by temple and therefore
remained in full force and effect. Temple filed a separate suit against the
Company seeking a declaratory judgement that its agreement with the Company was
properly terminated. In December, 1996, these legal actions were terminated.
Under the settlement, the parties have entered into a new pharmaceutical use
license agreement that is equivalent to the original agreement in duration and
scope.

F-20

HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1995 and 1996

In March 1995, the Company instituted a declaratory judgment action against the
February 1992 noteholder of a $5 million convertible note and a second defendant
in the United State District Court for the Eastern District of Pennsylvania
("the Pennsylvania action") to declare as void, set aside, and cancel the
February 1992 convertible note between the Company and the noteholder ("the
Note"). In addition, the noteholder instituted suit against the Company on the
Note in the Circuit Court of the 15th Judicial District in and for Palm Beach
County, Florida, seeking judgment on the note, plus attorneys fees, costs and
expenses; in August 1995, this action was stayed by the Florida Court pending
the outcome of the Pennsylvania action. The noteholder also filed a motion for a
preliminary injunction in the Pennsylvania court to enjoin the Company from
disbursing the proceeds of a public offering in the amount of $5.8 million,
which motion was granted in November, 1995. On February 15, 1996, the Company
reached an agreement to settle this matter. Terms and conditions of the
settlement include payment of $6,450,000 to the noteholder to cover the note
balance and legal expenses. The noteholder and related parties are to maintain
certain Warrants that were granted prior to the lawsuit. Other Warrants granted
to the noteholder in the note restructuring in 1994 were relinquished. The funds
under this settlement were paid on March 21, 1996 and charged to the note
payable, accrued interest and accrued professional fees. Mutual releases were
executed which completed the settlement of the litigation.

The Company is subject to claims and legal actions that arise in the ordinary
course of their business. Management believes that the ultimate liability, if
any, with respect to these claims and legal actions will not have a material
effect on the financial position or results of operations of the Company.

F-21

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

No dealer, salesman or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus in connection with the offer made by this Prospectus and, if given or
made, such information or representations must not be relied upon as having been
authorized by the Company or the Representative. Neither the delivery of this
Prospectus nor any sale made hereunder shall under any circumstances create any
implication that there has been no change in the affairs of the Company since
the date hereof. This Prospectus does not constitute an offer or solicitation by
anyone in any jurisdiction in which such offer or solicitation is not authorized
or in which the person making such offer or solicitation is not qualified to do
so or to anyone to whom it is unlawful to make such offer or solicitation.

TABLE OF CONTENTS Page
----

Additional Information...................................................3, 91
Prospectus Summary...........................................................4
Risk Factors.................................................................9
Selected Financial Data.....................................................22
Dividends...................................................................25
Management's Discussion and Analysis of
Financial Condition........................................................26
Business....................................................................31
Management..................................................................60
Principal Shareholders......................................................73
Resales by Selling Securityholders..........................................76
Certain Transactions........................................................79
Description of Securities...................................................89
Shares Eligible for Future Sale.............................................90
Legal Matters...............................................................91
Experts.....................................................................91
Financial Statements.......................................................F-1

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

Until , 1997 all dealers effecting transactions in the registered
securities, whether or not participating in this distribution, may be required
to deliver a Prospectus. This delivery requirement is in addition to the
obligation of dealers to deliver a Prospectus when acting as underwriters and
with respect to their unsold allotments or subscriptions.

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

HEMISPHERx BIOPHARMA, INC.

310,544 WARRANTS AND STOCK OPTIONS
640,475 SHARES OF COMMON STOCK UNDERLYING WARRANTS
2,500,000 SHARES OF COMMON STOCK UNDERLYING
SERIES E PREFERRED STOCK
6,213,000 SHARES OF COMMON STOCK
UNDERLYING CLASS A WARRANTS
462,000 UNITS UNDERLYING A UNIT PURCHASE OPTION ("OPTION")
462,000 SHARES OF COMMON STOCK UNDERLYING UNITS INCLUDED
IN THE OPTION
462,000 CLASS A WARRANTS UNDERLYING UNITS
INCLUDED IN OPTION
462,000 SHARES OF COMMON STOCK UNDERLYING
CLASS A WARRANTS INCLUDED IN THE OPTION

---------------
PROSPECTUS
---------------

April __, 1997

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

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution.

SEC Registration Fee $ 2,769
Printing $ 3,000*
Legal Fees and Expenses $ 15,000
Accounting Fees and Expenses $ 5,000*
Miscellaneous Expenses (including travel
and promotional expenses) $ 1,000*
--------
TOTAL $ 26,769*
========

*Estimated

The Selling Security Holders will not pay any portion of the foregoing
expenses of issuance and distribution.

Item 14 Indemnification of Directors and Officers.

The Restated Certificate of Incorporation of the Company provides as
follows:

No person who is or was a director of this Corporation shall be
personally liable to the Corporation or its stockholders for monetary
damages for the breach of any fiduciary duty as a director, unless, and
only to the extent that, such director is liable (i) for any breach of the
director's duty of loyalty to the Corporation or its stockholder, (ii) for
acts or omissions not in good faith or that involve intentional misconduct
or a knowing violation of law, (iii) under Section 174 of the General
Corporation Law of the State of Delaware, or (iv) for any transaction form
which the director derived an improper personal benefit.

Section 145 of the Delaware General Corporation Law gives Delaware
corporations the power to indemnify each of the Company's present and former
officers and directors under certain circumstances, if such person acted in good
faith and in a manner which he reasonably believed to be in, or not opposed to,
the best interests of the corporation. The Company's Restated Certificate of
Incorporation generally requires the Company to indemnify directors and officers
to the fullest extent permissible under Delaware law.

The Company has entered into indemnification agreements with its current
directors and certain of its executive officers. These agreements have the
practical effect in certain cases of eliminating the ability of stockholders to
collect monetary damages from such individuals.

Item 15. Recent Sales of Unregistered Securities.

(a) The following information sets forth certain information with respect
to the sale of securities by the Company since December 31, 1992. All references
to numbers of

II-1

shares in the following discussion have been adjusted to give effect to the
Pre-Public Offering Transactions.

(1) From January 1, 1990 through the filing date of this Registration
Statement, the Company granted options under the 1990 Stock Option Plan to
purchase an aggregate of 360,232 shares of Common Stock at a weighted
average price of $3.39 per share and issued 8,028 shares of Common Stock
upon the exercise of options granted under the 1990 Stock Option Plan for
an aggregate purchase price of $11,479 in cash.

(2) In February 1993, the Company issued and sold a convertible
promissory note in the aggregate principal amount of $480,000, and warrants
to purchase an aggregate of 7,372 shares of Common Stock or 8,000 shares of
Series C Preferred Stock at the lower of (i) $13.02 or $12.00 per share,
respectively, or (ii) the per share price of Common Stock in the initial
public offering to Lincoln Trust Company, custodian FBO Gerald Tsai, Jr.

(3) In March through May 1993, the Company issued and sold demand
promissory notes in the aggregate principal amount of $830,000 for an
aggregate of $830,000 to Maryann Charlap Azzato, William A. Carter, Charles
L. Moore, Michael C. Burrows, and Michael Dubilier. In April, William A.
Carter was repaid $97,566 of his $100,000 Demand Note.

(4) In May, June and July 1993, the Company issued and sold
convertible notes in the aggregate principal amount of $600,000, and
warrants to purchase an aggregate of 9,216 shares of Common Stock or 10,000
shares of Series C Preferred Stock at the lower of (i) $13.02 or $12.00 per
share, respectively, of (ii) the per share price of Common Stock in the
initial public offering to Julian and Eunice Cohen Investments Limited
Partnership, Sidney Stoneman, Frank B. Carr, Keys foundation, Myron Cherry
and Lloyd DeVos.

(5) In June 1993, the Company issued convertible promissory notes in
the aggregate principal amount of 632,434, and warrants to purchase an
aggregate of 9,216 shares of Common Stock or 10,000 shares of Series C
Preferred Stock at the lower of (i) $13.02 or $12.00 per share,
respectively, or (ii) the per share price of Common Stock in the initial
public offering to Maryann Charlap Azzato, William A. Carter, Michael C.
Burrows and Michael Dubilier in exchange for and forgiveness of $632,434 of
the March through May 1993 demand promissory notes.

(6) In June 1993, the Company issued and sold an aggregate of 16,667
shares of Series C Preferred Stock at $12,00 per share, for an aggregate of
$200,004, to Canaan Venture and Canaan Offshore.

(7) In August through December 1993, the Company issued and sold
convertible promissory notes in the aggregate principal amount of
$1,000,000 and warrants to purchase an aggregate of 16,900 shares of Common
Stock or 18,337 shares of Series C Preferred Stock at the lower of (i)
$13.02 or $12.00 per share, respectively, or (ii) the per share price of
Common Stock in the initial public offering, for an aggregate of

II-2

$1,100,000 to Maryann Charlap Azzato, Michael Dubilier, Keys Foundation and
William A. Carter.

(8) In October 1993, the Company issued and sold an aggregate of
25,000 shares of Series C Preferred Stock at $12.00 per share, for an
aggregate of $300,000 to Canaan Venture and Canaan Offshore.

(9) In December 1993, the Company issued an aggregate of 433,343
shares of Series C Preferred Stock at $5.00 per share for an aggregate of
$2,166,719 in settlement of $632,434 in principal plus unpaid interest of
the June 1993, convertible promissory notes held by Maryann Charlap Azzato,
William A. Carter, Michael C. Burrows and Michael Dubilier, $400,000 in
principal plus unpaid interest of the May, June and July 1993 convertible
promissory notes held by Julian and Eunice Cohen Investments Limited
Partnership, Sidney Stoneman, Frank B. Carr and Keys Foundation, $1,082,000
in principal plus unpaid interests on the August, September, October,
November and December 1993 convertible promissory notes held by Maryann
Charlap Azzato, Michael Dubilier, Keys Foundation and William A. Carter.
The above conversion includes 10,457 shares of Series C Preferred Stock in
satisfaction of $52,285 of accrued unpaid interest.

(10) In December 1993, the Company agreed to issue 42,502 shares of
Series C Preferred Stock issued at $5.00 per share for an aggregate amount
of $212,510 to certain vendors and suppliers in payment of some or all
indebtedness due them. These suppliers include Broadgate and Associates,
Richard Piani, Austin Darragh and Paul Actor.

(11) In January 1994, William A. Carter sold 122,880 shares of Common
Stock at $3.26 per share to Canaan Ventures and Canaan Offshore Ventures,
Keys Foundation, FLF Associates, Michael Dubilier and Coughlin.

(12) In January 1994, the Company executed an agreement to issue and
sell 100,000 shares of Series C Preferred Stock at $5.00 per share to
William A. Carter and Maryann Charlap Azzato purchased 3,600 shares of
Series C Preferred Stock at $5.00 per share pursuant to a standby financing
commitment.

(13) As of March 31, 1994, the Company entered into an agreement with
certain convertible promissory note holders to convert upon the
effectiveness of the initial public offering an aggregate of $2,400,000
debt principal plus accrued but unpaid interest into Series C Preferred
Stock at $5.00 per share for an aggregate total of 519,224 shares. This
debt consisted of (i) $1,920,000 in principal plus unpaid interest on the
December 1992 convertible promissory notes held by FLF Associates and
Gerald Tsai, Jr.; and (ii) $480,000 in principal plus unpaid interest on
the February 1993 convertible promissory note held by Lincoln Trust
company, Custodian FBO Gerald Tsai. In February 1995, the terms of this
transaction were restructured, and a settlement agreement was entered into
by the parties. See "Risk Factors - Legal Proceedings," "Risk Factors - No
Assurance of Certain Debt Conversions" and "Certain Transactions."

II-3

(14) On February 26, 1994, the Company was in default with respect to
the principal payment and quarterly interest payments in arrears under the
February 26, 1992, $5 million convertible note. An amendment to the terms
of the note has been executed to waive the events of default as follows:
(1) convert $2 million in principal into 1,131,290 shares of Series B
Preferred stock upon the consummation of the contemplated initial public
offering on or before February 26, 1995 and full repayment of the remaining
principal balance of the note, together with any accrued unpaid interest
thereon (ii) unpaid interest after June 30, 1994 shall be paid in the form
of 60,284 shares of Series B Preferred stock on a quarterly basis if the
contemplated initial public offering has not closed and the Company
receives at least $1,000,000 under the Bridge Financing (iii) the due date
of the remaining principal balance and accrued unpaid interest is to be
extended to February 26, 1995 or the completion of an initial public
offering, whichever is earlier (iv) increase the warrants to the warrant
holders to 325,523 shares of the Company's Series B Preferred Stock or
300,000 under the Bridge Financing (iii) the due date of the remaining
principal balance and accrued unpaid interest is to be extended to February
26, 1995 or the completion shares of the Company's Series B Preferred Stock
or 300,000 shares of the Company's Common Stock at an exercise price of
$1.84 and $2.00, respectively, with an expiration date of vie years
following the effective date of an initial public offering (v) require that
20 percent of certain gross proceeds, other than Bridge Financing and sale
of Series C Preferred Stock be used to repay the note (vi) issue additional
warrants to purchase in aggregate 130,210 shares of the Company's Series B
Preferred Stock or 120,000 shares of the Company's Common Stock at an
exercise price of $1.84 and $2.00, respectively with an expiration date of
five years following the effective date of an initial public offering (vii)
required the Company to register 20 percent of the original conversion
shares in a registration statement with gross proceeds to the Company of at
least $10,000,000 at the Company's expense, limited to 111,250 shares per
quarter during the six month period following the lock-up period as
defined.

(15) In April 1994, the Company executed an agreement to issue and
sell 40,000 shares of Series C Preferred Stock at a price of $5.00 per
share to Maryann Charlap Azzato pursuant to a private placement of the
Company's securities. As of March 31, 1995, Ms. Azzato has purchased 30,000
shares of Series C Preferred Stock at a price of $5.00 per share.

(16) In April 1994 Maryann Charlap Azzato sold 46,080 shares of Common
Stock at $3.26 per share to Four Partners Associates, Gerald Tsai and Keys
Foundation.

(17) In April 1994, Maryann Charlap Azzato, guaranteed payment of two
promissory notes in the aggregate amount of $76,000 payable by the Company
representing payments due in connection with the Temple Agreement (the
"Temple Notes"). In return for the guarantee, HEM assigned its rights,
patents and related technology in its Oragen and Diagen products to Ms.
Charlap Azzato, which rights will revert to the Company upon repayment of
the principal on the Temple Notes, 12% interest, and Ms. Charlap Azzati's
fees and expenses. The Company also received a right of first refusal with
respect to the sales or assignment by Ms. Charlap Azzato of this
technology. In May and June 1994, Temple Agreement and nonpayment of
certain

II-4

invoices in the approximate amount of $1,500. In July 1994, Temple notified
the Company that it considered the Temple Agreement terminated.

(18) In May 1994, the Company executed a loan agreement with Bridge
Ventures, Inc. ("Bridge Ventures") in the amount of $100,000. In
consideration for this unsecured loan, the Company issued two-year options
to purchase 92,160 shares of the Company's Common Stock at $2.72 per share.
The loan term is 60 days or repayment from the proceeds of the next
financing in excess of $500,000. The Company has granted certain rights to
the Company optionholder to have the options registered under the
Securities Act. In August 1994, Bridge Ventures converted its note into
200,000 shares of Common Stock and received a warrant to purchase 200,000
shares of Common Stock of the Company at $3.50 per share. In addition, the
Company converted a $50,000 consulting fee payable to Bridge Ventures into
100,000 shares of Common Stock.

(19) From July to November 1994, the Company sold 2,050,000 shares of
Common Stock for an aggregate consideration of $1,025,000 to 26 accredited
investors. In conjunction with the financing, the Company agreed to
collateralize various patents until the earlier of an executed initial
public stock offering or the consummation of corporate alliances, or
licensing arrangements which provide significant operating capital or
clinical development funding to the Company. In connection with the
financing, the Company issued warrants to purchase 300,000 shares of Common
Stock at an exercise price of $3.50 per share to Stephen J. Drescher in
November 1994 in exchange for general consulting services.

(20) In September 1994, Maryann Charlap Azzato, entered into an
agreement with Lloyd DeVos, a stockholder, former director and holder of a
note in the principal amount of $100,000 (the "DeVos Note") in order to
settle a lawsuit filed against the Company and Dr. Carter by Mr. DeVos in
the United States District Court for the Southern District of New York
alleging breach of contract, conversion and certain violations of the
federal securities laws in connection with issuance of Mr. DeVos' note.
Pursuant to the settlement agreement, principal and interest on the DeVos
Note were repaid by Ms. Azzato as well as certain expenses incurred by Mr.
DeVos in the approximate amount of $2,600 and 1,536 shares of Common Stock
of the Company were transferred to Mr. DeVos in exchange for the assignment
to Ms. Azzato by Mr. DeVos of his right to repayment by the Company of the
DeVos Note and warrant to purchase 1,667 shares of Series C Preferred
Stock. In addition, certain options to purchase 6,912 shares of Common
Stock of the Company previously issued to Mr. DeVos were delivered to Mr.
DeVos. In exchange for the above agreement, Mr. DeVos, the Company and Dr.
Carter executed mutual releases of all claims and Mr. DeVos dismissed the
suit.

(21) In October 1994 in connection with the execution of the SAB
Agreement, the Company granted Cedric C. Philipp, a Director of the
Company, an option to purchase 20,000 shares of Common Stock at a price of
$3.50 per share.

(22) In October 1994, the Company received loans in the aggregate
amount of $750,000 from Jordan Belfort and the Belfort Family Trust. The
loans were repaid by the Company without interest from the proceeds of the
Bridge Loans.

II-5

(23) In October and November 1994, the Company granted Rule 701
Warrants to purchase 20,000 shares of Common Stock at $3.50 per share to
Maryann Charlap Azzato, E. Gerald Kay, Cedric C. Philipp and Peter Rodino
III. IN addition, the Company granted the following Rule 701 Warrants to
William A Carter, 200,000 Rule 701 Warrants to Sharon Will; and 400,000
Rule 701 Warrants to Harris Freedman.

(24) In November 1994, the Company restructured a $100,000 note issued
to Myron Cherry (the "Cherry Note"), a stockholder and former director of
the Company pursuant to which the repayment date of the principal amount of
the Cherry Note was extended to the closing date of this Public Offering
and the accrued but unpaid interest subsequent to September 30, 1993 shall
be converted into Common Stock of the Company at a price of $5.43 per
share. In the event that this Public Offering is not completed by February
28, 1995, the principal amount will be repaid by the Company of Bridge
Ventures Inc. by March 6, 1995. In addition, the Company issued to Mr.
Cherry 5,000 immediately exercisable warrants with an exercise price of
$3.50 per share and Bridge Ventures agreed that the unpaid principal on the
Cherry Note would be collateralized by the Company's patents on the same
terms as the Bridge Financing arranged by Bridge Ventures. Harris Freedman,
a Vice President of the Company, is an officer of Bridge Ventures. In March
1995, the Company and Myron Cherry agreed to extend until March 31, 1995
the maturity date of the $100,000 note issued to him. In exchange for the
extension of the maturity date, the Company issued warrants to purchase
5,000 shares of Common Stock at $3.50 per share to Mr. Cherry. In June
1995, the Company repaid the principal amount due on the Cherry Note; in
July 1995, the Company repaid the accrued interest due on the Cherry Note.

(25) Between February and April 1995, the Company issued Bridge Notes
in the aggregate principal amount of $1,500,000 to 17 accredited investors.
The Bridge Notes bear interest at 8% per year and are due the earlier of
the closing of this Public Offering August 1, 1996. In consideration for
making the loans, the Company granted to the holders of the Bridge Notes
Bridgeholder Options to purchase an aggregate of 1,000,000 Bridge Units.
Each Bridge Unit contains one share of Common Stock, on Class A Redeemable
Warrant and one Class B Redeemable Warrant. The Bridgeholder Options are
immediately exercisable upon the effectiveness of this Public Offering and
remain exercisable for five years thereafter.

(26) In February 1995, the Company entered a settlement agreement with
FLF Associates, Gerald Tsai and Lincoln Trust (the "Tisch/Tsai Entities")
to restructure the December 1992 and February 1993 promissory notes in the
aggregate principal amount of $2,400,000 and settle certain threatened
claims made by the Tisch/Tsai Entities against the Company. This debt
restructuring consisted of (i) the repayment by the Company of $1,200,000
in principal, (ii) the issuance of replacement notes in the aggregate
principal amount of $600,000 to the Tisch/Tsai Entities which notes are due
on the earlier of the closing of this Public Offering or May 28, 1996 and
bear interest at the rate of 8% per annum, which interest is payable in
quarterly installments from an interest reserve established by the Company,
(iii) the conversion of $600,000 of principal into 344,828 shares of Series
C Preferred Stock at the rate of $1.74 per share, (iv) the amendment and
restatement of certain warrants issued in connection with the original

II-6

notes in order to increase the number of shares of stock issuable
thereunder by 32,000 shares to provide for warrants to purchase a total of
144,000 shares of Common Stock at an exercise price of $4.00 and $2.00 per
share, respectively, which warrants are exercisable until December 31,
1997, and (v) the release by all parties of any claims. The replacement
notes were secured by a pledge by Dr. William A. Carter of 112,925 shares
of Series C Preferred Stock and 240,756 shares of Common Stock. The Company
may have been in default of these notes. See "Risk Factors--Possible
Default on Certain Debt."

(27) In March 1995, the Company issued a note in the Principal amount
of $200,000 bearing interest at the rate of 12% per year to Gerald A.
Brauser, (the "Original Brauser Note"). The Original Brauser Note also
provided for the issuance of warrants to purchase 50,000 shares of the
Company's Common Stock at $1.75 per share. In May 1995, the Company
restructured the Original Brauser Note in exchange for the Company issuing
to MR. Brauser (i) a promissory note (the "New Brauser Note"),
collateralized by the Company's patent estate, in the principal amount of
$100,000 bearing interest at a rate of 12% per year, (ii) a warrant to
purchase 25,000 shares of Common Stock at a price of $1.75 per share, (iii)
100,000 shares of Common Stock at $.50 per share, and (iv) a Bridge Loan in
the amount of $50,000 as well as a Bridgeholder Option to purchase 33,340
Bridge Units. The New Brauser Note was originally due on the earlier of
June 30, 1995 or the Company's receipt of a certain payment from
SAB/Bioclones but has been amended to extend the date on which repayment is
due to the earlier of November 2, 1995 or the closing of this Public
Offering.

(28) In May 1995, the Company and certain officers, directors and
shareholders entered into a Standby Financing Agreement pursuant to which
the parties agreed to provide an aggregate of $5,500,000 in financing to
the Company during 1995 in the event that existing and additional financing
is insufficient to cover the cash needs of the Company through December 31,
1995. In exchange for entering into the Standby Financing Agreement, the
Company issued warrants to purchase an aggregate of 2,750,000 shares of
Common Stock at $1.75 per share to the parties. In September 1995, the
parties to the 1995 Standby Financing Agreement, including Dr. Carter and
Mr. Kay, agreed to extend their obligations through December 31, 1996.

(29) In June 1995, the Company entered into an agreement with the Sage
Group pursuant to which the Sage Group agreed to identify distribution
partners for the Company. In connection with this agreement, the Company
agreed to issue warrants to purchase 100,000 shares of Common Stock
exercisable at $1.75 per share under certain conditions.

(30) In January 1996, the Company entered into an agreement with The
Research Works ("RW"), a market research firm, in which RW agreed to
perform certain analytical services and provide four market reports. In
exchange, the Company granted 60,000 warrants exercisable at $4.00 per
share.

II-7

(31) In January 1996, the Company entered into an agreement with
Michael Burrows pursuant to which Burrows agreed to certain consulting
duties. In exchange, the Company granted 250,000 warrants to purchase
Common Stock exercisable at $3.50 per share.

(32) In March 1996, the Company granted certain employees an aggregate
of 100,000 warrants to purchase Common Stock at $3.50 per share.

(33) In May 1996, the Company entered into two agreements with the
Sage Group, Inc. One agreement stipulates that the Sage Group will identify
distribution partners in foreign countries. The second agreement provides
for the services of Douglas Hulse as interim Chief Operating Officer for a
period of 18 months. The Company granted 140,000 warrants and 250,000
warrants, respectively, at an exercise price of $3.50 per share.

(34) In July 1996, the Company issued 6,000 shares of its Series D
Preferred Stock to GFL Advantage Fund Limited, a foreign investment fund,
at a price of $1,000 per share. The Preferred Stock is convertible into
Common Stock.

(35) In June 1996, the Company issued 480,000 warrants to purchase
Common Stock at an exercise price of $4.00 per share, to The Olmstead
Group, Fred Craves and Francis F. Bodkin, Jr. for their efforts in placing
the Series D Preferred Stock.

(36) In August 1996, the Company issued to Shamrock Partners, Ltd., as
compensation for financial consulting services, an option to purchase
600,000 of Common Stock during the five year period commencing August 15,
1996 at an exercise price of $2.50 per share.

(37) In March 1997, the Company issued 5,000 shares of its Series E
Preferred at a purchase price of $1,000 per share. The proceeds from the
sale were used to retire the Company's outstanding Series D Preferred
Stock.

(b) No underwriters were engaged in connection with the sales of securities
described in Item 15(a).

The issuances of securities set forth in Item 15(a) were deemed exempt from
registration under the Securities Act in reliance upon Section 4(2) of the
Securities Act and the rules and regulations promulgated thereunder as
transactions by an issuer not involving a public offering. The purchasers of
securities in each such transaction represented their intentions to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof and appropriate legends were affixed to the
securities issued in such transactions. All recipients had adequate access,
through their relationships with the Company or otherwise, to information about
the Registrant.

II-8

Item 16. Exhibits and Financial Statement Schedule

(a) The following exhibits are filed herewith:

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

(1)1.1 Form of Underwriting Agreement

(1)1.2 Form of Selected Dealer Agreement

(1)1.3 Form of Agreement Among Underwriters

(1)3.1 Amended and Restated Certificate of Incorporation of
Registrant, as amended, along with Certificates of
Designations, Rights and Preferences of Series A1, A2, B
and C Preferred Stock, as amended

(1)3.2 By-laws of Registrant, as amended

(2)3.3 Certificate of Designations of Series D Preferred Stock

(2)3.4 Certificate of Correction to Certificate of Designations of
Series D Preferred Stock

3.5 Certificate of Designations of Series E Preferred Stock

(1)4.1 Specimen certificate representing Registrant's Common Stock

(1)4.2 Form of Class A Redeemable Warrant Certificate

(1)4.3 Form of Underwriter's Unit Option Purchase Agreement

(1)4.4 Form of Class A Redeemable Warrant Agreement with
Continental Stock Transfer and Trust Company

5.1 Opinion of Silverman, Collura & Chernis, P.C. with respect
to legality of the securities of the Registrant being
registered

(1)10.1 Registration Rights Agreement, dated as of May 9, 1989

(1)10.2 Subordination Agreement, dated as of September 18, 1992

(1)10.3 Series A1 and Series A2 Preferred Stock Purchase Agreement,
dated as of January 22, 1991

II-9

(1)10.4 Sixth Amendment Agreement, dates as of March 31, 1994,
amending the Series A1 and Series A2 Preferred Stock
Purchase Agreement

(1)10.5 Seventh Amendment Agreement, dated as of January 1, 1995,
amending the Series A1 and Series A2 Preferred Stock
Purchase Agreement

(1)10.6 Form of Series C Preferred Stock Subscription Agreement,
dated as of June 22, 1993

(1)10.7 Form of Series C Debt Subscription Agreement, dates as of
June 30, 1993

(1)10.8 Form of Note issued with respect to Series C Debt
Subscription Agreement, dated as of June 30, 1993

(1)10.9 Form of Warrant issued with respect to Series C Debt
Subscription Agreement, dated as of June 30, 1993

(1)10.10 Cohn Restructuring Agreement, dated as of March 31, 1994

(1)10.11 Form of Warrant issued with respect to Cohn Restructuring
Agreement, dated as of March 31, 1994

(1)10.12 Note issued with respect to Cohn Restructuring Agreement,
dated as of March 31, 1994

(1)10.13 Letter Agreement, dated April 14, 1994 between the
Registrant and Maryann Charlap and Promissory Notes

(1)10.14 Letter Agreement, dated July 13, 1994 between Bridge
Ventures, Inc. and the Registrant

(1)10.15 Letter Agreement dated September 20, 1994 between Maryann
Charlap and Lloyd DeVos

(1)10.16 Letter Agreement, dated November 1, 1994 among the
Registrant, Bridge Ventures, Inc. and Myron Cherry

(1)10.17 Form of Bridge Loan Agreement and Promissory Note

(1)10.18 [Intentionally left blank]

(1)10.19 Form of Registration Rights Agreement issued pursuant to
1994 Common Stock Financing Subscription Agreement

(1)10.20 Form of Proxy issued pursuant to 1994 Common Stock
Financing Subscription Agreement

II-10

(1)10.21 Standby Financing Agreement, dated June 2, 1995, as amended
September 20, 1995

(1)10.22 Tisch/Tsai Entities Stock Pledge Agreement, dated February
28, 1995

(1)10.23 Tisch/Tsai Entities Settlement Agreement, dated February
28, 1995

(1)10.24 Form of Promissory Note with Tisch/Tsai Entities

(1)10.25 Form of Warrant with Tisch/Tsai Entities

(1)10.26 Letter Agreement, dated May 4, 12995 between the Registrant
and Gerald Brauser

(1)10.27 Brauser Note, dated May 2, 1995

(1)10.28 1990 Stock Option Plan

(1)10.29 1992 Stock Option Plan

(1)10.30 1993 Employee Stock Purchase Plan

(1)10.31 Form of Confidentiality, Invention and Non-Compete
Agreement

(1)10.32 Form of Clinical Research Agreement

(1)10.33 Form of Collaboration Agreement

(1)10.34 Employment Agreement by and between the Registrant and John
R. Rapoza, dated May 18, 1992

(1)10.35 Employment Agreement by and between the Registrant and
James R. Owen, dated September 21, 1992

(1)10.36 Amended and Restated Employment Agreement by and between
the Registrant and Dr. William A. Cater, dated as of July
1, 1993

(1)10.37 Employment Agreement by and between Registrant and Harris
Freedman, dated August 1, 1994

(1)10.38 Employment Agreement by and between the Registrant and
Sharon Will, dated August 1 1994

(1)10.39 License Agreement by and between the Registrant and the
Johns Hopkins University, dated December 31, 1980

II-11

(1)10.40 Technology Transfer, Paten License and Supply Agreement by
and between the Registrant, Pharmacia LKB Biotechnology
Inc., Pharmacio P-L Biochemicals Inc. and E.I. du Pont de
Nemours and Company, dated November 24, 1987

(1)10.41 Pharmaceutical Use Agreement, by and between the Registrant
and Temple University, dated August 3, 1988

(1)10.42 Assignment and Research Support Agreement by and between
the Registrant, Hahnemann University and Dr. David Strayer,
Dr. Isadore Brodsky and Dr. David Gillespie, dated June 30,
1989

(1)10.43 Lease Agreement between the Registrant and Red Gate III
Limited Partnership, dated November 1, 1989, relating to
the Registrant's Rockville, Maryland facility

(1)10.44 Fee Agreement between the Registrant and Choate, Hall &
Stewart, dated January 27, 1993

(1)10.45 Settlement and Release Agreement between the Registrant and
Lloyd DeVos, dated August 18, 1994

(1)10.46 Agreement between the Registrant and Bioclones
(Proprietary) Limited

(1)10.47 Licensing Agreement with Core BioTech Corp.

(1)10.48 Licensing Agreement with BioPro Corp.

(1)10.49 Licensing Agreement with BioAegean Corp.

(1)10.50 Letter Agreement, dated may 12, 1992, between the
Registrant and Dr. Werner E.G. Muller

(1)10.51 Amendment, dated August 3, 1995, to Agreement between the
Registrant and Bioclones (Proprietary) Limited (contained
in Exhibit 10.46)

(1)10.52 Agreement, dated July 16, 1995, between the Registrant,
Vernacular Communications, Inc. Gerald Souham, Mitchell L.
Reisman, Craig S. O'Keefe and Robert C. Conaboy

(1)10.53 Agreement, dated June 27, 1995, between the Registrant and
The Sage Group

(1)10.54 Form of Indemnification Agreement

(1)10.55 Agreement, dated September 13, 1995, between the Registrant
and River Pharma Inc.

II-12

(2)10.56 Series D Preferred Stock Subscription Agreement, dated June
28, 1996

(2)10.57 Series D Preferred Stock Registration Rights Agreement,
dated June 28, 1996

(2)10.58 GFL Advantage Fund Limited Common Stock Purchase Warrant,
dated June 28, 1996

10.59 Form of Series E Preferred Stock Registration Rights
Agreement

(1)11 Calculation of Earnings Per Share

(1)14.1 Material Foreign Patents

(1)21 Subsidiaries of the Registrant

23.1 Consent of Silverman, Collura & Chernis, P.C. (included in
Exhibit 5.1)

23.2 Consent of KMPG Peat Marwick LLP

(1) Incorporated by reference from Registration Statement on Form S-1
(Registration No. 33-93314) filed by the Company with the Securities and
Exchange Commission.

(2) Incorporated by reference from Registration Statement on Form S-1
(Registration No. 333-8941) filed by the Company with the Securities and
Exchange Commission.

b. Financial Statement Schedules.

All schedules are omitted from this Registration Statement because they are
not required or the required information is included in the Consolidated
Financial Statement or the Notes thereto.

Item 17. Undertakings.

(a) Rule 415 Offerings.

The undersigned issuer hereby undertakes that it will:

(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this Registration Statement to:

(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act;

II-13

(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the Registration Statement; and

(iii) Includes any additional or changed material information on
the plan of distribution.

provided, however, the paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the
Registration Statement is on Form S-3 or Form S-8, and the information required
in a post-effective amendment by those paragraphs is contained in periodic
reports filed by the Registrant pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in the
Registration Statement.

(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.

(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.

(b) Request for acceleration of effective date.

(1) Insofar as indemnification for liabilities arising under the Securities
Act, may be permitted to directors, officers and controlling persons of the
small business issuer pursuant to the foregoing provisions, or otherwise, the
issuer has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the issuer
of expenses incurred or paid by a director, officer or controlling person of the
issuer in the successful defense of any action, suit or proceedings) is asserted
by such director, officer or controlling person in connection with the
securities being registered, the issuer will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such court.

(2) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.

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SIGNATURES

In accordance with the requirements of the Securities Act, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements of filing on Form S-1 and authorized this registration statement to
be signed on its behalf by the undersigned, in the City of Philadelphia, State
of Pennsylvania, on April 10, 1997.

HEMISPHERx BIOPHARMA, INC.

By: /s/ William A. Carter
--------------------------------
William A. Carter, M.D., CEO

In accordance with the requirements of the Securities Act, this
Registration statement was signed by the following persons in the capacities and
on the dates stated.

Signature Title Date
--------- ----- ----

/s/ William A. Carter Principal Executive Officer April 10, 1997
- ------------------------------ and Chairman of the Board
William A. Carter, M.D. and as Power of Attorney
for Members of the Board

/s/ Robert E. Peterson
- ------------------------------ Principal Financial Officer April 10, 1997
Robert E. Peterson and Principal Accounting
Officer

/s/ Cedric C. Philipp
- ------------------------------ Special Advisor to the Board April 11, 1997
Cedric C. Philipp Associate Secretary
and Director

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/s/ Peter W. Rodino III
- ------------------------------ Secretary and Director April 11, 1997
Peter W. Rodino III

- ------------------------------ Director
Richard C. Piani

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