U.S.
Securities and Exchange Commission


Washington,
D.C. 20549


Form
10-K


(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, 2008[     ]
            
            Transition
      Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934
      [No Fee Required]
              
              Commission
      File Number 0-20791AMARILLO
      BIOSCIENCES, INC.
              (Exact
      name of Registrant as specified in its charter)Texas
              (State
      of other jurisdiction of incorporation or organization)
            75-1974352
              (I.R.S.
      Employer Identification No.)4134
      Business Park Drive, Amarillo, Texas
              (Address
      of principal executive offices)
            79110-4225
              (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





Indicate by check mark whether the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act.  [  ] Yes   [√]
No





Indicate by check mark whether the
issuer is not required to file reports pursuant to Section 13 or 15(d) of the
Exchange Act.  [  ] Yes   [√] No





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act of 1934 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   [ ] No





Indicate
by check mark if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and
will not 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-K or any amendment to this Form 10-K.  [√ ]


1


Indicate
by check mark whether the registrant is a large accelerated filer, and
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in rule 12b-2 of the Exchange
Act.





Large
      accelerated filer [ ]
            
            Accelerated
      filer [ ]Non-accelerated
      filer [ ] (do not check if smaller reporting company)
            
            Smaller
      reporting company [√]





Indicate
by checkmark whether the registrant is a shell company (as defined in Rule 12b-2
of the Act).  [ ] Yes   [√] No





As of
December 31, 2008, there were outstanding 35,953,377 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 31,283,674
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 December 31, 2008) was
approximately $1,720,602.   Shares of common stock held by
officers, directors and each shareholder owning ten percent or more of the
outstanding common stock have been excluded in that such persons may be deemed
to be affiliates.





The number of
shares of the Registrant’s common stock outstanding as of March 17,
2009 was 40,973,782.





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 2009 Plan of Operations” as well as
those discussed elsewhere in this Form 10-K. The following discussion should be
read in conjunction with the Financial Statements and the Notes thereto included
elsewhere in this Form 10-K.






ITEM
      1.
            BUSINESS.




General




Amarillo
Biosciences, Inc. (the “Company” or “AMAR” or "Amarillo"), a Texas corporation
formed in 1984, is engaged in developing biologics for the treatment of human
and animal diseases.  We have a proprietary technology for a less
toxic method of administration, low-dose oral interferon, in FDA Phase 2
clinical trials.  Injectable interferon is an immune modulator used to
treat viral and autoimmune diseases and cancer with a $5 billion market even
though side effects are often moderate to severe.




We have
completed numerous clinical trials in animals and humans using the low-dose oral
interferon mucosal route of administration.  Orally delivered
interferon binds to mucosal cells in the mouth and throat resulting in
stimulation of immune mechanisms and has been shown to activate hundreds of
immune system genes in the peripheral blood.  Oral interferon is given
in doses 10,000 times less than injectable interferon, so side effects are
reduced or eliminated.  The company has ten issued patents and four
patents pending including a patent pending for oral interferon treatment of
chronic cough.




2


We
currently have a Phase 2 study in progress in the United States to treat oral
warts in HIV+ patients (Orphan Drug Designation).  We are seeking
funding for a Phase 2 proof-of-concept study to treat chronic cough in COPD
patients (large market potential).   Dr. Lorenz Lutherer at Texas
Tech is conducting a Phase 2 proof-of-concept study to evaluate our orally
administered interferon-alpha in the treatment chronic cough in chronic
obstructive pulmonary disease (COPD) and idiopathic pulmonary fibrosis (IPF)
patients.  Cytopharm, our licensee in Taiwan, plans to start a
hepatitis C Phase 2 study in May. Dr. Manfred Beilharz at The University of
Western Australia plans to start a Phase 2 clinical study in May to evaluate our
oral interferon in the prevention and treatment of influenza in human subjects
in Australia.




Besides
the development of low-dose oral interferon as treatment of disease indications
with small market potential (Orphan Drug Designation), the company added the
treatment of a disease indication with large market potential (chronic cough in
COPD patients).  Once Phase 2 proof-of-concept studies of cough have
been completed, we plan to seek license and supply agreements with large global
pharmaceutical partners. We plan to use upfront fees and milestone payments from
licensees to complete Phase 2b and Phase 3 studies and obtain regulatory
approval in the USA.  We plan to utilize our global pharmaceutical
partners to simultaneously complete Phase 3 clinical studies in Europe, obtain
EU regulatory approval, and commercialize oral interferon
globally.  We expect to receive royalties from global sales by
licensees.




Interferon




Interferon
was discovered 52 years ago when the protein “interfering” with the growth of
influenza virus in chicken embryos was isolated and named interferon.  Interferon
is not just an antiviral protein; it is now recognized as a key component of the
immune system.  Not only does interferon act to trigger, amplify and
sustain different phases of the immune response, but it also promotes a balance
between the infection and an inflammatory response when an infection is
declining, and helps shut down the immune system when the infection has
ended.  Depending on dosage, interferon can boost or suppress the
immune system; therefore, interferon is called an immune modulator.




Twenty
two years ago, injectable interferon-alpha was approved by the FDA for use in
high doses to treat hairy cell leukemia.  Since then, injectable
interferon-alpha has been approved to treat other forms of cancer, hepatitis B,
hepatitis C and genital warts.  Interferon-beta has been approved to
treat multiple sclerosis, an autoimmune disease.  Despite the benefits
of injectable interferon, it causes severe side effects that many patients
cannot tolerate, forcing them to discontinue interferon therapy.




Low-Dose
Interferon Technology




Our
product is a natural human interferon alpha administered into the oral cavity in
low doses (150 to 500 IU) as a small tablet (lozenge) which dissolves in the
mouth. Interferon binds to surface (mucosal) cells in the mouth and throat
resulting in stimulation of immune mechanisms.  Orally delivered
interferon has been shown to activate hundreds of immune system genes in the
peripheral blood.  Human studies have shown that oral interferon is
effective against viral and autoimmune diseases. Oral interferon is given in
concentrations 10,000 times less than that given by injection, so side effects
are eliminated or rare.




3


Besides
being non-toxic, our low-dose oral interferon product is stable at room
temperature, unlike high-dose injectable interferon that requires
refrigeration.  Low-dose oral interferon is taken by mouth in the form
of a small tablet (lozenge) so it is easier for patients to take than high-dose
interferon that must be injected with a needle and syringe.  Finally,
our product is less expensive because interferon is effective at lower doses
when given orally, compared to the high doses which must be injected to overcome
the body’s efficient mechanisms for clearing interferon from the
blood.




All
mammals naturally produce interferon in their nasal secretions that trickles
down the throat to activate an immune response. If a virus is inhaled, the
tissue of the nose and throat responds by producing interferon in the nasal and
pharyngeal secretions thereby activating hundreds of interferon stimulating
genes thereby sending a message to the immune system.




We first
did testing of oral interferon in dogs with parvovirus, cats with feline
leukemia and cattle with shipping fever (bovine respiratory
disease).  We and others have conducted additional studies of oral
interferon in swine, horses, poultry, rats, mice and humans. Over 100 studies of
low-dose oral or intranasal interferon have been conducted in humans and in
animals.




Safety
Profile of Low-Dose Oral Interferon




AMAR has
sponsored 15 double-blind, placebo-controlled studies of orally administered
interferon-alpha (IFNα) lozenges in the
treatment of 1504 subjects with various diseases.  Seven different
disease indications were treated daily with IFNα doses ranging
from 15 to 1600 international units (IU) for a few days or as long as 10
months.  In this meta-analysis of 15 double-blind, placebo-controlled
studies, IFNα
delivered in the form of low-dose, orally dissolved maltose lozenges was found
to be as safe as a matching placebo.




Oral
interferon has been tested and reported, by us and others, to be safe and
beneficial in treating several human health conditions:  respiratory
infections caused by influenza virus or RSV, autoimmune diseases, chronic cough,
chronic active hepatitis, fibromyalgia, oral warts (papillomaviruses), aphthous
stomatitis, oral mucositis in cancer patients, and herpesvirus.




Intellectual
Property




The AMAR
portfolio consists of patents with claims that encompass method of use or
treatment and composition of matter and manufacturing.  AMAR presently
owns or licenses ten patents with one of the ten on AMAR’s dietary
supplement.  The company has four pending patents related to low-dose
orally delivered interferon.  We have vigorously enforced our patent
position in the past, resulting in successful settlement. There are no current
patent litigation proceedings.




The
Company has filed applications with the U.S. Food and Drug Administration
(“FDA”), and there now are in effect, six active Investigational New Drug
(“IND”) applications covering indicated uses for low-dose oral interferon alpha,
including treatment of Behçet’s disease, chronic cough, oral warts in HIV+
patients, hepatitis C, influenza and HIV infection.




Our
objective is to exploit our proprietary technology to become a leader in the
field of low-dose oral applications of interferon alpha. Our 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 our opinion, have the greatest commercial potential and are most
likely to be approved by the FDA.  We will attempt to gain market
share for approved products by forming alliances with strong marketing
partners.




4


We have
six full-time employees.  We make extensive use of consultants in
business and research and development.  Governmental or FDA approval
is required for our principal products.  Our progress toward approval
is discussed under each specific indication, below.




Low-Dose
Oral Interferon Alpha – FDA Clinical Trials Status




Influenza
– FDA Phase 2 study to commence, mostly funded by third party




Influenza
(the flu) is a contagious respiratory illness caused by influenza
viruses.  It can cause mild to severe illness, and at times can lead
to death.  Influenza usually starts suddenly and may include the
following symptoms: 1) fever (usually high), 2) headache, 3) tiredness (can be
extreme), 4) cough, 5) sore throat, 6) runny or stuffy nose, 7) body aches, and
8) digestive problems such as diarrhea, nausea and
vomiting.  Complications of flu can include bacterial pneumonia, ear
infections, sinus infections, dehydration, and worsening of chronic medical
conditions, such as congestive heart failure, asthma, or diabetes.




Flu
viruses spread mainly from person to person through coughing or
sneezing.   Sometimes people may become infected by touching
something with flu viruses on it and then touching their mouth or
nose.  Most healthy adults may be able to infect others beginning 1
day before symptoms develop and up to 5 days after becoming
sick.  That means that a person may be able to pass on the flu to
someone else before they know they are sick, as well as while they are
sick.




Influenza
A viruses are divided into subtypes based on 2 proteins on the surface of the
virus: the hemagglutinin (H) and the neuraminidase (N).  There are 16
different H subtypes and 9 different N subtypes, all of which have been found
among influenza A viruses in wild birds.  Wild birds are the primary
natural reservoir for all subtypes of influenza A viruses and are thought to be
the source of influenza A viruses in all other animals.  Most
influenza viruses cause asymptomatic or mild infection in birds; however, the
range of symptoms in birds varies greatly depending on the strain of
virus.  Infection with certain avian influenza A viruses (for example,
some strains of H5 and H7 viruses) can cause widespread disease and death among
some species of wild and especially domestic birds such as chickens and
turkeys.




Pigs can
be infected with both human and avian influenza viruses in addition to swine
influenza viruses.  Infected pigs get symptoms similar to humans, such
as cough, fever and runny nose.  Because pigs are susceptible to
avian, human and swine influenza viruses, they potentially may be infected with
influenza viruses of different species (e.g., ducks and humans) at the same
time.  If this happens, it is possible for the genes of these viruses
to mix and create a new virus.  For example if a pig were infected
with a human influenza virus and an avian influenza virus at the same time, the
viruses could mix (reassort) and produce a new virus with most of the genes from
the human virus, but a hemagglutinin and/or neuraminidase from the avian
virus.  The resulting new virus would likely to be able to infect
humans and spread from person to person, but it would have surface proteins
(hemagglutinin and/or neuraminidase) not previously seen in influenza viruses
that infect humans.  This type of major change in the influenza A
viruses is known as antigenic shift.  Antigenic shift results when a
new influenza A subtype to which most people have little or no immune protection
infects humans.  If this new virus causes illness in people and can be
transmitted easily from person to person, an influenza pandemic can
occur.




Influenza
A viruses are found in many different animals, including ducks, chickens, pigs,
whales, horses and seals.  Influenza B viruses circulate widely only
among humans. While it is unusual
for people to get influenza infections directly from animals, sporadic human
infections and outbreaks caused by certain avian influenza A viruses have been
reported.




5




A number
of natural outbreak or challenge studies indicate that low doses of IFNα given
orally and/or intranasally are safe and effective at treating human
flu.  IFNα administered intranasally coats the oropharynx and comes in
contact with the same receptors as IFNα administered
orally.  Leukocyte interferon was given in low doses intranasally for
3 consecutive days to 374 subjects “at the height” of an influenza
outbreak.  Interferon-treated subjects had less severe illness than
382 subjects given placebo.  When interferon was given to 320 subjects
“before” the influenza outbreak, these subjects had less illness than the 317
subjects given placebo.  It was reported that the interferon treatment
was free of adverse events.




In 1969,
approximately 14,000 people in Moscow participated in controlled studies of
placebo versus interferon treatment during a natural outbreak of Hong Kong
influenza.  Interferon (about 128 units) or placebo was dripped into
the nose daily for 5 days starting about the time of the first reported
influenza cases.  Interferon treatment significantly (P<0.01)
reduced the number of influenza cases. Intranasal drops of human interferon
alpha (5,000 units daily) given for 4 months reduced the frequency and severity
of diseases due to influenza A(H3N2
and H1N1) and parainfluenza virus.  Data was collected on 83
volunteers in the study.  Fever occurred in 6 of 40 volunteers given
interferon and in 15 of 43 volunteers given placebo
(P<0.01).  Subjective symptoms such as headache, cough, fatigue,
anorexia, myalgia, etc. occurred in 34% of volunteers given interferon and in
67% of volunteers given placebo (P<0.01).




In 1982,
it was reported that human leukocyte interferon (10,000 units/day) or placebo
was dripped into the nostrils of 27 children daily for 60 days.  The
children lived in an orphanage where natural outbreaks of influenza A and
influenza B occurred during the treatment period.  Interferon did not
prevent illness but significantly reduced the duration of fever and reduced the
main peak fever.  Clinical manifestations of influenza were milder in
children given interferon compared to placebo.  Adverse events due to
interferon therapy were not observed.




During
influenza epidemics in 1983, 1984 and 1985, 140 children were treated with a
spray of natural human interferon alpha into the nose and mouth twice daily for
3-4 days.  The total daily dose was reported to be 700-1600
units.  The 53 control children were given traditional Chinese
herbs.  Children given interferon had a significantly (P<0.01)
faster normalization of temperature at 24, 36 and 48 hours after the first
treatment.  The clinicians reported that pharyngitis and lymphadenosis
of the posterior pharynx improved when fever subsided.




Low doses
of interferon probably do not have a direct antiviral effect but instead exert
an immune modulatory effect through interferon stimulated
genes.  Influenza studies conducted in the USA, Australia and Germany
have shown that oral interferon protects mice against an otherwise fatal
influenza infection.




The
University of Western Australia in Perth has received a grant from the
Department of Health, Government of Western Australia for a Phase 2 clinical
study of oral interferon as prevention/treatment of respiratory illnesses,
including influenza, in Australia.  AMAR is providing the study drug,
electronic data collection service, and US regulatory support for the
study.  Beginning in May, up to 200 healthy volunteers with high
levels of anticipated occupational exposure to respiratory viruses will take
oral interferon or placebo lozenges once daily for 16 weeks. Once per week, the
study volunteers will submit a report detailing the severity of any cold/flu
symptoms




6


experienced,
any medications taken, number of days of work missed, etc. The aim of the study
is to determine whether the volunteers who take oral interferon experience fewer
respiratory illnesses and/or less severe symptoms during the winter cold/flu
season in Australia (June-August). Final results of the study are expected in
the 4th quarter of 2009.




Chronic
Cough – COPD – FDA Phase 2 ongoing, funding sought for a second
study




COPD
affects approximately 10% of the world population over 40, is a growing problem,
and is the 4th leading
cause of death in the world.  Chronic obstructive pulmonary disease
(COPD) is a clinical condition with a progressive airflow limitation that is
poorly reversible and characteristic of chronic bronchitis and
emphysema.  The causes of COPD include tobacco smoke, occupational
dusts, chemicals, vapors and environmental pollutants.  COPD is
estimated to affect more that 600 million people worldwide. There are no
effective therapies for emphysema, nor are there efficient clinical management
strategies.




Data from
a Phase 2 clinical study at Texas Tech University shows that treatment with oral
interferon leads to a rapid and significant reduction in the cough associated
with idiopathic pulmonary fibrosis (IPF), resulting in improved quality of
life.  Blinded, controlled studies in the US and Canada showed that
oral interferon relieves chronic coughing in horses with COPD-like disease. The
company has 10 patents and 4 patents pending, including a patent pending for
oral interferon treatment of chronic cough. Oral interferon treatment of cough
is expected to improve quality of life of COPD patients.




A
proof-of-concept study of low-dose oral interferon as treatment of chronic cough
is ongoing at Texas Tech University. This experimental clinical study is a Phase
2, randomized, double-blind, placebo-controlled, parallel trial in which 40
eligible volunteers with IPF or COPD-associated chronic cough will be randomly
assigned to one of two groups in equal numbers to receive either oral interferon
or placebo lozenges. Treatment will be given three times daily for 4 weeks, and
patients will be followed for 4 weeks post-treatment to assess durability of
response. The study will evaluate the ability of oral interferon to reduce the
frequency and severity of chronic cough, compared to placebo.




We are
seeking funding to complete an expanded proof-of-concept study of low-dose oral
interferon for treatment of chronic cough. A successful Phase 2 proof-of-concept
study in COPD patients is anticipated to generate interest from potential big
pharma partners, which should result in milestone payments and royalties for the
Company.




Behçet’s Disease - FDA
Phase 2 completed




Behçet’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. Behçet’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 FDA’s Office of Orphan
Drugs has granted AMAR orphan drug status for low dose orally administered
Interferon-alpha treatment in this condition.




NOBEL
ILAC SANAYII VE TICARET A.S. (“Nobel”), our licensee, completed a double-blind,
placebo-controlled Phase 2 trial in Turkey in 2008 with 84 Behçet’s disease
patients randomized out of an initial target of 90.  We are still
awaiting receipt of a final report of the study




7


results
from Nobel. However, Nobel has informed AMAR that the study found no significant
difference between the treatment groups with respect to the primary endpoint.
Whether any secondary study endpoints favored oral interferon treatment will not
be known until the full study report is available.




Hepatitis
C – FDA Phase 2 to start, funded by third party




CytoPharm,
Inc., our licensee for Taiwan and China, will be launching a Phase 2,
placebo-controlled, dose-ranging study of 165 hepatitis C virus-infected
patients in Taiwan in the second quarter of 2009.  The study, which
has been approved by both the US FDA and the Taiwanese Department of Health, is
designed to test the ability of oral interferon to reduce the virologic relapse
rate of patients who have completed standard therapy with pegylated interferon
plus ribavirin.  Treatment time is 6 months with 6 months of post
treatment observation.  Results are expected by the end of
2010.




Oral
Warts in HIV+ Patients – FDA Phase 2 ongoing, funded by AMAR




Oral
warts are lesions in the mouth caused by the human papillomavirus. The FDA has
granted Orphan Drug Designation to AMAR for interferon in the treatment of oral
warts in HIV+ patients. In Phase 1/2 clinical studies of 36 HIV+ patients with
multiple oral warts who were receiving highly active antiretroviral therapy
(HAART), efficacy of oral interferon was observed when some subjects achieved a
complete or nearly complete regression of their warts.




AMAR
launched a placebo-controlled, Phase 2 study in 2007. The protocol covers a
24-week, 80-patient study in which 20 patients will receive placebo and 60 will
receive active treatment at 1500 IU per day.  As of today, 59 oral
warts patients have been enrolled at 12 active clinical
sites.  Completion of the study is anticipated by the end of 2009. If
the current study is successful, a partner will be sought to fund further
clinical development, which would include a Phase 3 trial to confirm safety and
efficacy.




Strategic
Alliance with HBL




Hayashibara
Biochemical Laboratories, Inc. (“HBL”) was established in 1970 to engage in
research and development regarding the manufacture and clinical application of
interferon and other cytokines. It is a subsidiary of Hayashibara Company, Ltd.,
a privately-owned Japanese holding corporation with diversified subsidiaries.
For more than 130 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




8


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; May 10, 1996; and September 7, 2001.  The
current expiration date of the Development Agreement is March 12, 2011, at which
time it will automatically renew for an additional three (3) years, unless the
parties agree otherwise. 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 Note 4 to the Financial Statements
attached to this 10-K.




Strategic Alliance with Nobel –Behçet’s
Disease




The
Company signed a licensing and supply agreement in September 2004 with Nobel, a
leading Turkish pharmaceutical company, providing the rights to oral low-dose
interferon-alpha for the treatment of Behçet’s disease in Turkey and in
Azerbaijan, Bosnia & Herzegovina, Bulgaria, Croatia, Georgia, Kazakhstan,
Kyrghyzstan, Macedonia, Romania, Russia, Saudi Arabia, Slovenia, Tajikistan,
Turkmenistan, Uzbekistan, and Federal Republic of Yugoslavia.




Nobel
concluded a Phase 2 study in Turkey with 84 Behçet’s disease
patients.  Nobel has informed us that the study found no significant
difference between the treatment groups with respect to the primary endpoint. We
are still awaiting receipt of a final report of the study results from Nobel.
Whether any secondary study endpoints favored oral interferon treatment will not
be known until the full study report is available.




Strategic Alliance with Bumimedic -Influenza




On
January 18, 2006, we  entered into a distribution agreement with
Bumimedic (Malaysia) Sdn. Bhd, a Malaysian pharmaceutical company that is a part
of the Antah HealthCare Group, to market our low-dose interferon (natural human
IFN) in Malaysia.  Bumimedic will seek registration for our natural
human IFN and commence marketing the product after approval. The terms of the
agreement call for Bumimedic to manufacture lozenges from our bulk natural human
IFN (which is supplied by Hayashibara Biochemical Laboratories); package the
lozenges and distribute them to local hospitals, pharmacies and clinics in
Malaysia.  Pursuant to the agreement, we will receive an initial
license fee upon execution of the agreement and will receive milestone payments,
upon regulatory approval, and upon production.   We will also
receive a royalty on the sale of the natural human IFN. This agreement was made
possible through the Company’s previously announced relationship with Dr. Claus
Martin, President and CEO, Gessellschaft Fur Medizinisch and Technische
Investionen mbH & CoKG. (GMTI), a privately held German venture capital
group.   Bumimedic is expected to await the results of the
influenza study in Australia before conducting their own study.




Strategic Alliance with CytoPharm –Hepatitis
C




On
November 16, 2006, we entered into a License and Supply Agreement with
CytoPharm, Inc., a Taipei, Taiwan-based biopharmaceutical company whose parent
company is Vita Genomics, Inc., the largest biotech company in Taiwan
specializing in pharmaco-genomics and specialty Clinical Research Organization.
Under the terms of the Agreement, CytoPharm and its subsidiary will conduct all
clinical trials, and seek to obtain regulatory approvals in both China and
Taiwan (the Territory) to launch our low dose oral interferon in the Territory
for influenza, hepatitis B and hepatitis C indications. According to the
Agreement, CytoPharm will make payments to us upon




9


reaching
certain milestones and will also pay royalties on low dose oral interferon sales
in the Territory. Enrollment of 165 subjects with hepatitis C in a Phase 2
clinical trial in Taiwan is expected by CytoPharm to begin in 2nd quarter
of 2009.




In March
2008, we entered into a Supply Agreement for Animal Health with CytoPharm,
Inc.  Under the terms of the Agreement, CytoPharm will conduct all
clinical trials, and seek to obtain regulatory approvals in China and Taiwan
(the “Territory”) to launch our low dose oral interferon in the Territory for
treatment of diseases and other healthcare applications of swine, cattle and
poultry.  CytoPharm will make payments to us upon reaching certain
milestones and will also pay royalties on low dose oral interferon sales in the
Territory.




Status
of Relocation to Kansas




The
Junction City Commissioners voted to offer the company a relocation package. Our
Board voted to accept the offer. The city then sent a signed contract which was
edited, signed and returned. The city has not initialed the changes and is in
their “due diligence” period until after the elections in Kansas April 7. Some
Junction City citizens are opposed to Junction City issuing more general
obligation debt to fund relocation incentives for us.  Three other
cities in Kansas have asked us to visit to discuss relocation.




Publishing




A
manuscript entitled “Protection From Lethal Influenza Virus Challenge by Oral
Type 1 Interferon” was published online by the Biochemical & Biophysical
Research Communication in February 12, 2007.




A
manuscript by Tumpey and others titled “The Mx1 Gene Protects Mice Against
Pandemic 1918 and Highly Lethal Human H5N1 Influenza Viruses” was published in J
Virol in October 2007.




A
manuscript by Van Hoeven and others titled “Pathogenesis of the 1918 pandemic
and H5N1 influenza virus infection in a guinea pig model: The antiviral
potential of exogenous alpha-interferon to reduce virus shedding” was published
online by J Virol in 2009.




A
manuscript by Kugel and others titled “Intranasal Administration of
Interferon-Alpha Reduces Seasonal Influenza A Virus Morbidity in Ferrets” was
published online in J Virol in February 2009.




These
four publications are supportive of our efforts to develop oral interferon as a
treatment and prevention of influenza.




A
manuscript by Cummins and others titled “Fenbendazole Stimulates Interferon
Secretion in Calves during Viral Infection” was published in the Journal of
Bovine Practitioner in spring 2008.




Cost
of Compliance with Environmental Regulations




We
incurred no costs to comply with environment regulations in 2008.




Competition




The
pharmaceutical industry is an expanding and rapidly changing industry
characterized by intense competition. We believe that our ability to compete
will be dependent in large part upon our ability to continually enhance and
improve our products and technologies. In order to do so, we must effectively
utilize and expand our 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




10


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
us, therefore, have a significant competitive advantage.
Our  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
us.   Our  competitors may succeed in developing
products or processes that are more effective or less costly than any that may
be developed by us or that gain regulatory approval prior to our
products.  We also expect that the number of 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 us in manufacturing, marketing
and distributing its products. There can be no assurance that we will be able to
compete successfully.




Government
Regulation




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




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




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




11


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.




Research
and Development




During
the years ended December 31, 2008 and 2007, the Company incurred research and
development expenses of $525,903 and $530,867, respectively. Research and
development is expected to remain a significant component of the Company’s
business. The Company has arranged for others, at their cost, to perform
clinical research and intends to continue to do so while utilizing its staff for
monitoring such research.






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.






ITEM
      3.
            LEGAL
      PROCEEDINGS.




From time
to time, we may become involved in various lawsuits and legal proceedings which
arise in the ordinary course of business. Litigation is subject to inherent
uncertainties, and an adverse result in these or other matters may arise from
time to time that may harm our business.  As of the date of this
report, we were not aware of any such legal proceedings or claims against
us.






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


None.






PART
II







ITEM
      5.
            MARKET
      FOR THE REGISTRANT’S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS, AND
      ISSUER PURCHASES OF EQUITY
SECURITIES.




12


Common
Stock




The
Company is presently traded on the OTC Bulletin Board under the symbol
AMAR.  Our common stock is presently considered a “penny stock” and is
subject to such market rules. The range of high and low bids as quoted on the
OTC Bulletin Board for each quarter of 2008 and 2007 was as
follows:




2008
            2007Quarter
            
            High
            
            
            Low
            
            
            High
            
            LowFirst
            
            $
            0.39
            
            
            $
            0.25
            
            
            $
            1.08
            
            
            $
            0.59Second
            
            
            0.33
            
            
            
            0.22
            
            
            
            0.92
            
            
            
            0.55Third
            
            
            0.24
            
            
            
            0.12
            
            
            
            0.62
            
            
            
            0.36Fourth
            
            
            0.20
            
            
            
            0.05
            
            
            
            0.50
            
            
            
            0.22





The
quotations reflect inter-dealer bids without retail markup, markdown, or
commission, and may not represent actual transactions. As of December 31, 2008,
the Company had approximately 1,600 shareholders of record.




The
Company has 100,000,000 shares of voting common shares authorized for
issuance.  The shareholders approved an increase in authorized shares
from 50,000,000 to 100,000,000 in 2007. On December 31, 2008, the Company had
60,195,789 shares of common stock outstanding and reserved for issuance upon
exercise of options and warrants.  The Company issued common stock in
2008 and 2007 as follows:




Common
      Stock Issued in 2008
            
            Shares
            
            
            Issue
      Price
            
            
            Net
      PricePrivate
      placements – cash
            
            
            1,160,000
            
            
            $
            0.10-$0.25
            
            
            $
            121,000Directors,
      officers, consultants plan – cash
            
            
            188,404
            
            
            
            0.10
            
            
            
            18,841Officers
      – salaries
            
            
            280,772
            
            
            
            0.11-0.33
            
            
            
            52,086Consultants
      – services
            
            
            421,667
            
            
            
            0.06-0.33
            
            
            
            134,225Preferred
      stock dividends
            
            
            437,273
            
            
            
            0.09-0.27
            
            
            
            77,903Conversion
      of preferred stock to common
            
            
            4,000,000
            
            
            
            0.01
            
            
            
            40,000Total
      Common Stock Issued in 2008
            
            
            6,488,116
            
            
            $
            0.01-0.33
            
            
            $
            444,055





Common
      Stock Issued in 2007
            
            Shares
            
            
            Issue
      Price
            
            
            Net
      PricePrivate
      placements – cash
            
            
            4,087,155
            
            
            $
            0.20-$0.45
            
            
            $
            1,154,506Options
      exercised – cash
            
            
            529,486
            
            
            
            0.06-0.44
            
            
            
            102,489Options
      exercised – cashless
            
            
            171,853
            
            
            
            0.06-0.44
            
            
            
            -Consultants
      – services
            
            
            200,000
            
            
            
            0.82-0.84
            
            
            
            166,000Total
      Common Stock Issued in 2007
            
            
            4,988,494
            
            
            $
            0.06-0.84
            
            
            $
            1,422,995




During
the years ended December 31, 2008 and 2007, finder’s fees paid related to
private placements of stock totaled $10,000 and $34,950, respectively, and are
included as general and administrative expenses in the accompany statements of
operations.




We have
not paid any dividends to our common stock shareholders to date, and have no
plans to do so in the immediate future.




We use
the services of American Stock Transfer and Trust Company as our transfer
agent.




13


Preferred
Stock




The
Company has 10,000,000 shares of preferred stock authorized for issuance which
is issuable in series.  During the first quarter of 2008, the Company
completed a private placement by selling 1,000 shares of Series A convertible
preferred stock for $1,000 per share in a private placement offering; generating
gross proceeds of $1,000,000 and net proceeds of $793,793.  The
convertible preferred stock is convertible into 4,000,000 shares of common
stock.  The investor also received five year warrants to purchase
4,000,000 shares of common stock at $0.30 per share. The investment banker was
paid a commission of $80,000 plus received five year warrants to purchase
640,000 shares of common stock at $0.30 per share.




The
Series A preferred shareholder was paid $77,903 (10% annualized return) of stock
dividends during 2008.   A total of 437,273 shares were issued at
$0.09 to $0.27 per share.  The preferred stock shareholder converted
all the outstanding preferred stock into common stock at $0.25 per share in
three stages on October 15, 17 and 20, 2008.  Currently there is no
preferred stock outstanding and no future dividends required to be
paid.




Stock
Options and Warrants




During
2007, the Company issued 1,600,000 options to consultants and 10,000 options to
an Scientific Advisory Committee member and recognized $644,723 expense related
to these options.   During 2008, 1,076,912 options were issued to
consultants, advisors, directors, employees and two former employees, and the
Company recognized $76,745 of expense related to these options.




During
2006, the Company issued 1,200,000 options to officers of the Company. These
options vest over the next four years.  In 2008, Company issued
700,000 to a new officer.  These options vest over the next three
years.  The Company recognized $234,939 expense in 2007 and $304,025
expense in 2008 related to these options.  The remaining cost expected
to be recognized if these options vest is $514,195.  No options were
issued to employees during 2007.




During
2007, two Directors and two employees received 171,853 shares of common stock
from the cashless exercise of 214,000 options.  No cashless options
were exercised by Directors or employees in 2008.




During
2007, consultants exercised 350,000 options at $0.20 per share for
cash.  A Board member exercised 20,000 options at $0.27 per
share.   Employees exercised 90,486 shares at $0.06, 10,000
shares at $0.23 and 25,000 shares at $0.44.  A former employee
exercised 4,000 shares at $0.44.  An investor exercised 30,000
warrants at $0.22 per share.  No options were exercised by Directors
or employees in 2008.




A summary
of the Company's stock option activity and related information for the years
ended December 31, 2008 and 2007 is as follows:




2008
            2007Options
            Price
            Options
            PriceOutstanding
      Beg of Year
            9,193,412
            $0.20-0.87
            8,589,237
            $0.06-4.00Granted
            1,776,912
            0.10-0.35
            1,610,000
            0.20-0.40Cancelled/Expired
            (2,087,912)
            0.20-0.48
            (292,339)
            0.44-4.00Exercised
            -
            -
            (713,486)
            0.06-0.44Outstanding
      End of Year
            8,882,412
            0.10-0.87
            9,193,412
            0.20-0.87Exercisable
      End of Year
            7,172,412
            0.10-0.87
            7,773,412
            0.20-0.87





14


Options
reserved for Director, employee and consultant plans but not issued (11,176,583)
are not included in the table above since this stock may be utilized for other
purposes if not used for the plans. The weighted-average remaining contractual
life of the above options is 2.36 years.




During
2008, 15,160,000 warrants were issued.  Of these 12,000,000 were
issued to a preferred shareholder, 1,920,000 to an investment banking company,
80,000 to a consultant and 1,160,000 to purchasers of unsecured private
placement stock.  Deemed dividends for $548,489 and $87,758 were
recognized for the warrants issued to the preferred shareholder and investment
banking company respectively. $11,522 was recognized as stock compensation
expense for the warrants issued to a consultant.   The Company
recognized the total purchase price for private placement stock and warrants as
the cost to purchase the stock.




We
recognized $636,247 of deemed dividends for anti-dilution benefits received by
warrant holders on November 21, 2008.   Holders of 4,640,000
warrants exercisable at $0.30 cents per share with January 8, 2013 expiration
date received 9,280,000 additional warrants.   We sold private
placement stock on November 21, 2008 for $0.10 per share which triggered the
warrant anti-dilution provisions.  Total warrants were increased by a
factor of three and the exercise price reduced to $0.10.  We are at
risk of triggering the warrant anti-dilution provisions again in the future if
we sell stock below $0.10 per share to any non-exempt
parties.  Holders of options and warrants prior to January 8, 2008
plus officers, directors and consultants under stock plans approved by outside
board of director members are exempt from the anti-dilution
provisions.




A summary
of the Company's stock warrant activity and related information for the years
ended December 31, 2008 and 2007 is as follows:




2008
            
            
            2007Warrants
            
            
            Price
      Range
            
            
            Warrants
            
            
            Price
      RangeOutstanding
      Beg of Year
            
            
            260,000
            
            
            $
            0.47-2.00
            
            
            
            290,000
            
            
            $
            0.22-2.00Granted
            
            
            15,160,000
            
            
            
            0.10-0.30
            
            
            
            -
            
            
            
            -Cancelled
            
            
            (60,000
            )
            
            
            0.47-0.50
            
            
            
            -
            
            
            
            -Exercised
            
            
            -
            
            
            
            -
            
            
            
            (30,000
            )
            
            
            0.22Outstanding
      End of Year
            
            
            15,360,000
            
            
            
            0.10-2.00
            
            
            
            260,000
            
            
            
            0.47-2.00Exercisable
      End of Year
            
            
            15,360,000
            
            
            $
            0.10-2.00
            
            
            
            260,000
            
            
            $
            0.47-2.00





The
weighted-average remaining contractual life of the warrants outstanding at
December 31, 2008 is 3.2 years.




Notes Payable




The
Company has two $1,000,000 notes payable under an unsecured loan agreement with
HBL dated July 22, 1999.  The annual interest rate on unpaid principal
from the date of each respective note is 4.5 percent, with accrued interest
being payable at the maturity.  $1,000,000 was payable on or before
June 3, 2008.  The other $1,000,000 was payable on or before August
28, 2008.




15


On
December 10, 2008, HBL proposed to extend the two notes and accrued interest
until December 3, 2009 and February 28, 2010 if payment of $200,000 of accrued
interest was received by February 28, 2009.  We have requested more
time to pay the $200,000 to extend the notes.  Although we are
currently in default of the notes, HBL has not demanded payment.




During
2008, the Company paid HBL $200,000 of interest on these notes.






ITEM
      6.
            SELECTED
      FINANCIAL DATA.





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






ITEM
      7.
            MANAGEMENT
      DISCUSSION 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




We
continue to engage in research and development activities focused on developing
biologics for the treatment of human and animal diseases.  We have not
commenced any significant product commercialization and, until such time, we
will not generate significant product revenues.  However, a license
deal with a large pharmaceutical partner may provide sufficient capital to fund
FDA approval and marketing launch of low-dose oral interferon
technology.  Our accumulated deficit has increased, from $28,459,951
at December 31, 2007 to $31,660,009 at December 31, 2008. Operating losses are
expected to continue for the foreseeable future and until such time as the
Company is able obtain a large pharmaceutical partner or attain sales levels
sufficient to support operations.




In 2009
we will continue research and development activities, as well as the activities
necessary to develop commercial partnerships and licenses. Expenditure of
financial resources in 2009 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.




Liquidity
and Capital Resources




At
December 31, 2008, we had available cash of $10,853, and had a working capital
deficit of $3,114,314.   Negative cash flow from operating
activities plus equipment purchases, software purchases and patent filings (burn
rate) is approximately $81,000 per month.  Continued losses and lack
of liquidity indicate that we may not be able to continue as a going concern for
a reasonable period of time. The ability to continue as a going concern is
dependent upon several factors including, but not limited to, the ability to
generate sufficient cash flow to meet obligations on a timely basis, obtain
additional financing and continue to obtain supplies and services from vendors.
We will need to raise additional funds in order to fully




16


execute
our 2009 Plan.  We are presently negotiating with human and animal
health commercial development partners in various regions of the
world.  We believe that one or more of these agreements will be
executed during 2009. These agreements could generally include provisions for
the commercial partner to pay us a technology access fee, could include payments
for a portion of the clinical trial expenses, could include payment obligations
to us 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. However, there can be no assurance that
we will be successful in obtaining additional funding from human health
commercial development partners, institutional or private
investors.   If we are not successful in raising additional
funds, we 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 were approximately 13% higher at the end of 2008
with approximately $3.14 million at December 31, 2008, as compared to
approximately $2.78 million at December 31, 2007.




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




Stock
based compensation expense is recorded in accordance with SFAS 123R (Revised
2004), Share-Based
Payment, for stock and stock options awarded in return for services
rendered. The expense is measured at the grant-date fair value of the award and
recognized as compensation expense on a straight-line basis over the service
period, which is the vesting period. The Company estimates forfeitures that it
expects will occur and records expense based upon the number of awards expected
to vest.




The fair
value of each option granted in 2007 is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions: dividend yield of 0.0%, expected volatility of 103.2%, risk-free
interest rate of 4.34% and expected life of 1.57 years.   The
fair value of each option granted in 2008 is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions: dividend yield of 0%, expected volatility of between 109.6 and
165.75%, risk-free interest rate between 1.00 and 3.34%, and expected life
between 2 and 8 years.




Patents
and Patent Expenditures




AMAR
holds patent license agreements and holds patents that 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.  Amortization expense amounted to $14,271 and $13,970 for the
years ended December 31, 2008 and 2007, respectively.




Long-lived
Assets




Impairment
losses are recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets' carrying amount.  No
impairment losses have been recorded since inception.




17




Comparison
of results for the fiscal year ended December 31, 2008, to the fiscal year ended
December 31, 2007.




Revenues.  During
the fiscal year ended December 31, 2008, $109,836 from product sales, sublicense
fees and royalties was generated compared to $70,069 for the fiscal year ended
December 31, 2007, an increase of $39,767 or approximately 57%.




Selling, General and Administrative
Expenses.  We were successful in cutting costs in
2008.  Selling, General and Administrative expenses were reduced from
$1,936,847 for the fiscal year ended December 31, 2007 to $1,366,076 for the
fiscal year ended December 31, 2008, a cost savings of $570,771 or approximately
29.4%.  Professional and investor relations fees were cut $678,930 and
$56,286 respectively.  A portion of the cost reductions in
professional and investor relations fees were offset by adding Dr. Peter Mueller
to the management team on April 15, 2008 and also increasing employee health
insurance benefits.    Salaries, payroll taxes, employee
option expenses and health insurance costs were $278,174 higher in 2008 than
2007. Total non-cash operating expenses for stock, options and accrued salaries
were $849,436 in 2008 compared to $1,045,662 in 2007, a decrease
of  $196,226 or approximately 19%.




Research
and Development Expenses.Research and Development expenses of
$525,903 were incurred for the fiscal year ended December 31, 2008, compared to
$530,867 for the fiscal year ended December 31, 2007, a decrease of $4,964 or
approximately 1%.




Net Income
(Loss).  Net loss for the fiscal year ended December 31, 2008
was $1,923,067 compared to a net loss of $2,506,073 for the fiscal year ended
December 31, 2007, a decrease of $583,006 or approximately 23%.  Net
loss applicable to common shareholders that includes stock dividends for
preferred stock shareholders, deemed dividend for the preferred stock beneficial
conversion feature  (BCF) and warrant anti-dilution reset deemed
dividends for 2008 was $3,200,058 compared to $2,506,073 for 2007, an increase
of $693,985 or approximately 28%.   Preferred stock dividends,
preferred stock BCF deemed dividend and warrant anti-dilution reset deemed
dividends in 2008 were $77,903, $562,841 and $636,247 respectively.






ITEM
      7A.
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
  RISK.




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.  We currently own four patents and license nine
patents.  No assurance can be given that such licenses or rights used
by us 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 us.




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 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




18
 
  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 funding from private placements of stock.




Sales
revenue, sublicense fees and royalty income are low compared to
expenses.  Our primary focus is to achieve FDA approval of oral
interferon for one or more disease indications.  We do not expect
significant sales or royalty revenue in the near term as Phase 2 and Phase 3
clinical studies must be completed before a NDA (New Drug Application) may be
submitted to the FDA.  We operate at a net loss and current
liabilities exceed current assets by $3,114,314.  Most of this is the
amount owed to HBL for two $1 million notes plus $572,773 of accrued interest on
December 31, 2008.   HBL was paid $200,000 of accrued interest in
January of 2008 and extended the notes and remaining accrued interest until June
3, 2008 and August 28, 2008.  On December 10, 2008, HBL proposed to
extend the notes and accrued interest until December 3, 2009 and February 28,
2010 if payment of $200,000 of accrued interest was received by February 28,
2008.  We have requested more time to pay the $200,000 to extend the
notes.  Although the notes are in default, HBL has not demanded
payment.  We are presently pursuing funding from prospective investors
and prospective pharmaceutical partners.  If the Company does not get
funding from investors or prospective pharmaceutical partners, the Company will
not be able to pay the requested accrued interest to extend the
notes.  The Company is discussing alternatives with HBL, but currently
has no commitment or assurance that HBL will not demand payment and/or declare
the notes in default.  We do not have sufficient liquidity to pay off
the notes or to fund operating losses unless funding is obtained from
pharmaceutical partners or private placements of stock.  There can be
no assurance that private placement or pharmaceutical company funding will
always be available as market conditions may change.




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
and Chief Executive Officer, Peter R. Mueller, our Chief Operating Officer and
Director of Research, Gary W. Coy, our Chief Financial Officer, and Martin J.
Cummins, our Vice President of Clinical




19
 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 currently have
employment agreements with our executive officers. 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.




If
we do not successfully develop, acquire or license new drugs our business may
not grow.




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.  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 may 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.




Our
competitors are much larger and more experienced than we are and, even if we
complete the development of our drugs, we may not be able to successfully
compete with them.




The
pharmaceutical industry is highly competitive.  Our biologics and low-dose
oral interferon alpha applications compete with high dose injectable interferon
manufactured by Roche, InterMune, Serano, Biogen, Berlex and
Hemispherx.  High dose injectable interferon has been widely accepted
by the medical community for many years.  Companies who manufacture
injectable interferon alpha applications are more established than we are and
have far greater financial, technical, research and development, sales and
marketing, administrative and other resources than we do.  Even if we
successfully complete the development of our tests, we may not be able to
compete effectively with these much larger companies and their more established
products.




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 is 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.  Even though we have not
historically experienced any problems associated with claims by users of our
products, we do currently maintain product liability insurance.




We
have been the subject of a going concern opinion by our independent auditors who
have expressed substantial doubt as to our ability to continue as a going
concern.




Our
Independent Registered Public Accountants have added an explanatory paragraph to
their audit opinions issued in connection with our financial statements which
states that our recurring losses from operations and the need to raise
additional financing in order to execute our business plan raise substantial
doubt about our ability to continue as a going concern.  We have
experienced net losses from operations of $2,418,316 for the year ended December
31, 2007 and $1,836,758 for the year ended December 31, 2008. Net loss
applicable




20


to common
shareholders including preferred stock dividends and deemed dividends was
$3,200,058 in 2008.  There were no stock dividends or deemed dividends
in 2007. In addition, as of December 31, 2007 we had an accumulated deficit of
$28,459,951 and $31,660,009 for the year ended December 31, 2008. These factors,
among others, raise substantial doubt about our ability to continue as a going
concern. Our financial statements do not include any adjustment that might
result from the outcome of this uncertainty. Assurances cannot be given that
adequate financing can be obtained to meet our capital needs. If we are unable
to generate profits and unable to continue to obtain financing to meet our
working capital requirements, we may have to curtail our business sharply or
cease operations altogether. Our continuation as a going concern is dependent
upon our ability to generate sufficient cash flow to meet our obligations on a
timely basis to retain our current financing, to obtain additional financing,
and, ultimately, to attain profitability. Should any of these events not occur,
we will be adversely affected and we may have to cease operations.




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 Bulletin Board, and there can be no assurance that a trading market will
develop further or be maintained in the future.  There were 15,360,000
warrants and 7,172,412 options outstanding and exercisable as of December 31,
2008.  If the warrants or options are exercised and the stock sold,
the volume of stock sales may adversely impact the market price.






ITEM
      8.
            FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA.





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






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




None.






ITEM
      9A.
            CONTROLS
      AND PROCEDURES.




As of
December 31, 2008, the disclosure controls and procedures in place have been
evaluated and are sufficient to ensure the accurate and full disclosure of
financial matters.




The
management of the Company is responsible for establishing and maintaining
adequate internal controls over the financial reporting of the
Company.  The Company uses the following framework to evaluate the
effectiveness of the internal controls over financial reporting:




We
maintain a system of disclosure controls and procedures that are designed to
provide reasonable assurance that information, which is required to be timely
disclosed, is accumulated and communicated to management in a timely
fashion.




In the
ordinary course of business, we review our system of internal control over
financial reporting and make changes to our systems and processes to improve
controls and


21


increase
efficiency, while ensuring that we maintain an effective internal control
environment. Changes may include such activities as implementing new, more
efficient systems and automating manual processes.




An evaluation of the effectiveness of
the design and operation of our disclosure controls and procedures was performed
as of the end of the period covered by this report. This evaluation was
performed under the supervision and with the participation of management,
including our Chief Executive Officer and Chief Financial Officer. Based upon
that evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures are effective to provide
reasonable assurance that information required to be disclosed by the Company in
the reports that it files or submits under the Securities Exchange Act of 1934
is accumulated and communicated to management, including our Chief Executive
Officer, to allow timely decisions regarding required disclosure and are
effective to provide reasonable assurance that such information is recorded,
processed, summarized and reported within the time periods specified by the
SEC’s rules and forms.




Management
assessed the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2008.  In making this assessment, management
used the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission in Internal Control-Integrated Framework.  Based on
such assessment and those criteria, management believes that the Company
maintained effective internal control over financial reporting as of December
31, 2008.  The Company’s accounting firm has not issued an attestation
report on the management’s assessment of the Company’s internal
controls.   There were no changes made to the internal controls
in 2008.  See Exhibit 33.1 for managements report on internal control
over financial reporting.







PART
III






ITEM
      10.
            DIRECTORS,
      EXECUTIVE OFFICERS, AND CORPORATE
  GOVERNANCE.










Name
            Age
            PositionJoseph
      M. Cummins, DVM, PhD (1)
            66
            Chairman
      of the Board, President, Chief Executive Officer and
    DirectorPeter
      R. Mueller, PhD
            55
            Chief
      Operating Officer and Director of ResearchGary
      W. Coy, PhD
            64
            Vice
      President and Chief Financial OfficerMartin
      J. Cummins
            41
            Vice
      President of Clinical & Regulatory AffairsStephen
      Chen, PhD (2)(3)(4)
            59
            DirectorThomas
      D’Alonzo, JD (1)(2)(3)(4)
            65
            DirectorDennis
      Moore, DVM (1)(4)
            62
            DirectorJames
      Page, MD (2)(3)
            81
            Director


(1)
            Member
      of the Executive Committee.


(2)
            Member
      of the Compensation & Stock
Committee.


(3)       Member
of the Audit Committee.


(4)     
 Member of the Search Committee.


22


Joseph M. 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. Dr.
Cummins has been conducting research on oral cytokines, most particularly
interferon alpha, in animals and humans for over 30 years. Dr. Cummins has 54
publications and is the inventor on 21 issued or pending patents many of 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.




Peter R. Mueller, Chief
Operating Officer and Director of Research, joined AMAR in April
2008.  He has more than 20 years of global experience in the
pharmaceutical industry.  Most recently, he has headed Epicenter
Consulting Inc., a New Jersey based health care consulting firm that he founded
in 2001. Previously, Dr. Mueller was Vice President, Global Marketing &
Medical Information and Technology for Aventis Pharmaceuticals. Prior to that
position, he served as Vice President, Global Marketing Business & Marketing
Services for Hoechst Marion Roussel.  He was also Director, Global
Commercial Development, Cardiovascular and Metabolism for Marion Merrell
Dow.  Dr. Mueller is a pharmacist with a PhD degree in pharmaceuticals
from the University Of Mainz, Germany.




Gary W.
Coyprovided financial
consulting services to the Company since 2004 and has been the Chief Financial
Officer since April 2006. Previously, Dr. Coy was Chairman and President of
multiple companies including Lighthouse Properties, Inc., a real estate
partnership syndicator and property management company, and Poly-Drug, Inc., a
toxicology and therapeutic drug monitoring medical laboratory that he founded,
financed, developed and sold to a publicly traded company.  Dr. Coy
has a PhD (Chemistry), an MBA (Finance) and an MA (Chemistry) from Boston
University as well as a BS from the University of Iowa.




Martin J. 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 Vice President of Clinical and Regulatory Affairs. Mr. Cummins
has received extensive training in the fields of clinical trial design,
monitoring and analysis, as well as regulatory affairs and compliance and has 11
publications to reflect his work. He received a BS degree in microbiology from
Texas Tech University. He is the son of Joseph Cummins.




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.  He received a PhD degree in Pharmaceuticals from Purdue
University in 1977.




Thomas D’Alonzo has been a
director of the Company since June 2006.Mr.
D’Alonzo is a seasoned executive with experience in all major facets of
pharmaceutical operations: sales and marketing, manufacturing, quality
assurance, finance and licensing and strategic planning. Mr. D’Alonzo served as
President of Pharmaceutical Product Development, Inc., a multi-national clinical
research organization with 3,000 employees operating in 14 countries and
generating $300 million in revenues from analytical labs and Phase 1, 2, 3 and 4
clinical trials.  Previously, Mr. D’Alonzo was President of Genevec, Inc.,
a gene therapy biotech company. Before that, Mr. D’Alonzo was President of
Glaxo, Inc., the US unit of what is now Glaxo SmithKline.  He received
a BS degree  in Business Administration from University of Delaware in
1965 and a JD degree from University of Delaware in 1970.




23


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.   He received a DVM degree from Colorado State
University in 1972.




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.  He received a MB.BS
London and MRCS, LRCP England from University of London St. Mary’s Hospital
Medical School in 1950.




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 receive
compensation of $1,000 per day for attendance at meetings, $250 per day for
regularly scheduled teleconference meetings, and are reimbursed for any
out-of-pocket expenses in connection with their attendance at
meetings.




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




Audit
Committee Financial Expert




Thomas
D’Alonzo, JD, qualifies as an audit committee financial expert for the
Company.  An audit committee financial expert is a person who has an
understanding of GAAP and financial statements; the ability to assess accounting
and financial principles in connection with the accounting of the Company;
experience preparing, auditing, analyzing, or evaluating financial statements;
an understanding of internal controls over financial reporting; and an
understanding of audit committee functions.




Code
of Ethics




The
Company’s Code of Ethics may be found on the Company’s website,
www.amarbio.com.




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%
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, the following persons have failed to file, on a timely
basis, the identified reports required by the Exchange Act during the most
recent fiscal year:




24





Name
      and Principal Position
            Number
      of Late Reports
            Known
      Failures to File a Required FormDr.
      Joseph M. Cummins, Chairman of the Board, President and Chief Executive
      Officer
            3
            0Dr.
      Peter R. Mueller, Chief Operating Officer and Director of
      Research
            2
            0Dr.
      Gary W. Coy, Vice President and Chief Financial Officer
            1
            0Mr.
      Martin J. Cummins, Vice President of Clinical and Regulatory
      Affairs
            1
            0Stephen
      Chen, Director
            3
            0Thomas
      D’Alonzo, Director
            1
            0Dennis
      Moore, Director
            1
            0James
      Page, Director
            1
            0







ITEM
      11.
            EXECUTIVE
      COMPENSATION.




The
following table sets forth for the three years ended December 31, 2008
compensation paid by the Company to its Chairman of the Board, President and
Chief Executive Officer; to its Chief Operating Officer and Director of
Research; to its Vice President of Clinical and Regulatory Affairs as well as
the compensation paid by the Company to its Vice President and Chief Financial
Officer for the year ended December 31, 2008. Other compensation in 2006
consists of the fair value of a stock grant approved in the first quarter and
issued in the second quarter of 2006.  Other compensation in 2008
consists of the fair value of a stock grant approved in the fourth quarter of
2007 and contingent upon the successful completion of $1 million of funding in
the first quarter of 2008.   The $2,500 bonus in 2008 was the
cash portion of the bonus based on completion of the $1 million
funding.







Summary
      Compensation TableAnnual
      Compensation
            Long
      Term CompensationName
      and Principal Position
            
            Year
            
            Salary
            
            Bonus
            
            Other
      Compensation
            
            Securities
      Underlying OptionsDr.
      Joseph M. Cummins,
              Chairman
      of the Board,
              President
      and Chief
              Executive
      Officer
            
            2008
            
            $  175,000
            
            $
       2,500
            
            $    
       2,500
            
            490,0002007
            
            $  175,000
            
            $     –
            
            $ 
              –
            
            -2006
            
            $  141,416
            
            $60,000
            
            $ 
      216,000
            
            400,000


25





Dr.
      Peter R. Mueller,
              Chief
      Operating
              Officer
      and Director
              of
      Research
            
            2008
            
            $  210,000
            
            $       –
            
            $          –
            
            700,000Mr.
      Martin J. Cummins,
              Vice
      President of Clinical
              and
      Regulatory Affairs
            
            2008
            
            $  125,000
            
            $       –
            
            $          –
            
            29,0002007
            
            $  125,000
            
            $  
        500
            
            $          –
            
            -2006
            
            $    97,866
            
            $       –
            
            $          –
            
            400,000Dr.
      Gary W. Coy,
              Vice
      President and Chief
              Financial
      Officer
            
            2008
            
            $  125,000
            
            $       –
            
            $          –
            
            -2007
            
            $  125,000
            
            $ 
         500
            
            $          –
            
            -2006
            
            $    88,542
            
            $       –
            
            $          –
            
            400,000





Option
Grants in 2008





Name
            
            Number
      of Shares of Common Stock Underlying Options
              Granted
      (#)
            
            %
      of Total
              Options
      Granted
              to
      Employees
              in
      2008
            
            Exercise
      or Base Price
              ($/Sh)
            
            Expiration
              DateJoseph
      M.
      Cummins
            
            490,000
            
            40.2%
            
            $0.10
      (1)
            
            12/16/2011Peter
      R. Mueller
            
            100,000
            
            8.2%
            
            $0.32
      (2)
            
            4/15/2013Peter
      R. Mueller
            
            200,000
      (2)
            
            16.4%
            
            $0.32
      (2)
            
            4/15/2014Peter
      R. Mueller
            
            200,000
      (3)
            
            16.4%
            
            $0.32
      (2)
            
            4/15/2015Peter
      R. Mueller
            
            200,000
      (4)
            
            16.4%
            
            $0.32
      (2)
            
            4/15/2016Martin
      J.
      Cummins
            
            29,000
            
            2.4%
            
            $0.10
      (1)
            
            12/16/2011Gary
      W.
      Coy
            
            0
            
            0%
            
            -
            
            -





(1)
            The
      fair market value of the common stock on the date of grant was
      $0.07.


(2)
            The
      fair market value of the common stock on the date of the
      grant.


(3)
            Options
      vest on 4/15/2009.


(4)
            Options
      vest on 4/15/2010.


(5)
            Options
      vest on 4/15/2011


26


Aggregated
Option Exercises at December 31, 2008


And
Year-End Option Values




The
following table sets forth information for the executive officers named above,
regarding the exercise of options during 2008 and unexercised options held at
the end of 2008.





Name
            
            Number
      of Shares Acquired on
              Exercise
            
            Value
              Realized
            
            Number
      of Shares of Common Stock Underlying Unexercised Options at
              December
      31, 2008 Exercisable/Unexercisable
            
            
            Value
      of Unexercised
              In-The-Money
              Options
      at
              December 31, 2008(1)Exercisable/UnexercisableJoseph
      M. Cummins
            
            None
            
            None
            
            1,930,000
            /
            200,000
            
            
            None
            /
            NonePeter
      R. Mueller
            
            None
            
            None
            
            100,000
            /
            600,000
            
            
            None
            /
            NoneMartin
      J. Cummins
            
            None
            
            None
            
            879,000
            /
            200,000
            
            
            None
            
            NoneGary
      W. Coy
            
            None
            
            None
            
            200,000
            /
            200,000
            
            
            None
            /
            None





(1)
            Calculated
      based on the closing price of the common stock ($0.055) as reported by OTC
      BB on December 31, 2008.


Director
      Compensation for Last Fiscal Year


Cash
      Compensation
            
            Stock
      OptionsName
            
            Meeting Fees(1)
            
            Consulting Fees(2)
            
            Number
      of Securities Underlying OptionsStephen
      Chen, PhD
            
            $              -
            
            $          3,693
            
            64,125Thomas
      D’Alonzo, JD
            
            $              -
            
            $             392
            
            6,800Dennis
      Moore, DVM
            
            $              -
            
            $          3,693
            
            64,125James
      Page, MD
            
            $              -
            
            $          3,693
            
            64,125


(1)
            Directors
      receive $1,000 compensation for attendance at directors’ meetings and $250
      for regularly scheduled teleconference meetings. There were no regularly
      scheduled meetings during 2008.


(2)
            Options
      were granted to directors on December 16, 2008 with $0.10 exercise price
      and 3-year term.  The closing price of stock on the date of
      grant was $0.07.





Employment
agreements were executed with Joseph M. Cummins, Martin J. Cummins and Gary W.
Coy during 2006.  No employment or Director agreements were executed
in 2007.  An employment contract was executed with Peter R. Mueller in
2008.  No other employment or Director agreements were executed in
2008.








27






ITEM
      12.
            SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS




As of
December 31, 2008, there were 35,953,377 shares of the Company’s common stock
outstanding. The following table sets forth as of December 31, 2008, the
beneficial ownership of each person who owns more than 5% of such outstanding
common stock:




Name
      and Address
            
            Amount
      and Nature of Beneficial Ownership
            
            Percent
      of Class OwnedHayashibara
      Biochemical Laboratories, Inc.
              2-3
      Shimoishii 1-chome
              Okayama
      700, Japan
            
            3,118,655*
            
            8.67%




*
Shareholder above holding more than 5% of the common stock owns no options or
warrants.





The
following table sets forth the beneficial ownership of the Company’s stock as of
December 31, 2008 by each executive officer and director and by all executive
officers and directors as a group:







Name
      and Address of Owner
            
            Amount
      and Nature of Beneficial Ownership
            
            Percent of Class
      Owned9Joseph
      M. Cummins
              7308
      Ashland
              Amarillo,
      TX 79119
            
            2,183,0291
            
            3.63%Gary
      W. Coy
              907
      Cat Hollow Club Drive
              Spicewood,
      TX 78669
            
            635,5082
            
            1.06%Martin
      J. Cummins
              6615
      Sandie
              Amarillo,
      TX 79109
            
            1,026,6923
            
            1.71%Dennis
      Moore
              402
      Fish Hatchery
              Hamilton,
      MT  59840
            
            1,020,7414
            
            1.70%





28





Name
      and Address of Owner
            
            Amount
      and Nature of Beneficial Ownership
            
            Percent of Class
      Owned9Thomas
      D’Alonzo
              908
      Vance Street
              Raleigh,
      NC 27608
            
            35,4725
            
            0.06%Stephen
      Chen
              Floor
      7-1, No. 18
              Xin
      Yi Road,  Sec. 5
              Taipei,
      Taiwan
            
            913,6256
            
            1.52%James
      Page
              103
      Clubhouse Lane, #182
              Naples,
      FL  34105
            
            855,0347
            
            1.42%Peter
      R. Mueller
              3
      Busch Court
              Clinton,
      NJ 08809
            
            339,122
            
            0.66%Total
      Group (all directors and executive officers - 8 persons)
            
            7,009,223
            
            11.74%





1  1,930,000
      of these shares are exercisable options
            6     774,125
      of these shares are exercisable options2100,000
      of these shares are exercisable options
            7814,125
      of these shares are exercisable options3     879,000
      of these shares are exercisable options
            8     100,000
      of these shares are exercisable options
              9Calculated
      based on 60,195,789 total shares4     814,125
      of these shares are exercisable options5         6,800
      of these shares are exercisable options
            outstanding
      and reserved


29


1996
Employee Stock Option Plan




The 1996
Employee Stock Option Plan was approved by the shareholders of the Company and
was amended and restated effective September 12, 1998, and May 11, 1999, both of
said amendments and restatements also were approved by the shareholders of the
Company.  590,000 shares of the Company’s common stock are reserved
for issuance under said Employee Stock Option Plan; however, none of such
options are currently outstanding to employees of the
Company.  Options granted in prior years under the Employee Stock
Option Plan have either lapsed, or have been exercised in full, or have been
returned to the Company in exchange for non-qualified stock options. However,
the Company may grant qualified stock options to employees under the 1996
Employee Stock Option Plan from time to time in the future.




1996
Director Stock Option Plan




The 1996
Director Stock Option Plan was approved by the shareholders of the Company, and
was amended and restated effective September 12, 1998, and May 11, 1999, both of
said amendments and restatements also were approved by the shareholders of the
Company.  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.  Options under the plan have a ten year term and become
exercisable over a five year period.  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.




2006
Employee Stock Option and Stock Bonus Plan




The 2006
Employee Stock Option and Stock Bonus Plan was approved by the Board of
Directors on February 20, 2006.  This plan has authorized a maximum of
500,000 shares of the Company’s common stock to be issued or
reserved.  During 2006, 300,000 shares were issued under this plan to
an employee of the Company. The plan shall remain in effect until the end of the
Company’s fiscal year 2011. Options granted under the plan have a ten year term
and become exercisable over a five year period. The option price is equal to
100% of the fair value of the common stock on the date of grant.




2008
Consultant’s Stock Grant Plan




The 2008 Consultant’s Stock Grant Plan
was approved by the Board of Directors on March 24, 2008.  This plan
has authorized a maximum of 100,000 shares of the company’s common stock to be
issued for consultants.  During 2008, 100,000 shares were issued under
this plan to a consultant.




2008
Stock Incentive Plan (Consultants)




The 2008 Stock Incentive Plan was
approved by the Board of Directors on May 20, 2008.  This plan has
authorized a maximum of 600,000 shares of the Company’s common stock to be
issued for consultants.  The purpose of the plan is to assist in
attracting, retaining, and compensating highly competent consultants and to act
as an incentive in motivating selected consultants to achieve long-term
corporate objectives, as well as to reduce debts of the Company through the
issuance of Common Stock rather than payment of cash.  During 2008,
321,667 shares were issued to 3 consultants.




30


2008
Directors, Officers and Consultants Stock Purchase Plan




The 2008 Directors, Officers and
Consultants Stock Purchase Plan was approved by the Board of Directors on
October 22, 2008.  This plan has authorized a maximum of ten million
shares of the Company’s common stock to be issued for Directors, Officers and
Consultants.  Awards under the Plan shall be in the form of Purchase
Rights to purchase a specified number of shares of common stock of the Company
at market value. During 2008, 294,175
shares were issued to one Director and three Officers.






ITEM
      13.
            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 previously described, 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 8.67% of the
issued and outstanding shares of common stock of the Company.




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 at contractual prices. The Company pays HBL a 12% royalty on the first
$100 million of interferon alpha net sales and a 10% royalty on additional net
sales.




Additionally,
the Company is obligated to pay HBL a percentage of sublicense fee income the
Company receives.  There were no sales of interferon alpha and no
royalty payments made to HBL in 2007.  A $19,991 sublicense fee to HBL
was paid in 2007.  $53,971 of sublicense fees to HBL were recorded in
2008 and were owed to HBL as of December 31, 2008.




HBL is
obligated to pay the Company an 8% royalty on sales of oral interferon in
Japan.  The Company received $0 in 2008 and $27,919 of royalties in
2007 from HBL animal health sales of oral interferon.




During
2008, 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
$47,677 by said firm in 2008.




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.






ITEM
      14.
            PRINCIPAL
      ACCOUNTING FEES AND SERVICES.





The
following summarizes the fees incurred by the Company during 2008 and 2007 for
accountant and related services.




31


Audit
Fees




2008
            2007LBB
      & Associates Ltd., LLP
            $59,190
            $
      37,137





All
Other Fees




None.




Accountant
Approval Policy




Before an
accountant is engaged by the Company to perform audit or non-audit services, the
accountant must be approved by the Company’s Audit Committee.




32


PART
IV
   ITEM
15.                      EXHIBITS,
FINANCIAL STATEMENT SCHEDULES.
  
 EXHIBIT
INDEX
 
 3.1‡
              
              Restated
      Articles of Incorporation of the Company, dated July 5,
    2007.3.3*
              
              Bylaws
      of the Company.4.1*
              
              Specimen
      Common Stock Certificate.4.2*
              
              Form
      of Underwriter's Warrant.4.3(5)
              
              Form
      of Series A Common Stock Purchase Warrant, dated January 8, 2008, between
      the Company and Firebird Global Master Fund, Ltd.10.1(11)
              
              2008
      Stock Incentive Plan dated May 20, 2008.10.2*
              
              License
      Agreement dated as of March 22, 1988 between the Company and The Texas
      A&M University System.10.3(9)
              
              2006
      Employee Stock Option and Stock Bonus Plan10.4(9)
              
              Office/Warehouse
      Lease Agreement dated December 22, 2006, between Wild Pony Holdings, L.P.
      and the Company.10.5*
              
              Joint
      Development and Manufacturing/Supply Agreement dated March 13, 1992
      between the Company and HBL, as amended.10.6(9)
              
              Engagement
      Letter dated September 22, 2007, between MidSouth Capital Markets Group,
      Inc. and the Company.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.10.19(10)
              
              Stock
      Option Agreement, dated July 18, 2007, between the Company and
      Commonwealth Associates10.20†
              
              1996
      Employee Stock Option Plan, Amended and Restated as of May 11,
      1999.
 
  33
  
 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.10.24(10)
              
              Warrant
      Agreement, dated June 27, 2006, between the Company and Marks Value
      Partners, LLC10.25(10)
              
              Engagement
      Letter, dated November 3, 2006, between the Company and MidSouth Capital,
      Inc.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).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.
 
  34
  
 10.45††††a
              
              Supply
      Agreement dated June 20, 2004 between Global Kinetics, Inc. and the
      Company.10.46††††a
              
              License
      and Supply Agreement dated September 13, 2004 between Nobel ILAC SANAYII
      VE TICARET A.S. and the Company10.47(3)a
              
              License
      and Supply Agreement dated October 19, 2005 between Global Kinetics, Inc.
      and the Company.10.48(3)a
              
              License
      and Supply Agreement dated January 18, 2006, between Bumimedic (Malaysia)
      SDN. BHD., and the Company.10.49(4)
              
              Employment
      Contract dated March 13, 2006, between Gary W. Coy and the
      Company.10.50(4)
              
              Employment
      Contract dated September 10, 2006, between Joseph M. Cummins and the
      Company.10.51(4)
              
              Employment
      Contract dated September 10, 2006, between Martin J. Cummins and the
      Company.10.52(4)a
              
              Supply
      Agreement (Anhydrous Crystalline Maltose) dated October 16, 2006 between
      Hayashibara Biochemical Laboratories, Inc. and the
  Company10.53(4)a
              
              License
      and Supply Agreement dated November 16, 2006, between CytoPharm, Inc. and
      the Company.10.54(5)
              
              Securities
      Purchase Agreement dated January 8, 2008, between the Company and Firebird
      Global Master Fund, Ltd.10.55(5)
              
              Registration
      Rights Agreement dated January 8, 2008, between the Company and Firebird
      Global Master Fund, Ltd.*10.56(5)
              
              Certificate
      of Designation of Preferences dated January 8, 2008, executed by the
      Company10.57(5)
              
              Series
      A Common Stock Purchase Warrant dated January 8, 2008, between the Company
      and Firebird Global Master Fund, Ltd.10.58(7)
              
              Amendment
      No. 1 to the Securities Purchase Agreement dated February 14, 2008,
      between the Company and Firebird Global Master Fund,
  Ltd.10.59(7)
              
              Amendment
      No. 1 to the Registration Rights Agreement dated February 14, 2008,
      between the Company and Firebird Global Master Fund,
  Ltd.10.60(8)a
              
              Supply
      Agreement, dated March 20, 2008, between the Company and CytoPharm,
      Inc.10.61(8)
              
              Employment
      Contract, dated April 15, 2008, between the Company and Peter
      Mueller10.62(9)
              
              Engagement
      Letter dated September 22, 2007, between MidSouth Capital Markets Group,
      Inc. and the Company.10.63(10)
              
              Consulting
      Agreement, dated July 18, 2007, between the Company and Commonwealth
      Associates
  35
  
 10.64(10)
              
              Stock
      Option Agreement, dated June 21, 2006, between the Company and Teel
      Bivins10.65(10)
              
              Consulting
      Agreement, dated April 21, 2006, between the Company Teel
      Bivins10.66(10)
              
              Investor
      Direct Marketing Services Agreement, dated June 26, 2006, between the
      Company and Marks Value Partners
LLC
 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.
 †††† The
Exhibit is incorporated by reference to the Company's 2004 Annual Report on Form
10-KSB filed with the Commission on or before April 15, 2005.
 ‡ The
Exhibit is incorporated by reference to the Company's 2007 Annual Report on Form
10-KSB filed with the Commission on or before March 31, 2008.
 aPortions
of this exhibit have been omitted and filed separately with the
commission.
 
 (3)
              The
      Exhibit is incorporated by reference to the Company’s 2005 Annual report
      on Form 10-KSB filed with the SEC on April 3, 2006.(4)
              The
      Exhibit is incorporated by reference to the Company’s 2006 Annual report
      on Form 10-KSB filed with the SEC on March 26, 2007.(5)
              The
      Exhibit is incorporated by reference to the Company’s Report on
      Form 8-K filed with the SEC on January 15, 2008.(6)
              The
      Exhibit is incorporated by reference to the Company’s Report on
      Form 8-K/A filed with the SEC on January 22, 2008.(7)
              The
      Exhibit is incorporated by reference to the Company’s Report on
      Form 8-K filed with the SEC on February 21, 2008.(8)
              The
      Exhibit is incorporated by reference to the Company’s  Report on
      Form 8-K filed with the SEC on April 21, 2008.(9)
              The
      Exhibit is incorporated by reference to the Company’s Registration
      Statement on Form S-1 (No. 333-150421) filed with the SEC on
      April 24, 2008.(10)
              The
      Exhibit is incorporated by reference to the Company’s Amendment No. 1 to
      Registration Statement on Form S-1 (No. 333-150421) filed with
      the SEC on May 21, 2008.(11)
              The
      Exhibit is incorporated by reference to the Company’s Report on Form S-8
      filed with the SEC on May 22, 2008.
 
  36
  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.Date:March
      31   , 2009
            By:
      /s/ Joseph M.
      Cummins
              Joseph
      M. Cummins, Chairman of the Board,
              President,
      and Chief Executive OfficerDate:
      March
      31  , 2009
            By:
      /s/ Gary W.
      Coy
              Gary W. Coy, Vice President,
              Chief Financial Officer







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


Signature
            Title
            Date/s/
      Joseph M. Cummins
            Chairman
      of the Board,
              President,
      Director and
              Chief
      Executive Officer
            March  31,
      2009Joseph
      M. Cummins/s/
      Stephen Chen
            Director
            March
      31, 2009Stephen
      Chen/s/
      James Page
            Director
            March
      30 , 2009James
      Page/s/
      Dennis Moore
            Director
            March
      30 , 2009Dennis
      Moore/s/
      Thomas D’Alonzo
            Director
            March
      31 , 2009Thomas
      D’Alonzo








Amarillo
Biosciences, Inc.





Financial
Statements





Year
ended December 31, 2008








ContentsReport
      of Independent Registered Public Accounting
      Firm
            F-1Balance
      Sheets
            F-2Statements
      of
      Operations
            F-3Statements
      of Stockholders’
      Deficit
            F-4Statements
      of Cash
      Flows
            F-5Notes
      to Financial
      Statements
            F-6











Report of Independent
Registered Public Accounting Firm





To the
Board of Directors of


Amarillo
Biosciences, Inc.


Amarillo,
TX





We have
audited the accompanying balance sheets of Amarillo Biosciences, Inc. (the
“Company”) as of December 31, 2008 and 2007, and the related statements of
operations, stockholders' deficit, and cash flows for each of the 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 the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting.  Our audits included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting.  Accordingly, we express no
such opinion.  An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.





In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Amarillo Biosciences, Inc. as of
December 31, 2008 and 2007, and the results of its operations and its cash flows
for each of the 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 absence of
significant revenues, recurring losses from operations, and its need for
additional financing in order to fund its projected loss in 2009 raise
substantial doubt about its ability to continue as a going concern. The 2008
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.





LBB &
Associates Ltd., LLP


Houston,
Texas


March 18,
2009


F-1


Amarillo
Biosciences, Inc.


Balance
Sheets





December
      31,
              2008
            
            
            December
      31,
              2007AssetsCurrent
      assets:Cash
      and cash equivalents
            
            $
            10,853
            
            
            $
            47,184Other
      current assets
            
            
            12,813
            
            
            
            31,688Total
      current assets
            
            
            23,666
            
            
            
            78,872Property
      and equipment, net
            
            
            9,575
            
            
            
            14,098Patents,
      net
            
            
            126,828
            
            
            
            120,925Total
      assets
            
            $
            160,069
            
            
            $
            213,895Liabilities
      and Stockholders' DeficitCurrent
      liabilities:Accounts
      payable and accrued expenses
            
            $
            511,236
            
            
            $
            98,203Accrued
      interest - related party
            
            
            572,773
            
            
            
            682,773Accrued
      expenses – related parties
            
            
            53,971
            
            
            
            -Notes
      payable - related party
            
            
            2,000,000
            
            
            
            2,000,000Total
      current liabilities
            
            
            3,137,980
            
            
            
            2,780,976Total
      liabilities
            
            
            3,137,980
            
            
            
            2,780,976Commitments
      and contingenciesStockholders'
      deficitPreferred
      stock, $0.01 par value:Authorized
      shares - 10,000,000Issued
      and outstanding shares –  0 at December  31, 2008 and
      0 at December 31, 2007
            
            
            -
            
            
            
            -Common
      stock, $0.01par value:Authorized
      shares - 100,000,000Issued
      and outstanding shares – 35,953,377 at December 31, 2008 and 29,465,261 at
      December 31, 2007
            
            
            359,534
            
            
            
            294,653Additional
      paid-in capital
            
            
            28,322,564
            
            
            
            25,598,217Accumulated
      deficit
            
            
            (31,660,009
            )
            
            
            (28,459,951
            )Total
      stockholders' deficit
            
            
            (2,977,911
            )
            
            
            (2,567,081
            )Total
      liabilities and stockholders’ deficit
            
            $
            160,069
            
            
            $
            213,895


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


F-2


Amarillo
Biosciences, Inc.


Statements
of Operations





Year
      ended December 31,2008
            
            
            2007Revenues:Product
      sales
            
            $
            1,836
            
            
            $
            2,150Sublicense
      fee revenue
            
            
            108,000
            
            
            
            40,000Royalty
      revenue – related party
            
            
            -
            
            
            
            27,919Total
      revenues
            
            
            109,836
            
            
            
            70,069Cost
      of revenues:Product
      sales
            
            
            644
            
            
            
            680Sublicense
      fee revenue
            
            
            53,971
            
            
            
            19,991Total
      cost of revenues
            
            
            54,615
            
            
            
            20,671Gross
      margin
            
            
            55,221
            
            
            
            49,398Operating
      expenses:Research
      and development expenses
            
            
            525,903
            
            
            
            530,867Selling,
      general and administrative expenses
            
            
            1,366,076
            
            
            
            1,936,847Total
      operating expenses
            
            
            1,891,979
            
            
            
            2,467,714Operating
      loss
            
            
            (1,836,758
            )
            
            
            (2,418,316
            )Other
      income (expense)Interest
      expense
            
            
            (92,435
            )
            
            
            (90,648
            )Interest
      and other income
            
            
            6,126
            
            
            
            2,891Net
      loss
            
            
            (1,923,067
            )
            
            
            (2,506,073
            )Deemed
      dividend for beneficial conversion
            
            
            (562,841
            )
            
            
            -feature
              Deemed
      dividend for warrant anti-dilution
            
            
            (636,247
            )
            
            
            -Preferred
      stock dividend
            
            
            (77,903
            )
            
            
            -Net
      loss applicable to common shareholders
            
            $
            (3,200,058
            )
            
            $
            (2,506,073
            )Basic
      and diluted net loss per average share
              available
      to common shareholders
            
            $
            (0.10
            )
            
            $
            (0.09
            )Weighted
      average shares outstanding
            
            
            31,047,516
            
            
            
            26,569,803





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





F-3
 Amarillo
Biosciences, Inc.
 Statements
of Stockholders’ Deficit
 Years
Ended December 31, 2008 and 2007


Issuance
              Price
            Preferred
      Stock
            Common
      Stock
            Additional
              Paid
      in Capital
            Accumulated
              Deficit
            Total
      Stockholders’ DeficitShares
            Amount
            Shares
            AmountBalance
      at December 31, 2006
            
            -
            $             
                    -
            24,476,767
            $             
      244,768
            $      23,345,445
            $   (25,953,878)
            $             (2,363,665)Net
      loss for year ended December 31, 2007
            
            -
            -
            -
            -
            -
            (2,506,073)
            (2,506,073)Fair
      value of options and warrants issued
            
            
            
            
            
            879,662
            
            879,662Exercise
      of options and warrants for cash
            $0.06-0.44
            -
            -
            529,486
            5,295
            97,194
            -
            102,489Conversion
      and exercise of cashless options
            0.06-0.44
            -
            -
            171,853
            1,719
            (1,719)
            -
            -Issuance
      of common stock for cash in private placements
            0.20-0.45
            -
            -
            4,087,155
            40,871
            1,113,635
            -
            1,154,506Issuance
      of common stock for services
            0.82-0.84
            -
            -
            200,000
            2,000
            164,000
            -
            166,000Balance
      at December 31, 2007
            
            
            
            29,465,261
            294,653
            25,598,217
            (28,459,951)
            (2,567,081)Net
      loss for year ended December 31, 2008
            
            -
            -
            -
            -
            -
            (1,923,067)
            (1,923,067)Fair
      value of options and warrants issued
            
            -
            -
            -
            -
            392,292
            -
            392,292Issuance
      of preferred stock for cash, net
            $1,000
            1,000
            10
            -
            -
            793,783
            -
            793,793Conversion
      of preferred stock to common stock
            
            (1,000)
            (10)
            4,000,000
            40,000
            (39,990)
            -
            -Issuance
      of common stock for cash inprivate
      placements and stock plan
            0.10-0.25
            -
            -
            1,348,404
            13,484
            126,357
            -
            139,841Issuance
      of common stock for services
            0.06-0.33
            -
            -
            702,439
            7,024
            179,287
            -
            186,311Stock
      dividend to preferred shareholders
            0.09-0.27
            -
            -
            437,273
            4,373
            73,530
            (77,903)
            -Deemed
      dividend for beneficial conversion feature
            
            -
            -
            -
            -
            562,841
            (562,841)
            -Deemed
      dividend for warrant modification
            
            -
            -
            -
            -
            636,247
            (636,247)
            -Balance
      at December 31, 2008
            
            -
            $                          
       -
            35,953,377
            $               359,534
            $      28,322,564
            $   (31,660,009)
            $             (2,977,911)





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


F-4


Amarillo
Biosciences, Inc.


Statements
of Cash Flows


Year
      ended December 31,Operating
      Activities
            
            2008
            2007Net
      loss
            
            $
            (1,923,067
            )
            
            $
            (2,506,073
            )Adjustments
      to reconcile net loss to net cash
              used
      for operating activities:Depreciation
      and amortization
            
            
            19,774
            
            
            
            18,783Common
      stock issued for services
            
            
            186,311
            
            
            
            166,000Fair
      value of options issued
            
            
            392,292
            
            
            
            879,662Changes
      in operating assets and liabilities:Other
      current assets
            
            
            18,875
            
            
            
            2,683Accounts
      payable and accrued expenses
            
            
            413,033
            
            
            
            (55,179
            )Accrued
      interest – related party
            
            
            (110,000
            )
            
            
            82,072Accrued
      expenses – related party
            
            
            53,971
            
            
            
            -Net
      cash used in operating activities
            
            
            (948,811
            )
            
            
            (1,412,052
            )Investing
      ActivitiesPurchase
      of property and equipment
            
            
            (980
            )
            
            
            (2,578
            )Investment
      in patents
            
            
            (20,174
            )
            
            
            (9,025
            )Net
      cash used in investing activities
            
            
            (21,154
            )
            
            
            (11,603
            )Financing
      ActivitiesProceeds
      from exercise of warrants and options
            
            
            -
            
            
            
            102,489Issuance
      of common stock for cash
            
            
            139,841
            
            
            
            1,154,506Issuance
      of convertible preferred stock for cash
            
            
            793,793
            
            
            
            -Net
      cash provided by financing activities
            
            
            933,634
            
            
            
            1,256,995Net
      increase (decrease) in cash
            
            
            (36,331
            )
            
            
            (166,660
            )Cash
      and cash equivalents at beginning of period
            
            
            47,184
            
            
            
            213,844Cash
      and cash equivalents at end of period
            
            $
            10,853
            
            
            $
            47,184Supplemental
      Cash Flow InformationCash
      paid for interest
            
            $
            202,435
            
            
            $
            2,891Cash
      paid for income taxes
            
            $
            -
            
            
            $
            -Non-cash
      financing and investing activities:Stock
      dividend to preferred shareholders
            
            $
            77,903
            
            
            $
            -Deemed
      dividend for beneficial conversion feature of
              preferred
      stock
            
            $
            562,841
            
            
            $
            -Deemed
      dividend for anti-dilution warrants
            
            $
            636,247
            
            
            $
            -


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


F-5


Amarillo
Biosciences, Inc.


Notes
to Financial Statements


December
31, 2008








1.
Organization and Summary of Significant Accounting Policies





Organization
and Business





Amarillo
Biosciences, Inc. (the "Company” or “AMAR” or “Amarillo”), 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 has not commenced any significant product commercialization
activities.





Going
Concern





These
financial statements have been prepared in accordance with United States
generally accepted accounting principles, on a going concern basis, which
contemplates the realization of assets and the satisfaction of liabilities and
commitments in the normal course of business. The Company has not yet achieved
profitability, and its operations are funded primarily from debt and equity
financings. Losses are anticipated in the ongoing development of its business
and there can be no assurance that the Company will be able to achieve or
maintain profitability.





The
continuing operations of the Company and the recoverability of the carrying
value of assets is dependent upon the ability of the Company to obtain necessary
financing to fund its working capital requirements, and upon future profitable
operations. The accompanying financial statements do not include any adjustments
relative to the recoverability and classification of asset carrying amounts or
the amount and classification of liabilities that might result from the outcome
of this uncertainty.





There can
be no assurance that capital will be available as necessary to meet the
Company's working capital requirements or, if the capital is available, that it
will be on terms acceptable to the Company. The issuances of additional equity
securities by the Company may result in dilution in the equity interests of its
current stockholders. Obtaining commercial loans, assuming those loans would be
available, will increase the Company's liabilities and future cash commitments.
If the Company is unable to obtain financing in the amounts and on terms deemed
acceptable, the business and future success may be adversely affected and the
Company may cease operations.





Fair
Value of Financial Instruments





The
Company's financial instruments consist of cash and cash equivalents,
receivables and debt. The carrying amount of these financial instruments
approximates fair value due either to length of maturity or interest rates that
approximate prevailing market rates unless otherwise disclosed in these
financial statements.





F-6


Stock
Based Compensation





Stock
based compensation expense is recorded in accordance with SFAS 123R (Revised
2004), Share-Based
Payment, for stock and stock options awarded in return for services
rendered. The expense is measured at the grant-date fair value of the award and
recognized as compensation expense on a straight-line basis over the service
period, which is the vesting period. The Company estimates forfeitures that it
expects will occur and records expense based upon the number of awards expected
to vest.





The fair
value of each option granted in 2007 is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions: dividend yield of 0.0%, expected volatility of 103.2%, risk-free
interest rate of 4.34% and expected life of 1.57 years.   The
fair value of each option granted in 2008 is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions: dividend yield of 0%, expected volatility of between 109.6 and
165.75%, risk-free interest rate between 1.00 and 3.34%, and expected life
between 2 and 8 years.





Cash
and Cash Equivalents





The
Company classifies investments as cash equivalents if the original maturity of
an investment is three months or less.





Allowance
for Doubtful Accounts





The
Company establishes an allowance for doubtful accounts to ensure trade and notes
receivable are not overstated due to uncollectibility.  The Company’s
allowance is based on a variety of factors, including age of the receivable,
significant one-time events, historical experience, and other risk
considerations.  The Company had no material accounts receivable and
no allowance at December 31, 2008 and 2007.





Inventory





Inventories
are stated at the lower of cost or market. Cost is determined on a first-in,
first-out basis. The Company continually assesses the appropriateness of
inventory valuations giving consideration to slow-moving, non-saleable,
out-of-date or close-dated inventory. As of December 31, 2008 and 2007 the
Company had $2,342 and $3,133, respectively, of inventory included in other
current assets.


F-7


Property
and Equipment





Property
and equipment are stated on the basis of historical cost less accumulated
depreciation.  Depreciation is provided using the straight-line method
over the two to seven year estimated useful lives of the assets.





Patents
and Patent Expenditures





AMAR
holds patent license agreements and holds patents that 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.  Amortization expense amounted to $14,271 and $13,970 for the
years ended December 31, 2008 and 2007, respectively.





Long-lived
Assets





Impairment
losses are recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets' carrying amount.  No
impairment losses have been recorded since inception.





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





Dietary
supplement and interferon sales





Revenues
for the dietary supplement sales are recognized when an arrangement exists, the
price is fixed and it has been determined that collectibility is reasonably
assured.  This generally occurs at the point when the goods are
shipped to the customer.


F-8


Sublicense
fee revenue





Sublicense
revenue is calculated based on fees relating to a license.  Amarillo
recognizes revenue on these sublicense fees in the month the revenue is
generated by the licensee.





Royalty
revenue





Royalty
revenue is calculated based on royalty fees as a percent of net sales relating
to a license.  Amarillo recognizes revenue on these royalty payments
in the year the revenue is generated by the licensee.  Royalty revenue
of $27,919 was reported in the year ended December 31, 2007 for HBL sales of
Bimron to BioVet.  HBL reported no sales of Bimron to Bio Vet for
2008.





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.





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 is anti-dilutive.





Concentration
of Credit Risk





Financial
instruments that potentially subject the Company to significant concentration of
credit risk consist principally of cash and accounts receivable.





The
Company has cash balances in a single financial institution which, from time to
time, exceed the federally insured limit of $100,000.   No loss
has been incurred related to this concentration of cash.


F-9


Other
Concentrations





The
Company and its sublicensees are reliant on a single, foreign supplier for its
products.  The loss of this supplier could adversely affect the
Company’s future revenues.  During 2008 and 2007 the majority of
revenue came from royalties from its foreign supplier and sublicense fees from
one of its sublicensees.  The loss of revenue from one these revenue
sources could adversely affect the Company’s future revenues.





Reclassifications





Certain
2007 amounts have been reclassified to conform to 2008
presentation.





Recent
Accounting Pronouncements




The
Company does not expect the adoption of recently issued accounting
pronouncements to have a significant impact on the Company's results of
operations, financial position or cash flow.




2.
Property and Equipment





Property
and equipment is stated at cost and consists of the following at December 31,
2008 and 2007:





2008
            2007Furniture
      and equipment
            $       41,540
            $       58,528Software
            8,012
            7,03349,552
            65,561Less:  accumulated
      depreciation
            (39,977)
            (51,463)Property
      and equipment, net
            $         9,575
            $      14,098





Depreciation
expense amounted to $5,503 and $4,813 for the years ended December 31, 2008 and
2007, respectively.





3. Notes Payable





The
Company has two $1,000,000 notes payable under an unsecured loan agreement with
HBL dated July 22, 1999.  The annual interest rate on unpaid principal
from the date of each respective note is 4.5 percent, with accrued interest
being payable at maturity.  $1,000,000 was payable on or before June
3, 2008.  The other $1,000,000 was payable on or before August 28,
2008.  On December 10, 2008, HBL proposed to extend the two notes and
accrued interest until December 3, 2009 and February 28, 2010 if payment of
$200,000 of accrued interest was received by February 28, 2009.  We
have requested more time to pay the $200,000 to extend the
notes.  Although we are currently in default of the notes, HBL has not
demanded payment.





During
2008, the Company paid HBL $200,000 of interest on these notes, apart from the
pending arrangement above.





F-10


The
Company has a line of credit with Wells Fargo for $20,000, with
interest at the prime rate plus 6.75 percent. There was an outstanding balance
at December 31, 2008 and 2007 of $19,941 and $1,915, respectively, which is
included in accounts payable and accrued expenses. This line is used from time
to time for purchases.  The Company paid $2,435 and $2,891 of interest
under the line of credit in 2008 and 2007, respectively.





4.
Manufacturing and Supply Agreements





The
Company was a party to the following manufacturing and supply agreements at
December 31, 2008.





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 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 current expiration
date of the Development Agreement is March 12, 2011.





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, excluding 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.


F-11


A $7,500
minimum cash royalty was paid by the Company to Texas A&M University System
during 2008. A total of $53,971 in sublicense fees are owed to HBL based on
sublicense fee income earned by the Company during 2008 and are included in
accounts payable and accrued expenses.  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.  The Company plans to pay third parties
approximately $116,000 to complete enrollment of 21 HIV+ patients in the oral
warts Phase 2 clinical trials in 2009. The Company plans to pay third parties
approximately $45,000 for expenses related to the winter colds and influenza
symptoms study that will be completed in Australia in 2009.





7.
Common Stock





The
Company has 100,000,000 shares of voting common shares authorized for
issuance.  The shareholders approved an increase in authorized shares
from 50,000,000 to 100,000,000 in 2007. On December 31, 2008, the Company had
60,195,789 shares of common stock outstanding and reserved for issuance upon
exercise of options and warrants.  The Company issued common stock in
2008 and 2007 as follows:





Common
      Stock Issued in 2008
            Shares
            Issue
      Price
            Net
      PricePrivate
      placements – cash
            1,160,000
            $0.10-$0.25
            $121,000Directors,
      officers, consultants plan – cash
            188,404
            0.10
            18,841Officers
      – salaries
            280,772
            0.11-0.33
            52,086Consultants
      – services
            421,667
            0.06-0.33
            134,225Preferred
      stock dividends
            437,273
            0.09-0.27
            77,903Conversion
      of preferred stock to common
            4,000,000
            0.01
            40,000Total
      Common Stock Issued in 2008
            6,488,116
            $0.01-0.33
            $444,055





Common
      Stock Issued in 2007
            Shares
            Issue
      Price
            Net
      PricePrivate
      placements – cash
            4,087,155
            $0.20-$0.45
            $1,154,506Options
      exercised – cash
            529,486
            0.06-0.44
            102,489Options
      exercised – cashless
            171,853
            0.06-0.44
            -Consultants
      – services
            200,000
            0.82-0.84
            166,000Total
      Common Stock Issued in 2007
            4,988,494
            $0.06-0.84
            $1,422,995





During
the years ended December 31, 2008 and 2007, finder’s fees paid related to
private placements of stock totaled $10,000 and $34,950, and are included as
general and administrative expenses in the accompany statements of
operations.


F-12


8.  Preferred
Stock





The
Company has 10,000,000 shares of preferred stock authorized for issuance which
is issuable in series.  During the first quarter of 2008, the Company
completed a private placement by selling 1,000 shares of Series A convertible
preferred stock for $1,000 per share in a private placement offering; generating
gross proceeds of $1,000,000 and net proceeds of $793,793.  The
convertible preferred stock is convertible into 4,000,000 shares of common
stock.  The investor also received five year warrants to purchase
4,000,000 shares of common stock at $0.30 per share. The investment banker was
paid a commission of $80,000 plus received five year warrants to purchase
640,000 shares of common stock at $0.30 per share.





The
Series A preferred shareholder was paid $77,903 (10% annualized return) of stock
dividends during 2008.  A total of 437,273 shares were issued at $0.09
to $0.27 per share.  The preferred stock shareholder converted all the
outstanding preferred stock into common stock at $0.25 per share in three stages
on October 15, 17 and 20, 2008.  Currently there is no preferred stock
outstanding and no future dividends required to be paid.





9.
Stock Option and Stock Plans





The
Company has six stock option plans: the 1996 Employee Stock Option Plan (1996
Employee Plan), the Outside Director and Advisor Stock Option Plan (1996
Director Plan), the 2006 Employee Stock Option and Stock Bonus Plan (2006
Employee Plan), 2008 Consultant’s Stock Grant Plan, 2008 Stock Incentive Plan
(Consultants), and 2008 Directors, Officers and Consultants Stock Purchase
Plan.





The 1996
Employee Plan has authorized the grant of options to employees for up to 590,000
shares of the Company’s common stock; however, none of such options are
currently outstanding to employees of the Company. 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 1996
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.  No
options are current outstanding to directors under the plan.


F-13


The 2006
Employee Plan has authorized a maximum of 500,000 shares of the Company’s common
stock to be issued or reserved. During 2006, 300,000 shares under this plan were
issued to an employee of the Company. The plan shall remain in effect until the
end of the Company’s fiscal year 2011. Options granted under the plan have a
ten-year term and become exercisable over a five-year period. The option price
is equal to 100% of the fair value of the common stock on the date of
grant.





The 2008
Consultant’s Stock Grant Plan was approved by the Board of Directors on March
24, 2008. This plan has authorized a maximum of 100,000 shares of the company’s
common stock to be issued for consultants.  During 2008, 100,000
shares were issued under this plan to a consultant.





The 2008
Stock Incentive Plan was approved by the Board of Directors on May 20,
2008.  This plan has authorized a maximum of 600,000 shares of the
Company’s common stock to be issued for consultants.  The purpose of
the plan is to assist in attracting, retaining, and compensating highly
competent consultants and to act as an incentive in motivating selected
consultants to achieve long-term corporate objectives, as well as to reduce
debts of the Company through the issuance of Common Stock rather than payment of
cash.  During 2008, 321,667 shares were issued to three
consultants.





The 2008
Directors, Officers and Consultants Stock Purchase Plan was approved by the
Board of Directors on October 22, 2008.  This plan has authorized a
maximum of ten million shares of the Company’s common stock to be issued for
directors, officers and consultants.  Awards under the Plan shall be
in the form of Purchase Rights to purchase a specified number of shares of
common stock of the Company at market value. During 2008, 294,175
shares were issued to one Director and three Officers.





10.   Stock
Options and Warrants





During
2007, the Company issued 1,600,000 options to consultants and 10,000 options to
an Scientific Advisory Committee member and recognized $644,723 expense related
to these options.   During 2008, 1,076,912 options were issued to
consultants, advisors, directors, employees and two former employees, and the
Company recognized $76,745 of expense related to these options.





During
2006, the Company issued 1,200,000 options to officers of the Company. These
options vest through 2010.  In 2008, Company issued 700,000 to a new
officer.  These options vest through 2011.  The Company
recognized $234,939 expense in 2007 and $304,025 expense in 2008 related to
these options.  The remaining cost expected to be recognized if these
options vest is $514,195.  No options were issued to employees during
2007.





During
2007, two Directors and two employees received 171,853 shares of common stock
from the cashless exercise of 214,000 options.  No cashless options
were exercised by Directors or employees in 2008.


F-14


During
2007, consultants exercised 350,000 options at $0.20 per share for
cash.  A Board member exercised 20,000 options at $0.27 per
share.   Employees exercised 90,486 shares at $0.06, 10,000
shares at $0.23 and 25,000 shares at $0.44.  A former employee
exercised 4,000 shares at $0.44.  An investor exercised 30,000
warrants at $0.22 per share.  No options were exercised by Directors
or employees in 2008.





A summary
of the Company's stock option activity and related information for the years
ended December 31, 2008 and 2007 is as follows:


2008
            
            
            2007Options
            
            
            Price
            
            
            Options
            
            
            PriceOutstanding
      Beg of Year
            
            
            9,193,412
            
            
            $
            0.20-0.87
            
            
            
            8,589,237
            
            
            $
            0.06-4.00Granted
            
            
            1,776,912
            
            
            
            0.10-0.35
            
            
            
            1,610,000
            
            
            
            0.20-0.40Cancelled/Expired
            
            
            (2,087,912
            )
            
            
            0.20-0.48
            
            
            
            (292,339
            )
            
            
            0.44-4.00Exercised
            
            
            -
            
            
            
            -
            
            
            
            (713,486
            )
            
            
            0.06-0.44Outstanding
      End of Year
            
            
            8,882,412
            
            
            
            0.10-0.87
            
            
            
            9,193,412
            
            
            
            0.20-0.87Exercisable
      End of Year
            
            
            7,172,412
            
            
            $
            0.10-0.87
            
            
            
            7,773,412
            
            
            $
            0.20-0.87





Options
reserved for Director, employee and consultant plans but not issued (11,176,583)
are not included in the table above since this stock may be utilized for other
purposes if not used for the plans.





The
weighted-average remaining contractual life of the above options is 2.36
years.





During
2008, 15,160,000 warrants were issued.  Of these 12,000,000 were
issued to a preferred shareholder, 1,920,000 to an investment banking company,
80,000 to a consultant and 1,160,000 to purchasers of unsecured private
placement stock.  Deemed dividends for $548,489 and $87,758 were
recognized for the warrants issued to the preferred shareholder and investment
banking company respectively.  $11,522 was recognized as stock
compensation expense for the warrants issued to a
consultant.   The Company recognized the total purchase price for
private placement stock and warrants as the cost to purchase the
stock.





We
recognized $636,247 of deemed dividends for anti-dilution benefits received by
warrant holders on November 21, 2008.   Holders of 4,640,000
warrants exercisable at $0.30 per share with January 8, 2013 expiration date
received 9,280,000 additional warrants.   We sold private
placement stock on November 21, 2008 for $0.10 per share which triggered the
warrant anti-dilution provisions.  Total warrants were increased by a
factor of three and the exercise price reduced to $0.10.  We are at
risk of triggering the warrant anti-dilution provisions again in the future if
we sell stock below $0.10 per share to any non-exempt
parties.  Holders of options and warrants prior to January 8, 2008
plus officers, directors and consultants under stock plans approved by outside
board of director members are exempt from the anti-dilution
provisions.





F-15


A summary
of the Company's stock warrant activity and related information for the years
ended December 31, 2008 and 2007 is as follows:





2008
            
            
            2007Warrants
            
            
            Price
      Range
            
            
            Warrants
            
            
            Price
      RangeOutstanding
      Beg of Year
            
            
            260,000
            
            
            $
            0.47-2.00
            
            
            
            290,000
            
            
            $
            0.22-2.00Granted
            
            
            15,160,000
            
            
            
            0.10-0.30
            
            
            
            -
            
            
            
            -Cancelled/Expired
            
            
            (60,000
            )
            
            
            0.47-0.50
            
            
            
            -
            
            
            
            -Exercised
            
            
            -
            
            
            
            -
            
            
            
            (30,000
            )
            
            
            0.22Outstanding
      End of Year
            
            
            15,360,000
            
            
            
            0.10-2.00
            
            
            
            260,000
            
            
            
            0.47-2.00Exercisable
      End of Year
            
            
            15,360,000
            
            
            $
            0.10-2.00
            
            
            
            260,000
            
            
            $
            0.47-2.00





The
weighted-average remaining contractual life of the warrants outstanding at
December 31, 2008 is 3.2 years.





11.  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 $8,976,000 and $8,000,000 at December 31, 2008 and 2007
respectively, was subject to a valuation allowance of $8,976,000 and $8,000,000
at December 31, 2008 and 2007 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, 2008, the Company has net operating loss carryforwards of
approximately $24,676,000 for federal income tax purposes expiring in 2009
through 2028 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
from the change during 2008 and 2007 of the deferred tax asset valuation
allowance. As a result, the reported effective tax rate is 0%.





12.
Commitments and Contingencies





Delinquent
payroll





During
2008, the Company curtailed payment of salaries payable to senior management of
the Company. As of December 31, 2008, approximately $270,000 of unpaid salaries
due to senior management of the Company is included in accounts payable and
accrued expenses.





F-16


The
significance of the amounts owed to senior management subjects the Company to
the risk of resignation by these officers, as well as possible
litigation.





Lease
commitment





During
2006, the Company entered into an operating lease agreement for its offices in
Amarillo, TX. The lease for 3,675 square feet is for a period of 24 months
commencing in January 2007. Minimum lease payments under this operating lease
were a combined $44,400 for 2007 and 2008. The  Company began leasing
1,800 square feet for $1,000 per month on a month-to-month basis on January 1,
2009.





Minimum
Royalties





The
agreement with Texas A&M University requires the Company to make minimum
annual royalty payments of $7,500 through 2019.





Clinical Trial
Costs


Twelve
clinical investigation sites throughout the United States are participating in
an FDA Phase 2 study of oral interferon treatment of oral warts in HIV+
patients. The Company estimates the clinical trial costs for this study to be
approximately $116,000 in 2009.  The Company plans to pay third
parties approximately $45,000 for expenses related to a winter colds and
influenza symptoms study that will be completed in Australia in
2009.




Litigation





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,
2008.





13.
Related Party 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 previously described, 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 8.67% of the
issued and outstanding shares of common stock of the Company.





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 at contractual prices. The Company pays HBL a 12% royalty on the first
$100 million of interferon alpha net sales and a 10% royalty on additional net
sales.


F-17


Additionally,
the Company is obligated to pay HBL a percentage of sublicense fee income the
Company receives.  There were no sales of interferon alpha and no
royalty payments made to HBL in 2007.  A $19,991 sublicense fee to HBL
was paid in 2007.  $53,971 of sublicense fees to HBL were recorded in
2008 and were owed to HBL as of December 31, 2008.





HBL is
obligated to pay the Company an 8% royalty on sales of oral interferon in
Japan.  The Company received $0 in 2008 and $27,919 of royalties in
2007 from HBL animal health sales of oral interferon.





During
2007 and 2008, the Company engaged the law firm of SandersBaker,
P.C.  Mr. Edward Morris, Secretary of the Company, is a partner in
that firm. The Company was invoiced for $47,677 in 2008 and $59,387 during 2007
for legal services rendered by SandersBaker.





14.  Subsequent
Events





Since
December 31, 2008, the Company has sold 3,050,000 unregistered shares of common
stock for $0.10 per share plus 3,050,000 3-year warrants with $0.20 exercise
price and 500,000 unregistered shares of common stock for $0.10 per share plus
500,000 3-year warrants with $0.10 exercise price.  Private placement
stock sales totaled $355,000.  Also, the Company sold 1,470,405
unregistered shares of stock to Officers and Consultants through the 2008
Directors, Officers and Consultants Stock Purchase Plan at $0.05 - $0.08 per
share.  Plan purchases of stock totaled $110,846.





On
February 6, 2009, the Company entered into a 15-year License and Supply
agreement with Cyto Biotech, Inc. a Taipei, Taiwan animal health
company.  Under the terms of the agreement, Cyto Biotech, will, at its
sole expense and cost, conduct all clinical trials and studies and seek to
obtain regulatory approvals in China, Taiwan, Thailand, the Philippines,
Cambodia, Vietnam and Malaysia (“the Territory”), subject to the existing
license and supply agreements with CytoPharm, Inc. and Bumimedic SDN. BHD.,
required for the commercial launch of the Company’s low dose oral interferon in
the Territory for any animal and human health indications.





Cyto
Biotech purchased common stock, included in the above issuances in Amarillo
Biosciences; paid an initial license fee to AMAR; and will pay a net royalty on
low dose oral interferon sales.  In addition, the agreement calls for
certain minimum royalty payments to be made.








F-18