<PAGE>

                     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, 2002

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

                         COMMISSION FILE NUMBER 0-20791

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

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

           800 WEST 9TH AVENUE, AMARILLO, TEXAS                     79101
         (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 $79,730.

         As of December 31, 2002, there were outstanding 8,994,072 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) was approximately
$284,477.



<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 2003 Plan of Operations" as
well as those discussed elsewhere in this Form 10-KSB. The following discussion
should be read in conjunction with the Financial Statements and the Notes
thereto included elsewhere in this Form 10-KSB.

ITEM 1.  DESCRIPTION OF BUSINESS.

GENERAL

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

         The Company owns or licenses 18 United States patents relating to
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 Sjogren's syndrome and
fibromyalgia.

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

         The Company has 3 full-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 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. 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 (less than or
equal to 0.05) correlation was seen between increases in UWS and improvement in
a number of the symptoms of Sjogren's syndrome that were assessed in the study,
including oral dryness, throat dryness, nasal dryness and the ability to swallow
foods. This finding suggests that patients were able to perceive a benefit of
having increased salivary flow.

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


                                       3

<PAGE>


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

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

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

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

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

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

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

                                       4

<PAGE>

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

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

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

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


                                       5

<PAGE>

organization of inflammatory exudate within the airspaces in which fibroblasts
beneath the type I epithelium proliferate and increase their production of
fibronectin and collagen. Death of the patient usually occurs within 4-5 years
of diagnosis.

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

STRATEGIC ALLIANCE WITH HBL

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

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

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


                                       6

<PAGE>

OTHER AGREEMENTS

         In 2002 the Company entered into various licensing and supply
arrangements which could serve as a source of future revenue for the Company;
however, none of these arrangements are currently contributing in a significant
manner to the Company's revenue, and these arrangements are not considered by
the Company's management to be material, either individually or in the
aggregate.

PATENTS AND PROPRIETARY RIGHTS

         One patent was issued in 2002. This 2002 patent is entitled "Interfeorn
Dosage Form and Method Therefor" (U.S. Patent No. 6,372,281 B1) issued April 16,
2002, valid until April 16, 2019. Notice of Allowance of Claims was received on
a patent entitled "Interferon-Alpha Mediated Upregulation of Aquaporin
Expression" and it issued January 14, 2003 (U.S. Patent No. 6,506,377), valid
until September 27, 2021.

COMPETITION

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

GOVERNMENT REGULATION

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


                                       7

<PAGE>

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

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

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

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

Clinical Trials, Phase III. This phase usually involves 1,000 to 3,000 patients
in clinics and hospitals. Physicians monitor patients closely to confirm
efficacy and identify adverse events. These numbers may be modified based on the
disease prevalence.

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

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

         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 2003.

RESEARCH AND DEVELOPMENT

         During the years ended December 31, 2002 and 2001, the Company incurred
expenses of $382,880 and $516,288, respectively, resulting from
Company-sponsored research and development activities. Research and development
is expected to remain a significant component of the


                                       8

<PAGE>
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 2003 PLAN
OF OPERATIONS - Research and Development".

ITEM 2. DESCRIPTION OF PROPERTY.

         The Company's executive and administrative offices are located at 800
West 9th Avenue, Amarillo, Texas in a 1,500 square-foot facility leased by the
Company. The building contains offices, meeting rooms and a biologic storage
area. The Company believes that the facility is adequate for its present and
anticipated use.

ITEM 3. LEGAL PROCEEDINGS.

         None.

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

         None.

                                     PART II

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

         The Company is presently traded on the OTC Bulletin Board under the
symbol AMAR. The range of high and low sales prices as quoted on the OTC
Bulletin Board for each quarter of 2002 and 2001 was as follows:

<TABLE>
<CAPTION>
                                                   2002                                       2001
                                   --------------------------------------     -------------------------------------
           Quarter                       High                  Low                  High                 Low
-------------------------------    ----------------    ------------------     ----------------    -----------------
<S>                                <C>                 <C>                    <C>                 <C>
            First                       $1.1800              $0.3300               $1.3750             $0.5156

            Second                       0.5500               0.3100                0.9000              0.5400

            Third                        0.4700               0.1500                0.9000              0.6000

            Fourth                       0.2500               0.0500                0.9000              0.5100
</TABLE>


         As of December 31, 2002, the Company had 375 shareholders of record.


                                       9

<PAGE>


ITEM 6. MANAGEMENT'S 2003 PLAN OF OPERATIONS.

         The Company's Management has developed a Plan of Operations for 2003.
The Company continues to engage in research and development activities focused
on developing biologics for the treatment of human and animal diseases. The
Company has not commenced any significant product commercialization and, until
such time as it does, will not generate significant product revenues. The
Company's accumulated deficit has continued to grow, from approximately
$21,374,000 at December 31, 2001 to $22,130,000 at December 31, 2002. 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 2003 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
2003 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.

REVENUE FROM SALES OF DIETARY SUPPLEMENT

         The Company had sales of ACM generating $10,942 for the Company in
2002. Other supply agreements, are expected to provide additional revenue to the
Company, although the amount cannot be predicted and may not be material.

REVENUES FROM INTERFERON SALES

         There were no sales of interferon alpha in 2002.

RESEARCH AND DEVELOPMENT

         Until it achieves commercial product sales, the Company's business is
research and development and this is the area where the Company's principal
efforts will be expended in 2003. The Company has budgeted approximately
$592,731 for expenditure in 2003 on research and development.

         Other Research and Development expenditures in 2002 included costs
associated with the Company's Heliobacter pylori vaccine development program
being conducted at the Ohio State University.

PERSONNEL

         In addition to its intellectual property, the Company's principal
assets are its personnel. The Company has been successful in controlling its
personnel costs, both by maintaining its principal location in Amarillo, Texas
and by ensuring maximum efficiency and utilization of existing personnel. The
Company has budgeted approximately $275,489 for personnel expenses in 2003,
including salaries, payroll taxes, group health and liability insurance. Also,
in lieu of cash

                                       10

<PAGE>


compensation, the Company may issue stock options or other equity instruments to
selected employees in fiscal 2003.

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

CONSULTING AND PROFESSIONAL (EXCEPT LEGAL AND ACCOUNTING)

         The Company has budgeted approximately $12,000 for expenditure on
professional consultants in 2003. Consulting fees are expected to be paid to a
number of independent consultants in connection with the operation of the
Company and to certain directors who perform specific consulting tasks at the
Company's request. The Company will continue to use the services of consultants
to complement the Company's small full-time staff, where such is a more
efficient utilization of the Company's resources.

LEGAL AND ACCOUNTING

         Although the Company is not involved in litigation, it has budgeted
legal expenses of approximately $100,000 in 2003. Approximately 20% of the
Company's legal expenditures will be for preparation and filing of patents and
for maintenance of existing patents in a number of countries. Other legal
expenses will be related to compliance with laws and regulations affecting
public companies, licensing and contracting and general corporate matters. The
Company does not presently have an in-house legal staff, nor does it intend to
put such a staff in place in 2003. The Company has budgeted $18,000 for
accounting expense in 2003 and expects to use Malone & Bailey, PLLC as its
independent auditors.

PUBLIC RELATIONS, INVESTOR RELATIONS AND SHAREHOLDER RELATIONS

         The Company has budgeted approximately $5,000 for public relations,
investor relations and shareholder relations in 2003. The plan for hiring an
investor relations firm is to pay in stock options, not cash. The Company has
also budgeted sufficient amounts to maintain its comprehensive web site
(www.amarbio.com).

LIQUIDITY NEEDS

         The principal budget items discussed above, along with other
miscellaneous costs and expenses, will cause the Company to expend approximately
$1 million in 2003. At December 31, 2002, the Company had available cash of
approximately $100, and had a working capital deficit of approximately
($1,183,566). 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 2003 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
2003.

                                       11

<PAGE>

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.

FORWARD-LOOKING STATEMENTS

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

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

                                       12

<PAGE>

ITEM 7. FINANCIAL STATEMENTS.

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

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

         None.

                                    PART III

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

         As of December 31, 2002, the directors and executive officers of the
Company were as follows:


<TABLE>
<CAPTION>
NAME                                                      AGE       POSITION
----------------------------------------------------    --------    -----------------------------------------------
<S>                                                     <C>         <C>
Joseph Cummins, DVM, PhD (1)(3).................          60        Chairman of the Board, President, Chief
                                                                    Executive Officer, Chief Financial Officer
                                                                    and Director

Stephen Chen, PhD (2)(4)........................          53        Director

James Cook (1)(3)(5)............................          68        Director

Katsuaki Hayashibara (3)(4)(5)..................          58        Director

Dennis Moore, DVM (1)(4)(5).....................          56        Director

James Page, MD (1)(2)(5)........................          75        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...............................          35        Director of Clinical & Regulatory Affairs
</TABLE>

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

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

                                       13

<PAGE>

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

         James Cook has been a director of the Company since 1988. He was
President and Chief Executive Officer of the First National Bank of Arvada from
January 1992 until his retirement in 2001. From April 1987 to December 1991 he
was Executive Vice President of First National Bank of Amarillo.

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

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

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

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

         The Company's directors are elected at the annual meeting of
shareholders to hold office until the annual meeting of shareholders for the
ensuing year or until their successors have been duly elected and qualified.
Directors are reimbursed for any out-of-pocket expenses in connection with their
attendance at meetings. In addition, each director has been granted 20,000
non-qualified stock options. Such options expire August 29, 2006, are completely
vested, and are exercisable at $.65 per share, which was the fair market value
of the Company's stock on the date of grant. 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")

                                       14

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

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

ITEM 10. EXECUTIVE COMPENSATION.


         The following table sets forth for the three years ended December 31,
2002 compensation paid by the Company to its Chairman of the Board, President
and Chief Executive Officer and to its Chief Operating Officer. None of the
Company's other executive officers had annual salary and bonus in excess of
$100,000 for services rendered during any of the three years ended December 31,
2002.

                           SUMMARY COMPENSATION TABLE


<TABLE>
<CAPTION>
                                                                            Annual Compensation
                                                           --------------------------------------------------------
  NAME AND PRINCIPAL POSITION                  YEAR           SALARY             BONUS         OTHER COMPENSATION
------------------------------               -------       -----------       -----------      ---------------------
<S>                                          <C>           <C>               <C>              <C>
Dr. Joseph Cummins, Chairman
     of the Board, President and Chief         2002          $121,338          $   -                $       -
     Executive Officer...................
                                               2001           148,042          $   -                $       -
                                               2000            25,935          $   -                $       -

Kathleen Kelleher, Chief
     Operating Officer and Vice-President      2002                 -          $   -                $       -
     of Business Development.............
                                               2001             8,123          $   -                $       -

                                               2000           123,043          $   -                $       -
</TABLE>

                              OPTION GRANTS IN 2002

        The following table sets forth certain information relating to options
granted in 2002 to the executive officers named above, to purchase shares of
common stock of the Company.

                                       15
<PAGE>
<TABLE>
<CAPTION>
                                           NUMBER OF
                                           SHARES OF
                                             COMMON           % OF TOTAL
                                              STOCK             OPTIONS
                                           UNDERLYING           GRANTED          EXERCISE OR
                                            OPTIONS          TO EMPLOYEES        BASE PRICE           EXPIRATION
  NAME                                     GRANTED (#)          IN 2002            ($/SH)                DATE
--------------------------------------   --------------     ---------------    ---------------     ----------------
<S>                                       <C>                 <C>               <C>                <C>
Joseph M. Cummins.....................       150,000                43%             $0.06 (1)        12-23-2007
</TABLE>


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

                AGGREGATED OPTION EXERCISES AT DECEMBER 31, 2002
                           AND YEAR-END OPTION VALUES

        The following table sets forth information for the executive officers
named above, regarding the exercise of options during 2002 and unexercised
options held at the end of 2002.

<TABLE>
<CAPTION>
                                                               NUMBER OF SHARES OF
                                                                   COMMON STOCK                  VALUE OF UNEXERCISED
                                                              UNDERLYING UNEXERCISED                 IN-THE-MONEY
                                SHARES         VALUE                OPTIONS AT                        OPTIONS AT
                              ACQUIRED ON    REALIZED         DECEMBER 31, 2002 (#)            DECEMBER 31, 2002 ($) (1)
NAME                         EXERCISE (#)       ($)         EXERCISABLE/UNEXERCISABLE          EXERCISABLE/UNEXERCISABLE
---------------------       --------------   --------      ----------------------------      ----------------------------
<S>                         <C>              <C>           <C>                               <C>
Joseph Cummins                     -             -          447,000   /       None                $0    /     None

Kathleen Kelleher                  -             -           44,000   /       None               None   /     None
</TABLE>

(1)  Calculated based on the closing price of the common stock ($0.06) as
     reported by OTC BB on December 31, 2002.

                   DIRECTOR COMPENSATION FOR LAST FISCAL YEAR

<TABLE>
<CAPTION>
                                                                   Cash Compensation            Security Grants
                                                            ----------------------------------  ---------------
                                                                                                   NUMBER OF
                                                                                                  SECURITIES
                                                                                   CONSULTING     UNDERLYING
NAME                                                        MEETING FEES (1)         FEES (2)       OPTIONS
----------------------------------------                    ----------------      ------------  ---------------
<S>                                                         <C>                    <C>          <C>
Stephen Chen, PhD                                              $   -                $   -          50,000

James Cook                                                         -                    -          97,250

Katsuaki Hayashibara                                               -                    -          50,000

Dennis Moore, DVM                                                  -                    -          50,000

James Page, MD                                                     -                    -          50,000
</TABLE>

(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.

                                       16

<PAGE>

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

        As of December 31, 2002, there were 8,994,072 shares of the Company's
common stock outstanding. The following table sets forth as of December 31,
2002, the beneficial ownership of each person who owns more than 5% of such
outstanding common stock:

<TABLE>
<CAPTION>
NAME AND ADDRESS                                                    NUMBER OF SHARES            PERCENT OF TOTAL
------------------------------------------------------------    -------------------------    ----------------------
<S>                                                             <C>                          <C>
Hayashibara Biochemical Laboratories, Inc.
2-3 Shimoishii 1-chome                                                 3,290,781                       37%
Okayama 700, Japan

Cheryl A. Ulie
8843 SE 77th Place                                                     1,000,000                       11%
Mercer Island, Washington 98040
</TABLE>

        The following table sets forth the beneficial ownership of the Company's
stock as of December 31, 2002 by each executive officer and director and by all
executive officers and directors as a group:

<TABLE>
<CAPTION>
DIRECTORS                                                      NUMBER OF SHARES    PERCENT OF TOTAL
<S>                                                            <C>                 <C>
Joseph Cummins                                                      237,546             3.0%

Dennis Moore                                                         84,616             1.0%

James Cook                                                           66,600 (1)           *

Katsuaki Hayashibara                                                 48,240               *

Stephen Chen                                                         13,500               *

James Page                                                                -               -

Total Group (all directors and executive
officers - 6 persons)                                                                   4.0%
</TABLE>

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



                                       17
<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 37% 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, 2002, including
principal and accrued interest, was $2,266,351. 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 2002, 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 $33,801 by said firm in 2002.

         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.




                                       18
<PAGE>


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

    NUMBER        DESCRIPTION

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

      3.3*        Bylaws of the Company.

      4.1*        Specimen Common Stock Certificate.

      4.2*        Form of Underwriter's Warrant.

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

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

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

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

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

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

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

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

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

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

    10.23*        Indemnification Agreement between HBL and the Company.

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

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

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

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

  10.30***        Amendment No. 1 dated September 28, 1998 to License Agreement
                  of March 22, 1988 between The Texas A&M University System and
                  the Company.

   10.36++        License Agreement dated February 1, 2000 between Molecular
                  Medicine Research Institute and the Company (interferon gamma
                  administered orally).

                                       19
<PAGE>

     NUMBER       DESCRIPTION

  10.37++(a)      License and Supply Agreement dated April 3, 2000 with Key
                  Oncologics (Pty) Ltd. and the Company.

    10.38++       Amendment No. 1 dated April 4, 2000, to Interferon Gamma
                  Distribution Agreement dated September 17, 1997 between HBL
                  and the Company (interferon gamma).

  10.39++(a)      License and Supply Agreement dated April 25, 2000 between
                  Biopharm for Scientific Research and Drug Industry Development
                  and the Company.

  10.40++(a)      Sales Agreement dated May 5, 2000 between Wilke Resources,
                  Inc. and the Company.

    10.41++       Engagement Agreement dated September 26, 2000 between Hunter
                  Wise Financial Group, LLC and the Company.

  10.42++(a)      Supply Agreement (Anhydrous Crystalline Maltose) dated October
                  13, 2000 between Hayashibara Biochemical Laboratories, Inc.
                  and the Company.

  10.43++(a)      Supply Agreement dated December 11, 2000 between Natrol, Inc.
                  and the Company.

 10.44+++(a)      License Agreement dated September 7, 2001 between Atrix
                  Laboratories, Inc. and the Company.

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

<TABLE>
<CAPTION>

                    NAME                                         JURISDICTION OF INCORPORATION
                    -----------------------------------          -----------------------------
<S>                                                              <C>
                    VANGUARD BIOSCIENCES, INC.                                 TEXAS

                    VELDONA USA, INC.                                          TEXAS

                    VELDONA AFRICA, INC.                                       TEXAS

                    VELDONA POLAND, INC.                                       TEXAS

                    ABI TAIWAN, INC.                                           TEXAS

                    AMARILLO CELL OF CANADA, INC.                              TEXAS
</TABLE>

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




                                       20
<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.

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

Date: /s/  April 11, 2003
     ---------------------

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

<TABLE>
<CAPTION>
Signature                                                                     Title                               Date
---------                                                                     -----                               ----
<S>                                                          <C>                                      <C>
/s/ JOSEPH M. CUMMINS                                        Chairman of the Board,                         April 11, 2003
------------------------------------------------------------ President, Chief Financial Officer,      -----------------------------
Joseph M. Cummins                                            Director and
                                                             Chief Executive Officer


/s/ STEPHEN T. CHEN                                          Director                                       April 11, 2003
------------------------------------------------------------                                          -----------------------------
Stephen T. Chen

/s/JAMES COOK                                                Director                                       April 13, 2003
------------------------------------------------------------                                          -----------------------------
James Cook

/s/ KATSUAKI HAYASHIBARA                                     Director                                       April 11, 2003
------------------------------------------------------------                                          -----------------------------
Katsuaki Hayashibara

/s/ DENNIS MOORE                                             Director                                       April 13, 2003
------------------------------------------------------------                                          -----------------------------
Dennis Moore

/s/ JAMES A. PAGE                                            Director                                       April 11, 2003
------------------------------------------------------------                                          -----------------------------
James A. Page
</TABLE>




                                       21
<PAGE>



                              FORM OF CERTIFICATION
                       PURSUANT TO RULE 13A-14 AND 15D-14
              UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED

                                  CERTIFICATION

         I, Joseph M. Cummins, certify that:

         1. I have reviewed this annual report on Form 10-KSB of Amarillo
Biosciences, Inc.;

         2. Based on my knowledge, this annual report does not contain any
untrue statement of material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the periods covered by this
annual report;

         3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

         4. I am responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for
the registrant and have:

                  (a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;

                  (b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days of the filing date of this
annual report (the "Evaluation Date"); and

                  (c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;

         5. As the registrant's certifying officer I have disclosed, based on
the most recent evaluation, to the registrant's auditors and the audit committee
of the registrant's board of directors (or persons performing the equivalent
functions):

                  (a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize, and report financial data and have identified for
the registrant's auditors any material weaknesses in internal controls; and

                  (b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls.

         6. I have indicated in this annual report whether or not there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.


Date: April 11, 2003                    /s/  Joseph M. Cummins
                                    --------------------------------------------
                                    Name:  Joseph M. Cummins
                                    Title: President and Chief Executive Officer
                                           and Chief Financial Officer


<PAGE>
                           Amarillo Biosciences, Inc.
                                and Subsidiaries


                        Consolidated Financial Statements

                          Year ended December 31, 2002



                                    CONTENTS


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

Audited Consolidated Financial Statements

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

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

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

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

Notes to Consolidated Financial Statements .................................F-6
</TABLE>





<PAGE>


              Report of Malone & Bailey, PLLC Independent Auditors


The Board of Directors
Amarillo Biosciences, Inc.

We have audited the accompanying consolidated balance sheet of Amarillo
Biosciences, Inc. and subsidiaries as of December 31, 2002, and the related
consolidated statements of operations, stockholders' deficit and cash flows for
each of the two years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, based on our audits, the financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Amarillo Biosciences, Inc. and subsidiaries as of December 31, 2002, and the
consolidated results of their operations and their cash flows for 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 2003 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 2002 financial statements do not include any adjustments that might result
from the outcome of this uncertainty.

MALONE & BAILEY, PLLC
Houston, Texas
April 8, 2003

                                       F-1

<PAGE>



                           Amarillo Biosciences, Inc.
                                and Subsidiaries
                           Consolidated Balance Sheet
                                December 31, 2002


<TABLE>
<S>                                                         <C>
ASSETS
Current assets:
  Cash                                                      $        100
  Other current assets                                            10,039
                                                            ------------
Total current assets                                              10,139

Property and equipment, net                                       74,842
Patents, net of accumulated amortization of $132,599             162,309
                                                            ------------
Total assets                                                $    247,290
                                                            ============

LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
  Accounts payable                                          $    873,745
  Accrued interest expense                                       267,176
  Accrued payroll                                                 42,238
  Other accrued expense                                            4,136
  Current maturities of mortgage payable                           6,410
                                                            ------------
Total current liabilities                                      1,193,705

Mortgage payable, net of current maturities                       75,095
Notes payable to stockholders                                  2,045,000
                                                            ------------
Total liabilities                                              3,313,800

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 - 8,994,072 in 2002                            89,941
  Additional paid-in capital                                  18,923,182
  Accumulated deficit                                        (22,079,633)
                                                            ------------
Total stockholders' deficit                                   (3,066,510)
                                                            ------------
Total liabilities and stockholders' deficit                 $    247,290
                                                            ============

</TABLE>

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

                                       F-2

<PAGE>
                           Amarillo Biosciences, Inc.
                                and Subsidiaries
                     Consolidated Statements of Operations



<TABLE>
<CAPTION>
                                                       YEARS ENDED DECEMBER 31,
                                                      --------------------------
                                                           2002           2001
                                                      --------------------------
<S>                                                   <C>            <C>
Revenues:
  Dietary supplement sales                            $    10,942    $   105,000
  Interferon sales                                              -        110,900
  Interest income                                           1,740          2,343
  Sublicense fees                                          10,000         70,000
  Reimbursement of research and
     development expenses                                       -         99,600
  Assignment of orphan drug
     designation                                                -        265,000
  Federal Research Grant                                   48,342              -
  Other                                                     8,707         53,391
                                                      --------------------------
                                                           79,730        706,234
Expenses:
  Research and development expenses                       382,880        516,288
  Selling, general and administrative
     expenses                                             303,627        576,570
  Interest expense                                         99,045         94,981
                                                      --------------------------
                                                          785,552      1,187,839
                                                      --------------------------

Net loss                                              $  (705,822)   $  (481,605)
                                                      ==========================

Basic and diluted net loss per share                  $     (0.08)   $     (0.06)
                                                      ==========================

Weighted average shares outstanding                     8,864,277      7,852,358
                                                      ==========================
</TABLE>

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

                                                    F-3

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


<TABLE>
<CAPTION>
                                                                  COMMON STOCK           ADDITIONAL                     TOTAL
                                                    ISSUANCE  -----------------------      PAID IN     ACCUMULATED   STOCKHOLDERS'
                                                     PRICE       SHARES      AMOUNT        CAPITAL       DEFICIT    EQUITY (DEFICIT)
                                                   --------------------------------------------------------------------------------

<S>                                                <C>        <C>           <C>         <C>            <C>           <C>
Balance at December 31, 2000                                    7,807,357       78,074     18,399,449   (20,892,206)  (2,414,683)
Net loss and total comprehensive loss for year
    ended December 31, 2001                                             -            -              -      (481,605)    (481,605)
Issuance of common stock for cash in private
     placement                                       0.500         82,400          824         40,376             -       41,200
Issuance of common stock in lieu of salary           0.660         22,648          226         14,774             -       15,000
                                                              ------------------------------------------------------------------
Balance at December 31, 2001                                    7,912,405   $   79,124  $  18,454,599  $(21,373,811) $(2,840,088)

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

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


                                       F-4

<PAGE>

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


<TABLE>
<CAPTION>
                                                     YEAR ENDED DECEMBER 31,
                                                       2002          2001
                                                    ------------------------
<S>                                                 <C>          <C>
OPERATING ACTIVITIES
Net loss                                            $(705,822)   $(481,605)
Adjustments to reconcile net loss to
     net cash used in operating activities:
     Depreciation                                       5,702        8,682
     Loss on obsolete inventory                        48,639            -
     Amortization                                      17,129       14,250
     Gain on sale of assets                            (2,560)      (5,196)
     Common stock issued for services                       -       15,000
     Equipment issued for services                          -        2,400
     Changes in operating assets and liabilities:
       Inventory                                            -        7,200
       Other current assets                            41,366       (5,906)
       Accounts payable                                (2,548)     (77,930)
       Accrued expenses                                55,961      153,248
                                                    ----------------------
Net cash used in operating activities                (542,133)    (369,857)

INVESTING ACTIVITIES
Proceeds from sale of equipment                         9,225        7,500
Purchase of equipment                                  (7,359)           -
Patents                                               (46,548)     (39,816)
                                                    ----------------------
Net cash used in investing activities                 (44,682)     (32,316)
                                                    ----------------------

FINANCING ACTIVITIES
Proceeds from notes payable                            45,000       90,000
Repayments of notes payable                            (5,803)      (2,692)
Issuance of common stock                              479,400       41,200
                                                    ----------------------
Net cash provided by financing activities             518,597      128,508
                                                    ----------------------
Net decrease in cash                                  (68,218)    (273,665)
Cash at beginning of period                            68,318      341,983
                                                    ----------------------
Cash at end of period                               $     100    $  68,318
                                                    ======================
SUPPLEMENTAL INFORMATION
Cash paid for income taxes                                  -            -
Cash paid for interest                              $   9,045    $   4,444
                                                    ======================
</TABLE>

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

                                       F-5

<PAGE>


                   Amarillo Biosciences, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                                December 31, 2002



     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 2003 Plan of Operations calls for the Company to expend
     approximately $1 million in 2003. At December 31, 2002, the Company had
     available cash of $100 and negative working capital of approximately
     ($1,183,566). 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 2003 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 2003. These agreements
     could generally include provisions for the commercial partner to pay ABI a
     technology access fee, could include payments for a portion of the clinical
     trial expenses, could include payment obligations to ABI upon the
     accomplishment of certain defined tasks and/or could provide for payments
     relating to

                                       F-6

<PAGE>


                   Amarillo Biosciences, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                                December 31, 2002



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

     PRINCIPLES OF CONSOLIDATION

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

     CASH AND CASH EQUIVALENTS

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

     PROPERTY AND EQUIPMENT

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

     PATENTS; PATENT EXPENDITURES

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

     INCOME TAXES

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


                                       F-7

<PAGE>


                   Amarillo Biosciences, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                                December 31, 2002



     REVENUE RECOGNITION

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

     RESEARCH AND DEVELOPMENT

     Research and development costs are expensed as incurred.

     USE OF ESTIMATES

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

     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 LOSS PER SHARE

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


                                       F-8

<PAGE>


                   Amarillo Biosciences, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                                December 31, 2002



     2. PROPERTY AND EQUIPMENT

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

<TABLE>
<CAPTION>
                                                   DECEMBER 31,
                                               -------------------
                                                       2002
                                               -------------------
<S>                                            <C>
     Land                                       $            8,000
     Building                                               94,531
     Furniture and equipment                               116,230
                                               -------------------
                                                           218,761
     Less accumulated depreciation                         143,919
                                               -------------------
                                                $           74,842
                                               ===================
</TABLE>

     3. NOTES PAYABLE

     The Company had a loan agreement with HBL, which called for HBL to loan the
     Company $3,000,000 to be advanced in three installments. The annual
     interest rate on unpaid principal from the date of each respective advance
     was 4 1/2%, with accrued interest being payable at the maturity of the
     note. $1,000,000 is payable on or before July 22, 2004, or on or before the
     expiration of one (1) year after approval of the Company's product by the
     FDA, whichever occurs first. The other $1,000,000 is due on or before
     February 29, 2005, or on or before the expiration of one year after
     approval of the Company's product by the FDA, whichever occurs first.

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

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

     Effective November 1, 2002 the Company executed a Promissary Note for
     $45,000 payable to an individual stockholder. The Promissary Note accrues
     interest at the rate per year that will be the lesser of 3% in excess of
     the prime interest rate published from time to time in the Wall Street

                                       F-9

<PAGE>


                   Amarillo Biosciences, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                                December 31, 2002



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

     Subsequent event. Effective March 21, 2003 the Company executed a
     Promissary Note for $45,000 payable to an individual stockholder. The
     Promissary Note accrues interest at the rate per year that will be the
     lesser of 3% in excess of the prime interest rate published from time to
     time in the Wall Street Journal, adjusted on the first day of each calendar
     month based on such rate then in effect, or the maximum nonusurious rate of
     interest permitted by applicable law. Accrued interest is payable monthly,
     in arrears and the entire principal amount is payable October 31, 2004. The
     Note Holder is granted the right to purchase, within the next 3 years, up
     to 50,000 shares of stock at an exercise price of $0.06 per share.

     4. MANUFACTURING AND SUPPLY AGREEMENTS

     The Company was a party to the following manufacturing and supply
     agreements at December 31, 2002:

     The Company has a Joint Development and Manufacturing/Supply Agreement with
     HBL (the Development Agreement), a major stockholder (see Note 7) under
     which HBL will formulate, manufacture and supply HBL interferon for the
     Company or any sublicensee. In exchange, HBL is entitled to receive a
     transfer fee, specified royalties and a portion of any payment received by
     the Company for sublicense of rights under this agreement. The agreement
     further provides that the Company sublicense to HBL the right to market HBL
     interferon for oral use in humans and in non-human, warm-blooded species in
     Japan, in exchange for the Company receiving a royalty fee based on net
     sales. The Company is the exclusive agent for the development of HBL
     interferon for non-oral use in humans and in non-human, warm-blooded
     species in North America, in exchange, HBL is entitled to receive a
     transfer fee based on units of interferon supplied and the agreement also
     provides that a royalty fee be paid to HBL. As part of the License
     Agreement with Atrix Laboratories, Inc. executed September 7, 2001 (see
     below) 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.


                                      F-10

<PAGE>


                   Amarillo Biosciences, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                                December 31, 2002



     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 525,108 shares of common stock reserved for issuance upon
     exercise of warrants granted to outside consultants.

     On July 15, 2002, the Company commenced a private placement offering which
     is still ongoing. As of December 31, 2002, the Company had sold 81,667
     unregistered shares of its voting common stock at a price of $0.36 per
     share, generating $29,400 in cash.

     The Company completed a private placement in January 2002 pursuant to which
     it sold 1,000,000 shares of its voting common stock at $.50 per share, for
     a total of $500,000. After deducting selling commission of $45,000 paid to
     First Island Capital, Inc., and other offering costs of $5,000, the net
     proceeds to the Company were $450,000.

     On August 29, 2001, a Resolution was approved by the Company's Board of
     Directors authorizing issuance of restricted stock within the meaning of
     Rule 144 promulgated under the Securities Act of 1933, to Martin J.
     Cummins, in lieu of salary. Under this Resolution 22,648 shares were earned
     in August and September 2001, aggregating $15,000 in stock compensation.

     On April 18, 2001, the Company commenced a private placement offering. By
     the end of its second quarter, the Company sold 52,400 unregistered shares
     of its voting common stock at a price of $.50 per share, generating $26,200
     in cash, and an additional 30,000 shares were sold in October, generating
     $15,000, for a total of $41,200.

                                      F-11

<PAGE>


                   Amarillo Biosciences, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                                December 31, 2002



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

     8. STOCK OPTION PLAN

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

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

     No options were granted in 2002 pursuant to the Company's Employee and
     Director Stock Option Plans, although 693,250 non-qualified options were
     granted as follows: 447,250 to Directors (50,000 per Director, except for
     Joseph M. Cummins, who was granted 150,000, and Jim Cook, who in addition
     to his 50,000 director options, was granted 47,250 options for consulting
     services rendered); 6,000 to a former Director, Tom D'Alonzo, for
     consulting services rendered; 230,000 to other employees of the Company;
     and 10,000 to the Company's secretary, Edward L. Morris. All such options
     vested immediately.

     Tom D'Alonzo's 6,000 consulting options were granted December 31, 2002, and
     have an exercise price of $.44 per share; Jim Cook's 47,250 consulting
     options were granted on various dates, as services were rendered, with
     exercise prices from $.44 per share to $.60 per share; and 30,000 of the
     employee options were granted April 12, 2002, at an exercise price of $.44
     per share. All other 2002 options were granted December 23, 2002, and have
     an exercise price of $.06 per share, which was the fair market value of the
     stock on the date of grant.

     Supplemental information regarding net loss and net loss per share is
     required by SFAS 123 and has been determined as if the Company had
     accounted for its stock options under the fair value method of that
     Statement. The fair value for these options was estimated at the date of
     grant

                                      F-12

<PAGE>


                   Amarillo Biosciences, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                                December 31, 2002



     using the Black-Scholes option pricing model with the following weighted
     average assumptions for 2002 and 2001, respectively: risk-free interest
     rate of 4.10% and 5.30%; dividend yield of 0% and 0%; volatility factors of
     the expected market price of the Company's common stock of 106% and 93%;
     and a weighted-average expected life of the option of 5 and 5 years.

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

     For purposes of pro forma disclosures, the estimated fair value of the
     options is amortized to expense over the options' vesting period. The
     expense amounts for 2002 and 2001 are not necessarily indicative of the
     effects on reported net income (loss) for future years. The Company's pro
     forma information as of December 31, is as follows:

<TABLE>
<CAPTION>
                                                                        2002                2001
                                                                 ------------------------------------
<S>                                                              <C>                  <C>
     Pro forma net loss                                          $     (745,027)      $    (667,080)
     Pro forma basic and diluted net loss per share              $        (0.08)      $       (0.08)
</TABLE>

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


<TABLE>
<CAPTION>
                                                                         2002               2001
                                                                 ------------------------------------
<S>                                                                  <C>                  <C>
     Number of options issued at fair market value of stock             640,000            178,500
     Weighted-average fair value of options                               $0.06              $0.48
     Weighted-average exercise price of options                           $0.08              $0.67
</TABLE>

     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, 2002


<TABLE>
<CAPTION>
                                                           2002                                  2001
                                          --------------------------------------    ----------------------------------
                                                                  WEIGHTED                              WEIGHTED
                                                                  AVERAGE                               AVERAGE
                                                                  EXERCISE                              EXERCISE
                                                 OPTIONS           PRICE              OPTIONS            PRICE
                                          --------------------------------------    ----------------------------------
<S>                                       <C>                    <C>                <C>                 <C>
     Outstanding, beginning of year                 997,187       $1.76                1,082,812          $1.94
     Granted                                        711,589        0.12                  178,250           0.67
     Canceled                                      (146,000)       0.98                 (263,875)          1.76
     Exercised                                            -        -                           -           -
     Outstanding, end of year                     1,562,776       $0.98                  997,187          $1.76
                                          =================                         ============
     Exercisable at end of year                   1,521,653       $0.97                  970,712          $1.73
                                          =================                         ============
</TABLE>

     Exercise prices for options outstanding as of December 31, 2002 ranged from
     $0.06 to $5.00. Of these options, 148,000 have exercise prices ranging from
     $3.38 to $5.00 and the remainder range from $0.06 to $2.75. The
     weighted-average remaining contractual life of those options is 3.44 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, 2002 and 2001, 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 $7,000,000 and $6,711,000
     at December 31, 2002 and 2001 respectively, was subject to a valuation
     allowance of $7,000,000 and $6,711,000 at December 31, 2002 and 2001
     respectively, because of uncertainty regarding the Company's ability to
     realize future tax benefits associated with the deferred tax assets.
     Deferred tax assets were comprised primarily of net operating loss
     carryovers under the cash method of accounting used by the Company for
     federal income tax reporting.

     At December 31, 2002, the Company has net operating loss carryforwards of
     approximately $18,166,000 for federal income tax purposes expiring in 2006
     through 2022. The ability of the Company to utilize these carryforwards may
     be limited should changes in stockholder ownership occur.

                                      F-14

<PAGE>


                   Amarillo Biosciences, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                                December 31, 2002


     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,
     2002.

     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
     2002 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 $33,801 during 2002 for legal services rendered by
     SandersBaker.


                                      F-15




<PAGE>
                                 EXHIBIT INDEX

    NUMBER        DESCRIPTION

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

      3.3*        Bylaws of the Company.

      4.1*        Specimen Common Stock Certificate.

      4.2*        Form of Underwriter's Warrant.

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

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

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

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

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

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

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

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

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

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

    10.23*        Indemnification Agreement between HBL and the Company.

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

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

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

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

  10.30***        Amendment No. 1 dated September 28, 1998 to License Agreement
                  of March 22, 1988 between The Texas A&M University System and
                  the Company.

   10.36++        License Agreement dated February 1, 2000 between Molecular
                  Medicine Research Institute and the Company (interferon gamma
                  administered orally).

<PAGE>
     NUMBER       DESCRIPTION

  10.37++(a)      License and Supply Agreement dated April 3, 2000 with Key
                  Oncologics (Pty) Ltd. and the Company.

    10.38++       Amendment No. 1 dated April 4, 2000, to Interferon Gamma
                  Distribution Agreement dated September 17, 1997 between HBL
                  and the Company (interferon gamma).

  10.39++(a)      License and Supply Agreement dated April 25, 2000 between
                  Biopharm for Scientific Research and Drug Industry Development
                  and the Company.

  10.40++(a)      Sales Agreement dated May 5, 2000 between Wilke Resources,
                  Inc. and the Company.

    10.41++       Engagement Agreement dated September 26, 2000 between Hunter
                  Wise Financial Group, LLC and the Company.

  10.42++(a)      Supply Agreement (Anhydrous Crystalline Maltose) dated October
                  13, 2000 between Hayashibara Biochemical Laboratories, Inc.
                  and the Company.

  10.43++(a)      Supply Agreement dated December 11, 2000 between Natrol, Inc.
                  and the Company.

 10.44+++(a)      License Agreement dated September 7, 2001 between Atrix
                  Laboratories, Inc. and the Company.

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

<TABLE>
<CAPTION>

                    NAME                                         JURISDICTION OF INCORPORATION
                    -----------------------------------          -----------------------------
<S>                                                              <C>
                    VANGUARD BIOSCIENCES, INC.                                 TEXAS

                    VELDONA USA, INC.                                          TEXAS

                    VELDONA AFRICA, INC.                                       TEXAS

                    VELDONA POLAND, INC.                                       TEXAS

                    ABI TAIWAN, INC.                                           TEXAS

                    AMARILLO CELL OF CANADA, INC.                              TEXAS
</TABLE>

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