1
                     U.S. Securities and Exchange Commission
                             Washington, D.C. 20549
                                   Form 10-KSB
(Mark One)
   [X]        Annual Report Pursuant to Section 13 or 15(d) of the
                 Securities Exchange Act of 1934 [Fee Required]

                  For the Fiscal Year Ended December 31, 2005

   [_]         Transition Report Under Section 13 or 15(d) of the
               Securities Exchange Act of 1934 [No Fee Required]

                         Commission File Number 0-20791

                           AMARILLO BIOSCIENCES, INC.
                 (Name of small business issuer in its charter)

                     Texas                                       75-1974352
(State of other jurisdiction of incorporation or              (I.R.S. Employer
                 organization)                              Identification No.)

    4134 Business Park Drive, Amarillo, Texas                     79110-4225
     (Address of principal executive offices)                     (Zip Code)

Issuer's telephone number, including area code: (806) 376-1741

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

                                      None.

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

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

      Check whether the issuer is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act. [_]

      Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
                                                                  Yes [X] No [_]

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

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

<PAGE>

      Revenues for its most recent fiscal year were $178,286.

      As of December 31, 2005, there were outstanding 19,801,990 shares of the
registrant's common stock, par value $.01, which is the only class of common or
voting stock of the registrant. As of that date, the aggregate market value of
the shares of common stock held by non-affiliates of the registrant (based on
the closing price for the common stock on the OTC BB.AMAR) was approximately
$8,514,856.

                                     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 2006 Plan of Operations" as
well as those discussed elsewhere in this Form 10-KSB. The following discussion
should be read in conjunction with the Financial Statements and the Notes
thereto included elsewhere in this Form 10-KSB.

ITEM 1. DESCRIPTION OF BUSINESS.

General

         Amarillo Biosciences, Inc. (the "Company" or "ABI"), a Texas
corporation formed in 1984, is engaged in developing biologics for the treatment
of human and animal diseases. The Company is currently focusing its research on
human health indications for the use of low-dose orally administered natural
human interferon alpha, particularly for the treatment of Sjogren's syndrome,
Behcet's disease, polycythemia vera, essential thrombocythemia, idiopathic
pulmonary fibrosis and oral warts in HIV+ patients. The Company believes that
significant worldwide opportunities exist for the development of low-dose orally
administered natural interferon alpha as a cost-effective, non-toxic,
efficacious alternative to the treatment of diseases by injection of high doses
of interferon alpha. In addition, the Company believes that low-dose orally
administered natural human interferon alpha will be an effective treatment for
diseases or conditions for which current therapies are inadequate.

         The Company owns or licenses 15 United States patents relating to the
use or composition of low-dose oral natural interferon alpha and one patent on
the dose formulation of our dietary supplement. Since 1992, the Company has
filed with the U.S. Food and Drug Administration ("FDA"), and there now are in
effect, 6 Investigational New Drug ("IND") Applications covering indicated uses
for low-dose oral interferon alpha, including treatment of Behcet's disease,
Sjogren's syndrome, and oral warts in HIV+ patients.

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



                                       2
<PAGE>
         The Company has 4 full-time employees. The Company makes extensive use
of consultants in business and research and development. Governmental or FDA
approval is required on the Company's principal products. The Company's progress
toward approval is discussed under each specific indication, below.

Human Health Applications

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

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

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

         The Company believes that oral interferon alpha therapy helps to
relieve the dryness associated with Sjogren's syndrome, improves secretory
function, and may effectively supplement, or be used in lieu of existing
treatments. The Company has completed two 24-week Phase III clinical trials of
the use of interferon alpha lozenges in the treatment of primary Sjogren's
syndrome. Results of both Phase III clinical trials demonstrate an improvement
in saliva production in treated patients (see Arthritis Care & Research,
49:585-593, 2003). The studies were double-blinded, placebo-controlled tests in
which a total of 497 patients were treated three times daily for 24 weeks with a
lozenge containing either 150 international units (IU) of interferon alpha or a
placebo. Analysis of participants who completed the trials, designated as
evaluable patients, found a significant (p=0.01) increase in unstimulated whole
saliva (UWS) production among the interferon alpha treated patients, as compared
to those who received placebo. Increases in UWS are important to the Sjogren's
patient since UWS represents the basal salivary flow that is present over 90% of
the day.

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



                                       3
<PAGE>

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

Oral Warts in HIV+ Patients. Oral warts are lesions in the mouth caused by the
human papillomaviruses. In open-label Phase I/II clinical studies with 36
patients, complete or partial clearance of oral warts was achieved in 71% (5/7)
of HIV+ subjects given interferon-(alpha) at 1500 international units (IU) per
day. A double-blind, placebo-controlled Phase II study to confirm and expand
these findings is planned for initiation in 2006. The Company filed with the FDA
Office of Orphan Drugs and was granted (Summer 2000) orphan drug status for low
dose IFN(alpha) treatment in this condition.

Behcet's Disease. Behcet's disease is a severe chronic relapsing inflammatory
disorder marked by oral and genital ulcers, eye inflammation (uveitis) and skin
lesions, as well as varying multisystem involvement including the joints, blood
vessels, central nervous system, and gastrointestinal tract. The oral lesions
are an invariable sign, occurring in all patients at some time in the disease.
Behcet's disease is found world-wide, and is a significant cause of partial or
total disability. The US patient population has been estimated as 15,000. The
Company filed with the FDA Office of Orphan Drugs and was granted (Spring 2000)
orphan drug status for low dose orally administered IFN(alpha) treatment in this
condition. A double-blind, placebo-controlled Phase II trial is planned for
2006.

         At the end of February, 2006, Martin Cummins, Director of Regulatory
and Clinical Affairs for ABI, visited Nobel Ilac Sanayii Ve Ticaret A.S. He
participated in final investigatory meetings prior to the enrollment of 90
patients with Behcet's disease in a study of interferon lozenges versus placebo.
The treatment duration is 12 weeks, with completion of the study expected within
a year.

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

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



                                       4
<PAGE>

         In the earliest, reversible forms of alveolar injury, "leakiness" of
the alveolar type I cells and the adjacent capillary endothelial cells occurs,
causing alveolar and interstitial edema and the formation of intra alveolar
hyaline membranes. With persistence of the disease, increased alveolar-capillary
permeability and desquamation of intra-alveolar cells (alveolitis), mural
inflammation, and interstitial fibrosis are present on biopsy. This process is
also reflected in the composition of cells and enzymes recovered in BAL fluid
and in cellular components present in lung biopsy tissue. The presence and
severity of the disease process are spotty in distribution; a continuum of
inflammatory and fibrotic changes can be found throughout the affected lung.
Fibrosis follows from an organization of inflammatory exudate within the
airspaces in which fibroblasts beneath the type I epithelium proliferate and
increase their production of fibronectin and collagen. Death of the patient
usually occurs within 4-5 years of diagnosis.

         ABI's low-dose orally administered interferon alpha is being tested as
a treatment for IPF under an Advanced Technology Program Grant awarded by the
State of Texas to the Texas Tech University Health Sciences Center in Lubbock.
The $100,000 grant is being used by the Health Science Center to support a pilot
study of 20 patients with IPF. ABI is collaborating on this research with Lorenz
O. Lutherer, MD, PhD, professor, physiology, and Cynthia A. Jumper, MD,
associate professor patient care, internal medicine, and is providing support in
the form of study drug, data management and biostatistical analysis. A trial of
low-dose, orally administered IFNa (150 IU three times daily) has shown minimal
to no side effects. Subjects are evaluated with pulmonary function tests every
three months and high resolution computed tomography (HRCT) at yearly intervals.
Of the 9 subjects who have completed at least one year, the forced vital
capacity has remained stable in 8 and the oxygen saturation after a 6-minute
walk has been stable in 7 and improved in 1. One subject showing lack of
progression has been followed for over 4 years and another for 2 years. The 8
subjects whose pulmonary function tests were stable showed no evidence of
disease progression on HRCT scans. Most subjects who entered the study with a
cough noted marked improvement within the first few weeks of treatment with
corresponding increases in quality of life scores. These results strongly
suggest that this regimen can prevent progression according to the criteria
defined in the International Consensus Statement published by the American
Thoracic Society.

Bone Marrow Disorders. ABI will commence to test low dose oral interferon alpha
in forty patients with rare bone marrow proliferative disorders. The study will
be conducted at a major Texas cancer center with a leading medical authority who
specializes in the treatment of these myeloproliferative disorders. Twenty
patients, each with either polycythemia vera (PV) or essential thrombocythemia
(ET), will be given low dose oral interferon alpha daily as a treatment to
relieve the signs and symptoms associated with these disorders.

         In 1997-1998, Amarillo Biosciences, in conjunction with the Mayo
Clinic, conducted a 48-week pilot study in the treatment of PV and ET. Human
interferon alpha lozenges were administered to 7 PV and 6 ET patients. Because
of the benefits noted in the pilot study, and because so few good treatment
alternatives exist, this follow-up study is planned to commence in the second
quarter of this year. The first study treated patients once per day, but with
more clinical experience and a better understanding of the mechanism of action
of oral interferon, the new study will dose patients three times per day.



                                       5
<PAGE>

         PV and ET are stem cell disorders considered to be incurable. Treatment
is directed at reducing morbidity and preventing life-threatening complications.
The clinical course of both ET and PV are characterized by vasomotor
disturbances (headaches, dizziness), acral dysesthesia (impaired sensations in
limbs, fingers, ears), erythromelalgia (diffused redness and atrophy of skin on
legs), visual symptoms, thrombohemorrahagic (inappropriate clotting) events, and
the risk of transformation into acute myeloid leukemia or fibrosis of bone
marrow.

         Treatment efforts in ET strive to reduce clotting events in patients at
high-risk for thrombosis without increasing the intrinsically low risk of
leukemic transformation. All patients with PV require phlebotomy (drawing
blood), with the goal of reducing hematocrit levels (the concentration of red
blood cells). This maneuver prolongs survival by decreasing, but not abolishing,
the risk of thrombosis. The goal of therapy in PV is not only to prevent
thrombosis, but also to reduce the risk of transformation into acute myeloid
leukemia or myelofibrosis.

         In the previous 1997-1998 study, treatment response in PV patients was
based on changes in hematocrit levels and phlebotomy requirement. Four of 7
subjects had a =>50% reduction in phlebotomy requirement, compared to the 6
months prior to the study, and consequently were considered partial responders.
Response in the ET subjects was based on changes in platelet count. One of 6
subjects experienced normalization of platelet count (complete response), 3 were
unchanged and 2 experienced a progression of disease during interferon alpha
lozenge therapy. No deaths or serious adverse events occurred in this study.

         Patients are currently being enrolled in a study at M.D. Anderson
Cancer Center in Houston, Texas, to evaluate interferon lozenges in patients
with the pre-leukemic conditions known as essential thrombocythemia and
polycythemia vera. The first stage of enrollment should be completed by August.
Goal of the study is to support and expand on positive data ABI generated in
treating these conditions at the Mayo Clinic.

Influenza. Warnings have been issued that the avian influenza virus presently
killing animals and people in Asia may become the new strain of pandemic flu
which could potentially kill millions of people. These warnings have sparked
renewed interest in ways to treat or prevent influenza. Clinical observations
from thousands of influenza patients in Russia, Ukraine, Bulgaria, China, and
Japan claim significant clinical benefits to patients intranasally given
low-dose (a few hundred to 10,000 units) interferon during natural outbreaks of
influenza. In contrast, in experimental influenza virus challenge studies with
human volunteers, those volunteers given 800,000 to 70 million units of
interferon by intranasal delivery did not experience a clinical benefit. Data
generated using low dose interferon was rejected by Western scientists because
of the impure nature of the interferon used in early studies and because the low
dose interferon did not seem to make any sense. This review proposes that the
subject of low dose interferon for influenza be revisited. Intranasal and oral
administration of low-dose interferon deliver interferon to the same receptors
in the oral-pharyngeal cavity. Low-dose oral interferon may represent an
inexpensive, safe way to modulate the immune system during, or before, influenza
infection.

         ABI has arranged to support two animal studies in influenza. In a study
planned in Australia and another study planned in the USA, mice will be given
oral interferon or placebo and challenged with mouse-adapted influenza virus. It
is the Company's goal to generate animal data to support the human clinical data
from studies in the former Soviet Union, Bulgaria, Japan and China. In those
cases, it was reported that orally or intranasally administered interferon
significantly (P< 0.05) reduced the severity and duration of naturally occurring
influenza, compared to placebo. With these new animal data to supplement the
human data, the Company hopes to insert oral interferon into the debate as to
how best to respond to an influenza pandemic.




                                       6
<PAGE>

Strategic Alliance with HBL

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

         In 1981, HBL established the Fujisaki Institute to accelerate
development of industrial methods for the production of biologics and to sponsor
clinical trials for such products. In 1985, HBL built the Fujisaki Cell Center
to support basic research. In 1987, HBL successfully accomplished the mass
production of human cells in an animal host by producing human cells in
hamsters. This made it possible to economically produce a natural form of human
interferon alpha and other biologics. HBL also has developed and obtained
patents for technology relating to the production of interferon alpha-containing
lozenges by which the stability of the interferon alpha activity can be
maintained for up to 24 months at room temperature and up to five years if the
product is refrigerated. The Company believes that the use of such lozenges
gives it advantages over competitive technologies in terms of cost, taste and
ease of handling. On March 13, 1992, the Company entered into a Joint
Development and Manufacturing/Supply Agreement with HBL (the "Development
Agreement"). Such Development Agreement was subsequently amended on January 17,
1996; May 10, 1996; and September 7, 2001. The current expiration date of the
Development Agreement is March 12, 2008, 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 footnote 4 to the Consolidated Financial Statements attached to
this 10-KSB.

Strategic Alliance with Nobel

         The Company signed a licensing and supply agreement in September 2004
with a leading Turkish pharmaceutical company, NOBEL ILAC SANAYII VE TICARET
A.S., providing the rights to oral low-dose interferon-alpha for the treatment
of Behcet'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.

         The license agreement covers a territory whose population is
approximately 365 million. In Turkey, where the disease is more than 600 times
more prevalent than in the United States, there are from 56,000 to 259,000
people who are afflicted with the disease, according to a review published in
the New England Journal of Medicine. The U.S. Food and Drug Administration (FDA)
has granted Orphan Drug Designation for this product for the clinical indication
of Behcet's Disease to Amarillo Biosciences. The Orphan Drug Designation is
designed to promote the development of treatments for diseases rare in the
United States and provides certain marketing exclusivity incentives outlined
under the Orphan Drug Act.



                                       7
<PAGE>

         Under the terms of the agreement, ABI and NOBEL will conduct Behcet's
disease studies in Turkey under an Investigating New Drug (IND) Application
submitted by ABI to the U.S. FDA. U.S. FDA approval will be sought and this FDA
approval will be owned by ABI, but will be used by NOBEL to seek regulatory
approval in each country of the Territory.

         In 2005, the clinical protocol was developed, clinical supplies were
made and packaged, and clinical investigators identified. The first patients
will be enrolled in April 2006.

         At the end of February 2006, Martin Cummins, Director of Regulatory and
Clinical Affairs for ABI, visited Nobel. He participated in final investigatory
meetings prior to the enrollment of 90 patients with Behcet's disease in a study
of interferon lozenges versus placebo. The treatment duration is 12 weeks, with
completion of the study expected within a year.


Other Agreements

         On October 19, 2005, ABI reached agreement with Global Kinetics of
Kent, Washington to become the distributor of oral interferon in Cambodia.
Global Kinetics' sales of interferon are expected to begin in the first half of
2006. The supply agreement between ABI and Global Kinetics on dry mouth relief
was terminated.

         On December 29, 2005 ABI announced that it had entered into a
distribution agreement with Bumimedic (M) Sdn. Bhd, a Malaysian pharmaceutical
company to market ABI's low-dose interferon (natural human IFN) in Malaysia,
Singapore and Brunei. Bumimedic will apply for registration to have ABI's
natural human IFN approved for sale, following which it will commence marketing
the product. The terms of the agreement call for Bumimedic to manufacture the
tablets from ABI's natural human IFN (which is supplied by Hayashibara
Biochemical Laboratories), package the tablets and distribute them to local
hospitals, pharmacies and clinics in Malaysia, Singapore and Brunei. Pursuant to
the agreement, ABI will receive a series of payments, which will be received in
three stages: upon formal execution of the distribution agreement, upon
regulatory approval, and upon registration. ABI will also receive a royalty on
the sale of the natural human IFN sold. 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.

         In 2005 the Company also entered into various other licensing and
supply arrangements which could serve as a source of future revenue for the
Company; however, none of these arrangements are currently contributing in a
significant manner to the Company's revenue, and these arrangements are not
considered by the Company's management to be material, either individually or in
the aggregate.

Publishing

         A manuscript entitled "Orally Administered Interferon Alpha has
Systemic Effects" was published by the American Journal of Veterinary Research,
Vol. 166, 164-176, 2005.




                                       8
<PAGE>

Animal Health Application

         There is animal health approval for low dose oral administration of
human interferon alpha supplied by Hayashibara Biochemical Laboratories (HBL) in
Japan. The product was launched in Japan in September 2004. Amarillo Biosciences
owns the distribution rights to HBL interferon for animal health outside Japan
and receives a royalty on all Japanese HBL interferon sales.


Patents and Proprietary Rights

         No new patents were issued in 2005.

Cost of Compliance with Environmental Regulations

         The Company incurred no costs to comply with environment regulations in
2005.

Competition

         The pharmaceutical industry is an expanding and rapidly changing
industry characterized by intense competition. The Company believes that its
ability to compete will be dependent in large part upon its ability to
continually enhance and improve its products and technologies. In order to do
so, the Company must effectively utilize and expand its research and development
capabilities and, once developed, expeditiously convert new technology into
products and processes, which can be commercialized. Competition is based
primarily on scientific and technological superiority, technical support,
availability of patent protection, access to adequate capital, the ability to
develop, acquire and market products and processes successfully, the ability to
obtain governmental approvals and the ability to serve the particular needs of
commercial customers. Corporations and institutions with greater resources than
the Company may, therefore, have a significant competitive advantage. The
Company's potential competitors include entities that develop and produce
therapeutic agents for treatment of human and animal disease. These include
numerous public and private academic and research organizations and
pharmaceutical and biotechnology companies pursuing production of, among other
things, biologics from cell cultures, genetically engineered drugs and natural
and chemically synthesized drugs. Almost all of these potential competitors have
substantially greater capital resources, research and development capabilities,
manufacturing and marketing resources and experience than the Company. The
Company's competitors may succeed in developing products or processes that are
more effective or less costly than any that may be developed by the Company, or
that gain regulatory approval prior to the Company's products. The Company also
expects that the number of its competitors and potential competitors will
increase as more interferon alpha products receive commercial marketing
approvals from the FDA or analogous foreign regulatory agencies. Any of these
competitors may be more successful than the Company in manufacturing, marketing
and distributing its products. There can be no assurance that the Company will
be able to compete successfully.



                                       9
<PAGE>

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.

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, 2005 and 2004, the Company incurred
expenses of $187,810 and $171,043, respectively, resulting from
Company-sponsored research and development activities. Research and development
is expected to remain a significant component of the Company's business. The
Company has arranged for others, at their cost, to perform substantially all of
its clinical research and intends to continue to do so while utilizing its staff
for monitoring such research. See also ITEM 6, "MANAGEMENT'S 2006 PLAN OF
OPERATIONS - Research and Development".



                                       10
<PAGE>

ITEM 2.  DESCRIPTION OF PROPERTY.

         The Company's executive and administrative offices are located at 4134
Business Park Drive, Amarillo, Texas in a 1,800 square-foot facility rented by
the Company. The building contains offices, and a small warehouse. The Company
believes that the facility is inadequate and larger office space will be sought
in the future.

ITEM 3.  LEGAL PROCEEDINGS.

         None.

                                                       PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.

         The Company is presently traded on the OTC Bulletin Board under the
symbol AMAR. The range of high and low bids as quoted on the OTC Bulletin Board
for each quarter of 2005 and 2004 was as follows:

                            2005                         2004
                   -----------------------     -----------------------
 Quarter              High          Low           High          Low
                   --------      --------      --------      --------
 First             $   0.58      $   0.29      $   0.44      $   0.27
 Second                0.45          0.31          0.35          0.18
 Third                 0.38          0.27          0.32          0.20
 Fourth                0.61          0.27          0.38          0.21

         The quotations reflect inter-dealer bids without retail markup,
markdown, or commission, and may not represent actual transactions. As of
December 31, 2005, the Company had approximately 1,620 shareholders of record.

         During 2005 there were 32 sales of the unregistered common stock of the
Company by private placement, raising $850,014 in cash. Of those purchases, 8
were by individuals who were not accredited investors within the meaning of Rule
501 of Regulation D, promulgated under the U.S. Securities Act of 1933, and 24
purchases were made by accredited investors. Of these sales, 1,380,000 shares
were sold for $0.10 per share; 3,435,000 shares were sold for $0.20 per share;
and 113,700 shares were sold for $0.22 per share. The foregoing private
placements were conducted in reliance on Rule 506, promulgated under Section
4(2) of the Securities Act of 1933.



                                       11
<PAGE>

         The following shares of the Company were repurchased in 2005:

         -------------------------------------------------------------------
         Shares repurchased from the Crowe Estate:             120 shares
         -------------------------------------------------------------------


ITEM 6. 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

         The Company continues to engage in research and development activities
focused on developing biologics for the treatment of human and animal diseases.
The Company has not commenced any significant product commercialization and,
until such time as it does, will not generate significant product revenues. The
Company's accumulated deficit has increased, from approximately $22,507,207 at
December 31, 2004 to $23,132,394 at December 31, 2005. Operating losses are
expected to continue for the foreseeable future and until such time as the
Company is able to attain sales levels sufficient to support its operations.

         In 2006 the Company will continue its research and development
activities, as well as the activities necessary to develop commercial
partnerships and licenses. The Company's expenditure of financial resources in
2006 will fall principally into five broad categories, as follows: Research and
Development; Personnel; Consulting and Professional (except legal and
accounting); Legal and Accounting; and Public Relations, Investor Relations and
Shareholder Relations. The Company's expectations and goals with respect to
these categories are addressed separately below, by category.

         ABI issued 37,994 unregistered shares of its voting common stock as
payment for consulting services performed in 2005. Valuation of the stock
granted ranged from $0.29 to $0.4467 per share which generated a value of
$13,211.


Liquidity and Capital Resources

         At December 31, 2005, the Company had available cash of approximately
$193,515, and had a working capital deficit of approximately ($2,402,174).
Assuming there is no decrease in current accounts payable, and accounting for
various one-time expenses, the Company's negative cash flow is approximately
$39,000 per month. The Company's continued losses and lack of liquidity indicate
that the Company may not be able to continue as a going concern for a reasonable
period of time. The Company's ability to continue as a going concern is
dependent upon several factors including, but not limited to, the Company's
ability to generate sufficient cash flow to meet its obligations on a timely
basis, obtain additional financing and continue to obtain supplies and services
from its vendors. The Company will need to raise additional funds in order to
fully execute its 2006 Plan. The Company is presently negotiating with human
health commercial development partners in various regions of the world including
the United States, South America, China and Southeast Asia. The Company believes
that one or more of these agreements will be executed during 2006. These
agreements could generally include provisions for the commercial partner to pay
ABI a technology access fee, could include payments for a portion of the
clinical trial expenses, could include payment obligations to ABI upon the
accomplishment of certain defined tasks and/or could provide for payments
relating to the future sales of commercial product. These agreements could be an
important source of funds for ABI. However, there can be no assurance that the
Company will be successful in obtaining additional funding from human health
commercial development partners or private investors. If the Company is not
successful in raising additional funds, it will need to significantly curtail
clinical trial expenditures and to further reduce staff and administrative
expenses and may be forced to cease operations.



                                       12
<PAGE>

         Total outstanding current liabilities decreased to approximately $2.6
million at December 31, 2005, as compared to approximately $2.8 million at
December 31, 2004.


ITEM 7.  FINANCIAL STATEMENTS.

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

Critical Accounting Policies

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

Accounting for Stock-Based Compensation

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

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




                                       13
<PAGE>

Deferred Taxes

         Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax reporting purposes. A
valuation allowance of $6,989,000 has been recorded to reduce the Company's
deferred tax assets to the amount that is more likely than not to be realized.
Consideration of estimated future taxable income and ongoing tax planning
strategies is utilized in assessing the amount needed for the valuation
allowance. Based on these estimates, all deferred tax assets have been reserved.
If actual results differ favorably from those estimates used, the Company might
be able to realize all or part of our net deferred tax assets. Such realization
could positively impact operating results and cash flows from operating
activities.

Comparison of results for the fiscal year ended December 31, 2005, to the fiscal
year ended December 31, 2004.

Revenues. During the fiscal year ended December 31, 2005, $42,730 from product
sales was generated compared to revenues from product sales for the fiscal year
ended December 31, 2004, of $45,389, a decrease of $2,659 or approximately 6%.
The decrease is primarily due to lack of sales of interferon products in 2005.

Selling, General and Administrative Expenses. Selling, General and
Administrative expenses of $492,659 were incurred for fiscal year ended December
31, 2005, compared to $362,388 for the fiscal year ended December 31, 2004, an
increase of $130,271. There was $13,212 in non-cash expenses in recognition of
stock issued to cover services provided by consultants in lieu of cash.

Non-Cash Consulting Activities. During the year ended December 31, 2005, the
Board of Directors authorized the issuance of shares of restricted common stock
to various consultants in lieu of cash payments. Based upon the common stock
trading price at the times of issuance, and FASB rules, a non-cash consulting
expense of $13,212 was recorded for the issuance of these shares during the year
ended December 31, 2005. In addition, the Company issued 450,000 options to
consultants, to purchase restricted common stock in exchange for consulting
services. The options are as follows, 250,000 at $0.01 per share, and 200,000
options at $0.05 per share. These options were exercised and the fair market
value of the stock sales were stated; 250,000 shares for $0.01 per share,
generating $2,500 in cash and $77,500 in non-cash consulting services; and
200,000 shares for $0.05 per share, generating $10,000 in cash and $60,000 in
non-cash consulting services.



                                       14
<PAGE>

Net Income (Loss). Net Loss applicable to common shareholders for the fiscal
year ended December 31, 2005 was $625,186 compared to a Net Loss of $595,205 for
the fiscal year ended December 31, 2004.

RISK FACTORS

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

Risks Relating to our Business

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

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

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

         Third parties manufacture and distribute all of our products. We do not
currently have manufacturing facilities or personnel to independently
manufacture our products. Currently, Marlyn Nutraceutical manufactures our
nutraceutical products. Our licensed distributors, in the United States and
Internationally distribute the nutraceutical products. Except for any
contractual rights and remedies that we may have with our manufacturer and our
distributor, we have no control over the availability of our products, their
quality or cost or the actual distribution of our products. If for any reason we
are unable to obtain or retain third-party manufacturers and distributors on
commercially acceptable terms, we may not be able to produce and distribute our
products as planned. If we encounter delays or difficulties with our contract
manufacturer in producing or packaging our products or with our distributor in
distributing our products, the production, distribution, marketing and
subsequent sales of these products would be adversely affected, and we may have
to seek alternative sources of supply or distribution or abandon or sell product
lines on unsatisfactory terms. We may not be able to enter into alternative
supply, production or distribution arrangements on commercially acceptable
terms, if at all. There can be no assurance that the manufacturer that we have
engaged will be able to provide sufficient quantities of these products or that
the products supplied will meet with our specifications or that our distributor
will be able to distribute our products in accordance with our requirements.



                                       15
<PAGE>

We are dependant on certain key existing and future personnel.

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

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

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

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

         We face an inherent business risk of exposure to product liability
claims in the event that the use of our technologies or products are alleged to
have resulted in adverse side effects. Side effects or marketing or
manufacturing problems pertaining to any of our products could result in product
liability claims or adverse publicity. These risks will exist for those products
in clinical development and with respect to those products that receive
regulatory approval for commercial sale. Furthermore, although we have not
historically experienced any problems associated with claims by users of our
products, we do not currently maintain product liability insurance. We plan to
have a product liability insurance plan in place in 2006; however, there can be
no assurance that we will be able to acquire product liability insurance with
terms that are commercially feasible.



                                       16
<PAGE>

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.


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

         None.


ITEM 8A. CONTROLS AND PROCEDURES.

         As of December 31, 2005, 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 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 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, who
is also currently the Chief Financial Officer. Based upon that evaluation, our
Chief Executive 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.



                                       17
<PAGE>

          As of December 31, 2005, the Company's internal controls are effective
to ensure full and fair internal disclosure of financial matters. The Company's
accounting firm has issued an attestation report on the management's assessment
of the Company's internal controls. No material changes to the Company's
internal controls were made in 2005 and no material weaknesses in such controls
were found.

ITEM 8B. OTHER INFORMATION.

         The matters disclosed under PART II, ITEM 5, regarding private
placements by the Company of its securities during 2005, were required to be
reported in one or more Form 8-Ks during 2005, but were not so reported. All
such matters required to be reported on Forms 8-K during 2005 have been included
in ITEM 5 of this Form 10KSB.

                                    PART III

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

         As of December 31, 2005, the directors and executive officers of the
Company were as follows:

Name                                Age   Position

Joseph Cummins, DVM, PhD (1)(3)...  63    Chairman of the Board, President,
                                          Chief Executive Officer, Chief
                                          Financial Officer and Director

Stephen Chen, PhD (2)(4)..........  56    Director

Katsuaki Hayashibara (3)(4)(5)....  61    Director

Dennis Moore, DVM (1)(4)(5).......  59    Director

James Page, MD (1)(2)(5)..........  78    Director

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

Martin J. Cummins.................  38    Director of Clinical &
                                          Regulatory Affairs

----------
(1) Member of the Executive Committee.
(2) Member of the Compensation Committee.
(3) Member of the Finance Committee.
(4) Member of the Audit Committee.
(5) Member of the Stock Option Plans Administration Committee.

         Joseph Cummins has been the Chairman of the Board of the Company since
he founded it in June 1984. Dr. Cummins has also served as President of the
Company since December 1994 and as Chief Financial Officer since October 1998.
Dr. Cummins has been conducting research on oral cytokines, most particularly
interferon alpha, in animals and humans for 29 years. Dr. Cummins has more than
40 publications and a dozen patents that 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.



                                       18
<PAGE>

         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.

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

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

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

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

         The Company's directors are elected at the annual meeting of
shareholders to hold office until the annual meeting of shareholders for the
ensuing year or until their successors have been duly elected and qualified.
Directors are reimbursed for any out-of-pocket expenses in connection with their
attendance at meetings. In the event of the voluntary termination of a
recipient's association with the Company as a director, the options must be
exercised within 90 days after such termination, and in the event they are not
so exercised, will lapse.

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

Audit Committee Financial Expert

         The Company does not have an audit committee financial expert because
no one on the board has the education or experience to qualify as an audit
committee financial expert. 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.



                                       19
<PAGE>

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 percent shareholders are required by the Exchange Act
to furnish the Company with copies of all Section 16(a) forms they file.

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

ITEM 10. EXECUTIVE COMPENSATION.

         The following table sets forth for the three years ended December 31,
2005 compensation paid by the Company to its Chairman of the Board, President
and Chief Executive Officer. None of the Company's other executive officers had
annual salary and bonus in excess of $100,000 for services rendered during any
of the three years ended December 31, 2005.

<TABLE>
<CAPTION>
                           Summary Compensation Table
                                                                                                        Long Term
                                                                 Annual Compensation                  Compensation
                                                     --------------------------------------------- --------------------
Name and Principal Position              Year           Salary         Bonus                             Securities
                                                                                         Other           Underlying
                                                                                     Compensation         Options
-------------------------------------    --------    --------------    ---------    --------------     ----------------
<S>                                      <C>              <C>          <C>          <C>                        <C>
Dr. Joseph M. Cummins,                   2005             $177,000     $     -      $          -               600,000
  Chairman of the Board,
  President and Chief
  Executive Officer
                                         2004             $ 74,716     $     -      $          -               650,000
                                         2003             $103,779     $     -      $          -               490,000
</TABLE>




                                       20
<PAGE>

                              Option Grants in 2005

        The following table sets forth certain information relating to options
granted in 2005 to the executive officers named above, to purchase shares of
common stock of the Company.

<TABLE>
<CAPTION>

                                         Number of Shares        % of Total
                                         of Common Stock      Options Granted      Exercise or
  Name                                  Underlying Options      to Employees        Base Price       Expiration
                                           Granted (#)            in 2005             ($/Sh)            Date
--------------------------------------        -------                ----            ---------        ----------
<S>                                           <C>                    <C>             <C>            <C>
Joseph M. Cummins.....................        100,000                7.7%            $0.40 (1)        02/25/2010
                                              500,000               38.5%            $0.30 (1)        08/22/2010
</TABLE>

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

                Aggregated Option Exercises at December 31, 2005
                           And Year-End Option Values

        The following table sets forth information for the executive officers
named above, regarding the exercise of options during 2005 and unexercised
options held at the end of 2005.

<TABLE>
<CAPTION>
                                                                                                    Value of Unexercised
Name                                                     Number of Shares of Common Stock               In-The-Money
                               Shares         Value     Underlying Unexercised Options at                Options at
                             Acquired on    Realized          December 31, 2005 (#)              December 31, 2005 ($) (1)
                            Exercise (#)       ($)          Exercisable/Unexercisable            Exercisable/Unexercisable
--------------              --------------- -----------  --------------------------------   -----------------------------------
<S>                            <C>            <C>        <C>                               <C>
Joseph Cummins                    --            --        1,788,486   /       None          $769,049  /      None
</TABLE>

(1) Calculated based on the closing price of the common stock ($0.43) as
reported by OTC BB on December 30, 2005.

                                     Director Compensation for Last Fiscal Year

<TABLE>
<CAPTION>
                                                                   Cash Compensation                Stock Options
                                                         -----------------------------------     ------------------
                                                                                                      Number of
                        Name                                                  Consulting Fees         Securities
                                                         Meeting Fees (1)           (2)           Underlying Options
----------------------------------------------------------------------------------------------------------------------
<S>                                                                <C>                  <C>            <C>
Stephen Chen, PhD                                                  $   --               $   --         600,000

Katsuaki Hayashibara                                                   --                   --         600,000

Dennis Moore, DVM                                                      --                   --         600,000

James Page, MD                                                         --                   --         600,000
</TABLE>

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

(2)      Directors may receive up to $1,200 per day, prorated for partial days,
         for employment on special projects or assignments.

      There are no employment agreements with any of the executives of the
Company.



                                       21
<PAGE>

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

        As of December 31, 2005, there were 19,801,990 shares of the Company's
common stock outstanding. The following table sets forth as of December 31,
2005, the beneficial ownership of each person who owns more than 5% of such
outstanding common stock:

<TABLE>
<CAPTION>
Name and Address                                                  Amount and Nature of          Percent of Class
                                                                  Beneficial Ownership                Owned
--------------------------                                        --------------------                -----
<S>                                                                    <C>                             <C>
Hayashibara Biochemical Laboratories, Inc.
2-3 Shimoishii 1-chome
Okayama 700, Japan                                                     3,290,781                       17%
</TABLE>

        The following table sets forth the beneficial ownership of the Company's
stock as of December 31, 2005 by each executive officer and director and by all
executive officers and directors as a group:


<TABLE>
<CAPTION>
Name and Address of Owner                            Amount and Nature of         Percent of Class
                                                     Beneficial Ownership               Owned
-------------------------                            --------------------         ----------------
<S>                                                      <C>                            <C>
Joseph Cummins
2122 Harrison
Amarillo, TX 79109                                       2,025,032(1)                   9.4%

Dennis Moore
402 Fish Hatchery
Hamilton, MT  59840                                       864,299(2)                    4.2%

Katsuaki Hayashibara
2-3, Shimoishii, 1-chome
Okayama, 700 Japan                                        912,365(3)                    4.4%

Stephen Chen
Floor 7-1, No. 18
Xin Yi Road,  Sec. 5                                      864,125(4)                    4.2%
Taipei, Taiwan

James Page
103 Clubhouse Lane, #182
Naples, FL  34105                                         864,125(5)                    4.2%
                                                   -------------------------    ----------------------
                                                          5,529,946                     22.2%
Total Group (all directors and executive
officers - 5 persons)
</TABLE>

(1) 1,788,486 of these shares are exercisable options
(2) 814,125 of these shares are exercisable options
(3) 864,125 of these shares are exercisable options
(4) 814,125 of these shares are exercisable options
(5) 864,125 of these shares are exercisable options



                                       22
<PAGE>

Employee Stock Option Plan

      The Company has an employee stock option plan entitled the 1996 Employee
Stock Option Plan, which has been approved by the shareholders of the Company,
and which was amended and restated effective September 12, 1998, and May 11,
1999, both of said amendments and restatements also having been 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 Employee Stock Option Plan from time to time in
the future.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         The Company has relied significantly on HBL, the largest shareholder of
the Company, for a substantial portion of its capital requirements. Pursuant to
the Development Agreement described at Item 1 of Part 1 above, HBL advanced
$9,000,000 for funding of research. In addition, HBL has purchased substantial
amounts of the Company's common stock from time to time, to the point where it
now owns 17% of the issued and outstanding shares of common stock of the
Company. HBL loaned $1 million to the Company on November 30, 1999 and an
additional $1 million on February 29, 2000, both loans bearing interest at 4.5%
per annum. The November 30, 1999 loan has been extended until December 2006 and
the February 29, 2000 loan has been extended to February 29, 2007. The aggregate
balance on both notes at December 31, 2005, including principal and accrued
interest, was $2,510,701. In addition to the above, HBL and the Company are
parties to various license and manufacturing and supply agreements pursuant to
which the Company licenses certain technology to or from HBL. HBL supplies
formulations of its interferon alpha and other products to the Company.

         During 2005, 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 $20,354 by said firm in 2005.


                                       23
<PAGE>

         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 13. EXHIBITS

EXHIBIT INDEX

<TABLE>
<S>                 <C>
             3.1+   Restated Articles of Incorporation of the Company, dated June 22, 1999.

             3.3*   Bylaws of the Company.

             4.1*   Specimen Common Stock Certificate.

             4.2*   Form of Underwriter's Warrant.

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

            10.5*   Joint Development and Manufacturing/Supply Agreement dated March 13, 1992 between the Company and
                    HBL, as amended.

            10.7*   Japan Animal Health License Agreement dated January 20, 1993 between the Company and HBL.

           10.11*   Manufacturing/Supply Agreement dated June 1, 1994 between the Company and HBL.

           10.12*   Settlement Agreement dated April 27, 1995 among the Company, ISI, Pharma Pacific Management Pty.
                    Ltd. ("PPM"), Pharma Pacific Pty. Ltd., Pharma Pacific Ltd. and Fernz Corporation Limited.

           10.14*   PPM/ACC Sublicense Agreement dated April 27, 1995 between PPM and the Company.

           10.18*   Form of Consulting Agreement between the Company and the Underwriter.

           10.20+   1996 Employee Stock Option Plan, Amended and Restated as of May 11, 1999.

           10.21+   Outside Director and Advisor Stock Option Plan, Amended and Restated as of May 11, 1999.

           10.22*   Form of Indemnification Agreement between the Company and officers and directors of the Company.

           10.23*   Indemnification Agreement between HBL and the Company.

          10.26**   License Agreement dated July 22, 1997 between Hoffmann-La Roche, Inc. and the Company.

          10.27**   Distribution Agreement dated January 12, 1998 between Global Damon Pharmaceutical and the Company.

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


                                       24
<PAGE>


<TABLE>
<S>                 <C>
          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.

      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 Company.
          10.47 a   License and Supply Agreement dated October 19, 2005 between Global Kinetics, Inc. and the Company.

          10.48 a   License and Supply Agreement dated January 18, 2006, between Bumimedic (Malaysia) SDN. BHD., and
                    the Company.
</TABLE>



                                       25
<PAGE>

<TABLE>
<S>                 <C>
              21.   Subsidiaries of the Company. The following sets forth the
                    name and jurisdiction of incorporation of each subsidiary of
                    the Company. All of such subsidiaries are wholly-owned by
                    the Company.

                    Name                                                 Jurisdiction of Incorporation
                    ----                                                 -----------------------------
                    Vanguard Biosciences, Inc.                                      Texas
                    Veldona Africa, Inc.                                            Texas
                    Veldona Poland, Inc.                                            Texas
                    ABI Taiwan, Inc.                                                Texas
                    Amarillo Cell of Canada, Inc.                                   Texas

            99.1    906 Certification
</TABLE>

*The Exhibit is incorporated by reference to the exhibit of the same number to
the Company's Registration Statement on Form SB-2 filed with and declared
effective by the Commission (File No. 333-4413) on August 8, 1996.

**The Exhibit is incorporated by reference to the Company's 1997 Annual Report
on Form 10-KSB filed with the Commission on or before March 31, 1998.

***The Exhibit is incorporated by reference to the Company's 1998 Annual Report
on Form 10-KSB filed with the Commission on or before March 31, 1999.

+ The Exhibit is incorporated by reference to the Company's Report on Form
10-QSB for the quarterly period ended June 30, 1999, filed with the Commission
on August 12, 1999 and subsequently amended on September 13, 1999.

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

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

         The following summarizes the fees incurred by the Company during 2004
and 2005 for accountant and related services.

Audit Fees
                                                  2005            2004
                                             ---------------- --------------
Malone & Bailey, PLLC                                            $15,000
Lopez, Blevins, Bork & Assoc. LLP                $17,875         $ 3,500

Audit-Related Fees
                                                  2005            2004
                                             ---------------- --------------
Johnson & Sheldon                                 $465            $575

Tax Fees
                                                  2005            2004
                                             ---------------- --------------
Johnson & Sheldon                                $2,750          $2,100

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.


                                       26
<PAGE>


                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.


                              AMARILLO BIOSCIENCES, INC.

Date: March 31, 2006          By:  /s/  Joseph M. Cummins
      --------------               ------------------------
                                   Joseph M. Cummins,
                                   Chairman of the Board, President, Chief
                                   Financial Officer and Chief Executive Officer

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

<TABLE>
<CAPTION>
Signature                                                         Title                         Date
---------                                                         -----                         ----
<S>                                                <C>                                  <C>
/s/ Joseph M. Cummins                              Chairman of the Board,               March 31, 2006
----------------------------------------           President, Chief Financial
Joseph M. Cummins                                  Officer, Director and
                                                   Chief Executive Officer

                                                   Director
----------------------------------------
Stephen T. Chen

                                                   Director
----------------------------------------
Katsuaki Hayashibara

                                                   Director                             March 31, 2006
----------------------------------------
/s/ Dennis Moore                                   Director
----------------------------------------
Dennis Moore

/s/ James A. Page                                 Director                              March 31, 2006
----------------------------------------
James A. Page
</TABLE>


                                       27

<PAGE>

                   Amarillo Biosciences, Inc. and Subsidiaries

                        Consolidated Financial Statements

                          Year ended December 31, 2005



                                    Contents


Report of Independent Registered Public Accounting Firm .................F-1

Audited Consolidated Financial Statements


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

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

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

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

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



<PAGE>




             Report of Independent Registered Public Accounting Firm

The Board of Directors
Amarillo Biosciences, Inc.

We have audited the accompanying consolidated balance sheet of Amarillo
Biosciences, Inc. and subsidiaries as of December 31, 2005, and the related
consolidated statements of operations, stockholders' deficit and cash flows for
each of the two years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, based on our audits, the financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Amarillo Biosciences, Inc. and subsidiaries as of December 31, 2005, and the
consolidated results of their operations and their cash flows for each of the
two years then ended, in conformity with accounting principles generally
accepted in the United States of America.

As discussed in Note 1 to the financial statements, the Company's recurring
losses from operations and the need to raise additional financing in order to
execute its 2006 Plan raise doubt about its ability to continue as a going
concern. (Management's plans as to these matters are also described in Note 1.)
The 2005 financial statements do not include any adjustments that might result
from the outcome of this uncertainty.

LOPEZ, BLEVINS, BORK & ASSOCIATES, LLP
Houston, Texas
March 27, 2006


                                      F-1
<PAGE>


                   Amarillo Biosciences, Inc. and Subsidiaries
                           Consolidated Balance Sheet
                                December 31, 2005

<TABLE>
<CAPTION>
<S>                                                                        <C>
Assets
Current assets:
   Cash                                                                    $    193,315
   Other current assets                                                           2,788
                                                                           ------------
Total current assets                                                            196,103
Equipment, net                                                                      725
Patents, net of accumulated amortization of $191,789                            118,907
                                                                           ------------
Total assets                                                               $    315,735
                                                                           ============

Liabilities and Stockholders' Deficit
Current liabilities:
   Accounts payable                                                        $     41,513
   Accrued interest expense                                                     510,701
   Notes payable, including notes payable to stockholder                      2,093,500
                                                                           ------------
Total current liabilities                                                     2,645,714
                                                                           ------------
Total Liabilities                                                             2,645,714
                                                                           ------------

Commitments and contingencies
Stockholders' deficit
   Preferred stock, $.01 par value:
      Authorized shares - 10,000,000
      Issued shares - none                                                         --
   Common stock, $.01par value:
      Authorized shares - 50,000,000
      Issued shares - 19,801,870                                                198,019
   Additional paid-in capital                                                20,648,219
   Accumulated deficit                                                      (23,176,217)
                                                                           ------------
Total stockholders' deficit                                                  (2,329,979)
                                                                           ------------
Total liabilities and stockholder's deficit                                $    315,735
                                                                           ============
</TABLE>

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



                                      F-2
<PAGE>


                   Amarillo Biosciences, Inc. and Subsidiaries
                      Consolidated Statements of Operations

<TABLE>
<CAPTION>
                                                        Years ended December 31,
                                                      ----------------------------
                                                          2005             2004
                                                      ------------    ------------
<S>                                                   <C>             <C>
Revenues:
  Dietary supplement sales                            $     42,730    $     35,899
  Interferon sales                                            --             9,490
  Federal research grant                                    44,349            --
  Royalty revenue                                           67,486            --
  Other                                                       --             6,117
                                                      ------------    ------------
     Total Revenues                                        154,565          51,506
                                                      ------------    ------------
Expenses:
  Cost of sales                                             22,456          14,949
  Research and development expenses                        187,810         171,043
  Selling, general and administrative expenses             492,659         362,388
  Interest expense                                         120,651          98,331
                                                      ------------    ------------
     Total Expenses                                        823,576         646,711
                                                      ------------    ------------

Net income (loss)                                     $   (669,011)   $   (595,205)
                                                      ============    ============

Basic and diluted net income (loss) per share         $      (0.04)   $      (0.05)
                                                      ============    ============

Weighted average shares outstanding                     16,495,678      12,446,690
                                                      ============    ============
</TABLE>


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


                                      F-3
<PAGE>

                   Amarillo Biosciences, Inc. and Subsidiaries
                Consolidated Statements of Stockholders' Deficit
                     Years Ended December 31, 2005 and 2004

<TABLE>
<CAPTION>
                                                                                                                           Total
                                                                   Common Stock       Additional Paid  Accumulated     Stockholders'
                                              Issuance Price     Shares      Amount      in Capital        Deficit         Deficit
<S>                                            <C>            <C>         <C>        <C>              <C>            <C>
Balance at December 31, 2003                                  11,060,017   $ 110,600  $ 19,279,417    $ (21,912,001)  $ (2,521,984)
Net loss for year ended December 31, 2004                              -           -             -         (595,205)      (595,205)
Issuance of common stock for services          .2033-0.350        47,380         474        13,486                -         13,960
Issuance of common stock for cash in private
     placements                                  0.10-0.13     2,576,385      25,764       245,166                -        270,930
Issuance of common stock for debt                     0.37       100,000       1,000        36,000                -         37,000
Exercise of options for service                  0.20-0.21       450,000       4,500        87,500                -         92,000
Exercise of options for cash                          0.06       151,514       1,515         7,576                -          9,091
Balance at December 31, 2004                                  14,385,296     143,853    19,669,145      (22,507,206)    (2,694,208)
Net loss for year ended December 31, 2005                              -           -             -         (669,011)      (669,011)
Issuance of common stock for services          0.29-0.4467        37,994         380        12,832                -         13,212
Issuance of common stock for cash in private
     placements                                  0.20-0.22     4,928,700      49,287       800,702                -        849,989
Exercise of options for service                  0.32-0.35       450,000       4,500       145,500                -        150,000
Issuance of warrants in connection with debt                           -           -        20,105                -         20,105
Purchase and retirement of common stock               0.55          (120)         (1)          (65)                            (66)
Balance at December 31, 2005                                  19,801,870   $ 198,019  $ 20,648,219  $    (23,176,217) $ (2,329,979)
</TABLE>

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



                                      F-4
<PAGE>
                   Amarillo Biosciences, Inc. and Subsidiaries
                      Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
                                                           Years ended December 31
 Operating Activities                                          2005         2004
                                                            ---------    ---------
<S>                                                         <C>          <C>
Net income (loss)                                           $(669,011)   $(595,205)
Adjustments to reconcile net income (loss) to
    Net cash provided by (used for) operating activities:
    Depreciation and amortization                              12,439       29,041
    Common stock issued for services                          150,712      105,960
     Issuance of warrants in connection with debt              20,105
    Changes in operating assets and liabilities:
       Other current assets                                    (1,953)       4,737
       Accounts payable                                      (120,381)      18,490
       Accrued expenses                                       (47,302)     108,925
                                                            ---------    ---------
Net cash used in operating activities                        (655,391)    (328,052)
                                                            ---------    ---------

Investing Activities
Patents                                                          --         (3,486)
                                                            ---------    ---------
Net cash provided by (used in) investing activities              --         (3,486)
                                                            ---------    ---------

Financing Activities
Proceeds from notes payable                                      --         20,000
Proceeds from excersise of options                             12,500         --
Repayments of notes payable                                   (20,000)     (10,500)
Purchase and retirement of common stock                           (66)        --
Issuance of common stock                                      849,989      317,021
                                                            ---------    ---------
Net cash provided by financing activities                     842,423      326,521
                                                            ---------    ---------
Net increase (decrease) in cash                               187,032       (5,017)
Cash at beginning of period                                     6,283       11,300
                                                            ---------    ---------
Cash at end of period                                       $ 193,315    $   6,283
                                                            =========    =========

Supplemental Cash Flow Information
Cash paid for interest                                      $  36,967    $   5,542
                                                            =========    =========
</TABLE>

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


                                      F-5
<PAGE>


                   Amarillo Biosciences, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                                December 31, 2005

1. Organization and Summary of Significant Accounting Policies

Organization and Business

Amarillo Biosciences, Inc. (the "Company" or "ABI"), a Texas corporation formed
in 1984, is engaged in developing biologics for the treatment of human and
animal diseases. The Company is continuing its clinical studies as part of the
process of obtaining regulatory approval from the United States Food and Drug
Administration ("FDA"), so that commercial marketing can begin in the United
States. The Company has developed a dietary supplement and an interferon alpha
lozenge, but have not commenced any significant product commercialization
activities.

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

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

The Company's 2006 Plan of Operations calls for the Company to expend
approximately $5 million in 2006. At December 31, 2005, the Company had
available cash of $193,315 and negative working capital of approximately
($2,402,174). The Company's continued losses and lack of liquidity indicate that
the Company may not be able to continue as a going concern for a reasonable
period of time. The Company's ability to continue as a going concern is
dependent upon several factors including, but not limited to, the Company's
ability to generate sufficient cash flows to meet its obligations on a timely
basis, obtain additional financing and continue to obtain supplies and services
from its vendors. The Company will need to raise additional funds in order to
execute its 2006 Plan. The Company is presently negotiating with human health
commercial development partners in various regions of the world including the
United States, China, South America and Southeast Asia. The Company believes
that one or more of these agreements will be executed during 2006. These
agreements could generally include provisions for the commercial partner to pay
ABI a technology access fee, could include payments for a portion of the
clinical trial expenses, could include payment obligations to ABI upon the
accomplishment of certain defined tasks and/or could provide for payments
relating to the future sales of commercial product. These agreements could be an
important source of funds for ABI. However, there can be no assurance that the
Company will be successful in obtaining additional funding from either human
health and animal health commercial development partners or private investors.
If the Company is not successful in raising additional funds, it will need to
significantly curtail clinical trial expenditures and to further reduce staff
and administrative expenses and may be forced to cease operations.



                                      F-6
<PAGE>


                   Amarillo Biosciences, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                                December 31, 2005


Principles of Consolidation

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

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
consolidated financial statements.

Recent Accounting Pronouncements

In December 2004, the FASB, issued a revision to SFAS 123, also known as SFAS
123R, that amends existing accounting pronouncements for share-based payment
transactions in which an enterprise receives employee and certain non-employee
services in exchange for (a) equity instruments of the enterprise or (b)
liabilities that are based on the fair value of the enterprise's equity
instruments or that may be settled by the issuance of such equity instruments.
SFAS 123R eliminates the ability to account for share-based compensation
transactions using APB 25 and generally requires such transactions be accounted
for using a fair-value-based method. SFAS 123R's effective date would be
applicable for awards that are granted, modified, become vested, or settled in
cash in interim or annual periods beginning after June 15, 2005. SFAS 123R
includes three transition methods: one that provides for prospective application
and two that provide for retrospective application. The Company adopted SFAS
123R commencing in the third quarter of the fiscal year ending December 31,
2005. It is expected that the adoption of SFAS 123R will cause the Company to
record, as expense each quarter, a non-cash accounting charge approximating the
fair value of such share based compensation meeting the criteria outlined in the
provisions of SFAS 123R.


                                      F-7
<PAGE>


                   Amarillo Biosciences, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                                December 31, 2005


Long-lived Assets

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

Patents; Patent Expenditures

ABI holds patent license agreements and also holds patents which are owned by
the Company. All patent license agreements remain in effect over the life of the
underlying patents. Accordingly, the patent license fee is being amortized over
15-17 years using the straight-line method. Patent fees and legal fees
associated with the issuance of new owned patents are capitalized and amortized
over 15-17 years. Amortization expense amounted to $12,379 and $19,321 for the
years ended December 31, 2005 and 2004, respectively.

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 collectibilty is
reasonably assured. This generally occurs at the point when the goods are
shipped to the customer,

Federal research grant

On May 2, 2005, the Company was awarded a research grant through the National
Institute of Health, Small Business Innovation Research Program. The Ohio State
University was sub-contracted to perform the research associated with this
grant. Funds are drawn down electronically through the U.S. Department of Health
& Human Services Program Support Center, Financial Management Service, Division
of Payment Management (DPM). The sub-contractor requests funds to perform the
research, the Company then requests a draw from the DPM, the funds are wired to
the Company's bank account and a check is sent to the sub-contractor. These
funds are recognized by the Company when received and expensed when payment is
made to the sub-contractor.



                                      F-8
<PAGE>


                   Amarillo Biosciences, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                                December 31, 2005


Royalty revenue

Royalty revenue is calculated based on a percent of sales relating to a license.
Amarillo recognized revenue on these royalties in the month the revenue is
generated by the licensee.

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.

Stock Options

Stock based compensation. The Company accounts for its employee stock-based
compensation plans under Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees. There were 520,000 options granted to
purchase common stock in the three months ended March 31, 2005, with an exercise
price of $0.40 per share with a 5 year term. No options were granted in the
three month period ending June 30, 2005. During the three month period ending
September 30, 2005 there were 3,400,000 options granted to purchase common
stock, with an exercise price of $0.30 per share with a 5 year term. These
options vest immediately. No options were granted in the three month period
ending December 31, 2005.



                                      F-9
<PAGE>


                   Amarillo Biosciences, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                                December 31, 2005


The following table illustrates the effect on net loss and net loss per share if
Amarillo had applied the fair value provisions of FASB Statement No. 123,
Accounting for Stock-Based Compensation, to stock-based employee compensation.

                                                2005            2004
                                             -----------    -----------
Net loss, as reported                        $  (625,186)   $  (595,205)
Less:  stock based compensation determined   $  (984,339)   $  (360,199)
                                             -----------    -----------
Pro forma  net loss                          $(1,609,525)   $  (955,404)
Basic and diluted net loss per share
   As reported                               $     (0.04)   $     (0.05)
    Pro forma                                $     (0.10)   $     (0.08)


The fair value of each option granted is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions: dividend yield 0.0%, expected volatility of 141.0%, risk-free
interest rate of 1.5% and expected life of 60 months.

Basic and Diluted Net Loss Per Share

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

2. Equipment

Equipment is stated at cost and consists of the following:

                                               December 31, 2005
                                               -----------------
Furniture and equipment                            $54,011
                                                   -------
                                                    54,011
Less accumulated depreciation                       53,286
                                                   -------
                                                   $   725
                                                   =======

Depreciation expense amounted to $60 and $1,667 for the years ended December 31,
2005 and 2004, respectively.



                                      F-10
<PAGE>


                   Amarillo Biosciences, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                                December 31, 2005


3. Notes Payable

The Company had a loan agreement with HBL (July 22, 1999), which called for HBL
to loan the Company $3,000,000 to be advanced in three installments. One of
these 3 notes was converted into stock as shown below. The annual interest rate
on unpaid principal from the date of each respective advance was 4 1/2%, with
accrued interest being payable at the maturity of the note. $1,000,000 was
payable on or before December 3, 2005, or on or before the expiration of one (1)
year after approval of the Company's product by the FDA, whichever occurs first.
This note has been extended and is payable on or before December 3, 2006, or on
or before the expiration of one (1) year after approval of the Company's product
by the FDA, whichever occurs first. The other $1,000,000 is due on or before
February 29, 2007, or on or before the expiration of one year after approval of
the Company's product by the FDA, whichever occurs first.

On September 30, 1999, the Company entered into an Agreement to Convert Debt
with HBL regarding the above described note payable to HBL in the then principal
amount of $1,000,000, the first loan installment having by then been advanced.
On October 15, 1999, pursuant to the Agreement to Convert Debt, HBL canceled the
then note balance in exchange for 1,111,831 shares of common stock of the
Company valued at the then market value of $0.9044 per share.
This stock conversion leaves the Company owing HBL a principal amount of
$2,000,000 plus accrued interest.

Effective November 1, 2002 the Company executed a Promissory Note for $45,000
payable to an individual stockholder. The Promissory Note accrues interest at
the rate per year that will be the lesser of 3% in excess of the prime interest
rate published from time to time in the Wall Street Journal, adjusted on the
first day of each calendar month based on such rate then in effect, or the
maximum nonusurious rate of interest permitted by applicable law. Accrued
interest is payable monthly, in arrears and the entire principal amount was
payable October 31, 2004, in November 2005 the Company paid $20,000 toward the
principle of this note and a the Note was amended restating the Note amount as
$25,000, this Note is due October 31, 2006. The Note Holder is granted the right
to purchase the following; up to 30,000 shares of stock at an exercise price of
$0.15 per share on or before October 31, 2006; up to 30,000 shares of stock at
an exercise price of $0.22 per share on or before October 31, 2007; and 30,000
shares of stock at an exercise price of $0.47 per share on or before November
15, 2008.



                                      F-11
<PAGE>


                   Amarillo Biosciences, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                                December 31, 2005


Effective March 21, 2003 the Company executed a second Promissory Note for
$45,000 payable to the same individual stockholder. The Promissory Note accrues
interest at the rate per year that will be the lesser of 3% in excess of the
prime interest rate published from time to time in the Wall Street Journal,
adjusted on the first day of each calendar month based on such rate then in
effect, or the maximum nonusurious rate of interest permitted by applicable law.
Additions were made to this Promissory Note as follows: January 27, 2004,
$5,000; February 6, 2004 $5,000 and November 30, 2004 $10,000, bringing the
total of this Note to $65,000. Accrued interest is payable monthly, in arrears
and the entire principal amount is payable March 20, 2005. This note payable
date was extended to March 20, 2006. The Note Holder is granted the right to
purchase the following; up to 50,000 shares of stock at an exercise price of
$0.06 per share on or before March 31, 2007; and 30,000 shares of stock at an
exercise price of $0.50 per share on or before March 20, 2008.

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

The Company has secured a line of credit for up to $10,000 from it's bank Wells
Fargo. This line is used from time to time for purchases.

4. Manufacturing and Supply Agreements

The Company was a party to the following manufacturing and supply agreements at
December 31, 2005:

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, 2008.

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.



                                      F-12
<PAGE>


                   Amarillo Biosciences, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                                December 31, 2005


5. License and Sublicense Agreements

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

6. Research Agreements

The Company contracts with third parties throughout the world to conduct
research including studies and clinical trials. These agreements are generally
less than one year in duration.

7. Common and Preferred Stock

The Company has 50,000,000 shares of voting common shares authorized for
issuance and 10,000,000 shares of preferred stock authorized for issuance which
is issuable in series. To date, no preferred stock has been issued.

The Company has 7,512,862 shares of common stock reserved for issuance upon
exercise of options and warrants granted.

In 2005, the Company sold 4,928,700 unregistered shares of its voting common
stock in private placement offerings. Of these sales, 1,380,000 shares were sold
for $0.10 per share; 3,435,000 shares for $0.20 per share; 113,700 shares for
$0.22 per share; generating $850,014 in cash.

During the year ended December 31, 2005, the Board of Directors authorized the
issuance of 37,994 shares of restricted common stock to consultants in lieu of
cash payments. Based upon the common stock trading price at the times of
issuance, and FASB rules, a non-cash consulting expense of $13,211 was recorded
for the issuance of these shares during the year ended December 31, 2005.

8. Stock Options and Warrants

During 2005, the Company issued 450,000 options to consultants, to purchase
restricted common stock in exchange for consulting services. The options are as
follows, 250,000 at $0.01 per share, and 200,000 options at $0.05 per share.
These options were exercised and the fair market value of the stock sales were
stated; 250,000 shares for $0.01 per share, generating $2,500 in cash and
$77,500 in non-cash consulting services; and 200,000 shares for $0.05 per share,
generating $10,000 in cash and $60,000 in non-cash consulting services.



                                      F-13
<PAGE>


                   Amarillo Biosciences, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                                December 31, 2005


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

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

                                         2005                       2004
                                Options     Price           Options      Price
                                ------------------------------------------------
Outstanding Beg of Year         2,925,862    0.41          2,071,688     0.54
Granted                         3,920,000    0.31          1,500,000     0.25
Cancelled                               -                   (494,312)    1.12
Exercised                               -                   (151,514)    0.06
Outstanding End of Year         6,845,862    0.31          2,925,862     0.41
Exercisable End of Year         6,845,862    0.31          2,925,862     0.41

Exercise prices for options outstanding as of December 31, 2005 ranged from
$0.06 to $5.00. Of these options, 10,000 have exercise prices ranging from $4.00
to $5.00 and the remainder range from $0.06 to $1.63. The weighted-average
remaining contractual life of those options is 5.01 years.

9. Employee Benefit Plan

The Company has a Simplified Employee Pension Plan (the Plan), which is a
contributory plan that covers all employees of the Company. Contributions to the
Plan are at the discretion of the Company. The plan expense for the years ended
December 31, 2005 and 2004, were $0, and $0, respectively.



                                      F-14
<PAGE>


                   Amarillo Biosciences, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                                December 31, 2005


10. Income Taxes

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax reporting purposes. The Company's
deferred tax asset of approximately $6,989,000 and $6,660,000 at December 31,
2005 and 2004 respectively, was subject to a valuation allowance of $6,989,000
and $6,660,000 at December 31, 2005 and 2004 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, 2005, the Company has net operating loss carryforwards of
approximately $20,556,000 for federal income tax purposes expiring in 2006
through 2024. The ability of the Company to utilize these carryforwards may be
limited should changes in stockholder ownership occur.

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

11. Contingencies

The Company is not a party to any litigation and is not aware of any pending
litigation or unasserted claims or assessments as of December 31, 2005.

12. 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 described at Item 1 of Part 1 above, HBL advanced
$9,000,000 for funding of research. In addition, HBL has purchased substantial
amounts of the Company's common stock from time to time, to the point where it
now owns 17% of the issued and outstanding shares of common stock of the
Company. HBL loaned $1 million to the Company on November 30, 1999 and an
additional $1 million on February 29, 2000, both loans bearing interest at 4.5%
per annum. The November 30, 1999 loan has been extended until December 2006 and
extension of the February 29, 2000 loan is under discussion. The aggregate
balance on both notes at December 31, 2005, including principal and accrued
interest, was $2,510,701. In addition to the above, HBL and the Company are
parties to various license and manufacturing and supply agreements pursuant to
which the Company licenses certain technology to or from HBL. HBL supplies
formulations of its interferon alpha and other products to the Company.



                                      F-15
<PAGE>


                   Amarillo Biosciences, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                                December 31, 2005


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.

In the ordinary course of business, the Company has and expects to have
transactions with related parties, including stockholders. In addition to the
transactions disclosed elsewhere in these financial statements, during 2005 the
Company has used the law firm of SandersBaker, P.C. Mr. Edward Morris, Secretary
of the Company, is a partner in that firm. The Company was invoiced $20,354
during 2005 for legal services rendered by SandersBaker.

13.  Subsequent Events (Unaudited)

On March 14, 2006 the Company paid a Promissory Note for $65,000 payable to an
individual stockholder.

Since December 31, 2005, the Company has sold 1,471,060 shares of unregistered
stock in private placement offerings. Of these sales, 671,000 shares were sold
for $0.20 per share; 200,000 were sold for $0.38 per share; 600,000 were sold
for $0.52 per share; generating cash of $522,260.



                                      F-16