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, 2004

[_]       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          (I.R.S. Employer
      incorporation or organization)         Identification No.)

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

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

Securities registered under Section 12(b) of the Exchange Act:
                                     None.
Securities registered under Section 12(g) of the Exchange Act:

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

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

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

      Revenues for its most recent fiscal year were $51,506

      As of December 31, 2004, there were outstanding  14,385,296  shares of the
registrant's  common stock, par value $.01, which is the only class of common or
voting stock of the registrant.  As of that date, the aggregate  market value of
the shares of common stock held by  non-affiliates  of the registrant  (based on
the closing  price for the common stock on the OTC  BB.AMAR)  was  approximately
$3,612,138.

<PAGE>


                                     PART I

      The following contains  forward-looking  statements that involve risks and
uncertainties.  The Company's actual results could differ  materially from those
discussed  in the  forward-looking  statements  as a result of certain  factors,
including those set forth in  "Management's  2004 Plan of Operations" as well as
those discussed  elsewhere in this Form 10-KSB. The following  discussion should
be read in  conjunction  with the  Financial  Statements  and the Notes  thereto
included elsewhere in this Form 10-KSB.

ITEM 1.     DESCRIPTION OF BUSINESS.

General

      Amarillo  Biosciences,  Inc. (the "Company" or "ABI"), a Texas corporation
formed in 1984,  is engaged in  developing  biologics for the treatment of human
and animal  diseases.  The Company is  currently  focusing its research on human
health  indications  for the use of low-dose orally  administered  natural human
interferon alpha, particularly for the treatment of Sjogren's syndrome, Behcet's
disease,  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 16 United States patents  relating to the use
or  composition  of low-dose  oral natural  interferon  alpha.  Since 1992,  the
Company has filed with the U.S. Food and Drug Administration  ("FDA"), and there
now are in effect,  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.

      The Company has 3 full-time and 1 half-time  employees.  The Company makes
extensive use of consultants in business and research and development.


                                       2
<PAGE>

Human Health Applications

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

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

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

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

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

      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.

                                       3
<PAGE>

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 2005. 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
2005.

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

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

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


                                       4
<PAGE>

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.  Seventeen
IPF patients have been enrolled into treatment with  interferon  alpha lozenges.
Seven of the IPF patients  have  completed at least 12 months of treatment and 6
of these patients are stable, showing no sign of disease progression,  according
to Dr. Lutherer.

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 primary  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.

      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.

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


                                       5
<PAGE>

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 opened a blog site (http://interferonandinfluenza.blogspot.com) to
discuss oral interferon and the flu. ABI has contact with flu experts and health
officials  in  several  countries  in an effort to  conduct  testing of low dose
interferon alpha for influenza.


Strategic Alliance with HBL

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

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


Strategic Alliance with Nobel

      The Company signed a licensing and supply agreement 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.

                                       6
<PAGE>

      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.

      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.


Other Agreements

      In 2004 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..  A  chapter  entitled  "The  Clinical  Use of Low  Dose  Orally
Administered  Interferon  Alpha, with Emphasis on Treatment of Patients Positive
for Human  Immunodeficiency  Virus" appeared in the 2004 book, AIDS Vaccines and
Related Topics. Publishing this information, ABI believes, will help the Company
gain recognition for our technology.

Animal Health Application

Agroterrorism.  Dr. Joseph Cummins met with scientists,  livestock producers and
elected  officials  to  argue  for  alternatives  to the  government's  plans to
slaughter  livestock if diseases are introduced by  terrorists.  On February 12,
2004, Dr. Joseph Cummins  participated in an  agroterrorism  seminar held at the
Texas A&M Research and  Extension  Center in Amarillo,  Texas.  Working with Dr.
Albert Paszek of Cargill, a manuscript entitled "Interferon Alpha in the Feed to
Control  Foot-and-Mouth  Disease"  was  presented  June  23,  2004  at the  57th
Reciprocal Meat Conference in Lexington,  KY. At various times,  Dr. Cummins met
with members of the staff of US Senator  Cornyn and US Senator John  Rockefeller
to discuss  agroterrorism.  Members of the Emergency Management team in Amarillo
and the Randall County Judge met with Dr. Cummins on April 27, 2004, to hear his
concerns that the livestock in the Texas Panhandle are completely  vulnerable to
an attack with foot-and-mouth disease virus. On July 20, 21, 23, 24, 26, 27, and
31, 2004 Dr. Cummins presented seminars in Japan at which agroterrorism and oral
interferon  were  discussed;   approximately  700  veterinarians   attended  the
seminars.  Our paper on FMD was  published  in the  January  2005  International
Society for Interferon & Cytokine Research newsletter.  ABI continues to contact
scientists and government officials to urge development of an alternative to the
USDA's current policy.

                                       7
<PAGE>

      Dr. Roger Breeze,  former  director of the USDA's  Foreign  Animal Disease
Laboratory  on Plum Island,  New York,  has written an article on  agroterrorism
published  in  December  2004 at  www.biosecurityjournal.com.  We agree with Dr.
Breeze  that the USDA's  current  policy to  contain  FMD is  "fatally  flawed."
Working with Cargill,  ABI has published a plan  entitled  "Orally  administered
interferon to  prevent/treat  foot-and-mouth  disease" to help contain FMD. This
plan can be seen on our website www.amarbio.com.

      On July 22, 2004 ABI  announced  that  BioVet,  Inc., a Tokyo based animal
health company with whom Amarillo  Biosciences has been collaborating,  has been
granted regulatory  approval for production and marketing of oral interferon for
treatment of rotavirus in cattle in Japan.  Rotavirus  diarrhea is a major cause
of disease and death in animals and humans.

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


Patents and Proprietary Rights

      No new patents were issued in 2004.

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.


                                       8
<PAGE>

The Company's  potential  competitors  include entities that develop and produce
therapeutic  agents for  treatment of human and animal  disease.  These  include
numerous   public  and  private   academic   and  research   organizations   and
pharmaceutical and biotechnology  companies pursuing  production of, among other
things,  biologics from cell cultures,  genetically engineered drugs and natural
and chemically synthesized drugs. Almost all of these potential competitors have
substantially greater capital resources,  research and development capabilities,
manufacturing  and marketing  resources  and  experience  than the Company.  The
Company's  competitors may succeed in developing  products or processes that are
more effective or less costly than any that may be developed by the Company,  or
that gain regulatory approval prior to the Company's products.  The Company also
expects  that the  number of its  competitors  and  potential  competitors  will
increase  as  more  interferon  alpha  products  receive  commercial   marketing
approvals from the FDA or analogous foreign  regulatory  agencies.  Any of these
competitors may be more successful than the Company in manufacturing,  marketing
and distributing  its products.  There can be no assurance that the Company will
be able to compete successfully.

Government Regulation

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

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

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.

                                       9
<PAGE>

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

      ABI  obtained  an IND  for  oral  interferon  alpha  in the  treatment  of
Sjogren's  syndrome in 1994. ABI  successfully  completed Phase I development in
1996,  Phase II  development  in 1997 and  launched  the  first of its Phase III
trials in November  1998.  All Phase III trials in the  treatment  of  Sjogren's
syndrome  were  completed  in 2000.  Our goal is to  initiate a biopsy  study of
patients in 2004. Additionally,  ABI expects to launch a Phase III trial in HIV+
patients  with oral warts and a Phase  II/III  trial in patients  with  Behcet's
disease. All progress on approval is dependent on funding.


Research and Development

      During the years ended  December 31, 2004 and 2003,  the Company  incurred
expenses   of   $171,043   and   $173,345,    respectively,    resulting    from
Company-sponsored research and development activities.  Research and development
is expected to remain a  significant  component of the Company's  business.  The
Company has  arranged  for others to perform  substantially  all of its clinical
research  and  intends  to  continue  to do so while  utilizing  its  staff  for
monitoring such research. See also ITEM 6, "MANAGEMENT'S 2005 PLAN OF OPERATIONS
- Research and Development".

ITEM 2.     DESCRIPTION OF PROPERTY.

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

ITEM 3.     LEGAL PROCEEDINGS.

      None.

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

      None.

                                       10
<PAGE>

                                    PART II

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

      The Company is presently traded on the OTC Bulletin Board under the symbol
AMAR. The range of high and low sales prices as quoted on the OTC Bulletin Board
for each quarter of 2004 and 2003 was as follows:

                      2004                         2003
               --------------------- ------------------------------
  Quarter      High          Low          High        Low
-----------  --------- ------------ ------------ ------------------
First     $     0.44   $    0.27    $    0.19    $    0.05

Second          0.35        0.18         0.39         0.09

Third           0.32        0.20         0.51         0.22

Fourth          0.38        0.21         0.51         0.29

      As of December 31, 2004, the Company had approximately 850 shareholders of
record.


                                       11
<PAGE>

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


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

Overview

      The Company  continues  to engage in research and  development  activities
focused on developing  biologics for the treatment of human and animal diseases.
The Company has not commenced any  significant  product  commercialization  and,
until such time as it does, will not generate significant product revenues.  The
Company's accumulated deficit has increased,  from approximately  $21,912,001 at
December 31, 2003 to  $22,507,207  at December 31,  2004.  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 2005 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 2005 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.

      In 2004,  the Company  sold  2,576,385  unregistered  shares of its voting
common stock in private placement offerings. Of these sales, 376,385 shares were
sold for $0.13 per share; 150,000 shares for $0.11 per share; 100,000 shares for
$0.105 per share;  1,950,000 shares for $0.10 per share;  generating $270,930 in
cash.

      ABI  issued  47,380  unregistered  shares of its  voting  common  stock as
payment  for  consulting  services  performed  in 2004.  Valuation  of the stock
granted was $0.203 - 0.350 per share which generated a value of $13,960.

      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.

                                       12
<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 in October  2004.  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 June  2004,  ABI  reached  agreement  with  Global  Kinetics  of  Kent,
Washington to become the US  distributor  of Dry Mouth Relief  (DMR),  replacing
Natrol. Global Kinetics' sales of DMR are expected to begin in the first half of
2005.

      On July 22, 2004 ABI  announced  that  BioVet,  Inc., a Tokyo based animal
health company with whom Amarillo  Biosciences has been collaborating,  has been
granted regulatory  approval for production and marketing of oral interferon for
treatment of rotavirus in cattle in Japan.  Rotavirus  diarrhea is a major cause
of disease and death in animals and humans.  The animal  health  approval is for
low dose oral  administration  of human  interferon  alpha  supplied by HBL. The
product was  launched in Japan in August  2004.  Amarillo  Biosciences  owns the
distribution  rights to HBL interferon  for animal health  outside  Japan;  will
receive a royalty on all Japanese HBL interferon sales.

      ABI has opened a blog site (http://interferonandinfluenza.blogspot.com) to
discuss oral interferon and the flu. ABI has contact with flu experts and health
officials  in  several  countries  in an effort to  conduct  testing of low dose
interferon alpha for influenza.


Liquidity and Capital Resources

      At December  31, 2004,  the Company had  available  cash of  approximately
$6,283, and had a working capital deficit of approximately ($712,782).  Assuming
there is no decrease in current  accounts  payable,  and  accounting for various
one-time expenses, the Company's negative cash flow is approximately $39,000 per
month. The Company's  continued  losses and lack of liquidity  indicate that the
Company may not be able to continue as a going  concern for a reasonable  period
of time. The Company's  ability to continue as a going concern is dependent upon
several factors including, but not limited to, the Company's ability to generate
sufficient  cash  flows  to meet  its  obligations  on a  timely  basis,  obtain
additional  financing  and continue to obtain  supplies  and  services  from its
vendors.  The  Company  will  need to raise  additional  funds in order to fully
execute its 2005 Plan.  The Company is presently  negotiating  with human health
and animal  health  commercial  development  partners in various  regions of the
world including the United States, South America and Southeast Asia. The Company
believes  that one or more of these  agreements  will be executed  during  2005.
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.

                                       13
<PAGE>

      Total  outstanding  current  liabilities  increased to approximately  $2.8
million at December  31,  2004,  as compared to  approximately  $2.7  million at
December 31, 2003.


Critical Accounting Policies

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

Accounting for Stock-Based Compensation

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

Basic and Diluted Net Income (Loss) Per Share

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

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

                                       14
<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 $6,500,000  has been recorded to reduce the Company's  deferred tax
assets to the amount that is more likely than not to be realized.  Consideration
of  estimated  future  taxable  income and ongoing tax  planning  strategies  is
utilized in assessing the amount needed for the  valuation  allowance.  Based on
these estimates,  all deferred tax assets have been reserved.  If actual results
differ favorably from those estimates used, the Company might be able to realize
all or part of our net deferred tax assets.  Such  realization  could positively
impact operating results and cash flows from operating activities.

Comparison of results for the fiscal year ended December 31, 2004, to the fiscal
year ended December 31, 2003.

Revenues.  During the fiscal year ended  December  31, 2004 $45,389 from product
sales was generated  compared to revenues from product sales for the fiscal year
ended December 31, 2003, of $36,927, an increase of $8,462 or approximately 23%.
The  increase is  primarily  due to  international  orders for  Maxisal(R),  our
dietary supplement.

Selling,   General   and   Administrative   Expenses.   Selling,   General   and
Administrative expenses of $362,388 were incurred for fiscal year ended December
31, 2004,  compared to $394,772  for the fiscal year ended  December 31, 2003, a
decrease of $32,384.  There was $13,960 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, 2004, 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 $13,960 was recorded for the issuance of these shares during the year
ended December 31, 2004.

Net Income (Loss).  Net Loss  applicable to common  shareholders  for the fiscal
year ended December 31, 2004 was ($595,205) compared to a Net Income of $166,631
for the fiscal year ended  December 31, 2003. The increase in income in 2003 was
a result of the  dissolution  of Veldona  and with  legal  advice,  a  long-term
accrued  contingent  liability of $750,965 recorded in accounts payable that was
reversed into income in September 2003. Without this reversal, the Company would
have  reported a  consolidated  Net Loss of  $584,334  for the fiscal year ended
December 31, 2003.

RISK FACTORS

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

                                       15
<PAGE>

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.

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.

                                       16
<PAGE>

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 2005;  however,  there can be no assurance
that we will be able to acquire product liability  insurance with terms that are
commercially feasible.

Risks Relating to Ownership of Common Stock.

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

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

 ITEM 7.    FINANCIAL STATEMENTS.

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

                                       17
<PAGE>

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

      None.
                                   PART III

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

      As of December 31,  2004,  the  directors  and  executive  officers of the
Company were as follows:

Name                                   Age    Position
-------------------------------------------------------------------------------
Joseph Cummins, DVM, PhD (1)(3)..      62     Chairman of the Board,
                                              President, Chief Executive
                                              Officer, Chief Financial
                                              Officer and Director

Stephen Chen, PhD (2)(4).........      55     Director

Katsuaki Hayashibara (3)(4)(5)...      60     Director

Dennis Moore, DVM (1)(4)(5)......      58     Director

James Page, MD (1)(2)(5).........      77     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.

      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.

                                       18
<PAGE>

      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.

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.

                                       19
<PAGE>

ITEM 10.    EXECUTIVE COMPENSATION.

      The following table sets forth for the three years ended December 31, 2004
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, 2004.

                           Summary Compensation Table

                                                Annual Compensation
                                  ----------------------------------------------
                             Year     Salary     Bonus     Other      Securities
Name and Principal                                         Compen-    Underlying
Position                                                   sation        Options
--------------------------  -----  -----------  -------  ----------  -----------
Dr. Joseph M. Cummins,      2004      $74,716   $     -  $        -      650,000
  Chairman of the Board,
  President and Chief
  Executive Officer         2003     $103,779   $     -  $        -      290,000
                            2002     $121,338   $     -  $        -      150,000


                              Option Grants in 2004

      The  following  table sets forth certain  information  relating to options
granted in 2004 to the executive  officers  named above,  to purchase  shares of
common stock of the Company.

                            Number of
                            Shares of
                              Common
                              Stock       % of Total
  Name                      Underlying      Options      Exercise
                             Options        Granted      or Base
                            Granted (#)   to Employees    Price     Expiration
                                            in 2004       ($/Sh)       Date
-------------------------------------------------------------------------------
Joseph M. Cummins.........   500,000          57%       $0.23 (1)   05/31/2009
                             150,000          17%       $0.27 (1)   08/27/2009

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

                Aggregated Option Exercises at December 31, 2004
                           And Year-End Option Values

      The following  table sets forth  information  for the  executive  officers
named  above,  regarding  the  exercise of options  during 2004 and  unexercised
options held at the end of 2004.

<TABLE>
<CAPTION>

                    Shares                 Number of Shares of          Value of Unexercised
                   Acquired              Common Stock Underlying           In-The-Money
                      on      Value       Unexercised Options at            Options at
                   Exercise  Realized     December 31, 2004 (#)      December 31, 2004 ($)(1)
Name                 (#)       ($)      Exercisable/Unexercisable    Exercisable/Unexercisable
----------------------------------------------------------------------------------------------
<S>                <C>       <C>        <C>                          <C>
Joseph Cummins       -          -          988,486  /    None            $375,625/   None
</TABLE>

(1)   Calculated  based on the  closing  price of the  common  stock  ($0.38) as
      reported by OTC BB on December 31, 2004.

                                       20
<PAGE>

                   Director Compensation for Last Fiscal Year
                                                                     Security
                                           Cash Compensation          Grants
                                           -----------------          ------
                                                                     Number of
                                                                    Securities
                Name                    Meeting      Consulting     Underlying
                                         Fees (1)     Fees (2)        Options
--------------------------------------------------------------------------------
Stephen Chen, PhD                       $   -         $   -          150,000
Katsuaki Hayashibara                        -             -          150,000
Dennis Moore, DVM                           -             -          150,000
James Page, MD                              -             -          150,000

(1)   Directors  do  not  receive  compensation  for  attendance  at  directors'
      meetings.
(2)   Each director  receives  $1,200 per day,  prorated for partial  days,  for
      employment on special projects or assignments.

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

      As of December 31, 2004,  there were  14,385,296  shares of the  Company's
common  stock  outstanding.  The  following  table sets forth as of December 31,
2004,  the  beneficial  ownership  of each  person who owns more than 5% of such
outstanding common stock:

Name and Address                         Number of Shares       Percent of Total
--------------------------------------------------------------------------------
Hayashibara Biochemical Laboratories,
Inc.
2-3 Shimoishii 1-chome
Okayama 700, Japan                             3,290,781              23%

Hy Ochberg
102 N.E. 2nd Street, Suite 283                   750,000               5%
Boca Raton, Florida 33432

Cheryl A. Ulie
8843 SE 77th Place
Mercer Island, Washington 98040                  917,000               6%

      The following  table sets forth the beneficial  ownership of the Company's
stock as of December 31, 2004 by each executive  officer and director and by all
executive officers and directors as a group:

Directors                          Number of Shares       Percent of
                                                            Total
                                            248,756          2%
Joseph Cummins
                                             50,174          *
Dennis Moore

Katsuaki Hayashibara                         48,240          *

Stephen Chen                                 50,000          *

James Page                                        -          -
                                   ----------------       ----------
                                       397,170              3%
Total Group (all directors and
executive officers - 6 persons)

*  Less than 1%

                                       21
<PAGE>

ITEM 12.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

      The Company has relied  significantly  on HBL, the largest  shareholder of
the Company, for a substantial portion of its capital requirements.  Pursuant to
the  Development  Agreement  described  at Item 1 of Part 1 above,  HBL advanced
$9,000,000 for funding of research.  In addition,  HBL has purchased substantial
amounts of the  Company's  common stock from time to time, to the point where it
now owns  23% of the  issued  and  outstanding  shares  of  common  stock of the
Company.  HBL loaned $1  million to the  Company  on  November  30,  1999 and an
additional $1 million on February 29, 2000, both loans bearing  interest at 4.5%
per annum. The aggregate  balance on both notes at December 31, 2004,  including
principal and accrued  interest,  was $2,446,351.  In addition to the above, HBL
and the  Company are parties to various  license  and  manufacturing  and supply
agreements  pursuant to which the Company licenses certain technology to or from
HBL. HBL supplies formulations of its interferon alpha and other products to the
Company.

      During  2004,  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 $8,402 by said firm in 2004.

      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.


                                       22
<PAGE>

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

EXHIBIT INDEX

   Number     Description
--------------------------------------------------------------------------------

        3.1+  Restated Articles of Incorporation of the Company, dated June 22,
              1999.

        3.3*  Bylaws of the Company.

        4.1*  Specimen Common Stock Certificate.

        4.2*  Form of Underwriter's Warrant.

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

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

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

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

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

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

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

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

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

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

      10.23*  Indemnification Agreement between HBL and the Company.

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

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

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

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


                                       23
<PAGE>

    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.
              Supply Agreement dated June 20, 2004 between Global Kinetics, Inc.
 10.45++++ a  and the Company.


                                       24
<PAGE>

 10.46++++ a   License and Supply  Agreement  dated  September  13, 2004 between
               Nobel ILAC SANAYII VE TICARET A.S. and the Company.

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


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

      99.1  906 Certification

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

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

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

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

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

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

++++ 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.

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


                                       25
<PAGE>

                               REPORTS ON FORM 8-K

      None.
                                   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:      April 15, 2005             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.

Signature                               Title                 Date
---------                               -----                 ----

/s/  Joseph M. Cummins         Chairman of the Board,       April 15,2005
----------------------         President, Chief Financial   -------------
Joseph M. Cummins              Officer, Director and
                               Chief Executive Officer

/s/  Stephen T. Chen           Director                     April 13,2005
--------------------                                        --------------
Stephen T. Chen


/s/  Katsuaki Hayashibara      Director                     April 14,2005
-------------------------                                   -------------
Katsuaki Hayashibara


/s/  Dennis Moore              Director                     April 14,2005
-----------------                                           -------------
Dennis Moore


/s/  James A. Page             Director                     April 13,2005
------------------                                          -------------
James A. Page


                                       26


<PAGE>

                 Amarillo Biosciences, Inc. and Subsidiaries

                        Consolidated Financial Statements

                          Year ended December 31, 2004



                                    CONTENTS


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


Audited Consolidated Financial Statements


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

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

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

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

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


<PAGE>


     Report of Lopez, Blevins, Bork & Associates, LLP Independent Auditors


The Board of Directors
Amarillo Biosciences, Inc.

We  have  audited  the  accompanying  consolidated  balance  sheet  of  Amarillo
Biosciences,  Inc. and  subsidiaries  as of December  31, 2004,  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, 2004, 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 2005 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 2004 financial  statements do not include any adjustments  that might result
from the outcome of this uncertainty.

LOPEZ, BLEVINS, BORK & ASSOCIATES, LLP
Houston, Texas
April 5, 2005



                                       F-1
<PAGE>


                 Amarillo Biosciences, Inc. and Subsidiaries
                           Consolidated Balance Sheet
                                December 31, 2004


ASSETS
Current assets:
  Cash                                                             $      6,283
  Other current assets                                                      835
                                                                   ------------
Total current assets                                                      7,118
Equipment, net                                                              784
Patents, net of accumulated amortization of $179,409                    131,287
                                                                   ------------
Total assets                                                       $    139,189
                                                                   ============

LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
      Accounts payable                                             $    168,884
      Accrued interest expense                                          447,122
  Accrued payroll                                                       103,893
      Current maturities of notes payable                             1,048,500
                                                                   ------------
Total current liabilities                                             1,768,399

Notes payable to stockholders                                         1,065,000
                                                                   ------------
Total liabilities                                                     2,833,399

Commitments and contingencies

Stockholders'  Deficit
  Preferred  stock,  $.01 par value:
  Authorized  shares - 10,000,000
  Issued shares - none                                                       --
    Common stock, $.01 par value:
        Authorized shares - 20,000,000
        Issued shares - 14,385,296 in 2004                              143,853
      Additional paid-in capital                                     19,669,145
      Accumulated deficit                                           (22,507,207)
                                                                   ------------
Total stockholders' deficit                                          (2,694,209)
                                                                   ------------
Total liabilities and stockholders' deficit                        $    139,189
                                                                   ============

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


                                                     YEARS ENDED DECEMBER 31,
                                                   ----------------------------
                                                         2004          2003
                                                   ----------------------------
Revenues:
     Dietary supplement sales                      $     35,899    $     26,927
     Interferon sales                                     9,490          10,000
     Federal research grant                                --             6,586
     Gain on sale of intangible assets                     --            50,298
     Other                                                6,117           5,784
                                                   ------------    ------------
                                                         51,506          99,595
                                                   ------------    ------------
Expenses:
     Cost of sales                                       14,949           4,012
     Research and development expenses                  171,043         173,345
     Selling, general and administrative
       expenses                                         362,388         394,772
     Interest expense                                    98,331          97,956
     Loss on dissolution of subsidiary                     --             1,000
     Impairment of intangible assets                       --            50,298
     Gain on sale of building and equipment                --           (37,454)
      Reversal of accrued contingent liability             --          (750,965)
                                                   ------------    ------------
                                                        646,711         (67,036)
                                                   ------------    ------------

Net income (loss)                                  $   (595,205)   $    166,631
                                                   ============    ============

Basic and diluted net income (loss) per share      $      (0.05)   $       0.02
                                                   ============    ============

Weighted average shares outstanding                  12,446,690       9,800,073
                                                   ============    ============

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, 2004 and 2003

<TABLE>
<CAPTION>
                                                                    Common Stock         Additional       Total
                                                  Issuance      --------------------      Paid in      Accumulate      Stockholders'
                                                   Price         Shares       Amount      Capital        Deficit         Deficit
                                               -------------------------------------------------------------------------------------
<S>                                            <C>              <C>          <C>       <C>             <C>             <C>
Balance at December 31, 2002                                     8,994,072   $89,941   $ 18,923,182    $(22,079,633)   $ (3,066,510)

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

Net income for year ended December 31, 2004                           --        --             --          (595,205)       (595,205)
Issuance of common stock for services          0.2033-0.350         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)   $ (2,694,209)
                                                           =========================================================================
</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

                                                        YEAR ENDED DECEMBER 31,
                                                           2004          2003
                                                        ------------------------
OPERATING ACTIVITIES
Net income (loss)                                       $(595,205)    $ 166,631
Adjustments to reconcile net income (loss) to
   net cash used in operating activities:
   Depreciation and amortization                           29,041        22,145
   Gain on sale of assets                                    --         (37,453)
   Reversal of accrued liability                             --        (750,965)
   Common stock issued for services                       105,960       168,500
   Changes in operating assets and liabilities:
     Other current assets                                   4,737         4,468
     Accounts payable                                      18,490        33,797
     Accrued expenses                                     108,925       117,515
                                                        ------------------------
Net cash used in operating activities                    (328,052)     (275,362)
                                                        ------------------------
INVESTING ACTIVITIES
Proceeds from sale of assets                                 --         117,485
Purchase of equipment                                        --          (3,056)
Patents                                                    (3,486)      (12,303)
                                                        ------------------------
Net cash provided by (used in) investing
activities                                                 (3,486)      102,126
                                                        ------------------------
FINANCING ACTIVITIES
Proceeds from notes payable                                20,000        63,844
Repayments of notes payable                               (10,500)      (87,602)
Issuance of common stock                                  317,021       208,194
                                                        ------------------------
Net cash provided by financing activities                 326,521       184,436
                                                        ------------------------
Net increase (decrease) in cash                            (5,017)       11,200
Cash at beginning of period                                11,300           100
                                                        ------------------------
Cash at end of period                                   $   6,283     $  11,300
                                                        ========================
SUPPLEMENTAL INFORMATION
Cash paid for income taxes                                   --            --
Cash paid for interest                                  $   5,542     $  11,142
                                                        ========================

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, 2004


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  2005  Plan  of  Operations  calls  for  the  Company  to  expend
approximately  $918,000 in 2005. At December 31, 2004, the Company had available
cash of $6,283 and negative  working capital of  approximately  ($712,782).  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
2005 Plan.  The Company is  presently  negotiating  with human health and animal
health commercial development partners in various regions of the world including
the United States, Canada, Europe and the Middle East. The Company believes that
one or more of these  agreements will be executed during 2005.  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


                                       F-6
<PAGE>


                  Amarillo Biosciences, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                               December 31, 2004

future  sales of  commercial  product.  These  agreements  could be an important
source of funds for ABI.  However,  there can be no  assurance  that the Company
will be successful in obtaining  additional funding from either human health and
animal  health  commercial  development  partners or private  investors.  If the
Company  is not  successful  in  raising  additional  funds,  it  will  need  to
significantly  curtail  clinical trial  expenditures and to further reduce staff
and administrative expenses and may be forced to cease operations.

PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries, Amarillo Cell of Canada, Inc.,
Veldona Africa, Inc., Veldona Poland, Inc., 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 intends to adopt
SFAS 123R  prospectively  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, 2004

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.

INCOME TAXES

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

REVENUE RECOGNITION

Contract revenue for research and development  performed under the manufacturing
and supply agreement with  Hayashibara  Biochemical  Laboratories,  Inc. ("HBL")
(see Note 4) was recorded as earned based on research and  administrative  costs
incurred. Sales, reimbursement income, sublicense fees, etc. are recognized upon
receipt of payment.

RESEARCH AND DEVELOPMENT

Research and development costs are expensed as incurred.


                                       F-8
<PAGE>


                  Amarillo Biosciences, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                               December 31, 2004

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.  No options were granted in the three
month  period  ending  March 31, 2004.  There were  725,000  options  granted to
purchase  common stock in the three months ended June 30, 2004, with an exercise
price of $0.23 per share with a 5 year term  vesting  immediately.  In the three
month period ended  September 30, 2004 775,000  options were granted to purchase
common  stock,  with an  exercise  price of $0.27 per  share  with a 5 year term
vesting  immediately.  No options were granted in the three month period  ending
December 31, 2004.

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.

                                                  Year Ended December 31,
                                                    2004          2003
                                                 ------------  ------------
Net income (loss), as reported                   $ (595,205)   $   166,631
Less: stock based compensation determined
   under fair value based method                   (360,199)      (21,347)
                                                 ------------  ------------
                                                 $ (955,404)   $   145,284
Pro forma net loss
                                                 ============  ============

Basic and diluted net loss per share
   As reported                                   $    (0.05)   $      0.02
   Pro forma                                     $    (0.08)   $      0.01

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.


                                       F-9
<PAGE>


                  Amarillo Biosciences, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                               December 31, 2004

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, 2004
                                          ------------------

          Furniture and equipment         $           54,011
                                          ------------------
                                                      54,011
          Less accumulated depreciation               53,227
                                          ------------------
                                          $              784
                                          ==================

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.  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,  2004,  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, 2005, 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  was  due  on or  before  February  29,  2005,  or on or  before  the
expiration  of one year  after  approval  of the  Company's  product by the FDA,
whichever  occurs  first.  This note has also been extended and is payable on or
before  February 29, 2006, or on or before the  expiration of one (1) year after
approval of the Company's product by the FDA, whichever occurs first.

On  September  30, 1999,  the Company  entered into an Agreement to Convert Debt
with HBL regarding the above described note payable to HBL in the then principal
amount of $1,000,000,  the first loan installment  having by then been advanced.
On October 15, 1999, pursuant to the Agreement to Convert Debt, HBL canceled the
then note  balance  in  exchange  for  1,111,831  shares of common  stock of the
Company valued at the then market value of $0.9044 per share.
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 Promissary  Note for $45,000
payable to an individual  stockholder.  The Promissary Note accrues  interest at


                                      F-10
<PAGE>


                  Amarillo Biosciences, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                               December 31, 2004

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,  this Note has been extended  until October 31, 2005.
The Note Holder is granted the right to purchase, within the next 4 years, up to
30,000 shares of stock at an exercise price of $0.15 per share.  The Note Holder
is also  granted the right to  purchase,  within the next 3 years,  up to 30,000
shares of stock at an exercise price of $0.22 per share.

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

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

4. MANUFACTURING AND SUPPLY AGREEMENTS

The Company was a party to the following  manufacturing and supply agreements at
December 31, 2004:

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


                                      F-11
<PAGE>


                  Amarillo Biosciences, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                               December 31, 2004

Laboratories,  Inc.  (executed  September  7, 2001,  terminated  May 22, 2003) a
second  amendment  to the  Development  Agreement  was  executed  extending  the
Development  Agreement to March 12, 2005 and will be renewed  automatically  for
successive three-year terms.

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

5. LICENSE AND SUBLICENSE AGREEMENTS

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

6. RESEARCH AGREEMENTS

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

7. COMMON STOCK

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

The Company has  3,233,762  shares of common stock  reserved  for issuance  upon
exercise of options and warrants granted.

In 2004,  the Company sold  2,576,385  unregistered  shares of its voting common
stock in private placement  offerings.  Of these sales, 376,385 shares were sold
for $0.13 per share;  150,000  shares for $0.11 per  share;  100,000  shares for
$0.105 per share;  1,950,000 shares for $0.10 per share;  generating $270,930 in
cash.

On October 10, 2003 and December 31, 2003, unsecured loans totaling $14,000 were
received from an individual stockholder. Subsequently, on February 26, 2004, the
stockholder  used this loaned  money to purchase  100,000  shares of  restricted


                                      F-12
<PAGE>


                  Amarillo Biosciences, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                               December 31, 2004

private placement stock at $0.105 per share. The Company is still in debt to the
stockholder for $3,500.

During the year ended December 31, 2004,  the Board of Directors  authorized the
issuance of 47,380 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 $13,960 was recorded
for the issuance of these shares during the year ended December 31, 2004.

There  were  151,514  Non-plan  stock  options  exercised  for $0.06 per  share,
generating $9,091 in cash in 2004.

8. STOCK OPTIONS AND WARRANTS

The Company has 63,200  warrants to purchase common stock through April 11, 2005
at $3.125 per share and  warrants to purchase  common  stock at $3.75 per share.
Accordingly, the Company has reserved an additional 126,400 shares of its common
stock to satisfy the possible future exercise of such warrants.

During 2004,  the Company  issued 450,000  options to  consultants,  to purchase
restricted common stock in exchange for consulting  services at $0.01 per share.
These  options  were  exercised  and the fair market value of the stock sale was
state; 450,000 shares for $0.20 per share, generating $4,500 in cash and $77,500
in non-cash consulting services.

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:


                                      F-13
<PAGE>


                  Amarillo Biosciences, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                               December 31, 2004

                                          2004                      2003
                                ------------------------------------------------
                                              WEIGHTED                WEIGHTED
                                              AVERAGE                 AVERAGE
                                              EXERCISE                EXERCISE
                                 OPTIONS       PRICE       OPTIONS      PRICE
                                ------------------------------------------------
Outstanding, beginning of year   1,871,688   $   0.54     1,562,776    $   0.98
Granted                          1,950,000       0.25       782,037        0.42
Canceled                              --          --       (473,125)       0.54
Exercised                         (601,514)      0.06         --            --
                                 ---------                ---------
Outstanding, end of year         3,220,174   $   0.43     1,871,688    $   0.54
                                 =========                =========
Exercisable at end of year       3,220,174   $   0.43     1,871,688    $   0.54
                                 =========                =========

Exercise  prices for options  outstanding  as of  December  31, 2004 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 5.02 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, 2004 and 2003, were $0, and $0, respectively.

10. INCOME TAXES

Deferred  income  taxes  reflect  the net tax effects of  temporary  differences
between the carrying  amounts of assets and liabilities for financial  reporting
purposes and the amounts used for income tax reporting  purposes.  The Company's
deferred tax asset of  approximately  $6,660,000  and $6,495,000 at December 31,
2004 and 2003 respectively,  was subject to a valuation  allowance of $6,660,000
and  $6,495,000  at  December  31,  2004  and  2003  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.


                                      F-14
<PAGE>


                  Amarillo Biosciences, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                               December 31, 2004

At December  31,  2004,  the Company has net  operating  loss  carryforwards  of
approximately  $19,590,000  for  federal  income tax  purposes  expiring in 2006
through 2023. The ability of the Company to utilize these  carryforwards  may be
limited should changes in stockholder ownership occur.

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

11. CONTINGENCIES

The  Company is not a party to any  litigation  and is not aware of any  pending
litigation or unasserted claims or assessments as of December 31, 2004.

12. RELATED PARTY TRANSACTIONS

In the  ordinary  course  of  business,  the  Company  has and  expects  to have
transactions with related parties,  including  stockholders.  In addition to the
transactions disclosed elsewhere in these financial statements,  during 2004 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  $8,402
during 2004 for legal services rendered by SandersBaker.


                                      F-15