<PAGE>   1
                                 FORM 10-K/A
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

[X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

For the year ended December 31, 1997

                                       OR

[  ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

For the transition period from               to
                               -------------    ------------

Commission file number:  0-15070

                           Alpha 1 Biomedicals, Inc.
                           -------------------------
             (Exact name of registrant as specified in its charter)

<TABLE>
<S>                                                <C>
                 Delaware                                                    52-1253406
-------------------------------------------                 ---------------------------------------------------
(State or other jurisdiction of                                 (I.R.S. Employer Identification Number)
incorporation or organization)
</TABLE>

                      6707 Democracy Boulevard, Suite 111
                         Bethesda, Maryland  20817-1129
                         ------------------------------
          (Address of principal executive offices including zip code)
        Registrant's telephone number, including area code: 301-564-4400
                                                            ------------
          Securities registered pursuant to Section 12(b) of the Act:

<TABLE>
         <S>                                                            <C>
                                                                        Name of each exchange on
         Title of each class                                                  which registered
         -------------------                                         ----------------------------------
                 None                                                              N/A
</TABLE>

          Securities registered pursuant to Section 12(g) of the Act:
                 Common Stock, $.001 par value (Title of Class)
                 -----------------------------


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.

                  Yes      X       No
                     ----------      -------

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]

The approximate aggregate market value of voting stock held by nonaffiliates of
the registrant is $560,000 as of March 6, 1998.*

The number of shares of registrant's Common Stock outstanding as of March 6,
1998:  11,977,429

                    Documents Incorporated by Reference
                    -----------------------------------

Document                                                Form 10-K Part(s)
--------                                                -----------------

None

*The number of shares held by nonaffiliates was determined by excluding from
the number of shares outstanding 1,821,318 shares of Common Stock held by
directors and officers outstanding at March 6, 1998.  Exclusion of shares held
by any person should not be construed to indicate that such person possesses
the power, directly or indirectly, to direct or cause the direction of
management and policies of the registrant, or that such person controls, is
controlled by or is under common control with the registrant.


                                       1

<PAGE>   2
                                     PART I


ITEM 1.  BUSINESS

General

Alpha 1 Biomedicals, Inc. (the "Company" or "Alpha 1") is a pharmaceutical
research and development company focusing on the development of products to
treat a variety of human diseases.  The Company plans to utilize a virtual
product development strategy, which is an approach that will not require it to
maintain its own research and development laboratories or manufacturing
facilities.  The strategy consists of (i) identifying, evaluating and
in-licensing pharmaceutical product opportunities that appear to have
significant commercial potential; (ii) designing preclinical and/or clinical
protocols to test such products; (iii) utilizing third party contract
manufacturers to supply clinical grade material and third party contract
research organizations to perform pre-clinical and/or clinical studies in
accordance with its designed protocols; and (iv) pursuing sublicense
arrangements with established pharmaceutical companies to support late stage
clinical testing and ultimately marketing if regulatory approval is obtained.

At the current time, Alpha 1 employs four individuals.  These employees are
responsible for general corporate activities, product development planning and
the selection and management of the various external resources necessary to
conduct preclinical and clinical studies.  Alpha 1 has no plans to invest in
laboratory or manufacturing infrastructure or to hire personnel to undertake
activities that are generally available from reliable outside suppliers. Alpha
1 believes that this strategy will maximize its ability to allocate resources
rapidly to different projects and reduce risk.

The product development activities of the Company have been substantially
suspended pending receipt of additional financing.

COMMERCIAL DEVELOPMENT -- THYMOSIN ALPHA 1

Alpha 1's first commercial development project focused on a 28 amino acid
peptide, called Thymosin alpha 1, shown to regulate the immune system in animal
models.  The commercial development of this product was licensed to SciClone
Pharmaceuticals, Inc.  ("SciClone") in November 1994, whose trademark for the
product is Zadaxin(R).  SciClone has received regulatory approval to market
Zadaxin Thymosin alpha 1 as a therapy for hepatitis B in three Asian countries
-- the Peoples Republic of China, the Philippines and Singapore, and in two
Latin American countries -- Argentina and Peru.  SciClone has advised the
Company that it has filed for approval to market Zadaxin in 16 additional
countries in Asia, the Middle East and Latin America.

Under the terms of the Company's license agreement with SciClone, the Company
is entitled to receive certain royalties on SciClone's net sales revenue from
licensed products that range from 3% to 7% depending on SciClone's rights in
the country in which the sales occur.  Alpha 1's right to receive royalties
continues at least until September 30, 2002.  If at the end of this eight-year
period the Company has not realized royalty payments in the amount of $35





                                       2
<PAGE>   3
million, then SciClone's royalty obligation will continue until the earlier of
(i) the payment to the Company of royalties aggregating $35 million or (ii)
September 30, 2009.  In 1996, the Company entered into an agreement with
SciClone whereby the Company received a nonrefundable payment of royalties in
the amount of $500,000, which is included in revenues in 1996.  In exchange,
the Company agreed that after royalty payments totaling $1.75 million have been
made, the Company will forgo future royalties, if and when earned, in an amount
equal to $2.5 million.  Approximately $1.3 million, plus accrued interest
thereon, of the first $1.75 million in royalties has been committed by the
Company for repayment to certain vendors.  In August 1997, the Company entered
into a similar agreement with SciClone whereby the Company received $70,000 in
nonrefundable royalty payments and will forgo an additional $700,000 in future
royalties.  This payment has been included in revenues in 1997.

On December 17, 1997, the Company entered into an agreement with SciClone
whereby the Company's rights to receive royalty payments from the future sale
by SciClone and its licensees of Thymosin alpha 1 would be sold to SciClone in
exchange for $130,000 in cash and 444,115 shares of SciClone Common Stock, no
par value per share ("SciClone Common Stock").  The number of shares was
calculated based on a price of $4.053 per share.  If the market price of the
SciClone Common Stock is lower than $4.053 per share when the shares become
available for sale by the Company, the Company is entitled to receive up to
155,885 additional shares.  The Company expects to sell the shares of SciClone
Common Stock in order to fund current operations. Additionally, the Company has
agreed to use the proceeds from the sale of the shares of SciClone common stock
to pay $902,000 of the vendors obligations. The cash realized by the Company
from the sale of the shares will depend on the market price when the shares are
sold.  On March 20, 1998, the market price of the SciClone Common Stock was
$3.25 per share.  At the time of the entry into the agreement, further royalty
payments to the Company based on SciClone's future sales of Zadaxin were
suspended.  The transaction is subject to approval by Alpha 1's shareholders.
In the event shareholder approval is not received, after the Company has been
paid $1.75 million in royalties, royalty payments from SciClone will not resume
until SciClone effects sales of Licensed Products sufficient to generate
cumulative royalties in excess of $6.95 million.  After the royalty payments
resume, the Company is entitled to receive additional royalty payments up to
$28.05 million.  See Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations.

PRODUCT UNDER DEVELOPMENT -- THYMOSIN BETA 4

The Company has established a research program to develop a proprietary peptide
called Thymosin beta 4.  To date, the Company has conducted limited
pharmacology and toxicology testing in animals.  Additional animal testing will
be required before Thymosin beta 4 can be tested in humans.  The continued
development and testing of Thymosin beta 4 is contingent upon the receipt of
substantial additional funding.

Originally isolated from calf thymus, Thymosin beta 4 is a chemically
synthesized copy of a natural human peptide, consisting of 43 amino acid
residues.  Thymosin beta 4 is found in high concentration in blood platelets,
white blood cells and in a majority of other tissues, and has been shown to be
a unique peptide with well-characterized biochemical properties and actions.





                                       3
<PAGE>   4
Thymosin beta 4 is believed to be involved in a wide variety of cellular and
physiological processes as shown by the enhancement of antigen presentation by
macrophages in mice, macrophage migration inhibition in guinea pigs and
phenotypic changes in T-cell lines.  In animal models of septic shock, Thymosin
beta 4 has been shown to reduce death in a dose-dependent manner, presumably by
modulating pathologic mediators of inflammation and cell death.

Biological distribution of Thymosin beta 4 suggests a more general function in
addition to its role as an immune factor.  Thymosin beta 4 is actively involved
in the cellular microfilament system, functioning as an actin sequestering
peptide and potent regulator of actin polymerization in all living eukaryotic
cells.  Actin is an abundant protein and plays a central role in cell structure
and motility.  Research studies published in 1995 and 1997 reported that
Thymosin beta 4 could stimulate human endothelial cell migration and
differentiation in cell culture.  Endothelial cells are the major cell type
responsible for the formation of blood vessels.  Based upon these data, the
Company entered into a Material Transfer - Cooperative Research and Development
Agreement ("MTA-CRADA") with the National Institutes of Health ("NIH") during
the second quarter of 1997.  Under this agreement, the Company will provide an
NIH investigator with Thymosin beta 4 for testing in animal models in a wound
healing study.  In exchange, the Company is entitled to license from the NIH
any patent rights that might result from the research study that relates to the
use of Thymosin beta 4 as a tissue growth and repair factor.  These studies are
currently underway.

PRODUCT DEVELOPMENT RELATING TO THYMOSIN BETA 4

The Company suspended development of Thymosin beta 4 as a treatment for cystic
fibrosis in February 1996.  Since that time, the Company has conducted animal
experiments for the testing of Thymosin beta 4 for the treatment of Adult
Respiratory Distress Syndrome ("ARDS") associated with septic shock.  In March
1997, the Company commenced limited funding of a research contract with a major
United States university to determine the effect of Thymosin beta 4 in a sheep
model of ARDS.  This model is generally recognized as the most relevant animal
model for predicting the efficacy of drug treatments for various pulmonary
conditions, particularly ARDS.  The results of this study did not support the
testing of Thymosin beta 4 in human clinical trials for the treatment of ARDS.
A significant number of additional preclinical research studies would be
required to determine the value of Thymosin beta 4 in the treatment of ARDS.
Currently, the Company has no plans to commence additional studies for this
use.

Product development activities necessary to support the filing of an
Investigational New Drug Application ("IND") for human clinical testing include
(i) manufacturing of preclinical supplies; (ii) pharmacology studies; (iii)
toxicology studies; (iv) manufacture of clinical supplies; and (v) development
of radioimmunoassay for Thymosin beta 4.  The Company does not at present have
sufficient funds to complete these preclinical activities.

All current commercial development activities have been suspended.  Additional
studies will be required to further assess the safety of Thymosin beta 4 in
animals for further assurance of safety in humans.





                                       4
<PAGE>   5
MANUFACTURING

Alpha 1 will manufacture Thymosin beta 4 by contract through qualified outside
sources.  The Company has decided that investment in product development,
rather than investment in manufacturing plants, is prudent especially when the
outcome of clinical trials and likelihood of approval cannot be predicted.
This manufacturing strategy reduces financial risk associated with building a
manufacturing facility and increases the chances for success by relying on
experienced third parties.

Contract manufacturing sites have been identified for the synthesis of the
peptide, production of the bulk pharmaceutical chemical and finished drug.
Contractors are selected on the basis of their supply capability, ability to
produce a drug substance in accordance with current Good Manufacturing Practice
("GMP") requirements and meet Company-established specifications.

COMPETITION

The Company is engaged in a business that is highly competitive.  Research and
development activities for the development of drugs to treat ARDS patients are
being sponsored or conducted by private and public institutions and by major
pharmaceutical companies located in the United States and a number of foreign
countries.  Many of these companies and institutions have financial and human
resources that are substantially greater than those of the Company, and that
have extensive experience in conducting research and development activities and
clinical testing and in obtaining the regulatory approvals necessary to market
pharmaceutical products.

GOVERNMENT REGULATIONS

Regulation by governmental authorities in the United States and foreign
countries will be a significant factor in the manufacture and marketing of the
Company's products and in its ongoing research and product development
activities.  Any product developed by the Company will require regulatory
approval by governmental agencies prior to commercialization.  In particular,
human therapeutic products are subject to rigorous preclinical and clinical
testing and other approval procedures by the U.S. Food and Drug Administration
(the "FDA") and similar health authorities in foreign countries.  Various
federal statutes and regulations also govern or influence the manufacturing,
labeling, storage, record keeping and marketing of such products.  The process
of obtaining these approvals and the subsequent compliance with appropriate
federal statutes and regulations require the expenditure of substantial
resources.  Any failure by the Company to obtain regulatory approval, or any
delay in obtaining such approvals, could adversely affect the marketing of
products being developed by the Company, its ability to receive product or
royalty revenues and its liquidity and capital resources.

Preclinical testing in the laboratory must be conducted to evaluate the
potential efficacy and the safety of the investigational drug.  The results of
these studies are submitted to the FDA as part of an IND, which must be
reviewed and approved before clinical testing can begin. Typically, clinical
evaluation involves a three stage process.  In Phase I, trials are conducted
with a small number of subjects to determine the safety profile, the pattern of
drug distribution and metabolism.  In Phase II, trials are conducted with





                                       5
<PAGE>   6
groups of patients afflicted with a specific disease in order to determine
preliminary efficacy, optimal dosages and expanded evidence of safety.  In
Phase III, large scale, multi-center, comparative trials are conducted with
patients afflicted with a target disease in order to provide enough data for
the statistical proof of efficacy and safety required by the FDA and other
regulatory authorities.

The results of the preclinical and clinical testing with detailed information
on manufacturing are submitted to the FDA in the form of a New Drug Application
("NDA") or a Product License Application ("1PLA") accompanied by an
Establishment License Application ("ELA") for approval to commence commercial
sales.  In responding to an NDA, PLA or ELA, the FDA may grant marketing
approval, request additional information or deny the application if the FDA
determines that the application does not satisfy its regulatory approval
criteria.  Therefore, even if the Company completes Phase III clinical trials
for certain of its products, there can be no assurance that the FDA will grant
marketing approvals, or if granted, that they will be granted on a timely
basis.  If the FDA does approve a product, it may require, among other things,
post-marketing testing, including potentially expensive Phase IV studies, and
surveillance to monitor the safety and effectiveness of the drug.  In addition,
the FDA may in some circumstances impose restrictions on the use of the drug
that may be difficult and expensive to administer.  Product approvals may be
withdrawn if compliance with regulatory requirements are not maintained or if
problems occur after the product reaches the market.

Under the Orphan Drug Act, the FDA may designate a product or products as
having Orphan Drug status to treat "a rare disease or condition" which is a
disease or condition that affects populations of less than 200,000 individuals
in the United States, or, if victims of a disease number more than 200,000, the
sponsor establishes that it does not realistically anticipate its product sales
will be sufficient to recover its costs.  If a product is designated as an
Orphan Drug, then the sponsor is entitled to receive certain incentives to
undertake the development and marketing of the product.  One such incentive is
market exclusivity.  The sponsor that obtains the first marketing for a
designated Orphan Drug for a given indication is eligible to receive marketing
exclusivity for a period of seven years.  There may be multiple designations of
Orphan Drug status for a given drug and for different indications.  However,
only the sponsor of the first approved NDA (or PLA) for a given drug for its
use in treating a given rare disease may receive marketing exclusivity for such
use.  Even if a sponsor of a product for an indication for use with an Orphan
Drug designation is the first to obtain FDA approval of an NDA (or PLA) for
that designation and obtains marketing exclusivity, another sponsor's
application for the same drug product may be approved by the FDA during the
period of exclusivity if the FDA concludes that it is clinically superior.  It
is not known whether any indications for which Thymosin beta 4 might be
developed would qualify for Orphan Drug status.





                                       6
<PAGE>   7
PROPRIETARY RIGHTS

A United States composition of matter patent for Thymosin beta 4, which expires
in 1998, is held by The George Washington University ("GWU").  No corresponding
foreign patent filings were made.  The rights under the U.S. patent have been
licensed by GWU to Hoffmann-La Roche Inc. ("HLR"), which in turn has licensed
the U.S. patent rights to the Company on a sole and exclusive basis.  Under its
license agreement with HLR, the Company is obligated to pay HLR a royalty of 8%
on net sales (excluding sales for research purposes) in the United States until
the expiration of ten years from the date of the first commercial sale.  If,
during this period, the FDA approves Thymosin beta 4 for sale by a competitor,
the royalty due HLR will be reduced to 4%.  HLR is responsible for the royalty
due GWU under the primary license agreement.

Under a research agreement with GWU, the Company has funded Thymosin beta 4
research at GWU and is entitled to a sole and exclusive world-wide license to
any patents that result from such research.  Under the research agreement, the
Company is obligated to pay GWU a royalty of 4% of net sales of Thymosin beta
4.  Pursuant to the research agreement, the Company has exclusive rights to
patent applications filed in the United States and in Europe disclosing the use
of Thymosin beta 4 for the treatment of septic shock and associated syndromes
including ARDS.  Two U.S. patents have issued.  The first patent, No.
5,578,570, entitled "Method of Treating Septic Shock Using Thymosin beta 4,"
issued November 26, 1996; the second patent, No. 5,593,964, entitled "Method of
Treating Septic Shock By Preventing Actin Polymerization," issued on January
14, 1997.

The Company has entered into a Material Transfer Agreement- Cooperative
Research and Development Agreement ("MTA-CRADA") with the National Institutes
of Health ("NIH"), whereby the NIH investigator will use Thymosin beta 4
material provided by the Company in a wound healing study.  In exchange, the
Company is entitled to license from the NIH any patent rights that might result
from the research study that relate to the use of Thymosin beta 4 as a wound
healing treatment.

There is no assurance that any of the pending patent applications, to which the
Company has rights, will result in the issuance of patents or that any patents
issued will not be subject to challenge.  In the case of a claim of patent
infringement, there is no assurance that the Company will be able to afford the
expense of any litigation that may be necessary to enforce its proprietary
rights.

EMPLOYEES

Alpha 1 utilizes a product development strategy that involves contracting out
research, development and manufacturing functions to third parties partially in
order to minimize the expense and overhead associated with the maintenance of
permanent employees and laboratory and manufacturing facilities. Consistent
with this strategy, Alpha 1 currently has a total of four employees.





                                       7
<PAGE>   8
EXECUTIVE OFFICERS

<TABLE>
<CAPTION>
         NAME                              AGE                      POSITION
         ----                              ---                      --------
<S>                                        <C>              <C>
Allan L. Goldstein, Ph.D.                  60               Chairman of the Board

Michael L. Berman, Ph.D.                   48               President, Chief Executive Officer,
                                                            Director

Robert J. Lanham                           57               Vice President and Chief Financial
                                                            Officer, Treasurer and Secretary
</TABLE>


Allan L. Goldstein, Ph.D., Chairman of the Board and Chief Scientific Advisor.
Dr. Goldstein is a founder of the Company and also is Professor and Chairman of
the Department of Biochemistry and Molecular Biology at The George Washington
University School of Medicine and Health Sciences, a position he has held since
1978.  Prior to 1986, Dr. Goldstein served as Chief Executive Officer and
Treasurer of Alpha 1. Dr. Goldstein is currently a part-time employee of Alpha
1 and devotes a portion of his time to the business of the Company.

Michael L. Berman, Ph.D., was elected as President and Chief Executive Officer
of the Company in November 1994.  He joined the Company in early 1994 as Vice
President for new commercial programs.  From 1988 to 1993, Dr. Berman was Vice
President and Scientific Director and then Director of Business Development
with Oncologix, Inc.  He is also a director of Prototek, Inc. and Peptomers,
Inc.

Robert J. Lanham, Vice President and Chief Financial Officer.  Mr. Lanham
joined Alpha 1 in 1987 as Vice President, Finance and Administration and
Corporate Secretary.  He was elected Treasurer in 1989 and has served as Chief
Financial Officer since February 1995.

FORWARD LOOKING STATEMENTS

Any statements which are not actual facts contained in this document are
forward looking statements that involve risks and uncertainties, including but
not limited to, those relating to product demand, pricing, market acceptance,
the effect of economic conditions, intellectual property rights and litigation,
clinical trials, governmental regulations, competitive products, risks in
product and technology development, the results of financing efforts, the
ability to complete transactions and other risks identified in the Company's
Securities and Exchange Commission filings.

ITEM 2.  PROPERTIES

The Company's corporate headquarters are located in Bethesda, Maryland where it
leases approximately 550 square feet of office space.

ITEM 3.  LEGAL PROCEEDINGS

None





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<PAGE>   9
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None





                                       9
<PAGE>   10
                                    PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

The outstanding equity securities of the Company consist of shares of Common
Stock and Class D Warrants.  The Common Stock was initially issued to the
public in 1986 and is traded on the OTC Bulletin Board under the symbol ALBM.
There is no public market for the Class D Warrants.  On February 28, 1997, the
Company's outstanding Class C Warrants expired.

The following table sets forth the high and low bid prices as reported by OTC
Bulletin Board for the Common Stock for the periods indicated.  OTC Bulletin
Board quotations reflect inter-dealer prices, without retail mark-up,
mark-down, or commission, and may not represent actual transactions.

<TABLE>
<CAPTION>
                                  High             Low
                                  ----             ---
<S>                               <C>              <C>
For the year ended
         December 31, 1997:
          First Quarter           $.12             $.08
          Second Quarter          $.13             $.03
          Third Quarter           $.125            $.08
          Fourth Quarter          $.09             $.04


For the year ended
         December 31, 1996:
          First Quarter           $.625            $.125
          Second Quarter          $.4325           $.15625
          Third Quarter           $.25             $.09375
          Fourth Quarter          $.23             $.0625
</TABLE>

As of March 6, 1998, there were approximately 1,150 holders of record of the
Common Stock.

The Company has not paid a dividend on the Common Stock and does not anticipate
that any cash dividends will be paid in the foreseeable future.





                                       10
<PAGE>   11

ITEM 6. SELECTED FINANCIAL DATA

                             SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
BALANCE SHEET DATA                                                         December 31,
                                      --------------------------------------------------------------------------------------------


                                             1997               1996             1995                1994              1993
                                             ----               ----             ----                ----              ----
   <S>                                <C>                 <C>              <C>               <C>                 <C>
   Working capital                    $    (2,082,162)    $  (1,733,049)   $    (256,612)    $     3,273,945     $     13,748,345
   Total assets                                71,858           313,268        1,197,447           4,917,011           17,310,252
   Total noncurrent liabilities                  -                 -                -                371,250              421,151
   Accumulated deficit                    (38,055,927)      (37,260,497)     (35,624,470)        (31,532,273)         (20,225,328)
   Stockholders' equity (deficit)          (2,078,661)       (1,638,231)         (37,204)          3,683,743           14,953,563
</TABLE>





STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                      Year ended December 31,
                                          ---------------------------------------------------------------------------------



                                            1997            1996               1995             1994             1993
                                            ----            ----               ----             ----             ----
<S>                                       <C>           <C>               <C>              <C>              <C>
Revenues                                  $  215,034    $      542,243    $     105,591    $     720,383    $   1,374,751
                                          -----------   ---------------   --------------   --------------   --------------
Expenses
      Cost of sales                             -               -                -               131,875          701,561
      Research and product development        85,695         1,052,352        2,751,744        2,840,814        2,074,080
      General and administrative             784,316           968,568        2,060,891        8,606,641        4,227,066
                                          -----------   ---------------   --------------   --------------   --------------

           Total expenses                    870,011         2,020,920        4,812,635       11,579,330        7,002,707
                                          -----------   ---------------   --------------   --------------   --------------

Operating loss                              (654,977)       (1,478,677)      (4,707,044)     (10,858,947)      (5,627,956)
Equity in loss of VTI                             -              -             (181,026)        (347,455)        (328,750)
Gain on sale of VTI                               -              -              646,628             -                -
Interest expense                            (141,364)         (132,066)            -                -                -
Other (expense) income                           911           (25,284)         149,245         (100,543)         314,072
                                          -----------   ---------------   --------------   --------------   --------------


Net loss                                  $ (795,430)   $   (1,636,027)   $  (4,092,197)   $ (11,306,945)   $  (5,642,634)
                                          ===========   ===============   ==============   ==============   ==============

Basic and diluted net loss
   per common share                       $    (0.07)   $        (0.18)   $       (0.46)   $       (1.26)   $       (0.68)
                                          ===========   ===============   ==============   ==============   ==============
</TABLE>





                                       11
<PAGE>   12
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS

OVERVIEW

The Company was organized to engage in the development of pharmaceutical
products for the treatment of diseases or conditions that arise as the result
of immune system disorders, chronic viral infections, cancer and autoimmune
disease.  Since it was founded in 1982 and through mid-1994, the primary focus
of the Company was on efforts to commercialize Thymosin alpha 1 as a treatment
for various disease indications or as a vaccine adjuvant.  During this period,
the Company's resources were primarily devoted to the evaluation of Thymosin
alpha 1 as a treatment for chronic hepatitis B.  In April 1994, the results of
the Company's Phase III multicenter clinical trial for this indication were
analyzed.  These results did not show a statistically significant difference
between the response of the treatment group and the placebo group.  This led
the Company to conclude that, without further testing, the results of the Phase
III trial would not support an NDA to the U.S. Food and Drug Administration for
approval of Thymosin alpha 1 as a sole treatment for chronic hepatitis B.
Further testing, in the view of the Company, would be needed to support an NDA
and would require a commitment of resources beyond its financial capacity.

During 1995, the Company refocused its research efforts to Thymosin beta 4.
Research activities and preclinical studies were initiated and accelerated
based on anticipated cash resources that the Company expected to materialize
through a proposed merger.  In anticipation of the merger and the cash that was
to become available, the Company commenced placing orders for the conduct of
research studies and for the purchase of Thymosin beta 4 material.  In January
1996, the Company learned of the issuance of a U.S.  patent such that the
commercialization of Thymosin beta 4 as a mucolytic for the treatment for
cystic fibrosis would potentially infringe the claims of this patent.
Following an unsuccessful attempt to obtain a license to this patent, the
merger agreement was terminated.

TRANSACTIONS WITH SCICLONE

In August 1994, the Company entered into a license agreement (the "New License
Agreement") with SciClone Pharmaceuticals, Inc.  ("SciClone") which superseded
the original license agreement (the "Original License Agreement") between the
parties entered into in 1990.  Under the agreement, the Company granted to
SciClone an exclusive license to the Company's patent and other proprietary
rights with respect to Thymosin alpha 1 to develop, test, make, use and sell
Thymosin alpha 1 and products containing Thymosin alpha 1 for all human and
animal therapeutic and diagnostic uses.  The license covers all countries of
the world, except for several countries where the rights to Thymosin alpha 1
are held by other licensees of the Company.

In consideration for the license, the Company is entitled to receive a royalty
on SciClone's net sales revenue from Licensed Products that ranges from 3% to
7% depending on whether SciClone's rights in the country in which the sales
occur were acquired under the New SciClone License Agreement or the Original
SciClone License Agreement and on whether SciClone has patent protection or
comparable market exclusivity in such country.  The Company's right to receive





                                       12
<PAGE>   13
royalties continues until September 30, 2002.  If at the end of such period the
Company has not realized royalty payments of at least $35 million, then
SciClone's royalty obligation will continue until the earlier of (i) the
payment to the Company of royalties aggregating $35 million or (ii) September
30, 2009.

In 1996, the Company entered into an agreement with SciClone, whereby the
Company received a nonrefundable payment of royalties in the amount of
$500,000.  In exchange, the Company agreed that, after additional royalty
payments totaling $1.75 million have been made, the Company will forgo future
royalties, if and when earned, in an amount equal to $2.5 million.  In August
1997, the Company entered into a similar agreement with SciClone whereby the
Company received $70,000 in nonrefundable royalty payments and will forgo an
additional $700,000 in future royalties.

Under the New SciClone License Agreement, the decision whether to continue the
commercial development of Thymosin alpha 1 is at the sole discretion of
SciClone.  While the Company understands that SciClone is continuing with its
efforts to commercialize Thymosin alpha 1 and has announced receipt of licenses
to market Thymosin alpha 1 in several countries, there is no assurance either
that SciClone will be successful or as to the amount of the royalty payments
that the Company would receive based on SciClone's commercial sales.

On December 17, 1997, the Company entered into a Alpha Rights Acquisition
Agreement (the "Acquisition Agreement") with SciClone, pursuant to which the
Company has agreed to sell to SciClone its right to receive from SciClone
royalties on the future sales of Thymosin alpha 1.  In exchange, the Company
will receive a combination of cash and shares of SciClone common stock.  The
transaction is subject to the approval of the stockholders of the Company as
well as approval from creditors holding at least 90% of the Company's financial
obligation.

Under the Acquisition Agreement, the Company will relinquish its rights to
future royalties, effective as of the date of the Acquisition Agreement.  In
addition, Alpha will assign to SciClone (i) all patents held by the Company
with respect to Thymosin alpha 1 and (ii) all of the Company's rights and
obligations under licenses with third parties pursuant to which the Company has
acquired rights to Thymosin alpha 1 (subject to all required consents of such
third-party licensors).  In exchange, the Company will receive $130,000 in cash
and 444,115 shares of SciClone common stock (the "Initial Shares"), calculated
based on an average price of $4.053 per share over a period preceding the date
of the Acquisition Agreement (the "Initial Average Price").  In addition, on
each of 12 consecutive monthly Lock-Up Release Dates, the Company will be
entitled to receive additional shares of SciClone common stock (the "Additional
Shares") which, when added to the applicable fraction of the number of Initial
Shares, cannot exceed 600,000 shares, if the average of the closing sale prices
per share of the SciClone common stock on such Lock-Up Release Date and each
prior Lock-Up Release Date is less than the Initial Average Price.  On March
20, 1998, the market price of the SciClone common stock was $3.25 per share.

Both the Initial Shares and the Additional Shares will be subject to resale
restrictions, as provided for in a Stock Rights Agreement between the Company





                                       13
<PAGE>   14
and SciClone to be entered into at the closing.  Under the Stock Rights
Agreement, (i) SciClone will agree to file a registration statement (the
"Registration Statement") under the Securities Act of 1933, as amended, that
will register both the Initial Shares and the Additional Shares for resale by
the Company and (ii) the Company will agree that, commencing with the 30-day
period beginning on the effective date of the Registration Statement and during
each of the next eleven 30-day periods thereafter (the first day of each such
period being referred to as a "Lock-Up Release Date"), it will limit its resale
(A) of Initial Shares to a number equal to 1/12 of the total number Initial
Shares and (B) of Additional Shares to a number equal to 50,000, minus the
number of Initial Shares sold during the period.

Because the future price of SciClone common stock cannot be known, neither the
number of Additional Shares, if any, received by the Company, nor the proceeds
that the Company would realize from the sale of the Initial Shares and the
Additional Shares, if any, is determinable at this time.

To assist the Company in funding its operations pending the closing of the
transaction and prior to the effectiveness of the Registration Statement,
SciClone has agreed in the Acquisition Agreement to loan to the Company up to
$280,000 as follows: (i) $70,000 on the sixty-first calendar day following the
date of the Acquisition Agreement, (ii) $70,000 on the later of (A) the
ninety-first calendar day following the date of the Acquisition Agreement and
(B) the first business day following the closing, and (iii) $70,000 on the
business day in each of the next two months corresponding to the business day
of the loan referred to in clause (ii), if such corresponding business day
precedes the effective date of the Registration Statement (collectively, the
"Advances").  The obligation of the Company to repay the Advances will be
evidenced by a Promissory Note and Security Agreement.  Any advances are
non-interest bearing. Advances will be secured by Initial Shares having a
market value equal to the principal amount of the loans.  The Company will be
required to repay Advances in monthly installments of $70,000, commencing on
the earlier of (i) the ninth Lock-Up Release Date and (ii) the Lock-Up Release
Date following any date on which the Company receives new equity financing of
at least $500,000, and in any event the Advances will be due and payable in
full no later than May 31, 1999.  If the transaction does not close for any
reason, SciClone will be credited with a prepayment of $700,000 in future
royalties (effective after SciClone has made royalty payments to the Company
totaling $1.75 million) with respect to the $70,000 Advance made in
anticipation of the closing, in lieu of the obligation of the Company to repay
the Advance.  Based on the receipt of funds available through the Acquisition
Agreement prior to shareholder approval of the agreement, the Company has
sufficient resources to fund operations to the middle of the second quarter of
1998.

The Company intends to submit the transaction with SciClone to its stockholders
for approval at the Company's next annual meeting, which will be held as soon
as practicable.  Approval of the transaction requires the affirmative vote of
the holders of a majority of the outstanding shares of the Company's Common
Stock, as well as approval from creditors holding at least 90% of the Company's
financial obligation.  In the event shareholder approval is not received, after
the Company has been paid $1.75 million in royalties, royalty payments from
SciClone will not resume until SciClone effects sales of Licensed Products
sufficient to generate cumulative royalties in excess of





                                       14
<PAGE>   15
$6.95 million.  After the royalty payments resume, the Company is entitled to
receive additional royalty payments up to $28.05 million.

The Company will account for the SciClone Transaction based upon the fair value
of the consideration received, which is more readily determinable than the fair
value of the Company's right to receive royalty payments from the future sales
by SciClone and its licensees of Thymosin alpha 1.  The Company will record at
the Closing Date a gain on the SciClone Transaction in the amount as the sum of
(i) $130,000 of cash received, (ii) the fair market value of the 444,115
Initial Shares received, determined by reference to the closing market price
per share of SciClone Common Stock at the Closing Date as reported by the
Nasdaq Stock Market, and (iii) the intrinsic value of the Company's right to
receive Additional Shares of SciClone Common Stock, subject to a maximum of
155,885 Additional Shares, if the market value of SciClone Common Stock if
below $4.053 per share during the Lock-Up Periods.  The intrinsic value, which
approximates fair market value, of the right to receive Additional Shares of
SciClone Common Stock will be determined by reference to the closing market
price per share of SciClone Common Stock at the Closing Date as reported by the
Nasdaq Stock Market.  Because the future price of the SciClone Common Stock
cannot be known, the total gain on the SciClone Transaction is indeterminable
at this time.

Subsequent to the Closing Date, the Company will classify the SciClone Common
Stock as available-for-sale for financial reporting purposes.  To the extent
that the subsequent market value of the SciClone Common Stock is above or below
the market value on the Closing Date, the Company will record the SciClone
Common Stock at fair market value and will record the unrealized gain or loss,
respectively, net of tax, as a component of stockholders' equity until
realized.

To the extent that the subsequent market value of the SciClone Common Stock is
above or below the market value on the Closing Date, the Company will record
the right to receive Additional Shares of SciClone Common Stock at its
intrinsic value, which approximates fair market value, and will record the
unrealized loss or gain, respectively, net of tax, as a component of
Stockholders' equity until realized.  Based upon the terms of the Acquisition
Agreement, the maximum intrinsic value of the Company's right to receive
additional shares is $467,655.  On the date the Company receives Additional
Shares, if any, the Company will record the Additional Shares received at the
then fair market value and will reduce the right to receive Additional Shares
of SciClone Common Stock by a corresponding amount.

As a consequence of the New SciClone License Agreement, the Company is no
longer engaged in the commercial development of Thymosin alpha 1.  It is the
Company's current intention, subject to the receipt of the necessary financing,
to focus on the prospects for the commercialization of Thymosin beta 4, an
actin-binding peptide to which the Company holds certain proprietary rights.

The Company continues to pursue strategic alliances or other partnership
arrangements with entities interested in and with resources to develop Thymosin
beta 4, or other business transactions which would allow the Company to
generate resources to permit continuation of the Company's operations.





                                       15
<PAGE>   16
RESULTS OF OPERATIONS

Revenues for the year ended December 31, 1997 were $215,034 as compared to
$542,243 for the year ended December 31, 1996, and $105,591 for the year ended
December 31, 1995.

Revenues in 1997 consisted of (i) royalty payments totaling $69,104 from
SciClone, (ii) $70,000 in a nonrefundable advanced royalty payment from
SciClone received in exchange for an agreement by the Company to forego
$700,000 in possible future royalty payments, and (iii) payments totaling
$75,930 primarily for consulting services.  Revenues in 1996 consisted of
royalty payments totaling $17,243, a nonrefundable royalty payment of $500,000
received in exchange for an agreement by the Company to forgo $2.5 million in
possible future royalty payments, and a payment of $25,000, all of which was
received from SciClone.  Revenues in 1995 were primarily the results of product
sales and related consulting services to SciClone.

Expenses in 1997 totaled $870,011, as compared to $2,020,920 in 1996 and
$4,812,635 in 1995.  The decrease in expenses in 1997 from 1996 primarily
reflects the effects of the Company substantially suspending research
activities and the effect of an expense reduction program initiated during
early 1996.  The expense reduction program included termination of all ongoing
research and development activities, a reduction of leased spaced, a reduction
of certain salaries and the severance of administrative staff.  The Company now
employs a staff of three.  The decrease in expenses in 1996 from 1995 was
attributable primarily to the initiation of the expense reduction program in
1996, which included the closing of the Company's Sunnyvale, California
facility.

The net effect of operating activities was a net operating loss of $654,977 in
1997 as compared to net operating losses of $1,478,677 in 1996 and $4,707,044
in 1995.

Other (expense) income for each of the three years primarily reflects changes
recorded as a result of fluctuation in the value of short term investments.

During 1995, the Company sold its 50% interest in Viral Technologies, Inc.
("VTI") and recorded a gain on the sale of $646,628.  Equity losses of VTI for
1995 reflect payments to VTI for the conduct of clinical activities of
$181,026.

Interest expenses for 1997 and 1996 were $141,364 and $132,066, respectively,
representing amounts due under the terms of the vendor letter agreements with
certain major vendors.

CAPITAL RESOURCES AND LIQUIDITY

Since its inception in 1982, the Company's activities have consisted of
conducting research and development, sponsoring clinical trials of its
proprietary products, the construction and equipping of laboratory and
production facilities, and the manufacture of products for research, testing
and clinical trials.  The Company's accumulated deficit of $38,055,927 through
December 31, 1997 has been primarily funded by the proceeds from the issuance





                                       16
<PAGE>   17
of equity securities (and interest earned on such funds), the licensing of
technology developed or acquired by the Company and limited product sales.

The Company has delayed its development program for Thymosin beta 4, and has no
products that have received regulatory approval.  The Company has not generated
significant revenues from operations and does not anticipate generating product
revenues for the foreseeable future.  The Company will require substantial
funding in order to re-activate and conduct its research and development
activities and to manufacture and market the products which the Company intends
to develop.

During 1997, revenues consisted of consulting services and royalty income.
These revenue sources are substantially below the level required to cover fully
the Company's expenses or to provide adequate cash flow.  During March and June
1997, the Company concluded a private placement of five Units consisting of
Common Stock and Class D Warrants from which the Company received $250,000.
Each Unit consists of 500,000 shares of Common Stock and 165,000 Class D
Warrants each having an exercise price of $0.10 per warrant and a term of ten
years.  The proceeds of the offering were used in part to conduct preclinical
animal studies at a major United States university using Thymosin beta 4 and to
fund operations.  The Company currently believes, based on its existing
resources, that it will have sufficient cash to sustain its operations to the
second quarter of 1998.  If additional financing cannot be obtained prior to
that time, the Company likely will be forced to discontinue operations.

In July 1997, the Company received an unsecured $50,000 loan from an individual
to provide additional operating capital.  The terms of the loan agreement
provide for repayment of principal and interest within six months with interest
at the rate of 8% per annum.  Additionally, the noteholder received a warrant
to purchase 100,000 shares of the Company's Common Stock at $.13 per share, the
fair market value of the Company's Common Stock at the date of the grant. The
warrant has a five-year term.  During January 1998, the term note was extended
to provide for payments to be made in five consecutive equal monthly
installments, beginning January 1998.  In consideration of the extended payment
term, the noteholder received an additional 41,666 warrants at the same terms
as the original warrants.

In October 1997, the Company received an unsecured loan of $60,000 from ViroPro
Pharmaceuticals, Inc. ("ViroPro").  The demand note provides for repayment of
principal on demand, but no earlier than April 14, 1998, and bears interest at
the rate of 8%.  ViroPro and the Company had discussions through December 1997
regarding the possibility of a business combination.  There have been no
discussions since that time.

As a result of the termination of research and development activities during
1996, the Company canceled research orders with certain vendors.  The Company
was able to cancel approximately $1,200,000 of work on outstanding orders of
approximately $2,700,000.  Management entered into separate letter agreements
with four vendors, which in the aggregate totaled $1,323,000, to defer payment
in exchange for a commitment to the vendors of revenues received by the Company
in the future under the SciClone license agreement until the full amounts of
the liabilities have been liquidated.  In the event that sufficient funding is
obtained for the Thymosin beta 4 program, all amounts then due





                                       17
<PAGE>   18
would become payable immediately.  During 1997, $137,200 of interest was
accrued with respect to the vendor agreements.

In January and February 1998, the Company entered into amended agreements with
the four vendors, subject to the completion of the pending transaction with
SciClone, which will accelerate payments due.  In consideration for the
acceleration of payments, the vendors have agreed to reduce the Company's
aggregate obligation, including accrued interest, to $902,000, which the
Company has agreed to pay from the proceeds of the sale of the shares of
SciClone common stock received under the Alpha 1 Acquisition Agreement.

Cash balances at December 31, 1997 were $21,369.  Current cash balances will be
sufficient to sustain operations to the second quarter of 1998.  In the event
that substantial funding is not obtained, or the SciClone transaction is not
completed, the Company likely will be forced to discontinue operations.

On March 4, 1998, the Company entered into an agreement with Aurora Capital
Corporation pursuant to which Aurora will provide the Company with advisory and
investment banking services, including the identification of potential merger
or acquisition candidates and analysis of possible deal structures.  However,
there is no assurance that the Company's efforts, or those on behalf of the
Company by Aurora, will be successful.

The effect of inflation and changing prices on the continuing operations of the
Company is not expected to be significant.

NEW ACCOUNTING STANDARDS

Effective December 31, 1997, the Company retroactively adopted Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128") for
all periods presented.  This statement established new standards for computing
and presenting earnings per share ("EPS").  This standard replaced Accounting
Principles Board Opinion No. 15 ("APB 15") presentation of "primary EPS" with
"basic EPS," computed as income available to common stockholders divided by the
weighted average number of common shares outstanding during the period.  SFAS
128 also requires dual presentation of basic and diluted EPS on the face of the
income statement for entities with complex capital structures.  Diluted EPS is
computed similarly to "fully diluted EPS," as defined in APB 15.  In addition,
the statement requires a reconciliation of the numerator and denominator of the
basic to diluted EPS.  The adoption of SFAS 128 did not affect the Company's
previously reported net loss per share amounts.

In June 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" and
No. 131, "Disclosures about Segments of an Enterprise and Related Information."
These statements are effective for 1998.  The Company does not believe the
adoption of these statements will have a significant impact on its reporting
and disclosure requirements.

In July 1996, the Emerging Issues Task Force provided guidance which requires
that internal and external costs specifically associated with modifying
software for the Year 2000 should be expensed as incurred.  The Company
believes its computer systems are Year 2000 compliant and, accordingly, does
not believe modifications to its systems will be necessary.





                                       18
<PAGE>   19
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Financial Statements begin on the following page.

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

None.





                                       19
<PAGE>   20

                       REPORT OF INDEPENDENT ACCOUNTANTS


To the Board of Directors and Stockholders
Alpha 1 Biomedicals, Inc.


In our opinion, the accompanying balance sheets and the related statements of
operations, of stockholders' equity (deficit) and of cash flows present fairly,
in all material respects, the financial position of Alpha 1 Biomedicals, Inc.
at December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.  These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on the financial statements based on
our audits.  We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement.  An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis for the
opinion expressed above.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern.  As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency that raise substantial doubt about its ability
to continue as a going concern.  Management's plans in regard to these matters
are also described in Note 1.  The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.


PRICE WATERHOUSE LLP


Washington, DC
March 6, 1998





                                       20
<PAGE>   21
                            ALPHA 1 BIOMEDICALS, INC.

                                 BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                               December 31,        December 31,
                                                                                                  1997                1996
                                                                                                  ----                ----
<S>                                                                                         <C>                  <C>
ASSETS

Current assets
       Cash and cash equivalents                                                            $       21,369       $      153,725
       Prepaid insurance                                                                            46,988               61,048
       Other current assets                                                                           -                   3,677
                                                                                            ---------------      ---------------

                 Total current assets                                                               68,357              218,450

Fixed assets, net                                                                                    1,304                6,344
Due from related party, net of allowance                                                             2,197               72,643
Other assets                                                                                          -                  15,831
                                                                                            ---------------      ---------------

                 Total assets                                                               $       71,858       $      313,268
                                                                                            ===============      ===============

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current liabilities
       Accounts payable                                                                     $      276,215       $      165,084
       Accrued expenses                                                                            408,801              463,393
       Notes payable                                                                               110,000                 -
       Letter agreements with vendors                                                            1,290,503            1,323,022
       Deferred revenue                                                                             65,000                 -
                                                                                            ---------------      ---------------

                 Total current liabilities                                                       2,150,519            1,951,499
                                                                                            ---------------      ---------------


Stockholders' equity (deficit)
       Preferred stock, $.001 par value per share,
        1,000,000 authorized; no shares issued                                                        -                    -
       Common stock, par value $.001 per share,
        20,000,000 shares authorized; 11,977,429 and
         9,102,429 issued and outstanding, respectively                                             11,977                9,102
       Additional paid-in capital                                                               35,965,289           35,613,164
       Accumulated deficit                                                                     (38,055,927)         (37,260,497)
                                                                                            ---------------      ---------------

                 Total stockholders' equity (deficit)                                           (2,078,661)          (1,638,231)
                                                                                            ---------------      ---------------

                 Total liabilities and stockholders' equity (deficit)                       $       71,858       $      313,268
                                                                                            ===============      ===============
</TABLE>



   The accompanying notes are an integral part of these financial statements.





                                       21
<PAGE>   22
                            ALPHA 1 BIOMEDICALS, INC.

                            STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                        Year ended
                                                                       December 31,
                                                  -------------------------------------------------------

                                                       1997                1996              1995
                                                       ----                ----              ----
<S>                                              <C>                 <C>                 <C>
Revenues
      Royalties                                  $     139,104       $     517,243       $        4,902
      Product sales                                       -                   -                  11,750
      Consulting                                        75,930              25,000               79,839
      Other                                               -                   -                   9,100
                                                 --------------      --------------      ---------------

Total revenues                                         215,034             542,243              105,591
                                                 --------------      --------------      ---------------

Expenses
      Research and product
       development                                      85,695           1,052,352            2,751,744
      General and administrative                       784,316             968,568            2,060,891
                                                 --------------      --------------      ---------------

Total expenses                                         870,011           2,020,920            4,812,635
                                                 --------------      --------------      ---------------

Operating loss                                        (654,977)         (1,478,677)          (4,707,044)
Equity in loss of VTI                                     -                   -                (181,026)
Gain on sale of VTI                                       -                   -                 646,628
Interest expense                                      (141,364)           (132,066)              -
Other (expense) income                                     911             (25,284)             149,245
                                                 --------------      --------------      ---------------

Net loss                                         $    (795,430)      $  (1,636,027)      $   (4,092,197)
                                                 ==============      ==============      ===============

Basic and diluted net loss per common share      $       (0.07)      $       (0.18)      $        (0.46)
                                                 ==============      ==============      ===============
</TABLE>





   The accompanying notes are an integral part of these financial statements.





                                       22
<PAGE>   23
                            ALPHA 1 BIOMEDICALS, INC.

                            STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                                 Year ended
                                                                                                December 31,
                                                                            ----------------------------------------------------
                                                                                  1997              1996               1995
                                                                                  ----              ----               ----
<S>                                                                         <C>               <C>                 <C>
Cash flows from operating activities:
       Net loss                                                             $     (795,430)   $  (1,636,027)      $  (4,092,197)

Adjustments to reconcile net loss to net cash used in
      operating activities:
             Depreciation                                                            5,040           12,517              47,947
             Amortization                                                              -             64,672             258,686
             Allowance for related party receivable                                 69,674              -                   -
             Equity in losses of VTI                                                   -                -               181,026
             Litigation settlement in common stock                                     -            (60,000)            200,000
             Loss on disposal/writedown of fixed assets                                -             26,969              32,703
             Loss on short term investments                                            -             34,028              37,091
             Sale of short term investments                                            -            250,510           3,425,406
             Changes in operating assets and liabilities:
                  Decrease in prepaid insurance                                     14,060           69,903              22,259
                  Decrease in other current assets                                   3,677           12,076             206,260
                  Decrease in due from related party                                   772            7,953              28,504
                  Decrease (increase) in other assets                               15,831           (1,221)             73,300
                  Increase (decrease) in accounts payable                          111,131          (92,967)           (128,904)
                  Increase (decrease) in accrued expenses                           50,408         (453,207)            301,537
                  (Decrease) increase in letter agreements with vendors            (32,519)       1,323,022                 -
                  Increase in deferred revenue                                      65,000              -                   -
                                                                            ---------------   --------------      --------------

Net cash (used in) provided by operating activities                               (492,356)        (441,772)            593,618
                                                                            ---------------   --------------      --------------

Cash flows from investing activities:
       Advances to VTI                                                                 -                -              (181,026)
       Proceeds from the sale of fixed assets                                          -             13,700             120,500
                                                                            ---------------   --------------      --------------

Net cash provided by (used in) investing activities                                    -             13,700             (60,526)
                                                                            ---------------   --------------      --------------

Cash flows from financing activities:
       Proceeds from issuance of common stock/warrants                             250,000           35,000                 -
       Increase in notes payable                                                   110,000              -                   -
                                                                            ---------------   --------------      --------------

Net cash provided by financing activities                                          360,000           35,000                 -
                                                                            ---------------   --------------      --------------

Net (decrease) increase in cash and cash equivalents                              (132,356)        (393,072)            533,092

Cash and cash equivalents at beginning of period                                   153,725          546,797              13,705
                                                                            ---------------   --------------      --------------

Cash and cash equivalents at end of period                                  $       21,369    $     153,725       $     546,797
                                                                            ===============   ==============      ==============
</TABLE>



   The accompanying notes are an integral part of these financial statements.





                                       23
<PAGE>   24
                            ALPHA 1 BIOMEDICALS, INC.

                  STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)


<TABLE>
<CAPTION>
                                        Common stock               Additional                             Total
                               ---------------------------------    paid-in         Accumulated      stockholders'
                                   Shares           Amount          capital           deficit       equity (deficit)
-----------------------------------------------------------------------------------------------------------------
<S>                             <C>              <C>          <C>             <C>                <C>
Balance, December 31, 1994       8,977,429        $    8,977   $  35,207,039   $    (31,532,273)  $    3,683,743
                                               
Expiration of stock options          -                    -          371,250               -             371,250
Net loss                             -                    -              -           (4,092,197)      (4,092,197)

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

Balance, December 31, 1995       8,977,429             8,977      35,578,289        (35,624,470)         (37,204)
                                               
Issuance of common stock           125,000               125          34,875               -              35,000
Net loss                              -                   -             -            (1,636,027)      (1,636,027)

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

Balance, December 31, 1996       9,102,429             9,102      35,613,164        (37,260,497)      (1,638,231)
                                               
Issuance of common stock         2,875,000             2,875         352,125               -             355,000
Net loss                              -                   -             -              (795,430)        (795,430)

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

Balance, December 31, 1997      11,977,429        $   11,977   $  35,965,289   $    (38,055,927)  $   (2,078,661)

==================================================================================================================
</TABLE>



   The accompanying notes are an integral part of these financial statements.





                                       24
<PAGE>   25
                           ALPHA 1 BIOMEDICALS, INC.

                         NOTES TO FINANCIAL STATEMENTS

NOTE 1 - ORGANIZATION AND BUSINESS

Organization and Nature of Operations

Alpha 1 Biomedicals, Inc. (the "Company"), a Delaware corporation, was
incorporated in 1982.  The Company operates predominantly in a single industry
segment, the biotechnology industry, which consists of researching and
developing new pharmaceutical products for the treatment of diseases or
conditions that arise as a result of immune system disorders, including chronic
viral infections, cancer and autoimmune disease.

Since early 1996, the Company has substantially halted its development program
and all other research and has no products that have received regulatory
approval.  During 1997, the Company entered into a Material Transfer Agreement-
Cooperative Research and Development Agreement ("MTA-CRADA") with the National
Institutes of Health ("NIH"), whereby the NIH investigator will use Thymosin
beta 4 material provided by the Company in a wound healing study.  In exchange,
the Company may license from the NIH any patent rights that might result from
the research study that relate to the use of Thymosin beta 4 as a wound healing
treatment.  To date, no data from the research has been released since the
study has not been completed.  The Company has not generated significant
revenues from operations and does not anticipate generating product revenues
for the foreseeable future.  The Company will require substantial funding in
order to re-activate and conduct its research and development activities and to
manufacture and market the products which the Company intends to develop.
Management plans to continue to pursue strategic alliances or other partnership
arrangements with entities interested in and with resources to develop Thymosin
beta 4, or other business transactions which would allow the Company to
generate resources to assure continuation of the Company's operations.

Cash and short-term investment balances at December 31, 1997 total $21,369.
This amount, based on the Company's commitments, was insufficient to satisfy
current requirements beyond January 1998.  In that regard, on December 17,
1997, the Company entered into a Alpha Rights Acquisition Agreement (the
"Acquisition Agreement") with SciClone Pharmaceuticals, Inc. ("SciClone"),
pursuant to which the Company has agreed to sell to SciClone its right to
receive from SciClone royalties on the future sales of Thymosin alpha 1.  In
exchange, the Company will receive a combination of cash and shares of SciClone
common stock.  The transaction is subject to the approval of the stockholders
of the Company.

The Company currently licenses to SciClone, on an exclusive basis, all of the
Company's patent and proprietary rights with respect to Thymosin alpha 1.
Under the license, SciClone has the right to develop, test, make, use and sell
Thymosin alpha 1 and products containing Thymosin alpha 1 for all human and
animal therapeutic and diagnostic uses (collectively, "Licensed Products").  In
consideration for the license, the Company is entitled to receive from SciClone
royalties on the sale by SciClone of Licensed Products that range from 3% to 7%
of SciClone's net sales revenues, depending upon the date the





                                       25
<PAGE>   26
license in a particular country was obtained by SciClone and on whether
SciClone has patent protection in the country in which the Licensed Products
are sold.

Under the Acquisition Agreement, the Company will relinquish its future rights
to royalties, effective as of the date of the Acquisition Agreement.  In
addition, Alpha will assign to SciClone (i) all patents held by the Company
with respect to Thymosin alpha 1 and (ii) all of the Company's rights and
obligations under licenses with third parties pursuant to which the Company has
acquired rights to Thymosin alpha 1 (subject to all required consents of such
third-party licensors).  In exchange, the Company received on the date of the
Acquisition Agreement, a cash payment of $65,000 and received a payment of an
additional $65,000 during January 1998.  If the transaction contemplated by the
Acquisition Agreement does not close for any reason, SciClone will be credited
with a prepayment of future royalties in an amount equal to $130,000 (less
royalties foregone by the Company following the date of the Acquisition
Agreement), multiplied by a factor of ten, effective after SciClone has made
royalty payments to the Company totaling $1.75 million.

Upon the closing of the transaction, the Company will receive 444,115 shares of
SciClone common stock (the "Initial Shares"), which number of shares has been
calculated based on an average of a price of $4.053 per share over a period
preceding the date of the Acquisition Agreement (the "Initial Average Price").
In addition, on each of 12 consecutive monthly Lock-Up Release Dates, the
Company will be entitled to receive additional shares of SciClone common stock
(the "Additional Shares") which, when added to Initial Shares, cannot exceed
600,000 shares, if the average of the closing sale prices per share of the
SciClone common stock on such Lock-Up Release Date and each prior Lock-Up
Release Date is less than the Initial Average Price.

Both the Initial Shares and the Additional Shares will be subject to resale
restrictions, as provided for in a Stock Rights Agreement between the Company
and SciClone to be entered into at the closing.  Under the Stock Rights
Agreement, (i) SciClone will agree to file a registration statement (the
"Registration Statement") under the Securities Act of 1933, as amended, that
will register both the Initial Shares and the Additional Shares for resale by
the Company and (ii) the Company will agree that, commencing with the 30-day
period beginning on the effective date of the Registration Statement and during
each of the next eleven 30-day periods thereafter (the first day of each such
period being referred to as a "Lock-Up Release Date"), it will limit its resale
(A) of Initial Shares to a number equal to 1/12 of the total number Initial
Shares and (B) of Additional Shares to a number equal to 50,000, minus the
number of Initial Shares sold during the period.

Because the future price of SciClone common stock cannot be known, neither the
number of Additional Shares, if any, received by the Company, nor the proceeds
that the Company would realize from the sale of the Initial Shares and the
Additional Shares, if any, is determinable.

To assist the Company in funding its operations pending the closing of the
transaction and prior to the effectiveness of the Registration Statement,
SciClone has agreed in the Acquisition Agreement to loan to the Company up to
$280,000 as follows: (i) $70,000 on the sixty-first calendar day following the
date of the Acquisition Agreement, (ii) $70,000 on the later of (A) the





                                       26
<PAGE>   27
ninety-first calendar day following the date of the Acquisition Agreement and
(B) the first business day following the closing, and (iii) $70,000 on the
business day in each of the next two months corresponding to the business day
of the loan referred to in clause (ii), if such corresponding business day
precedes the effective date of the Registration Statement (collectively, the
"Advances").  The obligation of the Company to repay the Advances will be
evidenced by a Promissory Note and Security Agreement.  Any advances are
non-interest bearing. Advances will be secured by Initial Shares having a
market value equal to the principal amount of the loans.  The Company will be
required to repay Advances in monthly installments of $70,000, commencing on
the earlier of (i) the ninth Lock-Up Release Date and (ii) the Lock-Up Release
Date following any date on which the Company receives new equity financing of
at least $500,000, and in any event Advances will be due and payable in full no
later than May 31, 1999.  If the transaction does not close for any reason,
SciClone will be credited with a prepayment of $700,000 in future royalties
(effective after SciClone has made royalty payments to the Company totaling
$1.75 million) with respect to the $70,000 Advance made in anticipation of the
closing, in lieu of the obligation of the Company to repay the Advance.  Based
on the receipt of funds available through the Acquisition Agreement prior to
shareholder approval of the agreement, the Company has sufficient resources to
fund operations to the second quarter of 1998.

The Company intends to submit the transaction with SciClone to its stockholders
for approval at the Company's next annual meeting, which will be held as soon
as practicable.  Approval of the transaction requires the affirmative vote of
the holders of a majority of the outstanding shares of the Company's Common
Stock as well as approval from creditors holding at least 90% of the Company's
financial obligation. In the event shareholder approval is not received, after
the Company has been paid $1.75 million in royalties, royalty payments from
SciClone will not resume until SciClone effects sales of Licensed Products
sufficient to generate cumulative royalties in excess of $6.95 million.  After
the royalty payments resume, the Company is entitled to receive additional
royalty payments up to $28.05 million.

The Company will account for the SciClone Transaction based upon the fair value
of the consideration received, which is more readily determinable than the fair
value of the Company's right to receive royalty payments from the future sales
by SciClone and its licensees of Thymosin alpha 1.  The Company will record at
the Closing Date a gain on the SciClone Transaction in the amount as the sum of
(i) $130,000 of cash received, (ii) the fair market value of the 444,115
Initial Shares received, determined by reference to the closing market price
per share of SciClone Common Stock at the Closing Date as reported by the
Nasdaq Stock Market, and (iii) the intrinsic value of the Company's right to
receive Additional Shares of SciClone Common Stock, subject to a maximum of
155,885 Additional Shares, if the market value of SciClone Common Stock if
below $4.053 per share during the Lock-Up Periods.  The intrinsic value, which
approximates fair market value, of the right to receive Additional Shares of
SciClone Common Stock will be determined by reference to the closing market
price per share of SciClone Common Stock at the Closing Date as reported by the
Nasdaq Stock Market.  Because the future price of the SciClone Common Stock
cannot be known, the total gain on the SciClone Transaction is indeterminable
at this time.





                                       27
<PAGE>   28
Subsequent to the Closing Date, the Company will classify the SciClone Common
Stock as available-for-sale for financial reporting purposes.  To the extent
that the subsequent market value of the SciClone Common Stock is above or below
the market value on the Closing Date, the Company will record the SciClone
Common Stock at fair market value and will record the unrealized gain or loss,
respectively, net of tax, as a component of stockholders' equity until
realized.

To the extent that the subsequent market value of the SciClone Common Stock is
above or below the market value on the Closing Date, the Company will record
the right to receive Additional Shares of SciClone Common Stock at its
intrinsic value, which approximates fair market value, and will record the
unrealized loss or gain, respectively, net of tax, as a component of
Stockholders' equity until realized.  Based upon the terms of the Acquisition
Agreement, the maximum intrinsic value of the Company's right to receive
additional shares is $467,655.  On the date the Company receives Additional
Shares, if any, the Company will record the Additional Shares received at the
then fair market value and will reduce the right to receive Additional Shares
of SciClone Common Stock by a corresponding amount.

During 1995, the Company refocused its research efforts to Thymosin beta 4.
Research activities and preclinical studies were initiated and accelerated
based on anticipated cash resources that the Company expected to materialize
through a proposed merger.  In anticipation of the merger and the cash that was
to become available, the Company commenced placing orders for the conduct of
research studies and for the purchase of Thymosin beta 4 material totaling
$2,704,000.  In January 1996, the Company learned of the issuance of a U.S.
patent such that the commercialization of Thymosin beta 4 as a mucolytic for
the treatment for cystic fibrosis would potentially infringe the claims of this
patent.  Following an unsuccessful attempt to obtain a license to this patent,
the merger agreement was terminated by mutual agreement.

If the SciClone Transaction is completed, the Company's sole source of cash,
absent a new financing, will be the sale of the SciClone Common Stock.  Based
on its current cash flow projections, the Company believes that the proceeds
from the SciClone Transaction will provide it with sufficient funds to continue
as a going concern into the fourth quarter of 1998.  This projection is
dependent upon the price of the SciClone Common Stock remaining at or above
$3.00 per share.  Should the price of SciClone Common Stock decline below that
price or should unforeseen financial needs arise, the period for which the
Company should be able to continue in operation using the proceeds of the
SciClone Transaction would be shortened.

As a result of the termination of research and development activities during
1996, the Company canceled research orders with certain vendors.  The Company
was able to cancel approximately $1,200,000 of work on outstanding orders of
approximately $2,700,000.  Management entered into separate letter agreements
with four vendors, which in the aggregate totaled $1,323,000, to defer payment
in exchange for a commitment to the vendors of revenues received by the Company
in the future under the license agreement with SciClone until the full amounts
of the liabilities have been liquidated.  In the event that sufficient funding
is obtained for the Thymosin beta 4 program, all amounts then due would become
payable immediately.





                                       28
<PAGE>   29
In January and February 1998, the Company entered into amended agreements with
the four vendors, subject to the completion of the pending transaction with
SciClone, which will accelerate payments due.  In consideration for the
acceleration of payments, the vendors have agreed to reduce the Company's
aggregate obligation, including accrued interest, to $902,000, which the
Company has agreed to pay from the proceeds of the sale of the shares of
SciClone common stock received under the Alpha 1 Acquisition Agreement.

The Company continues to pursue strategic alliances or other partnership
arrangements with entities interested in and with resources to develop Thymosin
beta 4, or other business transactions which would allow the Company to
generate resources to permit continuation of the Company's operations.

In this regard, on March 4, 1998, the Company entered into an agreement with
Aurora Capital Corporation pursuant to which Aurora will provide the Company
with advisory and investment banking services, including the identification of
potential merger or acquisition candidates and analysis of possible deal
structures.  However, there is no assurance that the Company's efforts, or
those on behalf of the Company by Aurora, will be successful.

Should the Company obtain substantial additional funding, other factors
including competition, dependence on third parties, uncertainty regarding
patents, protection of proprietary rights, manufacturing of peptides and
technology obsolescence could have a significant impact on the Company and its
operations.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of estimates in preparation of financial statements

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of expenses during the reporting
period.  Actual results could differ from those estimates.  Estimates are used
when accounting for research projects, depreciation and amortization, asset
write-downs, employee benefit plans and income taxes.

Cash, cash equivalents and short term investments

Cash and cash equivalent balances at December 31, 1997 consisted solely of
cash.  Cash and cash equivalent balances at December 31, 1996 consisted of
highly liquid U.S. government and U.S. government-backed securities with
original maturities of ninety days or less.

Investment in Viral Technologies, Inc. ("VTI") joint venture

The Company sold its investment in VTI during 1995.  During the period prior to
such sale, the Company followed the equity method of accounting for the
investment (Note 4).





                                       29
<PAGE>   30
Fixed assets

Fixed assets are stated at cost less accumulated depreciation.  Expenditures
for maintenance and repairs which do not significantly prolong the useful lives
of the assets are charged to expense.  Depreciation is computed using the
straight-line method over estimated useful lives of two to ten years, or over
the term of the lease (Note 5).

Letter agreements with vendors

During 1996, the Company entered into four separate letter agreements with
research companies which allows the Company to defer payments of current
obligations (see Note 1).  The four letter agreements may be due on demand, but
stipulate that a percentage of future royalties received from SciClone will be
used to pay down their obligation.  Approximately $1,100,000 of the letter
agreements accrue interest at an annual rate of 12%.  Total accrued interest at
December 31, 1997 is $269,300.  In January and February 1998, the Company
entered into amended agreements with the four companies, subject to the
completion of the pending transaction with SciClone, which will accelerate
payments due.  In consideration for the acceleration of payments, the vendors
have agreed to reduce the Company's aggregate obligation, including accrued
interest, to $902,000, which the Company has agreed to pay from the proceeds of
the sale of the shares of SciClone common stock received under the Acquisition
Agreement.

Proprietary rights

Proprietary rights, which consisted of costs of rights purchased (Note 3) and
patents obtained, have been amortized, on a straight-line basis, over periods
up to 15 years (based on the estimated useful lives of the rights and patents
acquired).  All such rights became fully amortized during 1996.

Revenue Recognition

The Company recognizes royalties as revenue when received from SciClone.  The
Company recognizes advanced royalties as revenue when an advance royalty
agreement has been entered into with SciClone and the advanced royalty payment
has been received.  The advance royalties are non-refundable, do not require
future services from the Company and are not contingent upon the outcome of
future events.  The Company recognizes consulting revenue as the consulting
services are performed.

Research and development

Research and development costs are expensed as incurred.  Research and
development performed by third parties is expensed based upon the third party's
stage of product development.

Income taxes

The Company accounts for income taxes using the asset and liability approach
(SFAS No. 109 "Accounting for Income Taxes") which requires the recognition of
deferred tax assets and liabilities for the expected future tax consequences of
temporary differences between the carrying amounts and tax bases of assets and





                                       30
<PAGE>   31
liabilities.  A valuation allowance is recorded if, based upon the evidence
available, it is more likely than not that some portion or all of the deferred
tax assets will not be realized.

Fair value of financial instruments

The estimated fair values of the Company's cash and cash equivalents, due from
related party, accounts payable, letter agreements with vendors, accrued
expenses and notes payable approximate their carrying values, due to their
short-term nature.

Basic and diluted loss per share

Effective December 31, 1997, the Company retroactively adopted Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128") for
all periods presented.  This statement established new standards for computing
and presenting earnings per share ("EPS").  This standard replaced Accounting
Principles Board Opinion No. 15 ("APB 15") presentation of "primary EPS" with
"basic EPS," computed as income available to common stockholders divided by the
weighted average number of common shares outstanding during the period.  SFAS
128 also requires dual presentation of basic and diluted EPS on the face of the
income statement for entities with complex capital structures.  Diluted EPS is
computed similarly to "fully diluted EPS," as defined in APB 15.  In addition,
the statement requires a reconciliation of the numerator and denominator of the
basic to diluted EPS.  The adoption of SFAS 128 did not affect the Company's
previously reported net loss per share amounts.

Reconciliation of the numerator and denominator for basic net loss per common
share and diluted net loss per common share are shown below (amounts in
thousands, except for per share amounts).

<TABLE>
<CAPTION>
                                               Income (Loss)            Shares                Per Share
                                                (Numerator)          (Denominator)              Amount
                                                -----------          -------------            ---------
<S>                                                <C>                   <C>                  <C>
1995 Per Share Reconciliation:
    Net loss per common share                      ($4,092)               8,977               ($0.46)
    Options                                                                 *
                                                   --------               -----               -------
    Diluted                                        ($4,092)               8,977               ($0.46)
                                                   ========               =====               =======

1996 Per Share Reconciliation:
    Net loss per common share                      ($1,636)               9,069               ($0.18)
    Options                                                                 *
                                                   --------               -----               -------
    Diluted                                        ($1,636)               9,069               ($0.18)
                                                   ========               =====               =======

1997 Per Share Reconciliation:
    Net loss per common share                      ($795)                10,880               ($0.07)
    Options                                                                 *
    Warrants                                                                *
                                                   ------                ------               -------
    Diluted                                        ($795)                10,880               ($0.07)
                                                   ======                ======               =======
</TABLE>


*  The Company's common stock equivalent shares are not included in the
calculation of diluted net loss per share as their effect is antidilutive.





                                       31
<PAGE>   32
NOTE 3 - PROPRIETARY RIGHTS AND LICENSES

Under a series of license agreements entered into since 1982 with Hoffmann-La
Roche, Inc. and its foreign affiliate ("HLR") and with The George Washington
University ("GWU"), the Company acquired certain proprietary rights to Thymosin
alpha 1 both in the United States and a number of foreign countries.  In 1994,
the Company expanded the scope of its exclusive sublicense to SciClone, of the
Company's rights with respect to Thymosin alpha 1, to cover all countries
(other than Italy, Spain, Portugal and Korea, which became subject of the
exclusive license by subsequent amendment to the SciClone License Agreement)
(Note 1).  Under the SciClone license agreement, SciClone is responsible for
payment on behalf of the Company of all royalties due to HLR, GWU and the
University of Texas (from which HLR acquired certain rights to Thymosin alpha
1).

The Company holds the proprietary rights to Thymosin beta 4 in the United
States under the license from HLR pursuant to which the Company is obligated to
pay HLR a royalty of 8% on commercial sales (or 4% of commercial sales, if the
FDA has approved Thymosin beta 4 for sale by a competitor) until the expiration
of ten years from the date of the first commercial sale.  The Company also has
a worldwide license to certain uses of Thymosin beta 4 under a research
agreement with GWU under which the Company is obligated to pay GWU a royalty of
4% on commercial sales.

NOTE 4 - RELATED PARTIES

Viral Technologies, Inc.

In April 1986, the Company sold 50% of its right, title and interest in a newly
developed technology which may be useful in the diagnosis, prevention and
treatment of Acquired Immune Deficiency Syndrome ("AIDS") to CEL-SCI
Corporation ("CEL-SCI"), a publicly held company.  Simultaneously with the sale
of the technology, the Company entered into a joint venture with CEL-SCI
whereby each party contributed its interests in the technology and $10,000 in
cash to Viral Technologies, Inc. ("VTI"), a newly created corporation, in
exchange for a 50% interest each in VTI.

In November 1995, as a result of the Company's decision to concentrate its
efforts on Thymosin beta 4 technology, the Company sold its 50% interest in VTI
to CEL-SCI for which the Company received 159,170 shares of CEL-SCI common
stock and recorded a gain on the sale of $646,628, the fair market value of the
shares received based upon the quoted market price of the CEL-SCI common stock
on the date of sale.  As of December 31, 1995, the Company had sold 80,000 of
the CEL-SCI shares realizing net proceeds of $259,387.  During the first
quarter of 1996, the remaining 79,170 shares were sold realizing net proceeds
of $250,510.

Prior to the sale of its investment in VTI in 1995, the Company recognized
$181,026 in 1995 in VTI losses as a result of funds provided for operations.

Note Due from Related Party

In 1994, the Company entered into a note receivable agreement with Allan
Goldstein, Chairman of the Board of Directors, covering a loan of $149,000 due





                                       32
<PAGE>   33
December 30, 1994, which accrued interest at the prime rate calculated monthly.
The loan was repaid on January 1, 1995, in part with the proceeds of an
unsecured second loan to Dr. Goldstein from the Company in the amount of
$115,617.  The second loan has an interest rate of 11.5% and was to be repaid
in 36 equal monthly installments. In February 1996, the terms of the loan were
amended to provide for the suspension of installment payments for 12 months,
but with interest continuing to accrue.  In March 1997 and December 1997, the
terms of the loan were further amended to suspend installment payments an
additional nine and twelve months, respectively, with interest continuing to
accrue.  Currently, installment payments are suspended until December 1998, at
which time the loan will be repayable in 12 equal monthly installments.  As of
December 31, 1997, the outstanding balance on the loan was $69,674 and was
fully reserved as a doubtful collection.

Dr. Goldstein currently serves the Company as Chief Science Advisor and
receives a salary at the rate of $36,000 per year.  In addition to his
employment with the Company, Dr. Goldstein is also Chairman of the Department
of Biochemistry and Molecular Biology at GWU.  The Company has not funded any
research personally conducted by Dr. Goldstein, and anticipates that any future
funding, if any, will also be limited to research projects performed by
principal investigators at GWU other than Dr. Goldstein.  Payments made under
the research agreement totaling $196,079 were made during the year ended
December 31, 1995.  No funding was provided during 1996 or 1997.

NOTE 5 - BALANCE SHEET INFORMATION

Fixed assets consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                                                  December 31,
                                                                      --------------------------------
                                                                            1997                  1996
                                                                      ----------         -------------
         <S>                                                          <C>     <C>        <C>        <C>
         Furniture and equipment                                      $        40        $          40
         Leasehold improvements                                                -                     -
                                                                      -----------        -------------
                                                                               40                   40
         Less accumulated depreciation                                         39                   34
                                                                      -----------        -------------
                                                                      $         1        $           6
                                                                      ===========        =============
</TABLE>

Accrued expenses consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                                                  December 31,
                                                                      --------------------------------
                                                                            1997                  1996
                                                                      ----------         -------------
         <S>                                                          <C>                <C>       <C>
         Interest                                                     $       271        $         132
         Litigation settlement                                                -                    105
         Research projects                                                    -                     36
         Other                                                                138                  190
                                                                      -----------        -------------
                                                                      $       409        $         463
                                                                      ===========        =============
</TABLE>





                                       33
<PAGE>   34
NOTE 6 - NOTES PAYABLE AND STOCKHOLDERS' EQUITY

Common Stock and Warrants

During 1997, the Company completed a private placement of Units in which it
sold a total of five Units at a price of $50,000 per Unit.  Each Unit consisted
of (i) 500,000 shares of Common Stock and (ii) 165,000 Class D Warrants, each
of which is exercisable to purchase one share of Common Stock at an exercise
price of $0.10 per share and has a term of 10 years.

In January 1993, the Company announced its intention to redeem all outstanding
Class B Warrants and in connection therewith reduced the exercise price of the
Class B Warrants from $12.00 to $10.00 per share and augmented the
consideration to be received upon the exercise of each Class B Warrant by
including a Class C Warrant in addition to one share of Common Stock.  During
1993, substantially all of the Class B Warrants had been redeemed.   During
March 1993, the remaining Class B Warrants expired unexercised.  The Class C
Warrant entitled the holder to purchase one share of Common Stock at a price of
$19.00.  On February 28, 1997, all Class C Warrants expired unexercised.

Notes Payable and Warrants

During October 1997, the Company received a $60,000 unsecured loan under a
Promissory Note Agreement bearing interest of 8% per annum.  The note is due
April 14, 1998.  Additionally, during July 1997, the Company received a $50,000
unsecured loan from an individual to provide additional operating capital.  The
terms of the loan agreement provided for repayment within six months with
interest at the rate of 8% per annum.  Additionally, the noteholder received a
warrant to purchase 100,000 shares of the Company's Common Stock at $0.13 per
share.  The warrant has a term of five years.  In January 1998, the terms of
the note were amended to provide for monthly repayment of the loan in equal
amounts from January through June 1998.  In consideration of the amended terms,
the noteholder received an additional warrant to purchase 41,666 shares of the
Company's Common Stock at $.13 per share with a term of five years.

A warrant to purchase 20,000 shares of the Company's Common Stock was issued in
February 1995 in settlement of a suit filed against the Company.  The warrant
has an exercise price of $1.00 per share.  On February 2, 1998, the warrant
expired.

Shareholders Rights Plan

In April 1994, the Board of Directors adopted a Shareholders Rights Plan,
pursuant to which it declared a dividend distribution of one Preferred Stock
Purchase Right (Right) for each outstanding share of Common Stock.  The
dividend distribution was payable to stockholders of record at the close of
business April 29, 1994.

The Rights can become exercisable only if a person or group acquires more than
25% of the Common Stock or announces a tender offer the consummation of which
would result in ownership by a person or group of more than 25% of the Common
Stock.  Each Right would then entitle the holder to purchase one-thousandth
(1/1,000) of a share of a new series of preferred stock at an exercise price of
$16.00.





                                       34
<PAGE>   35
If the Company is acquired in a merger or other business combination
transaction with, or a significant portion of the Company's business is
acquired by, a person or group that has acquired more than 25% of its
outstanding Common Stock, each Right will entitle its holder (other than such
person or group or any of their affiliates or associates) to purchase, at the
then-current exercise price of the Right, a number of the acquiring company's
common shares having a value that is twice such exercise price.  In addition,
if a person or group acquires more than 25% of the Company's outstanding Common
Stock, each Right will entitle its holder (other than such person or group or
any of their affiliates or associates) to purchase, at the then-current
exercise price of the Right, a number of shares of Common Stock having a market
value that is twice such exercise price.

Prior to the time that the Rights become exercisable, they are redeemable at
the option of the Board of Directors at a redemption price of $0.01 per Right.
The Board of Directors is required to redeem the rights in the event of an
all-cash tender offer for all of the outstanding shares of the Common Stock
that meets certain requirements.  The Rights will expire on April 29, 2004.

Stock Option Plans

STOCK BASED COMPENSATION

The Company accounts for stock based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees," and related interpretations.  Under
APB No. 25, compensation cost is measured as the excess, if any, of the quoted
market price on the Company's Common Stock at the date of the grant over the
exercise price of the quoted market price on the Company's Common Stock at the
date of the grant over the exercise price of the option granted.  Compensation
cost for stock options, if any, is recognized ratably over the vesting period.
Generally, the Company's policy is to grant options with an exercise price
equal to the quoted market price of the Company's Common Stock on the grant
date.  The Company has adopted the disclosure only provisions of Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock Based
Compensation."  The fair value accounting requirement of SFAS No. 123 would not
have a material effect on the Company's net loss and basic and diluted net loss
per share.

INCENTIVE STOCK OPTION PLAN

The Company has an Incentive Stock Option Plan established in 1986, and since
amended from time to time, under which options to purchase shares of Common
Stock of the Company may be granted by the Company to any employee.  All
options granted under the Plan are exercisable at a price equal to the fair
market value of the Common Stock on the date of the grant.  The Plan authorizes
the issuance of up to 1,500,000 shares of Common Stock.

1987 NON-QUALIFIED STOCK OPTION PLAN

The 1987 Non-Qualified Stock Option Plan was adopted by the Board of Directors
and approved by the stockholders in 1987.  The Plan provides for grants of





                                       35
<PAGE>   36
stock options to any employee.  The Plan authorizes the issuance of up to
1,000,000 shares of Common Stock.

DIRECTORS STOCK OPTION PLAN

The Directors Stock Option Plan was adopted by the Board of Directors and
approved by the stockholders in 1987.  Under the Plan, options to purchase
10,000 shares of Common Stock are granted automatically to each person who
becomes a director after April 10, 1987 and who, at the time such person
becomes a director, is not an employee of the Company.  Options granted under
the Plan have an exercise price per share equal to the fair market value of the
Common Stock on the date of the grant.  In 1992, the Plan was amended, with the
approval of stockholders at the 1992 Annual Meeting (i) to add an automatic
annual grant to each non-employee director of an option to purchase 5,000
shares of Common Stock if the individual is reelected as a Director at the
Annual Meeting, and (ii) to increase to 200,000 the number of shares of Common
Stock issuable under the Plan.  Options granted under the Plan have a ten-year
term and become exercisable in 20% increments beginning on the date of the
grant and on each anniversary date thereafter.

OPTIONS OUTSTANDING AND EXERCISABLE

The following table summarizes the Company's stock option activity for 1995,
1996 and 1997:

<TABLE>
<CAPTION>
                                        Number of                 Exercise                 Weighted Average
                                         Shares                 Price Range                Exercise Price
<S>                                    <C>                   <C>                               <C>
Options outstanding
    December 31, 1994                    772,507              $0.44 to $16.25                   $7.00
Options granted                        1,350,000              $0.44 to $0.69                    $0.46
Options terminated                       486,834              $1.00 to $16.25                   $5.07
                                         -------              ---------------                   -----
                                                                                                     
Options outstanding                                                                                  
    December 31, 1995                  1,635,673              $0.44 to $16.25                   $2.18
Options terminated                     1,246,000              $0.44 to $16.25                   $0.46
                                       ---------              ---------------                   -----
                                                                                                     
Options outstanding                                                                                  
    December 31, 1996                    389,673              $0.53 to $16.25                   $7.16
Options granted                        1,388,120              $       0.13                      $0.13
                                       ---------              ---------------                   -----
                                                                                                     
Options outstanding                                                                                  
    December 31, 1997                  1,777,793              $0.13 to $16.25                   $1.79
                                       =========                                                      
</TABLE>





                                       36
<PAGE>   37
The following table summarizes information about the options outstanding at
December 31, 1997:

<TABLE>
<CAPTION>
                     -------------Options Outstanding-----------  ----Options Exercisable-----
                                          Weighted-
                                          Average          Weighted                      Weighted
                                          Remaining        Average                       Average
Range of Exercise         Number          Contractual      Exercise       Number         Exercise
     Prices            Outstanding        Life (Years)     Price       Outstanding       Price
---------------------------------------------------------------------------------------------------
<S>     <C>              <C>                 <C>          <C>           <C>               <C>    
                                                                                                 
$0.13                    1,388,120           9.0           $0.13        1,388,120          $0.13 
$0.53 -  $1.375            136,673           6.6           $0.77          132,673          $0.78 
$6.25 -  $8.125             37,500           1.6           $6.88           37,500          $6.88 
$9.50 -  $10.50            107,000           4.1           $9.77          107,000          $9.77 
$14.00 - $16.25            108,500           4.5          $14.64          108,500         $14.64 
                           -------                                        -------                
                         1,777,793                                      1,773,793                
                         =========                                      =========                
</TABLE>


At December 31, 1997, 1,773,793 options, with an average exercise price of
$1.79 per share, were exercisable.  At December 31, 1996, 381,375 options, with
an average exercise price of $7.15, were exercisable.  At December 31, 1995,
354,548 options, with an average exercise price of $7.75, were exercisable.  At
December 31, 1997, 335,306 shares were available for future grants.

In January 1997, the Company granted 1,388,120 options which became fully
vested during 1997.

In October 1995, the Company granted 1,245,000 options with vesting contingent
upon shareholder approval of a proposed merger transaction (Note 1).
Subsequent to December 31, 1995, these options were canceled due to the
termination of the merger on February 8, 1996.

NOTE 7 - EMPLOYEE BENEFIT PLANS

The Company maintains a 401(k) retirement plan whereby the Company matches a
portion of the employees' salary reduction contributions. Company contributions
to the plan were $3,284 and $21,152 in 1996 and 1995, respectively.  During
February 1996, the Company ceased to make contributions to the plan and,
accordingly, did not make contributions to the plan during 1997.

NOTE 8 - INCOME TAXES

Deferred tax assets are comprised of the following (in thousands):

<TABLE>
<CAPTION>
                                                                 December 31,            December 31,
                                                                     1997                    1996
                                                              -------------------      -------------------
         <S>                                                    <C>                     <C>
         Net operating loss carryforwards                       $     15,327            $       14,934
         Capital loss                                                    216                       166
         Research and development tax credit                             614                       611
         Other                                                            79                       163
                                                                -------------           ---------------
                                                                      16,236                    15,874
         Valuation allowance                                         (16,236)                  (15,874)
                                                                -------------           ---------------
         Net deferred tax assets                                $         --            $           --
                                                                =============           ===============
</TABLE>





                                       37
<PAGE>   38
The change in the valuation allowance is primarily attributable to 1997 losses.
The Company has provided a full valuation allowance for deferred tax assets
since realization of these future benefits cannot be reasonably assured.  If
the Company achieves profitability, these deferred tax assets would be
available to offset future income tax liabilities and expense, subject to
certain limitations.

At December 31, 1997, the Company had net operating loss and research and
development tax credit carryforwards of approximately $38.3 million and $.6
million, respectively, for income tax purposes which expire in various years
through 2012. Certain substantial changes in the Company's ownership would
result in an annual limitation on the amount of the net operating loss
carryforwards which can be utilized.

NOTE 9 - COMMITMENTS AND CONTINGENCIES

Since April 1996, the Company has occupied headquarters office space in
Bethesda, Maryland.  The current one-year lease, which expires in March 1998,
has been renewed through March 1999.  The Company has an operating lease for
production facility space in Sunnyvale, California, which expires in January
2002.  The Sunnyvale lease was assigned to a third party in March 1995 on the
same terms for the remaining term of the underlying lease.  The Company's
aggregate rent expense was $28,137, $127,771, and $350,308 for the years ended
December 31, 1997, 1996 and 1995, respectively.

During 1994, several suits were filed against the Company, its Chairman, and
former Chief Executive Officer, alleging the Company and certain of its
officers made or are responsible for false or misleading public statements
regarding the Company, Thymosin alpha 1, the results of Thymosin alpha 1 in the
treatment of chronic hepatitis B, and the prospects for success of Thymosin
alpha 1 in clinical trials and the impact on the Company.  The suits were
consolidated as a single action, and in a consolidated amended complaint, the
plaintiffs expanded their claims to include the allegation that the Company
made false and misleading public statements concerning its ability to satisfy
its contractual obligation to supply product to SciClone.  On March 13, 1995,
the district court issued an order dismissing all claims except for the claim
regarding a public statement made by the Company concerning its ability to
supply product to SciClone.  On September 26, 1995, the parties filed a
Stipulation of Settlement with the District Court under which the Company would
issue 500,000 shares of its Common Stock and make a $100,000 payment in
settlement of the remaining claim.  The $100,000 payment in settlement was
placed in an escrow account in September 1995.  During 1995, the Company
accrued $300,000 for the estimated settlement amount, which reflected the
$100,000 cash payment and the fair market value of the 500,000 shares of the
Company's Common Stock to be issued.  In 1996, the Company adjusted the accrued
settlement amount to the final settlement amount of $240,000.  Although the
Company believed the remaining claim was without merit, it entered into the
settlement agreement to avoid continuing costs of litigation.





                                       38
<PAGE>   39
                                   PART III

ITEM 10.     DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

(a)      Identification of Directors.  The forepart of the section captioned
"Election of Directors" in the Company's definitive Proxy Statement, to be
filed within 120 days of December 31, 1997 in accordance with General
Instruction G to Form 10-K, is hereby incorporated herein by reference.

(b)      Identification of Executive Officers.  Information concerning the
Company's executive officers is set forth in Part I hereof under the caption
"Executive Officers."

(c)      Compliance with Section 16(a) of the Exchange Act.  The section
captioned "Compliance with Section 16(a) of the Securities Exchange Act" in the
Company's definitive Proxy Statement, to be filed within 120 days of December
31, 1997 in accordance with General Instruction G to Form 10-K, is hereby
incorporated herein by reference.

ITEM 11.     EXECUTIVE COMPENSATION

The sections captioned "Executive Compensation" and "Compensation Committee
Interlocks and Insider Participation" in the Company's definitive Proxy
Statement, to be filed within 120 days of December 31, 1997 in accordance with
General Instruction G to Form 10-K, is hereby incorporated herein by reference.

ITEM 12.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The section captioned "Common Stock Ownership of Certain Beneficial Owners and
Management" in the Company's definitive Proxy Statement, to be filed within 120
days of December 31, 1997 in accordance with General Instruction G to Form
10-K, is hereby incorporated herein by reference.

ITEM 13.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

None.





                                       39
<PAGE>   40
                                    PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)   1.  Index to Financial Statements

      The Financial Statements of the Company for the year ended December 31, 
      1997, filed as part of this Annual Report on Form 10-K, are on the pages 
      set forth below:

<TABLE>
<CAPTION>
                                                                                                 Page Number
                                                                                                   of this
                                                                                                  Form 10-K

         <S>     <C>                                                                             <C>
         A.      Report of Independent Accountants                                                   20

         B.      Balance Sheets at December 31, 1997                                                 21
                 and 1996

         C.      Statements of Operations                                                            22
                 for the years ended December 31,
                 1997, 1996 and 1995

         D.      Statements of Cash Flows                                                            23
                 for the years ended December 31,
                 1997, 1996 and 1995

         E.      Statements of Stockholders' Equity                                                  24
                 (Deficit) for the years ended
                 December 31, 1997, 1996, and 1995

         F.      Notes to Financial Statements                                                      25-38

         2.      Financial Statement Schedules
                 -----------------------------
                 None are included because they are not applicable or not
                 required, or because the required information is included in
                 the Financial Statements or the Notes thereto.

         3.      Exhibits Required by Item 601 of Securities and Exchange Commission
                 --------------------------------------------------------------------
                 Regulation S-K
                 --------------
</TABLE>





                                       40
<PAGE>   41
<TABLE>
<CAPTION>
Exhibit No.    Description of Exhibit                              Reference **
----------     ----------------------                              ---------
  <S>          <C>                                                 <C>
  3.1          Restated Certificate of Incorporation of Company    Exhibit 3.1 to Registration Statement No.
                                                                   33-9370, Amendment No. 1 (filed 11/26/86)

  3.2          Amendment to Restated Certificate of                Exhibit 3.2 to the Company's Transitional Report
               Incorporation of Company                            on Form 10-K, File No. 1-15070 (filed 3/18/91)

  3.3          Bylaws of Company                                   Exhibit 3.2 to Registration Statement No.
                                                                   33-9370 (filed 10/8/86)

  3.4          Amendment No. 1 to Bylaws of Company adopted        Exhibit 4.7, Registration Statement No.
               8/11/89                                             33-34551, Amendment No. 3 (filed 6/21/90)

  3.5          Amendment No. 2 to Bylaws of Company adopted        Exhibit 4.8, Registration Statement No.
               6/18/90                                             33-34551, Amendment No. 3 (filed 6/21/90)

  3.6          Amendment No. 3 to Bylaws of Company adopted        Exhibit 3.6 to the Company's Transitional Report
               11/30/90                                            on Form 10-K, File No. 1-15070 (filed 3/18/91)

  4.1          Form of Stock Certificate                           Exhibit 4.1 to Registration Statement No.
                                                                   33-9370, Amendment No. 1 (filed 11/26/86)

  4.2          Rights Agreement, dated as of April 29, 1994,       Exhibit 1 to the Company's Registration
               between the Company and American Stock Transfer     Statement on Form 8-K, dated May 2, 1994
               & Trust Company, as Rights Agent

  4.3          Warrant Agreement,                                  Exhibit 4.3 to the Company's Annual Report on
               dated March 12, 1997                                Form 10-K, File No. 1-15070 (filed 3/31/97)

  4.4          Warrant Agreement,                                  Filed herewith
               dated July 7, 1997

  10.1         Commercial Text Agreement between the Company       Exhibit 10.10, Registration Statement No.
               and F. Hoffmann-La Roche, Inc., dated September     33-9370 (filed 10/8/86)
               15, 1982, and amended August 7, 1984 and
               September 18, 1986
</TABLE>





                                       41
<PAGE>   42
<TABLE>
  <S>          <C>                                                 <C>
  10.2         Thymosin Fraction 5 License Agreement between       Exhibit 10.11, Registration Statement No.
               the Company and F. Hoffmann-La Roche & Co.          33-9370 (filed 10/8/86)
               Limited Company, dated January 1, 1985

  10.3         Thymosin Alpha 1 License Agreement between the      Exhibit 10.12, Registration Statement No.
               Company and F. Hoffmann-La Roche & Co. Limited      33-9370 (filed 10/8/86)
               Company, dated August 5, 1986

  10.4         Thymosin Alpha 1 License Agreements between the     Exhibit 10.19 to the Company's Annual Report on
               Company and F. Hoffmann-La Roche & Co. Limited      Form 10-K, File No. 1-15070 (filed 6/29/89)
               Company, dated October 21, 1988

  10.5         Agreement between the Company and Hoffmann-La       Exhibit 10.19, Registration Statement No.
               Roche, Inc., dated as of December 21, 1989          33-34551 (filed 4/25/90)

  10.6         Letter Agreement, dated March 4, 1991, between      Exhibit 10.29 to the Company's Annual Report on
               the Company and F. Hoffmann-La Roche & Co.          Form 10-K, File No. 1-15070 (filed 3/25/92)
               Limited Co.

  10.7         Agreement between the Company and Hoffmann-La       Exhibit 10.30 to the Company's Annual Report on
               Roche, Inc., dated as of August 6, 1991             Form 10-K, File No. 1-15070 (filed 3/25/92)

  10.8*        1986 Incentive Stock Option Plan, as amended        Exhibit 10.23 to the Company's Annual Report on
               through May 15, 1992                                Form 10-K, File No. 1-15070 (filed 3/26/93)

  10.9*        1987 Non-Qualified Stock Option Plan, as amended    Exhibit 10.24 to the Company's Annual Report on
               through May 15, 1992                                Form 10-K, File No. 1-15070 (filed 3/26/93)

  10.10*       Amended and Restated Directors Stock Option         Exhibit 10.25 to the Company's Annual Report on
               Plan, dated as of May 15, 1992                      Form 10-K, File No. 1-15070 (filed 3/26/93)

  10.11        Lease Agreement, dated February 10, 1993,           Exhibit 10.28 to the Company's Annual Report on
               between the Company and John Arrillaga, Trustee,    Form 10-K, File No. 1-15070 (filed 3/26/93)
               and Richard T. Perry, Trustee (Sunnyvale,
               California lease)

  10.12        Thymosin alpha 1 License Agreement, dated as of     Exhibit 10.29 to the Company's Annual Report on
               February 12, 1993, between the Company and          Form 10-K, File No. 1-15070 (filed 3/26/93)
               Sclavo, S.p.A. (with certain confidential
               information deleted)
</TABLE>





                                       42
<PAGE>   43
<TABLE>
   <S>          <C>                                                 <C>
   10.13        Lease Agreement Amendment Number 1, dated           Exhibit 10.24 to the Company's Annual Report on
                September 1, 1993, and Amendment Number 2, dated    Form 10-K, File No. 1-15070 (filed 3/28/94)
                December 27, 1993
                (Sunnyvale, California lease)

   10.14        Thymosin Alpha 1 License Agreement, dated as of     Exhibit 1 to a Current Report on Form 8-K,  File
                August 19, 1994, between SciClone                   No. 1-15070 (filed 8/24/94)
                Pharmaceuticals, Inc. and the Company (with
                certain confidential information omitted)

   10.15        Lease Agreement Amendment Number 3, dated April     Exhibit 10.28 to the Company's Annual Report on
                19, 1994 (Sunnyvale, California Lease)              Form 10-K, File No. 1-15070 (filed 3/31/95)

   10.16        Assignment of Lease, dated March 22, 1995 from      Exhibit 10.24 to the Company's Annual Report on
                the Company to Scios Nova, Inc. (Sunnyvale,         Form 10-K, File No. 1-15070 (filed 3/31/95)
                California Lease)

   10.17        Unit Purchase Agreement dated March 12, 1997        Exhibit 10.25 to the Company's Annual Report on
                                                                    Form 10-K, File No. 1-15070 (filed 3/31/97)

   10.18        Registration Rights Agreement, dated March 12,      Exhibit 10.26 to the Company's Annual Report on
                1997                                                Form 10-K, File No. 1-15070 (filed 3/31/97)

   10.19        Alpha Rights Agreement, dated as of December 17,    Exhibit 10.1 to the Company's Report on Form
                1997, between the Company and SciClone              8-K, File No. 1-15070 (filed January 12, 1998)
                Pharmaceuticals, Inc.

   23           Consent of Price Waterhouse LLP                     Filed herewith

   27           Financial Data Schedule                             Filed herewith
</TABLE>

          *      Management contract or compensatory plan or arrangement

         **      The exhibits referred to in this column have heretofore been
filed with the Securities and Exchange Commission as exhibits to the documents
indicated and are hereby incorporated by reference thereto.  The Registration
Statements referred to are Registration Statements of the Company.





                                       43
<PAGE>   44
         (b)     Reports on Form 8-K

                 A current Report on Form 8-K was filed by the Company during
                 the fiscal quarter ended December 31, 1997 as follows: 
                           December 17, 1997 (Items 5 and 7).

         (c)     Exhibits

                 Attached hereto
                 See Index to Exhibits             Page 46





                                       44
<PAGE>   45
                                   SIGNATURES


         Pursuant to the requirements of Section 13 or 15(d) 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.


                                    ALPHA 1 BIOMEDICALS, INC.
                                           (Registrant)



                      By:       /s/  Michael L. Berman
                           -------------------------------------------
                                        Michael L. Berman
                              President and Chief Executive Officer


         Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:

<TABLE>
<CAPTION>
                 Signature                                  Title                                   Date
                 ---------                                  -----                                   ----
         <S>                                       <C>                                          <C>
         /s/  Allan L. Goldstein                   Director and                                 March 25, 1998
-----------------------------------------------    Chairman of the Board
         Allan L. Goldstein

         /s/  Michael L. Berman                    President and Chief
-----------------------------------------------    Executive Officer
         Michael L. Berman                         (Principal Executive Officer)                March 25, 1998

         /s/  Robert J. Lanham                     Vice President and Chief
-----------------------------------------------    Financial Officer (Principal
         Robert J. Lanham                          Financial Officer and Principal
                                                   Accounting Officer)                          March 25, 1998

         /s/  Joseph C. McNay                      Director                                     March 25, 1998
-----------------------------------------------
         Joseph C. McNay

         /s/  Albert Rosenfeld                     Director                                     March 25, 1998
-----------------------------------------------
         Albert Rosenfeld

</TABLE>




                                       45
<PAGE>   46
                               Index to Exhibits

<TABLE>
<CAPTION>
  Exhibit                                                                     Pages
   <S>       <C>                                                              <C>
   4.4       Warrant Agreement                                                47-48

   23        Consent of Price Waterhouse LLP                                   49

   27        Financial Data Schedule                                           50
</TABLE>





                                       46