Summary of HEMISPHERX BIOPHARMA INC

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, marketing and distribution of new drug therapies based on natural immune system enhancing technologies for the treatment of viral and immune based chronic disorders. The Company was founded in the early 1970s doing contract research 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 certain chronic diseases. We have three domestic subsidiaries BioPro Corp., BioAegean Corp., and Core BioTech Corp., all of which are incorporated in Delaware and are dormant. Our foreign subsidiaries include Hemispherx Biopharma Europe N.V./S.A. established in Belgium in 1998. Hemispherx Biopharma Europe N.V./S.A. has little or no activity.

Our current strategic focus is derived from four applications of our two core pharmaceutical technology platforms Ampligen® and Alferon N Injection®. The commercial focus for Ampligen® includes application as a treatment for Chronic Fatigue Syndrome ("CFS") and as a vaccine enhancer (adjuvant) for both therapeutic and preventative vaccine development. Alferon N Injection® is an FDA approved product with an indication for refractory or recurring genital warts. Alferon LDO (Low Dose Oral) is an application currently under development targeting influenza and viral diseases both as an adjuvant as well as a single entity anti-viral.

Ampligen® is an experimental drug currently undergoing clinical development for the treatment of Chronic Fatigue Syndrome ("CFS"). In August 2004, we completed a Phase III clinical trial ("AMP 516") treating over 230 CFS patients with Ampligen® and are presently in the registration process for a new drug application ("NDA") with the Food and Drug Administration ("FDA"). Over its developmental history, Ampligen® has received various designations, including Orphan Drug Product Designation (FDA), Emergency (compassionate) Cost Recovery Sales Authorization (FDA) and "promising" clinical outcome recognition based on the evaluation of certain summary clinical reports (AHRQ, Agency Health Research Quality). Ampligen® represents the first drug in the class of RNA (nucleic acid) molecules to apply for NDA review. For an update on the filing status of our Ampligen® New Drug Application filed on October 10, 2007, see "Research and Development Costs" contained within this section below.

On July 7, 2008, the FDA accepted for review our NDA for Ampligen®, an experimental therapeutic, to treat CFS, originally submitted in October 2007. We are seeking marketing approval for the first-ever treatment for CFS. At present, only supportive, symptom-based care is available for CFS patients. The NDA for Ampligen®, whose chemical designation is poly I : poly C12U, is also the first ever accepted for review by the FDA for systemic use of a toll-like receptor therapy to treat any condition.

The Status of our initiative for Ampligen® as an adjuvant for preventative vaccine development includes the pre-clinical studies in seasonal and pandemic influenza for intranasal administration being conducted by Japan's National Institute for Infectious Diseases. A three year program targeting regulatory approval for pandemic flu and seasonal flu in Japan has been funded by the Japanese Ministry of Health. Parties to the research grant include Hemispherx, the NIID and BIKEN (operational arm of the non-profit Foundation for Microbial Disease of Osaka University). Our agreement with BIKEN is part of a three party agreement to develop an effective influenza vaccine for Japan and utilizes the resources of the National Institute of Infectious Disease of Japan. Our development strategy includes reproduction of preclinical studies outside Japan and completion of the three year program. It is our intent to conduct human studies in the US and other countries and seek approval for seasonal and pandemic indications in the US and Europe for intranasal administration. A phase II study for intramuscular administration for seasonal flu is currently being conducted in Australia through the St. Vincent's Hospital Clinical Trials Centre and is now fully enrolled. This clinical study is expected to be completed in December of 2008.

Based on the results of published, peer reviewed pre-clinical studies and clinical trials, we believe that Ampligen® may have broad-spectrum anti-viral and anti-cancer properties. Over 1,000 patients have participated in the Ampligen® clinical trials representing the administration of more than 90,000 doses of this drug.

Alferon N Injection® 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® is also in clinical development for treating West Nile Virus.

Commercial sales of Alferon N Injection® were halted in April 2008 as the current expiration date of our finished goods inventory expired in March 2008. The FDA has declined to respond to our requests for an extension of the expiration date, therefore we consider the request to be denied. Since our testing of the product indicates that it is not impaired and could be safely utilized, the finished goods inventory of 2,745 Alferon N Injection® 5ml vials may be used to produce approximately 11,000,000 sachets of Low Dose Oral Alferon (LDO) for future clinical trials.

Production of Alferon N injection® from our work-in-progress inventory, which has an approximate expiration date of 2012, has been put on hold at this time due to the resources needed to prepare our New Brunswick facility for the FDA preapproval inspection with respect to our Ampligen® NDA. Work on the Alferon N Injection® is expected to resume in mid-2009 under the condition that adequate funding is obtained, which means that we may not have any Alferon N Injection® product commercially available until 2010.

We do not believe that our current and planned experimental programs involving Alferon N Injection® and Alferon LDO, including our anticipated clinical trials, will be materially affected by this situation.

We own and operate a 43,000 sq. ft. FDA approved facility in New Brunswick, NJ primarily designed to produce Alferon N Injection®. In 2006, we completed the installation of a polymer production line to produce Ampligen® raw materials on a more reliable and consistent basis.

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.

401(K) Plan

We have a defined contribution plan, titled Hemispherx Biopharma Employees
401(k) Plan and Trust Agreement (the 401(k) Plan). Full time members are eligible to participate in the 401(k) Plan following one year of employment. Subject to certain limitations imposed by federal laws and contribution limitation on those designated as Highly Compensated Employees by the 401(k) plan, participants are eligible to contribute up to 15% of their salary (including bonuses and/or commissions) per annum. Each participant immediately vests regarding his or her deferred salary contributions while our contributions vest over one year.

Effective March 15, 2008, we ended our 100% matching of up to 6% of the 401(k) contributions provided to the account for each eligible participant. Our 401(k) Plan contribution cost for the nine months ended September 30, 2008 is $20,421 with no company matching costs projected regarding the plan for the remaining of calendar year 2008.

New Accounting Pronouncements

Refer to "NOTE 7: RECENT ACCOUNTING PRONOUCEMENTS" under Notes To Unaudited Condensed Consolidated Financial Statements.

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 for the year ended December 31, 2007.

RESULTS OF OPERATIONS

Three months ended September 30, 2007 versus three months ended September 30, 2008

Net loss

Our net loss of approximately $3,415,000 for the three months ended September 30, 2008 was $2,303,000 or 40% lower when compared to the same period in 2007. This decrease in loss was primarily due to:

1) Research and Development costs in 2007 include significant expenses related to the preparation of the Ampligen® NDA as well as expenses related to the production of Ampligen® for use in stability studies. Research and development expenses in 2008 were down approximately $1,146,000 as compared to the same period in 2007.

2) There were no sales of Alferon N Injection® for the three months ended September 30, 2008, as finished goods inventory has reached its current product expiration date of March 31, 2008. Sales of Alferon N Injection® for the three months ended September 30, 2007, amounted to approximately $251,000.

3) General and administrative expenses decreased approximately $1,833,000 during the current quarter as compared to the prior period primarily due to the reduction of Stock Compensation Expense for approximately $1,814,000 for the three months ended September 30, 2008.

4) Interest and other income decreased $83,000 for the three months ended September 30, 2008 as compared to the same period in 2007 due to a reduction in Short Term Investments for marketable securities in the current period as compared to the prior period.

5) In September 2007, an increase of $346,000 in other income occurred due to the reversal of accrued liquidated damages in 2006 with respect to our debentures holders as a result of our failure to timely file our 2005 Audit Report on Form 10-K. These damages related to certain debenture covenants were settled without charge in the maturation and pay down of the debenture holder's outstanding loan balances in 2007.

Net loss per share was $0.05 for the current period versus $0.08 for the same period in 2007.

Revenues

Revenues for the three months ended September 30, 2008 were $17,000 compared to revenues of $285,000 for the same period in 2007. There were no revenues related to the sale of Alferon N Injection® for this period in 2008 versus $251,000 in 2007. Revenues from our Ampligen® cost recovery program were down $17,000 as fewer patients are participating in the program. Commercial sales of Alferon N Injection® were halted in April 2008 as the current expiration date of our finished goods inventory expired in March 2008. As a result, we have no product to sell and all $17,000 of Revenue was generated from clinical treatment programs.

Major efforts of the New Brunswick manufacturing staff were redirected throughout year 2008 to the upcoming preapproval FDA inspection of the Ampligen® program.

Work on the Alferon N Injection® is expected to resume in mid-2009 under the condition that adequate funding is obtained, which means that we may not have any Alferon N Injection® product commercially available until 2010.

Production costs/cost of goods sold

Production/cost of goods sold was approximately $216,000 and $199,000, respectively, for the three months ended September 30, 2007 and 2008. This represented a decrease of approximately $17,000 or 7% as compared to the same period in 2007. These costs primarily represent: 1) costs of goods sold of approximately $95,000 and $0, respectively, for the three months ended September 30, 2007 and 2008, 2) testing and reporting costs incurred in our attempt to have the FDA extend the commercial sales life of our Alferon Finished Goods and
3) costs to maintain Alferon N Injection® work-in-process Inventory including stability tests and indirect overhead.

Our Alferon N Injection® work-in-process ("WIP"), with an approximate expiration of 2012, should produce approximately 7,500 doses when completed. At this time we have put further work on the WIP on hold as we are applying our New Brunswick resources to the task of preparing our plant for an FDA Pre-approval Inspection in connection with the Ampligen® NDA review process.

Research and development costs

Overall research and development costs for the three months ended September 30, 2008 were $1,594,000 as compared to $2,740,000 for the same period a year ago reflecting a decrease of $1,146,000 or 42%. This decrease was primarily due to reduced outside consulting fees and other costs related to the preparation and filing of our NDA for Ampligen®.

On July 7, 2008 we were notified that the FDA accepted for review our amended NDA filing for using Ampligen® to treat CFS. FDA approval of this application would provide the first-ever treatment for CFS. At present, only supportive symptom-based care is available for CFS patients. While we are optimistic, there are no assurances that the NDA will be approved. Over the summer of 2008, our clinical monitors visited our sites associated with our AMP-511 cost recovery treatment program for the collection and audit of additional data to be submitted to the FDA in support of our NDA for CFS currently under review. FDA inspections of several clinical sites did not result in the issuance of any "483" reports indicating lack of compliance with various regulations governing clinical trials.

We are preparing for the preapproval inspection by the U.S. FDA for manufacturing of Ampligen® product and its starting materials, polynucleotides Poly I and Poly C12U. A satisfactory recommendation from the FDA Office of Compliance based upon an acceptable preapproval inspection is required prior to approval of the product. The preapproval inspection determines compliance with current Good Manufacturing Practices (cGMPs) as well as a product specific evaluation concerning the manufacturing process of product. Currently, Hemispherx's personnel are working diligently towards a successful preapproval inspection. The activities include many aspects of the cGMP requirements, such as manufacturing process validation, equipment qualification, analytical method validation, facility cleaning, quality systems, documentation system and part 11 compliance. On September 19, 2008, we executed an agreement with Lovelace Respiratory Research Institute in Albuquerque, New Mexico to perform certain animal toxic studies in support of our Ampligen® NDA. These studies were requested by the FDA and will be done in collaboration with the resources of the New Brunswick facility. We expect these studies to be complete in January 2009.

We are also engaged in ongoing, experimental studies assessing the efficacy of Ampligen®, Alferon N Injection®, and Alferon LDO against influenza viruses as a single adjuvant agent antiviral with Japan's National Institute of Infectious disease, Biken (the non-profit operational arm of the Foundation for Microbial Diseases of Osaka University) and St. Vincent's Hospital in Darlinghurst, Australia. No further results have been reported by Defence R&D Canada with respect to their independent study assessing the efficacy of Ampligen® against Influenza viruses as a single agent antiviral.

The Biken arrangement was concluded in December 2007 and basically consists of Biken purchasing Ampligen® from us for use in conducting further animal studies of intranasal prototype vaccines containing antigens from influenza sub-types H1N1, H3N2 and B progressing to human studies with all programs supported by the Japanese Health Ministry. Under the terms of the non-exclusive licensing arrangement, we will receive royalties as well as income for all Ampligen® used in the ongoing experimental work and any subsequent marketing of Ampligen® as an immuno-enhancer for flu vaccines delivered intranasally in Japan. To date, only two or three pharma companies worldwide have achieved regulatory authorizations to sell intranasally (IN) administered influenza vaccines versus many companies receiving approval for intramuscular vaccine delivery routes. Safety has been paramount in developing effective treatments. However, animal studies to date indicate Ampligen®, an experimental drug, may be safely administered intranasally. Clinical studies (in other disorders) have built a database of more than 90,000 injections of Ampligen® when given parenterally (intravenous, or "IV"). In June 2008, Biken notified us they were accelerating their program and requested additional Ampligen® supplies for various preclinical vaccine studies. A secondary goal of the trial is to evaluate whether antibodies stimulated by the vaccine/Ampligen® combination also provide protection against H5N1, the avian influenza virus. Since 2003, the World Health Organization has attributed 241 human deaths worldwide to H5N1. Investigators from Japan's Institute of Infectious Disease have conducted studies in animals that suggest that Ampligen® can stimulate a sufficiently broad immune response to provide cross-protection against a range of virus strains, including H5N1.

We completed enrollment in our Phase II clinical trial to evaluate the safety and efficacy of Ampligen® as an enhancer for seasonal influenza vaccine. This study is being monitored by Clinical Network Services Pty. Ltd. located in Brisbane, Australia. The clinical trials center of St. Vincent's Hospital based in DarlingHurst, Australia is conducting the trial. This clinical study is expected to be completed in the Fall of 2008. The data is being analyzed from the single-center study in Australia in which 38 healthy volunteers between 60 and 80 years of age who have not received this year's seasonal flu vaccine. Study subjects were randomized into groups receiving vaccine plus Ampligen® or vaccine plus a placebo. Under the double-blinded structure of the trial, neither study subjects nor clinicians conducting the trial know which subjects are receiving Ampligen® or placebo until final results are recorded. Efforts will be made to determine whether cross-protection, seen in monkey studies, is also observed in human studies with Ampligen®.

As reported in the Journal of American Medical Association in 2003 by Thompson, Shay, Weintraub, Brammer, Cox, Anderson, et al. seasonal influenza kills approximately 36,000 Americans annually, most over the age of 70. In 2004 in JAMA, the same authors attributed 200,000 U.S. hospital admissions annually to seasonal flu.

Collaboration studies in non-human primates conducted by ViroClinics in the Netherlands suggest a potential role for Alferon LDO as another novel therapeutic approach to viral pandemics. Meetings with prospective partners are underway with respect to conducting clinical trials using Alferon LDO to treat and/or prevent seasonal influenza in the Pacific Rim countries. Alferon LDO is now poised for clinical trials against seasonal influenza epidemics; meetings with prospective partners are ongoing to conduct clinical trials in the Pacific Rim countries and elsewhere. The opportunity for Alferon LDO is reinforced by new reports of severe side effects secondary to Tamiflu, the present standard of care, by both the FDA and Japanese health authorities. Also, Tamiflu resistant strains of flu virus are now raising serious concerns on a world-wide basis.

General and Administrative Expenses

General and Administrative ("G&A") expenses for the three months ended September 30, 2007 and 2008 were approximately $3,508,000 and $1,675,000, respectively, reflecting a decrease of $1,833,000 or 52%. This decrease relates primarily to the reduction of Stock Compensation Expense for approximately $1,814,000 for the three months ended September 30, 2008.

Reversal of Previously Accrued Interest Expense

We had no reversal of previously accrued interest expense for the three months ended September 30, 2008 as compared to the $346,000 for the same period in 2007. This September 2007 item, classified as other income, resulted from the reversal of accrued liquidated damages in 2006 related to a certain covenant in our debenture agreements. These charges were incurred as a result of our failure to timely file our 2005 Annual Report on Form 10-K and our report on Form 10-Q for the quarterly period ended March 31, 2006 with the SEC pursuant to the 1934 Act. These liquidated damages were not included as part of the maturation and pay down of the debenture holder's outstanding loan balances.

Interest and Other Income

Interest and other income for the three months ended September 30, 2007 and 2008 was $119,000 and $36,000, respectively, representing a decrease of $83,000 or 70%. The decrease in interest and other income during the current period was mainly due to a reduction in the holding of Short Term Investments for $3,944,000 as marketable securities in the current period as compared to the prior period.

Interest Expense and Financing Costs

We had no interest expense or non-cash financing costs for the three months ended September 30, 2007 and 2008.

Nine months ended September 30, 2007 versus nine months ended September 30, 2008

Net loss

Our net loss of approximately $9,382,000 for the nine months ended September 30, 2008 was $5,361,000 or 36% lower when compared to the same period in 2007. This decrease in loss was primarily due to:

1) Research and Development costs in 2007 include significant expenses related to the preparation of the Ampligen® NDA as well as expenses related to the production of Ampligen® for use in stability studies and preparation of pre commercial lots for regulatory review purposes. Research and development expenses in 2008 were down approximately $4,389,000 as compared to the same period in 2007.

2) There were no sales of Alferon N Injection® for the last six months as finished goods inventory has reached its current product expiration date of March 31, 2008. Sales of Alferon N Injection® for the nine months ended September 30, 2008 and 2007 amounted to approximately $173,000 and $667,000, respectively for a reduction of $494,000.

3) General and administrative expenses decreased approximately $1,472,000 during the nine months ended September 30, 2008 versus the same period a year ago primarily due to reductions in the cost of Stock Compensation of $1,704,000, Director Fees for $125,000 and Accounting Fees of $73,000 that were offset with an increase of Legal Fees for $506,000 resulting from litigation.

4) Interest and other income decreased $140,000 for the nine months ended September 30, 2008 as compared to the same period in 2007 due to a reduction in the holding of Short Term Investments for $3,944,000 as marketable securities in the current period as compared to the prior period.

5) In 2007, we had financing costs and interest expense of $280,000 and $116,000, respectively, related to our convertible debentures. These convertible debentures were paid off in June 2007. No financing costs or interest charges were incurred during the current period related to these debentures.

6) In September 2007, an increase of $346,000 in other income occurred due to the reversal of accrued liquidated damages in 2006 with respect to our debentures holders as a result of our failure to timely file our 2005 Audit Report on Form 10-K. These damages related to certain debenture covenants were settled without charge in the maturation and pay down of the debenture holder's outstanding loan balances in 2007.

Net loss per share was $0.13 for the current period versus $0.21 for the same period in 2007.

Revenues

Revenues for the nine months ended September 30, 2008 were $240,000 compared to revenues of $774,000 for the same period in 2007. Revenues related to the sale of Alferon N Injection® for the nine months ended September 30, 2008 were $173,000 versus $667,000 in 2007. The primary reason for the 74% drop in sales for the nine months ended September 30, 2008 is that commercial sales of Alferon N Injection® were halted in April 2008 as the current expiration date of our finished good inventory expired in March 2008. As a result, we had no product to sell for the last six months. Revenues from our Ampligen® cost recovery program were down $40,000 or 37% as fewer patients are participating in the program. Our clinical staff discouraged cost recovery clinical enrollments in order that resources could address the NDA and related documents preparatory to filing for a full commercial license.

Production costs/cost of goods sold

Production/cost of goods sold was approximately $767,000 and $643,000, respectively, for the nine months ended September 30, 2007 and 2008. This represented a decrease of approximately $124,000 or 16% as compared to the same period in 2007. These costs primarily represent: 1) costs of goods sold of approximately $273,000 and $60,000, respectively, for the nine months ended September 30, 2007 and 2008, and 2) Costs to maintain Alferon N Injection Inventory including storage, stability testing and reporting costs incurred in our attempt to have the FDA extend the commercial sales life of our Alferon N Injection® Finished Goods. The primary reason for the decrease in costs can be . . .