UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549


FORM
10-Q/A


Quarterly
Report Pursuant to Section 13 or 15(d)


of the
Securities Exchange Act of 1934





For the
Quarterly Period Ended March 31, 2010




Commission
File Number: 1-13441




HEMISPHERX BIOPHARMA,
INC.


(Exact
name of registrant as specified in its charter)





Delaware
                
                52-0845822(State
      or other jurisdiction of
                
                (I.R.S.
      Employerincorporation
      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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or such shorter period that the registrant was required to submit and
post such files).


 ̈
Yes    x No





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company.  See definition of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.  (Check one):


 ̈ Large accelerated
      filer
            x Accelerated
      filer ̈ Non-accelerated
      filer
             ̈ Smaller reporting
      company





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





132,876,924
shares of common stock were issued and outstanding as of May 05,
2010.





EXPLANATORY
NOTE





Hemispherx
Biopharma, Inc. (“Hemispherx”, the “Company”, “we”, “our” or “us”) is filing
this amendment to its Quarterly Report on Form 10-Q (“Form 10-Q/A”) to restate
its Consolidated Condensed Financial Statements as of and for the three months
ended March 31, 2010 as described in Note 11, Restatement, of the Notes to the
Consolidated Condensed Financial Statements included herein.  As
previously disclosed in the Company’s Current Report on Form 8-K filed with the
Securities and Exchange Commission (the “SEC”) on December 28, 2010, the Company
received a comment letter from the SEC concerning its review of the Company’s
annual report on Form 10-K, as amended, for the year ended December 31,
2009.  During the process of resolving the SEC’s comments, the SEC
Staff alerted the Company that they did not agree with the Company’s method of
computing the fair value of certain Warrants.  As a result, on
December 22, 2010, after discussion with the Company’s independent registered
public accounting firm, the Company’s Audit Committee determined that the
previously issued financial statements included in the Company’s Annual Report
on Form 10-K for the year ended December 31, 2009 and in its Forms 10-Q for the
periods ended March 31, 2010, June 30, 2010 and September 30, 2010 and in its
Forms 10-Q for the periods ended June 30, 2009 and September 30, 2009, should
not be relied upon.  The Company simultaneously herewith is filing
amendments to its Annual Report on Form 10-K for the year ended December 31,
2009 and Quarterly Reports on Form 10-Q for the quarters ended June 30, 2010 and
September 30, 2010 to reflect this restatement.





For the
convenience of the reader, this Form 10-Q/A sets forth the Company’s original
Form 10-Q for the quarter ended March 30, 2010 (the “Original 10-Q") in its
entirety, as amended by, and to reflect, the restatement.  No attempt
has been made in this Form 10-Q/A to update other disclosures presented in the
Original 10-Q, except as required to reflect the effects of the
restatement.  This Form 10-Q/A does not reflect events occurring after
the filing of the Original 10-Q or modify or update those disclosures, including
the exhibits to the Original 10-Q affected by subsequent events.





The
following sections of this Form 10-Q/A have been amended to reflect the
restatement:





Part I –
Item 1 – Financial Statements; and


Part I –
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results
of Operations.





This Form
10-Q/A has been signed as of a current date and, as required by Rule 12b-15 of
the Securities Exchange Act of 1934, all certifications of the Company’s Chief
Executive Officer and our Chief Financial and Accounting Officer are given as of
a current date.  Accordingly, this Form 10-Q/A should be read in
conjunction with our filings made with the SEC subsequent to the filing of the
Original 10-Q, including any amendments to those filings.


2


PART I - FINANCIAL
INFORMATION


ITEM
1:   Financial Statements


HEMISPHERX
BIOPHARMA, INC. AND SUBSIDIARIES


Consolidated
Balance Sheets


(in
thousands, except for share and per share amounts)





December
                      31, 2009
                    
                    
                    March 31,
                      2010(restated)
                    
                    
                    (Unaudited)(restated)ASSETSCurrent
      assets:Cash
      and cash equivalents (Note 12)
                    
                    $
                    58,072
                    
                    
                    $
                    50,723Inventories
      (Note 4)
                    
                    
                    -
                    
                    
                    
                    -Marketable
      securities maturing in less than oneyear
      (Note 5)
                    
                    
                    -
                    
                    
                    
                    3,053Prepaid
      expenses and other current assets
                    
                    
                    332
                    
                    
                    
                    216Total
      current assets
                    
                    
                    58,404
                    
                    
                    
                    53,992Property
      and equipment, net
                    
                    
                    4,704
                    
                    
                    
                    4,738Patent
      and trademark rights, net
                    
                    
                    830
                    
                    
                    
                    838Investment
                    
                    
                    35
                    
                    
                    
                    35Construction
      in progress (Note 8)
                    
                    
                    135
                    
                    
                    
                    389Other
      assets (Note 4)
                    
                    
                    886
                    
                    
                    
                    892Total
      assets
                    
                    $
                    64,994
                    
                    
                    $
                    60,884LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable
                    
                    $
                    1,294
                    
                    
                    $
                    1,808Accrued
      expenses (Note 6)
                    
                    
                    1,321
                    
                    
                    
                    615Current
      portion of capital lease (Note 7)
                    
                    
                    -
                    
                    
                    
                    35Total
      current liabilities
                    
                    
                    2,615
                    
                    
                    
                    2,458Long-term
      liabilitiesLong-term
      portion of capital lease (Note 7)
                    
                    
                    -
                    
                    
                    
                    30Redeemable
      warrants (Note 11)
                    
                    
                    3,684
                    
                    
                    
                    5,020Total
      liabilities
                    
                    
                    6,299
                    
                    
                    
                    7,508Commitments
      and contingenciesStockholders’
      equity (Note 9):Preferred
      stock, par value $0.01 per share, authorized 5,000,000; issued and
      outstanding; none
                    
                    
                    -
                    
                    
                    
                    -Common
      stock, par value $0.001 per share, authorized 200,000,000 shares; issued
      and outstanding 132,787,447 and 132,860,602, respectively
                    
                    
                    133
                    
                    
                    
                    133Additional
      paid-in capital
                    
                    
                    263,151
                    
                    
                    
                    263,232Accumulated
      other comprehensive loss
                    
                    
                    -
                    
                    
                    
                    (20
                    )Accumulated
      deficit
                    
                    
                    (204,589
                    )
                    
                    
                    (209,969
                    )Total
      stockholders’ equity
                    
                    
                    58,695
                    
                    
                    
                    53,376Total
      liabilities and stockholders’ equity
                    
                    $
                    64,994
                    
                    
                    $
                    60,884





See
accompanying notes to 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 March 31,2009
                    
                    
                    2010
                      (restated)Revenues:Clinical
      treatment programs
                    
                    $
                    29
                    
                    
                    $
                    32Total
      revenues
                    
                    
                    29
                    
                    
                    
                    32Costs
      and expenses:Production/cost
      of goods sold
                    
                    
                    121
                    
                    
                    
                    140Research
      and development
                    
                    
                    1,595
                    
                    
                    
                    1,996General
      and administrative
                    
                    
                    1,166
                    
                    
                    
                    1,969Total
      costs and expenses
                    
                    
                    2,882
                    
                    
                    
                    4,105Operating
      loss
                    
                    
                    (2,853
                    )
                    
                    
                    (4,073
                    )Financing
      costs
                    
                    
                    (241
                    )
                    
                    
                    -Interest
      and other income
                    
                    
                    7
                    
                    
                    
                    29Redeemable
      warrants valuation adjustment (Note 11)
                    
                    
                    -
                    
                    
                    
                    (1,336
                    )Net
      loss
                    
                    $
                    (3,087
                    )
                    
                    $
                    (5,380
                    )Basic
      and diluted loss per share (Note 2)
                    
                    $
                    (.04
                    )
                    
                    $
                    (.04
                    )Weighted
      average shares outstanding, basic and diluted
                    
                    
                    79,836,247
                    
                    
                    
                    132,818,036





See
accompanying notes to consolidated financial statements.


4


HEMISPHERX
BIOPHARMA, INC. AND SUBSIDIARIES


Consolidated
Statements of Changes in Stockholders' Equity and Comprehensive
Loss


(in thousands except
share data)


(Unaudited)





Common
                    Stock
                    Shares
                  
                  
                  Common
                    Stock
                    $.001
                    Par
                    Value
                  
                  
                  Additional
                    Paid-In
                    Capital
                    (restated)
                  
                  
                  Accumulated
                    Other
                    Compre-hensive
                    Loss
                  
                  
                  Accumulated
                    Deficit
                    (restated)
                  
                  
                  Total
                    Stockholders’
                    Equity
                    (restated)
                  
                  
                  Compre-
                    hensive
                    Loss
                    (restated)Balance
      at December 31, 2009
                  
                  
                  132,787,447
                  
                  
                  $
                  133
                  
                  
                  $
                  263,151
                  
                  
                  $
                  -
                  
                  
                  $
                  (204,589
                  )
                  
                  $
                  58,695
                  
                  
                  $
                  -Stock
      issued for settlement of accounts payable
                  
                  
                  73,155
                  
                  
                  
                  -
                  
                  
                  
                  45
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  45
                  
                  
                  
                  -Equity
      based compensation
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  36
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  36
                  
                  
                  
                  -Unrealized
      loss in investment securities
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (20
                  )
                  
                  
                  -
                  
                  
                  
                  (20
                  )
                  
                  
                  (20
                  )Net
      loss - restated
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (5,380
                  )
                  
                  
                  (5,380
                  )
                  
                  
                  (5,380
                  )Balance
      at March 31, 2010 - restated
                  
                  
                  132,860,602
                  
                  
                  $
                  133
                  
                  
                  $
                  263,232
                  
                  
                  $
                  (20
                  )
                  
                  $
                  (209,969
                  )
                  
                  $
                  53,376
                  
                  
                  $
                  (5,400
                  )




See
accompanying notes to consolidated financial statements.


5


HEMISPHERX
BIOPHARMA, INC. AND SUBSIDIARIES


Consolidated
Statements of Cash Flows


For
the Three Months Ended March 31, 2009 and 2010


(in
thousands)


(Unaudited)





2009
                
                
                2010(restated)Cash
      flows from operating activities:Net
      loss - restated
                
                $
                (3,087
                )
                
                $
                (5,380
                )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      of property and equipment
                
                
                90
                
                
                
                94Amortization
      of patent and trademark rights, and royalty interest
                
                
                119
                
                
                
                20Financing
      cost related to Standby Financing
                
                
                241
                
                
                
                -Redeemable
      warrants valuation adjustment
                
                
                -
                
                
                
                1,336Equity
      based compensation
                
                
                18
                
                
                
                36Change
      in assets and liabilities:Prepaid
      expenses and othercurrent
      assets
                
                
                56
                
                
                
                116Accounts
      payable
                
                
                547
                
                
                
                559Accrued
      expenses
                
                
                592
                
                
                
                (706
                )Net
      cash used in operating activities
                
                $
                (1,424
                )
                
                $
                (3,925
                )Cash
      flows from investing activities:Purchase
      of property plant andequipment
                
                $
                (6
                )
                
                $
                (312
                )Additions
      to patent and trademarkrights
                
                
                (17
                )
                
                
                (28
                )Capital
      lease deposit
                
                
                -
                
                
                
                (6
                )Purchase
      of short-term investments
                
                
                (1,920
                )
                
                
                (3,073
                )Net
      cash used in investing activities
                
                $
                (1,943
                )
                
                $
                (3,419
                )


6


HEMISPHERX
BIOPHARMA, INC. AND SUBSIDIARIES


Consolidated
Statements of Cash Flows (Continued)


For
the Three Months Ended March 31, 2009 and 2010


(in thousands)


(Unaudited)





2009
                
                
                2010(restated)Cash
      flows from financing activities:Payments
      on capital lease
                
                $
                -
                
                
                $
                (5
                )Proceeds
      from sale of stock, net of issuance costs
                
                
                869
                
                
                
                -Net
      cash provided by (used in) financing activities
                
                $
                869
                
                
                $
                (5
                )Net
      decrease in cash and cash equivalents
                
                
                (2,498
                )
                
                
                (7,349
                )Cash
      and cash equivalents at beginning of period
                
                
                6,119
                
                
                
                58,072Cash
      and cash equivalents at end of period
                
                $
                3,621
                
                
                $
                50,723Supplemental
      disclosures of non-cash investingand
      financing cash flow information:Issuance
      of common stock for accounts payable and accrued expenses
                
                $
                360
                
                
                $
                45Equipment
      acquired by capital lease
                
                $
                -
                
                
                $
                70Unrealized
      loss on investments
                
                $
                -
                
                
                $
                (20
                )Redeemable
      warrants valuation adjustment
                
                $
                -
                
                
                $
                1,336





See
accompanying notes to consolidated financial statements.


7


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
subsidiary, Hemispherx Biopharma Europe N.V./S.A., established in Belgium in
1998, has 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 and the impact of a restatement on the December 31, 2009 Balance Sheet and
Income Statement for the year then ended.  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 for theyear ended
December 31, 2009 included in our amended and restated annual report on Form
10-K/A-2, filed on February 11, 2011.





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
35,737,069 and 21,236,453 shares, are excluded from the calculation of diluted
net loss per share for the three months ended March 31, 2009 and 2010,
respectively, since their effect is antidilutive.





Note
3: Equity Based Compensation





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 fair values
of the options granted, were estimated based on the following weighted average
assumptions:


Three
      Months Ended March 31,2009
                  
                  
                  2010Risk-free
      interest rate
                  
                  
                  1.76
                  %
                  
                  
                  1.02
                  %Expected
      dividend yield
                  
                  
                  -
                  
                  
                  
                  -Expected
      lives
                  
                  5.0
      years
                  
                  
                  5.0
      yearsExpected
      volatility
                  
                  
                  86.78
                  %
                  
                  
                  109.81
                  %Weighted
      average grant date fair value of options and warrants
    issued
                  
                  $
                  7,800
                  
                  
                  $
                  11,300


8


Stock
option activity for 2009 and during the three months ended March 31, 2010, is as
follows:





Stock
option activity for employees:





Number
                  of
                  Options
                
                
                Weighted
                  Average
                  Exercise
                  Price
                
                
                Weighted
                  Average
                  Remaining
                  Contractual
                  Term
                  (Years)
                
                
                Aggregate
                  Intrinsic
                  ValueOutstanding
      December 31, 2008
                
                
                6,258,608
                
                
                $
                2.60
                
                
                
                7.92
                
                
                $
                -Options
      granted
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Options
      forfeited
                
                
                (29,856
                )
                
                
                2.24
                
                
                
                5.75
                
                
                
                -Outstanding
      December 31, 2009
                
                
                6,228,752
                
                
                $
                2.60
                
                
                
                6.95
                
                
                
                -Options
      granted
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Options
      forfeited
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Outstanding
      March 31, 2010
                
                
                6,228,752
                
                
                $
                2.60
                
                
                
                6.70
                
                
                $
                -Exercisable
      March 31, 2010
                
                
                6,190,419
                
                
                $
                2.60
                
                
                
                6.71
                
                
                $
                -





The
weighted-average grant-date fair value of options granted during the three
months ended March 31, 2009 and 2010 was $-0- and $-0-,
respectively.





Unvested
stock option activity for employees:





Number
                  of
                  Options
                
                
                Weighted
                  Average
                  Exercise
                  Price
                
                
                Average
                  Remaining
                  Contractual
                  Term
                  (Years)
                
                
                Aggregate
                  Intrinsic
                  ValueOutstanding
      December 31, 2008
                
                
                76,944
                
                
                $
                1.41
                
                
                
                8.89
                
                
                $
                -Options
      granted
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Options
      vested
                
                
                (38,611
                )
                
                
                1.28
                
                
                
                7.92
                
                
                
                -Options
      forfeited
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Outstanding
      December 31, 2009
                
                
                38,333
                
                
                $
                1.54
                
                
                
                8.00
                
                
                
                -Options
      granted
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Options
      vested
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Options
      forfeited
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Outstanding
      March 31, 2010
                
                
                38,333
                
                
                $
                1.54
                
                
                
                7.75
                
                
                $
                -




9





Stock
option activity for non-employees:





Number of
                  Options
                
                
                Weighted
                  Average
                  Exercise
                  Price
                
                
                Weighted
                  Average
                  Remaining
                  Contractual
                  Term
                  (Years)
                
                
                Aggregate
                  Intrinsic
                  ValueOutstanding
      December 31, 2008
                
                
                2,417,482
                
                
                $
                2.35
                
                
                
                6.98
                
                
                
                -Options
      granted
                
                
                361,250
                
                
                
                2.12
                
                
                
                7.00
                
                
                
                -Options
      exercised
                
                
                (293,831
                )
                
                
                1.56
                
                
                
                7.93
                
                
                
                -Options
      forfeited
                
                
                (251,469
                )
                
                
                2.14
                
                
                
                7.43
                
                
                
                -Outstanding
      December 31, 2009
                
                
                2,233,432
                
                
                $
                2.44
                
                
                
                5.73
                
                
                
                -Options
      granted
                
                
                20,000
                
                
                
                .89
                
                
                
                10.00
                
                
                
                -Options
      exercised
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Options
      forfeited
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Outstanding
      March 31, 2010
                
                
                2,253,432
                
                
                $
                2.43
                
                
                
                5.52
                
                
                
                -Exercisable
      March 31, 2010
                
                
                2,123,223
                
                
                $
                2.39
                
                
                
                5.83
                
                
                
                -





The
weighted-average grant-date fair value of options granted during the three
months ended March 31, 2009 and 2010 was approximately $7,800 and $11,300,
respectively.





Unvested
stock option activity for non-employees during the year:





Number of
                  Options
                
                
                Weighted
                  Average
                  Exercise
                  Price
                
                
                Weighted
                  Average
                  Remaining
                  Contractual
                  Term
                  (Years)
                
                
                Aggregate
                  Intrinsic
                  ValueOutstanding
      December 31, 2008
                
                
                26,667
                
                
                $
                1.43
                
                
                
                9.00
                
                
                $
                -Options
      granted
                
                
                131,250
                
                
                
                2.81
                
                
                
                3.42
                
                
                
                -Options
      vested
                
                
                (18,333
                )
                
                
                1.79
                
                
                
                7.45
                
                
                
                -Options
      forfeited
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Outstanding
      December 31, 2009
                
                
                139,584
                
                
                $
                2.68
                
                
                
                3.76
                
                
                
                -Options
      granted
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Options
      vested
                
                
                (9,375
                )
                
                
                2.81
                
                
                
                4.25
                
                
                
                -Options
      forfeited
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Outstanding
      March 31, 2010
                
                
                130,209
                
                
                $
                2.67
                
                
                
                3.46
                
                
                $
                -





The
impact on the Company’s results of operations of recording equity based
compensation for the three months ended March 31, 2009 and 2010 was to increase
general and administrative expenses by approximately $18,000 and $36,000
respectively. However, there was no impact on basic and fully diluted earnings
per share.





As of
March 31, 2009 and 2010, respectively, there was $37,000 and $205,000 of
unrecognized equity based compensation cost related to options granted under the
Equity Incentive Plan.





Note 4: Inventories
and Other Assets





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


10





Inventories
consist of the following:





(in
      thousands)December
      31,
                  
                  
                  March
      31,2009
                  
                  
                  2010Raw
      materials
                  
                  $
                  -
                  
                  
                  $
                  -Finished
      goods, net of reserves of $282,000 at December 31, 2009
      and  March 31, 2010.
                  
                  
                  -
                  
                  
                  
                  -$
                  -
                  
                  
                  $
                  -





The
conversion of existing Alferon N Injection® Work-In-Progress inventory is
projected to begin in late 2010 or early 2011 to allow for the creation of new
Finished Goods available for commercial sales in mid to late 2011.  As
a result of delaying the conversion of Work-In-Progress, the Company reclassed
the $864,000 value of inventory to “Other assets” in 2009.





Other
assets consist of the following:





(in
      thousands)December
      31,
                    
                    
                    March
      31,2009
                    
                    
                    2010Inventory
      work in process
                    
                    $
                    864
                    
                    
                    $
                    864Security
      deposit
                    
                    
                    15
                    
                    
                    
                    15Internet
      Domain Names
                    
                    
                    7
                    
                    
                    
                    7Security
      deposit on Capital Lease (see Note 7)
                    
                    
                    -
                    
                    
                    
                    6$
                    886
                    
                    
                    $
                    892





Note
5: Marketable Securities





Marketable
securities consist of fixed income securities with remaining maturities of
greater than three months at the date of purchase, debt securities and equity
securities.  At March 31, 2010, all of our fixed income securities
were classified as available for sale investments and measured as Level 1
instruments of the fair value measurements standard (see Note 10: Fair
Value).  Securities classified as available for sale consisted
of:





March 31,
2010


(in
thousands)





Name Of Security
                    
                    Cost
                    
                    
                    Market
                      Value
                    
                    
                    Unrealized
                      Loss
                    
                    Maturity
                      DateMarketable
      Securities with maturity periods less than one year:GE
      Money Bank
                    
                    $
                    250
                    
                    
                    $
                    250
                    
                    
                    $
                    -
                    
                    4/15/2010American
      Express Centurion
                    
                    
                    500
                    
                    
                    
                    500
                    
                    
                    
                    -
                    
                    4/21/2010American
      Express Bank  FSB
                    
                    
                    500
                    
                    
                    
                    500
                    
                    
                    
                    -
                    
                    4/21/2010Protective
      Life
                    
                    
                    523
                    
                    
                    
                    505
                    
                    
                    
                    (18
                    )
                    8/16/2010GE
      Money Bank
                    
                    
                    250
                    
                    
                    
                    249
                    
                    
                    
                    (1
                    )
                    10/15/2010Discover
      Bank
                    
                    
                    500
                    
                    
                    
                    499
                    
                    
                    
                    (1
                    )
                    10/29/2010GE
      Money Bank
                    
                    
                    250
                    
                    
                    
                    250
                    
                    
                    
                    -
                    
                    1/14/2011World
      Financial Capital
                    
                    
                    300
                    
                    
                    
                    300
                    
                    
                    
                    -
                    
                    1/28/2011Total
      Marketable Securities with maturity periods less than one
      year:
                    
                    $
                    3,073
                    
                    
                    $
                    3,053
                    
                    
                    $
                    (20
                    )





No
investment securities had a maturity of greater than one year nor were pledged
to secure public funds at March 31, 2010.


11


Note 6: Accrued Expenses





Accrued
expenses consists of the following:





(in
      thousands)December
      31,
                  
                  
                  March
      31,2009
                  
                  
                  2010Compensation
                  
                  $
                  716
                  
                  
                  $
                  153Professional
      fees
                  
                  
                  421
                  
                  
                  
                  186Other
      expenses
                  
                  
                  71
                  
                  
                  
                  49Other
      liability
                  
                  
                  113
                  
                  
                  
                  227$
                  1,321
                  
                  
                  $
                  615





Note
7: Capital Lease





The
Company has acquired equipment under a capital lease as follows:





(in
      thousands)AssetBalance
      atMarch
      31,
                    2010Leased
      Equipment included with property and equipment
                  
                  $
                  70Less:
      accumulated depreciation
                  
                  
                  1$
                  69





The
following is a schedule by year of future minimum lease payments under the
capital lease as of March 31, 2010:





2010
                    
                    $
                    272011
                    
                    
                    352012
                    
                    
                    4Total
      lease payments remaining
                    
                    
                    66Less:
      amount representing interest
                    
                    
                    1Present
      value of remaining minimum lease payments
                    
                    
                    65Less:
      current obligations under lease obligations
                    
                    
                    35Long-term
      capital lease obligations
                    
                    $
                    30





Lease
payments made under this capital lease are $3,000 per month for 24 months
starting February 2010.  Imputed rate is 2% per annum.  A
security deposit of $6,000 was paid and is included in other
assets.


12


Note
8: Construction in progress





On
September 16, 2009, our Board of Directors approved up to $4.4 million for full
engineering studies, capital improvements, system upgrades and introduction of
building management systems to enhance production of three products: Alferon N
Injection®, Alferon® LDO and Ampligen®.  Construction in progress
consists of accumulated costs for the construction and installation of property
and equipment within the Company’s New Jersey facility until the assets are
placed into service.  As of December 31, 2009, construction in
progress was $135,000 as compared to $389,000 for the three months ended March
31, 2010.





Note
9: Stockholders’ Equity





The
Equity Compensation 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
Plan of 2004.  Unless sooner terminated, the Equity Compensation Plan
of 2004 will continue in effect for a period of 10 years from its effective
date.  As of March 31, 2010, the Company effectively exhausted this
plan and issued an aggregate 7,999,981 shares, stock options and warrants to
vendors, Board Members, Directors and consultants under the 2004 Equity
Compensation Plan.  The shares had prices ranging from $0.35 to $0.89
based on the NYSE Amex closing price.  The stock options had various
exercise prices ranging from $1.30 to $6.00, had terms of five to ten years and
vesting over varying periods





The
Equity Incentive Plan of 2007, effective June 20, 2007, authorizes the grant of
non-qualified and incentive stock options, stock appreciation rights, restricted
stock and other stock awards.  A maximum of 9,000,000 shares of common
stock is reserved for potential issuance pursuant to awards under the Equity
Incentive Plan of 2007.  Unless sooner terminated, the Equity
Incentive Plan of 2007 will continue in effect for a period of 10 years from its
effective date.  The Company issued to vendors, Board Members,
Directors and consultants, shares, stock options, warrants and “Incentive
Rights” under the Employee Wages or Hours Reduction Program.  As of
March 31, 2010, the Company effectively exhausted this plan and issued an
aggregate of 8,980,374 shares and shares issuable upon exercise/conversion of
the foregoing securities.  The aggregate shares to vendors, Board
Members, Directors and consultants had prices ranging from $0.32 to $2.54 based
on the NYSE Amex closing price. The stock options had various exercise prices
ranging from $0.72 to $3.05, terms of ten years and vesting over varying
periods.





The
Company utilized the Black-Scholes Pricing Model to fair value the stock options
which had been issued during the three months ended March 31, 2010 and
accordingly recorded approximately $11,300 as equity based compensation for
these issuances during this period.  The stock options vested
immediately upon grant.





In an
effort to conserve our cash, the Employee Wage Or Hours Reduction Program (the
“Program”) was ratified by our Board effective January 1, 2009.  The Incentive Rights are
rights for employees to receive Company shares and had prices ranging from $0.13
to $0.80 based on the average daily closing prices of the Company shares on the
NYSE Amex.  TheProgram was suspended as of May 31, 2009 with
employees returning back to their rate of pay as of January 1,
2009.  At the passage of six months for each of their months of
participation, non-affiliate employees have been issued shares for the months
ended July 31, August 31, September 30, October 30 and November 30,
2009.  Individuals defined by Rule 144 in the Securities Act of 1933
as an “affiliate” have yet to receive their distribution of 1,435,295 shares of
stock from the Program.


13


The
Equity Incentive Plan of 2009, effective June 24, 2009, authorizes the grant of
non-qualified and incentive stock options, stock appreciation rights, restricted
stock and other stock awards.  A maximum of 15,000,000 shares of
common stock is reserved for potential issuance pursuant to awards under the
Equity Incentive Plan of 2009.  Unless sooner terminated, the Equity
Incentive Plan of 2009 will continue in effect for a period of 10 years from its
effective date.  As of March 31, 2010 the Company issued 1,357,475
securities to Directors and consultants consisting of an aggregate of 1,261,642
options and 95,833 shares of common stock issuable upon exercise/conversion of
the foregoing securities.  The shares issued to consultants had prices
ranging from $0.40 to $0.45 based on the NYSE Amex closing price.





The
aggregate stock options had various exercise prices ranging from $0.51 to $2.81,
had terms of ten years and vested immediately upon grant.





Note
10: Fair Value





The
Company is required under U.S. Generally Accepted Accounting Principles (“GAAP”)
to disclose information about the fair value of all the Company’s financial
instruments, whether or not these instruments are measured at fair value on the
Company’s consolidated balance sheet.





The
Company estimates that the fair values of cash and cash equivalents, securities,
other assets, accounts payable and accrued expenses approximate their carrying
values due to the short-term maturities of these items.  The Company
also has certain warrants with cash settlement or “Put” rights in the unlikely
occurrence of a Fundamental Transaction (the “Warrants”).  For a
discussion about how the Company values these Warrants, please see Note 11:
Restatement below.





On
January 1, 2008, the Company adopted new accounting guidance (codified at FASB
ASC 820 and formerly Statement No. 157 Fair Value Measurements) that
defines fair value, establishes a framework for measuring fair value in GAAP,
and expands disclosures about fair value measurements.  The guidance
does not impose any new requirements around which assets and liabilities are to
be measured at fair value, and instead applies to asset and liability balances
required or permitted to be measured at fair value under existing accounting
pronouncements.  The Company measures its warrant liability at fair
value.  As of March 31, 2010, except for the Warrants, the Company had
no derivative assets or liabilities.





FASB ASC
820-10-35-37 (formerly SFAS No. 157) establishes a valuation hierarchy based on
the transparency of inputs used in the valuation of an asset or
liability.  Classification is based on the lowest level of inputs that
is significant to the fair value measurement.  The valuation hierarchy
contains three levels:





·
            Level
      1 – Quoted prices are available in active markets for identical assets or
      liabilities at the reporting date.





·
            Level
      2 – Observable inputs other than Level 1 prices such as quote prices for
      similar assets or liabilities; quoted prices in markets that are not
      active; or other inputs that are observable or can be corroborated by
      observable market data for substantially the full term of the assets or
      liabilities.





·
            Level
      3 – Unobservable inputs that are supported by little or no market activity
      and that are significant to the fair value of the assets or
      liabilities.  Level 3 assets and liabilities include financial
      instruments whose value is determined using pricing models, discounted
      cash flow methodologies, or other valuation techniques, as well as
      instruments for which the determination of fair value requires significant
      management judgment or estimation.  As of December 31, 2009, the
      Company has classified the Warrants(that contain embedded put and call
      features) as Level 3.  Management evaluates a variety of inputs
      and then estimates fair value based on those inputs.  As
      discussed below in Note 11: Restatement, the Company utilized the Monte
      Carlo Simulation approach in valuing these
  Warrants.


14


The table
below presents the balances of assets and liabilities measured at fair value on
a recurring basis by level within the hierarchy as of March 31, 2010 (in
thousands):





Total
                    
                    
                    Level 1
                    
                    
                    Level 2
                    
                    
                    Level 3Assets:Marketable
      Securities
                    
                    $
                    3,053
                    
                    
                    $
                    3,053
                    
                    
                    $
                    -
                    
                    
                    $
                    -Liabilities:Warrants
                    
                    
                    5,020
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    5,020Total
                    
                    $
                    8,073
                    
                    
                    $
                    3,053
                    
                    
                    $
                    -
                    
                    
                    $
                    5,020





For
detailed information regarding the change to the fair value of assets recorded
in Level 1 (See Note 5: Marketable Securities).





The
changes in Level 3 Liabilities measured at fair value on a recurring basis are
summarized as follows:





FairValueofRedeemable
                    Warrants
                    (inthousands)March 31,2009
                  
                  
                  March 31, 2010Balance
      at beginning of quarter
                  
                  $
                  -
                  
                  
                  $
                  3,684Fair
      value adjustment at March 31, 2010
                  
                  
                  -
                  
                  
                  
                  1,336Balance
      at March 31, 2010
                  
                  $
                  -
                  
                  
                  $
                  5,020





Note
11: Restatement





In
connection with equity financings on May 11 and 19, 2009, we issued warrants
(the “Warrants”) that are single compound derivatives containing both an
embedded right to obtain stock upon exercise (a “Call”) and a series of embedded
rights to settle the Warrants for cash upon the occurrence of certain events
(each, a “Put”).  Generally, the Put provisions allow the Warrant
Holders liquidity protection; the right to receive cash in certain situations
where the Holders would not have a means of readily selling the shares issuable
upon exercise of the Warrants (e.g., where there would no longer be a
significant public market for our common stock).  However because the
contractual formula used to determine the cash settlement value of the embedded
Put requires use of certain assumptions, the cash settlement value of the
embedded Put can differ from the fair value of the unexercised embedded Call
option at the time the embedded Put option is
exercised.  Specifically, the Put rights would be triggered upon the
happening of a “Fundamental Transaction” (as defined below) that also is (1) an
all cash transaction; (2) a “Rule 13e-3 transaction” under the Exchange Act
(where the Company would be taken private); or (3) a transaction involving a
person or entity not traded on a national securities
exchange.  “Fundamental Transactions” include (i) a merger or
consolidation of the Company with or into another person or entity; (ii) a sale,
lease, license, transfer or other disposition of all or substantially all of the
Company’s assets; (iii) any purchase offer, tender offer or exchange offer in
which holders of Company Common Stock are permitted to sell, tender or exchange
their shares for other securities, cash or property, which offer has been
accepted by the holders of 50% or more of the Company’s outstanding Common
Stock; (iv) a reclassification, reorganization or recapitalization of the Common
Stock pursuant to which the Common Stock is effectively converted into or
exchanged for other securities, cash or property; or (v) a stock purchase or
other business combination with another person or entity is effected pursuant to
which such other person or entity acquires more than 50% of the outstanding
shares of Common Stock.  Pursuant to the Warrants, the Put rights
enable the Warrant Holders to receive cash in the amount of the Black-Scholes
value is obtained from the “OV” function on Bloomberg, L.P. (“Bloomberg”)
determined as of the day of consummation of the applicable Fundamental
Transaction for pricing purposes and reflecting (A) a risk-free interest rate
corresponding to the U.S. Treasury rate for a period equal to the time between
the date of the public announcement of the applicable Fundamental Transaction
and the Warrant expiration date, (B) an expected volatility equal to the greater
of 100% and the 100 day volatility obtained from the HVT function on Bloomberg
as of the Trading Day immediately following the public announcement of the
applicable Fundamental Transaction, (C) the underlying price per share used in
such calculation shall be the sum of the price per share being offered in cash,
if any, plus the value of any non-cash consideration, if any, being offered in
such Fundamental Transaction and (D) a remaining option time equal to the time
between the date of the public announcement of the applicable Fundamental
Transaction and the Warrant expiration date.


15


Initially, the Company
determined that these Warrants created a related Liability in accordance with
ASC 480-10-55-29 & 30 due to the fact that the Warrants could be settled for
cash as discussed above.In their estimation of the value of
this Liability, the Company interpreted and applied the concept of “Fair Value”
from ASC 820 (formally SFAS 157).  After reviewing current accounting
literature and the findings and opinion of an independent appraiser in
determining proper accounting treatment, the Company took into account the
extreme unlikelihood of the occurrence of a Fundamental Transaction triggering a
right to cash settlement as a probability factor in applying a
Black-Scholes-Merton valuation of the Warrants.  As a result,
Management deemed the fair value of the Warrants to be immaterial and,
therefore, stated the Warrants’ related Liability from May 31, 2009 through
December 31, 2009 at
zero.




On
September 15, 2010, the Company received a comment letter from the Securities
and Exchange Commission (“SEC”) concerning its review of the Company’s annual
report on Form 10-K, as amended, for the year ended December 31,
2009.  During the process of resolving the SEC’s comments, the SEC
Staff alerted Management that they did not agree with their method of computing
the fair value of the Warrants as discussed above.




As a result, on December
22, 2010, after discussion with McGladrey & Pullen, LLP, the Company’s
independent registered public accounting firm, the Company’s Audit Committee
determined thatthe previously issued financial statements included in
the Company’s Annual Report on Form 10-K for the year ended December 31, 2009
and in its Forms 10-Q for the periods ended March 31, 2010, June 30, 2010 and
September 30, 2010 and in its Forms 10-Q for the periods ended June 30, 2009 and
September 30, 2009, should not be relied upon.  Management has restated thefinancial statements for the year ended December 31, 2009 contained in
the Company’s Form 10-K and in its Forms 10-Q for the periods ended March 31,
2010, June 30, 2010 and September 30, 2010 (including the comparable periods
ended June 30, 2009 and September 30, 2009) to reflect the revised value of this
Liability.




The
restatements reflect the recalculation of the fair value of the Warrants using a
Monte Carlo Simulation approach, applying critical assumptions provided by
Management reflecting conditions at the valuation date.  The Monte
Carlo Simulation approach incorporates the incremental value of the Put rights
available to the Warrant Holders.  The fair value of Warrants ranged
from $0.37 to $0.38 at December 31, 2009 and all valued at $0.51 at March 31,
2010.


16


The
Company recomputes the fair value of the Warrants at the end of each quarterly
reporting period.  Such value computation includes subjective input
assumptions that are consistently applied each period.  If the Company
were to alter its assumptions or the numbers input based on such assumptions,
the resulting fair value could be materially different.





Fair
value at March 31, 2010, was estimated using the following
assumptions:





Underlying
      price per share
                  
                  $0.74Exercise
      price per share
                  
                  $1.31
      – $1.65Risk-free
      interest rate
                  
                  2.12%
      - 2.36%Expected
      holding period
                  
                  4.13
      - 4.63 yearsExpected
      volatility
                  
                  113.14%
      – 114.38%Expected
      dividend yield
                  
                  None





The
significant assumptions using the Monte Carlo Simulation approach for valuation
of the Warrants are:





(i)       Risk-Free Interest
Rate.  The risk-free interest rates for the Warrants are based
on U.S Treasury constant maturities for periods commensurate with the remaining
expected holding periods of the warrants.


(ii)      Expected Holding Period. The
expected holding period represents the period of time that the Warrants are
expected to be outstanding until they are exercised.  The Company
utilizes the remaining contractual term of the Warrants at each valuation date
as the expected holding period.


(iii)     Expected
Volatility.  Expected stock volatility is based on daily
observations of the Company’s historical stock values for a period commensurate
with the remaining expected holding period on the last day of the period for
which the computation is made.


(iv)     Expected Dividend
Yield.  Expected dividend yield is based on the Company’s
anticipated dividend payments over the remaining expected holding
period.  As the Company has never issued dividends, the expected
dividend yield is $-0- and this assumption will be continued in future
calculations unless the Company changes its dividend policy.


(v)      Expected Probability of a
Fundamental Transaction.  The possibility of the occurrence of
a Fundamental Transaction triggering a Put right is extremely
remote.  As discussed above, a Put right would only arise if a
Fundamental Transaction 1) is an all cash transaction; (2) results in the
Company going private; or (3) is a transaction involving a person or entity not
traded on a national securities exchange.  The Company believes such
an occurrence is highly unlikely because:





a.
            The
      Company only has one product that is FDA
  approved;


b.
            The
      Company will have to perform additional clinical trials for FDA approval
      of its flagship product;


c.
            Industry
      and market conditions continue to include a global market recession,
      adding risk to any transaction;


d.
            Available
      capital for a potential buyer in a cash transaction continues to be
      limited;


e.
            The
      nature of a life sciences company is heavily dependent on future funding
      and high fixed costs, including Research &
  Development;


f.
            According
      to Forbes.com, of approximately 17,000 public companies, fewer than 30
      went private in 2008 and less than 100 were completed in 2007,
      representing 0.18% and 0.6%, respectively.  This would be
      further reduced based on the nature of a life sciences company and the
      potential lack of revenues, cash flows and the Company’s funding needs;
      and


g.
            The
      Company's Rights Agreement makes it less attractive to a potential
      buyer.


17


With the
above factors utilized in analysis of the likelihood of the Put's potential
Liability, the Company estimated the range of probabilities related to a Put
right being triggered as:





Range of Probability
                  
                  ProbabilityLow
                  
                  
                  0.5
                  %Medium
                  
                  
                  1.0
                  %High
                  
                  
                  5.0
                  %





The Monte
Carlo Simulation incorporated a 5.0% probability of a Fundamental
Transaction.





(vi)     Expected Timing of Announcement of a
Fundamental Transaction.  As the Company has no specific
expectation of a Fundamental Transaction, for reasons elucidated above, the
Company utilized a discrete uniform probability distribution over the Expected
Holding Period to model in the potential announcement of a Fundamental
Transaction occurring during the Expected Holding Period.


(vii)  
Expected 100 Day Volatility at
Announcement of a Fundamental Transaction.  An estimate of
future volatility is necessary as there is no mechanism for directly measuring
future stock price movements.  Daily observations of the Company’s
historical stock values for the 100 days immediately prior to the Warrants’
grant dates, with a floor of 100%, were utilized as a proxy for the future
volatility.


(viii) 
Expected Risk-Free Interest
Rate at Announcement of a Fundamental Transaction.  The Company
utilized a risk-free interest rate corresponding to the forward U.S. Treasury
rate for the period equal to the time between the date forecast for the public
announcement of a Fundamental Transaction and the Warrant expiration date for
each simulation.


(ix)   Expected Time
Between Announcement and Consummation of a Fundamental
Transaction.  The expected time between the announcement and
the consummation of a Fundamental Transaction is based on the Company’s
experience with the due diligence process performed by acquirers, and is
estimated to be six months.  The Monte Carlo Simulation approach
incorporates this additional period to reflect the delay Warrant Holders would
experience in receiving the proceeds of the Put.





As a
result of the corrections in the valuation of the Liabilities as described
above, the Company has restated its consolidated financial statements in this
amended report as follows:


18




HEMISPHERX
BIOPHARMA, INC. AND SUBSIDIARIES


Consolidated
Balance Sheet


March
31,2010





(in
thousands)





March
                                          31,2010
                                          As
                                          Previously
                                          Reported
                                        
                                        
                                        Adjustments
                                        
                                        
                                        March 31, 2010
                                          As restatedASSETSCurrent
      Assets:Cash
      and cash equivalents
                                        
                                        $
                                        50,723
                                        
                                        
                                        
                                        
                                        
                                        $
                                        50,723Marketable
      securities maturing in less than one year
                                        
                                        
                                        3,053
                                        
                                        
                                        
                                        
                                        
                                        
                                        3,053Prepaid
      expenses and other current assets
                                        
                                        
                                        216
                                        
                                        
                                        
                                        
                                        
                                        
                                        216Total
      current assets
                                        
                                        
                                        53,992
                                        
                                        
                                        
                                        
                                        
                                        
                                        53,992Property
      and equipment, net
                                        
                                        
                                        4,738
                                        
                                        
                                        
                                        
                                        
                                        
                                        4,738Patent
      and trademark rights, net
                                        
                                        
                                        838
                                        
                                        
                                        
                                        
                                        
                                        
                                        838Investment
                                        
                                        
                                        35
                                        
                                        
                                        
                                        
                                        
                                        
                                        35Construction
      in progress
                                        
                                        
                                        389
                                        
                                        
                                        
                                        
                                        
                                        
                                        389Other
      assets
                                        
                                        
                                        892
                                        
                                        
                                        
                                        
                                        
                                        
                                        892Total
      assets
                                        
                                        $
                                        60,884
                                        
                                        
                                        
                                        
                                        
                                        $
                                        60,884LIABILITIES
      ANDSTOCKHOLDERS’
      EQUITYCurrent
      liabilities:Accounts
      Payable
                                        
                                        $
                                        1,808
                                        
                                        
                                        
                                        
                                        
                                        $
                                        1,808Accrued
      expenses
                                        
                                        
                                        615
                                        
                                        
                                        
                                        
                                        
                                        
                                        615Current
      portion of capital lease
                                        
                                        
                                        35
                                        
                                        
                                        
                                        
                                        
                                        
                                        35Total
      current liabilities
                                        
                                        
                                        2,458
                                        
                                        
                                        
                                        
                                        
                                        
                                        2,458Long-term
      portion of capital lease
                                        
                                        
                                        30
                                        
                                        
                                        
                                        
                                        
                                        
                                        30Redeemable
      warrants
                                        
                                        
                                        -
                                        
                                        
                                        
                                        3,6841,336
                                        
                                        
                                        
                                        5,020Total
      liabilities
                                        
                                        
                                        2,488
                                        
                                        
                                        
                                        5,020
                                        
                                        
                                        
                                        7,508Commitment
      and contingenciesStockholders’
      equityPreferred
      stock
                                        
                                        
                                        -
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        -Common
      stock
                                        
                                        
                                        133
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        133Additional
      paid-in capital
                                        
                                        
                                        273,174
                                        
                                        
                                        
                                        (9,942
                                        )
                                        
                                        
                                        263,232Accumulated
      other comprehensive loss
                                        
                                        
                                        (20
                                        )
                                        
                                        
                                        
                                        
                                        
                                        
                                        (20
                                        )Accumulated
      deficit
                                        
                                        
                                        (214,891
                                        )
                                        
                                        
                                        6,258
                                        
                                        
                                        
                                        (209,969
                                        )(1,336
                                        )Total
      stockholders' equity
                                        
                                        
                                        58,396
                                        
                                        
                                        
                                        (5,020
                                        )
                                        
                                        
                                        53,376Total
      liabilities and stockholders’ equity
                                        
                                        $
                                        60,884
                                        
                                        
                                        
                                        
                                        
                                        
                                        $
                                        60,884


19





HEMISPHERX
BIOPHARMA, INC. AND SUBSIDIARIES


Consolidated
Statement of Operations


Three
months ended March 31,2010





(in
thousands, except per share data)





March
                              31,2010
                              As
                              Previously
                              Reported
                            
                            
                            Adjustments
                            
                            
                            March 31, 2010
                              As restatedRevenues:Sales
      of product, net
                            
                            $
                            
                            
                            
                            
                            
                            $Clinical
      treatment programs
                            
                            
                            32
                            
                            
                            
                            
                            
                            
                            32Total
      revenues
                            
                            
                            32
                            
                            
                            
                            
                            
                            
                            32Costs
      and expenses:Production/cost
      of goods sold
                            
                            
                            140
                            
                            
                            
                            
                            
                            
                            140Research
      and development
                            
                            
                            1,996
                            
                            
                            
                            
                            
                            
                            1,996General
      and administrative
                            
                            
                            1,969
                            
                            
                            
                            
                            
                            
                            1,969Total
      costs and expenses
                            
                            
                            4,105
                            
                            
                            
                            
                            
                            
                            4,105Operating
      loss
                            
                            
                            (4,073
                            )
                            
                            
                            
                            
                            
                            (4,073
                            )Interest
      and other income
                            
                            
                            29
                            
                            
                            
                            
                            
                            
                            29Redeemable
      warrants valuation adjustment
                            
                            
                            
                            
                            
                            
                            (1,336
                            )
                            
                            
                            (1,336
                            )Net
      loss
                            
                            $
                            (4,044
                            )
                            
                            
                            (1,336
                            )
                            
                            $
                            (5,380
                            )Basic
      and diluted loss per share
                            
                            $
                            (.03
                            )
                            
                            
                            (.01
                            )
                            
                            $
                            (.04
                            )Weighted
      average shares outstanding Basic and Diluted
                            
                            
                            132,818,036
                            
                            
                            
                            
                            
                            
                            
                            132,818,036





Note to above
tables:  The estimated fair value of the Liability related to
the Warrants was revalued at March 31, 2010.  Due to the increasing
trading value of our stock during the relevant period, at March 31, 2010, the
value of the Liability related to the remaining outstanding Warrants was
$5,020,000, resulting in a related non-cash loss of $1,336,000.





None of
the above issues from this non-cash adjustment affected the Company’s revenues,
operating expenses, liquidity or cash flows from past, nor should they affect
future operations, except in the highly unlikely event that a Put right is
triggered under the Warrants.





NOTE 12: Cash And Cash
Equivalents





The
Company considers all highly liquid investments with an original maturity of
three months or less when purchased to be cash equivalents.


20


NOTE 13: Recent Accounting
Pronouncements





The FASB
has published FASB Accounting Standards Update 2010-01 through
2010-12.  The adoption of published FASB Accounting Standards Update
2010-01 through 2010-12 has no material effect on the Company’s financial
statements for the three months ended March 31, 2010.





NOTE
14: Subsequent Events





The
Company evaluated subsequent events through the date on which the financial
statements were issued, and determined that there are no subsequent events that
require adjustment or disclosure to the financial statements for
the three months ended March 31, 2010.





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
specialty pharmaceutical company based in Philadelphia, Pennsylvania and engaged
in the clinical development of new drug therapies based on natural immune system
enhancing technologies for the treatment of viral and immune based chronic
disorders.  We were 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 natural interferon and 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 subsidiary is Hemispherx Biopharma Europe
N.V./S.A. established in Belgium in 1998, which has no activity.  All
significant intercompany balances and transactions have been eliminated in
consolidation.


21


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 an influenza vaccine
enhancer (adjuvant) for both therapeutic and preventative vaccine
development.  Alferon N Injection® is a Food and Drug Administration
(“FDA”) approved product with an indication for refractory or recurring genital
warts.  Alferon® LDO (Low Dose Oral) is a formulation currently under
development targeting influenza.





We have
formed an independent Data Monitoring Committee (“DMC”) which will oversee our
various drug development programs.  The principal role of an
independent DMC is to perform, absent of serious conflict of interest, interim
analyses of the clinical outcome data and to insure the safety of patients in
clinical trials.  The DMC also plays a critical role in studies that
may use “Adaptive Design” wherein trial design modifications can be made after
patient enrollment has started.  Adaptive Design should enable us to
respond to data collected during a trial to increase the likelihood of
generating statistically and clinically significant results.





We own
and operate a 43,000 sq. ft. FDA approved facility in New Brunswick, NJ that was
primarily designed to produce Alferon®.  On September 16, 2009, our
Board of Directors approved up to $4.4 million for full engineering studies,
capital improvements, system upgrades and introduction of building management
systems to enhance production of three products: Alferon N Injection®, Alferon®
LDO and Ampligen®.  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.




Ampligen®




Ampligen®
is an experimental drug currently undergoing clinical development for the
treatment of Myalgic Encephalomyelitis/Chronic Fatigue Syndrome
(“ME/CFS”).  Over its developmental history, Ampligen® has received
various designations, including Orphan Drug Product Designation (FDA), Treatment
IND (e.g., treatment investigational new drugs, or “Emergency” or
“Compassionate” use authorization) with Cost Recovery Authorization (FDA) and
“promising” clinical outcome recognition based on the evaluation of certain
summary clinical reports (“AHRQ” or Agency for Healthcare Research and
Quality).  Ampligen® represents the first drug in the class of large
(macromolecular) RNA (nucleic acid) molecules to apply for New Drug Application
(“NDA”) review.  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.





On
November 25, 2009, we received a Complete Response Letter (“CRL”) from the FDA
which described specific additional recommendations related to the Ampligen®
NDA.  In accordance with its 2008 Complete Response procedure, the FDA
reviewers determined that they could not approve the application in its present
form and provided specific recommendations to address the outstanding
issues.


22


We are
carefully reviewing the CRL and will seek a meeting with the FDA to discuss its
recommendations upon the compilation of necessary data to be used in our
response.  We intend to take the appropriate steps to seek approval
and commercialization of Ampligen®.  Most notably, the FDA stated that
the two primary clinical studies submitted with the NDA did not provide credible
evidence of efficacy of Ampligen® and recommended at least one additional
clinical study which shows convincing effect and confirms safety in the target
population.  The FDA indicated that the additional study should be of
sufficient size and sufficient duration (six months) and include appropriate
monitoring to rule out the generation of autoimmune disease.  In
addition, patients in the study should be on more than one dose regimen,
including at least 300 patients on dose regimens intended for
marketing.  We are presently planning a confirmatory clinical study
which will utilize the same primary endpoints as our earlier studies but with an
enlarged number of subjects to potentially achieve a more representative
statistical model.  Lastly, additional data including a
well-controlled QT interval study (i.e., a measurement of time between the start
of the Q wave and the end of the T wave in the heart’s electrical cycle) and
pharmacokinetic evaluations of dual dosage regiments were
requested.  Other items required by the FDA include certain aspects of
Non-Clinical safety assessment and Product Quality.  In the
Non-Clinical area, the FDA recommended among other things that we complete
rodent carcinogenicity studies in two species.  As part of the NDA
submission, we had requested that these studies be waived.  The waiver
has not been granted as of May 5, 2010.





In the October 8, 2009
issue of Science Express, a consortium of researchers from the Whittemore
Peterson Institute, the National Cancer Institute and the Cleveland Clinic
reported a new retrovirus in the blood cells of 67% ofChronic Fatigue
Syndrome (“CFS”)patients and 3.7% in healthy control subjects.  The infectious virus
was also greater than 99% identical to that previously detected in prostate
cancer.Retrospective analyses of patient samples from the
completed Phase III trial of Ampligen® in
potential treatment of CFS continues in collaboration with the Whittemore PetersonInstitute with these studies hoping to provide a new perspective on the
design of a confirmatory Phase III study in this disorder.  The
samples are being analyzed for the presence of XMRV, a novel retrovirus reported
to be found in approximately two-thirds of CFS patients.





Alferon
N Injection®





Alferon N
Injection® is the registered trademark for our injectable formulation of natural
alpha interferon, which is approved by the FDA in 1989 for the treatment of
certain categories of genital warts.  Alferon® is the only
natural-source, multi-species alpha interferon currently approved for sale in
the U.S. for the intralesional (within lesions) treatment of refractory
(resistant to other treatment) or recurring external genital warts in patients
18 years of age or older.





Alferon N
Injection® [Interferon alfa-n3 (human leukocyte derived)] is a highly purified,
natural-source, glycosylated, multi-species alpha interferon
product.  There are essentially no antibodies observed against natural
interferon to date and the product has a relatively low side-effect
profile.





Commercial
sales of Alferon N Injection® were halted in March 2008 as the current
expiration date of our finished goods inventory expired.  We are
undertaking a major capital improvement program to upgrade our manufacturing
capability for Alferon N Injection® at our New Brunswick facility that will
continue throughout 2010.  As a result, Alferon N Injection® could be
available for commercial sales in mid to late 2011.





In April
2010, we began the process to undertake a clinical study with Max Neeman
International, one of the leading and largest clinical research organizations
(“CROs”) in India.  This collaborative clinical research effort is
intended to utilize Alferon N Injection® for treatment of acute seriously ill
patients hospitalized with either seasonal influenza or pandemic
influenza.  The Indian site selection process has begun.  It
is our goal to enroll subjects for the upcoming monsoon season of mid to late
2010.


23


Alferon® Low Dose Oral
(LDO)





Alferon®
LDO [Low Dose Oral Interferon Alfa-n3 (Human Leukocyte Derived)] is an
experimental low-dose, oral liquid formulation of Natural Alpha Interferon and
like Alferon N Injection® should not cause antibody formation, which is a
problem with recombinant interferon.  It is an experimental
immunotherapeutic believed to work by stimulating an immune cascade response in
the cells of the mouth and throat, enabling it to bolster systemic immune
response through the entire body by absorption through the oral
mucosa.  Oral interferon could be economically feasible for patients
and logistically manageable in development programs in third-world countries
primarily affected by HIV and other emerging viruses (e.g., SARS, Ebola, bird
and swine flu).  Oral administration of Alferon® LDO, with its
anticipated affordability, low toxicity, no production of antibodies, and broad
range of potential bioactivity, could be a breakthrough treatment or prevention
for viral diseases.





In
October 2009, we submitted a protocol to the FDA proposing to conduct a Phase 2,
well-controlled, clinical study using Alferon® LDO for the prophylaxis and
treatment of seasonal and pandemic influenza of more than 200
subjects.  Following a teleconference with the FDA in November 2009,
the FDA placed the proposed study on “Clinical Hold” because the protocol was
deemed by the FDA to be deficient in design, and because of the need for
additional information to be submitted in the area of chemistry, manufacturing
and controls (“CMC”).  Thereafter in December 2009, we submitted
additional information by Amendment with respect to both the clinical protocol
design issues and the CMC items.  In January 2010, the FDA
acknowledged that our responses to the clinical study design issues were
acceptable; however, removal of the Clinical Hold was not warranted because the
FDA believed that certain CMC issues had not been satisfactorily
resolved.  In this regard, the FDA communicated concern regarding the
extended storage of Alferon® LDO drug product clinical lots which had been
manufactured from an active pharmaceutical ingredient (“API”) of Alferon N
Injection® manufactured in year 2001.  While the biological
(antiviral) potency of the product had remained intact, we learned through newly
conducted physico-chemical tests (the “new tests” of temperature, pH, oxidation
and light on the chemical stability of the active API), that certain changes in
the drug over approximately nine storage years (combined storage of Alferon N
Injection® plus storage of certain LDO sachets) had introduced changes in the
drug which might adversely influence the human safety profile.  These
“new tests” are part of recent FDA requirements for biological products, such as
interferon, which did not exist at the time of the original FDA approval of
Alferon N Injection® for commercialization and at the time of FDA approval of
the “Establishment License” for Hemispherx’ manufacturing
facility.  Based on the recent FDA request, we have now established
and implemented the “new test” procedures.  As a result, we have found
that certain Alferon N Injection® lots with extended storage (i.e.,
approximately eight to nine years) do appear to demonstrate some altered
physico-chemical properties.  However we have also observed that more
recent lots, including those manufactured beginning in the year 2006, are
superior with respect to the enhanced scrutiny of these tests and, in our view,
could be considered appropriate for clinical trials in the Alferon® LDO sachet
format.  Upon their review, the FDA has been responsive to these new
findings and requested additional stability data on the lots proposed for use in
this clinical study utilizing the new test methods.  These data are
expected to be compiled, analyzed and submitted to the FDA in mid to late
2010.  Once the FDA has received and reviewed the additional data, we
believe that the full Clinical Hold could be thereafter lifted if the FDA
concurs that the data address the outstanding CMC issues cited in the January
2010 FDA recommendations.


24


401(k)
Plan





In December 1995, we
establisheda defined contribution plan, entitled the Hemispherx
Biopharma Employees 401(K) Plan and Trust Agreement (the “401(k)
Plan”).  Full time employees of the Company are eligible to
participate in the 401(K) Plan following one year of
employment.  Subject to certain limitations imposed by federal tax
laws, participants are eligible to contribute up to 15% of their salary
(including bonuses and/or commissions) per annum. Participants' contributions to
the 401(K) Plan may be matched by the Company at a rate determined annually by
the Board of Directors.





Each participant immediately vests in
his or her deferred salary contributions, while Company contributions will vest
over one year.  The 6% Company matching contribution was terminated as
of March 15, 2008 and was reinstated effective January 1, 2010.  The
Company provided matching contributions to each employee for up to 6% of annual
pay aggregating $39,806 for the three months ended March 31, 2010.





Restatement





The
Management’s Discussion and Analysis of Financial Condition and Results of
Operations gives effect to the restatement as discussed in Note 11: Restatement
of the Notes to Consolidated Condensed Financial Statements.





New Accounting
Pronouncements





Refer to
“Note 13: Recent Accounting Pronouncements” 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 Part I; Item 2: “Management's
Discussion and Analysis of Financial Condition and Results of Operations;Critical Accounting Policies” contained in our amended and restatedAnnual Report
on Form 10-K/A-2 for the year ended December 31, 2009.




RESULTS
OF OPERATIONS





Three months ended March 31,
2010 versus three months ended March 31, 2009





Net Loss –
restated





Our net loss as restated was
approximately $5,380,000 for the three months ended March 31, 2010, which was an
increase of $2,293,000 or 74% when compared to the same period in
2009.  This increase in loss for these three months was primarily due
to the following expense elements:





1)
            Research
      and Development costs increased approximately $401,000 or
    25%;





2)
            General
      and Administrative expenses increased approximately $803,000 or
      69%;





3)
            A
      decrease in Production/Cost of Goods Sold of approximately $19,000 or
      16%;


25


4)
            A
      decrease in finance costs of $241,000 from a Standby Finance Agreement
      executed in February 2009; and





5)
            A
      restatement adjustment of $1,336,000 of redeemable warrants. See Note
      11.





Net loss per share as restated was
$0.04 for the current period and for the same period in 2009.




Revenues





Revenues
from our Ampligen® cost recovery program increased $3,000 or 10% for the quarter
in 2010 with approximately the same number of patients participating in the
program.  As previously stated, we have no Alferon N Injection®
product to commercially sell at this time and all revenue was generated from the
Ampligen® cost recovery clinical treatment programs.





Production/Cost of Goods
Sold





Production/Cost
of Goods Sold was approximately $121,000 and $140,000, respectively, for the
three months ended March 31, 2010 and 2009.  This is a decrease of
$19,000 or 16%.  These expenses basically represent the cost to
maintain the Alferon N Injection® and Ampligen® inventory including storage,
stability testing, transport and reporting costs.  The costs are
essentially flat and the increase reflects price increases and charges for the
movement of inventory between locations.





Research and Development
Costs





Overall
Research and Development (“R&D”) costs for the three months ended March 31,
2010 were approximately $1,996,000 as compared to $1,595,000 for the same period
a year ago reflecting a increase of $401,000 or 25%.  The primary
factor for the increase in expenses was related to our preparation of a response
to the November 25,
2009 Complete Response Letter (“CRL”) from the FDA which described specific
additional recommendations related to the Ampligen® NDA along with
R&D costs associated with Alferon® LDO for potential clinical programs and
preparations towards a launch of Alferon N Injection® Phase II clinical
tests.





General and Administrative
Expenses





General and Administrative (“G&A”)
expenses for the three months ended March 31, 2010 and 2009 were approximately
$1,969,000 and $1,166,000, respectively, reflecting an increase of $803,000 or
69%.  The primary cause of this increase in expense was an additional
$769,000 in legal fees associated with our defense in three proceedings (See
Part II – OTHER INFORMATION, ITEM 1. Legal Proceedings) plus minor increases in
other expenses.





Interest and Other
Income





Interest and other income for the three
months ended March 31, 2010 and 2009 was approximately $29,000 and $7,000,
respectively, representing an increase of $22,000.  The primary cause
for the increase of interest income in 2010 was increased funds available for
secure and highly liquid investments.


26


Redeemable
Warrants





Restatement
for a non-cash valuation adjustment of $1,336,000 was made in 2010 due to a
revaluation of redeemable warrants.  See Note 11.





Liquidity and Capital
Resources





Cash used
in operating activities for the three months ended March 31, 2010 was
$3,925,000, compared to $1,424,000 for the same period in 2009, an increase of
$2,501,000 or 176%.  This utilization of cash reflects the increased
expenses in operations as explained in Management’s Discussion and Analysis
section above in conjunction with the impact of 2009’s effort to conserve cash
through implementation of the Employee Wage Or Hours Reduction Program (the
“Program”) implemented January 1 through May 31, 2009 in which all active
full-time employees reduced their base salary from 10% to 50% in return for our
common stock issued six months after the shares were
earned.As of March 31, 2010, we had approximately $50,723,000
in Cash and Cash Equivalents or a decrease of approximately $7,349,000 from
December 31, 2009, of which approximately $3,073,000 was used to purchase
short-term investments.





We have
been using the proceeds from 2009’s financings with the assistance of Rodman & Renshaw, LLC
(“Rodman”) as placement agent and from Fusion Capital Fund II,
LLC (“Fusion Capital”) equity financing to fund operating expenses and
infrastructure growth including preparation for manufacturing, regulatory
compliance and market development costs related to the FDA approval process for
Ampligen®, Alferon N Injection® and Alferon® LDO development.  While
as of September
2009, we had effectively exhausted the Fusion Capital Purchase Agreement through
the purchase of the maximum number of shares that were registered under the
Registration Statement, this agreement was formally terminated through
notification on April 7, 2010.





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.  We are unable to estimate
the amount, timing or nature of future sales of outstanding common stock or
instruments convertible into or exercisable for our common stock.  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, if
needed, 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 $50,723,000 in Cash and Cash Equivalents at March 31,
2010.  In the past, we had invested the excess cash in three to twelve
month interest bearing financial instruments.  However with the
current state of the market and our funds well in excess of our short-term
operational needs, our Board has reassessed our cash investment strategy
consistent with the following objectives:


1.
            to
      preserve, secure and control
capital;


2.
            to
      maintain liquidity to meet our operating cash flow requirements;
      and


27


3.
            to
      maximize return subject to policies and procedures that manage risks with
      respect to a conservative to moderate investment exposure at high credit
      quality institutions.





To
accomplish these goals, in March 2010 we entrusted our investible funds through
external investment managers with detailed investment and trading guidelines
that are analyzed for compliance on an on-going basis.  We have not
entered into, and do not expect to enter into, financial instruments for trading
or hedging purposes.





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
Federal Deposit Insurance Corporation insurance limit.





ITEM
4: Controls and Procedures





Our Chairman of the Board
(serving as the principal executive officer) and the Chief Financial Officer
performed an evaluation of the effectiveness of our disclosure controls and
procedures, which have been designed to permit us toeffectively identify
and timely disclose important information.  In designing and
evaluating the disclosure controls and procedures, Management recognized that
any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objectives,
and Management is required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.  Based on that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that the controls and procedures were effective as of March 31, 2010 to ensure
that material information was accumulated and communicated to our Management,
including our Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required
disclosure.





During
the quarter ended March 31, 2010, we have made no change in our internal
controls over financial reporting that has materially affected, or is
reasonablylikely to
materially affect, our internal controls over financial
reporting.





Part
II – OTHER INFORMATION





ITEM
1. Legal Proceedings





(a)
            Hemispherx
      Biopharma, Inc. v. Johannesburg Consolidated Investments, et al.,U.S.
      District Court for the Southern District of Florida, Case No.
      04-10129-CIV.





In
December, 2004, we filed a multi-count complaint in federal court (Southern
District of Florida) for fraud and injunctive relief against Bioclones, Dr.
Donniger, Bart Goemare, JCI, Brett Kebble and H.C.
Buidentag.  However, a motion to dismiss the complaint, in part on
grounds that the matter must be arbitrated in South Africa, was granted by the
court.  We appealed this decision to the 11th Circuit
Court of Appeals.  In July 2008, while the appeal was pending, we
settled our disputes with both Bioclones and Cyril Donninger and dismissed them
from the lawsuit.  In 2005 Buitendag and Kebble were indicted for
using JCI to perpetrate the largest financial fraud in South African
history.  The appeals court allowed the fraud action to go
forward.  In 2008, we filed a second amended complaint for fraud
against JCI, Goemare, the Estate of Kebble and Buidentag, the only remaining
defendants.  In 2009, we settled our disputes with Goemare and
dismissed him from the lawsuit.  In February of 2010, the Court began
considering the remaining Defendants’(JCI, estate of Kebble, and Buidentag)
motion to dismiss the complaint.  On April 7, 2010, the Court denied
the motion to dismiss and we are awaiting Defendants’ Answer.  We
continue to vigorously prosecute this case and the law firm of Colson Hicks
Eidson is serving as our co-counsel.


28


(b)
            Hemispherx
      Biopharma, Inc. v. MidSouth Capital, Inc., Adam Cabibi, And Robert L.
      Rosenstein v. Hemispherx Biopharma, Inc. and The Sage Group,
      Inc.,Civil Action
      No. 1:09-CV-03110-CAP.





On June
4, 2009, we filed suit in the United States District Court for the Southern
District of Florida against MidSouth Capital, Inc. (“MidSouth”) and its
principals seeking monetary and injunctive relief against MidSouth's tortuous
interference with certain financing transactions in which we were
engaged.  The case was transferred to the Northern District of
Georgia, and we engaged Holland & Knight LLP on November 13, 2009 to serve
as local counsel.  On November 19, 2009, MidSouth answered our
Complaint and filed a Counterclaim against us and The Sage Group, Inc., seeking
to recover between $3,900,000 and $4,800,000 for fees allegedly owed to it as a
result of the same financing transactions, plus attorneys' fees and punitive
damages.





On
January 12, 2010, we filed a Motion for Judgment on the Pleadings with the
Court.  By Order dated March 31, 2010, the Court granted that Motion
in part and denied it in part.  The Court held that MidSouth's claim
based upon an alleged breach of contract could not be
sustained.  Additionally, the Court denied the Motion to dismiss
insofar as it pertained to MidSouth's claims based upon promissory estoppel,
quantum meruit, unjust enrichment, fraud, and MidSouth's request for attorney's
fees and punitive damages.  The Court’s ruling merely held that
MidSouth's pleadings were sufficient to state those claims; it does not
constitute a ruling on the merits.  We are vigorously defending the
remaining counterclaim and prosecuting our own claims against
MidSouth.  Discovery is in a very preliminary
stage.  Accordingly, we have no projection as to the likely outcome of
the case.





(c)
            Cato
      Capital, LLC v. Hemispherx Biopharma, Inc., U.S. District Court for the
      District of Delaware, Case No.
09-549-GMS.





On July
31, 2009, Cato Capital LLC (“Cato”) filed suit asserting that under a November
2008 agreement, we owe Cato a placement fee for certain investment
transactions.  The Complaint seeks damages in the amount of $5,000,000
plus attorneys’ fees.  We filed our Answer on August 20,
2009.  On October 13, 2009, Cato filed a Motion seeking leave to file
an Amended Complaint which proposes that Cato be permitted to add The Sage Group
as an additional defendant and to bring additional causes of action against us
arising from the defenses contained in our Answer and increase the total amount
sought to $9,830,000, plus attorneys’ fees and punitive damages.  We
filed a response objecting to the Motion with disposition of this Motion pending
before the Court.  The law firm of Black and Gerngross is serving as
our local counsel.  We believe we have meritorious defenses and are
vigorously defending against this claim.


29


(d)
            In
      re Hemispherx Biopharma, Inc. Litigation, U. S. District Court for the
      Eastern District of Pennsylvania, Civil Action No.
  09-5262.





Between
November 10, 2009 and December 29, 2009, five putative class actions were filed
against us and our Chief Executive Officer generally asserting that Defendants
misrepresented the status of our New Drug Application (“NDA”) for
Ampligen®.  Each action was purportedly brought on behalf of investors
who purchased our publicly traded securities.  On February 12, 2010,
the Court consolidated the five actions (“Securities Class Action Lawsuit”) and
on February 26, 2010, a consolidated amended complaint was filed, adding our
Medical Director as a Defendant.  On March 12, 2010, we filed a motion
to dismiss the amended complaint, which the Court denied on April 20,
2010.  On April 27, 2010, the Court entered a Case Management Order
directing the parties to begin the Discovery process.





Also in
December 2009 and January 2010, three Shareholder Derivative Complaints were
filed against us and some of our Officers and Directors (“Shareholder Derivative
Lawsuits”).  These suits also allege that the named Defendants caused
us to misrepresent the status of our NDA forAmpligen®.  On February 12, 2010, the Court consolidated the
Securities Class Action Lawsuit with the Shareholder Derivative Lawsuits for
purposes of Discovery and transferred the Shareholder Derivative Lawsuits to the
civil suspense docket.





We intend
to vigorously defend the Securities Class Action Lawsuit and the Shareholder
Derivative Lawsuits.  Due to the preliminary state of the proceedings,
the potential impact of these actions, which seek unspecified damages,
attorneys’ fees and expenses, are uncertain.





(e)
            Summation.





In
reference to Contingencies identified above as (b), (c) and (d), there can be no
assurance that an adverse result in these proceedings would not have a
potentially material adverse effect on our business, results of operations, and
financial condition.  With regards to Contingency (d), we maintain a
Directors and Officers Insurance Policy that provides coverage for claims and
retention of legal counsel.





We have not recorded any loss
contingencies as a result of the above matters for the year ended December 31,
2009 or three months ended March 31, 2010.





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 Form 10-Q.  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®
and related products.  The development of Ampligen®and
our other related products is subject to a number of significant
risks.  Ampligen®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 investigational 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®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.  Please see the next risk factor.


30


Alferon N
Injection®.  Although Alferon N Injection® 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.





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 adversely affected.





All of
our drugs and associated technologies, other than Alferon N Injection®, are
investigational and must receive prior regulatory approval by appropriate
regulatory authorities for commercial distribution and sale and are currently
legally available only through clinical trials with specified
disorders.  At present, Alferon N Injection® 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® for
other indications will require regulatory approval.





Our
products, including Ampligen®, are subject to extensive regulation by numerous
governmental authorities in the United States (“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® or any other proposed
product and receive product revenues or royalties.  We cannot assure
you that Ampligen® will ultimately be demonstrated to be safe or
efficacious.  While Ampligen® is authorized for use in clinical trials
in the U.S. and Europe, 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.  In addition, although Ampligen® has been authorized by the
FDA for treatment use under certain conditions, including provision for cost
recovery, there can be no assurance that such authorization will continue in
effect.





On July
7, 2008, the FDA accepted for review our New Drug Application (“NDA”) for
Ampligen® to treat CFS, originally submitted in October
2007.





On
November 25, 2009, we received a Complete Response Letter (“CRL”) from the FDA
which described specific additional recommendations related to the Ampligen®
NDA.  In accordance with its 2008 Complete Response procedure, the FDA
reviewers determined that they could not approve the application in its present
form and provided specific recommendations to address the outstanding
issues.  We are carefully reviewing the CRL and will seek a meeting
with the FDA to discuss its recommendations.  We intend to take the
appropriate steps to seek approval and commercialization of
Ampligen®.  Most notably, the FDA stated that the two primary clinical
studies submitted with the NDA did not provide credible evidence of efficacy of
Ampligen® and recommended at least one additional clinical study which shows
convincing effect and confirms safety in the target population.  The
FDA indicated that the additional study should be of sufficient size and
sufficient duration (6 months) and include appropriate monitoring to rule out
the generation of autoimmune disease.  In addition, patients in the
study should be on more than one dose regimen, including at least 300 patients
on dose regimens intended for marketing.  Finally, additional data
including a well-controlled QT interval study of the heart’s electrical cycle
and pharmacokinetic evaluations of dual dosage regiments was
requested.  Other items required by the FDA include certain aspects of
Non-Clinical safety assessment and product Quality.  In the
Non-Clinical area, the FDA recommended among other things that we complete
rodent carcinogenicity studies in two species.  As part of the NDA
submission, we had requested that these studies be waived, but the waiver has
not been granted.


31


If we are
unable to generate the additional data required by the FDA or if, for that or
any other reason, Ampligen® 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.





Alferon® LDO is undergoing
pre-clinical testing for possible prophylaxis against
influenza.  While the studies to date have been encouraging,
preliminary testing in the laboratory and in animal models 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 Alferon® as a possible treatment
of any flu requires prior regulatory approval.In October 2009, we
submitted a protocol to the FDA proposing to conduct a Phase 2, well-controlled,
clinical study for the prophylaxis and treatment of seasonal and pandemic
influenza of more than 200 subjects.  Following a teleconference with
the FDA in November 2009, the FDA placed the proposed study on “Clinical Hold”
because the protocol was deemed by the FDA to be deficient in design and because
additional information was required to be submitted in the area of chemistry,
manufacturing and controls (“CMC”).  Thereafter in December 2009, we
submitted additional information by Amendment with respect to both the clinical
protocol design issues and the CMC items.  While the FDA has
acknowledged that our responses to the clinical issues were acceptable, they
have requested additional stability data on the lots proposed for use in
clinical studies utilizing new test methods and the Clinical Hold remains in
effect because the FDA believed that certain CMC issues had not yet been
satisfactorily resolved.  In this regard, the FDA communicated the
additional requirement of testing regarding the extended storage of Alferon® LDO
drug product clinical lots which had been manufactured from an active
pharmaceutical ingredient (“API”) of Alferon N Injection® manufactured in year
2001.  Only the FDA can determine
whether a drug is safe, effective or appropriate for clinical testing or
treating a specific application.  Therefore, no assurance can be given
that the use of our existing inventory will be permitted for use in future
clinical trials.





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 to get our experimental drug, Ampligen®,
approved. As of March 31, 2010, our restated accumulated deficit was
approximately $(209,969,000).  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 March 31, 2010, we had approximately $50,723,000 in
Cash and Cash Equivalents.  Given the harsh economic conditions, we
continue to review every aspect of our operations for cost and spending
reductions to assure our long-term financial stability while maintaining the
resources necessary to achieve our primary objectives of obtaining NDA approval
of Ampligen® and securing a strategic partner.


32


If we are
unable to commercialize and sell Ampligen® or Alferon® LDO and/or recommence and
increase sales of Alferon N Injection® or our other products, we eventually may
need to secure other sources of funding through additional equity or debt
financing or other sources in order to satisfy our working capital needs and/or
complete the necessary clinical trials and the regulatory approval processes on
which the commercialization of our products depends.





Our
ability to raise additional funds from the sale of equity securities is
limited.  In this regard, we only have approximately 32,200,000 shares
authorized but unissued and unreserved.  At our annual stockholders’
meeting held on June 24, 2009, we sought approval of an amendment to our
Certificate of Incorporation to increase the number of authorized shares of
Common Stock from 200,000,000 to 350,000,000.  At this meeting, there
was an insufficient number of votes in favor of the proposal and voting on this
proposal had been left open until September 3, 2009.  We announced on
September 2, 2009 that insufficient votes were obtained for passage of Proposal
No. 3 contained in the proxy for the 2009 Annual Meeting of
Stockholders.  With voting on this proposal as the sole purpose of the
adjourned Stockholders' Meeting scheduled for September 4, 2009, this meeting
was cancelled.  Since the approval was not obtained to increase the
number of authorized shares of Common Stock, the amount of proceeds we may
receive from the sale of our Common Stock is limited.





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 or continue our
operations.





Our Alferon N Injection® Commercial
Sales were halted due to lack of finished goods inventory.





Commercial
sales of Alferon N Injection® were halted in March 2008 as the current
expiration date of our finished goods inventory expired in March 2008. As a
result, we have no product to sell at this time.  We are undertaking a
major capital improvement program, that will continue throughout 2010, to
enhance our manufacturing capability to produce the purified drug concentrate
used in the formulation of Alferon N Injection® at our New Brunswick
facility.  As a result, Alferon N Injection® could be available for
commercial sales in mid to late 2011.  However our agreement with a
third party to formulate, package and label Alferon N Injection® has expired and
we are seeking new vendors to supply this service.  Also, each
production lot of Alferon N Injection® is subject to FDA review and approval
prior to releasing the lots to be sold.  In light of these
contingencies, there can be no assurances that the approved Alferon N Injection®
product will be returned to production on a timely basis, if at all, or that if
and when it is again made commercially available, it will return to prior sales
levels.





Although preliminary in vitro
testing indicates that Ampligen® 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®
is currently being tested as a vaccine adjuvant for H5N1, a pathogenic avian
influenza virus (“HPAIV”) in Japan, where the preclinical data has shown
activity in preventing lethal challenge with the original virus used for
vaccination as well as the other related, but not identical, isolates of H5N1
virus (i.e., cross-reactivity).  The clinical testing phase of
Ampligen® in Japan is expected to begin in 2010.  No assurance can be
given that similar results will be observed in clinical trials.  Use
of Ampligen® in the treatment of flu requires prior regulatory
approval.  Only the FDA or other corresponding regulatory agencies
world-wide can determine whether a drug is safe, effective and appropriate for
treating a specific application.  As discussed above, obtaining
regulatory approvals is a rigorous and lengthy process (see “Our drugs and related technologies
are investigational and subject to regulatory approval.  If we are
unable to obtain regulatory approval, our operations will be significantly
adversely affected” above).


33


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® for a
particular disease in order to obtain exclusive rights for the commercial sale
of Ampligen® for such disease.  We obtained all rights to Alferon N
Injection®, 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 experimental drug,
Ampligen®.  We also have been issued patents on the use of Ampligen®
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® in patients with Chronic Fatigue Syndrome.  We have
not yet been issued any patents in the United States for the use of
AmpligenÒ as a sole
treatment for any of the cancers which we have sought to target.  With
regard to Alferon N Injection®, 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 so.  If we cannot
protect our patents covering the use of our products for a particular disease,
or obtain additional patents, we may not be able to successfully market our
products.





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





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





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





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


34


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.





We
have limited marketing and sales capability.  If we are unable to
obtain additional distributors and our current and future distributors do not
market our products successfully, we may not generate significant revenues or
become profitable.





We have
limited marketing and sales capability.  We are dependent upon
existing and, possibly future, marketing agreements and third party distribution
agreements for our products in order to generate significant revenues and become
profitable.  As a result, any revenues received by us will be
dependent in large part on the efforts of third parties, and there is no
assurance that these efforts will be successful.





Our
commercialization strategy for Ampligen® for ME/CFS may include
licensing/co-marketing agreements utilizing the resources and capacities of a
strategic partner(s).  We continue to seek world-wide marketing
partner(s), with the goal of having a relationship in place before approval is
obtained.  In parallel to partnering discussions, appropriate
premarketing activities will be undertaken.  We intend to control
manufacturing of Ampligen® on a world-wide basis.





We cannot
assure that our U.S. or foreign marketing strategy will be successful 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.  Our inability to
establish viable marketing and sales capabilities would most likely have a
materially adverse effect on us.





There
are no long-term agreements with suppliers of required materials and
services.  If we are unable to obtain the required raw materials
and/or services, we may not be able to manufacture Alferon N Injection® and/or
Ampligen®.





A number
of essential materials are used in the production of Alferon N Injection®,
including human white blood cells.  We do not have, but are working
towards having long-term agreements for the supply 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®.  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®
polymers from raw materials in order to obtain polymers on a more consistent
manufacturing basis.





If we are
unable to obtain or manufacture the required raw materials, we may be unable to
manufactureAlferon N
Injection® and/or Ampligen®.  The costs and availability of products
and materials we need for the production of Ampligen® and the commercial
production of Alferon N Injection® 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.


35


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.





Changes
in methods of manufacturing, including commercial scale-up, may affect the
chemical structure of Ampligen® and other RNA drugs, as well as their safety and
efficacy.  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, or capable of being manufactured
under applicable quality standards, economically, and in commercial quantities,
or successfully marketed.





We
have limited manufacturing experience.





Ampligen®
has been produced to date in limited quantities for use in our clinical trials,
and we are dependent upon a qualified third party supplier for the manufacturing
and packaging 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 may not be adequate for the
production of our proposed products for large-scale
commercialization.  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 Practice (“cGMP”)
requirements.  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® or other products in
commercial quantities at costs acceptable to us.





We have
never produced Ampligen® 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® 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® 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.


36


Our
products may be subject to substantial competition.





Ampligen®.  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 preclinical 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 disease indications in which we plan to address include
Gilead Sciences, Pfizer, Bristol-Myers Squibb, Abbott Laboratories,
GlaxoSmithKline and Merck.  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® on the immune system, we cannot assure that we
will be able to compete.





Alferon N
Injection®.  Our 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® currently competes with Schering’s injectable recombinant alpha
interferon product (INTRON® A) for the treatment of genital warts.  3M
Pharmaceuticals also offer competition from its immune-response modifier,
Aldara®, a self-administered topical cream, for the treatment of external
genital and perianal warts.  In addition, Medigene AG has FDA approval
for a self-administered ointment, Veregen®, which is indicated for the topical
treatment of external genital and perianal warts.  Alferon N
Injection® 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®.  If and
when we obtain additional approvals of uses of this product, we expect to
compete primarily on the basis of product performance.  Our
competitors have developed or may develop products (containing either alpha or
beta interferon or other therapeutic compounds) or other treatment modalities
for those uses.  There can be no assurance that, if we are able to
obtain regulatory approval of Alferon N Injection® 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®.  Currently, our wholesale price on a per unit basis of
Alferon N Injection® 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.


37


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





Ampligen®.  We
believe that Ampligen® 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 15-20% 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 reducing the rate of infusion.  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® in certain clinical situations and therefore, could adversely
affect potential revenues and physician/patient acceptability of our
product.





Alferon N
Injection®.  At present, Alferon N Injection® 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®, 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® which could threaten or
limit such product’s usefulness.





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





We face
an inherent business risk of exposure to product liability claims in the event
that the use of Ampligen® 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.





On
November 28, 2008, we suspended product liability insurance for Alferon N
Injection® and Ampligen®.  In the case of an international emergency
basis sale of Ampligen® or Alferon® LDO, we would require the third-party to
indemnify us.  We concluded that years of successfully addressing the
limited number of product liability claims filed against Ampligen® and Alferon®
LDO, combined with the informed consent and other patient waivers completed as
an element of clinical trials, and the lack of any commercial sales since April
2008, that temporarily discontinuing the liability insurance was an acceptable
risk until we receive regulatory clearance for Ampligen® or Alferon® LDO or
until Alferon N Injection® again becomes available.





Currently,
without product liability coverage for Ampligen®, Alferon N Injection® and
Alferon® LDO, a claim against the products could have a materially adverse
effect on our business and financial condition.





The
loss of services of key personnel including Dr. William A. Carter could hurt our
chances for success.





Our
success is dependent on the continued efforts of our staff, especially certain
doctors and researchers along with 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®, and his knowledge of our overall
activities, including patents and clinical trials.  The loss of the
services of Dr. Carter or other personnel key to our operations, could have a
material adverse effect on our operations and chances for success.  As
a cash conservation measure, we have elected to discontinue the Key Man life
insurance on the life of Dr. Carter.  An employment agreement
continues to exist 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 key personnel or the failure to recruit additional personnel as
needed could have a materially adverse effect on our ability to achieve our
objectives.


38


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.





A
Number of Purported Class Action Lawsuits Have Been Filed Against Us and We May
Be Subject to Civil Liabilities.





A number
of purported class action lawsuits have been filed against us alleging
securities fraud (see“Part II – Other
Information; Item 1. Legal Proceedings”).  The complaints seek
monetary damages, costs, attorneys’ fees, and other equitable and injunctive
relief. Securities class action suits and derivative suits are often brought
against companies following periods of volatility in the market price of their
securities. Defending against these suits, even if meritless, can result in
substantial costs to us and could divert the attention of our
management.





The
existence of these proceedings could have a material adverse effect on our
ability to access the capital markets to raise additional funds. While
management believes that the lawsuits are without merit, we cannot predict or
determine the timing or final outcomes of the lawsuits and are unable to
estimate the amount or range of loss that could result from unfavorable
outcomes.  Adverse results in some or all of these legal proceedings
could be material to our results of operations, financial condition or cash
flows.





Risks
Associated With an Investment in Our Common Stock





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





The
market price of our common stock has been and is likely to be
volatile.  This is especially true given the current significant
instability in the financial markets.  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:





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


39


·
            announcement
      of legal actions against us and/or settlements or verdicts adverse to
      us;


·
            adverse
      reactions to products;


·
            governmental
      approvals, delays in expected governmental approvals or withdrawals
      of  any prior governmental approvals or public or regulatory
      agency comments regarding the safety or effectiveness of our products, or
      the adequacy of the procedures, facilities or controls employed in the
      manufacture of our products;


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


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


·
            announcements
      of technological innovations by us or our
  competitors;


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


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


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


·
            conditions
      and trends in the pharmaceutical and other
  industries;


·
            new
      accounting standards;


·
            overall
      investment market fluctuation;


·
            restatement
      of financial results; and


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





Our
common stock is listed for quotation on the NYSE Amex.  For the 12
month period ended March 31, 2010, the closing price of our common stock has
ranged from $0.45 to $3.75 per share.  We expect the price of our
common stock to remain volatile.  The average daily trading volume of
our common stock varies significantly.





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.   In this regard,
please see “A Number of
Purported Class Action Lawsuits Have Been Filed Against Us and We May Be Subject
to Civil Liabilities” above.





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





In May
2009 we issued an aggregate of 25,543,339 shares and warrants to purchase an
additional 14,708,687 shares under a universal shelf registration
statement.  4,895,000 of these warrants have been exercised as of
March 31, 2010.  Depending upon market conditions, we anticipate
selling 9,813,687 shares pursuant to the conversion of remaining
warrants.





In
addition to the foregoing, we registered with the SEC on September 29, 2009,
1,038,527 shares issuable upon exercise of certain other warrants.  To
the extent the exercise price of our outstanding 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 exercise price of certain of these warrants are adjusted pursuant to
anti-dilution protection, the warrants 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.  In this regard we have registered
$150,000,000 of securities for public sale pursuant to a universal shelf
registration, none of which has been designated or issued.  We are
unable to estimate the amount, timing or nature of future sales of outstanding
common stock or instruments convertible into or exercisable for our common
stock.





Sales of
substantial amounts of our common stock in the public market, including our sale
of securities pursuant to the universal shelf registration statement, 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.


40


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 (“Rights Plan”) and, under
the Rights 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-hundredth 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 5.4% of our
common stock, the Rights Plan’s threshold will be 20%, instead of
15%.  The Rights Plan will expire on November 19, 2012, and may be
redeemed prior thereto at $.01 per Right under certain
circumstances.




Special
Note Regarding Forward Looking Statements





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® 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 revenue.





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





During the quarter ended March 31,
2010, we issued an aggregate of 73,155 shares to consultants and vendors for
services performed.





All of
the foregoing transactions were conducted pursuant to the exemption from
registration provided by Section 4(2) of the Securities Act of 1933 or pursuant
to our Registration Statement on Form S-8.


41


We did
not repurchase any of our securities during the quarter ended March 31,
2010.





ITEM
3:   Defaults upon Senior Securities





None.





ITEM
4:   Removed and Reserved








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


42


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. CarterWilliam
      A. Carter, M.D.Chief
      Executive Officer&
      President/s/Charles T. BernhardtCharles
      T. Bernhardt, CPAChief
      Financial Officer





Date:
February 11, 2011


43