Filed Pursuant to Rule 424(b)(3)
                           Registration Nos. 333-136187, 333-108645, 333-111135,
                                           333-113796, 333-117178 and 333-130008

                              PROSPECTUS SUPPLEMENT
                                    Number 2
                                       to
                         Prospectus dated August 7, 2006
                                       of
                           HEMISPHERX BIOPHARMA, INC.


NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.

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

This prospectus supplement no. 2 supplements the information provided in our
prospectus dated August 7, 2006 and our prospectus supplement no. 1 dated August
14, 2006. This prospectus supplement should be read in conjunction with that
Prospectus and Prospectus Supplement No. 1, which are to be delivered with this
prospectus supplement.

This Prospectus Supplement includes our Quarterly Report on Form 10-Q for the
quarter ended September 30, 2006 filed with the Securities and Exchange
Commission on November 7, 2006 and our Current Report on Form 8-K filed with the
Securities and Exchange Commission on November 9, 2006, both of which are
attached hereto. The attached Current Report on Form 8-K discloses information
concerning the change in our certifying accountant.


          The date of this Prospectus Supplement is November 14, 2006.




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

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

For the Quarterly Period Ended September 30, 2006

Commission File Number: 0-27072

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

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

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

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

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

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

Indicate by check mark whether the registrant is a large  accelerated  filer, an
accelerated  filer, or a  non-accelerated  filer.  See definition of accelerated
filer and large  accelerated  filer in Rule 12b-2 of the  Exchange  Act.  (Check
one): |_| Large  accelerated  filer |X|  Accelerated  filer |_|  Non-accelerated
filer

Indicate by check mark whether the  registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). |_| Yes |X| No

63,585,329  shares of common stock were issued and outstanding as of November 1,
2006.


                                       2


                         PART I - FINANCIAL INFORMATION

ITEM 1: Financial Statements

                   HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
                           Consolidated Balance Sheets
                                 (in thousands)

                                                   December 31,    September 30,
                                                       2005            2006
                                                   ------------    -------------
                                                                    (unaudited)

                                 ASSETS
Current assets:
 Cash and cash equivalents                           $   3,827       $   4,518
 Short term investments (Note 4)                        12,377          14,505
 Inventory, net                                          1,767           1,092
 Accounts and other receivables, net of
 reserves of $1 and $1, respectively                        96             279
 Prepaid expenses and other current assets                 142              87

         Total current assets                           18,209          20,481

Property and equipment, net                              3,364           4,773
Patent and trademark rights, net                           795             875
Investment                                                  35              35
Construction in Progress                                   821             546
Royalty Interest                                            --             612
Deferred financing costs                                   113              57
Advance receivable (Note 5)                              1,300           1,300
Other assets                                                17              17
                                                     ---------       ---------

         Total assets                                $  24,654       $  28,696
                                                     =========       =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
 Accounts payable                                    $     991       $   2,288
 Accrued expenses                                          865           1,172
 Current portion of long-term debt                          --           3,756
                                                     ---------       ---------
         Total current liabilities                       1,856           7,216
                                                     ---------       ---------

 Long-Term Debt (Note 5)                                 4,171              --
                                                     ---------       ---------

Commitments and contingencies

Stockholders' equity:
 Preferred stock, par value $0.01 per share,
 authorized 5,000,000; issued and outstanding;
 none                                                       --              --
 Common stock, par value $0.01 per share,
 authorized 200,000,000 shares; issued and
 outstanding 56,264,155 and 62,892,847
 respectively                                               56              63
 Additional paid-in capital                            166,394         183,852
 Accumulated other comprehensive (loss) income            (171)             24
 Accumulated deficit                                  (147,652)       (162,459)
                                                     ---------       ---------

 Total stockholders' equity                             18,627          21,480
                                                     ---------       ---------

 Total liabilities and stockholders' equity          $  24,654       $  28,696
                                                     =========       =========

See accompanying notes to condensed consolidated financial statements.


                                       3


                   HEMISPHERX BIOPHARMA, INC. AND SUBSIDIARIES
                      Consolidated Statements of Operations
                 (in thousands, except share and per share data)
                                   (Unaudited)

                                                Three months ended September 30,
                                                --------------------------------
                                                    2005               2006
                                                ------------       ------------

Revenues:
Sales of product net                            $        216       $        189
Clinical treatment programs                               55                 43
                                                ------------       ------------

Total revenues                                           271                232

Costs and expenses:
Production/cost of goods sold                             93                308
Research and development                                 987              2,512
General and administrative                             1,384              1,276
                                                ------------       ------------

Total costs and expenses                               2,464              4,096

Interest and other income                                250                356
Interest expense                                         (84)              (164)
Financing costs (Note 5)                                (616)              (135)
                                                ------------       ------------

Net loss                                        $     (2,643)      $     (3,807)
                                                ============       ============

Basic and diluted loss per share (Note 2)       $       (.05)      $       (.06)
                                                ============       ============

Weighted average shares outstanding               51,301,946         62,570,061
                                                ============       ============

See accompanying notes to consolidated financial statements.


                                       4


                   HEMISPHERX BIOPHARMA, INC. AND SUBSIDIARIES
                      Consolidated Statements of Operations
                 (in thousands, except share and per share data)
                                   (Unaudited)

                                                Nine months ended September 30,
                                                -------------------------------
                                                    2005               2006
                                                ------------       ------------

Revenues:
Sales of product net                            $        685       $        569
Clinical treatment programs                              144                146
                                                ------------       ------------

Total revenues                                           829                715

Costs and expenses:
Production/cost of goods sold                            294              1,005
Research and development                               3,413              7,530
General and administrative                             3,933              6,454
                                                ------------       ------------

Total costs and expenses                               7,640             14,989

Interest and other income                                543                516
Interest expense                                        (297)              (574)
Financing costs (Note 5)                              (2,403)              (475)
                                                ------------       ------------

Net loss                                        $     (8,968)      $    (14,807)
                                                ============       ============

Basic and diluted loss per share (Note 2)       $       (.18)      $       (.24)
                                                ============       ============

Weighted average shares outstanding               50,401,043         60,953,372
                                                ============       ============

See accompanying notes to consolidated financial statements.


                                       5


                   HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES

                      Consolidated Statements of Changes in
                  Stockholders' Equity and Comprehensive loss
                        (in thousands except share data)
                                   (Unaudited)



                                                           Common
                                                            Stock                       Accumulated
                                              Common        $.001        Additional        other                           Total
                                              Stock          Par           paid-in     Comprehensive    Accumulated    stockholders'
                                              Shares        Value          capital     Income (loss)      deficit         equity
                                            ----------    ----------     ----------    -------------    -----------    -------------
                                                                                                      
Balance at December 31, 2005                56,264,155    $       56     $  166,394     $     (171)     $ (147,652)     $   18,627
Debt conversions                               400,642             1            833             --              --             834
Interest Payments                               43,875            --            101             --              --             101
Warrants exercised                             255,416            --            672             --              --             672
Private placement, net of issuance costs     5,539,366             6         12,587             --              --          12,593
      31.2  Certification  pursuant to
payable and accrued expenses                    77,665            --            209             --              --             209
Stock issued to purchase patents                61,728            --            150             --              --             150
Stock issued to purchase royalty interest      250,000             0            620             --              --             620
Stock warrant compensation expense                  --            --          2,286             --              --           2,286

Net comprehensive income (loss)                     --            --             --            195         (14,807)        (14,612)
                                            ----------    ----------     ----------     ----------      ----------      ----------

Balance at September 30, 2006               62,892,847    $       63     $  183,852     $       24      $ (162,459)     $   21,480
                                            ==========    ==========     ==========     ==========      ==========      ==========


See accompanying notes to consolidated financial statements.


                                       6


                   HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
                      Consolidated Statements of Cash Flows
              For the Nine Months Ended September 30, 2005 and 2006
                                 (in thousands)
                                   (Unaudited)

                                                           2005          2006
                                                         --------      --------
Cash flows from operating activities:
Net loss                                                 $ (8,968)     $(14,807)

Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation of property and equipment                         87           131
Amortization of patent and trademark rights, and
royalty interest                                              222           125
Financing cost related to debt discounts                    2,403           475
Stock compensation expense                                    289         2,286
Interest expense                                              317           101
Changes in assets and liabilities:
Inventory                                                     314           676
Accounts and other receivables                                 70          (183)
Prepaid expenses and other current assets                     172            54
Accounts payable                                              263         1,505
Accrued expenses                                             (452)          309
                                                         --------      --------
Net cash used in operating activities                      (5,283)       (9,328)
                                                         --------      --------

Cash flows from investing activities:
Purchase of property plant and equipment, net                (289)       (1,266)
Additions to patent and trademark rights                     (107)          (47)
Maturity of short term investments                          7,934        12,548
Purchase of short term investments                         (6,900)      (14,481)

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

Net cash provided by (used in) investing activities      $    638      $ (3,246)
                                                         --------      --------


                                       7


                   HEMISPHERX BIOPHARMA, INC. AND SUBSIDIARIES
                Consolidated Statements of Cash Flows (Continued)
              For the Nine Months Ended September 30, 2005 and 2006
                                 (in thousands)
                                   (Unaudited)

                                                              2005         2006
                                                            -------      -------
Cash flows from financing activities:
Proceeds from exercise of stock warrants                          8          672
Proceeds from sale of stock, net of issuance costs              790       12,593

                                                            -------      -------
Net cash provided by financing activities                       798       13,265
                                                            -------      -------

Net decrease in cash and cash equivalents                    (3,847)         691

Cash and cash equivalents at beginning of period              8,813        3,827
                                                            -------      -------

Cash and cash equivalents  at end of period                 $ 4,966      $ 4,518
                                                            =======      =======

Supplemental disclosures of non-cash investing
and financing cash flow information:
Issuance of common stock for
Patents and royalty interest                                $    --      $   770
                                                            =======      =======
Issuance of common stock for
accounts payable and accrued
expenses                                                    $   314      $   209
                                                            =======      =======
Issuance of common stock for
debt conversion and debt
payments                                                    $ 1,927      $   834
                                                            =======      =======

Supplemental disclosure of cash flow information:
  Cash paid during the year for interest                    $    --      $   145
                                                            =======      =======

See accompanying notes to consolidated financial statements.


                                       8


                   HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: BASIS OF PRESENTATION

The  consolidated  financial  statements  include the  financial  statements  of
Hemispherx Biopharma,  Inc. and its wholly-owned  subsidiaries.  The Company has
three  domestic  subsidiaries  BioPro Corp.,  BioAegean  Corp.  and Core Biotech
Corp., all of which are incorporated in Delaware and are dormant.  The Company's
foreign subsidiaries  include Hemispherx Biopharma Europe N.V./S.A.  established
in  Belgium  in 1998  and  Hemispherx  Biopharma  Europe  S.A.  incorporated  in
Luxemburg  in  2002,  which  have  limited  or  no  activity.   All  significant
intercompany balances and transactions have been eliminated in consolidation.

In the opinion of management,  all adjustments necessary for a fair presentation
of such consolidated  financial statements have been included.  Such adjustments
consist  of  normal  recurring  items.   Interim  results  are  not  necessarily
indicative of results for a full year.

The interim consolidated financial statements and notes thereto are presented as
permitted by the Securities and Exchange  Commission  (SEC),  and do not contain
certain information which will be included in our annual consolidated  financial
statements and notes thereto.

These consolidated  financial  statements should be read in conjunction with our
consolidated financial statements included in our annual report on Form 10-K/A-2
for the year ended December 31, 2005, as filed with the SEC on July 31, 2006.

NOTE 2: NET LOSS PER SHARE

      Basic and  diluted  net loss per  share is  computed  using  the  weighted
average  number of  shares  of  common  stock  outstanding  during  the  period.
Equivalent common shares, consisting of stock options and warrants including the
Company's  convertible  debentures,  which amounted to 29,319,185 and 29,693,497
shares,  are excluded from the calculation of diluted net loss per share for the
nine months ended September 30, 2005 and 2006, respectively,  since their effect
is antidilutive.

NOTE 3: STOCK BASED COMPENSATION

      Prior to the adoption of Statement  of Financial  Accounting  Standard No.
123R,  "Share Based  Payment",  ("FAS 123R") the Company  applied the  intrinsic
value-based  method of  accounting  prescribed by  Accounting  Principles  Board
("APB")  Opinion No. 25,  Accounting for Stock Issued to Employees,  and related
interpretations  including FASB  Interpretation  No. 44,  Accounting for Certain
Transactions  involving Stock  Compensation an interpretation of APB Opinion No.
25 issued in March 2000 ("FIN 44"), to account for its fixed plan stock options.
Under this method,  compensation  expense was recorded on the date of grant only
if the current market price of the underlying stock exceeded the exercise price.
Statement of Financial  Accounting  Standard No. 123, Accounting for Stock-Based
Compensation  ("FAS 123"),  established  accounting and disclosure  requirements
using  a  fair  value-based  method  of  accounting  for  stock-based   employee
compensation  plans.  In December 2002,  the FASB issued  Statement of Financial
Accounting Standard No. 148, Accounting for Stock-Based  Compensation Transition
and Disclosure,  an amendment of FASB Statement No. 123. This Statement  amended
FAS 123, to provide  alternative methods of transition for a voluntary change to
the fair value method of accounting for stock-based employee compensation.

      The Equity  Incentive Plan effective May 1, 2004,  authorizes the grant of
non-qualified and incentive stock options, stock appreciation rights, restricted
stock and other stock awards.  A maximum of 8,000,000  shares of common stock is
reserved for potential  issuance  pursuant to awards under the Equity  Incentive
Plan.  Unless  sooner  terminated,  the Equity  Incentive  Plan will continue in
effect for a period of 10 years from its effective date.


                                       9


      The Equity  Incentive Plan is administered by the Board of Directors.  The
Equity Incentive Plan provides for awards to be made to such officers, other key
employees,  non-employee directors,  consultants and advisors of the Company and
its subsidiaries as the Board may select.

      Stock options  awarded under the Equity  Incentive Plan may be exercisable
at such  times  (not  later  than 10 years  after the date of grant) and at such
exercise  prices (not less than fair  market  value at the date of grant) as the
Board may  determine.  The Board may provide  for options to become  immediately
exercisable upon a "change in control," which is defined in the Equity Incentive
Plan to occur  upon any of the  following  events:  (a) the  acquisition  by any
person or group, as beneficial  owner, of 20% or more of the outstanding  shares
or the voting power of the outstanding  securities of the Company;  (b) either a
majority of the directors of the Company at the annual stockholders  meeting has
been nominated  other than by or at the direction of the incumbent  directors of
the Board,  or the  incumbent  directors  cease to  constitute a majority of the
Company's  Board;  (c) the  Company's  stockholders  approve  a merger  or other
business  combination  pursuant  to which the  outstanding  common  stock of the
Company no longer  represents  more than 50% of the  combined  entity  after the
transaction;   (d)  the  Company's  shareholders  approve  a  plan  of  complete
liquidation or an agreement for the sale or disposition of all or  substantially
all of the Company's assets;  or (e) any other event or circumstance  determined
by the  Company's  Board to affect  control of the  Company  and  designated  by
resolution of the Board as a change of control.

      Effective  January 1, 2006, the Company adopted FAS 123R.  Under FAS 123R,
share-based  compensation  cost is  measured  at the  grant  date,  based on the
estimated  fair  value of the  award,  and is  recognized  as  expense  over the
requisite service period. The Company adopted the provisions of FAS 123R using a
modified  prospective  application.  Under  this  method,  compensation  cost is
recognized for all share-based  payments granted,  modified or settled after the
date of adoption,  as well as for any unvested awards that were granted prior to
the date of adoption.  Prior periods are not revised for  comparative  purposes.
Because the Company previously adopted only the pro forma disclosure  provisions
of FAS 123, it will recognize compensation cost relating to the unvested portion
of awards granted prior to the date of adoption,  using the same estimate of the
grant-date fair value and the same attribution  method used to determine the pro
forma disclosures under FAS 123, except that forfeitures rates will be estimated
for all options,  as required by FAS 123R. The cumulative effect of applying the
forfeiture rates is not material.

      The fair  value of each  option  award is  estimated  on the date of grant
using a Black-Scholes  option valuation model.  Expected  volatility is based on
the  historical  volatility of the price of the Company's  stock.  The risk-free
interest rate is based on U.S. Treasury issues with a term equal to the expected
life of the  option.  The Company  uses  historical  data to  estimate  expected
dividend  yield,  expected life and  forfeiture  rates.  The estimated per share
weighted  average  grant date fair values of stock  options  granted  during the
three months ended September 30, 2005 and 2006, were $.83 and $0,  respectively.
The estimated per share weighted average grant date fair values of stock options
granted during the nine months ended  September 30, 2005 and 2006, were $.85 and
$1.97,  respectively.  The fair values of the options  granted,  were  estimated
based on the following weighted average assumptions:


                                       10


                                        Nine months ended September 30,
                                          2005                    2006
                                          ----                    ----
          Expected volatility        58.78% - 60.67%         72.06% - 79.3%
          Risk-free interest rate    4.81%                   4.3% - 4.97%
          Expected dividend yield    --                      --
          Expected life              5 years                 2.5 - 5 years

      Stock option  activity during the nine months ended September 30, 2006, is
      as follows:



                                                                        Weighted
                                                        Weighted        average
                                                         average       remaining     Aggregate
                                       Number of        exercise      contracted     intrinsic
                                        Options          price       term (years)      value
                                       ---------       ---------     ------------    ---------
                                                                                
Outstanding at January 1, 2006         1,985,680       $    2.15
Options granted                        1,106,650            3.39
Options exercised                             --              --
Options forfeited                         (1,308)           1.90
                                       ---------       ---------
Options outstanding at                 =========       =========      =========      =========
September 30, 2006                     3,091,022       $    2.59           9.04            -0-
                                       =========       =========      =========      =========

Options exercisable at                 =========       =========      =========      =========
September 30, 2006                     3,004,322       $    2.70           8.56            -0-
                                       =========       =========      =========      =========


      The impact on the Company's results of operations of recording share-based
compensation  for the three and nine  months  ended  September  30,  2006 was to
increase  general  and  administrative  expenses  by  approximately  $23,000 and
$2,286,000, respectively, and reduce earnings per share by $0 and $.04 per basic
and diluted share, respectively.

      As  of  September  30,  2006,   there  was  no  unrecognized   stock-based
compensation cost related to options granted under the Equity Incentive Plan.

      The following  table  illustrates  the effect on the net loss and net loss
per share as if the Company had applied the fair value recognition provisions of
FAS 123 to stock based compensation prior to January 1, 2006:



                                                                                    Three              Nine
                                                                                    months             months
                                                                                    Ended              Ended
                                                                                September 30,      September 30,
                                                                                     2005               2005
                                                                                (in thousands)     (in thousands)
                                                                                              
Net loss, as reported                                                            $     (2,643)      $     (8,968)

Add stock-based employee compensation expense included in reported net loss               177                283

Deduct total stock-based employee compensation expense determined under
fair value based method for all awards, net of tax                                       (291)              (373)
                                                                                 -------------------------------

Pro forma net loss                                                               $     (2,757)      $     (9,058)
                                                                                 ============       ============

Net loss per common share (Basic and diluted):
  As Reported                                                                    $       (.05)      $       (.18)
                                                                                 ============       ============
  Pro Forma                                                                      $       (.05)      $       (.18)
                                                                                 ============       ============

Weighted average common shares outstanding:
Basic and diluted                                                                  51,301,946         50,401,043
                                                                                 ============       ============



                                       11


Note 4: SHORT TERM INVESTMENTS

Securities classified as available for sale consisted of (in thousands):

                                 September 30, 2006
                                 ------------------
                                             Market    Unrealized      Maturity
Name of security                   Cost       value       gain           date
                                 -------     -------   ----------     ----------

General Electric                 $ 1,199     $ 1,231     $    32      11/21/2006
Natexis Banques Popl                 969         967          (2)      5/25/2007
AIG FDG Disc Com Paper               972         971          (1)      4/25/2007
American General Fin Corp            976         974          (2)      3/30/2007
General Electric                     965         962          (3)      6/26/2007
Certificate of Deposit             2,000       2,000          --      11/27/2006
Certificate of Deposit             2,000       2,000          --      12/21/2006
Certificate of Deposit             2,000       2,000          --      12/27/2006
Certificate of Deposit             1,400       1,400          --      12/29/2006
Certificate of Deposit             2,000       2,000          --      12/29/2006
                                 --------------------------------
                                 $14,481     $14,505     $    24
                                 ================================

No  investment  securities  were pledged to secure public funds at September 30,
2006.

Comprehensive Income (loss)

The Company  reports  comprehensive  income (loss),  which includes net loss, as
well as  certain  other  items,  which  result in a change to equity  during the
period.



                                                  Three months ended         Nine months ended
                                                     September 30              September 30
                                                  ------------------        ------------------
                                                    (in thousands)            (in thousands)

                                                   2005         2006         2005         2006
                                                  -----        -----        -----        -----
                                                                               
Unrealized gains (losses) during the period       $(149)       $ 136        $(234)         300

Realized loss (gains) during the period              10         (191)          10         (105)
                                                  --------------------------------------------
Other comprehensive income(loss)                  $(139)       $ (55)       $(224)       $ 195
                                                  ============================================


There are no income tax effects allocated to comprehensive  income (loss) as the
Company has no tax liabilities due to net operating losses.

The  basis on which  the  Company  computes  gains  and  losses  is based on the
specific  identification  method  of  accounting.  For  the  nine  months  ended
September 30, 2006 total gains from sales of  securities  was $232,000 and total
losses from the sales of securities for the nine months ended September 30, 2006
was $127,000.


                                       12


Note 5: DEBENTURE FINANCING

Long term debt consists of the following:

                                                    (in thousands)
                                       December 31, 2005     September 30, 2006
                                       -----------------     ------------------

October 2003                                $ 2,071                $ 2,071
January 2004                                  1,365                  1,031
July 2004                                     1,500                  1,000
                                            -------                -------
Total                                         4,936                  4,102

Less Discounts                                 (765)                  (346)
                                            -------                -------

Total                                         4,171                  3,756
                                            =======                =======

Less current portion                             --                  3,756
                                            -------                -------

Long term debt                              $ 4,171                $    --
                                            =======                =======

      As of  December  31,  2005,  the  Company  made  installment  payments  of
$2,389,000 and investors converted an aggregate  $2,818,000  principal amount of
debt from the debentures as noted below (in thousands):



---------------------------------------------------------------------------------------------------
                                                                            Common
                  Original        Debt       Installment    Remaining       Shares    Common Shares
                 Principal   Conversion to   payments in    Principal     issued for    issued in
 Debenture         Amount    Common Shares  Common Shares     Amount     Conversion   installments
---------------------------------------------------------------------------------------------------
                                                                      
October 2003     $   4,142     $   2,071      $      --     $   2,071     1,025,336            --
---------------------------------------------------------------------------------------------------
January 2004         4,000           747          1,889         1,365       347,000     1,094,149
---------------------------------------------------------------------------------------------------
July 2004            2,000            --            500         1,500            --       331,669
---------------------------------------------------------------------------------------------------
Totals           $  10,142     $   2,818      $   2,389     $   4,936     1,372,336     1,425,818
---------------------------------------------------------------------------------------------------


         As of September 30, 2006, the Company made aggregate installment
payments of $2,389,000 and the investors converted an aggregate $3,651,000
principal amount of debt from the debentures as noted below (in thousands):



---------------------------------------------------------------------------------------------------
                                                                            Common
                  Original        Debt       Installment    Remaining       Shares    Common Shares
                 Principal   Conversion to   payments in    Principal     issued for    issued in
 Debenture         Amount    Common Shares  Common Shares     Amount     Conversion   installments
---------------------------------------------------------------------------------------------------
                                                                      
October 2003     $   4,142     $   2,071      $      --     $   2,071     1,025,336            --
---------------------------------------------------------------------------------------------------
January 2004         4,000         1,080          1,889         1,031       507,257     1,094,149
---------------------------------------------------------------------------------------------------
July 2004            2,000           500            500         1,000       240,385       331,669
---------------------------------------------------------------------------------------------------
Totals           $  10,142     $   3,651      $   2,389     $   4,102     1,772,978     1,425,818
---------------------------------------------------------------------------------------------------


October 2003 Debentures

On October 29, 2003,  the Company issued an aggregate of $4,142,357 in principal
amount of 6% Senior  Convertible  Debentures  due October 31, 2005 (the "October
2003  Debentures")  and an  aggregate of 410,134  Warrants  (the  "October  2008
Warrants") in a private  placement for aggregate  gross  proceeds of $3,550,000.
Pursuant to the terms of the October 2003 Debentures, $1,550,000 of the proceeds
from the sale of the  October  2003  Debentures  were  held  back and were to be
released to the Company if, and only if, the  Company  acquired  ISI's  facility
within 90 days of January  26, 2004 and  provided a mortgage on the  facility as
further  security for the October 2003  Debentures.  In April 2004,  the Company
acquired the facility and the Company subsequently  provided the mortgage of the
facility to the Debenture holders and the above funds were released. The Company
recorded an additional  debt discount of $259,000 upon receiving these held back
proceeds.  The October  2003  Debentures  were to mature on October 31, 2005 and
bore  interest  at 6% per  annum,  payable  quarterly  in cash  or,  subject  to
satisfaction  of certain  conditions,  common stock.  Any shares of common stock
issued to the  investors  as payment of interest  are to be valued at 95% of the
average closing price of the common stock during the five  consecutive  business
days ending on the third  business  day  immediately  preceding  the  applicable
interest payment date.  Pursuant to the terms and conditions of the October 2003
Debentures,  the Company  pledged all of the  Company's  assets,  other than the
Company's  intellectual  property,  as collateral and was subject to comply with
certain financial and negative covenants, which included but were not limited to
the repayment of principal  balances upon achieving  certain revenue  milestones
(see "Collateral and Financial Covenants" below).


                                       13


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

The October 2008 Warrants, as amended, received by the investors were to acquire
an  aggregate  of 410,134  shares of common stock at a price of $2.32 per share.
These  Warrants were exercised in July 2004 which produced gross proceeds in the
amount of approximately $952,000.

Pursuant to the Company's  agreement with the holders the Company registered the
shares issuable upon conversion of the October 2003 Debentures and upon exercise
of the October 2008 Warrants for public sale.

The October 2003  Debentures were recorded at a discount on issuance and with an
original  issue  discount  of  $2,000,000  and  $333,000,  respectively,  due to
ascribing value to the beneficial  conversion feature and fair value of warrants
based on the relative fair value of the proceeds.

The conversion  option and detachable  warrant carry  registration  rights and a
feature  that in certain  circumstances,  deemed in the control of the  Company,
could require  partial  settlement of the  conversion  options to be in cash. In
addition, the October 2003 Debentures include other features including mandatory
conversion  option and optional  redemption  rights if  contingent  transactions
occur.   To  determine   whether  the  October  2003   Debentures  had  embedded
derivatives, including the conversion option, that required bifurcation and fair
value accounting, the Company analyzed the terms of the debentures in accordance
with FASB Statement No. 133, "Accounting for Derivative  Instruments and Hedging
Activities"  ("FAS 133"), and EITF 00-19,  "Accounting for Derivative  Financial
Instruments Indexed to, and Potentially Settled in a Company's Own Stock" ("EITF
00-19").  The  Company  concluded  that  bifurcation  was not  required  for the
conversion option and that EITF 00-27: "Application of Issue No. 98-5 to Certain
Convertible  Instruments"  ("EITF 00-27") was the  appropriate  accounting to be
applied.  The  warrants  were  deemed  to be  permanent  equity.  The  mandatory
conversion  option and optional  redemption rights were deemed to be derivatives
requiring  bifurcation and thus the Company obtained a third party valuation for
the aggregate fair value of these  derivatives  that showed the fair value to be
immaterial at inception and for each subsequent reporting period.


                                       14


In October  2005,  the Company  entered  into an  amendment  agreement  with the
October 2003 Debenture  holders to amend the maturity date from October 31, 2005
to June 30, 2007,  and increase the interest rate from 6% to 7% (see  "Debenture
Agreement Amendment" below for more details).

On July 13, 2004, in consideration for the Debenture holders' exercise of all of
the July 2003 ("July 2008 Warrants") and October  2003("October  2008 Warrants")
Warrants  amounting to approximately  $2,199,000 in gross proceeds,  the Company
issued to these  holders  warrants  (the "June 2009  Warrants")  to  purchase an
aggregate of 1,300,000  shares of common  stock.  The Company  recorded  charges
associated with the issuance of these warrants,  as restated,  fair valued using
the Black-Scholes  Method,  at $1,676,000,  which has been reflected as a deemed
dividend in 2004.

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

The Company has paid $1,300,000  into the debenture cash  collateral  account as
required by the terms of the October 2003  Debentures.  The amounts paid through
September  30,  2006 have been  accounted  for as  advances  receivable  and are
reflected as such on the  accompanying  balance  sheet as of September 30, 2006.
The cash  collateral  account  provides  partial  security for  repayment of the
outstanding  principal  and accrued  interest on the  Debentures in the event of
default.

As of September  30, 2006,  the investors  had  converted  $2,071,178  principal
amount of the October 2003 Debenture into 1,025,336  shares of Common Stock. The
remaining  balance of $2,071,178 is convertible  into 1,025,336 shares of common
stock.

The Company  recorded  financing  costs for the three months ended September 30,
2005 and 2006,  with regard to the October 2003  Debentures  of $124,000 and $0,
respectively. Interest expense for the three months ended September 30, 2005 and
2006, with regard to the October 2003 Debentures was  approximately  $31,000 and
$37,000, respectively.

The Company  recorded  financing  costs for the nine months ended  September 30,
2005 and 2006,  with regard to the October  2003  Debentures  of $865,000 and $0
respectively.  Interest expense for the nine months ended September 30, 2005 and
2006, with regard to the October 2003 Debentures was  approximately  $93,000 and
$108,000, respectively.

January 2004 Debentures

On January 26, 2004,  the Company issued an aggregate of $4,000,000 in principal
amount of 6% Senior  Convertible  Debentures  due January 31, 2006 (the "January
2004  Debentures"),  an aggregate of 790,514 warrants (the "July 2009 Warrants")
and  158,104  shares of common  stock,  and  Additional  Investment  Rights  (to
purchase  up to an  additional  $2,000,000  principal  amount  of  January  2004
Debentures  commencing  in six months) in a private  placement for aggregate net
proceeds of $3,695,000.  The January 2004  Debentures  were to mature on January
31,  2006 and bear  interest  at 6% per  annum,  payable  quarterly  in cash or,
subject to satisfaction of certain conditions, common stock. As discussed below,
the maturity  date and interest  rate were  amended.  Any shares of common stock
issued to the  investors  as payment of  interest  shall be valued at 95% of the
average closing price of the common stock during the five  consecutive  business
days ending on the third  business  day  immediately  preceding  the  applicable
interest  payment  date.  Pursuant to the terms of the January 2004  Debentures,
commencing  July 26,  2004,  the  Company  began to repay  the then  outstanding
principal amount under the Debentures in monthly installments  amortized over 18
months in cash or, at the  Company's  option,  in  shares of common  stock.  Any
shares of common stock issued to the investors as installment  payments shall be
valued at 95% of the average closing price of the common stock during the 10-day
trading period  commencing on and including the eleventh trading day immediately
preceding  the date  that the  installment  is due.  Pursuant  to the  terms and
conditions  of the  January  2004  Debentures,  the  Company  pledged all of the
Company's assets, other than the Company's  intellectual property, as collateral
and was subject to comply with certain financial and negative  covenants,  which
included  but were not  limited to the  repayment  of  principal  balances  upon
achieving certain revenue  milestones (see "Collateral and Financial  Covenants"
below).


                                       15


The January 2004  Debentures  are  convertible at the option of the investors at
any time through January 31, 2006 into shares of the Company's common stock. The
conversion price under the January 2004 Debentures was fixed at $2.53 per share,
subject to adjustment for anti-dilution  protection for issuance of common stock
or securities convertible or exchangeable into common stock at a price less than
the conversion price then in effect. In addition,  in the event that the Company
does not pay the redemption price at maturity,  the Debenture holders,  at their
option,  may convert the  balance due at the lower of (a) the  conversion  price
then in effect and (b) 95% of the  lowest  closing  sale price of the  Company's
common  stock  during  the  three  trading  days  ending  on and  including  the
conversion  date.  Upon  completion  of the August 2004 Private  Placement,  the
conversion  price was  lowered  to $2.08 per  share.  The  Company  recorded  an
additional debt discount of approximately  $915,000 due to this conversion price
reset.

In October  2005,  the Company  entered  into an  amendment  agreement  with the
January 31, 2004 Debenture  holders to amend the maturity date from January 2006
to June 30, 2007,  and increase the interest rate from 6% to 7% (see  "Debenture
Agreement Amendment" below for more details).

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

The January 2004  Debentures were recorded at a discount on issuance and with an
original issue discount of $306,000 and $465,000, respectively, due to ascribing
value to the beneficial  conversion  feature and fair value of warrants based on
the relative fair value of the proceeds.

The conversion  option and detachable  warrant carry  registration  rights and a
feature  that in certain  circumstances,  deemed in the control of the  Company,
could require  partial  settlement of the  conversion  options to be in cash. In
addition, the January 2004 Debentures include other features including mandatory
conversion  option and optional  redemption  rights if  contingent  transactions
occur.   To  determine   whether  the  January  2004   Debentures  had  embedded
derivatives, including the conversion option, that required bifurcation and fair
value accounting, the Company analyzed the terms of the debentures in accordance
with FASB Statement No. 133, "Accounting for Derivative  Instruments and Hedging
Activities"  ("FAS 133"), and EITF 00-19,  "Accounting for Derivative  Financial
Instruments  Indexed to, and Potentially Settled in a Company's Own Stock" (EITF
"00-19").  The Company  concluded  that  bifurcation  was not  required  for the
conversion option and that EITF 00-27: "Application of Issue No. 98-5 to Certain
Convertible  Instruments"  ("EITF 00-27") was the  appropriate  accounting to be
applied.  The  warrants  were  deemed  to be  permanent  equity.  The  mandatory
conversion  option and optional  redemption rights were deemed to be derivatives
requiring  bifurcation and thus the Company obtained a third party valuation for
the aggregate fair value of these  derivatives  that showed the fair value to be
immaterial at inception and for each subsequent reporting period.


                                       16


Section 713 of the American Stock Exchange Company Guide

Section 713 of the American Stock Exchange  ("AMEX") Company Guide provides that
the Company must obtain  stockholder  approval before  issuance,  at a price per
share below market value, of common stock, or securities convertible into common
stock,  equal to 20% or more of the  Company's  outstanding  common  stock  (the
"Exchange  Cap").  The Debentures and Warrants have  provisions that require the
Company to pay cash in lieu of issuing shares upon  conversion of the Debentures
or exercise of the Warrants if the Company is prevented from issuing such shares
because of the Exchange Cap. In May 2004, the Debenture  holders agreed to amend
the  provisions of these  Debentures and Warrants to limit the maximum amount of
funds that the holders  could  receive in lieu of shares upon  conversion of the
Debentures  and/or  exercise of the  Warrants in the event that the Exchange Cap
was reached to 119.9% of the  conversion  price of the relevant  Debentures  and
19.9% of the  relevant  Warrant  exercise  price.  See below for the  accounting
effect on this matter.

Taken  separately,   the  March,   July,  October  and  January  2004  debenture
transactions  do not trigger  Section 713.  However,  the AMEX took the position
that these transactions should be aggregated and, as such,  stockholder approval
was required  for the  issuance of common  stock for a portion of the  potential
exercise of the warrants and conversion of the Debentures in connection with the
January 2004  Debentures.  The amount of potential shares that the Company could
exceed the Exchange Cap amounted to approximately  1,299,000. In accordance with
EITF 00-19,  Accounting  For  Derivative  Financial  Instruments  Indexed to and
Potentially  Settled in a Company's Own Stock,  the Company  recorded on January
26,  2004,  a  redemption   obligation  of   approximately   $2,160,000  with  a
corresponding  increase to debt  discount to be  amortized  over the life of the
debt or until the Company obtains shareholder  approval.  Any remaining discount
would be reclassed to additional paid in capital.

In addition, in accordance with EITF 00-19, the Company revalued this redemption
obligation as of March 31, 2004. The Company increased the redemption obligation
and  recorded  additional  finance  charge  of  $1,024,000  as a result  of this
revaluation.  The Company also incurred $104,000 in financing charges related to
the amortization of the related discount during the first quarter of 2004.

Stockholder   approval  was  obtained  at  the  Company's   Annual   Meeting  of
Stockholders  on June 23,  2004.  In  accordance  with EITF  00-19,  the Company
revalued this redemption  obligation  associated with the 1,299,000 shares as of
June 23, 2004 (date of shareholder  approval).  The Company recorded a reduction
in the value of the redemption  obligation and financing charge of $839,000 as a
result of this  revaluation and additional  financing charge of $242,000 related
to the  amortization  of the  debt  discount  in the  second  quarter  2004.  In
addition,  upon receiving the requisite  stockholder  approval on June 23, 2004,
the  redemption  obligation of $2,345,000  and the  remaining  unamortized  debt
discount of $1,815,000 were reclassified as additional paid in capital.


                                       17


As of September 30, 2006, the Company has made aggregate installment payments of
$1,889,000  and the  investors  have  converted an aggregate  of  $1,080,000  of
principal  amount of the January  2004  Debentures  into  1,094,149  and 507,257
shares of common stock,  respectively.  During the quarter  ended  September 30,
2006,  the investors did not convert any of the principal  amount of the January
2004 Debentures.  The remaining  principal on these Debentures was $1,031,268 as
of September 30, 2006.

The Company  recorded  financing  costs for the three months ended September 30,
2005 and 2006 with regard to the January  2004  Debentures  of $236,000  and $0,
respectively. Interest expense for the three months ended September 30, 2005 and
2006, with regard to the January 2004 Debentures was  approximately  $25,000 and
$7,000, respectively.

The Company  recorded  financing  costs for the nine months ended  September 30,
2005 and 2006  with  regard to the  January  2004  Debentures  of  $746,000  and
$49,000, respectively.  Interest expense for the nine months ended September 30,
2005 and 2006,  with regard to the January  2004  Debentures  was  approximately
$117,000 and $59,000, respectively.

July 2004 Debentures

Pursuant to the  Additional  Investment  Rights  issued in  connection  with the
January 2004  Debentures,  the Company  issued to the  investors  an  additional
$2,000,000   principal  amount  of  January  2004  Debentures  (the  "July  2004
Debentures").  The July  2004  Debentures  are  identical  to the  January  2004
Debentures  except that the conversion price is $2.58.  The investors  exercised
the Additional  Investment  Rights on July 13, 2004 and the Company received net
proceeds of $1,860,000.  Upon  completion of the August 2004 Private  Placement,
the conversion price of the July 2004 Debentures was lowered to $2.08 per share.
The Company recorded an additional debt discount of approximately  $632,000 upon
the conversion price reset to $2.08 per share, which is being amortized over the
remaining life of the debenture in accordance with the effective interest method
of accounting.

The July 2004 Debentures were recorded at a discount on issuance of $628,000 due
to  ascribing  value to the  beneficial  conversion  feature  and fair  value of
warrants based on the relative fair value of the proceeds.

The conversion  option and detachable  warrant carry  registration  rights and a
feature  that in certain  circumstances,  deemed in the control of the  Company,
could require  partial  settlement of the  conversion  options to be in cash. In
addition,  the July 2004 Debentures include other features  including  mandatory
conversion  option and optional  redemption  rights if  contingent  transactions
occur. To determine  whether the July 2004 Debentures had embedded  derivatives,
including  the  conversion  option,  that  required  bifurcation  and fair value
accounting,  the Company analyzed the terms of the debentures in accordance with
FASB  Statement No. 133,  "Accounting  for  Derivative  Instruments  and Hedging
Activities"  ("FAS 133"), and EITF 00-19,  "Accounting for Derivative  Financial
Instruments  Indexed to, and Potentially Settled in a Company's Own Stock" (EITF
00-19").  The  Company  concluded  that  bifurcation  was not  required  for the
conversion option and that EITF 00-27: "Application of Issue No. 98-5 to Certain
Convertible  Instruments"  ("EITF 00-27") was the  appropriate  accounting to be
applied.  The  warrants  were  deemed  to be  permanent  equity.  The  mandatory
conversion  option and optional  redemption rights were deemed to be derivatives
requiring  bifurcation and thus the Company obtained a third party valuation for
the aggregate fair value of these  derivatives  that showed the fair value to be
immaterial at inception and for each subsequent reporting period.


                                       18


In October 2005, the Company  entered into an amendment  agreement with the July
2004 Debenture holders to amend the maturity date from July 31, 2006 to June 30,
2007,  and increase the interest  rate from 6% to 7% (see  "Debenture  Agreement
Amendment" below for more details).

As of September 30, 2006, the Company has made aggregate installment payments of
$500,000  resulting in the issuance of 331,669  shares of the  Company's  common
stock.  During the nine months ended  September 30, 2006, the Debenture  holders
converted  $500,000  principal  amount of the July 2004  Debentures into 240,385
shares of common stock.  The remaining  principal amount on these debentures was
$1,000,000 as of September 30, 2006.

The Company  recorded  financing  costs for the three months ended September 30,
2005 and 2006 with regard to the July 2004  Debentures of $114,000 and $116,000,
respectively. Interest expense for the three months ended September 30, 2005 and
2006,  with regard to the July 2004  Debentures  was  approximately  $28,000 and
$16,000, respectively.

The Company  recorded  financing  costs for the nine months ended  September 30,
2005 and 2006 with regard to the July 2004  Debentures of $361,000 and $369,000,
respectively.  Interest expense for the nine months ended September 30, 2005 and
2006,  with regard to the July 2004  Debentures  was  approximately  $61,000 and
$87,000, respectively.

Debenture Agreement Amendment

On October 6, 2005,  the Company  entered into a material  definitive  agreement
with the October 2003,  January 2004 and July 2004 debenture holders to 1) amend
the remaining outstanding Debentures that were to mature on October 31, 2005 (as
amended,  the "October 2003  Debenture")  and the two  traunches of  outstanding
debentures  due to mature on January 31,  2006 (as  amended,  respectively,  the
"January 2004 and July 2004  Debentures"),  to a maturity date of June 30, 2007,
2) to  increase  the  interest  rate  from  6% per  annum  to 7% per  annum.  In
consideration for extending the maturity date of the outstanding debentures, the
Company issued an aggregate of 225,000 Warrants (the "October 2009 Warrants") to
the debenture  holders to acquire  common stock at a price of $2.50 per share at
any time from  October  31, 2005  through  October 31,  2009.  The October  2009
Warrants  contain  provisions for adjustment of the exercised price in the event
of certain  anti-dilution  events.  The Company  agreed to register  135% of the
shares  issuable as interest  shares that might result due to the  amendments to
the Debentures and issuable upon exercise of the October 2009 Warrants.

      In accordance with EITF 96-19,  "Debtor's Accounting for a Modification or
Exchange  of Debt  Instruments",  the Company has treated the change in terms to
the original  debentures as non-substantial in nature and have not accounted for
such modification as an extinguishment of debt, but rather a debt  modification.
In  addition,   the  225,000  warrants  issued  to  the  debenture   holders  as
consideration   for   extending   the  maturity   date  were  valued  using  the
Black-Scholes  method and $189,000 of additional  debt discount on the July 2004
Debenture was recorded.  The discount will be amortized as interest expense over
the new term of the debt  instrument in accordance  with the effective  interest
method of  accounting.  Any costs  incurred by third  parties  were  expensed as
incurred.

Conversion of Convertible Debt

      The maximum  number of shares  issuable  upon debt  conversion,  including
interest as well as 135% of the shares  issuable  upon  conversion  and interest
payments were 3,667,662 and 2,851,331  shares at December 31, 2005 and September
30, 2006, respectively.


                                       19


Collateral and Financial Covenants

      The Company paid  $1,300,000  in 2003 into the debenture  cash  collateral
account  held by the  debenture  holders as required by the terms of the October
2003 Debentures. The amounts paid have been accounted for as advances receivable
and are reflected as such on the accompanying  balance sheet as of September 30,
2006. The cash collateral account provides partial security for repayment of the
outstanding Debentures in the event of default.

      Pursuant to the terms and conditions of all of the outstanding Debentures,
the Company has pledged all of the  Company's  assets,  other than the Company's
intellectual property, as collateral,  and the Company is subject to comply with
certain  financial  covenants.  As of September 30, 2006,  the Company was fully
compliant with its financial covenants.

      The Company  failed to timely file its 2005 Annual Report on Form 10-K and
Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2006 with
the Securities  and Exchange  Commission  ("SEC")  pursuant to the 1934 Act, and
therefore,  was in violation of its covenant to timely file within its debenture
agreements.  The Company  obtained a waiver  letter from its  debenture  holders
regarding the failure to meet this covenant.  In addition,  due to the Company's
inability  to timely  file its  annual  report  on Form 10-K for the year  ended
December 31, 2005,  the Company's  registration  statement,  and the  prospectus
contained  therein,  registering  the shares  issuable  upon  conversion  of and
interest  under the  debentures  and upon  exercise of related  warrants  was no
longer  current.  As a result,  the Company was subject to payment of liquidated
damages until such time as the foregoing shares were again registered for public
resale or eligible for resale  pursuant to Rule 144(k) under the Securities Act.
Liquidated  damages are based on the outstanding  debt balance times the rate of
0.00067 per day or  approximately  $2,748 per day. On July 31, 2006, the Company
filed with the SEC its Form 10-K/A-2 for the year ended  December 31, 2005,  its
Forms 10-Q/A for the  quarterly  periods  ended June 30, 2005 and  September 30,
2005, and, its registration statement on Form S-1 to, among other things, update
its stale registration statements previously filed on Form S-3. The Form S-1 was
declared  effective on August 7, 2006,  which included the shares  issuable upon
conversion  and interest  under the  debenture  securities  and upon exercise of
certain  warrants.  Through  September 30, 2006,  liquidated  damages due to the
debenture holders were calculated to be approximately $350,000.

Note 6: EQUITY FINANCING

      On  July 8,  2005,  the  Company  entered  into a  common  stock  purchase
agreement with Fusion Capital Fund II, LLC ("Fusion Capital"), pursuant to which
Fusion Capital has agreed, under certain conditions, to purchase on each trading
day $40,000 of the  Company's  common stock up to an aggregate of $20.0  million
over  approximately  a 25 month period,  subject to earlier  termination  at the
Company's discretion.  In the Company's discretion,  it could elect to sell less
common stock to Fusion  Capital than the daily amount and it could  increase the
daily amount as the market price of the Company's stock increases.  The purchase
price of the shares of common  stock was equal to a price  based upon the future
market price of the common stock without any fixed discount to the market price.
Fusion  Capital did not have the right or the  obligation to purchase  shares of
the  Company's  common  stock in the event that the price of the common stock is
less than $1.00.

      Pursuant  to the  Company's  agreement  with Fusion  Capital,  the Company
registered  for public  sale by Fusion  Capital up to  10,795,597  shares of our
common stock.  However, in the event that the Company decides to issue more than
10,113,278,  i.e. greater than 19.99% of the outstanding  shares of common stock
as of the date of the  agreement,  the  Company  would  first  seek  stockholder
approval in order to be in compliance  with American Stock Exchange rules. As of
April 3, 2006, Fusion Capital had purchased an aggregate of 8,791,838 (4,678,382
in 2006) shares amounting to approximately $20,000,000, in gross proceeds to the
Company which completed the terms of the July 8, 2005, Fusion Capital agreement.
Pursuant to the  agreement,  the Company also issued  785,597  (235,287 in 2006)
commitment fee shares and 10,000 shares as reimbursement for expenses.


                                       20


      On April 12, 2006, the Company  entered into another Common Stock Purchase
Agreement ("Purchase  Agreement") with Fusion Capital.  Pursuant to the terms of
the Purchase  Agreement,  Fusion Capital has agreed to purchase from the Company
up to  $50,000,000  of common stock over a period of  approximately  twenty-five
(25) months.  Pursuant to the terms of the Registration Rights Agreement,  dated
as of April 12, 2006, the Company  registered  12,386,723  shares issuable to or
issued to Fusion  Capital under the Purchase  Agreement.  Once the  Registration
Statement  was  declared  effective,  each  trading  day  during the term of the
Purchase  Agreement  the Company  has the right to sell to Fusion  Capital up to
$100,000 of the Company's common stock on such date or the arithmetic average of
the three lowest closing trade prices of the common stock during the immediately
proceeding  12  trading  day  period.  At the  Company's  option  under  certain
conditions, Fusion Capital can be required to purchase greater amounts of common
stock during a given  period.  In  connection  with  entering  into the Purchase
Agreement,  the Company  issued to Fusion  Capital as commitment  shares 321,751
shares of our common stock and the Company is  obligated to issue an  additional
321,751 commitment shares. These additional  commitment shares will be issued in
an amount  equal to the  product  of (x)  321,751  and (y) the  Purchase  Amount
Fraction.  The "Purchase  Amount  Fraction"  means a fraction,  the numerator of
which is the  purchase  price at which the shares are being  purchased by Fusion
Capital and the denominator of which is $50,000,000.

      The   purchase   price   will  be   adjusted   for   any   reorganization,
recapitalization,  non-cash dividend, stock split, or other similar transaction.
Fusion Capital may not purchase  shares of the Company's  common stock under the
common stock  purchase  agreement if it,  together  with its  affiliates,  would
beneficially  own more than 9.9% of our common stock  outstanding at the time of
the purchase by Fusion Capital. Fusion Capital has the right at any time to sell
any shares  purchased under the 2006 Purchase  Agreement which would allow it to
avoid the 9.9%  limitation.  Due to AMEX guidelines,  without prior  stockholder
approval, we do not have the right or the obligation under the Agreement to sell
shares to Fusion  Capital in excess of  12,386,723  shares  (i.e.  19.99% of the
61,964,598 outstanding shares of our common stock on April 12, 2006, the date of
the 2006 Purchase  Agreement)  inclusive of  commitment  shares issued to Fusion
Capital under the Agreement.  In addition,  Fusion Capital cannot  purchase more
than 27,386,723 shares,  inclusive of the commitment shares under the Agreement.
On  September  20,  2006  our  stockholders  voted  to  allow  us to  sell up to
27,386,723 shares pursuant to the terms of the Fusion agreement.

      As of September 30, 2006,  Fusion  Capital has purchased  from the Company
300,000  shares for  aggregate  gross  proceeds  of  approximately  613,000.  In
addition,  the  Company  issued to  Fusion  Capital  3,946  shares  towards  the
remaining commitment fee.

NOTE 7 - INTANGIBLE ASSETS

      On July 3, 2006, and July 20, 2006, the Company  entered into an agreement
with Paul  Griffin and The  Asclepius  Trust  ("Asclepius")  whereby the Company
acquired the right,  title and interest in certain  awarded  patents and pending
patent  applications  ("patents').  Consideration  given by the  Company for the
acquisition  of these  patents  amounted  to  $150,000  paid with  shares of the
Company's  common stock to Paul Griffin  valued at the closing price on the date
of the agreement or July 3, 2006.  The value of the  Company's  common stock was
$2.43 on this date and equated to  consideration  of 61,728 shares of HEB common
stock.  The Company  registered these shares on behalf of Mr. Griffin for public
resale.  Asclepius will receive in  consideration a 2% royalty of the gross sums
received  from all sales  utilizing  or relying  upon the  patents.  The Company
recorded the acquisition of these patents under guidance set forth in SFAS No. 2
Accounting for Research and  Development  Costs ("FAS 2") and refers to SFAS No.
142 - Goodwill and Other Intangible Assets ("FAS 142") as an intangible asset to
be amortized over the remaining life of the patent.


                                       21


      On July 26,  2006,  the  Company  executed  an  agreement  with  Stem Cell
Innovations,  Inc. (formerly Interferon Sciences,  Inc.) whereby it acquired the
royalty  interest  previously  granted  Interferon  Sciences with respect to the
Company's sale of products  containing  alpha interferon in exchange for 250,000
shares of common stock.  The Company  registered  these shares on behalf of Stem
Cell Innovations for public resale. The Company recorded this transaction on its
balance sheet as an intangible  asset under guidance  provided by FAS 142 -. The
total  consideration  paid to Stem Cell under the agreement amounted to $620,000
and was derived by  multiplying  the number of shares  issued by the fair market
value of the  Company's  common stock on the date of the  agreement or $2.48 per
share. The intangible asset will be amortized over the period which the asset is
expected to contribute  directly or indirectly to the Company's  cash flow.  The
balance of this intangible asset as of September 30, 2006, was $612,000.

Note 8 - SUBSEQUENT EVENTS

      To  facilitate  a  financing   undertaken  by  Chronix  Biomedical,   Inc.
("Chronix") on October 5, 2006 the Company terminated a Shareholders  Agreement,
Investor Rights Agreement and a Co-Sale Agreement  between the Company,  Chronix
and certain  Chronix  investors,  each dated as of August 25, 2000 (the "Chronix
Agreements").  As  consideration  for  terminating  the Chronix  Agreements  the
Company received  250,000 shares of restricted  Chronix common stock and entered
into a Voting  Agreement,  Investor  Rights  Agreement  and Co-Sale and Right of
First Refusal Agreement with Chronix and Certain Chronix investors.  The Company
does not believe that this transaction will have a material  financial impact on
its financial statements.

NOTE 9: RECENT ACCOUNTING PRONOUNCEMENTS

      In February  2006, the FASB issued SFAS No. 155,  "Accounting  for Certain
Hybrid Financial  Instruments" ("FAS 155") - an amendment of FASB Statements No.
133 and 140. FAS 155 amends SFAS No. 133, "Accounting for Derivative Instruments
and Hedging  Activities" ("FAS 133"), and SFAS No. 140 ("FAS 140"),  "Accounting
for  Transfers  and  Servicing  of  Financial  Assets  and   Extinguishments  of
Liabilities",  to permit  fair  value  re-measurement  of any  hybrid  financial
instrument that contains an embedded  derivative  that would  otherwise  require
bifurcation.  Additionally,  FAS 155 seeks to clarify which interest-only strips
and principal-only  strips are not subject to the requirements of FAS 133 and to
clarify that  concentrations of credit risk in the form of subordination are not
embedded derivatives.  This Statement is effective for all financial instruments
acquired or issued  after the  beginning  of an entity's  first fiscal year that
begins after  September  15, 2006.  Management  does not believe the adoption of
this  standard  will have a material  impact on the  financial  condition or the
results of operations of the Company.

      On  July  13,  2006,  the  Financial  Accounting  Standards  Board  issued
Interpretation  No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48").
The  requirements  are effective for fiscal years  beginning  after December 15,
2006.  The  purpose of FIN 48 is to clarify and set forth  consistent  rules for
accounting for uncertain tax positions in accordance with Statement of Financial
Accounting  Standards No. 109,  "Accounting  for Income  Taxes".  The cumulative
effect of applying  the  provisions  of this  interpretation  are required to be
reported separately as an adjustment to the opening balance of retained earnings
in the year of  adoption.  Management  does not  believe  the  adoption  of this
standard will have a material  impact on the financial  condition or the results
of operations of the Company.


                                       22


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

Special Note Regarding Forward-Looking Statements

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

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

                                    Overview

General

      We are a  biopharmaceutical  company engaged in the clinical  development,
manufacture  and marketing of new drug entities  based on natural  immune system
enhancing  technologies  for the  treatment  of viral and immune based acute and
chronic disorders.  We were founded in the early 1970s, as a contract researcher
for the National  Institutes of Health.  Since that time, we have  established a
strong foundation of laboratory, pre-clinical, and clinical data with respect to
the development of nucleic acids to enhance the natural antiviral defense system
of the human body and to aid the  development  of  therapeutic  products for the
treatment  of  acute  and  chronic  diseases.  We  own  a  U.S.  Food  and  Drug
Administration ("FDA") approved GMP (good manufacturing  practice) manufacturing
facility in New Jersey.

      Our flagship  products  include  Ampligen(R)  and Alferon N  Injection(R).
Ampligen(R) is an experimental drug currently  undergoing  clinical  development
for  the  treatment  of  Myalgic   Encephalomyelitis/Chronic   Fatigue  Syndrome
("ME/CFS" or "CFS") and HIV, and clinical  testing for  treatment/prevention  of
avian and seasonal influenza.


                                       23


      Alferon N  Injection(R)  is the  registered  trademark for our  injectable
formulation  of natural alpha  interferon,  which is approved by the FDA for the
treatment  of  genital  warts.  Alferon  N  Injection(R)  is  also  in  clinical
development for treating Multiple Sclerosis and West Nile Virus ("WNV").

New Accounting Pronouncements

      In February  2006, the FASB issued SFAS No. 155,  "Accounting  for Certain
Hybrid Financial  Instruments" ("FAS 155") - an amendment of FASB Statements No.
133 and 140. FAS 155 amends SFAS No. 133, "Accounting for Derivative Instruments
and Hedging  Activities" ("FAS 133"), and SFAS 140 ("FAS 140"),  "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities",
to permit fair value  re-measurement  of any hybrid  financial  instrument  that
contains  an  embedded  derivative  that would  otherwise  require  bifurcation.
Additionally,   FAS  155  seeks  to  clarify  which  interest-only   strips  and
principal-only  strips  are not  subject to the  requirements  of FAS 133 and to
clarify that  concentrations of credit risk in the form of subordination are not
embedded derivatives.  This Statement is effective for all financial instruments
acquired or issued  after the  beginning  of an entity's  first fiscal year that
begins after September 15, 2006. We do not believe the adoption of this standard
will have a material  impact on our  financial  condition  or the results of our
operations.

      On  July  13,  2006,  the  Financial  Accounting  Standards  Board  issued
Interpretation  No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48").
The  requirements  are effective for fiscal years  beginning  after December 15,
2006.  The  purpose of FIN 48 is to clarify and set forth  consistent  rules for
accounting for uncertain tax positions in accordance with Statement of Financial
Accounting  Standards No. 109,  "Accounting  for Income  Taxes".  The cumulative
effect of applying  the  provisions  of this  interpretation  are required to be
reported separately as an adjustment to the opening balance of retained earnings
in the year of  adoption.  Management  does not  believe  the  adoption  of this
standard will have a material  impact on the financial  condition or the results
of operations on us.

Disclosure About Off-Balance Sheet Arrangements

None.

Critical Accounting Policies

There have been no material  changes in our  critical  accounting  policies  and
estimates from those disclosed in Item 7 of our Annual Report on Form 10-K/A for
the year ended December 31, 2005.

RESULTS OF OPERATIONS

Three months ended  September  30, 2005 versus Three months ended  September 30,
2006

Net loss

      Our  net  loss  for  the  three  months  ended   September  30,  2006  was
approximately  $3,807,000  or an  increase  of  $1,164,000  compared to the same
period in 2005. As discussed in more detail below,  this 44% increase  primarily
consists  of 1) an increase of  $215,000  in  production  (manufacturing),  2) a
$1,525,000 increase in research and development due to the continued development
of our products.  These increases were offset by a $108,000  decrease in general
and administration expenses and a $481,000 decrease in financing costs.

      Net loss per share was $.06 for the  current  period  versus  $.05 for the
same period in 2005.


                                       24


Revenues

      Revenues for the three months ended  September  30, 2006 were  $232,000 as
compared  to  revenues  of  $271,000  for the same  period  in 2005.  Alferon  N
Injection(R)  sales were down  $27,000 or 13% while  Ampligen(R)  sold under the
cost recovery clinical program was down $12,000 or 22%. The decline in Alferon N
Injection(R)  sales can be attributed to continued pressure from rival products.
Ampligen(R)  sold  under the cost  recovery  clinical  program  is a product  of
physicians  and ME/CFS  patients  applying to us to enroll in the program.  This
program has been in effect for many years and is offered as a  treatment  option
to patients severely affected by ME/CFS. As the name "cost recovery" implies, we
have no gain or profit on these sales.  The benefits to us include 1) physicians
and patients  becoming  familiar with  Ampligen(R) and 2) collection of clinical
data relating to the patients'  treatment and results.  We are in the process of
changing our marketing strategy for Alferon N Injection(R).  We are looking into
conducting a pilot program with a contract sales organization  ("CSO").  As part
of this strategic change, we have eliminated our direct sales force.

Production costs/cost of goods sold

      Our costs for  production/cost  of goods sold  increased  $215,000 for the
three months ended  September 30, 2006 compared to the same period in 2005. This
increase  was  primarily  due to higher  production  costs  representing  excess
production  capacity  during the current period  amounting to $161,000.  Cost of
goods sold for the three months ended  September  30, 2005 and 2006 were $93,000
and $147,000, respectively.

      As previously  reported,  we executed a Manufacturing and Safety Agreement
with  Hyaluron,  Inc.  ("Hyaluron")  of  Burlington,   Massachusetts,   for  the
formulation, packaging and labeling of Alferon N Injection(R). During the second
quarter 2006,  Hyaluron conducted three production runs for stability testing of
Alferon N  Injection(R)'s  new vial material.  The stability test results at the
three  month  check  point  met the  required  specifications.  We  believe  all
stability and validation testing will be completed by year end 2006.

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

Research and Development costs

      Overall  research  and  development  costs  for  the  three  months  ended
September 30, 2006 were $2,512,000 as compared to $987,000 for the same period a
year ago  representing  an  increase of  $1,525,000  or 155%.  The higher  costs
reflect an increase in the direct  costs  associated  with our effort to develop
our lead  products,  Ampligen(R),  as a therapy in  treating  acute and  chronic
diseases,  cancers and on-going clinical trials involving  patients with HIV and
pre-clinical and clinical testing for possible  treatment for avian and seasonal
influenza viruses.

      Much of this increase in R&D cost is related to the  production of polymer
at our new polymer  production  line  recently  installed  at our New  Brunswick
facility. The New Brunswick facility produced two lots of Poly I and two lots of
Poly  C12U,   which  have  been  shipped  to   Hollister-Stier   (our   contract
manufacturer) for use in producing Ampligen(R) doses.

      The initial three productions lots produced by  Hollister-Stier  are being
used for validity and stability testing. The results of these tests will be used
in our Ampligen NDA submission. All costs relating to the production of polymers
and Ampligen doses are expensed  pursuant to SFAS No. 2 "Accounting for Research
and  Development  Cost" as  Ampligen  is an  experimental  drug with no  present
commercial value.


                                       25


      We continue to focus our research and  development  efforts on three areas
that have the greatest potential for commercialization:

      o     The preparation of a new drug application (NDA) for our experimental
            drug,  Ampligen(R),  for the treatment of Chronic  Fatigue  Syndrome
            (CFS). CFS is a severe chronic disease that does not have recognized
            treatment therapy.

      o     The formulation of a broad-spectrum biodefense strategy built on the
            use of our  experimental  compounds  consisting of  Ampligen(R)  and
            Alferon  LDO(Low  Dose Oral).  The initial  phase of this program is
            focused on the treatment of Avian and seasonal flu.

      o     The validation of suggestions  that Alferon N Injection(R),  already
            approved for treating HPV-related genital warts, my have application
            in treating Vulvar Vestibulitis Syndrome (VVS).

Ampligen NDA

      We continue our efforts  with respect to preparing a New Drug  Application
("NDA") for  submission  to the Food and Drug  Administration  ("FDA") for using
Ampligen(R) to treat patients  afflicted with Chronic Fatigue Syndrome  ("CFS").
CFS is a debilitating  disease in which patients suffer complex symptoms such as
fatigue,  flu-like ailments,  headaches and muscle pain. At this time, there are
no approved  treatment  therapies.  The Center for Disease  Control  ("CDC") has
added CFS to its priority list of emerging diseases.  The preparation of the NDA
is a time consuming and laborious process and basically involves the preparation
of multiple technical  documents including those covering 1) safety data results
from  animal  and humans  exposed to  Ampligen(R),  2) the data  collection  and
analysis of data from human clinical  trials proving the efficacy of Ampligen(R)
and 3) the capacity and ability to produce  Ampligen(R) on a consistent basis in
commercial quantities. We have experienced technical teams assigned to preparing
each of these three segments.  When completed  these three  technical  documents
will be consolidated  into the common  technical  document for submitting to the
FDA.  While the results of our AMP 516 Phase III clinical study is the basis for
filing the NDA we must also  include the safety data  collected  on all patients
that ever received  Ampligen(R) (some 800 patients from clinical trials for CFS,
HIV,  Hepatitis,  cancer,  etc.) All of this is time  consuming  as our clinical
monitors  and research  assistants  must visit and audit the records of clinical
investigators  involved in our Ampligen clinical studies conducted over the last
15 years.  Our  pre-NDA  meeting  with the FDA on August  2,  2006  resulted  in
constructive  guidance  with  respect  to  the  various  data  segments  of  our
anticipated NDA filing. We may request additional meetings in the near future to
complete our pre-NDA requests for guidance.

      We have  engaged  an  independent  contractor  to assist in filing the NDA
electronically  to  facilitate  the  review by the FDA.  We can not yet  provide
guidance as to the tentative date at which the compilation and filing of the NDA
will be  complete,  as  significant  factors are outside our control  including,
without  limitation,  the ability and  willingness of the  independent  clinical
investigators  to complete the  requisite  reports at an  acceptable  regulatory
standard,  the ability to collect  overseas  generated  data, and the ability of
Hollister-Stier   facilities   to   interface   with   our  own  New   Brunswick
staff/facilities  to meet the  manufacturing  regulatory  standards.  Also,  the
timing of the FDA review process of the NDA is subject to the control of the FDA
and  could  result  in  one of the  following  events;  1)  approval  to  market
Ampligen(R)  for use in treating  ME/CFS  patients,  2) require  more  research,
development,  and clinical  work,  3) approval to market as well as conduct more
testing, or 4) reject our NDA application.  Given these variables, we are unable
to project when material net cash inflows are expected to commence from the sale
of Ampligen(R).


                                       26


Biodefense

      Ampligen(R)   is  a  nucleic   acid-based   molecule  with  potent  immune
stimulatory  activity and we believe that it has the potential to safely enhance
the  effectiveness of flu vaccines.  Alferon LDO(R) is a new  experimental  drug
delivery platform for our natural source alpha interferon.  Preclinical  results
indicate that Alferon LDO has systemic  biological  activity on  upregulation of
Interferon related genes.  Potential applications include respiratory infections
including  influenza.  An update on our research and development with respect to
these concepts follows.

      Our  collaborative  research  partners  in  Japan,  headed  by Dr.  Hideki
Hasegawa,  M.D., Ph.D.  presented new data on augmentation of influenza vaccines
using  Ampligen(R)  at the Second  International  Conference on Vaccines for the
World on October 20, 2006 in Vienna, Austria.  Preclinical research conducted by
the National  Institute of  Infectious  Diseases of Japan  indicate that certain
influenza vaccines augmented with Ampligen can provide  cross-protection against
Avian Flu viral  mutations in animals.  Influenza  vaccines,  both  seasonal and
avian flu  specific,  share certain  limitations  which  researcher  hope may be
overcome  using  vaccine  enhancing  agents such as Ampligen,  our  experimental
therapeutic. Additional studies are planned.

      A  pre-clinical  animal  study is being  conducted  by Defence R&D Canada,
Suffield  (DROC  Suffield),  an agency of the  Canadian  department  of National
Defence,   to  evaluate  the  antiviral   efficacy  of  our  experimental  drug,
Ampligen(R) and for protection against human respiratory  influenza in validated
animal  models.  The results of this study are  expected to be available by year
end 2006.

A  pre-clinical  study being  conducted by research  affiliates  of the National
Institute of Health at Utah State University to examine if Ampligen(R)  enhances
the effectiveness of different drug combinations on avian influenza. The ongoing
research is comparing the relative protection conveyed by Tamiflu  (Oseltamiuir,
Roche) and Relenza (Zanamiuir,  GlaxoSmithKline) with Ampligen(R),  alone and in
combination,  against the avian flu virus.  Early results indicate that there is
improved  protection when Ampligen(R) is combined with Tamiflu and Relenza,  and
also suggest the potential  benefits of Ampligen(R)  given as monotherapy.  This
study is ongoing.

Vulvar Vestibulitis Syndrome

      Alferon N.  Injection(R)  is our  registered  trademark for our injectable
formulation  of Natural  Alpha  Interferon,  and is  approved by the FDA for the
intralesional  treatment of  refractory  or  recurring  external  genital  warts
(condylomata acuminate) in patients.

      Our strategy is to pursue a modified  FDA  approval for a related  ailment
with a large market  opportunity  and little  competition.  Vulvar  vestibulitis
syndrome is a perplexing and debilitating disorder involving pain limited to the
vulvar vestibule. The condition impairs sexual function, social interactions and
creates  psychological  distress and despair in millions of women.  Its cause is
probably multi-factorial, and a number of studies have shown vulvar vestibulitis
syndrome to be linked to HPV.

      The market  opportunity  is very  large and  represents  approximately  14
million women in the United States alone.

      We are collaborating with others in this effort.


                                       27


Other Clinical Projects

      A clinical study conducted at the Princess  Margaret Hospital in Hong Kong
evaluated  the use of  Alferon  LDO (Low Dose  Oral  Interferon  Alfa-N3,  Human
Leukocyte  Derived) to determine the affect on genes  associated with anti-viral
and  immunological  functions in normal  volunteers.  This study  completed  the
dosing of ten patients  during the fourth quarter 2005. The initial  analysis of
data from this study is complete. A more definitive evaluation protocol is being
developed to further validate the results.

      A  clinical  study to  evaluate  the use of  Alferon  LDO in HIV  infected
volunteers was initiated during the second quarter 2005 in Philadelphia, PA. The
study  is  currently  being  conducted  at  two  sites,  Drexel  University  and
Philadelphia FIGHT, a comprehensive AIDS service organization  providing primary
care,  consumer  education,  advocacy and research on potential  treatments  and
vaccines. The study is designed to determine whether Alferon LDO can resuscitate
the broad-spectrum  antiviral and  immunostimulatory  genes. The initial patient
enrolled in this study in July 2005 and, as of October 2006,  nineteen  patients
have enrolled and completed dosing.

      We are currently  receiving data from this study and we are in the process
of  analyzing  the  results  along with the  results  from the Alferon LDO study
conducted in Hong Kong.  This  methodology  may have  implications  for treating
other emerging  viruses such as avian influenza (bird flu).  Present  production
methods for  vaccines  involve the use of millions of chicken  eggs and would be
slow to respond to an outbreak  according  to a recently  convened  World Health
Organization  expert panel in November 2004. Health officials are also concerned
that  bird flu  could  mutate  to cause the next  pandemic  and  render  present
vaccines under development ineffective.

      Forty (40) HIV  patients  have  participated  in our AMP-720 HIV  clinical
trial.  This  clinical  trial is designed to study the affects of Ampligen  with
respect to  boosting  the immune  system of HIV  patients  while they are off of
their  highly  active  anti-retroviral  therapy  ("HAART").  The use of  various
combinations of three or more of these drugs is referred to as HAART.  HAART has
provided dramatic decreases in morbidity and mortality of HIV Infection.  Often,
HIV patients must go off of their HAART  regiment due to cumulative  build up of
toxicities.  This off period is referred to strategic  therapeutic  interruption
("STI"). We believe that the use of Ampligen(R) (an anti-viral  compound) during
the STI period will aid in the  suppression  of HIV allowing  patients to remain
off HAART for longer  periods of time (longer STI periods allow the HIV patients
more time to rid their bodies of the toxicities).  Patients,  who have completed
at least nine months of Ampligen(R)  therapy,  were able to stay off HAART for a
total STI  duration  with a mean time of 29.0 weeks  whereas the control  group,
which was also taken off  HAART,  but not given  Ampligen(R),  had  earlier  HIV
rebound  with a mean  duration of 18.7  weeks.  Thus,  on  average,  Ampligen(R)
therapy  spared the  patients  excessive  exposure to HAART,  with its  inherent
toxicities,  for more than 11 weeks.  The rate of  enrollment  in this HIV trial
depends on patient  availability  and on other products being in clinical trials
for the treatment of HIV, causing  competition for the same patient  population.
At present,  more than 18 FDA approved drugs for HIV treatment all competing for
available  patients.  The length, and subsequently the expense of these studies,
will also be determined by an analysis of the interim data, which will determine
when  completion  of the ongoing  Phase IIb trial is  appropriate  and whether a
Phase III trial will be conducted or not. In case a Phase III study is required,
the FDA might require a patient population  exceeding the current one which will
influence the cost and time of the trial. Accordingly,  the number of "unknowns"
is  sufficiently  great to be unable to predict when, or whether,  we may obtain
revenues from our HIV  treatment  indications.  This study has been  temporarily
suspended pending the filing of our Ampligen/CFS NDA.


                                       28


      Two  toxicology  studies have been  completed  at the  Lovelace  clinic in
Albuquerque, New Mexico. These studies involved the use of Ampligen as a vaccine
immunostimulant.  We  plan  to  conduct  a  study  in  Australia  to  study  the
immunostimulant effect of Ampligen(R) on influenza vaccination in the elderly.

General and Administrative Expenses

      General and  Administrative  ("G&A")  expenses  for the three months ended
September  30,  2005 and 2006  were  approximately  $1,384,000  and  $1,276,000,
respectively. The decrease in G&A expenses of $108,000 or 8%, during this period
is primarily due to lower professional fees related to public relations services
as compared to the same period a year ago.

Interest and Other Income and Expense

      Interest and other income and expense for the three months ended September
30, 2005 and 2006 amounted to $250,000 and $356,000,  respectively. The increase
in  interest  and other  income and  expense  during  the  current  quarter  can
primarily be attributed to the timing of maturing  marketable  securities during
the comparable  periods.  All funds in excess of our immediate need are invested
in short-term high quality securities.

Interest Expense and Financing Costs

      Interest expense and non-cash financing costs were approximately  $299,000
for the three months ended September 30, 2006 versus $700,000 in charges for the
same  three  months  a  year  ago.  Non-cash  financing  costs  consist  of  the
amortization  of  Original  Issue  Discounts  and  the   amortization  of  costs
associated  with  beneficial  conversion  features  of our  Debentures  and  the
relative fair value of the warrants  relating to the  Debentures.  These charges
are reflected in the  Consolidated  Statements  of Operations  under the caption
"Financing  Costs." These charges are amortized over the life of the Debentures.
The main  reason for the  decrease in interest  expense and  financing  costs of
$401,000  can be  attributed  to  decreased  amortization  charges  on the  debt
discounts on the convertible Debentures. This was slightly offset by an increase
in interest  expense of $104,000 due to liquidated  damages  incurred during the
current  quarter.  Please see Note 5 in the  consolidated  financial  statements
contained herein for more details on these transactions.

Nine months ended September 30, 2005 versus Nine months ended September 30, 2006

Net loss

      Our net loss of $14,807,000  for the nine months ended  September 30, 2006
was up $5,839,000  or 65% compared to the same period in 2005.  This increase in
loss was primarily due to: 1) Higher G&A expense of $2,521,000 related primarily
to the adoption of FAS 123R  amounting to higher stock  compensation  expense of
$1,998,000 and higher  accounting  fees mainly related to the restatement of our
financial  statements of $697,000,  2) Higher research and development  costs of
$4,117,000  due to an  increase  in  direct  costs  associated  with  developing
Ampligen(R)  and Alferon N  Injection(R)  for new and existing  indications  and
costs   associated  with  stability   studies  for  Ampligen(R)  and  Alferon  N
Injection(R) related to manufacturing at our new contract  manufacturer's sites,
Hollister Stier and Hylaron,  and 3) higher  production  costs of  approximately
$711,000  due to  excess  manufacturing  capacity.  Offsetting  these  increased
expenditures,  was a decrease in our  interest  expense and  financing  costs of
approximately $1,651,000 as the amortization of the discounts on our convertible
Debentures  decreases as they near maturity.  Net losses per share were $.24 for
current period versus $.18 for the same period 2005.


                                       29


Revenues

      Revenues for the nine months  ended  September  30, 2006 were  $715,000 as
compared to revenues of $829,000 for the same period in 2005.  Ampligen(R)  sold
under the cost  recovery  clinical  program  was up  $2,000 or 1% and  Alferon N
Injection(R)  sales  were  down  $116,000  or 17%.  The  decline  in  Alferon  N
Injection(R)  sales  can be  attributed  to  increased  competition  from  rival
products. Ampligen(R) sold under the cost recovery clinical program is a product
of physicians and ME/CFS patients applying to us to enroll in the program.  This
program has been in effect for many years and is offered as a  treatment  option
to patients severely affected by ME/CFS. As the name "cost recovery" implies, we
have no gain or profit on these sales.  The benefits to us include 1) physicians
and patients  becoming  familiar with  Ampligen(R) and 2) collection of clinical
data  relating to the  patients'  treatment  and  results.  We are  changing our
marketing strategy for Alferon N Injection(R).  We are looking into conducting a
pilot  program  with a  contract  sales  organization  ("CSO").  As part of this
strategic change, we have eliminated our direct sales force. In the future,  our
focus will be on using CSO's to sell Alferon N Injection(R) in the United States
and overseas markets.

Production costs/cost of goods sold

      Production/cost of goods sold increased $711,000 for the nine months ended
September  30,  2006  compared  to the same period in 2005.  This  increase  was
primarily due to higher production costs representing excess production capacity
during the nine months ended September 30, 2006, amounting to $611,000.  Cost of
goods sold for the nine months ended  September  30, 2005 and 2006 were $294,000
and $394,000, respectively.

Research and Development costs

      Overall  research and  development  direct costs for the nine months ended
September  30,  2005 and 2006  were  $3,413,000  and  $7,530,000,  respectively,
representing an increase of $4,117,000 or 121%. For more information on research
and development  activities,  see the research and development section contained
within the results of operations  for the three months ended  September 30, 2005
versus three months ended September 30, 2006 discussed above.

General and Administrative Expenses

      General and  Administrative  ("G&A")  expenses  for the nine months  ended
September  30,  2005 and 2006  were  approximately  $3,933,000  and  $6,454,000,
respectively,  representing  an increase of a $2,521,000 or 64%. The increase in
G&A expenses  relates  primarily to the adoption of FAS 123R which has increased
stock compensation  expense  approximately  $1,998,000 during the current period
versus a year ago. In addition,  we have incurred higher accounting fees related
to the restatement of our financial statements which has increased these fees by
approximately  $697,000  from the same period a year  earlier.  These  increased
costs within G&A expenses were slightly offset by a decrease in costs related to
investment  banking fees of  approximately  $154,000  during the current  period
versus a year ago.

Interest and Other Income

      Interest and other income for the nine months ended September 30, 2005 and
2006 totaled $543,000 and $516,000,  respectively.  The decrease in interest and
other income during the current period can primarily be attributed to the timing
of the maturities of our marketable securities during the 2006 period versus the
same  period a year  earlier.  All  funds in excess  of our  immediate  need are
invested in short-term high quality securities.


                                       30


Interest Expense and Financing Costs

      Interest   expense  and  non-cash   financing  costs  were   approximately
$1,049,000  for the nine months ended  September 30, 2006 versus  $2,700,000 for
the same nine months a year ago.  The main  reason for the  decrease in interest
expense  and  financing  costs of  $1,651,000  can be  attributed  to  decreased
amortization charges on debt discounts during the current period versus the same
period a year earlier as well as fewer charges  related to the conversion of the
Debentures  being  incurred  during the current period (Please see Note 5 in the
consolidated  financial  statements  contained  herein for more details on these
transactions).

Liquidity And Capital Resources

      Cash used in operating  activities for the nine months ended September 30,
2006 was  $9,328,000  compared to $5,283,000 for the same period a year earlier.
This increase of $4,045,000 was primarily due to higher research and development
activity for our experimental  products.  Cash used in investing  activities was
$3,246,000 for the nine months ended  September 30, 2006. This was mainly due to
the net effect of purchases and maturities  within our short term investments as
well  as  capital  additions  to our New  Jersey  facility  relating  to our raw
material production line. Cash provided by financing  activities for this period
amounted to  $13,265,000,  primarily  from the sale of our common  stock.  As of
September  30,  2006,  we  had  approximately   $19,023,000  in  cash  and  cash
equivalents and short-term investments,  an increase of $2,819,000 from December
31,  2005.  These  funds  should  be  sufficient  to  meet  our  operating  cash
requirements including debt service for the next 18 months.

      On February 27, 2006, the Debenture holders converted  $333,334  principal
amount of the January 2004  Debentures  into 160,257 shares of common stock.  On
March 21,  2006,  the  Debenture  holders  converted  $500,000  of the July 2004
Debentures into 240,385 shares of common stock.

      Due to our inability to timely file our annual report on Form 10-K for the
year ended December 31, 2005, our  registration  statements,  and the prospectus
contained  therein,  registering  the shares  issuable  upon  conversion  of and
interest  under the  Debentures  and upon  exercise of related  warrants were no
longer  current.  As a result,  we were subject to liquidated  damages until the
time that such shares were again  registered  for public  resale or eligible for
resale  pursuant to Rule 144(k) under the Securities  Act. The  securities  were
again  covered by a  registration  statement  declared  effective  by the SEC on
August 7, 2006. We have  calculated the liquidated  damages to be  approximately
$350,000.

      Pursuant to the terms of the July 8, 2005 common stock purchase agreement,
as of April 3, 2006,  Fusion  Capital had  purchased  an  aggregate of 8,791,838
shares amounting to our receipt of  approximately  $20,000,000 in gross proceeds
which  completed  the terms of the  agreement.  Pursuant to the  agreement,  the
Company  also  issued  785,597  commitment  fee  shares  and  10,000  shares  as
reimbursement for expenses.

      On April 12, 2006, we entered into a common stock purchase  agreement (the
"2006 Purchase Agreement") with Fusion Capital, pursuant to which Fusion Capital
has agreed,  under certain conditions,  to purchase on each trading day $100,000
of  our  common  stock  up to an  aggregate  of  $50,000,000  over a  period  of
approximately  25 months as described  below.  We have the right to suspend such
purchases or terminate  the  agreement  at any time.  The purchase  price of the
shares of common  stock will be equal to a price  based  upon the future  market
price of the  common  stock.  Fusion  Capital  does  not  have the  right or the
obligation to purchase shares of our common stock in the event that the price of
our common stock is less than $1.00.

      The purchase price per share will be equal to the lesser of (i) the lowest
sale price of our common stock on the purchase  date; or (ii) the average of the
three  lowest  closing  sale  prices  of our  common  stock  during  the  twelve
consecutive trading days prior to the date of a purchase by Fusion Capital.


                                       31


      The   purchase   price   will  be   adjusted   for   any   reorganization,
recapitalization,  non-cash dividend, stock split, or other similar transaction.
Fusion  Capital  may not  purchase  shares of our common  stock under the common
stock purchase agreement if it, together with its affiliates, would beneficially
own more than 9.9% of our common stock  outstanding  at the time of the purchase
by Fusion  Capital.  Fusion Capital has the right at any time to sell any shares
purchased  under the 2006 Purchase  Agreement  which would allow it to avoid the
9.9% limitation.  Due to American Stock Exchange  requirements (the "AMEX Cap"),
without prior stockholder  approval,  we do not have the right or the obligation
under the  Agreement  to sell shares to Fusion  Capital in excess of  12,386,723
shares (i.e. 19.99% of the 61,964,598  outstanding shares of our common stock on
April  12,  2006,  the date of the 2006  Purchase  Agreement)  inclusive  of the
commitment  shares  (discussed  below).  Notwithstanding  the foregoing,  Fusion
Capital cannot purchase more than 27,386,723 shares, inclusive of the commitment
shares  under the common stock  purchase  agreement.  On September  20, 2006 our
stockholders  voted to approve the issuance of up to 27,386,723  shares pursuant
to the terms of the agreement.

      We also have the right to increase the daily purchase  amount at any time,
provided  however,  we may not increase the daily purchase amount above $100,000
unless our stock  price is above  $1.90 per share for five  consecutive  trading
days.  Specifically,  for every $0.10  increase in  Threshold  Price (as defined
below) above $1.90,  we have the right to increase the daily purchase  amount by
up to an additional  $10,000.  The "Threshold Price" is the lowest sale price of
our common stock during the five trading days  immediately  preceding our notice
to Fusion Capital to increase the daily purchase  amount.  If at any time during
any trading day the sale price of our common stock is below the Threshold Price,
the applicable increase in the daily purchase amount will be void.

      In addition to the daily purchase  amount,  we may elect to require Fusion
Capital to purchase on any single trading day the following:

o     $250,000 if our common  stock  trades at $1.50 or better for five  trading
      days.

o     $500,000 if our common  stock  trades at $3.00 or better for five  trading
      days.

o     $1,000,000  if our common stock trades at $5.00 or better for five trading
      days.

o     $2,000,000  if our common stock trades at $8.00 or better for five trading
      days.

      The price at which such shares  would be  purchased  will be the lesser of
(i) the  lowest  Sale Price on the  trading  day that such  purchase  notice was
received  Fusion  Capital or (ii) the lowest  purchase  price (as defined above)
during the previous ten trading days prior to the date that such purchase notice
was received by Fusion Capital.

      We filed a registration statement (the "Registration  Statement") with the
Securities  and Exchange  Commission on July 31, 2006 covering the shares of our
common stock to be issued under the 2006 Purchase  Agreement and are required to
keep it effective  until the earlier of the date that all shares are sold or can
be sold pursuant to the provisions of Rule 144(k) under the Securities  Act. The
registration  statement was declared  effective by the  Securities  and Exchange
Commission  on  August 7,  2006.  If we do not keep the  registration  statement
effective, Fusion Capital may terminate the agreement.

      Generally,   Fusion  Capital  may  terminate  the  common  stock  purchase
agreement  without any liability or payment to us upon the  occurrence of any of
the following events of default:


                                       32


o     our  failure  to  timely  file the  registration  statement  or,  once the
      registration  statement is declared  effective,  the  effectiveness of the
      registration  statement  lapses for any reason or is unavailable to Fusion
      Capital  for sale of our  common  stock and such  lapse or  unavailability
      continues for a period of 10 consecutive  trading days or for more than an
      aggregate of 30 trading days in any 365-day period;

o     suspension by our principal  market of our common stock from trading for a
      period of three consecutive trading days;

o     the de-listing of our common stock from the American Stock  Exchange,  our
      principal market,  provided our common stock is not immediately thereafter
      trading on the Nasdaq National  Market,  the Nasdaq SmallCap Market or the
      New York Stock Exchange or the OTC Bulleting Board;

o     the  transfer  agent's  failure for five  trading  days to issue to Fusion
      Capital  shares of our common  stock which  Fusion  Capital is entitled to
      under the 2006 Purchase Agreement;

o     any material  breach of the  representations  or  warranties  or covenants
      contained in the 2006 Purchase  Agreement or any related  agreements which
      has or which could have a material  adverse affect on us subject to a cure
      period of 10 trading days;

o     any participation or threatened  participation in insolvency or bankruptcy
      proceedings by or against us;

o     a  material  adverse  change  in  our  business,  properties,  operations,
      financial condition or results of operations; or

o     the issuance of an aggregate of 12,386,733  shares to Fusion Capital under
      our agreement and we fail to obtain the requisite stockholder approval.

      We have the unconditional  right at any time for any reason to give notice
to Fusion Capital terminating the 2006 Purchase Agreement.  Such notice shall be
effective one trading day after Fusion Capital receives such notice.

      Under the terms of 2006 Purchase  Agreement,  Fusion  Capital has received
321,751  shares of our common stock as a partial  commitment fee and is entitled
to receive up to an additional  321,751  commitment  shares  (collectively,  the
"Commitment  Shares").  These additional  commitment shares will be issued in an
amount equal to the product of (x) 321,751 and (y) the Purchase Amount Fraction.
The "Purchase Amount  Fraction" means a fraction,  the numerator of which is the
purchase price at which the shares are being purchased by Fusion Capital and the
denominator  of which is  $50,000,000.  Unless an event of default  occurs these
shares must be held by Fusion  Capital until 25 months from the date of the 2006
Purchase Agreement or the date such agreement is terminated or in the event that
certain conditions precedent are not met.

      We  anticipate  using the proceeds  from this  financing to extend our New
Brunswick facility for the production of Ampligen(R) and Alferon N Injection(R),
Research and Development to meet potential government  procurement  requirements
concerning avian influenza treatment and/or prevention and for general corporate
purposes.

      As of November 1, 2006,  Fusion  Capital had purchased  922,038 shares for
aggregate gross proceeds of approximately  $1,849,000. In addition, we issued to
Fusion Capital 11,898 shares towards the remaining commitment fee.

      To  facilitate  a  financing   undertaken  by  Chronix  Biomedical,   Inc.
("Chronix") on October 5,2006 we terminated a Shareholders  Agreement,  Investor
Rights Agreement and a Co-Sale Agreement between us, Chronix and certain Chronix
investors,  each  dated as of August 25,  2000 (the  "Chronix  Agreements").  As
consideration for terminating the Chronix  Agreements we received 250,000 shares
of restricted Chronix common stock and entered into a Voting Agreement, Investor
Rights  Agreement and Co-Sale and Right of First Refusal  Agreement with Chronix
and certain Chronix investors. We do not believe that this transaction will have
a material financial impact on our financial statements.


                                       33


      Please see Note 5 "Debenture  Financing" and Note 6 "Equity  Financing" in
the  consolidated  financial  statements  contained  herein for more  details on
debenture and stock financings.

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

      There can be no assurances that we will raise adequate funds from these or
other  sources,  which may have a  material  adverse  effect on our  ability  to
develop  our  products.  Also,  we have the  ability  to  curtail  discretionary
spending,  including some research and  development  activities,  if required to
conserve cash.

ITEM 3: Quantitative and Qualitative Disclosures About Market Risk

      We  had  approximately  $19,023,000  in  cash  and  cash  equivalents  and
short-term  investments  at September  30, 2006. To the extent that our cash and
cash equivalents and short term investments  exceed our near term funding needs,
we  generally  invest the  excess  cash in three to twelve  month  high  quality
interest  bearing  financial  instruments.  We employ  established  conservative
policies and procedures to manage any risks with respect to investment exposure.

      Our financial  instruments  that are exposed to  concentrations  of credit
risk consist primarily of cash and cash equivalents.  We place our cash and cash
equivalents   with  what   management   believes  to  be  high  credit   quality
institutions.  At times such  investments may be in excess of the FDIC insurance
limit.

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

Item 4: Controls and Procedures

Evaluation of Disclosure Controls and Procedures

      An  evaluation  of the  effectiveness  of the design and  operation of our
disclosure  controls  and  procedures  (as defined in Rule  13a-15(e)  under the
Securities  Exchange Act of 1934, as amended (the "Exchange Act")) as of the end
of the period covered by this  Quarterly  Report on Form 10-Q was made under the
supervision  and with the  participation  of  management,  including  our  Chief
Executive  Officer  and  Chief  Financial  Officer.   In  connection  with  such
evaluation,  our Chief  Executive  Officer  and  Chief  Financial  Officer  have
concluded that our disclosure controls and procedures are not effective based on
the material  weaknesses in internal control over financial  reporting described
in our Annual Report on Form 10-K/A for the period ended December 31, 2005.

Remediation of Material Weaknesses

      During the second quarter of 2006, to remedy the material  weakness in our
internal  control  over  financial  reporting,   we  initiated  the  process  of
establishing  procedures to enhance controls over the "financial statement close
and disclosure" process which included subscribing to CCH's "Accounting Research
Manager",   a  recognized  on-line  service  in  order  to  maintain  up-to-date
accounting and disclosure  guidance.  In addition,  we have established policies
and  procedures  to include a detailed  comprehensive  review of the  underlying
information  supporting the amounts included within our  consolidated  financial
statements and disclosures  including  documented reviews to assist in ensuring:
1)  clerical  accuracy  within our  financial  statements  and  disclosures,  2)
financial statement groupings within our financial  statements are accurate,  3)
support utilized in preparation of the  consolidated  statement of cash flows is
accurate,  and 4) equity transactions during the reporting period are completely
and accurately recorded. We engaged an additional accounting consultant in April
2006 to assist in initiating the implementation of these policies and procedures
during  the  second  quarter  2006.  The  control  deficiencies  will  be  fully
remediated when in the opinion of our management,  the revised control processes
have  been  operating  for a  sufficient  period of time to  provide  reasonable
assurance as to their  effectiveness.  We believe our management will be able to
make this assessment by December 31, 2006.


                                       34


Changes in Internal Controls

      Other  than as  described  above,  there  was no  change  in our  internal
controls over financial  reporting (as defined in Rule 13a-15(f) of the Exchange
Act) that occurred  during the period covered by this report that has materially
affected,  or is reasonably likely to materially  affect,  our internal controls
over financial reporting.

                           Part II - OTHER INFORMATION

Item 1. Legal Proceedings

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

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


                                       35


      In  December  2004,  we filed a  multicount  complaint  in  federal  court
(Southern  District  of  Florida)  against a  conspiratorial  group  seeking  to
illegally manipulate our stock for purposes of bringing about a hostile takeover
of Hemispherx.  The lawsuit alleges that the conspiratorial group commenced with
a plan to seize  control  of our  cash  and  proprietary  assets  by an  illegal
campaign to drive down our stock price and  publish  disparaging  reports on our
management and current fiduciaries. The lawsuit seeks monetary damages from each
member of the  conspiratorial  group as well as injunctions  preventing  further
recurrences of their misconduct.  The conspiratorial group includes Bioclones, a
privately held South African  Biopharmaceutical  company that  collaborated with
us, and  Johannesburg  Consolidated  Investments,  a South African  corporation,
Cyril Donninger, R. B. Kebble, H. C. Buitendag,  Bart Goemaere, and John Doe(s).
Bioclones,  Johannesburg Consolidated Investments, Cyril Donninger, R. B. Kebble
and H.C. Buitendag filed a motion to dismiss the complaint, which was granted by
the court.  We are in the process of appealing this decision to the 11th federal
circuit court of appeals.

      On January  10,  2005,  we  initiated a  multicount  lawsuit in the United
States  District  Court  for  the  Eastern  District  of  Pennsylvania   seeking
injunctive  relief and damages against a conspiratorial  group, many of whom are
foreign  nationals or companies  located outside the United States alleging that
the conspiratorial group has engaged in secret meetings,  market  manipulations,
fraudulent  misrepresentations,  utilization  of foreign  accounts  and  foreign
secrecy laws all in furtherance of an illegal scheme to take over Hemispherx and
enrich  themselves  at the  expense  of  Hemispherx's  public  shareholders.  On
February  18, 2005 we filed an amended  complaint  in the same  lawsuit  joining
Redlabs,   USA,  Inc.  as  a  defendant  with  the  existing  defendants  R.E.D.
Laboratories,  N.V./S.A.,  Bart Goemaere,  Jan Goemaere,  Dr. Kenny De Meirleir,
Kenneth Schepmans,  Johan Goossens,  Lieven Vansacker and John Does. Pursuant to
an agreement in which R.E.D.  Laboratories,  N.V./S.A.  and Dr. Kenny DeMeirleir
agreed not to  participate  in a hostile  takeover of Hemispherx for a period of
five years, R.E.D.  Laboratories,  N.V./S.A.  and Dr. Kenny DeMeirleir have been
dismissed as defendants in the litigation.  We dismissed  without  prejudice the
litigation against the remaining defendants.

      In October  2006,  litigation  was initiated in the Court of Common Pleas,
Philadelphia County,  Pennsylvania  between us and Hospira Worldwide,  Inc. with
regard to a  dispute  with  respect  to fees for  services  charged  by  Hospira
Worldwide,  Inc.  to us. The  dispute was  promptly  settled  and the  litiagion
dismissed.

ITEM 1A: Risk Factors

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

Risks Associated With Our Business

No assurance of successful product development

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


                                       36


      We are in the process of  preparing  an NDA to be submitted to the FDA for
approval to use Ampligen in the treatment of Chronic  Fatigue  Syndrome.  We can
provide no guidance as to the tentative data at which the compilation and filing
of the NDA will be  complete,  as  significant  factors  are outside our control
including,  without  limitation,  the ability and willingness of the independent
clinical  investigators  to  complete  the  requisite  reports at an  acceptable
regulatory  standard,  the ability to collect  overseas  generated data, and the
ability of  Hollister-Stier  facilities to interface  with our own New Brunswick
staff/facilities  to meet the  manufacturing  regulatory  standards.  Also,  the
timing of the FDA review process of the NDA is subject to the control of the FDA
and  could  result  in  one of the  following  events;  1)  approval  to  market
Ampligen(R)  for use in  treating  ME/CFS  patients  2) require  more  research,
development,  and clinical  work,  3) approval to market as well as conduct more
testing, or 4) reject our NDA application.  Given these variables, we are unable
to project when material net cash inflows are expected to commence from the sale
of Ampligen(R).

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

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

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

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


                                       37


Although  preliminary in vitro testing  indicates that Ampligen(R)  enhances the
effectiveness  of different drug  combinations on avian  influenza,  preliminary
testing in the laboratory is not necessarily predictive of successful results in
clinical testing or human treatment.

      Ampligen(R) is undergoing  pre-clinical  testing for possible treatment of
avian flu.  Although  preliminary in vitro testing  indicates  that  Ampligen(R)
enhances  the  effectiveness  of  different  drug  combinations  on  avian  flu,
preliminary  testing  in  the  laboratory  is  not  necessarily   predictive  of
successful  results in clinical testing or human treatment.  No assurance can be
given  that  similar  results  will  be  observed  in  clinical  trials.  Use of
Ampligen(R)  in the treatment of avian flu requires prior  regulatory  approval.
Only the FDA can  determine  whether a drug is safe,  effective or promising for
treating  a  specific  application.  As  discussed  in the  prior  risk  factor,
obtaining regulatory approvals is a rigorous and lengthy process.

      In  addition,  Ampligen(R)  is being  tested on two  strains of avian flu.
There are a number of strains and strains mutate. No assurance can be given that
Ampligen(R) will be effective on any strains that might infect humans.

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

      We began operations in 1966 and last reported net profit from 1985 through
1987. Since 1987, we have incurred  substantial  operating losses, as we pursued
our clinical  trial  effort and expanded our efforts in Europe.  As of September
30, 2006 our accumulated deficit was approximately $162,459,000. We have not yet
generated  significant  revenues from our products and may incur substantial and
increased  losses in the  future.  We cannot  assure  that we will ever  achieve
significant  revenues from product sales or become profitable.  We require,  and
will continue to require, the commitment of substantial resources to develop our
products.  We  cannot  assure  that  our  product  development  efforts  will be
successfully completed or that required regulatory approvals will be obtained or
that  any  products  will  be  manufactured  and  marketed  successfully,  or be
profitable.

We may require additional financing which may not be available.

      The development of our products will require the commitment of substantial
resources to conduct the time-consuming research,  preclinical development,  and
clinical trials that are necessary to bring  pharmaceutical  products to market.
As of September  30, 2006,  we had  approximately  $19,023,000  in cash and cash
equivalents and short-term investments. These funds should be sufficient to meet
our operating cash requirements,  including debt service,  for at least the next
18 months.

      On April 12, 2006, we entered into a common stock purchase  agreement with
Fusion Capital Fund II, LLC, pursuant to which Fusion Capital has agreed,  under
certain conditions and with certain limitations, to purchase on each trading day
$100,000 of our common stock up to an aggregate of  $50,000,000  over a 25 month
period. See Part I, Item 2.  "Management's  Discussion and Analysis of Financial
Condition and Results of Operations; Liquidity And Capital Resources."

      We only have the  right to  receive  $100,000  per  trading  day under the
agreement  with Fusion  Capital unless our stock price exceeds $1.90 by at least
$0.10, in which case the daily amount may be increased under certain  conditions
as the price of our common stock  increases.  Fusion  Capital shall not have the
right nor the  obligation  to  purchase  any shares of our  common  stock on any
trading days that the market  price of our common  stock is less than $1.00.  We
have registered  12,386,723 shares purchasable by Fusion Capital pursuant to the
common  stock  purchase  agreement   (inclusive  of  up  to  643,502  additional
Commitment Shares), the selling price of our common stock to Fusion Capital will
have to average at least  about  $4.26 per share for us to receive  the  maximum
proceeds of $50,000,000 without  registering  additional shares of common stock.
Assuming a  purchase  price of $2.03 per share  (the  closing  sale price of the
common stock on November 1, 2006) and the purchase by Fusion Capital of the full
12,386,723  shares  (inclusive of up to 643,502  additional  Commitment  Shares)
under  the  common  stock  purchase  agreement,  proceeds  to us  would  only be
$23,838,739 unless we choose to register more than 12,386,723  shares,  which we
have the right,  but not the  obligation,  to do. In the event we elect to issue
additional  shares  to Fusion  Capital,  we will be  required  to (i) file a new
registration  statement  and have it declared  effective by the  Securities  and
Exchange  Commission.  In order to be in  compliance  with  the  American  Stock
Exchange rules,  our stockholders on September 20, 2006 approved the issuance of
up to 27,386,723  shares to accommodate this agreement,  if needed. In addition,
Fusion  Capital  cannot  purchase  more than  27,386,723  shares,  inclusive  of
Commitment  Shares  under the  common  stock  purchase  agreement.  Accordingly,
depending upon the future market price of our common stock,  we may realize less
than the maximum $50,000,000  proceeds from the sale of stock under the Purchase
Agreement.


                                       38


      The extent to which we rely on Fusion  Capital as a source of funding will
depend on a number of factors  including,  the  prevailing  market  price of our
common stock and the extent to which we are able to secure working  capital from
other sources.

      If  obtaining  sufficient  financing  from  Fusion  Capital  were to prove
unavailable or prohibitively  dilutive and if we are unable to commercialize and
sell  Ampligen(R)  and/or  increase sales of Alferon N Injection(R) or our other
products,  we will need to secure  another source of funding in order to satisfy
our working  capital needs.  Even if we are able to access the full  $50,000,000
under the common stock purchase  agreement with Fusion  Capital,  we may need to
raise additional funds through additional equity or debt financing or from other
sources in order to complete the necessary  clinical  trials and the  regulatory
approval processes including the commercializing of Ampligen(R) products.  There
can be no assurances that we will raise adequate funds which may have a material
adverse effect on our ability to develop our products. Also, we have the ability
to curtail  discretionary  spending,  including  some  research and  development
activities, if required to conserve cash.

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

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


                                       39


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

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

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

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

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

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

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


                                       40


      We have limited  marketing and sales  capability.  We are  dependent  upon
existing and, possibly future, marketing agreements and third party distribution
agreements for our products in order to generate significant revenues and become
profitable.  As a result,  any revenues  received by us will be dependent on the
efforts of third  parties,  and there is no assurance that these efforts will be
successful.  Our  agreement  with Accredo  offers the  potential to provide some
marketing and  distribution  capacity in the United States while agreements with
Biovail  Corporation  and  Laboratorios  Del Dr. Esteve S.A. may provide a sales
force in Canada,  Spain and Portugal.  We also had an agreement  with  Bioclones
(Proprietary),  Ltd  ("Bioclones")  that covered South America,  Africa,  United
Kingdom,  Australia and New Zealand. However, we deem this marketing arrangement
with  Bioclones  void  due  to  the  numerous  and  long  standing  failures  of
performance by Bioclones.  In addition, in December 2004, we initiated a lawsuit
in Federal  Court  identifying  a  conspiratorial  group  seeking  to  illegally
manipulate  our stock for  purposes  of bringing  about the hostile  takeover of
Hemispherx. This conspiratorial group includes Bioclones.

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

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

      A number of essential  materials  are used in the  production of Alferon N
Injection(R),  including  human  white  blood  cells.  We do not have  long-term
agreements for the supply of any of such materials. There can be no assurance we
can enter into  long-term  supply  agreements  covering  essential  materials on
commercially reasonable terms, if at all.

      There are a limited number of manufacturers in the United States available
to provide the polymers for use in manufacturing Ampligen(R).  At present, we do
not have any  agreements  with  third  parties  for the  supply  of any of these
polymers. We have established relevant  manufacturing  operations within our New
Brunswick,  New Jersey  facility for the production of Ampligen(R) raw materials
in order to  obtain  polymers  on a more  consistent  manufacturing  basis.  The
establishment  of an Ampligen(R)  raw materials  production  line within our own
facilities,   while  having  obvious   advantages  with  respect  to  regulatory
compliance (other parts of our 43,000 sq. ft. wholly owned FDA approved facility
are already in compliance for the  manufacture of Alferon N  Injection(R)),  may
delay certain steps in the  commercialization  process,  specifically a targeted
NDA filing.

      If we are unable to obtain or manufacture  the required raw materials,  we
may be required to scale back our  operations or stop  manufacturing.  The costs
and  availability  of  products  and  materials  we need for the  production  of
Ampligen(R)  and the commercial  production of Alferon N Injection(R)  and other
products which we may commercially produce are subject to fluctuation  depending
on a variety  of factors  beyond our  control,  including  competitive  factors,
changes in technology,  and FDA and other governmental regulations and there can
be no assurance  that we will be able to obtain such  products and  materials on
terms acceptable to us or at all.

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


                                       41


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

We have limited manufacturing experience and capacity.

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

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

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

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

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


                                       42


Our products may be subject to substantial competition.

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

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

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


                                       43


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

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

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

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

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

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

      Our success is dependent on the continued efforts of Dr. William A. Carter
because of his  position as a pioneer in the field of nucleic  acid  drugs,  his
being  the  co-inventor  of  Ampligen(R),  and  his  knowledge  of  our  overall
activities,  including  patents and clinical  trials.  The loss of Dr.  Carter's
services could have a material  adverse effect on our operations and chances for
success.  We have secured key man life  insurance in the amount of $2,000,000 on
the life of Dr. Carter and we have an employment agreement with Dr. Carter that,
as amended,  runs until December 31, 2010. However,  Dr. Carter has the right to
terminate his employment  upon not less than 30 days prior written  notice.  The
loss of Dr.  Carter or other  personnel,  or the  failure to recruit  additional
personnel  as needed could have a  materially  adverse  effect on our ability to
achieve our objectives.


                                       44


Uncertainty of health care reimbursement for our products.

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

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

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

Risks Associated With an Investment in Our Common Stock

We reported material weaknesses in our internal control over financial reporting
that, if not remedied, could adversely affect our internal controls.

      We assessed  the  effectiveness  of our internal  control  over  financial
reporting as of December 31, 2005.  In making this  assessment,  our  management
used the criteria set forth by the Committee of Sponsoring  Organizations of the
Treadway Commission in Internal  Control--Integrated  Framework (COSO). Based on
this assessment,  our management identified the following material weaknesses as
of  December  31,  2005.  A  material  weakness  is  a  control  deficiency,  or
combination  of  control  deficiencies,  that  results  in  more  than a  remote
likelihood  that a material  misstatement  of the  annual or  interim  financial
statements will not be prevented or detected.

      1.    Financial  Statement  Close  and  Reporting  Process  - We  did  not
            maintain effective  controls over the financial  statement close and
            reporting  process  because we lacked a complement of personnel able
            to devote sufficient time and adequate financial reporting expertise
            commensurate with quarterly and year-end  financial  statement close
            requirements,  which include the financial statement preparation and
            disclosures. Additionally, we had inadequate policies and procedures
            providing  for a  detailed  comprehensive  review of the  underlying
            information  supporting  the  amounts  including  in our  annual and
            interim consolidation financial statements and disclosures.


                                       45


      2.    We did not maintain effective controls over the initial recording of
            our  convertible  debentures  that contained  beneficial  conversion
            features  (including  incorrect recording of investment banking fees
            incurred and subsequent  conversion price resets) and the accounting
            for warrants and options issued to non-employees. Our interpretation
            and application of EITF No. 00-27, FASB Statement 133, EITF 98-5 and
            EITF 00-19 was not  correct at the time the  convertible  debentures
            were  initially   recorded   (2003  through  July  2004),   and  our
            interpretation  and  application  of FASB  statement No. 123 was not
            correct  in  recording  certain  warrant  and  option  issuances  to
            non-employees.   These   control   deficiencies   resulted   in  the
            restatement  of the  2004  and 2003  annual  consolidated  financial
            statements  as  well  as  to  the  unaudited   consolidated  interim
            financial  statements  for each of the three  quarters in the period
            ended December 31, 2005.

      The result of applying the proper accounting  treatment  increased our net
loss applicable to common  stockholders by $0.01,  from $0.42 per share to $0.43
per share,  for the year ended  December  31,  2003 and  decreased  our net loss
applicable to common  stockholders  by $0.07,  from $0.53 per share to $0.46 per
share, for the year ended December 31, 2004.

      Although the recording of the convertible  debentures  occurred during the
periods from March 2003 through July 2004, and we have not issued any debentures
since July 2004, we have taken and plan to take,  during 2006,  additional steps
to remediate  these internal  control  weaknesses.  We have  subscribed to CCH's
"Accounting Research Manager," a recognized on-line service in order to maintain
up-to-date  accounting  guidance to enhance internal control over both financial
reporting and disclosure requirements. In addition, we have established policies
and  procedures  to include a detailed  comprehensive  review of the  underlying
information  supporting the amounts included within our  consolidated  financial
statements and disclosures including to assist in ensuring: 1) clerical accuracy
within  our  financial  statements  and  disclosures,   2)  financial  statement
groupings within our financial  statements are accurate,  3) support utilized in
preparation  of the  consolidated  statement of cash flows is  accurate,  and 4)
equity  transactions  during the reporting period are complete and accurate.  We
also  engaged an  additional  accounting  consultant  in April 2006 to assist in
initiating  the  implementation  of these  policies  and  procedures  on a going
forward basis. Notwithstanding the foregoing, and the measures we have taken and
any future  measures we may take to  remediate  the  reported  internal  control
weaknesses,  we may not be able to maintain  effective  internal  controls  over
financial  reporting in the future.  In addition,  deficiencies  in our internal
controls may be discovered in the future.  Any failure to remediate the reported
material weaknesses,  or to implement new or improved controls,  or difficulties
encountered in their implementation,  could harm our operating results, cause us
to fail to meet our reporting obligations or result in material misstatements in
our financial statements.  Any such failure also could affect the ability of our
management to certify in our Forms 10-K and 10-Q that our internal  controls are
effective when it provides an assessment of our internal  control over financial
reporting,  and could affect the results of our  independent  registered  public
accounting  firm's  related   attestation   report  regarding  our  management's
assessment.  Ineffective  internal  controls could also cause  investors to lose
confidence in our reported  financial  information,  which could have a negative
effect on the trading price of our securities.

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


                                       46


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

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

o     adverse reactions to products;

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

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

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

o     announcements of technological innovations by us or our competitors;

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

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

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

o     conditions  and trends in the  pharmaceutical  and other  industries;  new
      accounting standards; and

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

      Our common stock is listed for quotation on the American  Stock  Exchange.
For the 12-month  period ended  November 1, 2006,  the price of our common stock
has  ranged  from  $1.80 to $4.23 per  share.  We expect the price of our common
stock to remain  volatile.  The average daily trading volume of our common stock
varies  significantly.  Our relatively low average volume and low average number
of transactions per day may affect the ability of our stockholders to sell their
shares in the public  market at  prevailing  prices and a more active market may
never develop.

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

Our stock price may be adversely  affected if a significant amount of shares are
sold in the public market.

      We have  registered  12,386,723  shares  for sale by  Fusion  Capital  and
520,617 shares by others, and may, in the future, register additional shares for
sale by Fusion under the common  stock  purchase  agreement.  As of November 1,,
2006,   approximately   1,559,310  shares  of  our  common  stock,   constituted
"restricted securities" as defined in Rule 144 under the Securities Act, 715,409
of which have been registered in prior  registration  statements.  Also, we have
registered  10,084,996 shares issuable (i) upon conversion of approximately 135%
of  Debentures  that we issued in 2003 and 2004;  (ii) as payment of 135% of the
interest  on all of the  Debentures;  (iii)  upon  exercise  of 135% of  certain
Warrants; and (iv) upon exercise of certain other warrants.  Registration of the
shares  permits  the sale of the  shares  in the  open  market  or in  privately
negotiated transactions without compliance with the requirements of Rule 144. To
the extent the  exercise  price of the warrants is less than the market price of
the common  stock,  the holders of the warrants are likely to exercise  them and
sell the underlying shares of common stock and to the extent that the conversion
price  and  exercise  price  of  these  securities  are  adjusted   pursuant  to
anti-dilution protection, the securities could be exercisable or convertible for
even more shares of common  stock.  We also may issue  shares to be used to meet
our capital  requirements  or use shares to  compensate  employees,  consultants
and/or  directors.  We are unable to estimate  the  amount,  timing or nature of
future sales of outstanding  common stock.  Sales of substantial  amounts of our
common  stock in the public  market  could cause the market price for our common
stock to decrease. Furthermore, a decline in the price of our common stock would
likely  impede our ability to raise  capital  through the issuance of additional
shares of common stock or other equity securities.


                                       47


The sale of our common stock to Fusion  Capital may cause  dilution and the sale
of the  shares of common  stock  acquired  by Fusion  Capital  and other  shares
registered for selling stockholders could cause the price of our common stock to
decline.

      The sale by Fusion  Capital and other selling  stockholders  of our common
stock will  increase  the number of our  publicly  traded  shares,  which  could
depress the market price of our common  stock.  Moreover,  the mere  prospect of
resales by Fusion Capital and other selling stockholders as contemplated in this
prospectus  could depress the market price for our common stock. The issuance of
shares to Fusion Capital under the common stock purchase agreement,  will dilute
the equity interest of existing stockholders and could have an adverse effect on
the market price of our common stock.

      The  purchase  price for the  common  stock to be sold to  Fusion  Capital
pursuant to the common stock  purchase  agreement  will  fluctuate  based on the
price of our common  stock.  All shares sold to Fusion  Capital are to be freely
tradable.  Fusion  Capital  may sell  none,  some or all of the shares of common
stock  purchased  from us at any time. We expect that the shares offered by this
prospectus will be sold over a period of in excess of 25 months.  Depending upon
market  liquidity at the time, a sale of shares under this offering at any given
time could cause the trading price of our common stock to decline. The sale of a
substantial  number of shares of our common stock to Fusion Capital  pursuant to
the  purchase  agreement,  or  anticipation  of such  sales,  could make it more
difficult for us to sell equity or equity-related  securities in the future at a
time and at a price that we might otherwise wish to effect sales.

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

      Provisions of our Certificate of  Incorporation  and Delaware law may make
it more difficult for someone to acquire  control of us or for our  stockholders
to remove existing management,  and might discourage a third party from offering
to acquire us, even if a change in control or in management  would be beneficial
to our stockholders.  For example, our Certificate of Incorporation allows us to
issue  shares of  preferred  stock  without  any vote or  further  action by our
stockholders.  Our Board of Directors has the authority to fix and determine the
relative rights and preferences of preferred  stock. Our Board of Directors also
has the authority to issue preferred stock without further stockholder approval.
As a result,  our Board of Directors could authorize the issuance of a series of
preferred  stock that would grant to holders the  preferred  right to our assets
upon  liquidation,  the right to receive dividend  payments before dividends are
distributed  to the holders of common stock and the right to the  redemption  of
the  shares,  together  with a premium,  prior to the  redemption  of our common
stock.  In this regard,  in November 2002, we adopted a stockholder  rights plan
and, under the Plan, our Board of Directors declared a dividend  distribution of
one Right for each  outstanding  share of Common Stock to stockholders of record
at the close of business on November 29,  2002.  Each Right  initially  entitles
holders to buy one unit of preferred stock for $30.00.  The Rights generally are
not transferable  apart from the common stock and will not be exercisable unless
and until a person or group  acquires or commences a tender or exchange offer to
acquire,  beneficial ownership of 15% or more of our common stock.  However, for
Dr. Carter, our chief executive officer,  who already  beneficially owns 9.0% of
our common stock,  the Plan's  threshold will be 20%, instead of 15%. The Rights
will expire on November 19, 2012,  and may be redeemed prior thereto at $.01 per
Right under certain circumstances.


                                       48


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

ITEM 2: Unregistered Sales of Equity Securities and Use of Proceeds

      During the quarter ended  September 30, 2006, we issued 1) 303,946  shares
issued  pursuant  to the 2006  Purchase  Agreement  with Fusion  Capital,  2) an
aggregate of 24,605  shares for services  performed  and an aggregate of 311,728
shares for the acquisition of patent rights and royalties.

      All of the foregoing transactions were conducted pursuant to the exemption
from registration provided by Section 4(2) of the Securities Act of 1933.

We did not repurchase any of our securities  during the quarter ended  September
30, 2006.

ITEM 3: Defaults upon Senior Securities

None.

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

      We held our Annual Meeting of  Stockholders on September 20, 2006. At that
meeting,  total shares voted were  47,903,996  shares out of  62,581,122  shares
eligible to vote.

      At the meeting, stockholders approved the following:

Election of Directors:
                                                For                    Withheld

William A. Carter, M.D.                      47,413,813                 490,185
Richard C. Piani, Esq.                       47,458,016                 445,982
Ransom W. Etheridge, Esq.                    47,473,955                 430,043
William M. Mitchell,M.D., Ph.D.              47,472,928                 431,070
Iraj-Eqhbal Kiani, Ph.D.                     47,461,968                 442,030
Steven D. Spence                             47,484,128                 419,870


                                       49


Amendment  of our  Certificate  of  Incorporation  to  increase  the  number  of
authorized shares of common stock from 100 million to 200 million:

For: 46,714,015 Against: 1,132,755 Abstain: 57,228

Issuance of our common stock to comply with AMEX Company Guide Section 713:

For: 5,634,086 Against: 453,478 Abstain: 41,781,796

The  ratification  of the  appointment  of BDO Seidman,  LLP as our  independent
registered public accountants was not voted on as BDO Seidman,  LLP has resigned
following the filing of this Form 10-Q.

ITEM 5: Other Information

None.

ITEM 6: Exhibits

(a)   Exhibits

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

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

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

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


                                       50


                                   SIGNATURES

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


                                        HEMISPHERx BIOPHARMA, INC.

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


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

Date: November 7, 2006


                                       51


                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 8-K


                                 CURRENT REPORT

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

                Date of Report (Date of earliest event reported)
                                November 7, 2006

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

                           Delaware 0-27072 52-0845822
               (state or other juris- (Commission (I.R.S. Employer
           diction of incorporation) File Number) (Identification No.)

              1617 JFK Boulevard, Philadelphia, Pennsylvania 19103
               (Address of principal executive offices) (Zip Code)

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


          (Former name or former address, if changed since last report)


Check  the  appropriate  box  below  if the  Form  8-K  filing  is  intended  to
simultaneously  satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2. below):

[ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)

[ ] Soliciting  material  pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12) [ ] Pre-commencement  communications pursuant to Rule 14d-2(b) under
the Exchange Act (17 CFR 240.14d-2(b))

[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange
Act (17 CFR 240.13e-4(c))


                                       52



Section 4 - Matters Related to Accountants and Financial Statements

Item 4.01 Changes in The Registrant's Certifying Accountant.

Retention of New Accountants

         On  November 7, 2006,  the Audit  Committee  of our Board of  Directors
approved  the  appointment  of  McGladrey & Pullen,  LLP ("  McGladrey")  as our
independent registered public accounting firm, effective immediately.  McGladrey
replaces BDO as our independent registered public accounting firm.

         During our two most recent  fiscal  years ended  December  31, 2004 and
December 31,  2005,  and through the date of this Report on Form 8-K, we did not
consult McGladrey with respect to the application of accounting  principles to a
specified  transaction,  either  completed  or  proposed,  or the  type of audit
opinion that might be rendered on our financial statements, or any other matters
or reportable events listed in Items 304(a)(2) of Regulation S-K.

Resignation of Former Accountants

         As noted in our Current  Report on Form 8-K/A filed with the Commission
on September 22, 2006, BDO Seidman, LLP ("BDO") informed us that it would resign
from  the  client-auditor  relationship  with us no  later  than the date of our
filing of our Form 10-Q report for the period ending  September 30, 2006.  BDO's
decision to resign was not  recommended or approved by our Audit  Committee.  On
November 7, 2006,  we filed our Form 10-Q report for the period ended  September
30, 2006 and BDO resigned from the client-auditor relationship with us.

         BDO's  reports on our financial  statements  for the fiscal years ended
December 31, 2004 and  December 31, 2005 did not contain any adverse  opinion or
any disclaimer of opinion and were not qualified or modified as to  uncertainty,
audit scope or accounting principles.

         During the fiscal years ended  December 31, 2004 and December 31, 2005,
and the subsequent interim period preceding the date of BDO's resignation, there
were no disagreements  between us and BDO on any matter of accounting principals
or  practice,  financial  statement  disclosure  or auditing  scope of procedure
which, if not resolved to the satisfaction of BDO, would have caused BDO to make
a reference to the subject  matter  thereof in connection  with its reports and,
during  the same  period,  there  were no  reportable  events as defined in item
304(a)(1)(v) of the Commission  Regulation S-K, except as previously reported in
Item 9A of our 2005 Form 10-K/A2.

         We provided  BDO with a copy of this  Report on Form 8-K and  requested
that BDO furnish us with a letter addressed to the SEC stating whether it agrees
with the foregoing  statements by us and, if not,  stating the respects in which
it does not agree. A copy of the letter from BDO stating that it does agree with
the foregoing statements is filed with this Report on Form 8-K as Exhibit 16.1.

On November 9, 2006,  Hemispherx issued a press release disclosing the retention
of McGladrey & Pullen, LLP, a copy of which is attached hereto as Exhibit 99.1.

Section 9 - Financial Statements and Exhibits Item 9.01 Financial Statements and
Exhibits.

(c)      Exhibits


Exhibit No.                Description

16.1     Letter on change in certifying accountant.
99.1     Press Release dated November 9, 2006.


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                                   SIGNATURES


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


                                HEMISPHERX BIOPHARMA, INC.


November 9, 2006              By:  /s/ Robert Peterson
                                --------------------------------------------
                                Robert Peterson, Chief Financial Officer


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