<PAGE>   1

                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                   FORM 10-KSB
(Mark One)

[ X ]    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                       EXCHANGE ACT OF 1934 [FEE REQUIRED]
                   For the Fiscal Year Ended December 31, 2000

[ ]      TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
                     EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

                         COMMISSION FILE NUMBER 0-20791

                           AMARILLO BIOSCIENCES, INC.
                 (NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)

<TABLE>
<S>                                                             <C>
                            TEXAS                                    75-1974352
               (State of other jurisdiction of                    (I.R.S. Employer
                incorporation or organization)                  Identification No.)

             800 WEST 9TH AVENUE, AMARILLO, TEXAS                      79101
           (Address of principal executive offices)                  (Zip Code)
</TABLE>

         ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE: (806) 376-1741

Securities registered under Section 12(b) of the Exchange Act:

                                      None.

Securities registered under Section 12(g) of the Exchange Act:

                          Common Stock, Par Value $.01
                                (Title of class)

         Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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
                                                                      ---   ---

         Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]

         Revenues for its most recent fiscal year were $53,756

         As of December 31, 2000, there were outstanding 7,807,357 shares of the
registrant's common stock, par value $.01, which is the only class of common or
voting stock of the registrant. As of that date, the aggregate market value of
the shares of common stock held by nonaffiliates of the registrant (based on the
closing price for the common stock on the OTC BB) was approximately $4,217,306.

<PAGE>   2

                                     PART I

         The following contains forward-looking statements that involve risks
and uncertainties. The Company's actual results could differ materially from
those discussed in the forward-looking statements as a result of certain
factors, including those set forth in "Management's 2001 Plan of Operations" as
well as those discussed elsewhere in this Form 10-KSB. The following discussion
should be read in conjunction with the Financial Statements and the Notes
thereto included elsewhere in this Form 10-KSB.

ITEM 1.           DESCRIPTION OF BUSINESS.

GENERAL

         Amarillo Biosciences, Inc. (the "Company" or "ABI"), a
development-stage company incorporated in 1984, is engaged in developing
biologics for the treatment of human and animal diseases. The Company is
currently focusing its research on human health indications for the use of low
dose orally administered natural human interferon alpha (IFNa), particularly for
the treatment of Sjogren's syndrome, fibromyalgia, hepatitis B, hepatitis C and
Behcet's disease. The Company believes that significant worldwide opportunities
exist for the development of low dose orally administered natural IFNa as a cost
effective, non-toxic, efficacious alternative to the treatment of disease by
injection of high doses of IFNa. In addition, the Company believes that low dose
oral natural human IFNa will be an effective treatment for diseases or
conditions for which current therapies are inadequate.

         The Company owns or licenses 19 United States patents relating to low
dose oral natural IFNa. Since 1992, the Company has filed with the U.S. Food and
Drug Administration ("FDA"), and there now are in effect, 6 Investigational New
Drug ("IND") Applications covering indicated uses for low dose oral IFNa,
including treatment of Sjogren's syndrome and fibromyalgia. The Company is
seeking regulatory approvals in certain foreign countries to test low dose oral
IFNa in the treatment of hepatitis B and C.

         The Company's objective is to exploit its proprietary technology to
become a leader in the field of low dose oral IFNa applications. The Company's
business strategy is to pursue those indications for low dose oral IFNa
treatment for which initial clinical research has indicated the treatment is
efficacious and which, in the opinion of the Company, have the greatest
commercial potential and are most likely to be approved by the FDA. To the
extent possible, the Company will attempt to minimize the cost to the Company of
obtaining FDA approval by utilizing forms of IFNa already approved (in other
dosage forms and for different indications) by the Japanese Ministry of Health
and Welfare for human use. The Company believes that cost savings will result.
The Company will attempt to gain market share for approved products by forming
alliances with strong marketing partners.

         The Company has 6 full-time employees and one part-time employee. The
Company makes extensive use of consultants in business and research and
development.

                                        2
<PAGE>   3

HUMAN HEALTH APPLICATIONS

Sjogren's Syndrome. Sjogren's syndrome is a chronic autoimmune disorder
characterized by dryness of the eyes and mouth. It can exist as a primary
disorder or in association with other autoimmune diseases such as rheumatoid
arthritis, systemic lupus erythematosus and scleroderma. Patients with primary
Sjogren's syndrome may have clinical signs such as rash, arthritis, pneumonitis
and nephritis. Typical symptoms include the sensation of burning in the eyes,
dryness of the mouth, skin, nose and vagina, difficulty swallowing, painful
throat and fatigue. Oral candidiasis (a fungus infection of the mouth) may also
arise as a result of reduced saliva flow. Although Sjogren's syndrome is not
life threatening, it can cause extreme discomfort and seriously impair quality
of life.

         The Sjogren's Syndrome Foundation, Inc. estimates that there are
approximately two to four million people in the United States who suffer from
Sjogren's syndrome. The Company believes that the incidence of Sjogren's
syndrome worldwide is similar to its incidence in the United States. Women
constitute 90% of Sjogren's patients.

         Topical use of artificial tears is the prevailing treatment for the dry
eye symptom of the disease. Artificial tears must be used on a regular basis.
Intensive oral hygiene is prescribed to prevent progressive oral problems that
may develop as a result of the disease. Topical and systemic means of increasing
salivary flow may provide transient relief of symptoms.

         The Company believes that oral IFNa therapy helps to relieve the
dryness associated with Sjogren's syndrome, improves secretory function, and may
effectively supplement, or be used in lieu of, existing treatments.

         A Phase II trial using low dose orally administered IFNa was
completed in late 1997. At the end of 12 weeks, ninety patients who took placebo
or interferon were evaluable. Patients given 150 IU three times per day had a
significant (p<0.014) increase in stimulated saliva production. Subjective
measures of relief of dryness also favored the same interferon group. The Phase
III pivotal trial program for Sjogren's syndrome was initiated in November 1998.
Protocols compared treatment with low dose orally-administered IFNa (150 IU
lozenges) and placebo. The endpoints were significant improvement in salivary
function and relief of oral dryness. The first of 2 randomized, double-blinded,
placebo-controlled efficacy studies completed enrollment of 241 subjects in
August, 1999. Subjects finished treatment in February 2000. After 24 weeks of
treatment, neither primary endpoint was significantly improved in the IFNa
group, compared to the placebo group. However, unstimulated whole saliva flow
(UWS), an important measure of basal salivary gland function, was significantly
increased in IFNa-treated patients, compared to placebo. In addition, increases
in UWS correlated significantly with improvement in the symptoms of Sjogren's
syndrome in IFNa-treated, but not placebo patients. The second efficacy trial of
256 subjects began active enrollment in September 1999, finalized enrollment in
March 2000 and completed treatment of all patients in September 2000. Neither
primary endpoint was significantly improved in the IFNa group, compared to the
placebo group, after 24 weeks of treatment. However, unstimulated whole saliva
flow (UWS), an important measure of basal salivary gland function, was
borderline significantly increased in IFNa-treated patients, compared to
placebo. In addition, increases in UWS correlated significantly with improvement
in the symptoms of Sjogren's syndrome in IFNa-treated, but not placebo patients.

                                        3
<PAGE>   4

         Following 24 weeks of treatment, subjects who successfully completed
these controlled trials were eligible to enter a 24-week "open-label" trial, in
which all subjects were given active treatment with 150 IU IFNa lozenges. A
preliminary analysis has been conducted to date using data from all patients who
completed the study (n=179). In this group, mean unstimulated whole saliva (UWS)
was increased at week 24 compared to baseline, but this difference failed to
reach statistical significance. Mean stimulated whole saliva (SWS) was
relatively unchanged during treatment. However, several of the subjective
endpoints were significantly increased (improved) at week 24, compared to
baseline, including oral dryness, oral comfort, eye dryness and throat dryness.

         In addition, data from the open-label and double-blind studies have
been combined and a preliminary analysis of patients who completed both studies
has been conducted (n=175). Patients who received IFNa for 48 weeks had a
significantly greater (p<0.001) mean UWS at the end of treatment compared to
baseline. Patients who received placebo for 24 weeks and IFNa for 24 weeks
exhibited a non-significant UWS increase. These data seem to indicate that
improvement from IFNa is gradual and continues throughout treatment. Both groups
had non-significant increases in SWS. Concerning subjective endpoints, both
groups had significant improvement from baseline to week 48 in all 8 of the
symptoms that were assessed, with the biggest increases noted for oral dryness
and oral comfort (p<0.0001 for both groups).

Hepatitis B and C. Viral hepatitis is a worldwide health problem of enormous
proportions and consequences. It is the most common cause of jaundice, chronic
liver disease, cirrhosis, and hepatocellular carcinoma. It has been estimated by
the World Health Organization that there are 500 million individuals infected
worldwide with one of the six distinct hepatitis viruses. The Company has
prepared clinical trial protocols to test the efficacy of low dose
orally-administered IFNa as a sole treatment in chronic active hepatitis B, and
in combination with other anti-viral agents in treatment of hepatitis C. The
Company is engaged in active discussions to initiate clinical trials in
countries where hepatitis virus infection is endemic.

Fibromyalgia. During 1999, the Company conducted a Phase II randomized,
placebo-controlled, double-blinded trial in fibromyalgia patients. This clinical
study examined the effects of low dose orally-administered IFNa on relief of
morning stiffness, a significant aspect of the symptom complex in this disorder.
IFNa lozenge treatment was combined with a low dose of amitriptyline, an
antidepressant commonly used in this condition.

         The Phase II results of the fibromyalgia clinical trial became
available in March, 2000. The three-month study, involving 89 patients at four
clinical sites around the United States, was designed to measure the
effectiveness of low doses of orally administered interferon-alpha (IFNa) in
relieving morning stiffness of joints, a significant problem for fibromyalgia
sufferers. Patients participating in the study were divided into three groups,
and each individual was given three lozenges per day. The three lozenges given
to members of the first group contained 50 international units (IU) of IFNa
each, while the second group got one 50 IU IFNa lozenge and two placebos.
Members of the final group received three placebos. All three groups reported a
reduction in morning stiffness, but across the entire study panel the
improvement was most pronounced in those taking one 50 IU lozenge of IFNa per
day. However, the result did not reach statistical significance relative to the
controls, nor did increasing the dosage to three IFNa lozenges per day improve
on the results. Prior to commencing further clinical trials in fibromyalgia, the
Company will consult with a group of expert clinicians and

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<PAGE>   5

opinion leaders in fibromyalgia syndrome research to review the results of our
studies to date and to assist us in designing any future trials.

HIV. A pilot trial was completed of treatment of persistent, treatment-resistant
oral viral warts in patients infected with HIV. Oral warts have been identified
as an oral complication of HIV infection with a growing incidence. In this
open-label study, significant reductions were seen in wart surface area and
numbers of warts following treatment with low dose orally-administered IFNa. The
Company filed with the FDA Office of Orphan Drugs and was granted (Summer 2000)
orphan drug status for low dose IFNa treatment in this condition. Future
clinical trials will be conducted to confirm and extend these initial
encouraging results.

Behcet's Disease. Behcet's disease is a severe chronic relapsing inflammatory
disorder marked by oral and genital ulcers, eye inflammation (uveitis) and skin
lesions, as well as varying multisystem involvement including the joints, blood
vessels, central nervous system, and gastrointestinal tract. The oral lesions
are an invariable sign, occurring in all patients at some time in the disease.
Behcet's disease is found world-wide, and is a significant cause of partial or
total disability. The US patient population has been estimated as 15,000. The
Company filed with the FDA Office of Orphan Drugs and was granted (Spring 2000)
orphan drug status for low dose orally-administered IFNa treatment in this
condition. A clinical protocol was prepared for a controlled study and the
Company participated in a teleconference with the FDA on the subject of low dose
IFNa in Behcet's disease in November 2000. Future clinical trials in Behcet's
disease will depend on funding.

STRATEGIC ALLIANCE WITH HBL

         Hayashibara Biochemical Laboratories, Inc. ("HBL") was established in
1970 to engage in research and development. It is a subsidiary of Hayashibara
Company, Ltd., a privately-owned Japanese holding corporation with diversified
subsidiaries. For more than 100 years the Hayashibara Company, Ltd. and its
predecessors have been applying microbiological technology in the starch
industry for the production of maltose and other sugars.

         In 1981, HBL established the Fujisaki Institute to accelerate
development of industrial methods for the production of biologics and to sponsor
clinical trials for such products. In 1985, HBL built the Fujisaki Cell Center
to support basic research. In 1987, HBL successfully accomplished the mass
production of human cells in an animal host by producing human cells in
hamsters. This made it possible to economically produce a natural form of human
IFNa and other biologics. HBL also has developed and obtained patents for
technology relating to the production of IFNa-containing lozenges by which the
stability of the IFNa activity can be maintained for up to 18 months at room
temperature and up to three years if the product is refrigerated. The Company
believes that the use of such lozenges gives it advantages over competitive
technologies in terms of cost, taste and ease of handling. On March 13, 1992,
the Company entered into a Joint Development and Manufacturing/Supply Agreement
with HBL (the "Development Agreement"). Such Development Agreement was
subsequently amended on January 17, 1996, and May 10, 1996. Among other things,
the Development Agreement provides the Company with a source of natural human
interferon alpha for use in the Company's interferon alpha-containing products.
Additional information on the Development Agreement is set forth in footnote 4
to the Consolidated Financial Statements attached to this 10-KSB.

                                        5
<PAGE>   6

         In September 1997, HBL and ABI entered license agreements granting
exclusive rights to ABI to develop interferon gamma for oral use in humans and
for all routes of administration in animals, and tumor necrosis factor alpha for
oral and topical uses in humans and for all routes of administration in animals;
the rights were granted worldwide, except Japan. In June 2000, HBL and ABI
amended their license agreement on interferon gamma to include the inhalation
route of administration.

OTHER AGREEMENTS

         The Company and Mitsubishi Corporation entered into an agreement in
November, 1992, whereby Mitsubishi would provide market development, licensing,
and distribution services for IFNa in designated parts of the world. This
agreement terminated November 26, 2000.

         On June 16, 1999, the Company entered into a License Agreement with
North China Pharmaceutical Group Corporation ("NCPC"), which contemplated the
conduct of clinical trials, and eventual product sales in the Peoples Republic
of China.. To date, the Company has received no payment from NCPC, nor have
clinical trials been initiated. Although the agreement has not been officially
terminated, NCPC has informed the Company that it is not possible to import IFNa
into China. ABI therefore assumes that the contract will not be honored by NCPC
and no revenues nor clinical funding will be attributable to this agreement.

PATENTS AND PROPRIETARY RIGHTS

         One patent was issued in 2000. This patent is "Treatment of
Fibromyalgia With Low Dose Interferon" (U.S. Patent No. 6,036,949) issued March
14, 2000, valid until March 5, 2018.

COMPETITION

         The pharmaceutical industry is an expanding and rapidly changing
industry characterized by intense competition. The Company believes that its
ability to compete will be dependent in large part upon its ability to
continually enhance and improve its products and technologies. In order to do
so, the Company must effectively utilize and expand its research and development
capabilities and, once developed, expeditiously convert new technology into
products and processes which can be commercialized. Competition is based
primarily on scientific and technological superiority, technical support,
availability of patent protection, access to adequate capital, the ability to
develop, acquire and market products and processes successfully, the ability to
obtain governmental approvals and the ability to serve the particular needs of
commercial customers. Corporations and institutions with greater resources than
the Company may, therefore, have a significant competitive advantage. The
Company's potential competitors include entities that develop and produce
therapeutic agents for treatment of human and animal disease. These include
numerous public and private academic and research organizations and
pharmaceutical and biotechnology companies pursuing production of, among other
things, biologics from cell cultures, genetically engineered drugs and natural
and chemically synthesized drugs. Almost all of these potential competitors have
substantially greater capital resources, research and development capabilities,
manufacturing and marketing resources and experience than the Company. The
Company's competitors may succeed in developing products or processes that are
more effective or less costly than any that may be developed by the Company, or
that gain regulatory approval prior to the Company's products. The Company also
expects that the

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<PAGE>   7

number of its competitors and potential competitors will increase as more
IFN[alpha] products receive commercial marketing approvals from the FDA or
analogous foreign regulatory agencies. Any of these competitors may be more
successful than the Company in manufacturing, marketing and distributing its
products. There can be no assurance that the Company will be able to compete
successfully.

GOVERNMENT REGULATION

         Once a new compound has been identified in the laboratory, medicines
are developed as follows:

Preclinical testing. A pharmaceutical company conducts laboratory and animal
studies to show biological activity of the compound against the targeted
disease, and the compound is evaluated for safety.

Investigational New Drug Application (IND). After completing preclinical
testing, a company files an IND with the US Food and Drug Administration (FDA)
to begin to test the drug in people. The IND becomes effective if the FDA does
not disapprove it within 30 days. The IND shows results of previous experiments;
how, where and by whom the new studies will be conducted; the chemical structure
of the compound; how it is thought to work in the body; any toxic effects found
in the animal studies; and how the compound is manufactured. All clinical trials
must be reviewed and approved by the Institutional Review Board (IRB) where the
trials will be conducted. Progress reports on clinical trials must be submitted
at least annually to FDA and the IRB.

Clinical Trials, Phase I. These tests involve about 20 to 80 normal, healthy
volunteers. The tests study a drug's safety profile, including the safe dosage
range. The studies also determine how a drug is absorbed, distributed,
metabolized, and excreted as well as the duration of its action.

Clinical Trials, Phase II. In this phase, controlled trials of approximately 100
to 300 volunteer patients (people with the disease) assess a drug's
effectiveness.

Clinical Trials, Phase III. This phase usually involves 1,000 to 3,000 patients
in clinics and hospitals. Physicians monitor patients closely to confirm
efficacy and identify adverse events. These numbers may be modified based on the
disease prevalence. ABI's Phase III clinical trial as negotiated with the FDA
will require a total of 500 patients.

New Drug Application (NDA)/Biologics License Application (BLA). Following the
completion of all three phases of clinical trials, a company analyzes all of the
data and files with FDA an NDA, in the case of a drug product, or a BLA in the
case of a biologic product, if the data successfully demonstrate both safety and
effectiveness. The NDA/BLA contains all of the scientific information that the
Company has gathered. NDA's typically run 100,000 pages or more. By law, FDA is
allowed twelve months to review a standard NDA/BLA.

Approval. Once FDA approves an NDA, the new medicine becomes available for
physicians to prescribe. A company must continue to submit periodic reports to
FDA, including any cases of adverse reactions and appropriate quality-control
records. For some medicines, FDA requires additional trials (Phase IV) to
evaluate long-term effects.

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<PAGE>   8
         ABI obtained an IND for oral IFNa in the treatment of Sjogren's
syndrome in 1994. ABI successfully completed Phase I development in 1996, Phase
II development in 1997, and launched the first of its Phase III trials in
November 1998. All Phase III trials in the treatment of Sjogren's syndrome were
completed in 2000.

         An IND for oral IFNa in the treatment of fibromyalgia was obtained in
1993. Phase I/II studies were completed in 1995. The confirmatory Phase II trial
was initiated in 1998 and was completed in February, 2000.

RESEARCH AND DEVELOPMENT

         During the years ended December 31, 2000 and 1999, the Company incurred
expenses of $2,276,504 and $4,732,365, respectively, resulting from
Company-sponsored research and development activities. Research and development
is expected to remain a significant component of the Company's business. The
Company has arranged for others to perform substantially all of its clinical
research and intends to continue to do so while utilizing its staff for
monitoring such research. See also ITEM 6, "MANAGEMENT'S 2001 PLAN OF OPERATIONS
- Research and Development".

ITEM 2.           DESCRIPTION OF PROPERTY.

         The Company's executive and administrative offices are located at 800
West 9th Avenue, Amarillo, Texas in a 5,200 square foot facility owned by the
Company. The building contains offices, meeting rooms and a biologic storage
area. The Company believes that the facility is adequate for its present and
anticipated use. The facility is insured against hazards in the amount of its
market value.

ITEM 3.           LEGAL PROCEEDINGS.

         None.

ITEM 4.           SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

         None.

                                     PART II

ITEM 5.           MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER
                  MATTERS

         The Company is presently traded on the OTC Bulletin Board under the
symbol AMAR. The range of high and low sales prices as quoted on the OTC
Bulletin Board for each quarter of 2000 and 1999 was as follows:

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<TABLE>
<CAPTION>
                                                       2000                                            1999
                                    ------------------------------------------      ------------------------------------------
           Quarter                         High                     Low                    High                     Low
------------------------------      ------------------       -----------------      ------------------       -----------------
<S>                                       <C>                     <C>                     <C>                     <C>
            First                         $4.4375                 $1.5625                 $3.5000                 $0.8125
            Second                         3.7500                  1.5000                  3.1250                  1.4062
            Third                          2.6250                  1.4375                  1.8750                  0.6250
            Fourth                         1.5625                  0.4375                  1.8750                  0.5000
</TABLE>

         As of December 31, 2000, the Company had 312 shareholders of record.

ITEM 6.           MANAGEMENT'S 2001 PLAN OF OPERATIONS

         The Company's Management has developed a Plan of Operations for 2001.
As a development stage company, the Company continues to engage in research and
development activities focused on developing biologics for the treatment of
human and animal diseases. The Company has not commenced any significant product
commercialization and, until such time as it does, will not generate significant
product revenues. The Company's accumulated deficit has continued to grow, from
approximately $17,497,000 at December 31, 1999 to $20,892,000 at December 31,
2000. Operating losses are expected to continue for the foreseeable future and
until such time as the Company is able to attain sales levels sufficient to
support its operations.

         In 2001 the Company will continue its research and development
activities, as well as the activities necessary to develop commercial
partnerships and licenses. The Company's expenditure of financial resources in
2001 will fall principally into seven broad categories, as follows: Revenue From
Sales of Dietary Supplement; Research and Development; Personnel; Consulting and
Professional (except legal and accounting); Legal and Accounting; Public
Relations, Investor Relations, and Shareholder Relations; and Liquidity Needs.
The Company's expectations and goals with respect to these categories are
addressed separately below, by category:

REVENUE FROM SALES OF DIETARY SUPPLEMENT

         The Company has received orders for anhydrous crystalline maltose (ACM)
from Natrol as dictated by the Supply Agreement executed in December 2000 (see
F-16). The Company has received copies of the advertising campaign Natrol will
be starting in April 2001 and Natrol has identified retailers who will start
selling ACM in the second quarter of 2001. The Company expects sales of ACM to
generate at least $211,000 for ABI in the first half of 2001 from the minimum
orders. Other supply agreements, in negotiation, are expected to provide
additional revenue to the Company.

RESEARCH AND DEVELOPMENT

         Until it achieves commercial product sales, the Company's business is
research and development, and this is the area where the Company's principal
efforts will be expended in 2001. The Company has budgeted approximately
$813,000 for expenditure in 2001 on research and development.

                                        9
<PAGE>   10
         The budgeted amount for Research and Development in 2000 was almost
exclusively dedicated to the completion of the pivotal Phase III Sjogren's
syndrome clinical trial. The Phase III pivotal trial program for Sjogren's
syndrome was initiated in November 1998. Protocols compared treatment with low
dose orally-administered IFNa (150 IU lozenges) and placebo. The endpoints were
improvement in stimulated salivary flow and relief of oral dryness subjective
endpoint. The first of 2 randomized, double-blinded, placebo-controlled efficacy
studies completed enrollment of 241 subjects in August 1999. Subjects finished
treatment in February 2000. After 24 weeks of treatment, neither primary
endpoint was significantly improved in the IFNa group, compared to the placebo
group. However, unstimulated whole saliva flow (UWS), an important measure of
basal salivary gland function, was significantly increased in IFNa-treated
patients, compared to placebo. In addition, increases in UWS correlated
significantly with improvement in the symptoms of Sjogren's syndrome in
IFNa-treated, but not placebo patients. The second efficacy trial of 256
subjects began active enrollment in September 1999, finalized enrollment in
March 2000 and completed treatment of all patients in September 2000. Neither
primary endpoint was significantly improved in the IFNa group, compared to the
placebo group, after 24 weeks of treatment. However, unstimulated whole saliva
flow (UWS), an important measure of basal salivary gland function, was
borderline significantly increased in IFNa-treated patients, compared to
placebo. In addition, increases in UWS correlated significantly with improvement
in the symptoms of Sjogren's syndrome in IFNa-treated, but not placebo patients.

         Following 24 weeks of treatment, subjects who successfully completed
these controlled trials were eligible to enter a 24-week "open-label" trial, in
which all subjects were given active treatment with 150 IU IFNa lozenges. A
preliminary analysis has been conducted to date using data from all patients who
completed the study (n=179). In this group, mean unstimulated whole saliva (UWS)
was increased at week 24 compared to baseline, but this difference failed to
reach statistical significance. Mean stimulated whole saliva (SWS) was
relatively unchanged during treatment. However, several of the subjective
endpoints were significantly increased (improved) at week 24, compared to
baseline, including oral dryness, oral comfort, eye dryness and throat dryness.

         In addition, data from the open-label and double-blind studies have
been combined and a preliminary analysis of patients who completed both studies
has been conducted (n=175). Patients who received IFNa for 48 weeks had a
significantly greater (p<0.001) mean UWS at the end of treatment compared to
baseline. Patients who received placebo for 24 weeks and IFNa for 24 weeks
exhibited a non-significant UWS increase. These data seem to indicate that
improvement from IFNa is gradual and continues throughout treatment. Both groups
had non-significant increases in SWS. Concerning subjective endpoints, both
groups had significant improvement from baseline to week 48 in all 8 of the
symptoms that were assessed, with the biggest increases noted for oral dryness
and oral comfort (p<0.0001 for both groups).

         Other Research and Development expenditures include final costs
associated with the fibromyalgia Phase II clinical trial and costs associated
with the initiation of a Behcet's disease clinical trial during the first half
of 2001.

                                       10
<PAGE>   11

PERSONNEL

         In addition to its intellectual property, the Company's principal
assets are its personnel. The Company has been successful in controlling its
personnel costs, both by maintaining its principal location in Amarillo, Texas,
and by ensuring maximum efficiency and utilization of existing personnel. The
Company has budgeted approximately $480,000 for personnel expenses in 2001,
including salaries, payroll taxes, directors' and officers' general liability
insurance, group health, and liability insurance. Also, in lieu of cash
compensation, the Company may issue stock options or other equity instruments to
selected employees in fiscal 2001.

         At the present time, the President and CEO of the Company, Joseph M.
Cummins, is also serving as the Company's Chief Financial Officer (CFO).

CONSULTING AND PROFESSIONAL (EXCEPT LEGAL AND ACCOUNTING)

         The Company has budgeted approximately $24,000 for expenditure on
professional consultants in 2001. Consulting fees are expected to be paid to a
number of independent consultants in connection with the operation of the
Company, and to certain directors who perform specific consulting tasks at the
Company's request. The Company will continue to use the services of consultants
to complement the Company's small full-time staff, where such is a more
efficient utiliza tion of the Company's resources.

LEGAL AND ACCOUNTING

         Although the Company is not involved in litigation, it has budgeted
legal expenses of approximately $120,000 in 2001. Approximately 20% of the
Company's legal expenditures will be for preparation and filing of patents and
for maintenance of existing patents in a number of countries. Other legal
expenses will be related to compliance with laws and regulations affecting
public companies, licensing and contracting, and general corporate matters. The
Company does not presently have an in-house legal staff, nor does it intend to
put such a staff in place in 2001. The Company has budgeted $40,000 for
accounting expense in 2001, and expects to continue with Ernst & Young, LLP as
its independent auditors.

PUBLIC RELATIONS, INVESTOR RELATIONS AND SHAREHOLDER RELATIONS

         The Company has budgeted approximately $7,600 for public relations,
investor relations and shareholder relations in 2001. The plan for hiring an
investor relations firm is to pay in stock options, not cash. The Company has
also budgeted sufficient amounts to maintain its comprehensive web site
(www.amarbio.com).

LIQUIDITY NEEDS

         The principal budget items discussed above, along with other
miscellaneous costs and expenses, will cause the Company to expend approximately
$1.7 million in 2001. At December 31, 2000, the Company had available cash of
approximately $342,000. The Company also has a working capital deficit of
approximately ($615,000). The Company's continued losses and lack of liquidity
indicate that the Company may not be able to continue as a going concern for a
reasonable period of

                                       11
<PAGE>   12

time. The Company's ability to continue as a going concern is dependent upon
several factors including, but not limited to, the continued non-demand for
immediate payment of outstanding indebtedness by the Company's vendors and
suppliers, the Company's ability to generate sufficient cash flows to meet its
obligations on a timely basis, obtain additional financing, and continue to
obtain supplies and services from its vendors. The Company will need to raise
additional funds in order to satisfy its vendors and other creditors and to
completely execute its 2001 Plan. The Company is presently negotiating with
human health and animal health commercial development partners in various
regions of the world including the United States, Canada, Europe, and the Middle
East. The Company believes that one or more of these agreements will be executed
during 2001. These agreements could generally include provisions for the
commercial partner to pay ABI a technology access fee, could include payments
for a portion of the clinical trial expenses, could include payment obligations
to ABI upon the accomplishment of certain defined tasks, and/or could provide
for payments relating to the future sales of commercial product. These
agreements could be an important source of funds for ABI. Management believes
the fact that it has concluded an advanced Phase III clinical trial
significantly enhances its ability to successfully raise additional funds from
its commercial partnering activities and from private investors. However, there
can be no assurance that the Company will be successful in obtaining additional
funding from either human health and animal health commercial development
partners or private investors. If the Company is not successful in raising
additional funds, it will need to significantly curtail clinical trial
expenditures and to further reduce staff and administrative expenses and may be
forced to cease operations. Furthermore, the Company's creditors could demand
the Company's obligations to them be satisfied immediately. Should this event
occur, the Company could be forced to file for protection under Chapter 11 of
the United States Bankruptcy Code if it were not able to obtain alternative
sources of financing.

FORWARD-LOOKING STATEMENTS

         Certain statements made in this Plan of Operations and elsewhere in
this report are "forward- looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 (the "Act"). Forward-looking statements
include, without limitation, any statement that may predict, forecast, indicate
or imply future results, performance, achievements, costs or expenses and may
contain words such as "believe", "anticipate", "expect", "estimate", "project",
"budget", or words or phrases of similar meaning. Forward-looking statements
involve risks and uncertainties which may cause actual results to differ
materially from those projected in the forward-looking statements. Such risks
and uncertainties are detailed from time to time in reports filed by the Company
with the SEC, including Forms 8-K, 10-QSB and 10-KSB, and include among others
the following: promulgation and implementation of regulations by the U.S. Food
and Drug Administration ("FDA"); promulgation and implementation of regulations
by foreign governmental instrumentalities with functions similar to those of the
FDA; costs of research and development and clinical trials, including without
limitation, costs of clinical supplies, packaging and inserts, patient
recruitment, trial monitoring, trial evaluation, and publication; and possible
difficulties in enrolling a sufficient number of qualified patients for certain
clinical trials. The Company is also dependent upon a broad range of general
economic and financial risks, such as possible increases in the costs of
employing and/or retaining qualified personnel and consultants, and possible
inflation which might affect the Company's ability to remain within its budget
forecasts. The principal uncertainties to which the Company is presently subject
are its inability to ensure that the results of the Sjogren's syndrome Phase III
trial, or any other trials performed by the Company, will be sufficiently
favorable to ensure eventual regulatory approval for commercial sales, its
inability to accurately budget at this time the possible costs

                                       12
<PAGE>   13

associated with hiring and retaining of additional personnel, uncertainties
regarding the terms and timing of one or more commercial partner agreements, and
its ability to continue as a going concern.

         The risks cited here are not exhaustive. Other sections of this report
may include additional factors which could adversely impact the Company's
business and future prospects. Moreover, the Company is engaged in a very
competitive and rapidly changing industry. New risk factors emerge from time to
time and it is not possible for management to predict all such risk factors, nor
can it assess the impact of all such risk factors on the Company's business, or
the extent to which any factor or combination of factors may cause actual
results to differ materially from those projected in any forward-looking
statements. Given these risks and uncertainties, investors should not place
undue reliance on forward-looking statements as a prediction of actual future
events.

ITEM 7.           FINANCIAL STATEMENTS.

         The financial statements of the Company are set forth beginning on page
F-1 immediately following the signature page of this report.

ITEM 8.           CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                  ACCOUNTING AND FINANCIAL DISCLOSURE.

         None.

                                    PART III

ITEM 9.           DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
                  PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
                  ACT.

         As of December 31, 2000, the directors and executive officers of the
Company were as follows:

<TABLE>
<CAPTION>
NAME                                                        AGE         POSITION
---------------------------------------------------      ---------      ----------------------------------------------
<S>                                                        <C>          <C>
Joseph Cummins, DVM, PhD (1)(3)....................         58          Chairman of the Board, President,
                                                                        Chief Executive Officer, Chief
                                                                        Financial Officer and Director
Edward Amento, MD (3)(5)...........................         54          Director
Stephen Chen, PhD (2)(4)...........................         51          Director
James Cook (1)(3)(5)...............................         66          Director
Thomas D'Alonzo (1)(2).............................         57          Director
Katsuaki Hayashibara (3)(4)(5).....................         56          Director
Dennis Moore, DVM (1)(4)(5)........................         54          Director
James Page, MD (1)(2)(5)...........................         73          Director
Kathleen L. Kelleher (6)...........................         52          Chief Operating Officer, Vice
                                                                        President Business Development
</TABLE>

                                       13
<PAGE>   14

<TABLE>
<CAPTION>
NAME                                                        AGE         POSITION
---------------------------------------------------      ---------      ----------------------------------------------

The following are not executive officers, but are expected by the Company to make a
significant contribution to the business:
<S>                                                        <C>          <C>
Philip C. Fox, DDS (6).............................         51          Consultant for Research and
                                                                        Development
Martin J. Cummins..................................         32          Clinical Project Director
</TABLE>

(1)   Member of the Executive Committee.
(2)   Member of the Compensation Committee.
(3)   Member of the Finance Committee.
(4)   Member of the Audit Committee.
(5)   Member of the Stock Option Plans Administration Committee.
(6)   Ms. Kelleher's employment with the Company was terminated effective
      January 19, 2001, and Dr. Fox's contract of employment with the Company
      expired December 31, 2000, and was not renewed. Both Ms. Kelleher and Dr.
      Fox have agreed to remain available to the Company on a consulting basis.

         Joseph Cummins has been the Chairman of the Board of the Company since
he founded it in June 1984. Dr. Cummins has also served as President of the
Company since December 1994, and as Chief Financial Officer since October 1998.
Dr. Cummins has been conducting research on oral cytokines, most particularly
IFN[alpha], in animals and humans for 29 years. Dr. Cummins has more than 40
publications and a dozen patents which reflect his work in the field oral IFN.
He received a PhD degree in microbiology from the University of Missouri in 1978
and a doctor of veterinary medicine degree from Ohio State University in 1966.

         Edward Amento has been a Director of the Company since 1999. Dr. Amento
has been Director and Chairman of the Molecular Medicine Research Institute
since 1995. Dr. Amento is also clinical professor of medicine and dermatology at
Stanford University School of Medicine. He was formerly the President and
co-founder of Connective Therapeutics (now Connectics Corp.) of Palo Alto,
California. Dr. Amento held senior positions at Genentech from 1987 to 1993.

         Stephen Chen has been a director of the Company since February 1996. He
has been President and Chief Executive Officer of STC International, Inc., a
health care investment firm, since May 1992. From August 1989 to May 1992 he was
Director of Pharmaceutical Research and Development for the Ciba Consumer
Pharmaceuticals Division of Ciba-Geigy.

         James Cook has been a director of the Company since 1988. He has been
President and Chief Executive Officer of the First National Bank of Arvada since
January 1992 and from April 1987 to December 1991 he was Executive Vice
President of First National Bank of Amarillo.

         Thomas D'Alonzo has been a director of the Company since 1997. Until
September, 1999 he was President and Chief Operating Officer of PPD and its
Clinical Research Organization subsidiary, PPD Development, Inc., was President
of GENVEC, Inc., from 1993 to 1996, and was President of Glaxo, Inc. from 1983
to 1993.

         Katsuaki Hayashibara has been a director of the Company since 1994. Mr.
Hayashibara was named Director of the Overseas Business Development Division of
Hayashibara Company, Ltd. in January 1997. Prior to 1997, Mr. Hayashibara served
as Director of Research and Development for HBL.

                                       14
<PAGE>   15

         Dennis Moore has been a director of the Company since 1986. Dr. Moore
has been a doctor of veterinary medicine since 1972 and was in private practice
from 1972 to 1995. Since 1995, Dr. Moore has been involved in managing his
personal investments.

         James Page has been a director of the Company since February 1996.
Prior to retiring in 1991 as a Vice President with Adria Laboratories, Inc., a
pharmaceutical company specializing in therapy given to cancer and AIDS
patients, Dr. Page held various upper management level positions with Carter
Wallace, Inc., Merck Sharpe & Dohme Research Laboratories and Wyeth
Laboratories.

         Kathleen Kelleher has been an officer of the Company since January
1999. Ms. Kelleher holds a Bachelor's Degree and a Master's Degree in Biology.
In addition, she holds a MBA from the University of Chicago. Ms. Kelleher has
spent the last twenty years working in the pharmaceutical and biopharmaceutical
industry. She has held senior management positions in marketing, business
development, licensing, product planning, strategic marketing, strategic
planning and operations. Most recently, Ms. Kelleher was employed as senior
director of licensing at G.D. Searle, the pharmaceutical division of Monsanto.

         Philip Fox joined The Company as Director, Research and Development in
January 1999. Prior to that, he was at the National Institutes of Health,
National Institute of Dental and Craniofacial Research since 1976. During his
NIH tenure, he served as Clinical Director of the Intramural Research Program,
and Chief of the Clinical Investigations Section, Gene Therapy and Therapeutics
Branch. Dr. Fox is an oral/maxillofacial surgeon and a diplomate of the American
Board of Oral Medicine.

         Martin Cummins has held several positions within the Company since
joining the Company full-time in June 1992. Mr. Cummins currently oversees all
research studies involving human participants as Clinical Project Director.
Martin Cummins is the son of Joseph Cummins.

         The Company's directors are elected at the annual meeting of
shareholders to hold office until the annual meeting of shareholders for the
ensuing year or until their successors have been duly elected and qualified.
Until October of 1999, the Company paid directors who were not employees of the
Company a fee of $1,000 per regularly scheduled Board meeting attended, or $250
for participation in a regularly scheduled Board meeting by conference
telephone. Commencing October 29, 1999, each director receives 1,500 options for
physical attendance, and 375 options for telephone participation, at a maximum
of one (1) meeting per quarter. The options are granted at December 31 of the
year during which they are earned, and are exercisable at the fair market value
of the stock on the date of grant. The directors no longer receive payment of
fees for attendance at meetings; however, they are reimbursed for any
out-of-pocket expenses in connection with their attendance at meetings.

         Officers are elected annually by the Board of Directors and serve at
the discretion of the Board.

COMPLIANCE WITH SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

         Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") requires directors and officers of the Company and persons who
own more than 10 percent of the

                                       15
<PAGE>   16

Company's common stock to file with the Securities and Exchange Commission (the
"Commission") initial reports of ownership and reports of changes in ownership
of the common stock. Directors, officers and more than 10 percent shareholders
are required by the Exchange Act to furnish the Company with copies of all
Section 16(a) forms they file.

         During 2000, Dr. Dennis Moore, a director of the Company, was late
filing three (3) Form 4's (Statements of Changes in Beneficial Ownership) within
the time period required by Section 16(a) of the Exchange Act. Said Form 4's
were duly filed on December 15, 2000, and to the Company's knowledge, there are
no remaining delinquencies.

         Other than mentioned above, to the Company's knowledge based solely on
a review of the copies of such reports furnished to the Company, all filings
applicable to its directors, officers and more than 10% beneficial owners were
timely filed.

ITEM 10.          EXECUTIVE COMPENSATION.

         The following table sets forth for the three years ended December 31,
2000 compensation paid by the Company to its Chairman of the Board, President
and Chief Executive Officer, and to its Chief Operating Officer. None of the
Company's other executive officers had annual salary and bonus in excess of
$100,000 for services rendered during any of the three years ended December 31,
2000.

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                             Annual Compensation
                                                         ------------------------------------------------------------
  NAME AND PRINCIPAL POSITION                  YEAR           SALARY               BONUS         OTHER COMPENSATION
------------------------------------------   --------    -----------------     --------------   ---------------------
<S>                                            <C>       <C>                      <C>           <C>
Dr. Joseph Cummins, Chairman
     of the Board, President and
     Chief Executive Officer..............     2000      $          25,935        $         -   $        -
                                               1999                150,000        $         -   $        -
                                               1998                150,000        $         -   $        -

Kathleen Kelleher, Chief
     Operating Officer and Vice-
     President of Business
     Development..........................     2000                123,043        $         -   $        -
                                               1999                150,000        $         -   $        -
</TABLE>

                              OPTION GRANTS IN 2000

         The following table sets forth certain information relating to options
granted in 2000 to the executive officers named above, to purchase shares of
common stock of the Company.

                                       16
<PAGE>   17

<TABLE>
<CAPTION>
                                            NUMBER OF
                                            SHARES OF
                                           COMMON STOCK          % OF TOTAL
                                            UNDERLYING        OPTIONS GRANTED      EXERCISE OR
                                             OPTIONS            TO EMPLOYEES        BASE PRICE       EXPIRATION
  NAME                                     GRANTED (#)            IN 2000             ($/SH)            DATE
--------------------------------------  ------------------  --------------------  --------------  ----------------
<S>                                           <C>                   <C>             <C>               <C>
Kathleen Kelleher.....................        8,000                 100%            $2.75 (1)         1-19-04
</TABLE>

(1)   The fair market value of the common stock on the date of the grant.

                AGGREGATED OPTION EXERCISES AT DECEMBER 31, 2000
                           AND YEAR-END OPTION VALUES

         The following table sets forth information for the executive officers
named above, regarding the exercise of options during 2000 and unexercised
options held at the end of 2000.


<TABLE>
<CAPTION>
                                                               NUMBER OF SHARES OF         VALUE OF UNEXERCISED
                                                             COMMON STOCK UNDERLYING           IN-THE-MONEY
                                  SHARES                     UNEXERCISED OPTIONS AT             OPTIONS AT
                                ACQUIRED ON      VALUE        DECEMBER 31, 2000 (#)     DECEMBER 31, 2000 ($) (1)
NAME                           EXERCISE (#)   REALIZED ($)  EXERCISABLE/UNEXERCISABLE   EXERCISABLE/UNEXERCISABLE
------------------------------ ------------- ------------- --------------------------- ----------------------------
<S>                              <C>            <C>          <C>                         <C>
Joseph Cummins                       -             -         282,750   /    1,750        $47,000  /      None
Kathleen Kelleher                    -             -          77,333   /    66,667       $6,768   /      None
</TABLE>

(1)   Calculated based on the closing price of the common stock ($1.063) as
      reported by OTC BB on December 31, 2000.

                   DIRECTOR COMPENSATION FOR LAST FISCAL YEAR

<TABLE>
<CAPTION>
                                                                         Cash Compensation                         Security Grants
                                                             -----------------------------------------       ---------------------
                                                                                                                   NUMBER OF
                                                                                                                  SECURITIES
                                                                 MEETING                CONSULTING                UNDERLYING
                        NAME                                     FEES (1)                FEES (2)                 OPTIONS (3)
-----------------------------------------------------        ----------------        -----------------       ---------------------
<S>                                                              <C>                     <C>                                 <C>
Edward Amento, MD                                                $          -            $           -                       2,625
Stephen Chen, PhD                                                           -                        -                       3,750
James Cook                                                                  -                        -                       3,750
Thomas D'Alonzo                                                             -                    1,000                       2,625
Katsuaki Hayashibara                                                        -                        -                       3,750
Dennis Moore, DVM                                                           -                        -                       3,750
James Page, MD                                                              -                        -                       3,750
</TABLE>

(1)   Directors do not receive cash compensation for attendance at directors'
      meetings, but each director receives 1,500 options for physical
      attendance, and 375 options for telephone participation, at a maximum of
      one (1) meeting per quarter. The options are granted at December 31 of the
      year during which they are earned, and are exercisable at the fair market
      value of the stock on the date of grant.
(2)   Each director receives $1,200 per day, prorated for partial days, for
      employment on special projects or assignments.
(3)   Includes options granted for participation in meetings; see Note (1),
      above.

                                       17
<PAGE>   18

ITEM 11.          SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                  MANAGEMENT.

         As of December 31, 2000, there were 7,807,357 shares of the Company's
common stock outstanding. The following table sets forth as of December 31,
2000, the beneficial ownership of each person who owns more than 5% of such
outstanding common stock:

<TABLE>
<CAPTION>
NAME AND ADDRESS                                                      NUMBER OF SHARES              PERCENT OF TOTAL
-----------------------------------------------------------      --------------------------      -----------------------
<S>                                                                        <C>                            <C>
Hayashibara Biochemical Laboratories, Inc.
2-3 Shimoishii 1-chome
Okayama 700, Japan                                                         3,290,781                      42.1%

Dr. Joseph Cummins
800 West 9th Avenue
Amarillo, Texas 79101                                                        549,214 (1)                   7.0%
</TABLE>

(1)   Includes an aggregate of 181,704 shares of common stock held by Joseph
      Cummins as trustee under certain trusts for the benefit of his children
      and 10,000 shares owned by Dr. Cummins' wife.

         The following table sets forth the beneficial ownership of the
Company's stock as of December 31, 2000 by each executive officer and director,
and by all executive officers and directors as a group:

<TABLE>
<CAPTION>
DIRECTORS                                                NUMBER OF SHARES              PERCENT OF TOTAL
---------------------------------------------       --------------------------      -----------------------
<S>                                                         <C>                                <C>
Joseph Cummins                                              549,214 (1)                        7.0%
Dennis Moore                                                 84,616                            1.1%
James Cook                                                   66,600 (2)                        *
Katsuaki Hayashibara                                         48,240                            *
Kathleen Kelleher                                            21,390                            *
Stephen Chen                                                 13,500                            *
Thomas D'Alonzo                                               3,000                            *
Edward Amento                                                     -                            -
James Page                                                        -                            -
Total Group (all directors and                              786,560                            8.1%
executive officers - 11 persons)
</TABLE>

*  Less than 1%
(1)   Includes an aggregate of 181,704 shares of common stock held by Joseph
      Cummins as trustee under certain trusts for the benefit of his children
      and 10,000 shares owned by Dr. Cummins' wife.
(2)   All of such shares are owned jointly with Mr. Cook's wife.

                                       18
<PAGE>   19

ITEM 12.          CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The Company has relied significantly on HBL, the largest shareholder of
the Company, for a substantial portion of its capital requirements. Pursuant to
the Development Agreement described at Item 1 of Part 1, above, HBL advanced
$9,000,000 for funding of research. In addition, HBL has purchased substantial
amounts of the Company's common stock from time to time, to the point where it
now owns 42.1% of the issued and outstanding shares of common stock of the
Company. HBL loaned $1 million to the Company on November 30, 1999, and an
additional $1 million on February 29, 2000, both loans bearing interest at 4.5%
per annum. The aggregate balance on both notes at December 31, 2000, including
principal and accrued interest, was $2,086,351. In addition to the above, HBL
and the Company are parties to various license and manufacturing and supply
agreements pursuant to which the Company licenses certain technology to or from
HBL. HBL supplies formulations of its interferon alpha and other products to the
Company.

         During 2000, the Company has used the law firm of Sprouse, Smith &
Rowley, P.C. Mr. Edward Morris, Secretary of the Company, is a partner in the
firm. In 2000, the Company was invoiced $110,320 by said firm.

         On March 25, 1999, ABI signed a contract with PPD Pharmaco, Inc., now
known as PPD Development, Inc. to provide clinical monitoring and data entry
services for ABI's Phase III clinical trials in Sjogren's syndrome. During the
year ended December 31, 2000, the Company paid $816,552 for clinical research
organization services to PPD Development, Inc. At the time that the contract was
signed, Mr. Tom D'Alonzo was President and Chief Operating Officer of PPD and
its Clinical Research Organization subsidiary, PPD Development, Inc., and was
also a member of the ABI Board of Directors. Mr. D'Alonzo retired from PPD
Development, Inc. in October, 1999. Mr. D'Alonzo is still a member of the ABI
Board of Directors.

         All future transactions and loans between the Company and its officers,
directors and 5% shareholders will be on terms no less favorable to the Company
than could be obtained from independent third parties. There can be no
assurance, however, that future transactions or arrangements between the Company
and its affiliates will be advantageous, that conflicts of interest will not
arise with respect thereto or that if conflicts do arise, that they will be
resolved in favor of the Company.

                                       19
<PAGE>   20

ITEM 13.          EXHIBITS AND REPORTS ON FORM 8-K.

EXHIBIT INDEX

<TABLE>
<CAPTION>
     NUMBER         DESCRIPTION
----------------    -----------------------------------------------------------------------------------------------------
<S>                 <C>
 3.1+               Restated Articles of Incorporation of the Company, dated June 22, 1999.
 3.3*               Bylaws of the Company.
 4.1*               Specimen Common Stock Certificate.
 4.2*               Form of Underwriter's Warrant.
10.1*               Agreement dated as of April 1, 1984 between University Patents, Inc. and the
                    Company.
10.2*               License Agreement dated as of March 22, 1988 between the Company and The
                    Texas A&M University System.
10.3*               License Agreement dated October 20, 1989 between the Company and ISI.
10.4*               Manufacturing and Supply Agreement dated October 20, 1989 between the Company
                    and ISI.
10.5*               Joint Development and Manufacturing/Supply Agreement dated March 13, 1992
                    between the Company and HBL, as amended.
10.7*               Japan Animal Health License Agreement dated January 20, 1993 between the
                    Company and HBL.
10.9*               Employment Agreement dated as of March 4, 1994 between the Company and Dr.
                    Joseph M. Cummins, as amended.
10.11*              Manufacturing/Supply Agreement dated June 1, 1994 between the Company and
                    HBL.
10.12*              Settlement Agreement dated April 27, 1995 among the Company, ISI, Pharma
                    Pacific Management Pty. Ltd. ("PPM"), Pharma Pacific Pty. Ltd., Pharma Pacific
                    Ltd., and Fernz Corporation Limited.
10.13*              Amendment of ACC/ISI License Agreement dated April 27, 1995 between the
                    Company and ISI.
10.14*              PPM/ACC Sub-license Agreement dated April 27, 1995 between PPM and the
                    Company.
10.18*              Form of Consulting Agreement between the Company and the Underwriter.
10.20+              1996 Employee Stock Option Plan, Amended and Restated as of May 11, 1999.
10.21+              Outside Director and Advisor Stock Option Plan, Amended and Restated as of May
                    11, 1999.
10.22*              Form of Indemnification Agreement between the Company and officers and directors
                    of the Company.
10.23*              Indemnification Agreement between HBL and the Company.
10.26**             License Agreement dated July 22, 1997, between Hoffmann-La Roche Inc., and the
                    Company.
10.27**             Distribution Agreement dated January 12, 1998, between Global Damon
                    Pharmaceutical and the Company.
</TABLE>

                                       20
<PAGE>   21

<TABLE>
<CAPTION>
     NUMBER         DESCRIPTION
----------------    -----------------------------------------------------------------------------------------------------
<S>                 <C>
10.28**             Distribution Agreement dated September 17, 1997, between HBL and the Company
                    (TNF-A).
10.29**             Distribution Agreement dated September 17, 1997, between HBL and the Company
                    (IFN-G).
10.30***            Amendment No. 1 dated September 28, 1998 to License Agreement of March 22,
                    1988, between The Texas A&M University System and the Company.
10.36               License Agreement dated February 1, 2000 between Molecular
                    Medicine Research Institute, and the Company (IFN-G
                    administered orally).
10.37(a)            License and Supply Agreement dated April 3, 2000 with Key Oncologics (Pty) Ltd.,
                    and the Company.
10.38               Amendment No. 1 dated April 4, 2000, to Interferon-G Distribution Agreement
                    dated September 17, 1997 between HBL and the Company (IFN-G).
10.39(a)            License and Supply Agreement dated April 25, 2000 between
                    Biopharm for Scientific Research and Drug Industry
                    Development and the Company.
10.40(a)            Sales Agreement dated May 5, 2000, between Wilke Resources, Inc. and the
                    Company.
10.41               Engagement Agreement dated September 26, 2000, between Hunter Wise Financial
                    Group, LLC, and the Company.
10.42(a)            Supply Agreement (Anhydrous Crystalline Maltose) dated October 13, 2000,
                    between Hayashibara Biochemical Laboratories, Inc., and the Company.
10.43(a)            Supply Agreement dated December 11, 2000, between Natrol, Inc., and the
                    Company.
21.                 Subsidiaries of the Company. The following sets forth the name and jurisdiction of
                    incorporation of each subsidiary of the Company. All of such subsidiaries are wholly-
                    owned by the Company.

<CAPTION>
                       NAME                                                    JURISDICTION OF INCORPORATION
                       ----------------------------------------------          -----------------------------------------
<S>                                                                                  <C>
                       VANGUARD BIOSCIENCES, INC.                                                TEXAS
                       VELDONA USA, INC.                                                         TEXAS
                       VELDONA AFRICA, INC.                                                      TEXAS
                       VELDONA POLAND, INC.                                                      TEXAS
                       ABI TAIWAN, INC.                                                          TEXAS
                       AMARILLO CELL OF CANADA, INC.                                             TEXAS

23.1                Consent of Ernst & Young LLP.
</TABLE>

*The Exhibit is incorporated by reference to the exhibit of the same number to
the Company's Registration Statement on Form SB-2 filed with and declared
effective by the Commission (File No. 333-4413) on August 8, 1996.
**The Exhibit is incorporated by reference to the Company's 1997 Annual Report
on Form 10-KSB filed with the Commission on or before March 31, 1998.
***The Exhibit is incorporated by reference to the Company's 1998 Annual Report
on Form 10-KSB filed with the Commission on or before March 31, 1999.
+The Exhibit is incorporated by reference to the Company's Report on Form 10-QSB
for the quarterly period ended June 30, 1999, filed with the Commission on
August 12, 1999, and subsequently amended on September 13, 1999.
(a)Portions of this exhibit have been omitted and filed separately with the
commission.

                                       21
<PAGE>   22

                               REPORTS ON FORM 8-K

A report on Form 8-K was filed on February 11, 2000, relating to an Agreement to
Convert Debt between Amarillo Biosciences, Inc. and Hayashibara Biochemical
Laboratories, Inc., dated September 30, 1999, reporting that the exchange called
for by said Agreement to take place on February 29, 2000, in which Hayashibara
Biochemical Laboratories, Inc. would contribute $1 million to the Company and
receive an equivalent amount of the Company's common stock, would not take
place, but instead, by mutual consent of the parties, Hayashibara Biochemical
Laboratories, Inc. agreed to loan $1 million to the Company at an interest rate
of 4.5% per annum payable on or before February 29, 2005, or one (1) year after
FDA approval of a drug containing Hayashibara's interferon alpha for oral
administration to humans, whichever should occur first.

                                       22
<PAGE>   23

                                   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.


                                       AMARILLO BIOSCIENCES, INC.


                                       By:   /s/ JOSEPH M. CUMMINS
                                             -----------------------------------
                                             Joseph M. Cummins, Chairman of the
                                             Board, President, Chief Financial
                                             Officer and Chief Executive Officer
Date:    April 12, 2001
      ---------------------

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/ JOSEPH M. CUMMINS                                         Chairman of the Board,                     12 April 2001
-----------------------------------------------------------   President, Chief Financial                 ---------------------------
Joseph M. Cummins                                             Officer, Director and
                                                              Chief Executive Officer

/s/ EDWARD P. AMENTO                                          Director                                   12 April 2001
-----------------------------------------------------------                                              ---------------------------
Edward P. Amento

/s/ STEPHEN T. CHEN                                           Director                                   12 April 2001
-----------------------------------------------------------                                              ---------------------------
Stephen T. Chen

/s/ JAMES COOK                                                Director                                   12 April 2001
-----------------------------------------------------------                                              ---------------------------
James Cook

/s/ THOMAS W. D'ALONZO                                        Director                                   12 April 2001
-----------------------------------------------------------                                              ---------------------------
Thomas W. D'Alonzo

/s/ KATSUAKI HAYASHIBARA                                      Director                                   11 April 2001
-----------------------------------------------------------                                              ---------------------------
Katsuaki Hayashibara

/s/ DENNIS MOORE                                              Director                                   12 April 2001
-----------------------------------------------------------                                              ---------------------------
Dennis Moore

/s/ JAMES A. PAGE                                             Director                                   11 April 2001
-----------------------------------------------------------                                              ---------------------------
James A. Page
</TABLE>
<PAGE>   24

                           Amarillo Biosciences, Inc.
                                and Subsidiaries
                      (companies in the development stage)

                        Consolidated Financial Statements

                          Year ended December 31, 2000



                                    CONTENTS

<TABLE>
<S>                                                                                                                      <C>
Report of Independent Auditors ..........................................................................................F-1


Audited Consolidated Financial Statements


Consolidated Balance Sheets .............................................................................................F-2

Consolidated Statements of Operations ...................................................................................F-3

Consolidated Statements of Stockholders' Equity (Deficit) ...............................................................F-4

Consolidated Statements of Cash Flows ...................................................................................F-7

Notes to Consolidated Financial Statements ..............................................................................F-9
</TABLE>

<PAGE>   25

               Report of Ernst & Young, LLP, Independent Auditors


The Board of Directors
Amarillo Biosciences, Inc.

We have audited the accompanying consolidated balance sheets of Amarillo
Biosciences, Inc. and subsidiaries (companies in the development stage) as of
December 31, 2000 and 1999, and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for each of the two
years in the period ended December 31, 2000 and for the period from June 25,
1984 (inception) through December 31, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. The financial
statements for the period June 25, 1984 (inception) through December 31, 1991,
were audited by other auditors whose report dated July 12, 1992, which has been
furnished to us, expressed an unqualified opinion on those statements. The
financial statements for the period June 25, 1984 (inception) through December
31, 1991, include total revenues and net loss of $643,566 and $3,901,236,
respectively. Our opinion on the statements of operations, stockholders' equity
(deficit), and cash flows for the period June 25, 1984 (inception) through
December 31, 2000, insofar as it relates to amounts for prior periods through
December 31, 1991, is based solely on the report of other auditors.

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

In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Amarillo Biosciences, Inc. and
subsidiaries as of December 31, 2000 and 1999, and the consolidated results of
their operations and their cash flows for each of the two years in the period
ended December 31, 2000, and the period from June 25, 1984 (inception) through
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.

As discussed in Note 1 to the financial statements, the Company's recurring
losses from operations and the need to raise additional financing in order to
satisfy its vendors and other creditors and execute its 2001 Plan raise
substantial doubt about its ability to continue as a going concern.
(Management's plans as to these matters are also described in Note 1.) The 2000
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.

                                                        ERNST & YOUNG LLP

Dallas, Texas
March 21, 2001

                                       F-1
<PAGE>   26

                           Amarillo Biosciences, Inc.
                                and Subsidiaries
                      (companies in the development stage)

                           Consolidated Balance Sheets

<TABLE>
<CAPTION>
                                                                                                   DECEMBER 31,
                                                                                -------------------------------------------------
                                                                                         2000                      1999
                                                                                -------------------------------------------------
<S>                                                                             <C>                       <C>
ASSETS
Current assets:
   Cash and cash equivalents                                                    $              341,983    $             1,302,343
   Inventory                                                                                    55,839                     48,639
   Other current assets                                                                         45,500                     32,137
                                                                                -------------------------------------------------
Total current assets                                                                           443,322                  1,383,119

Property and equipment, net                                                                     93,236                    105,799
Patents, net of accumulated amortization of $101,221
   and $89,807 in 2000 and 1999, respectively                                                  107,323                     73,495
                                                                                -------------------------------------------------
Total assets                                                                    $              643,881    $             1,562,413
                                                                                =================================================

LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
   Accounts payable                                                             $              957,489    $               521,199
   Accrued interest expense                                                                     86,351                      3,526
   Accrued legal expense                                                                             -                      3,025
   Accrued vacation                                                                                  -                     19,000
   Other accrued expense                                                                        14,724                     63,173
                                                                                -------------------------------------------------
Total current liabilities                                                                    1,058,564                    609,923

Notes payable to stockholder                                                                 2,000,000                  1,000,000
                                                                                -------------------------------------------------
Total liabilities                                                                            3,058,564                  1,609,923

Commitments and contingencies

Stockholders' deficit
   Preferred stock, $.01 par value:
      Authorized shares - 10,000,000
      Issued shares - none                                                                           -                          -
   Common stock, $.01 par value:
     Authorized shares - 20,000,000
     Issued shares - 7,807,357 in 2000 and 7,472,157 in 1999                                    78,074                     74,722
   Additional paid-in capital                                                               18,399,449                 17,374,570
   Deficit accumulated during the development stage                                        (20,892,206)               (17,496,802)
                                                                                -------------------------------------------------
Total stockholders' deficit                                                                 (2,414,683)                   (47,510)
                                                                                -------------------------------------------------
Total liabilities and stockholders' deficit                                     $              643,881    $             1,562,413
                                                                                =================================================
</TABLE>

See accompanying notes.

                                       F-2
<PAGE>   27

                           Amarillo Biosciences, Inc.
                                and Subsidiaries
                      (companies in the development stage)

                      Consolidated Statements of Operations

<TABLE>
<CAPTION>
                                                                                                               CUMULATIVE
                                                                                                             FROM JUNE 25,
                                                                                                                  1984
                                                                                                              (INCEPTION)
                                                                     YEAR ENDED DECEMBER 31,                    THROUGH
                                                          ----------------------------------------------      DECEMBER 31,
                                                                   2000                    1999                   2000
                                                          ----------------------------------------------------------------------
<S>                                                            <C>                    <C>                    <C>
Revenues:
   Contract revenues                                           $                -     $                -     $        9,000,000
   Interferon sales                                                             -                      -                420,974
   Interest income                                                         47,017                111,368              1,573,022
   Sublicense fees                                                              -                      -                113,334
   Royalty income                                                               -                      -                 31,544
   Gain (loss) on ISI stock                                                 4,909                 (5,735)               113,146
   Other                                                                    1,830                  2,400                608,661
                                                          ----------------------------------------------------------------------
                                                                           53,756                108,033             11,860,681
Expenses:
   Research and development expenses                                    2,276,504              4,732,365             18,361,313
   Selling, general, and administrative
      expenses                                                          1,089,832              1,456,072             13,418,624
   Interest expense                                                        82,824                 38,182                937,950
                                                          ----------------------------------------------------------------------
                                                                        3,449,160              6,226,619             32,717,887
                                                          ----------------------------------------------------------------------

Loss before income taxes                                               (3,395,404)            (6,118,586)           (20,857,206)
Income tax expense                                                              -                      -                 35,000
                                                          ----------------------------------------------------------------------
Net loss                                                       $       (3,395,404)    $       (6,118,586)    $      (20,892,206)
                                                          ======================================================================

Basic and diluted net loss per share                           $            (0.44)    $            (0.96)
                                                          ===============================================

Weighted average shares outstanding                                     7,715,086              6,362,047
                                                          ===============================================
</TABLE>

See accompanying notes.

                                       F-3
<PAGE>   28

                           Amarillo Biosciences, Inc.
                                and Subsidiaries
                      (companies in the development stage)

            Consolidated Statements of Stockholders' Equity (Deficit)
       Cumulative from June 25, 1984 (Inception) through December 31, 2000

<TABLE>
<CAPTION>


                                                                              COMMON STOCK                 ADDITIONAL
                                                    ISSUANCE      -------------------------------------     PAID IN
                                                     PRICE              SHARES             AMOUNT           CAPITAL
                                                  --------------------------------------------------------------------------
<S>                                               <C>                <C>               <C>             <C>
1984
Initial issuance for cash                                $0.29              84,000     $          840  $          23,660
Initial issuance in exchange for legal fees               0.29              30,000                300              8,450
Initial issuance in exchange for services and
   research and development costs                         0.01           1,086,000             10,860             (9,955)
1985
Issuance for cash                                         0.83             102,000              1,020             83,980
Issuance in exchange for professional fees,
   salaries and research services                         0.83              10,800                108              8,892
1986
Issuance in exchange for professional fees,
   salaries and services                                  0.83              22,800                228             18,772
Treasury stock purchase; 11,040 shares at cost                                   -                  -                  -
Issuance for cash                                    0.83-1.25             182,352              1,824            154,626
Issuance in exchange for professional fees,
   salaries and research services                         0.83              19,020                190             15,660
1987
Issuance for cash                                    1.25-2.08             309,648              3,096            445,974
Treasury stock purchase; 2,400 shares at cost                                    -                  -                  -
1988
Issuance for cash                                         1.88             120,972              1,210            225,613
1989
Issuance for cash                                         2.08               2,568                 26              5,324
Issuance for cash                                         2.50             227,748              2,277            567,093
1990
Issuance for cash                                    1.72-2.50             592,584              5,926          1,108,634
Issuance for cash                                         4.17             174,000              1,740            723,260
Issuance in exchange for note receivable from
   stockholder                                            2.50              54,540                545            135,805
1991
Repayment of note receivable from stockholder                                    -                  -                  -
Net loss and total comprehensive loss cumulative
   from June 25, 1984 (inception) through
   December 31, 1991                                                             -                  -                  -

<CAPTION>
                                                      DEFICIT
                                                    ACCUMULATED                                 NOTE
                                                     DURING THE          UNREALIZED          RECEIVABLE
                                                    DEVELOPMENT         GAIN (LOSS)             FROM             TREASURY
                                                       STAGE           ON INVESTMENT        STOCKHOLDER            STOCK
                                                  ------------------------------------------------------------------------------
<S>                                               <C>                 <C>                 <C>                 <C>
1984
Initial issuance for cash                         $              -    $              -    $              -    $             -
Initial issuance in exchange for legal fees                      -                   -                   -                  -
Initial issuance in exchange for services and
   research and development costs                                -                   -                   -                  -
1985
Issuance for cash                                                -                   -                   -                  -
Issuance in exchange for professional fees,
   salaries and research services                                -                   -                   -                  -
1986
Issuance in exchange for professional fees,
   salaries and services                                         -                   -                   -                  -
Treasury stock purchase; 11,040 shares at cost                   -                   -                   -            (22,500)
Issuance for cash                                                -                   -                   -                  -
Issuance in exchange for professional fees,
   salaries and research services                                -                   -                   -                  -
1987
Issuance for cash                                                -                   -                   -                  -
Treasury stock purchase; 2,400 shares at cost                    -                   -                   -             (3,500)
1988
Issuance for cash                                                -                   -                   -                  -
1989
Issuance for cash                                                -                   -                   -                  -
Issuance for cash                                                -                   -                   -                  -
1990
Issuance for cash                                                -                   -                   -                  -
Issuance for cash                                                -                   -                   -                  -
Issuance in exchange for note receivable from
   stockholder                                                   -                   -            (136,350)                 -
1991
Repayment of note receivable from stockholder                    -                   -             136,350                  -
Net loss and total comprehensive loss cumulative
   from June 25, 1984 (inception) through
   December 31, 1991                                    (3,901,236)                  -                   -                  -

<CAPTION>


                                                        TOTAL
                                                    STOCKHOLDERS'
                                                   EQUITY (DEFICIT)
                                                  -------------------
<S>                                                <C>
1984
Initial issuance for cash                          $           24,500
Initial issuance in exchange for legal fees                     8,750
Initial issuance in exchange for services and
   research and development costs                                 905
1985
Issuance for cash                                              85,000
Issuance in exchange for professional fees,
   salaries and research services                               9,000
1986
Issuance in exchange for professional fees,
   salaries and services                                       19,000
Treasury stock purchase; 11,040 shares at cost                (22,500)
Issuance for cash                                             156,450
Issuance in exchange for professional fees,
   salaries and research services                              15,850
1987
Issuance for cash                                             449,070
Treasury stock purchase; 2,400 shares at cost                  (3,500)
1988
Issuance for cash                                             226,823
1989
Issuance for cash                                               5,350
Issuance for cash                                             569,370
1990
Issuance for cash                                           1,114,560
Issuance for cash                                             725,000
Issuance in exchange for note receivable from
   stockholder                                                      -
1991
Repayment of note receivable from stockholder                 136,350
Net loss and total comprehensive loss cumulative
   from June 25, 1984 (inception) through
   December 31, 1991                                       (3,901,236)
</TABLE>


                                       F-4
<PAGE>   29

                           Amarillo Biosciences, Inc.
                                and Subsidiaries
                      (companies in the development stage)

      Consolidated Statements of Stockholders' Equity (Deficit)(continued)
       Cumulative from June 25, 1984 (Inception) through December 31,2000


<TABLE>
<CAPTION>
                                                                              COMMON STOCK                      ADDITIONAL
                                                    ISSUANCE         --------------------------------------       PAID IN
                                                     PRICE                 SHARES           AMOUNT                CAPITAL
                                                  ---------------------------------------------------------------------------------
<S>                                               <C>                   <C>            <C>                   <C>
1992
Net loss and total comprehensive loss for year
    ended December 31, 1992                                                        -   $                -    $               -
                                                                     --------------------------------------------------------------
Balance at December 31, 1992                                               3,019,032               30,190            3,515,788
1993
Net loss and total comprehensive loss for year
    ended December 31, 1993                                                        -                    -                    -
                                                                     --------------------------------------------------------------
Balance at December 31, 1993                                               3,019,032               30,190            3,515,788
1994
Net loss and total comprehensive loss for year
    ended December 31, 1994                                                        -                    -                    -
Adjustment to unrealized loss on investments                                       -                    -                    -

Total comprehensive loss
                                                                     --------------------------------------------------------------
Balance at December 31, 1994                                               3,019,032               30,190            3,515,788
1995
Issuance for stock grant                          $       2.50                29,640                  297               73,803
Net loss for year ended December 31, 1995                                          -                    -                    -
Adjustment to unrealized loss on investments                                       -                    -                    -

Total comprehensive loss
                                                                     --------------------------------------------------------------
Balance at December 31, 1995                                               3,048,672               30,487            3,589,591
1996
Issuance for cash                                         5.00             2,300,000               23,000            9,354,502
Issuance for stock grant                                  5.00                79,000                  790              394,210
Warrants issued for cash                                                           -                    -                  200
Cancellation of treasury stock                                               (13,440)                (135)             (25,865)
Net loss for year ended December 31, 1996                                          -                    -                    -
Adjustment to unrealized loss on investments                                       -                    -                    -

Total comprehensive loss
                                                                     --------------------------------------------------------------
Balance at December 31, 1996                                               5,414,232               54,142           13,312,638
1997
Net loss for year ended December 31, 1997                                          -                    -                    -
Adjustment to unrealized gain (loss) on
investment                                                                         -                    -                    -

Total comprehensive loss

Options issued for professional services                                           -                    -               79,500
                                                                     --------------------------------------------------------------
Balance at December 31, 1997                                               5,414,232               54,142           13,392,138

<CAPTION>
                                                       DEFICIT
                                                     ACCUMULATED                                      NOTE
                                                      DURING THE             UNREALIZED            RECEIVABLE
                                                     DEVELOPMENT            GAIN (LOSS)               FROM
                                                        STAGE              ON INVESTMENT           STOCKHOLDER
                                                  --------------------------------------------------------------------
<S>                                               <C>                    <C>                    <C>
1992
Net loss and total comprehensive loss for year
    ended December 31, 1992                       $         (505,558)    $                -     $                -
                                                  --------------------------------------------------------------------
Balance at December 31, 1992                              (4,406,794)                     -                      -
1993
Net loss and total comprehensive loss for year
    ended December 31, 1993                                 (108,363)                     -                      -
                                                  --------------------------------------------------------------------
Balance at December 31, 1993                              (4,515,157)                     -                      -
1994
Net loss and total comprehensive loss for year
    ended December 31, 1994                                 (129,239)                     -                      -
Adjustment to unrealized loss on investments                       -                (57,316)                     -

Total comprehensive loss
                                                  --------------------------------------------------------------------
Balance at December 31, 1994                              (4,644,396)               (57,316)                     -
1995
Issuance for stock grant                                           -                      -                      -
Net loss for year ended December 31, 1995                   (311,579)                     -                      -
Adjustment to unrealized loss on investments                       -                 57,316                      -

Total comprehensive loss
                                                  --------------------------------------------------------------------
Balance at December 31, 1995                              (4,955,975)                     -                      -
1996
Issuance for cash                                                  -                      -                      -
Issuance for stock grant                                           -                      -                      -
Warrants issued for cash                                           -                      -                      -
Cancellation of treasury stock                                     -                      -                      -
Net loss for year ended December 31, 1996                 (1,618,188)                     -                      -
Adjustment to unrealized loss on investments                       -                 (3,500)                     -

Total comprehensive loss
                                                  --------------------------------------------------------------------
Balance at December 31, 1996                              (6,574,163)                (3,500)                     -
1997
Net loss for year ended December 31, 1997                 (2,471,252)                     -                      -
Adjustment to unrealized gain (loss) on
investment                                                         -                 37,198                      -

Total comprehensive loss

Options issued for professional services                           -                      -                      -
                                                  --------------------------------------------------------------------
Balance at December 31, 1997                              (9,045,415)                33,698                      -

<CAPTION>
                                                                             TOTAL
                                                     TREASURY            STOCKHOLDERS'
                                                       STOCK            EQUITY (DEFICIT)
                                                  ----------------------------------------
<S>                                               <C>                 <C>
1992
Net loss and total comprehensive loss for year
    ended December 31, 1992                       $              -    $           (505,558)
                                                  ----------------------------------------
Balance at December 31, 1992                               (26,000)               (886,816)
1993
Net loss and total comprehensive loss for year
    ended December 31, 1993                                      -                (108,363)
                                                  ----------------------------------------
Balance at December 31, 1993                               (26,000)               (995,179)
1994
Net loss and total comprehensive loss for year
    ended December 31, 1994                                      -                (129,239)
Adjustment to unrealized loss on investments                     -                 (57,316)
                                                                      --------------------
Total comprehensive loss                                                          (186,555)
                                                  ----------------------------------------
Balance at December 31, 1994                               (26,000)             (1,181,734)
1995
Issuance for stock grant                                         -                  74,100
Net loss for year ended December 31, 1995                        -                (311,579)
Adjustment to unrealized loss on investments                     -                  57,316
                                                                      --------------------
Total comprehensive loss                                                          (254,263)
                                                  ----------------------------------------
Balance at December 31, 1995                               (26,000)             (1,361,897)
1996
Issuance for cash                                                -               9,377,502
Issuance for stock grant                                         -                 395,000
Warrants issued for cash                                         -                     200
Cancellation of treasury stock                              26,000                       -
Net loss for year ended December 31, 1996                        -              (1,618,188)
Adjustment to unrealized loss on investments                     -                  (3,500)
                                                                      --------------------
Total comprehensive loss                                                        (1,621,688)
                                                  ----------------------------------------
Balance at December 31, 1996                                     -               6,789,117
1997
Net loss for year ended December 31, 1997                        -              (2,471,252)
Adjustment to unrealized gain (loss) on
investment                                                       -                  37,198
                                                                      --------------------
Total comprehensive loss                                                        (2,434,054)
                                                                      --------------------
Options issued for professional services                         -                  79,500
                                                  ----------------------------------------
Balance at December 31, 1997                                     -               4,434,563
</TABLE>

                                       F-5
<PAGE>   30

                           Amarillo Biosciences, Inc.
                                and Subsidiaries
                      (companies in the development stage)

      Consolidated Statements of Stockholders' Equity (Deficit)(continued)
       Cumulative from June 25, 1984 (Inception) through December 31,2000

<TABLE>
<CAPTION>


                                                                              COMMON STOCK                 ADDITIONAL
                                                    ISSUANCE         --------------------------------       PAID IN
                                                     PRICE               SHARES            AMOUNT           CAPITAL
                                                  --------------------------------------------------------------------------
<S>                                               <C>                <C>               <C>              <C>
1998
Net loss for year ended December 31, 1998                                        -     $            -   $              -
Adjustment to unrealized gain (loss) on
investment                                                                       -                  -                  -

Total comprehensive loss
                                                                     -------------------------------------------------------
Balance at December 31, 1998                                             5,414,232             54,142         13,392,138
1999
Net loss and total comprehensive loss for year
    ended December 31, 1999                                                      -                  -                  -
Issuance in exchange for note payable to
    stockholder                                   $     2.9992             946,094              9,461          2,828,065
Issuance in exchange for note payable to
    stockholder                                         0.9044           1,111,831             11,119            994,367
Options issued for professional services                                         -                  -            160,000
                                                                     -------------------------------------------------------
Balance at December 31, 1999                                             7,472,157             74,722         17,374,570
2000
Net loss and total comprehensive loss for year
    ended December 31, 2000                                                      -                  -                  -
Issuance of common stock and warrants for cash            2.50             316,000              3,160            786,840
    in private placement
Exercise of employee stock options                       0.875              19,200                192             16,608
Employee options granted in lieu of salary                                       -                  -            221,431
                                                                     -------------------------------------------------------
Balance at December 31, 2000                                             7,807,357     $       78,074   $     18,399,449
                                                                     =======================================================

<CAPTION>
                                                       DEFICIT
                                                     ACCUMULATED                                  NOTE
                                                      DURING THE          UNREALIZED           RECEIVABLE
                                                     DEVELOPMENT          GAIN (LOSS)             FROM           TREASURY
                                                        STAGE             ON INVESTMENT        STOCKHOLDER         STOCK
                                                  ------------------------------------------------------------------------------
<S>                                               <C>                 <C>                 <C>                 <C>
1998
Net loss for year ended December 31, 1998         $     (2,332,801)   $              -    $              -    $             -
Adjustment to unrealized gain (loss) on
investment                                                       -             (33,698)                  -                  -

Total comprehensive loss
                                                  ------------------------------------------------------------------------------
Balance at December 31, 1998                           (11,378,216)                  -                   -                  -
1999
Net loss and total comprehensive loss for year
    ended December 31, 1999                             (6,118,586)                  -                   -                  -
Issuance in exchange for note payable to
    stockholder                                                  -                   -                   -                  -
Issuance in exchange for note payable to
    stockholder                                                  -                   -                   -                  -
Options issued for professional services                         -                   -                   -                  -
                                                  ------------------------------------------------------------------------------
Balance at December 31, 1999                           (17,496,802)                  -                   -                  -
2000
Net loss and total comprehensive loss for year
    ended December 31, 2000                             (3,395,404)                  -                   -                  -
Issuance of common stock and warrants for cash
    in private placement                                         -                   -                   -                  -
Exercise of employee stock options                               -                   -                   -                  -
Employee options granted in lieu of salary                       -                   -                   -                  -
                                                  ------------------------------------------------------------------------------
Balance at December 31, 2000                      $    (20,892,206)   $              -    $              -    $             -
                                                  ==============================================================================

<CAPTION>


                                                          TOTAL
                                                    STOCKHOLDERS'
                                                   EQUITY (DEFICIT)
                                                  -------------------
<S>                                               <C>
1998
Net loss for year ended December 31, 1998         $       (2,332,801)
Adjustment to unrealized gain (loss) on
investment                                                   (33,698)
                                                  -------------------
Total comprehensive loss                                  (2,366,499)
                                                  -------------------
Balance at December 31, 1998                               2,068,064
1999
Net loss and total comprehensive loss for year
    ended December 31, 1999                               (6,118,586)
Issuance in exchange for note payable to
    stockholder                                            2,837,526
Issuance in exchange for note payable to
    stockholder                                            1,005,486
Options issued for professional services                     160,000
                                                  -------------------
Balance at December 31, 1999                                 (47,510)
2000
Net loss and total comprehensive loss for year
    ended December 31, 2000                               (3,395,404)
Issuance of common stock and warrants for cash               790,000
    in private placement
Exercise of employee stock options                            16,800
Employee options granted in lieu of salary                   221,431
                                                  -------------------
Balance at December 31, 2000                      $       (2,414,683)
                                                  ===================
</TABLE>

See accompanying notes.

                                       F-6
<PAGE>   31

                           Amarillo Biosciences, Inc.
                                and Subsidiaries
                      (companies in the development stage)

                      Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                                                                      CUMULATIVE
                                                                                                                     FROM JUNE 25,
                                                                                                                         1984
                                                                                                                     (INCEPTION)
                                                                           YEAR ENDED DECEMBER 31,                     THROUGH
                                                            --------------------------------------------------       DECEMBER 31,
                                                                       2000                      1999                    2000
                                                            ------------------------------------------------------------------------
<S>                                                         <C>                          <C>                      <C>
OPERATING ACTIVITIES
Net loss                                                    $               (3,395,404)  $          (6,118,586)   $     (20,892,206)
Adjustments to reconcile net loss to
     net cash used in operating activities:
      Loss on impairment of ISI stock                                                -                   5,735               80,325
      Depreciation                                                              12,563                  17,092              220,121
      Amortization                                                              11,414                   8,630              112,261
      Discount on investment in ISI                                                  -                       -               24,675
      Recognition of deferred sub-license
        fees                                                                         -                       -              (32,844)
      Organization costs                                                             -                       -              (11,040)
      Gain (loss) on sale of assets                                                  -                       -               (7,373)
      Common stock issued for stock grant                                            -                       -              469,100
      Common stock issued for services                                               -                       -               53,505
      Options issued for services                                                    -                 160,000              239,500
      Options issued for wages                                                 221,431                       -              221,431
      Changes in operating assets and
        liabilities:
        Inventory                                                               (7,200)                (48,639)             (55,839)
        Other current assets                                                   (13,363)                 11,278              (45,500)
        Accounts payable                                                       436,290                 432,279              957,489
        Accrued expenses                                                        12,351                (140,354)             101,075
                                                            ------------------------------------------------------------------------
Net cash used in operating activities                                       (2,721,918)             (5,672,565)         (18,565,320)

INVESTING ACTIVITIES
Capital expenditures                                                                 -                  (6,130)            (329,055)
Proceeds from sale of equipment                                                      -                       -               23,071
Patents                                                                        (45,242)                (38,302)            (208,544)
Investment in ISI common stock                                                       -                       -             (105,000)
                                                            ------------------------------------------------------------------------
Net cash used in investing activities                                          (45,242)                (44,432)            (619,528)
                                                            ------------------------------------------------------------------------
</TABLE>

                                      F-7
<PAGE>   32

                           Amarillo Biosciences, Inc.
                                and Subsidiaries
                      (companies in the development stage)

                Consolidated Statements of Cash Flows (continued)

<TABLE>
<CAPTION>
                                                                                                                   CUMULATIVE
                                                                                                                  FROM JUNE 25,
                                                                                                                      1984
                                                                                                                  (INCEPTION)
                                                                          YEAR ENDED DECEMBER 31,                   THROUGH
                                                           ------------------------------------------------       DECEMBER 31,
                                                                      2000                     1999                   2000
                                                           ------------------------------------------------------------------------
<S>                                                        <C>                         <C>                    <C>
FINANCING ACTIVITIES
Receipt of sub-license fees                                   $                  -     $                  -   $              32,844
Proceeds from notes payable                                              1,000,000                1,000,000               2,000,000
Issuance of common stock and warrants                                      806,800                1,243,012              17,493,987
                                                           ------------------------------------------------------------------------
Net cash provided by financing
   activities                                                            1,806,800                2,243,012              19,526,831
                                                           ------------------------------------------------------------------------
Net increase (decrease) in cash and
   cash equivalents                                                       (960,360)              (3,473,985)                341,983
Cash and cash equivalents at
   beginning of period                                                   1,302,343                4,776,328                       -
                                                           ------------------------------------------------------------------------
Cash and cash equivalents at end of
   period                                                     $            341,983     $          1,302,343   $             341,983
                                                           ========================================================================

SUPPLEMENTAL INFORMATION
Cash paid for income taxes                                    $                  -     $                  -   $              37,084
                                                           ========================================================================

Cash paid for interest                                        $                  -     $                  -   $               6,466
                                                           ========================================================================
</TABLE>

See accompanying notes.

                                       F-8
<PAGE>   33

                   Amarillo Biosciences, Inc. and Subsidiaries
                      (companies in the development stage)

                   Notes to Consolidated Financial Statements

                                December 31, 2000

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION AND BUSINESS

Amarillo Biosciences, Inc. (the "Company" or "ABI"), a development-stage company
incorporated in 1984, is engaged in developing biologics for the treatment of
human and animal diseases. The Company is currently conducting clinical studies
as part of the process of obtaining regulatory approval from the United States
Food and Drug Administration (FDA), so that commercial marketing can begin in
the United States. Among other activities the Company recently concluded a Phase
III clinical trial, initiated during November, 1998, using low dose oral
IFN[alpha] for the treatment of Sjogren's syndrome. The analyses of these Phase
III data continues and are expected to be completed in the second quarter of
2001.

The Company's viability is dependent upon successful commercialization of
products resulting from its research and product development activities. The
Company plans on working with commercial development partners in the United
States and in other parts of the world to provide the necessary sales,
marketing, and distribution infrastructure to successfully commercialize the
IFN[alpha] product for both human and animal applications. All of the Company's
products will require significant additional development, laboratory and
clinical testing and investment prior to the Company obtaining regulatory
approval to commercially market its product(s). Accordingly, for at least the
next few years, the Company will continue to incur research and development and
general and administrative expenses and likely will not generate sufficient
revenues from product sales to support its operations.

The Company has been dependent upon financing from its stockholders. The
Company's development-stage-through-1991 activities were financed primarily
through the issuance of common stock. From 1991 to August 1996, such activities
were financed under an agreement (described in Note 4) with a major stockholder.
In August 1996, the Company completed its initial public offering, receiving net
proceeds of approximately $9,378,000.

The Company's 2001 Plan of Operations calls for the Company to expend
approximately $1.7 million in 2001.At December 31, 2000, the Company had
available cash of $341,983 and negative working capital of approximately
($615,000). The Company's continued losses and lack of liquidity indicate that
the Company may not be able to continue as a going concern for a reasonable
period of time. The Company's ability to continue as a going concern is
dependent upon several factors including, but not limited to, the continued
non-demand for immediate payment of outstanding indebtedness by the Company's
vendors and suppliers, the Company's ability to generate sufficient cash flows
to meet its obligations on a timely basis, obtain additional financing, and
continue to obtain supplies and services from its vendors. The Company will need
to raise additional funds in order to satisfy its vendors and creditors and
execute its 2001 Plan. The

                                       F-9
<PAGE>   34

                   Amarillo Biosciences, Inc. and Subsidiaries
                      (companies in the development stage)

             Notes to Consolidated Financial Statements (continued)

                                December 31, 2000

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Company is presently negotiating with human health and animal health commercial
development partners in various regions of the world including the United
States, Canada, Europe, and the Middle East. The Company believes that one or
more of these agreements will be executed during 2001. These agreements could
generally include provisions for the commercial partner to pay ABI a technology
access fee, could include payments for a portion of the clinical trial expenses,
could include payment obligations to ABI upon the accomplishment of certain
defined tasks, and/or could provide for payments relating to the future sales of
commercial product. These agreements could be an important source of funds for
ABI. Management believes the fact that it has concluded an advanced Phase III
clinical trial significantly enhances its ability to successfully raise
additional funds from its commercial partnering activities and from private
investors. However, there can be no assurance that the Company will be
successful in obtaining additional funding from either human health and animal
health commercial development partners or private investors. If the Company is
not successful in raising additional funds, it will need to significantly
curtail clinical trial expenditures and to further reduce staff and
administrative expenses and may be forced to cease operations. Furthermore, the
Company's creditors could demand the Company's obligations to them be satisfied
immediately. Should this event occur, the Company could be forced to file for
protection under Chapter 11 of the United States Bankruptcy Code if it were not
able to obtain alternative sources of financing. Additionally, the recorded
value of the Company's patents and property and equipment may not be recoverable
in the event future operations are not sustainable.

PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, Amarillo Cell of Canada, Inc.,
Veldona Africa, Inc., Veldona Poland, Inc., Veldona USA, Inc., Vanguard
Biosciences, Inc. and ABI Taiwan, Inc. (all Texas corporations). All significant
intercompany balances and transactions have been eliminated in consolidation.
The effect of translation of foreign currencies is not material.

CONCENTRATION OF CREDIT RISK

At December 31, 2000, the Company's cash equivalents were invested principally
in money market accounts, a substantial portion of which are uninsured.

CASH AND CASH EQUIVALENTS

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

                                      F-10
<PAGE>   35

                   Amarillo Biosciences, Inc. and Subsidiaries
                      (companies in the development stage)

             Notes to Consolidated Financial Statements (continued)

                                December 31, 2000

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

INVENTORY

The Company's inventory consists of IFN[alpha] lozenges available for sale. The
Company's policy is to state inventory at the lower of cost determined on a lot
basis or market.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Depreciation is calculated using
methods that approximate the declining balance method over the estimated useful
lives of the assets.

PATENTS; PATENT EXPENDITURES

ABI holds patent license agreements and also holds patents which are owned by
the Company. All patent license agreements remain in effect over the life of the
underlying patents. Accordingly, the patent license fee is being amortized over
15-17 years using the straight-line method. Patent fees and legal fees
associated with the issuance of new owned patents are capitalized and amortized
over 15-17 years.

INCOME TAXES

The Company files a consolidated income tax return with its domestic
subsidiaries, Amarillo Cell of Canada, Inc., Veldona Africa, Inc., Veldona
Poland, Inc., Veldona USA, Inc., Vanguard Biosciences, Inc. and ABI Taiwan, Inc.

On January 1, 1993, the Company changed its method of accounting for income
taxes from the deferred method to the liability method required by Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109).
As permitted by the new rules, prior years' financial statements have not been
restated. The effect of adopting SFAS 109 was not material.

REVENUE RECOGNITION

Contract revenue for research and development performed under the manufacturing
and supply agreement with Hayashibara Biochemical Laboratories, Inc. (HBL) (see
Note 4) was recorded as earned based on research and administrative costs
incurred. Amounts received in advance of services to be performed were recorded
as deferred revenue until expenses were incurred. The remaining balance of all
contract revenue received from HBL was recorded as earned in 1996.

                                      F-11
<PAGE>   36

                   Amarillo Biosciences, Inc. and Subsidiaries
                      (companies in the development stage)

             Notes to Consolidated Financial Statements (continued)

                                December 31, 2000

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

RESEARCH AND DEVELOPMENT

Research and development costs are expensed as incurred.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

STOCK SPLIT

In May 1993, the Company approved a ten-for-one stock split for all issued and
outstanding shares. As described in Note 7, during 1996 a six-for-five stock
split was effected. All references to common stock and per share data have been
restated to give effect to these splits.

STOCK-BASED COMPENSATION

The Company accounts for stock-based compensation utilizing Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB
25). In October 1996, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards Number 123, Accounting for Stock Based
Compensation (SFAS 123). Under the provisions of SFAS 123, the Company has
elected to continue to apply the provisions of APB 25 to its stock- based
compensation arrangements and provide supplementary financial statement
disclosures as required under SFAS 123.

BASIC AND DILUTED NET LOSS PER SHARE

Net loss per share is based on the number of weighted average shares
outstanding. The effect of warrants and options outstanding (see Notes 7 and 8)
is anti-dilutive.

                                      F-12
<PAGE>   37

                   Amarillo Biosciences, Inc. and Subsidiaries
                      (companies in the development stage)

             Notes to Consolidated Financial Statements (continued)

                                December 31, 2000

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

COMPREHENSIVE INCOME

As of January 1, 1998, the Company adopted Financial Accounting Standards Board
Statement No. 130 (SFAS 130), Reporting Comprehensive Income. SFAS 130
establishes new rules for the display of comprehensive income and its
components; however, the adoption of this Statement had no impact on the
Company's results of operations or shareholders' equity. SFAS 130 requires
unrealized gains or losses on the Company's available-for-sale securities, which
prior to adoption were reported separately in shareholders' equity, to be
included in other comprehensive income. Prior year financial statements have
been reclassified to conform to the requirements of SFAS 130.

2. PROPERTY AND EQUIPMENT

Property and equipment are stated at cost and consist of the following:

<TABLE>
<CAPTION>
                                                                                 DECEMBER 31,
                                                                    -------------------------------------
                                                                            2000              1999
                                                                    -------------------------------------
<S>                                                                   <C>                <C>
      Land                                                            $          8,000   $          8,000
      Building                                                                  94,532             94,532
      Furniture and equipment                                                  134,287            134,287
      Automobile                                                                13,688             13,688
                                                                    -------------------------------------
                                                                               250,507            250,507
      Less accumulated depreciation                                            157,271            144,708
                                                                    -------------------------------------
                                                                      $         93,236   $        105,799
                                                                    =====================================
</TABLE>

3. NOTES PAYABLE

In September 1991, the Company borrowed $1,000,000 under a note payable
agreement with HBL. In September 1992, the Company borrowed an additional
$1,000,000 under a similar note agreement with HBL. The $1,000,000 note plus
accrued interest of $300,000 due September 25, 1996 was renewed in a new note to
HBL for $1,300,000 due September 25, 2001, which accrued interest at the rate of
4 1/2%. The $1,000,000 note plus accrued interest of $300,000 due September 16,
1997 was renewed in a new note to HBL for $1,300,000 due September 16, 2002,
which accrued interest at the rate of 4 1/2%. Each of the notes provided that
the principal and accrued interest be paid only from 10% of the Company's gross
revenues from sales of interferon.

                                      F-13
<PAGE>   38

                   Amarillo Biosciences, Inc. and Subsidiaries
                      (companies in the development stage)

             Notes to Consolidated Financial Statements (continued)

                                December 31, 2000

3. NOTES PAYABLE (CONTINUED)

In April 1999, HBL agreed to convert $2,837,526 debt and accrued interest owed
to it by the Company to voting common stock of the Company. The total number of
shares issued to HBL in consideration for the cancellation of the indebtedness
was 946,094 shares valued at the then market value of $2.99 per share.

The Company also had a loan agreement with HBL, which called for HBL to loan the
Company $3,000,000 to be advanced in three installments as follows: $1,000,000
by August 31, 1999; $1,000,000 by November 30, 1999; and $1,000,000 by February
29, 2000. The annual interest rate on unpaid principal from the date of each
respective advance was 4 1/2%, with accrued interest being payable at the
maturity of the note. The note was payable on or before July 22, 2004, or on or
before the expiration of one (1) year after approval of the Company's product by
the FDA, whichever occurs first.

On September 30, 1999, the Company entered into an Agreement to Convert Debt
with HBL regarding the above described note payable to HBL in the then principal
amount of $1,000,000, the first loan installment having by then been advanced.
On October 15, 1999, pursuant to the Agreement to Convert Debt, HBL canceled the
then note balance in exchange for 1,111,831 shares of common stock of the
Company valued at the then market value of $0.9044 per share. The two additional
$1,000,000 advances were to be likewise converted to equity purchases on or
before November 30, 1999 and February 29, 2000, respectively.

However, by subsequent agreement of the parties, the equity purchases planned
for November 30, 1999 and February 29, 2000 were reinstated as loans. The
Company received a loan of $1,000,000 on November 30, 1999, evidenced by note
dated December 3, 1999 in the original principal amount of $1,000,000 bearing
interest at the rate of 4 1/2% per annum and due and payable on or before
December 3, 2004, or on or before the expiration of one year after approval of
the Company's product by the FDA, whichever occurs first. The final installment
was advanced on February 29, 2000, under terms which are identical, except that
the principal and accrued interest under that note will be payable on or before
February 29, 2005, or on or before the expiration of one year after approval of
the Company's product by the FDA, whichever occurs first.

As a result of its related party nature, the Company has concluded it is not
practicable to estimate the fair value of its note payable to stockholder.

                                      F-14
<PAGE>   39

                   Amarillo Biosciences, Inc. and Subsidiaries
                      (companies in the development stage)

             Notes to Consolidated Financial Statements (continued)

                                December 31, 2000

4. MANUFACTURING AND SUPPLY AGREEMENTS

The Company was a party to the following manufacturing and supply agreements at
December 31, 2000:

On March 13, 1992, the Company entered into a Joint Development and
Manufacturing/Supply Agreement with HBL (the Development Agreement), a major
stockholder (see Note 7) under which HBL will formulate, manufacture, and supply
HBL interferon for the Company or any sub- licensee. In exchange, HBL is
entitled to receive a transfer fee, specified royalties and a portion of any
payment received by the Company for sub-license of rights under this agreement.
The agreement further provides that the Company sub-license to HBL the right to
market HBL interferon for oral use in humans and in non-human, warm-blooded
species in Japan, in exchange for the Company receiving a royalty fee based on
net sales. On June 1, 1994, the Company entered into an additional agreement
with HBL to make the Company HBL's exclusive agent for the development of HBL
interferon for non-oral use in humans and in non-human, warm-blooded species in
North America. In exchange, HBL is entitled to receive a transfer fee based on
units of interferon supplied.

On April 4, 2000, the Company amended its existing distribution agreement with
HBL to expand the agreement to include inhalation administration of human
interferon-gamma.

Under the Development Agreement, HBL provided $9,000,000 in research funding to
the Company. The agreement also provides that a royalty fee be paid to HBL. The
initial term of the agreement was for seven years, has been extended through
March 13, 2002, and will be renewed automatically for successive three-year
terms. However, HBL can terminate the agreement at any time after March 13,
2002, upon ninety (90) days' advance written notice of the Company's net sales
of interferon-containing products for oral use in warm-blooded species not
having exceeded $100,000 during the preceding calendar year.

On October 20, 1989, the Company entered into a manufacturing and supply
agreement with Interferon Sciences, Inc. (ISI), then a 1% stockholder of the
Company, under which ISI will manufacture and utilize ISI interferon to
formulate and supply interferon-containing compositions to the Company for use
in non-human species. Under the Agreement, ISI is entitled to receive certain
transfer fees, manufacturing and supply fees, and a portion of any payments
received by the Company related to the use of ISI interferon. The agreement will
be in force for seven years after ISI's receipt of the first purchase order from
the Company and thereafter as long as net sales of such products by the Company
meet certain levels. As of December 31, 2000, the Company had not submitted a
purchase order to ISI.

                                      F-15
<PAGE>   40

                   Amarillo Biosciences, Inc. and Subsidiaries
                      (companies in the development stage)

             Notes to Consolidated Financial Statements (continued)

                                December 31, 2000

4. MANUFACTURING AND SUPPLY AGREEMENTS (CONTINUED)

On October 13, 2000, the Company entered into a supply agreement with HBL under
which the Company gained an exclusive right to purchase and distribute anhydrous
crystalline maltose for the treatment of dry mouth (xerostomia). This exclusive
supply agreement is worldwide, except Japan.

On December 11, 2000, the Company entered into a supply agreement with Natrol,
Inc., whereby the Company will supply anhydrous crystalline maltose exclusively
to Natrol to treat xerostomia in the USA and Canada.

5. LICENSE AND SUBLICENSE AGREEMENTS

On April 4, 2000, the Company amended its existing distribution agreement with
HBL to expand the agreement to include inhalation administration of human
interferon-gamma.

The Company holds patent rights for which the Company has paid certain license
fees under three license agreements. Under these agreements, the Company will
pay the licensor a portion of any sub-license fee received by the Company with
respect to the manufacturing, use or sale of a licensed product, as well as a
royalty fee based on the net selling price of licensed products, subject to a
minimum annual royalty. The Company has also entered into various sub-license
agreements under which the Company is entitled to receive royalties based on the
net sales value of licensed products.

6. RESEARCH AGREEMENTS

The Company contracts with third parties throughout the world to conduct
research including studies and clinical trials. These agreements are generally
less than one year in duration. At December 31, 2000, the Company had
commitments to provide additional funding of approximately $251,627 under these
agreements.

7. COMMON STOCK

In May 1993, the stockholders of the Company approved an amendment to the
Articles of Incorporation to increase the total number of authorized shares of
common stock of the Company from 1,000,000 shares to 10,000,000 shares. The
stockholders also approved a ten-for-one stock split for the currently issued
and outstanding shares of the Company.

Pursuant to shareholder approval obtained at the Company's 1999 annual meeting
of shareholders, the Company amended its Articles of Incorporation effective
June 22, 1999, to increase the number of voting common shares authorized for
issuance from 10,000,000

                                      F-16
<PAGE>   41

                   Amarillo Biosciences, Inc. and Subsidiaries
                      (companies in the development stage)

             Notes to Consolidated Financial Statements (continued)

                                December 31, 2000

7. COMMON STOCK (CONTINUED)

to 20,000,000, and to establish a new class of preferred stock consisting of
10,000,000 authorized shares, issuable in series. To date, no preferred stock
has been issued.

Since 1984, the Company has issued common stock in exchange for various
professional, research, and consulting services. The stock issued for non-cash
consideration was assigned a value based on the fair value of the services
received.

In July 1992, the Board of Directors approved restricted stock grants to three
employees which allowed the Company to issue, under certain conditions, up to
180,000 shares of its authorized but unissued shares of common stock. In May
1994, the Board of Directors approved restricted stock grants to an additional
employee which allowed the Company to issue, under certain conditions, up to
30,000 shares of its authorized but unissued shares of common stock. In January
1995, 29,640 shares of common stock (net of required federal withholdings of
12,360 shares) were issued to a former employee under a Contract Termination and
Severance Agreement. The issuance and withholding were in full satisfaction of
the employee's original 84,000 shares in stock grants. In August 1996, 79,000
shares of common stock (net of required federal withholdings of 47,000 shares)
were issued to the other three employees. The issuance and withholding were in
full satisfaction of the three employees original 126,000 shares in stock
grants. Total charges to compensation expense recognized by the Company
cumulative from June 25, 1984 (inception) through December 31, 1998 was
$735,000.

In August 1996, the Company completed its initial public offering and issued
2,300,000 shares of common stock resulting in net proceeds of approximately
$9,377,702.

As described in Note 3, in April 1999, HBL agreed to convert $2,837,526 of debt
and accrued interest owed to it by the Company to 946,094 shares of common stock
of the Company. HBL subsequently entered into a $3,000,000 loan agreement with
the Company, of which $1,005,486.50 in debt and accrued interest was converted
to 1,111,831 shares of the Company's voting common stock effective October 15,
1999.

In addition to 200,000 warrants granted to the Company's underwriter
(exercisable through August 6, 2001 at $8.10 per share), the Company has 525,108
shares of common stock reserved for issuance upon exercise of warrants granted
to outside consultants, 373,608 of which are not vested, and will vest only upon
the occurrence of significant funding events in which the respective warrant
holders are instrumental.

                                      F-17
<PAGE>   42

                   Amarillo Biosciences, Inc. and Subsidiaries
                      (companies in the development stage)

             Notes to Consolidated Financial Statements (continued)

                                December 31, 2000

7. COMMON STOCK (CONTINUED)

During 1997, the Company granted 30,000 options to outside professionals for
services which vested immediately at an exercise price of $4.25 (fair market
value of the common stock at the date of the grant). The Company recognized
$79,500 (representing the fair value of the options) in expense relating to
these grants.

During 1999, the Company granted 407,252 options to employees in lieu of cash
compensation to be paid in fiscal 2000. The Company recorded compensation
expense of $221,431 and a credit to additional paid in capital for 334,312
options, net of forfeitures, which vested in 2000.

During 2000, the Company raised $790,000 from investors pursuant to a private
placement of 316,000 shares of its common stock and 126,400 warrants to purchase
that number of shares of the Company's common stock from time to time through
April 11, 2005 at $3.125 per share for 63,200 shares and $3.75 per share for
63,200 shares. Accordingly, the Company has reserved an additional 126,400
shares of its common stock to satisfy the possible future exercise of such
warrants.

8. STOCK OPTION PLAN

The Company has elected to follow APB 25 and related interpretations in
accounting for its stock- based compensation. Under APB 25, because the exercise
price of the Company's stock options has been equal to or greater than the
market price of the underlying stock on the date of grant, no compensation
expense has been recognized.

During 1996, the Company introduced two stock option plans: the 1996 Employee
Stock Option Plan (Employee Plan) and the Outside Director and Advisor Stock
Option Plan (Director Plan). The Employee Plan has authorized the grant of
options to employees for up to 590,000 shares of the Company's common stock. All
options granted have five to ten year terms and become exercisable over a four
to five year period. The option price is equal to 100% to 110% of the fair value
of the common stock on the date of grant depending on the percentage of common
stock owned by the optionee on the grant date. The Director Plan allows options
to purchase a maximum of 410,000 shares of the Company's common stock to be
granted to outside directors and scientific advisors to the Company at an
exercise price equivalent to 100% of the fair market value of the common stock
on the date of grant. These are ten-year options and become exercisable over a
period of five years.

In addition to options issued pursuant to the Company's Employee and Director
stock option plans, the Company recently granted 625,932 non-qualified options
to Directors, employees, and one consultant. Two Hundred Thousand (200,000)
options were granted to Directors on December 16, 1999. Such options vested
immediately, and have an exercise price of $1.625 per

                                      F-18
<PAGE>   43

                   Amarillo Biosciences, Inc. and Subsidiaries
                      (companies in the development stage)

             Notes to Consolidated Financial Statements (continued)

                                December 31, 2000

8. STOCK OPTION PLAN (CONTINUED)

share which was the fair market value of the Company's stock as of the date of
grant. Twenty Thousand (20,000) options were granted on the same date and upon
the same terms to a non- affiliated consultant of the Company. Four Hundred Five
Thousand Nine Hundred Thirty-Two (405,932) options were granted to employees of
the Company, including 300,000 granted to Joseph Cummins, President and CEO.
Such options are exercisable at a price of $.875 per share, being the fair
market value of the Company's stock on December 29, 1999, the date of grant. All
of such options granted to employees were granted in consideration of the
employees' agreement to relinquish salary during 2000, on the basis of two
options granted for every $1.00 of salary voluntarily relinquished, with the
amount of such relinquished salary being reflected in the Option Agreement
signed with each employee, such options to vest monthly over twelve (12) months
beginning in January 2000, and to expire December 29, 2004. The 300,000 options
granted to Joseph Cummins were subsequently reduced to 250,000 options by
agreement of the parties.

Supplemental information regarding net loss and net loss per share is required
by SFAS 123 and has been determined as if the Company had accounted for its
stock options under the fair value method of that Statement. The fair value for
these options was estimated at the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions for 2000 and 1999,
respectively: risk-free interest rate of 5.99% and 5.69%; dividend yield of 0%
and 0%; volatility factors of the expected market price of the Company's common
stock of 1.408 and 1.306; and a weighted-average expected life of the option of
5.4 and 3.1 years.

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of its stock options.

For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The expense amounts
for 2000 and 1999 are not necessarily indicative of the effects on reported net
income (loss) for future years. The Company's pro forma information as of
December 31, is as follows:

                                      F-19
<PAGE>   44

                   Amarillo Biosciences, Inc. and Subsidiaries
                      (companies in the development stage)

             Notes to Consolidated Financial Statements (continued)

                                December 31, 2000

8. STOCK OPTION PLAN (CONTINUED)

<TABLE>
<CAPTION>
                                                                                  2000                     1999
                                                                            -----------------------------------------
<S>                                                                         <C>                      <C>
      Pro forma net loss                                                    $     (3,840,572)        $    (6,549,923)
      Pro forma basic and diluted net loss per share                        $          (0.49)        $         (1.03)
</TABLE>

Based on the Black-Scholes method, the fair value of the options granted during
the year ended December 31, is as follows:

<TABLE>
<CAPTION>
                                                                                               2000                  1999
                                                                                    --------------------  ---------------------
<S>                                                                                               <C>                   <C>
      Number of options issued at fair market value of stock                                      32,000                854,307
      Weighted-average fair value of options                                                       $1.35                  $0.90
      Weighted-average exercise price of options                                                   $1.48                  $1.18
</TABLE>

A summary of the Company's stock option activity, and related information for
the year ended December 31, is as follows:

<TABLE>
<CAPTION>
                                                              2000                           1999
                                                  ----------------------------    ---------------------------
                                                                     WEIGHTED                       WEIGHTED
                                                                     AVERAGE                        AVERAGE
                                                                     EXERCISE                       EXERCISE
                                                     OPTIONS           PRICE          OPTIONS         PRICE
                                                  ----------------------------    ---------------------------
<S>                                               <C>                <C>          <C>              <C>
      Outstanding, beginning of year                1,176,807          $1.88           322,500        $3.74
      Granted                                          32,000           1.48           854,307         1.18
      Canceled                                       (106,795)          1.35                 -            -
      Exercised                                       (19,200)          0.88                 -            -
                                                  -------------                   --------------
      Outstanding, end of year                      1,082,812          $1.94         1,176,807        $1.88
                                                  =============                   ==============
      Exercisable at end of year                      861,175          $1.91           384,661        $2.67
                                                  =============                   ==============
</TABLE>

Exercise prices for options outstanding as of December 31, 2000 ranged from
$0.875 to $5.50. Of these options, 221,500 have exercise prices ranging from
$3.875 to $5.50 and the remainder range from $0.875 to $3.375. The
weighted-average remaining contractual life of those options is 5.63 years.

                                      F-20
<PAGE>   45

                   Amarillo Biosciences, Inc. and Subsidiaries
                      (companies in the development stage)

             Notes to Consolidated Financial Statements (continued)

                                December 31, 2000

9. EMPLOYEE BENEFIT PLAN

The Company has a Simplified Employee Pension Plan (the Plan), which is a
contributory plan that covers all employees of the Company. Contributions to the
Plan are at the discretion of the Company. The plan expense for the years ended
December 31, 2000 and 1999, and cumulative from June 25, 1984 (inception)
through December 31, 2000 was $0, $0 and $200,857, respectively.

10. INCOME TAXES

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax reporting purposes. The Company's
deferred tax asset of approximately $6,900,000 and $5,825,000 at December 31,
2000 and 1999, respectively, was subject to a valuation allowance of $6,900,000
and $5,825,000 at December 31, 2000 and 1999, respectively, because of
uncertainty regarding the Company's ability to realize future tax benefits
associated with the deferred tax assets. Deferred tax assets were comprised
primarily of net operating loss carryovers and the cash method of accounting
used by the Company for federal income tax reporting.

At December 31, 2000, the Company has net operating loss carryforwards of
approximately $17,900,000 for federal income tax purposes expiring in 2006
through 2020. The ability of the Company to utilize these carryforwards may be
limited should changes in stockholder ownership occur.

At December 31, 2000, the Company had approximately $14,000 of alternative
minimum tax credits which may be carried forward indefinitely.

The difference between the reported income tax provision and the benefit
normally expected by applying the statutory rate to the loss before income taxes
results primarily from the inability of the Company to recognize its tax losses.

11. CONTINGENCIES

The Company is not a party to any litigation and is not aware of any pending
litigation or unasserted claims or assessments as of December 31, 2000.

                                      F-21
<PAGE>   46

                   Amarillo Biosciences, Inc. and Subsidiaries
                      (companies in the development stage)

             Notes to Consolidated Financial Statements (continued)

                                December 31, 2000

12. RELATED PARTY TRANSACTIONS

In the ordinary course of business, the Company has and expects to have
transactions with related parties, including stockholders. In addition to the
transactions disclosed elsewhere in these financial statements, during 2000 the
Company has used the law firm of Sprouse, Smith & Rowley, P.C. Mr. Edward
Morris, Secretary of the Company, is a partner with Sprouse, Smith & Rowley. The
Company was invoiced $110,320 during 2000 for legal services rendered by
Sprouse, Smith & Rowley.

On March 25, 1999, ABI signed a contract with PPD Pharmaco, Inc., now known as
PPD Development, Inc. to provide clinical monitoring and data entry services for
ABI's Phase III clinical trials in Sjogren's syndrome. During the year ended
December 31, 2000, the Company paid $816,552, for clinical research organization
services to PPD Development, Inc. At the time that the contract was signed, Mr.
Tom D'Alonzo was President and Chief Operating Officer of PPD and its Clinical
Research Organization subsidiary, PPD Development, Inc. Mr. D'Alonzo is also a
member of the Board of Directors of ABI. Mr. D'Alonzo retired from PPD
Development, Inc. in October 1999, but remains a member of the Board of
Directors of ABI.

                                      F-22
<PAGE>   47

EXHIBIT INDEX

<TABLE>
<CAPTION>
     NUMBER         DESCRIPTION
----------------    -----------------------------------------------------------------------------------------------------
<S>                 <C>
 3.1+               Restated Articles of Incorporation of the Company, dated June 22, 1999.
 3.3*               Bylaws of the Company.
 4.1*               Specimen Common Stock Certificate.
 4.2*               Form of Underwriter's Warrant.
10.1*               Agreement dated as of April 1, 1984 between University Patents, Inc. and the
                    Company.
10.2*               License Agreement dated as of March 22, 1988 between the Company and The
                    Texas A&M University System.
10.3*               License Agreement dated October 20, 1989 between the Company and ISI.
10.4*               Manufacturing and Supply Agreement dated October 20, 1989 between the Company
                    and ISI.
10.5*               Joint Development and Manufacturing/Supply Agreement dated March 13, 1992
                    between the Company and HBL, as amended.
10.7*               Japan Animal Health License Agreement dated January 20, 1993 between the
                    Company and HBL.
10.9*               Employment Agreement dated as of March 4, 1994 between the Company and Dr.
                    Joseph M. Cummins, as amended.
10.11*              Manufacturing/Supply Agreement dated June 1, 1994 between the Company and
                    HBL.
10.12*              Settlement Agreement dated April 27, 1995 among the Company, ISI, Pharma
                    Pacific Management Pty. Ltd. ("PPM"), Pharma Pacific Pty. Ltd., Pharma Pacific
                    Ltd., and Fernz Corporation Limited.
10.13*              Amendment of ACC/ISI License Agreement dated April 27, 1995 between the
                    Company and ISI.
10.14*              PPM/ACC Sub-license Agreement dated April 27, 1995 between PPM and the
                    Company.
10.18*              Form of Consulting Agreement between the Company and the Underwriter.
10.20+              1996 Employee Stock Option Plan, Amended and Restated as of May 11, 1999.
10.21+              Outside Director and Advisor Stock Option Plan, Amended and Restated as of May
                    11, 1999.
10.22*              Form of Indemnification Agreement between the Company and officers and directors
                    of the Company.
10.23*              Indemnification Agreement between HBL and the Company.
10.26**             License Agreement dated July 22, 1997, between Hoffmann-La Roche Inc., and the
                    Company.
10.27**             Distribution Agreement dated January 12, 1998, between Global Damon
                    Pharmaceutical and the Company.
</TABLE>

                                       20
<PAGE>   48

<TABLE>
<CAPTION>
     NUMBER         DESCRIPTION
----------------    -----------------------------------------------------------------------------------------------------
<S>                 <C>
10.28**             Distribution Agreement dated September 17, 1997, between HBL and the Company
                    (TNF-A).
10.29**             Distribution Agreement dated September 17, 1997, between HBL and the Company
                    (IFN-G).
10.30***            Amendment No. 1 dated September 28, 1998 to License Agreement of March 22,
                    1988, between The Texas A&M University System and the Company.
10.36               License Agreement dated February 1, 2000 between Molecular
                    Medicine Research Institute, and the Company (IFN-G
                    administered orally).
10.37(a)            License and Supply Agreement dated April 3, 2000 with Key Oncologics (Pty) Ltd.,
                    and the Company.
10.38               Amendment No. 1 dated April 4, 2000, to Interferon-G Distribution Agreement
                    dated September 17, 1997 between HBL and the Company (IFN-G).
10.39(a)            License and Supply Agreement dated April 25, 2000 between
                    Biopharm for Scientific Research and Drug Industry
                    Development and the Company.
10.40(a)            Sales Agreement dated May 5, 2000, between Wilke Resources, Inc. and the
                    Company.
10.41               Engagement Agreement dated September 26, 2000, between Hunter Wise Financial
                    Group, LLC, and the Company.
10.42(a)            Supply Agreement (Anhydrous Crystalline Maltose) dated October 13, 2000,
                    between Hayashibara Biochemical Laboratories, Inc., and the Company.
10.43(a)            Supply Agreement dated December 11, 2000, between Natrol, Inc., and the
                    Company.
21.                 Subsidiaries of the Company. The following sets forth the name and jurisdiction of
                    incorporation of each subsidiary of the Company. All of such subsidiaries are wholly-
                    owned by the Company.

<CAPTION>
                       NAME                                                    JURISDICTION OF INCORPORATION
                       ----------------------------------------------          -----------------------------------------
<S>                                                                                  <C>
                       VANGUARD BIOSCIENCES, INC.                                                TEXAS
                       VELDONA USA, INC.                                                         TEXAS
                       VELDONA AFRICA, INC.                                                      TEXAS
                       VELDONA POLAND, INC.                                                      TEXAS
                       ABI TAIWAN, INC.                                                          TEXAS
                       AMARILLO CELL OF CANADA, INC.                                             TEXAS

23.1                Consent of Ernst & Young LLP.
</TABLE>

*The Exhibit is incorporated by reference to the exhibit of the same number to
the Company's Registration Statement on Form SB-2 filed with and declared
effective by the Commission (File No. 333-4413) on August 8, 1996.
**The Exhibit is incorporated by reference to the Company's 1997 Annual Report
on Form 10-KSB filed with the Commission on or before March 31, 1998.
***The Exhibit is incorporated by reference to the Company's 1998 Annual Report
on Form 10-KSB filed with the Commission on or before March 31, 1999.
+The Exhibit is incorporated by reference to the Company's Report on Form 10-QSB
for the quarterly period ended June 30, 1999, filed with the Commission on
August 12, 1999, and subsequently amended on September 13, 1999.
(a)Portions of this exhibit have been omitted and filed separately with the
commission.

                                       21