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, 2003

[ ]   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)


                 TEXAS                                       75-1974352

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

 4134 BUSINESS PARK DRIVE, AMARILLO, TEXAS                   79110-4225
 (Address of principal executive offices)                    (Zip Code)

         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. |X|

      Revenues for its most recent fiscal year were $99,595

      As of December 31, 2003, there were outstanding  11,060,017  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  non-affiliates  of the registrant  (based on
the closing  price for the common stock on the OTC  BB.AMAR)  was  approximately
$3,107,694.


<PAGE>


                                     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  2004 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 Texas corporation
formed 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, particularly for the treatment of Sjogren's syndrome, Behcet's
disease,  fibromyalgia,  idiopathic  pulmonary  fibrosis  and oral warts in HIV+
patients.  The Company believes that significant  worldwide  opportunities exist
for the development of low-dose orally administered  natural interferon alpha as
a cost-effective, non-toxic, efficacious alternative to the treatment of disease
by  injection  of high doses of  interferon  alpha.  In  addition,  the  Company
believes that low-dose orally  administered  natural human interferon alpha will
be an effective treatment for diseases or conditions for which current therapies
are inadequate.

      The Company owns or licenses 16 United States patents  relating to the use
or  composition  of low-dose  oral natural  interferon  alpha.  Since 1992,  the
Company has filed with the U.S. Food and Drug Administration  ("FDA"), and there
now are in effect,  5  Investigational  New Drug ("IND")  Applications  covering
indicated  uses for  low-dose  oral  interferon  alpha,  including  treatment of
Sjogren's syndrome, oral warts and fibromyalgia.

      The Company's objective is to exploit its proprietary technology to become
a leader in the field of low-dose oral  applications  of interferon  alpha.  The
Company's  business  strategy is to pursue those  indications  for low-dose oral
interferon alpha 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 interferon alpha 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 from this strategy.  The Company will attempt to gain market
share for approved products by forming alliances with strong marketing partners.

      The Company has 4 full-time employees.  The Company makes extensive use of
consultants in business and research and development.


<PAGE>


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,
difficulty  swallowing,  painful throat, fatigue and dryness of the mouth, skin,
nose and vagina.  Oral  candidiasis  (a fungal  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 syndrome 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  interferon  alpha 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.  The Company
has  completed  two 24-week  Phase III clinical  trials of the use of interferon
alpha lozenges in the treatment of primary Sjogren's  syndrome.  Results of both
Phase III clinical  trials  demonstrate an  improvement in saliva  production in
treated patients (see Arthritis Care & Research,  49:585-593, 2003). The studies
were double-blinded,  placebo-controlled  tests in which a total of 497 patients
were treated three times daily for 24 weeks with a lozenge containing either 150
international  units  (IU)  of  interferon  alpha  or  a  placebo.  Analysis  of
participants who completed the trials, designated as evaluable patients, found a
significant  (p=0.01)  increase in  unstimulated  whole saliva (UWS)  production
among the interferon alpha treated  patients,  as compared to those who received
placebo.  Increases in UWS are  important  to the  Sjogren's  patient  since UWS
represents the basal salivary flow that is present over 90% of the day.

Importantly,  in  interferon  alpha  treated  subjects  a  significant  (p#0.05)
correlation was seen between increases in UWS and improvement in a number of the
symptoms of Sjogren's  syndrome that were assessed in the study,  including oral
dryness,  throat dryness,  nasal dryness and the ability to swallow foods.  This
finding  suggests  that  patients  were able to  perceive  a  benefit  of having
increased salivary flow.

Measurements  of stimulated  whole saliva and  subjective  oral dryness were the
designated  primary endpoints of these studies.  Neither the evaluable  analysis
nor the intent-to-treat analysis of these data resulted in significant findings.
The FDA typically  requires that  statistical  significance be achieved using an
intent-to-treat  analysis of primary  endpoints  in order to achieve  regulatory
approval.


                                       3
<PAGE>


The  Company  discussed  the results of these  studies  with the FDA in February
2001. The FDA felt the demonstrated improvement in UWS flow was encouraging, but
not  sufficient  for  marketing  approval as UWS was a secondary,  rather than a
primary  study  endpoint.   The  FDA  suggested  that  the  Company  sponsor  an
additional,  large-scale  Phase III study  that  would  include  UWS flow as the
primary endpoint. Instead, the Company proposed a study designed to demonstrate,
by biopsy, improvement at the site of disease activity, the salivary glands. The
Company  believes that, if successful,  the salivary gland study results,  along
with the beneficial UWS results  generated in the twin Phase III studies,  would
form a  reasonable  basis  for the  approval  of oral  interferon  alpha  in the
treatment  of Sjogren's  syndrome.  Even though the FDA stated their belief that
the data package  would still be  insufficient,  the Company  plans to conduct a
biopsy study and, if successful, to file for marketing approval.

Fibromyalgia Syndrome. The Company completed a second Phase II clinical trial in
fibromyalgia  in  March  2000.  Fibromyalgia  syndrome  has only  recently  been
recognized  as a  separate  clinical  entity,  much to the  relief  of  patients
suffering  from  chronic  pain and  stiffness.  The market in the U.S.  has been
estimated at 5-10 million patients, which may well be underestimated.

Current  treatment  consists of  antidepressants  and  painkillers.  There is an
immense  loss  of  working  hours  in  the  U.S.  due  to  fibromyalgia,  and  a
subsequently  heavy financial  burden to patients,  employers and the government
(estimated at $15 billion annually).

In  ABI's  initial  Phase  II  fibromyalgia  study,  6 weeks  of  low-dose  oral
interferon  alpha  treatment  resulted in a  significant  (p<0.05)  reduction in
stiffness  upon waking  ("morning  stiffness")  compared  to  placebo.  Patients
reported  feeling  better  than they had in  years.  Based on these  results,  a
second, longer study was conducted.

The most recently  completed Phase II clinical study showed  promising  results.
Patients  participating  in the study were divided into three  groups,  and each
individual was given three lozenges per day for three months. The three lozenges
given to members of the first group  contained 50 IU of  interferon  alpha each,
the second group was given one 50 IU interferon  alpha lozenge and two placebos,
while  members of the final group  received  three  placebos.  All three  groups
reported a  reduction  in  morning  stiffness,  but across the entire  study the
improvement  was most pronounced in those taking one 50 IU lozenge of interferon
alpha per day.  However,  the  results  did not reach  statistical  significance
relative to the controls,  nor did increasing the dose to three interferon alpha
lozenges per day improve the results.

Participants   were  also  given  a  low  dose  of  the   anti-depressant   drug
amitriptyline,  which  they  began  taking  one month  prior to the start of the
interferon  alpha trial and continued  throughout  the  three-month  study.  The
addition of the amitriptyline was deemed necessary so the placebo patients would
not have to  tolerate  a  three-month  study  without  any  beneficial  therapy.
However, use of amitriptyline complicated the analysis and interpretation of the
study results.

Patients  who  did not  worsen  during  the  lead-in  month  of  treatment  with
amitriptyline  went  on  to  demonstrate  a  significant  reduction  in  morning
stiffness  (p<0.005)  when they took the 50 IU interferon  alpha lozenges once a
day for three months, as compared to those who received placebo.  However, those
patients who reported  worsening of their morning  stiffness  during the lead-in
month of  amitriptyline  showed no benefit during the subsequent three months of
interferon alpha treatment.


                                       4
<PAGE>


The Company  believes  that a modified  Phase II study design would  confirm the
therapeutic  benefit of  low-dose  oral  interferon  alpha in the  treatment  of
morning  stiffness in patients  suffering  from  fibromyalgia.  Upon  successful
completion of an additional  Phase II study, ABI would then plan on working with
a corporate partner to conduct the Phase III clinical trials necessary to secure
marketing approval.

Oral Warts in HIV+  Patients.  Oral warts are lesions in the mouth caused by the
human  papillomaviruses.  In  Phase  I/II  clinical  studies  with 36  patients,
complete  and partial  clearance of oral warts was achieved in 70% (5/7) of HIV+
subjects given  interferon-(alpha) at 500 international units (IU) three times a
day (tid).  Completion  of a Phase III  clinical  study  offers ABI the fastest,
least  expensive  way to achieve  FDA  approval.  The  clinical  endpoint  is an
objective  endpoint,  i.e. - a decrease in the number and area of warts. A Phase
III protocol and IND was submitted to FDA in October,  2003.  Ten clinical sites
have been  identified and the Company will launch its Phase III study when funds
are  obtained.  The  Company  filed with the FDA Office of Orphan  Drugs and was
granted  (Summer 2000) orphan drug status for low dose  IFN(alpha)  treatment in
this condition.

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 IFN(alpha) treatment in this
condition.  The Company  expects to work with a company in  Istanbul,  Turkey to
conduct  Phase  II/III  studies in Turkey in Behcet's  disease  patients.  These
studies  will be conducted  under FDA Phase II/III  protocols so the data can be
submitted to the US FDA and to regulatory authorities in Turkey.

Idiopathic Pulmonary Fibrosis.  Idiopathic Pulmonary Fibrosis (IPF) is a chronic
inflammatory  fibrotic  disorder  localized to the lower  respiratory  tract and
characterized   by   an   alveolitis   dominated   by   alveolar    macrophages,
polymorphonuclear  leukocytes  (PMNs) and, to a lesser extent,  lymphocytes  and
eosinophils.  The disease  usually  presents as dyspnea on  exertion,  the chest
x-ray shows diffuse reticulonodular  infiltrates,  and analysis of lung function
reveals restrictive abnormalities. The disease process does not affect the upper
or conducting  airways,  but  bronchiolitis  of respiratory  bronchioles  may be
present and alveolar units are always involved.

Normally,  overlying  or  interspersed  in the  alveoli  are a variety of immune
cells,  including  alveolar  macrophages,  dendritic  macrophages,  interstitial
monocytes,  lymphocytes,  and inflammatory  cells, such as PMNs and eosinophils.
The cellular content of normal bronchial-alveolar lavage (BAL) fluid consists of
approximately 80 percent alveolar macrophages,  10 percent lymphocytes (of which
70 percent are T  lymphocytes),  1 to 5 percent B lymphocytes or plasma cells, 1
to 3 percent PMNs, and 1 percent eosinophils.  In the lymphocyte population, the
ratio of CD4 T helper and CD8 T suppressor/cytotoxic cells is about 1.5.

In the  earliest,  reversible  forms  of  alveolar  injury,  "leakiness"  of the
alveolar  type I cells and the  adjacent  capillary  endothelial  cells  occurs,
causing  alveolar and  interstitial  edema and the  formation of intra  alveolar
hyaline membranes. With persistence of the disease, increased alveolar-capillary
permeability  and  desquamation  of  intra-alveolar  cells  (alveolitis),  mural


                                       5
<PAGE>


inflammation,  and interstitial  fibrosis are present on biopsy. This process is
also reflected in the  composition  of cells and enzymes  recovered in BAL fluid
and in cellular  components  present in lung biopsy  tissue.  The  presence  and
severity  of the  disease  process are spotty in  distribution;  a continuum  of
inflammatory  and fibrotic  changes can be found  throughout  the affected lung.
Fibrosis  follows  from an  organization  of  inflammatory  exudate  within  the
airspaces in which  fibroblasts  beneath the type I epithelium  proliferate  and
increase  their  production of  fibronectin  and collagen.  Death of the patient
usually occurs within 4-5 years of diagnosis.

ABI's  low-dose  orally  administered  interferon  alpha  is being  tested  as a
treatment  for IPF under an Advanced  Technology  Program  Grant  awarded by the
State of Texas to the Texas Tech  University  Health Sciences Center in Lubbock.
The $100,000 grant is being used by the Health Science Center to support a pilot
study of 20 patients with IPF. ABI is collaborating on this research with Lorenz
O.  Lutherer,  MD,  PhD,  professor,  physiology,  and  Cynthia A.  Jumper,  MD,
associate professor patient care, internal medicine, and is providing support in
the form of study drug, data  management and  biostatistical  analysis.  Ten IPF
patients have been enrolled into treatment with interferon alpha lozenges.  Four
of the IPF  patients  have already been treated for 12 months and all 4 patients
are stable or improved, according to Dr. Lutherer.

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  interferon  alpha and
other  biologics.  HBL also has  developed and obtained  patents for  technology
relating to the production of interferon  alpha-containing lozenges by which the
stability of the interferon alpha activity can be maintained for up to 24 months
at room  temperature  and up to five 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.


                                       6
<PAGE>


OTHER AGREEMENTS

         In  2003  the  Company  entered  into  various   licensing  and  supply
arrangements  which could serve as a source of future  revenue for the  Company;
however, none of these arrangements are currently  contributing in a significant
manner to the Company's  revenue,  and these  arrangements are not considered by
the  Company's  management  to  be  material,  either  individually  or  in  the
aggregate.

PATENTS AND PROPRIETARY RIGHTS

      Two patents were issued in 2003.  "Interferon-Alpha  Mediated Upregulation
Of Aquaporin  Expression"  (U.S.  Patent No. 6,506,377) issued January 14, 2003,
valid until  September 27, 2021 and  "Composition  And Method For Promoting Oral
Health" (U.S.  Patent No.  6,656,920) issued December 2, 2003, valid until April
18, 2023

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 number of its competitors
and  potential  competitors  will  increase as more  interferon  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.


                                       7
<PAGE>


Investigational  New Drug  Application  ("IND").  After  completing  preclinical
testing,  a  company  files  an IND  with  the 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.

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.

      ABI  obtained  an IND  for  oral  interferon  alpha  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.  Our goal is to  initiate a biopsy  study of
patients in 2004. Additionally,  ABI expects to launch a Phase III trial in HIV+
patients  with oral warts and a Phase  II/III  trial in patients  with  Behcet's
disease. All progress on approval is dependent on funding.


                                       8
<PAGE>


RESEARCH AND DEVELOPMENT

      During the years ended  December 31, 2003 and 2002,  the Company  incurred
expenses   of   $173,345   and   $382,880,    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 2004 PLAN OF OPERATIONS
- Research and Development".

ITEM 2.  DESCRIPTION OF PROPERTY.

      The  Company's  executive and  administrative  offices are located at 4134
Business Park Drive,  Amarillo,  Texas in a 1,800 square-foot facility rented by
the Company. The building contains offices,  and a small warehouse.  The Company
believes that the facility is adequate for its present use.

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 2003 and 2002 was as follows:


<TABLE>
<CAPTION>
                                       2003                    2002
                              -----------------------  ----------------------
         Quarter                  High        Low         High        Low
      ---------------         -----------  ----------  ----------  ----------
<S>                           <C>          <C>         <C>         <C>
         First                $     0.19   $    0.05   $     1.18  $   0.3300

         Second                     0.39        0.09         0.55      0.3100


         Third                      0.51        0.22         0.47      0.1500


         Fourth                     0.51        0.29         0.25      0.0500
</TABLE>


         As of December 31, 2003, the Company had 834 shareholders of record.



                                       9
<PAGE>



ITEM 6.  MANAGEMENT DISCUSSIONS AND ANALYSIS OR PLAN OF OPERATION.


The  following  discussion  should  be read in  conjunction  with our  financial
statements  and the notes  thereto  which appear  elsewhere in this report.  The
results  shown  herein  are not  necessarily  indicative  of the  results  to be
expected  in  any  future  periods.  This  discussion  contains  forward-looking
statements based on current expectations,  which involve  uncertainties.  Actual
results   and  the  timing  of  events   could   differ   materially   from  the
forward-looking  statements as a result of a number of factors.  Readers  should
also  carefully  review  factors set forth in other reports or documents that we
file from time to time with the Securities and Exchange Commission.

OVERVIEW

      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 decreased,  from approximately  $22,130,000 at
December  31, 2002 to  $21,912,001  at December  31,  2003.  This  decrease  was
primarily a result of income  recognized from the reversal of a previous accrued
contingent liability of $750,965.  Without this reversal, the Company would have
recognized a  consolidated  net loss of $584,334 for the year ended December 31,
2003.  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 2004 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 2004 will fall
principally into five broad  categories,  as follows:  Research and Development;
Personnel;  Consulting and Professional (except legal and accounting); Legal and
Accounting; and Public Relations,  Investor Relations and Shareholder Relations.
The  Company's  expectations  and goals  with  respect to these  categories  are
addressed separately below, by category.

      Two patents were issued in 2003.  "Interferon-Alpha  Mediated Upregulation
Of Aquaporin  Expression"  (U.S.  Patent No. 6,506,377) issued January 14, 2003,
valid until  September 27, 2021 and  "Composition  And Method For Promoting Oral
Health" (U.S.  Patent No.  6,656,920) issued December 2, 2003, valid until April
18, 2023.

      On February 14, 2003 the Company's  building was sold for a sales price of
$137,500.  On June 6, 2001 the Company borrowed $90,000 under a real estate lien
note agreement collateralizing the Company's building with Apple Cattle Company,
a Texas general partnership.  The real estate lien note was paid off at closing.
The Company now leases about 1,800 square feet of office and warehouse space.

      In 2003,  the Company  sold  1,500,945  unregistered  shares of its voting
common stock in private placement offerings. Of these sales, 300,000 shares were
sold for $0.08333 per share;  100,000 shares for $0.10 per share; 250,000 shares
for $0.105  per share;  500,000  shares for $0.12 per share;  54,400  shares for


                                       10
<PAGE>


$0.25 per share;  30,000 shares for $0.25480 per share;  30,000 shares for $0.27
per share and 36,545 for $0.301 per share, generating $201,594 in cash.

      On June 4, 2003,  ABI  issued  300,000  unregistered  shares of its voting
common stock as payment for consulting  services performed in the second quarter
of 2003.  Valuation of the stock  granted was $0.38 per share which  generated a
value of $114,000. November 5, 2003, ABI issued 100,000 registered shares of its
voting  common  stock as  payment  for  consulting  services  performed  for the
Company.  Valuation of the stock  granted was $0.35 per share which  generated a
value of $35,000.

      In 2003 the Company entered into various licensing and supply arrangements
which could serve as a source of future revenue for the Company;  however,  none
of these arrangements are currently  contributing in a significant manner to the
Company's  revenue,  and these  arrangements are not considered by the Company's
management to be material,  either individually or in the aggregate. The Company
had a License  Agreement with Atrix  Laboratories,  Inc.  executed  September 7,
2001.  This  Agreement was  terminated May 22, 2003 and all rights to the use of
the product and technology were returned to the Company.

      Veldona USA, Inc. ("Veldona"),  an inactive subsidiary of the Company, was
formally  dissolved  on  September  26, 2003.  Prior to formal  dissolution,  an
assignment  was entered  into  between the Company and Veldona  that allowed the
Company to buy from Veldona all of its previous and existing  Investigative  New
Drug  applications,  ("INDs")  for  $50,298.  This  transaction  resulted in the
Company  recognizing  the INDs as an  intangible  asset on its balance sheet and
Veldona recognizing a gain on the sale.

      The Company purchased the INDs from Veldona based on their probable use in
the future, with no current plans of their utilization,  therefore,  the Company
subsequently expensed the cost of the INDs as an impairment loss.

      Also  prior to the  dissolution  of  Veldona  and  with  legal  advice,  a
long-term accrued contingent  liability of $750,965 recorded in accounts payable
was  reversed  into income in  September  2003.  This  reversal  resulted in the
recognition of net income for the nine months ended September 30, 2003.  Without
this  reversal,  the  Company  would have  reported a  consolidated  net loss of
$392,802 for the nine months ended September 30, 2003.

LIQUIDITY AND CAPITAL RESOURCES

      At December  31, 2003,  the Company had  available  cash of  approximately
$11,300, and had a working capital deficit of approximately ($575,611). Assuming
there is no decrease in current  accounts  payable,  and  accounting for various
one-time expenses, the Company's negative cash flow is approximately $39,000 per
month. 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 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 fully
execute its 2004 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


                                       11
<PAGE>


2004.  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.  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.

      Total  outstanding  current  liabilities  decreased to approximately  $2.7
million at December  31,  2003,  as compared to  approximately  $3.3  million at
December  31,  2002.  The  current  liabilities  decrease  was the result of the
building  sale,   which  decreased  notes  payable  and  the  write-off  of  our
subsidiaries  long-term  accrued  contingent  liability of $750,965  recorded in
accounts payable reversed into income in September 2003.

      From  December 31, 2002, to December 31, 2003,  total assets  decreased by
approximately  $73,000 as a result of  liquidating  some  property and equipment
with the sale of the building.

CRITICAL ACCOUNTING POLICIES

      We believe the  following  critical  accounting  policies,  among  others,
affect our more  significant  judgments and estimates used in the preparation of
our financial statements:

ACCOUNTING FOR STOCK-BASED COMPENSATION

      The Company  accounts for  stock-based  compensation  under the  intrinsic
value method.  Under this method, the Company recognizes no compensation expense
for stock  options  granted  when the number of  underlying  shares is known and
exercise  price of the option is greater  than or equal to the fair market value
of the stock on the date of grant.

BASIC AND DILUTED NET INCOME (LOSS) PER SHARE

      We  account  for  stock-based  compensation  based  on the  provisions  of
Accounting  Principles  Board  Opinion No. 25,  "Accounting  for Stock Issued to
Employees,"   as   amended  by  the   Financial   Accounting   Standards   Board
Interpretation  No. 44,  "Accounting  for Certain  Transactions  Involving Stock
Compensation."   Accounting  Principles  Board  Opinion  No.  25  and  Financial
Accounting  Standards  Board  Interpretation  No. 44 state that no  compensation
expense is recorded for stock options or other  stock-based  awards to employees
that are granted  with an exercise  price equal to or above the  estimated  fair
value per share of the company's  common stock on the grant date. We adopted the
disclosure  requirements of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based  Compensation," which requires  compensation expense
to be  disclosed  based on the fair value of the options  granted at the date of
the grant.

In December 2002, the Financial  Accounting Standards Board issued its Statement
No.  148,   "Accounting   for   Stock-Based   Compensation   --  Transition  and


                                       12
<PAGE>


Disclosure--an  amendment of Financial  Accounting Standards Board Statement No.
123." This Statement amends Statement of Financial Accounting Standards No. 123,
to provide  alternative  methods of  transition  for an entity that  voluntarily
changes to the fair value based method of accounting  for  stock-based  employee
compensation. It also amends the disclosure provisions of Statement of Financial
Accounting  Standards No. 123 to require prominent  disclosure about the effects
on reported net income of an entity's  accounting  policy decisions with respect
to stock-based  employee  compensation.  The  transition  and annual  disclosure
provisions of Statement of Financial  Accounting Standards No. 148 are effective
for fiscal  years ending after  December  15, 2002,  and the interim  disclosure
provisions were effective for the first interim period  beginning after December
15,  2002.  We did not  voluntarily  change to the fair  value  based  method of
accounting for stock-based  employee  compensation,  therefore,  the adoption of
Statement  of  Financial  Accounting  Standards  No. 148 did not have a material
impact on our operations and/or financial position.

DEFERRED 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.  A valuation
allowance of $6,500,000  has been recorded to reduce the Company's  deferred tax
assets to the amount that is more likely than not to be realized.  Consideration
of  estimated  future  taxable  income and ongoing tax  planning  strategies  is
utilized in assessing the amount needed for the  valuation  allowance.  Based on
these estimates,  all deferred tax assets have been reserved.  If actual results
differ favorably from those estimates used, the Company might be able to realize
all or part of our net deferred tax assets.  Such  realization  could positively
impact operating results and cash flows from operating activities.

COMPARISON OF RESULTS FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003, TO THE FISCAL
YEAR ENDED DECEMBER 31, 2002.

      REVENUES.  During the fiscal year ended  December  31, 2003  $36,927  from
product  sales was  generated  compared to revenues  from product  sales for the
fiscal year ended  December  31,  2002,  of  $10,942,  an increase of $25,985 or
approximately  237%. The increase is primarily due to  international  orders for
Maxisal(R),  our dietary  supplement.  The fiscal year 2003 also includes income
from the reversal of a previously accrued contingent liability of $750,965.

      SELLING,  GENERAL  AND  ADMINISTRATIVE  EXPENSES.   Selling,  General  and
Administrative expenses of $394,772 were incurred for fiscal year ended December
31, 2003,  compared to $302,977 for the fiscal year ended  December 31, 2002, an
increase of $91,795.  There was $166,500 in non-cash  expenses in recognition of
stock issued to cover services provided by consultants in lieu of cash.


                                       13
<PAGE>


      NON-CASH CONSULTING  ACTIVITIES.  During the year ended December 31, 2003,
the Board of Directors  authorized  the issuance of shares of restricted  common
stock to various  consultants  in lieu of cash  payments.  Based upon the common
stock  trading  price at the  times of  issuance,  and FASB  rules,  a  non-cash
consulting  expense of $166,500  was  recorded  for the issuance of these shares
during the year ended December 31, 2003.

      NET INCOME (LOSS).  Net Income  applicable to common  shareholders for the
fiscal  year ended  December  31,  2003 was  $166,631  compared to a Net Loss of
($705,822)  for the fiscal year ended  December 31, 2002. The increase in income
was a result of the  dissolution  of Veldona and with legal advice,  a long-term
accrued  contingent  liability of $750,965 recorded in accounts payable that was
reversed into income in September 2003. Without this reversal, the Company would
have  reported a  consolidated  Net Loss of  $584,334  for the fiscal year ended
December 31, 2003.

RISK FACTORS

You  should  carefully  consider  the risks  described  below  before  making an
investment  in  Amarillo  Biosciences,  Inc.  All of these  risks may impair our
business operations. If any of the following risks actually occurs our business,
financial  condition  or results of  operations  could be  materially  adversely
affected. In such case, the trading price of our common stock could decline, and
you may lose all or part of your investment.

RISKS RELATING TO OUR BUSINESS

We may not be able to adequately protect and maintain our intellectual property.

      Our success will depend in part on our ability to protect and maintain our
patents,  intellectual  property  rights  and  licensing  arrangements  for  our
products and technology.  No assurance can be given that licenses or rights used
by Amarillo Biosciences, Inc. will not be challenged, infringed or circumvented,
or that the rights granted thereunder will provide competitive advantages to us.
Furthermore,  there  can be no  assurance  that we will  be  able to  remain  in
compliance  with our existing or future  licensing  arrangements.  Consequently,
there may be a risk that licensing  arrangements are withdrawn with no penalties
to the licensee or compensation to Amarillo Biosciences, Inc.

We rely on third parties for the supply,  manufacture  and  distribution  of our
products.

      Third parties  manufacture  and distribute all of our products.  We do not
currently   have   manufacturing   facilities  or  personnel  to   independently
manufacture  our products.  Currently,  Marlyn  Nutraceutical  manufactures  our
nutraceutical  products.  Our licensed  distributors,  in the United  States and
Internationally   distribute  the   nutraceutical   products.   Except  for  any
contractual  rights and remedies that we may have with our  manufacturer and our
distributor,  we have no control over the  availability  of our products,  their
quality or cost or the actual distribution of our products. If for any reason we
are unable to obtain or retain  third-party  manufacturers  and  distributors on
commercially  acceptable terms, we may not be able to produce and distribute our
products as planned.  If we encounter  delays or difficulties  with our contract
manufacturer  in producing or packaging our products or with our  distributor in
distributing  our  products,   the  production,   distribution,   marketing  and
subsequent sales of these products would be adversely affected,  and we may have


                                       14
<PAGE>


to seek alternative sources of supply or distribution or abandon or sell product
lines on  unsatisfactory  terms.  We may not be able to enter  into  alternative
supply,  production or  distribution  arrangements  on  commercially  acceptable
terms, if at all. There can be no assurance that the  manufacturer  that we have
engaged will be able to provide sufficient  quantities of these products or that
the products supplied will meet with our  specifications or that our distributor
will be able to distribute our products in accordance with our requirements.

We are dependant on certain key existing and future personnel.

      Our success will depend, to a large degree, upon the efforts and abilities
of our officers and key  management  employees  such as Joseph M.  Cummins,  our
President,  Chief Executive Officer and Chief Financial  Officer;  and Martin J.
Cummins,  our  Director  of Clinical  and  Regulatory  Affairs.  The loss of the
services  of one or more of our key  employees  could  have a  material  adverse
effect on our operations.  We do not currently have  employment  agreements with
any of our employees. We do not currently maintain key man life insurance on any
of our key employees. In addition, as our business plan is implemented,  we will
need to recruit and retain additional  management and key employees in virtually
all  phases  of our  operations.  We  cannot  assure  that  we  will  be able to
successfully attract and retain key personnel.

Our growth is  dependent  on our  ability to  successfully  develop,  acquire or
license new drugs.

      We must invest substantial time,  resources and capital in identifying and
developing  new drugs,  dosage  and  delivery  systems,  either on our own or by
acquiring and licensing such products from third parties. Our growth depends, in
part, on our success in such process. Our planned expansion over time is founded
on a simple  principal of introducing  two new products or line  extensions each
year  and to  expand  distribution  into two new  territories  each  year.  This
strategy has the advantage of building brands through  geographic  expansion and
line  extensions,  and  establishing  incremental  capabilities  for new product
introductions.  We believe that our planned  expansion will require $5.0 million
in total over three  years,  which we intend to fund out of our future  revenues
and, if necessary,  additional financing. If we are unable to either develop new
products on our own or acquire licenses for new products from third parties, our
ability  to grow  revenues  and  market  share will be  adversely  affected.  In
addition, we may not be able to recover our investment in the development of new
drugs, given that projects may be interrupted,  unsuccessful,  not as profitable
as initially  contemplated or we may not be able to obtain  necessary  financing
for such  development if we are unable to fund such  development from our future
revenues.  Similarly, there is no assurance that we can successfully secure such
rights from third parties on an economically feasible basis.

We may be subject to product liability claims in the future.

      We face an inherent  business risk of exposure to product liability claims
in the event that the use of our  technologies  or products  are alleged to have
resulted in adverse side  effects.  Side  effects or marketing or  manufacturing
problems  pertaining  to any of our products  could result in product  liability
claims or  adverse  publicity.  These  risks will  exist for those  products  in
clinical  development and with respect to those products that receive regulatory
approval for commercial  sale.  Furthermore,  although we have not  historically
experienced any problems associated with claims by users of our products,  we do
not currently  maintain product liability  insurance.  We plan to have a product
liability  insurance plan in place in 2004;  however,  there can be no assurance


                                       15
<PAGE>


that we will be able to acquire product liability  insurance with terms that are
commercially feasible.

RISKS RELATING TO OWNERSHIP OF COMMON STOCK.

There may not be sufficient  liquidity in the market for our securities in order
for investors to sell their securities.

      There is  currently  only a limited  public  market for our common  stock,
which is listed on the  Nasdaq,  and  there can be no  assurance  that a trading
market will develop further or be maintained in the future.

 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,  2003,  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).................          61        Chairman of the Board, President, Chief
                                                                    Executive Officer, Chief Financial Officer
                                                                    and Director

Stephen Chen, PhD (2)(4)........................          54        Director

James Cook (1)(3)(5)............................          69        Director

Katsuaki Hayashibara (3)(4)(5)..................          59        Director

Dennis Moore, DVM (1)(4)(5).....................          57        Director

James Page, MD (1)(2)(5)........................          76        Director


The  following  is not an executive  officer,  but is expected by the Company to make a significant contribution
to the business:

Martin J. Cummins...............................          36        Director of Clinical & Regulatory Affairs
</TABLE>


(1) Member of the Executive Committee.
(2) Member of the Compensation Committee.
(3) Member of the Finance Committee.


                                       16
<PAGE>


(4) Member of the Audit Committee.
(5) Member of the Stock Option Plans Administration Committee.

      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
interferon  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 of oral
interferon.  He received a PhD degree in  microbiology  from the  University  of
Missouri in 1978 and a doctor of veterinary  medicine degree from the Ohio State
University in 1966.

      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 was President
and Chief  Executive  Officer of the First  National Bank of Arvada from January
1992 until his  retirement  in 2001.  From April  1987 to  December  1991 he was
Executive Vice President of First National Bank of Amarillo.

      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.

      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.

      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 Director of Clinical and  Regulatory
Affairs. 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.  Directors  are
reimbursed for any out-of-pocket expenses in connection with their attendance at
meetings. In the event of the voluntary termination of a recipient's association
with the Company as a director,  the options  must be  exercised  within 90 days
after such termination, and in the event they are not so exercised, will lapse.

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


                                       17
<PAGE>


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  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.

      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,
2003  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,
2003.

<TABLE>
<CAPTION>
                                             SUMMARY COMPENSATION TABLE
                                                                           ANNUAL COMPENSATION
                                                    ------------------------------------------------------------------
NAME AND PRINCIPAL POSITION              YEAR          SALARY         BONUS              OTHER          SECURITIES
                                                                                        COMPEN-          UNDERLYING
                                                                                        SATION            OPTIONS
-------------------------------------    -------    --------------    ----------    --------------    ----------------
<S>                                      <C>             <C>          <C>           <C>               <C>
Dr. Joseph M. Cummins,                                                $       --    $          --             290,000
  Chairman of the Board,
  President and Chief
  Executive Officer                      2003            $103,779

                                         2002            $121,338     $       --    $          --             150,000

                                         2001            $148,042     $       --    $          --              20,000
</TABLE>


                                       18
<PAGE>



                              OPTION GRANTS IN 2003

      The  following  table sets forth certain  information  relating to options
granted in 2003 to the executive  officers  named above,  to purchase  shares of
common stock of the Company.

<TABLE>
<CAPTION>
                                         NUMBER OF SHARES        % OF TOTAL
                                         OF COMMON STOCK      OPTIONS GRANTED      EXERCISE OR
  NAME                                  UNDERLYING OPTIONS      TO EMPLOYEES        BASE PRICE       EXPIRATION
                                           GRANTED (#)            IN 2003             ($/SH)            DATE
--------------------------------------   -----------------    ---------------     --------------    -------------
<S>                                          <C>                    <C>             <C>             <C>
Joseph M. Cummins.....................       290,000                87%             $0.40 (1)        09/29/2008
</TABLE>


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


                AGGREGATED OPTION EXERCISES AT DECEMBER 31, 2003
                           AND YEAR-END OPTION VALUES

      The following  table sets forth  information  for the  executive  officers
named  above,  regarding  the  exercise of options  during 2003 and  unexercised
options held at the end of 2003.

<TABLE>
<CAPTION>
                                                                                                    VALUE OF UNEXERCISED
                                                          NUMBER OF SHARES OF COMMON STOCK              IN-THE-MONEY
                                SHARES         VALUE      UNDERLYING UNEXERCISED OPTIONS AT              OPTIONS AT
                              ACQUIRED ON    REALIZED          DECEMBER 31, 2003 (#)             DECEMBER 31, 2003 ($) (1)
 NAME                        EXERCISE (#)       ($)          EXERCISABLE/UNEXERCISABLE           EXERCISABLE/UNEXERCISABLE
--------------------------- --------------- -----------  ------------------------------------  --------------------------------
<S>                         <C>             <C>          <C>                                   <C>
Joseph Cummins                    --            --          440,000   /       None               $176,000   /      None
</TABLE>

(1)   Calculated  based on the  closing  price of the  common  stock  ($0.40) as
      reported by OTC BB on December 31, 2003.

                   DIRECTOR COMPENSATION FOR LAST FISCAL YEAR


<TABLE>
<CAPTION>
                                                Cash Compensation                  Security Grants
                                                                                              NUMBER OF
                                                                                              SECURITIES
          NAME                         MEETING FEES (1)        CONSULTING FEES (2)         UNDERLYING OPTIONS
---------------------------------    -------------------       -------------------        --------------------
<S>                                  <C>                       <C>                        <C>
Stephen Chen, PhD                                              $                --        $                 --

James Cook                                                                      --                          --

Katsuaki Hayashibara                                                            --                          --

Dennis Moore, DVM                                                               --                          --

James Page, MD                                                                  --                          --
</TABLE>


                                       19
<PAGE>


 (1)  Directors  do  not  receive  compensation  for  attendance  at  directors'
      meetings.

 (2)  Each director  receives  $1,200 per day,  prorated for partial  days,  for
      employment on special projects or assignments.

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

      As of December 31, 2003,  there were  11,060,017  shares of the  Company's
common  stock  outstanding.  The  following  table sets forth as of December 31,
2003,  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                30%

Cheryl A. Ulie
8843 SE 77th Place                                               1,000,000                9%
Mercer Island, Washington 98040

Hy Ochberg                                                          653,000               6%
102 N.E. 2nd St.
Boca Raton, FL 33432
</TABLE>


      The following  table sets forth the beneficial  ownership of the Company's
stock as of December 31, 2003 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>
                                                                    237,546              2%
Joseph Cummins

Dennis Moore                                                        141,442              1%

James Cook                                                       66,600 (1)               *

Katsuaki Hayashibara                                                 48,240               *

Stephen Chen                                                         63,500               *

James Page                                                                -               -

Total Group (all directors and executive
officers - 6 persons)                                               557,328              5%
</TABLE>

*  Less than 1%

 (1) All of such shares are owned jointly with Mr. Cook's wife.


                                       20
<PAGE>


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  30% 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, 2003,  including
principal and accrued  interest,  was $2,356,351.  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 2003,  the Company used the law firm of  SandersBaker,  P.C. Mr.
Edward  Morris,  Secretary of the Company is a partner in that firm. The Company
was invoiced $22,686 by said firm in 2003.

         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.



                                       21
<PAGE>


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

EXHIBIT INDEX

     NUMBER        DESCRIPTION
---------------    ------------------------------------------------------------
          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.


         10.2*     License  Agreement  dated as of March 22,  1988  between  the
                   Company and The Texas A&M University System.

         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.

         10.11*    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.

         10.14*    PPM/ACC Sublicense 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.

        10.28**    Distribution  Agreement  dated September 17, 1997 between HBL
                   and the Company (tumor necrosis factor-alpha).

        10.29**    Distribution  Agreement  dated September 17, 1997 between HBL
                   and the Company (interferon gamma).

       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 (interferon gamma
                   administered orally).


                                       22
<PAGE>

     NUMBER        DESCRIPTION
---------------    ------------------------------------------------------------
       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  Gamma
                   Distribution  Agreement  dated September 17, 1997 between HBL
                   and the Company (interferon gamma).

        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.

        10.44+++a  License  Agreement  dated  September  7, 2001  between  Atrix
                   Laboratories, 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.



                   NAME                           JURISDICTION OF INCORPORATION
                   ---------------------------   -------------------------------
                   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


         99.1      906 Certification

*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.

++The Exhibit is  incorporated  by reference to the Company's 2000 Annual Report
on Form 10-KSB filed with the Commission on or before April 16, 2001.

+++ The Exhibit is incorporated by reference to the Company's Report on Form 8-K
filed with the Commission on September 24, 2001.

aPortions  of this  exhibit  have been  omitted  and filed  separately  with the
commission.



                                       23
<PAGE>


                               REPORTS ON FORM 8-K

         None.


<PAGE>



                                   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 28, 2004

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.


Signature
---------

<TABLE>
<CAPTION>
<S>                                                          <C>                                    <C>
                                                                         Title                            Date
/s/                                                                      -----                           ------
------------------------------------------------------------ Chairman of the Board,                    April 28, 2004
Joseph M. Cummins                                            President, Chief Financial Officer,   ---------------------
                                                             Director and
                                                             Chief Executive Officer


/s/                                                          Director                                    April 29, 2004
------------------------------------------------------------ ---------------------------------------- ---------------------
Stephen T. Chen

/s/                                                          Director                                     April 29, 2004
------------------------------------------------------------ ---------------------------------------- ---------------------
James Cook




/s/                                                          Director                                     April 29, 2004
------------------------------------------------------------ ---------------------------------------- ---------------------
Katsuaki Hayashibara


/s/                                                          Director                                     April 29, 2004
------------------------------------------------------------ ---------------------------------------- ---------------------
Dennis Moore


/s/                                                          Director                                     April 29, 2004
------------------------------------------------------------ ---------------------------------------- ---------------------
James A. Page
</TABLE>


                                       24

<PAGE>



                   Amarillo Biosciences, Inc. and Subsidiaries

                        Consolidated Financial Statements

                          Year ended December 31, 2003



                                    Contents


Report of Independent Auditors ..............................................F-1


Audited Consolidated Financial Statements


Consolidated Balance Sheet ..................................................F-2

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

Consolidated Statements of Stockholders' Deficit ............................F-4

Consolidated Statements of Cash Flows .......................................F-5

Notes to Consolidated Financial Statements ..................................F-6


<PAGE>


              Report of Malone & Bailey, PLLC Independent Auditors


The Board of Directors
Amarillo Biosciences, Inc.

We  have  audited  the  accompanying  consolidated  balance  sheet  of  Amarillo
Biosciences,  Inc. and  subsidiaries  as of December  31, 2003,  and the related
consolidated statements of operations,  stockholders' deficit and cash flows for
each  of  the  two  years  then  ended.  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.

We conducted our audits in accordance with auditing standards generally accepted
in the  United  States of  America.  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  provide  a
reasonable basis for our opinion.

In our opinion,  based on our audits, 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, 2003, and the
consolidated  results of their  operations  and their cash flows for each of the
two years  then  ended,  in  conformity  with  accounting  principles  generally
accepted in the United States of America.

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
execute  its 2004 Plan raise  doubt  about its  ability to  continue  as a going
concern.  (Management's plans as to these matters are also described in Note 1.)
The 2003 financial  statements do not include any adjustments  that might result
from the outcome of this uncertainty.

MALONE & BAILEY, PLLC
Houston, Texas
April 16, 2004


                                       F-1

<PAGE>




                   Amarillo Biosciences, Inc. and Subsidiaries
                           Consolidated Balance Sheet
                                December 31, 2003


ASSETS
Current assets:
  Cash                                                         $        11,300
  Other current assets                                                   5,572
                                                               ---------------
Total current assets                                                    16,872
Equipment, net                                                           2,106
Patents, net of accumulated amortization of $151,689                   155,521
                                                               ---------------
Total assets                                                   $       174,499
                                                               ===============

LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
  Accounts payable                                             $       159,844
  Accrued interest expense                                             356,886
  Accrued payroll                                                       69,543
  Other accrued expense                                                  6,211
  Current maturities of long term debt                               1,045,000
                                                               ---------------
Total current liabilities                                            1,637,484

Notes payable to stockholders                                        1,059,000
                                                               ---------------
Total liabilities                                                    2,696,484

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 - 11,060,017 in 2003                                110,600
  Additional paid-in capital                                        19,279,417
  Accumulated deficit                                              (21,912,001)
                                                               ---------------
Total stockholders' deficit                                         (2,521,985)
                                                               ---------------

Total liabilities and stockholders' deficit                    $       174,499
                                                               ===============


See  accompanying  summary  of  significant  accounting  policies  and  notes to
consolidated financial statements.


                                       F-2

<PAGE>




                   Amarillo Biosciences, Inc. and Subsidiaries
                      Consolidated Statements of Operations



<TABLE>
<CAPTION>
                                                                  YEARS ENDED DECEMBER 31,
                                                             --------------------------------
                                                                 2003                 2002
                                                             -------------------------------
<S>                                                          <C>                <C>
Revenues:
  Dietary supplement sales                                   $    26,927        $     10,942
  Interferon sales                                                10,000                   -
  Interest income                                                      -               1,740
  Federal research grant                                           6,586              48,342
  Sublicense fees                                                      -              10,000
  Gain on sale of intangible assets                               50,298
  Other                                                            5,784               8,707
                                                                  99,595              79,730
                                                             -------------------------------
Expenses:
  Cost of sales                                                    4,012                 650
  Research and development expenses                              173,345             382,880
  Selling, general and administrative
     expenses                                                    394,772             302,977
  Interest expense                                                97,956              99,045
  Loss on dissolution of subsidiary                                1,000                  --
  Impairment of intangible assets                                 50,298                  --
  Gain on sale of building and equipment                         (37,454)                 --
  Reversal of accrued contingent liability                      (750,965)                 --
                                                             -------------------------------
                                                                 (67,036)            785,552
                                                             -------------------------------

Net income (loss)                                            $   166,631        $   (705,822)
                                                             ===============================

Basic and diluted net income (loss) per share                $    0.02                (0.08)
                                                             ===============================

Weighted average shares outstanding                            9,800,073           8,864,277
                                                             ===============================
</TABLE>


See  accompanying  summary  of  significant  accounting  policies  and  notes to
consolidated financial statements.


                                       F-3

<PAGE>




                   Amarillo Biosciences, Inc. and Subsidiaries
                Consolidated Statements of Stockholders' Deficit
                     Years Ended December 31, 2003 and 2002


<TABLE>
<CAPTION>
                                                                     COMMON STOCK         ADDITIONAL                     TOTAL
                                                   ISSUANCE     ----------------------     PAID IN       ACCUMULATED  STOCKHOLDERS'
                                                    PRICE        SHARES        AMOUNT      CAPITAL         DEFICIT       DEFICIT
                                                ------------------------------------------------------------------------------------
<S>                                              <C>          <C>           <C>         <C>            <C>             <C>
Balance at December 31, 2001                                    7,912,405   $  79,124   $ 18,454,599   $ (21,373,811)  $ (2,840,088)

Net loss for year ended December 31, 2002                              --          --             --        (705,822)      (705,822)
Issuance of common stock  for cash in private
     placement, net of expenses                        0.500    1,000,000      10,000        440,000              --        450,000
Issuance of common stock for cash in private
     placement                                         0.360       81,667         817         28,583              --         29,400
                                                              ---------------------------------------------------------------------
Balance at December 31, 2002                                    8,994,072   $  89,941   $ 18,923,182   $ (22,079,633)  $ (3,066,510)

Net income for year ended December 31, 2003                            --          --             --   $     166,631   $    166,631
Issuance of common stock for services              0.35-0.44      455,000       4,550        164,150              --        168,500
Issuance of common stock for cash in private
     placements                                  0.060-0.301    1,500,945      15,009        186,585              --        201,594
Exercise of options for cash                           0.060      110,000       1,100          5,500              --          6,600
Loss on dissolution of subsidiary                                      --          --             --              --         (1,000)
                                                              ---------------------------------------------------------------------
Balance at December 31, 2003                                   11,060,017   $ 110,600   $ 19,279,417   $ (21,912,001)  $ (2,521,985)
                                                              =====================================================================
</TABLE>

See  accompanying  summary  of  significant  accounting  policies  and  notes to
consolidated financial statements.



                                       F-4

<PAGE>


                   Amarillo Biosciences, Inc. and Subsidiaries
                      Consolidated Statements of Cash Flows


<TABLE>
<CAPTION>
                                                         YEAR ENDED DECEMBER 31,
                                                            2003         2002
                                                        -----------------------
OPERATING ACTIVITIES
<S>                                                     <C>          <C>
Net income (loss)                                       $   166,631  $ (705,822)
Adjustments to reconcile net income (loss) to
     net cash used in operating activities:
     Depreciation and amortization                           22,145      22,831
     Loss on obsolete inventory                                  --      48,639
     Gain on sale of assets                                 (37,453)     (2,560)
     Reversal of accrued liability                         (750,965)         --
     Common stock issued for services                       168,500          --
     Changes in operating assets and liabilities:
       Other current assets                                   4,468      41,366
       Accounts payable                                      33,797      (2,548)
       Accrued expenses                                     117,515      55,961
                                                        -----------------------
Net cash used in operating activities                      (275,362)   (542,133)
                                                        -----------------------
INVESTING ACTIVITIES
Proceeds from sale of assets                                117,485       9,225
Purchase of equipment                                        (3,056)     (7,359)
Patents                                                     (12,303)    (46,548)
                                                        -----------------------
Net cash used in investing activities                       102,126     (44,682)
                                                        -----------------------

FINANCING ACTIVITIES
Proceeds from notes payable                                  63,844      45,000
Repayments of notes payable                                 (87,602)     (5,803)
Issuance of common stock                                    208,194     479,400
                                                        -----------------------
Net cash provided by financing activities                   184,436     518,597
                                                        -----------------------
Net decrease in cash                                         11,200     (68,218)
Cash at beginning of period                                     100      68,318
                                                        -----------------------
Cash at end of period                                   $    11,300  $      100
                                                        =======================
SUPPLEMENTAL INFORMATION
Cash paid for income taxes                                       --          --
Cash paid for interest                                  $    11,142  $    9,045
                                                        =======================
</TABLE>

See  accompanying  summary  of  significant  accounting  policies  and  notes to
consolidated financial statements.



                                       F-5

<PAGE>


                   Amarillo Biosciences, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                                December 31, 2003



     1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     ORGANIZATION AND BUSINESS

     Amarillo  Biosciences,  Inc. (the "Company" or "ABI"), a Texas  corporation
     formed in 1984,  is engaged in  developing  biologics  for the treatment of
     human and animal  diseases.  The Company is continuing its 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.  The  Company  has  developed  a dietary
     supplement  and an  interferon  alpha  lozenge,  but have not commenced any
     significant product commercialization activities.

     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  interferon  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 may not  generate  sufficient  revenues  from
     product sales to support its operations.

     The Company has been dependent upon  financing from its  stockholders.  The
     Company's  activities have been financed  primarily through the issuance of
     common  stock,  and under an agreement  with a major  stockholder,  and its
     initial public offering.

     The  Company's  2004 Plan of  Operations  calls for the  Company  to expend
     approximately  $500,000 in 2004.  At  December  31,  2003,  the Company had
     available  cash of $11,300 and negative  working  capital of  approximately
     ($575,611).  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  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 execute its 2004 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 2004. 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


                                       F-6

<PAGE>


                   Amarillo Biosciences, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                                December 31, 2003



     the  future  sales of  commercial  product.  These  agreements  could be an
     important source of funds for ABI. 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.

     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.

     Veldona USA, Inc.  ("Veldona"),  an inactive subsidiary of the Company, was
     formally dissolved on September 26, 2003. Prior to formal  dissolution,  an
     assignment  was entered  into  between the Company and Veldona that allowed
     the  Company  to  buy  from  Veldona  all  of  its  previous  and  existing
     Investigative New Drug applications, ("INDs") for $50,298. This transaction
     resulted in the Company  recognizing the INDs as an intangible asset on its
     balance sheet and Veldona recognizing a gain on the sale.

     The Company  purchased the INDs from Veldona based on their probable use in
     the future,  with no current  plans of their  utilization,  therefore,  the
     Company subsequently expensed the cost of the INDs as an impairment loss.

     Also prior to the dissolution of Veldona and with legal advice, a long-term
     accrued  contingent  liability of $750,965 recorded in accounts payable was
     reversed  into income in  September  2003.  This  reversal  resulted in the
     recognition  of net income for the twelve  months ended  December 31, 2003.
     Without this reversal,  the Company would have reported a consolidated  net
     loss of $584,334 for the twelve months ended December 31, 2003.

     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-7

<PAGE>


                   Amarillo Biosciences, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                                December 31, 2003



     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 asset and  liability  approach is used to account  for income  taxes by
     recognizing deferred tax assets and liabilities for the expected future tax
     consequences of temporary  differences between the carrying amounts and the
     tax  bases of assets  and  liabilities.  The  Company  records a  valuation
     allowance  to reduce the  deferred  tax  assets to the amount  that is more
     likely than not to be realized.

     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.  Sales,  reimbursement  income,
     sublicense fees, etc. are recognized upon receipt of payment.

     RESEARCH AND DEVELOPMENT

     Research and development costs are expensed as incurred.

     USE OF ESTIMATES

     The  preparation  of financial  statements  in conformity  with  accounting
     principles  generally  accepted  in the United  States of America  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.



                                       F-8

<PAGE>


                   Amarillo Biosciences, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                                December 31, 2003



     STOCK-BASED COMPENSATION

     The Company accounts for stock-based compensation under the intrinsic value
     method.  Under this method, the Company recognizes no compensation  expense
     for stock options granted when the number of underlying shares is known and
     exercise  price of the option is greater  than or equal to the fair  market
     value of the stock on the date of grant.

     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 2003 and 2002 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:


<TABLE>
<CAPTION>
                                                                      2003                 2002
                                                                 ----------------------------------
<S>                                                              <C>                  <C>
     Pro forma net loss                                          $       145,284      $    (745,027)
     Pro forma basic and diluted net loss per share              $        (0.01)      $       (0.08)
</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>
                                                                                 2003               2002
                                                                          ----------------------------------
<S>                                                                               <C>                <C>
     Number of options issued at fair market value of stock                       782,037            640,000
     Weighted-average fair value of options                                         $0.42              $0.06
     Weighted-average exercise price of options                                     $0.42              $0.08
</TABLE>

     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-9

<PAGE>


                   Amarillo Biosciences, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                                December 31, 2003



     2. EQUIPMENT

     Equipment is stated at cost and consists of the following:

                                                December 31,
                                               -------------
                                                    2003
                                               -------------
     Land                                          $    --
     Building                                           --
     Furniture and equipment                        67,029
                                               -------------
                                                    67,029
     Less accumulated depreciation                  64,923
                                               -------------
                                                   $ 2,106
                                               =============

     3. NOTES PAYABLE

     The Company had a loan agreement with HBL, which called for HBL to loan the
     Company  $3,000,000  to be  advanced  in  three  installments.  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. $1,000,000 is 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.  The other  $1,000,000  is due 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.

     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.  This stock conversion  leaves the Company owing HBL a principal
     amount of $2,000,000 plus accrued interest.

     On June 6, 2001 the Company  borrowed $90,000 under a real estate lien note
     agreement collateralizing the Company's building with Apple Cattle Company,
     a Texas general  partnership.  The annual interest rate on unpaid principal
     is 10% , due and  payable in  monthly  installments  of  $1,660,  including
     escrow for taxes and insurance of $471,  continuing until June 6, 2011. The
     building was sold on February  14, 2003 for a sales price of $137,500.  The
     real estate lien note was paid off at closing.

     Effective  November  1, 2002 the  Company  executed a  Promissary  Note for
     $45,000 payable to an individual  stockholder.  The Promissary Note accrues
     interest at the rate per year that will be


                                      F-10

<PAGE>


                   Amarillo Biosciences, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                                December 31, 2003



     the lesser of 3% in excess of the prime  interest rate  published from time
     to time in the Wall  Street  Journal,  adjusted  on the  first  day of each
     calendar  month  based  on  such  rate  then  in  effect,  or  the  maximum
     nonusurious rate of interest  permitted by applicable law. Accrued interest
     is payable  monthly,  in arrears and the entire principal amount is payable
     October 31, 2004. The Note Holder is granted the right to purchase,  within
     the next 3 years,  up to  30,000  shares of stock at an  exercise  price of
     $0.15 per share.

     Effective March 21, 2003 the Company executed a second  Promissary Note for
     $45,000  payable to the same  individual  stockholder.  The Promissary Note
     accrues  interest  at the rate per year  that  will be the  lesser of 3% in
     excess of the prime  interest rate  published from time to time in the Wall
     Street  Journal,  adjusted on the first day of each calendar month based on
     such rate then in  effect,  or the  maximum  nonusurious  rate of  interest
     permitted  by  applicable  law.  Accrued  interest is payable  monthly,  in
     arrears and the entire principal amount is payable March 20, 2005. The Note
     Holder is granted  the right to  purchase,  within the next 3 years,  up to
     50,000 shares of stock at an exercise price of $0.06 per share.

     Subsequent  events.  January 27, 2004 the Company  borrowed $5,000 from the
     above  mentioned  individual  stockholder.  February  6,  2004 the  Company
     borrowed  an  additional   $5,000  from  the  above  mentioned   individual
     stockholder.  This $10,000 has been added to the Promissory  Note above and
     interest is calculated and paid in accordance with the terms stated above.

     On October 10, 2003 and December 31, 2003, unsecured loans totaling $14,000
     were received from an individual stockholder. Subsequently, on February 26,
     2004,  $10,500 of that money was used to purchase private  placement shares
     of the Company. The Company is still in debt to the stockholder for $3,500.

     4. MANUFACTURING AND SUPPLY AGREEMENTS

     The  Company  was  a  party  to  the  following  manufacturing  and  supply
     agreements at December 31, 2003:

     The Company has a Joint Development and Manufacturing/Supply Agreement with
     HBL (the Development  Agreement),  a major stockholder under which HBL will
     formulate,  manufacture  and supply HBL  interferon  for the Company or any
     sublicensee.  In  exchange,  HBL is  entitled  to receive a  transfer  fee,
     specified  royalties  and a portion of any payment  received by the Company
     for  sublicense  of rights  under this  agreement.  The  agreement  further
     provides  that  the  Company  sublicense  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.  The  Company  is the  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 and the agreement also


                                      F-11

<PAGE>


                   Amarillo Biosciences, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                                December 31, 2003



     provides  that a  royalty  fee be  paid to  HBL.  As  part  of the  License
     Agreement  with  Atrix  Laboratories,  Inc.  (executed  September  7, 2001,
     terminated May 22, 2003) a second  amendment to the  Development  Agreement
     was executed extending the Development Agreement to March 12, 2005 and will
     be renewed automatically for successive three-year terms.

     The Company has 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.

     5. LICENSE AND SUBLICENSE AGREEMENTS

     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  sublicense  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 sublicense  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.

     7. COMMON STOCK

     The Company has  20,000,000  shares of voting common shares  authorized for
     issuance and 10,000,000  shares of preferred stock  authorized for issuance
     which is issuable in series. To date, no preferred stock has been issued.

     The Company has 2,228,884 shares of common stock reserved for issuance upon
     exercise of options and warrants granted.

     In 2003,  the  Company  sold  1,500,945  unregistered  shares of its voting
     common stock in private placement offerings. Of these sales, 300,000 shares
     were sold for  $0.08333  per  share;  100,000  shares  for $0.10 per share;
     250,000  shares for $0.105 per share;  500,000  shares for $0.12 per share;
     54,400  shares for $0.25 per share;  30,000  shares for $0.25480 per share;
     30,000  shares  for $0.27  per  share and  36,545  for  $0.301  per  share,
     generating $201,594 in cash.

     The Company completed a private placement in January 2002 pursuant to which
     it sold 1,000,000  shares of its voting common stock at $.50 per share, for
     a total of $500,000. After deducting


                                      F-12

<PAGE>


                   Amarillo Biosciences, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                                December 31, 2003



     selling commission of $45,000 paid to First Island Capital, Inc., and other
     offering costs of $5,000, the net proceeds to the Company were $450,000.

     The Company has 63,200  warrants to purchase common stock through April 11,
     2005 at $3.125 per share and warrants to purchase common stock at $3.75 per
     share.  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.

     The Company has 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.

     On September 26, 2003, the Board of Directors passed a resolution approving
     788,437  options be granted to persons named in the  resolution,  effective
     upon  relinquishment by each of an equal number of options currently owned,
     such new options to be  exercisable  for a period of five years from grant,
     at an exercise  price equal to the closing price of the Company's  stock on
     the OTC BB on the last  business date  preceding the date of grant.  Of the
     788,437 options approved, 768,437 options were issued, with exercise prices
     ranging from $0.35 to $0.51 per share.  Additionally,  13,600 non-qualified
     options were granted to Directors for  consulting  services  rendered.  The
     13,600 non-qualified  options have an exercise price of $0.44 per share and
     are exercisable over five years. All such options vested immediately.

     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


                                      F-13

<PAGE>


                   Amarillo Biosciences, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                                December 31, 2003



     for 2003 and  2002,  respectively:  risk-free  interest  rate of 3.00%  and
     4.10%;  dividend  yield of 0% and 0%;  volatility  factors of the  expected
     market  price  of the  Company's  common  stock  of 166%  and  106%;  and a
     weighted-average expected life of the option of 5 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 2003 and 2002 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-14

<PAGE>


                   Amarillo Biosciences, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                                December 31, 2003


<TABLE>
<CAPTION>
                                                                      2003                 2002
                                                                ------------------------------------
<S>                                                              <C>                  <C>
     Pro forma net loss                                          $       145,284      $    (745,027)
     Pro forma basic and diluted net loss per share              $        (0.01)      $       (0.08)
</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>
                                                                                 2003               2002
                                                                        ------------------------------------
<S>                                                                               <C>                <C>
     Number of options issued at fair market value of stock                       782,037            640,000
     Weighted-average fair value of options                                         $0.42              $0.06
     Weighted-average exercise price of options                                     $0.42              $0.08
</TABLE>

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

<TABLE>
<CAPTION>
                                                      2003                               2002
                                          ---------------------------------------------------------------
                                                             Weighted                           Weighted
                                                             Average                            Average
                                                             Exercise                           Exercise
                                            Options           Price            Options           Price
                                          ---------------------------------------------------------------
<S>                                          <C>              <C>             <C>                 <C>
     Outstanding, beginning of year          1,562,776        $0.98             997,187           $1.76
     Granted                                   782,037         0.42             711,589            0.12
     Canceled                                 (473,125)        0.54            (146,000)           0.98
     Exercised                                      --           --                  --              --
     Outstanding, end of year                1,871,688        $0.54           1,562,776           $0.98
                                          ============                    =============
     Exercisable at end of year              1,871,688        $0.54           1,521,653           $0.97
                                          ============                    =============
</TABLE>

     Exercise prices for options outstanding as of December 31, 2003 ranged from
     $0.06 to $5.00. Of these options,  10,000 have exercise prices ranging from
     $4.00  to  $5.00  and  the  remainder  range  from  $0.06  to  $1.63.   The
     weighted-average remaining contractual life of those options is 5.03 years.

     9. EMPLOYEE BENEFIT PLAN

     The Company has a Simplified  Employee Pension Plan (the Plan),  which is a


                                      F-15

<PAGE>


                   Amarillo Biosciences, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                                December 31, 2003


     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, 2003 and 2002, were $0, and $0, 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 $6,500,000 and $7,000,000
     at  December  31,  2003 and 2002  respectively,  was subject to a valuation
     allowance  of  $6,500,000  and  $7,000,000  at  December  31, 2003 and 2002
     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  under the cash  method of  accounting  used by the  Company for
     federal income tax reporting.

     At December 31, 2003, the Company has net operating loss  carryforwards  of
     approximately  $19,100,000 for federal income tax purposes expiring in 2006
     through 2023. The ability of the Company to utilize these carryforwards may
     be limited should changes in stockholder ownership occur.

     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,
     2003.

     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
     2003 the Company has used the law firm of  SandersBaker,  P.C.  Mr.  Edward
     Morris,  Secretary of the Company,  is a partner in that firm.  The Company
     was  invoiced   $22,686  during  2003  for  legal   services   rendered  by
     SandersBaker.



                                      F-16