UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549


                                    FORM 10-Q


(X)    QUARTERLY  REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
       EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999

                                       OR

(  )   TRANSITION   REPORT   PURSUANT   TO  SECTION  13  OR  15(d)  OF  THE
       SECURITIES EXCHANGE ACT OF 1934


       Commission File Number: 0-21022


                          SHAMAN PHARMACEUTICALS, INC.
             (Exact name of registrant as specified in its charter)


                     Delaware                                94-3095806
(State or other jurisdiction of incorporation            (I.R.S. Employer
                or organization)                        Identification Number)

              213 East Grand Avenue, CA                        94080
      (Address of principal executive offices)               (ZIP Code)


Registrant's telephone number, including area code:      650-952-7070


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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

Number of shares of Common Stock,  $.001 par value,  outstanding as of July
30, 1999:  3,327,189


<PAGE>

                          SHAMAN PHARMACEUTICALS, INC.

                               INDEX FOR FORM 10-Q

                                  June 30, 1999

                                                                          PAGE
                                                                         NUMBER
                                                                         ------

PART I         FINANCIAL INFORMATION

Item 1.        Financial Statements and Notes

               Condensed Balance Sheets as of June 30, 1999 (unaudited)
               and December 31, 1998                                          3

               Condensed Statements of Operations for the three and six
               months ended June 30, 1999 and June 30, 1998 (unaudited)       4

               Condensed Statements of Cash Flows for the three and six
               months ended June 30, 1999 and June 30, 1998 (unaudited)       5

               Notes to Condensed Financial Statements                        6

Item 2.        Management's Discussion and Analysis of Financial Condition
               and Results of Operations                                      9

Item 3.        Quantitative and Qualitative  Disclosures About Market Risk   12


PART II        OTHER INFORMATION

Item 1.        Legal Proceedings                                             21

Item 2.        Changes in Securities                                         21

Item 3.        Defaults in Senior Securities                                 21

Item 4.        Submission of Matters to a Vote of Security Holders           21

Item 5.        Other Information                                             23

Item 6.        Exhibits and Reports on Form 8-K                              23


SIGNATURES                                                                   24

                                       2
<PAGE>


PART I   FINANCIAL INFORMATION

      Item 1.  Financial Statements and Notes

<TABLE>
<CAPTION>
                                                   SHAMAN PHARMACEUTICALS, INC.
                                                    CONDENSED BALANCE SHEETS


                                                                              June 30, 1999    December 31, 1998
                                                                              -------------    -----------------
<S>                                                                           <C>               <C>
                                                                               (Unaudited)       (in thousands)
           ASSETS

Current assets:
  Cash and cash equivalents                                                    $     517        $   5,887
  Short-term investments                                                              --            3,277
  Amounts due from related parties                                                   174              209
  Prepaid expenses and other current assets                                          371              284
                                                                                ---------        ---------
                       Total current assets                                        1,062            9,657

Property and equipment, net                                                        2,156            3,114
Other assets                                                                         308              368
                                                                                ---------        ---------
     Total assets                                                              $   3,526        $  13,139
                                                                                =========        =========

       LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)

Current liabilities:
  Accounts payable and other accrued expenses                                  $   1,489        $   1,515
  Accrued clinical trial costs                                                       901            2,051
  Accrued professional fees                                                          971              948
  Accrued compensation                                                               178              327
  Accrued restructuring costs                                                      1,600               --
  Advances - contract research                                                       969              969
  Current installments of long-term obligations                                    2,783            2,804
                                                                                ---------        ---------
     Total current liabilities                                                     8,891            8,614

Long-term obligations, excluding current installments                              1,318            2,415

Stockholders' equity:
  Preferred Stock                                                                     --               --
  Common Stock                                                                         3               30
  Additional paid-in capital                                                     154,977          152,699
  Deferred compensation and other adjustments                                        (55)            (185)
  Accumulated deficit                                                           (161,608)        (150,434)
                                                                                ---------        ---------
     Total stockholders' equity (net capital deficiency)                          (6,683)           2,110
                                                                                ---------        ---------
     Total liabilities and stockholders' equity (net capital deficiency)       $   3,526        $  13,139
                                                                                =========        =========
</TABLE>


NOTE: The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.

See Notes to condensed financial statements.

                                       3
<PAGE>




<TABLE>
<CAPTION>

                                                     SHAMAN PHARMACEUTICALS, INC.
                                                 CONDENSED STATEMENTS OF OPERATIONS
                                                             (Unaudited)


                                                              Three Months Ended June 30,        Six Months Ended June 30,
                                                              ----------------------------      ---------------------------
                                                                  1999            1998              1999           1998
                                                              ------------     -----------      ------------    -----------
                                                                             (in thousands, except per share data)
<S>                                                           <C>              <C>              <C>             <C>
Revenue from collaborative  agreements                        $       -        $     850        $       -       $   1,725

Operating expenses:
    Research and development                                      1,181            8,227            3,649          15,740
    General and administrative                                    1,325            1,408            2,819           2,684
    Restructuring costs                                            (136)               -            2,053               -
                                                              ----------       ----------       ----------      ----------
         Total operating expenses                                 2,370            9,635            8,521          18,424
                                                              ----------       ----------       ----------      ----------
Loss from operations                                             (2,370)          (8,785)          (8,521)        (16,699)

Other Income (expense):
    Interest income                                                  16              125               90             357
    Interest expense                                               (210)            (504)            (469)         (1,311)
                                                              ----------       ----------       ----------      ----------
Net (loss)                                                    $  (2,564)       $  (9,164)       $  (8,900)      $ (17,653)
Deemed dividend on Preferred Stock                                    -                -           (2,274)              -
                                                              ----------       ----------       ----------      ----------
Net loss applicable to Common Stockholders                    $  (2,564)       $  (9,164)       $ (11,174)      $ (17,653)
                                                              ==========       ==========       ==========      ==========
Basic and diluted net loss per common share                   $   (1.07)       $  (10.10)       $   (5.50)      $  (19.62)
                                                              ==========       ==========       ==========      ==========
Shares used in calculation of net loss per share                  2,399              908            2,031             900
                                                              ==========       ==========       ==========      ==========
</TABLE>

See Notes to condensed financial statements.

                                       4
<PAGE>


<TABLE>
<CAPTION>
                                         SHAMAN PHARMACEUTICALS, INC.
                                      CONDENSED STATEMENTS OF CASH FLOWS
                               Increase (Decrease) in Cash and Cash Equivalents
                                                  (Unaudited)

                                                                                Three Months Ended June 30,
                                                                              -------------------------------
                                                                                 1999                1998
                                                                              -----------         -----------
<S>                                                                           <C>                  <C>
Operating activities:                                                                 (in thousands)

Net loss applicable to Common Stockholders                                    $  (11,174)         $  (17,653)

Adjustments to reconcile net loss applicable to Common Stockholders
   to net cash used in operating activities:
        Depreciation                                                                 401                 714
        Amortization of warrants and deferred equity costs                           193                 394
        (Gain) loss on disposal of fixed assets                                      (14)                 20
        Deemed dividend on Preferred Stock                                         2,273                   -
        Payment of interest in Common Stock                                           33                 456

Changes in operating assets and liabilities:
        Prepaid expenses, current assets and other assets                            (26)               (433)
        Accounts payable, accrued professional fees, accrued compensation,
            accrued clinical trial costs and contract research advances              298               1,125
                                                                              -----------         -----------
Net cash used in operating activities                                             (8,016)            (15,422)
                                                                              -----------         -----------
Investing activities:
        Purchases of available-for-sale investments                                    -              (1,999)
        Maturities of available-for-sale investments                                   -               5,049
        Sales of available-for-sale investments                                    3,292               2,806
        Proceeds on sale of fixed assets due to restructuring                        658                   -
        Capital expenditures                                                         (87)               (222)
        Employee loans, net of repayments and forgiveness of interest                 35                   -
                                                                              -----------         -----------
Net cash provided by investing activities                                          3,898               5,634
                                                                              -----------         -----------
Financing activities:
        Other Preferred Stock costs                                                  (26)                  -
        Proceeds from issuance of Common Stock, net                                    -                  15
        Principal payments on long-term obligations                               (1,226)             (1,128)
        Proceeds from asset financing arrangements                                     -                 511
                                                                              -----------         -----------
Net cash used in financing activities                                             (1,252)               (602)
                                                                              -----------         -----------
Net (decrease) in cash and cash equivalents                                       (5,370)            (10,390)
Cash and cash equivalents at beginning of period                                   5,887              11,340
                                                                              -----------         -----------
Cash and cash equivalents at end of period                                    $      517          $      950
                                                                              ===========         ===========
</TABLE>
See Notes to condensed financial statements.

                                       5
<PAGE>


                          SHAMAN PHARMACEUTICALS, INC.

                 NOTES TO CONDENSED FINANCIAL STATEMENTS

                              June 30, 1999
                               (Unaudited)

1.    Basis of Presentation

      We are focused on the discovery, development, and marketing of novel,
proprietary botanical dietary supplements derived from tropical plant sources.
We intend to implement our commercialization efforts through our recently
established botanicals division, which we have named ShamanBotanicals.com. Our
commercialization plan includes the use of community building initiatives on the
Internet and other distribution channels, and is based on marketing our
exclusive access to our proprietary branded products. We also have available for
out-licensing a pipeline of botanical product candidates, as well as novel
pharmaceutical products for major human diseases developed by isolating active
compounds from tropical plants with a history of medicinal use.

      The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and in accordance with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting only of normal recurring adjustments) considered necessary for a
fair presentation have been included. The results of operations for the interim
periods shown herein are not necessarily indicative of operating results for the
entire year. This unaudited financial data should be read in conjunction with
the audited financial statements and notes thereto included in our Annual Report
on Form 10-K for the fiscal year ended December 31, 1998, filed with the
Securities and Exchange Commission on March 31, 1999.

      Until December 1998, we were solely focused on developing pharmaceutical
products derived from tropical plant sources. Our pharmaceutical business model
was dependent upon our ability to launch our first pharmaceutical product in
1999. As a result of the U.S. Food and Drug Administration response to our
proposed fast-track New Drug Application package for our leading pharmaceutical
product candidate, SP-303/Provir, and insufficient resources to continue the
costly process of conducting a second pivotal trial which would have created
significant delays, we restructured our business to focus on the development and
marketing of dietary supplements.

      These unaudited interim financial statements have been prepared assuming
that we will continue as a going concern. We need substantial working capital to
fund our operations. As of June 30, 1999, we had cash, cash equivalents and
short-term investment balances of approximately $517,000. Our long-term capital
requirements will depend on numerous factors, including among others, the extent
and progress of additional development activities related to the botanicals
products, the success of any marketing efforts related to the botanicals
products, the success of any out-licensing efforts with respect to the
pharmaceuticals programs, and the extent and timing of additional costs
associated with patents and other intellectual property rights. Our projections
show that cash on hand as of June 30, 1999 plus approximately $1.0 million we
borrowed in July 1999 under a credit agreement entered into in April 1999 and
$400,000 from the license and sale agreement entered into in August 1999 will be
sufficient to fund operations at the current level through mid-September 1999.
Unless we are successful in our efforts to sell or out-license our
pharmaceutical products, or to sell or establish collaborative agreements to
sell our botanical products, we will be unable to fund our current operations
beyond mid-September 1999. In addition, unless we are successful in our efforts
to raise additional capital through our current Series R Preferred Stock rights
offering or other offerings of equity securities, to sell or out-license our
pharmaceutical products, or to sell or establish collaborative agreements to
sell our botanical products, our cash resources will be used to satisfy our
existing liabilities, and we will be unable to fund our operations, which may
result in significant delay of our planned activities or the cessation of
operations. Even if we are successful in these efforts to raise additional
funds, such funds may not be adequate to fund our operations on a long-term
basis.

      In addition, we may need additional capital to fund the redemption of our
Series D Preferred Stock or to pay accumulated dividends. The delisting of our
common stock from The Nasdaq National Market on February 2, 1999 constituted an
optional redemption event for our Series D Preferred Stock. Since we do not have
adequate resources to pay to redeem the Series D Preferred Stock, we have issued
a notice to the holders of the Series D Preferred Stock as required under our
charter that prevented the redemption of the Series D Preferred Stock. Under the
terms of our charter, the effect of preventing this redemption event by issuing


                                       6
<PAGE>

the notice was to increase the annual cumulative dividend payable to the Series
D Preferred Stock holders to $180 per share and to adjust the conversion price
of the Series D Preferred Stock to 72% of the lowest trading price for a
designated period prior to the conversion. The notice preventing the redemption
of the Series D Preferred Stock will remain in effect for as long as our
securities are not listed on any of The Nasdaq National Market, The Nasdaq
SmallCap Market, the American Stock Exchange or the New York Stock Exchange. In
connection with the issuance of such notice, we recorded a deemed dividend
charge in the amount of $2,273,614 in the first quarter of 1999.

      We will need to obtain additional funding through public or private equity
or debt financing, collaborative agreements or from other sources to continue
our research and development activities, fund operating expenses and
commercialize products. If we raise additional funds by issuing equity
securities, current stockholders may experience significant dilution. If we
obtain additional funds through collaborative agreements, we may be required to
relinquish rights to certain of our technologies, product candidates, products
or marketing territories that we would otherwise seek to develop or
commercialize ourselves. We may be unable to obtain adequate financing on
acceptable terms when needed. If we are unable to obtain adequate funds, we may
be required to reduce significantly our spending and delay, scale back or
eliminate one or more of our research, development, or commercialization
programs, which would have a material adverse effect on our business, financial
condition and results of operations.

2.    Restructuring Expenses

      On February 1, 1999, we initiated a restructuring plan in which we closed
down the operations of our pharmaceutical business. We now intend to out-license
worldwide marketing rights to all our pharmaceutical compounds and will focus
our efforts on the development and commercialization of botanical dietary
supplements. The restructuring plan includes: cessation of pharmaceutical
research and development activities and related operations; outlicensing of all
of our current pharmaceutical research programs; reduction in force of
approximately 60 employees (65% of workforce); sale or disposal of all of our
fixed assets that are not needed for our botanicals business; and sub-leasing a
portion of our facility.

      The termination of 60 employees occurred on February 1, 1999. The
following table summarizes the Company's restructuring activities as of June 30,
1999.

<TABLE>
<CAPTION>
                                       Total
                                    Restructuring                     Balance at
            Category                   Charges         Spending     June 30, 1999
          --------------           ---------------   -----------   ----------------
          (in thousands)
<S>                                <C>               <C>           <C>

    Severance and related charges       $   467          $   352        $     0
    Cancellation of contracts             1,200                0          1,200
    Other                                   400                0            400
    Gain on disposal of fixed assets        (14)             (14)             0
                                        -------          -------        --------
                                        $ 2,053          $   453        $ 1,600
                                        =======          =======        =======
</TABLE>

      In addition, we have approximately $969,000 recorded as deferred revenue
which we have not yet earned. We are currently in negotiations with Lipha/Merck
for the discontinuation of the pharmaceutical research and development agreement
between Shaman and Lipha/Merck.

3.    Reverse Stock Split

      On June 11, 1999, the stockholders approved, and on June 22, 1999, the
Company effected, a one-for-twenty reverse stock split of the Company's
outstanding Common Stock. All common share and per common share amounts have
been restated to reflect the reverse stock split in all periods presented.

4.    Convertible Promissory Notes

      In April 1999, we entered into a credit facility and note purchase
agreement with certain investors, stockholders, key executives and members of
the board of directors, pursuant to which we borrowed approximately $1.0 million
in July 1999. The convertible promissory notes issued pursuant to the credit
agreement are due and payable on the earlier of (i) 30 days subsequent to the
completion of the public rights offering, or (ii) December 31, 1999. Interest on
the convertible promissory notes is accrued at an annual rate of 12%. The
convertible promissory notes are secured by certain assets of Shaman and are
convertible into shares of Series R Preferred Stock, or into common stock if no
public offering occurs prior to December 31, 1999. In connection with the credit


                                       7
<PAGE>

agreement, we issued warrants to purchase shares of Series R Preferred Stock.
The number of shares subject to these warrants is equal to 50% of the debt
amount divided by $15, which is the per share sale price of the shares sold in
the public offering. These warrants are exercisable, on a cashless basis,
commencing on April 5, 1999, and through the third anniversary date of the
public offering. The conversion price of the convertible promissory notes and
the exercise price of the warrants is equal to $15, which is the per share
offering price in the public offering. If a public offering is not completed
prior to December 31, 1999, then the conversion price of the convertible
promissory notes and the exercise price of the warrants will be the lower of
$0.05 per share of our common stock, or 1/3 of the five-day weighted average
trading price of our common stock for the period ending three trading days prior
to conversion or exercise.

      In April 1999, we entered into an amendment agreement with an existing
lender to permit the issuance by us of the convertible promissory notes. In
connection with the amendment, we issued a warrant to purchase shares of Series
R Preferred Stock, or into common stock if no public offering occurs prior to
December 31, 1999. The number of shares subject to these warrants is equal to
$592,685 divided by $15, which is the per share sale price of the shares sold in
the above offering. This warrant is exercisable, on a cashless basis, commencing
on April 30, 1999 and through the seventh anniversary date of the earlier to
occur of (i) December 31, 1999, or (ii) the date of the above offering. The per
share exercise price will be equal to $15, which is the per share offering price
of the public rights offering, or, if no offering is completed by December 31,
1999, then the lower of $0.05 per share of our common stock, or 1/3 of the
five-day weighted average trading price of our common stock for the period
ending three trading days prior to conversion or exercise.

4.    Subsequent Events

      Series R Convertible Preferred Stock Offering

      In July 1999, our Registration Statement on Form S-1 for the rights
offering was declared effective by the Securities and Exchange Commission. In
the rights offering, we are offering to sell up to 1,000,000 shares of our
Series R Convertible Preferred Stock at $15.00 per share (up to a total of $15
million) to our common stockholders of record on July 14, 1999. Stockholders of
record on July 14, 1999 received, at no cost, the right to buy seven shares of
Series R Preferred Stock for approximately every 22 shares of common stock that
they owned on July 14, 1999. Each share of Series R Preferred Stock will
automatically convert on February 1, 2000 into shares of common stock at a
conversion price equal to the lesser of (i) $0.10 or (ii) the price that is
equal to 10% of the average closing sales price of our common stock for the 10
trading days ending three trading days prior to February 1, 2000. The rights
offering will terminate on August 23, 1999, unless extended by us until
September 7, 1999.

      License and Sale Agreement

     In August 1999, we entered into a License and Sale Agreement with
Metabolix, Inc. whereby Metabolix, Inc. has licensed certain rights to Shaman's
library of extracts and compounds for research, development, and
commercialization purposes. We have received an up-front license payment of
$350,000 and additional $55,000 for an option fee to specific piece of
technology. We will receive royalties on any resulting products commercialized.
Metabolix, Inc. also has an option to license further technology for additional
up-front payments over the next four months.

                                       8
<PAGE>


                          SHAMAN PHARMACEUTICALS, INC.

Item 2. Management's Discussion and Analysis of Financial Condition and Results
        of Operations

Overview

      We are focused on the discovery, development, and marketing of novel,
proprietary botanical dietary supplements derived from tropical plant sources.
We intend to implement our commercialization efforts through our recently
established botanicals division, which we have named ShamanBotanicals.com. Our
commercialization plan includes the use of community building initiatives on the
Internet and other distribution channels, and is based on marketing our
exclusive access to our proprietary branded products. We also have available for
out-licensing a pipeline of botanical product candidates, as well as novel
pharmaceutical products for major human diseases developed by isolating active
compounds from tropical plants with a history of medicinal use.

      Until December 1998, we were solely focused on developing pharmaceutical
products derived from tropical plant sources. Our pharmaceutical business model
was dependent upon our ability to launch our first pharmaceutical product in
1999. As a result of the U.S. Food and Drug Administration response to our
proposed fast-track New Drug Application package for our leading pharmaceutical
product candidate, SP-303/Provir, and insufficient resources to continue the
costly process of conducting a second pivotal trial which would have created
significant delays, we restructured our business to focus on the development and
marketing of dietary supplements.

Results of Operations for the Quarters Ended June 30, 1999 and 1998

      The results of operations for the quarter and six months ended June 30,
1998 were related to our pharmaceutical operations. Since we ceased operations
of our pharmaceutical business and focused our efforts in our botanical business
in February 1999, our results of operations for the six months ended June 30,
1999 and future periods are not comparable to the same periods last year.

      We recorded collaborative revenues of $0 and $850,000 for the quarters
ended June 30, 1999 and 1998, respectively and $0 and $1,725,000 for the six
months ended June 30, 1999 and 1998, respectively. Revenues for the quarter and
six months ended June 30, 1998 resulted from Shaman's collaboration with
Lipha/Merck and research funding from Ono Pharmaceutical Co., Ltd., which
expired in May 1998.

      In December 1998, we renegotiated the terms of the existing agreement with
Lipha/Merck. Under the new terms, we forgave $6.0 million in aggregate payments
due over the remaining term of the original agreement in exchange for a one-time
up-front payment of an aggregate of $2.0 million, consisting of a $1.0 million
research payment (which remains recorded as deferred revenue that we have not
yet earned) and a $1.0 million equity investment. We are currently in
negotiations with Lipha/Merck for the discontinuation of this agreement. There
will be no further research payments from Lipha/Merck.

      We incurred research and development expenses of $1.2 million and $8.2
million for the quarters ended June 30, 1999 and 1998, respectively and $3.6
million, of which $1.6 million was related to the research and development of
the botanicals division, and $15.7 million for the six months ended June 30,
1999 and 1998, respectively. This decrease was primarily attributable to the
closing down of our pharmaceutical business as of February 1, 1999. Research and
development expenses are expected to decrease in 1999 as we focus our efforts in
our botanicals business, effective February 1, 1999.

      General and administrative expenses were $1.3 million and $1.4 million for
the quarters ended June 30, 1999 and 1998, respectively, and $2.8 million and
$2.7 million for the six months ended June 30, 1999 and 1998, respectively. This
increase was primarily attributable to the legal dispute costs. General and
administrative expenses are expected to decrease in 1999 as we focus our efforts
in our botanicals business, effective February 1, 1999.

      Interest income was $16,000 and $125,000 for the quarters ended June 30,
1999 and 1998, respectively and $90,000 and $357,000 for the six months ended
June 30, 1999 and 1998, respectively. Interest income decreased for the quarter
and six months ended June 30, 1999, compared with the quarter and six months
ended June 30, 1998, due to lower average cash and investment balances as we
continue to fund our operations. Interest expense was $210,000 and $504,000 for
the quarters ended June 30, 1999 and 1998, respectively and $470,000 and
$1,311,000 for the six months ended June 30, 1999 and 1998, respectively.


                                       9
<PAGE>

Interest expense decreased for the period ended June 30, 1999, compared with the
period ended June 30, 1998 due to lower average debt balances.

Restructuring Expenses

      On February 1, 1999, we initiated a restructuring plan in which we closed
down the operations of our pharmaceutical business. We now intend to out-license
worldwide marketing rights to all our pharmaceutical compounds and will focus
our efforts on the development and commercialization of botanical dietary
supplements. The restructuring plan includes: cessation of pharmaceutical
research and development activities and related operations; outlicensing of all
of our current pharmaceutical research programs; reduction in force of
approximately 60 employees (65% of workforce; sale or disposal of all of our
fixed assets that are not needed for our botanicals business; and sub-leasing a
portion of our facility.

      The termination of 60 employees occurred on February 1, 1999. The
following table summarizes the Company's restructuring activities as of June 30,
1999.

<TABLE>
<CAPTION>
                                       Total
                                    Restructuring                     Balance at
            Category                   Charges         Spending     June 30, 1999
          --------------           ---------------   -----------   ----------------
          (in thousands)
<S>                                <C>               <C>           <C>

    Severance and related charges       $   467          $   352        $     0
    Cancellation of contracts             1,200                0          1,200
    Other                                   400                0            400
    Gain on disposal of fixed assets        (14)             (14)             0
                                        -------          -------        --------
                                        $ 2,053          $   453        $ 1,600
                                        =======          =======        =======
</TABLE>

      In addition, we have approximately $969,000 recorded as deferred revenue
for which we have not yet earned. We are currently in negotiations with
Lipha/Merck for the discontinuation of the pharmaceutical research and
development agreement between Shaman and Lipha/Merck.

Delisting of our common stock from Nasdaq National Market

      The delisting of our common stock from The Nasdaq National Market on
February 2, 1999 constituted an optional redemption event for our Series D
Preferred Stock. Since we do not have adequate resources to pay to redeem the
Series D Preferred Stock, we have issued a notice to the holders of the Series D
Preferred Stock as required under our charter that prevented the redemption of
the Series D Preferred Stock. Under the terms of our charter, the effect of
preventing this redemption event by issuing the notice was to increase the
annual cumulative dividend payable to the Series D Preferred Stock holders to
$180 per share and to adjust the conversion price of the Series D Preferred
Stock to 72% of the lowest trading price for a designated period prior to the
conversion. The notice preventing the redemption of the Series D Preferred Stock
will remain in effect for as long as our securities are not listed on any of The
Nasdaq National Market, The Nasdaq SmallCap Market, the American Stock Exchange
or the New York Stock Exchange. In connection with the issuance of such notice,
we recorded a deemed dividend charge in the amount of $2,273,614 in the first
quarter of 1999.

Liquidity and Capital Resources

      As of June 30, 1999, our cash, cash equivalents, and investments totaled
approximately $517,000, compared with $9.2 million at December 31, 1998. We
invest excess cash according to our investment policy that provides guidelines
with regard to liquidity, type of investment, credit ratings and concentration
limits.

      In April 1999, we entered into a credit facility and note purchase
agreement with certain investors, stockholders, key executives and members of
the board of directors, pursuant to which we borrowed approximately $1.0 million
in July 1999. The convertible promissory notes issued pursuant to the credit
agreement are due and payable on the earlier of (i) 30 days subsequent to the
completion of the public rights offering, or (ii) December 31, 1999. Interest on
the convertible promissory notes is accrued at an annual rate of 12%. The
convertible promissory notes are secured by certain assets of Shaman and are
convertible into shares of Series R Preferred Stock, or into common stock if no
public offering occurs prior to December 31, 1999. In connection with the credit


                                       10
<PAGE>

agreement, we issued warrants to purchase shares of Series R Preferred Stock.
The number of shares subject to these warrants is equal to 50% of the debt
amount divided by $15, which is the per share sale price of the shares sold in
the public offering. These warrants are exercisable, on a cashless basis,
commencing on April 5, 1999, and through the third anniversary date of the
public offering. The conversion price of the convertible promissory notes and
the exercise price of the warrants is equal to $15, which is the per share
offering price in the public offering. If a public offering is not completed
prior to December 31, 1999, then the conversion price of the convertible
promissory notes and the exercise price of the warrants will be the lower of
$0.05 per share of our common stock, or 1/3 of the five-day weighted average
trading price of our common stock for the period ending three trading days prior
to conversion or exercise.

      We expect to continue to incur losses at least through 1999. We need
substantial working capital to fund our operations. As of June 30, 1999, we had
cash, cash equivalents and short-term investment balances of approximately
$517,000. Our long-term capital requirements will depend on numerous factors,
including among others, the extent and progress of additional development
activities related to the botanicals products, the success of any marketing
efforts related to the botanicals products, the success of any out-licensing
efforts with respect to the pharmaceuticals programs, and the extent and timing
of additional costs associated with patents and other intellectual property
rights. Our projections show that cash on hand as of June 30, 1999 plus
approximately $1.0 million we borrowed in July 1999 under a credit agreement
entered into in April 1999 and $400,000 from the license and sale agreement
entered into in August 1999 will be sufficient to fund operations at the current
level through mid-September 1999. Unless we are successful in our efforts to
sell or out-license our pharmaceutical products, or to sell or establish
collaborative agreements to sell our botanical products, we will be unable to
fund our current operations beyond mid-September 1999. In addition, unless we
are successful in our efforts to raise additional capital through our proposed
rights offering or other offerings of equity securities, to sell or out-license
our pharmaceutical products, or to sell or establish collaborative agreements to
sell our botanical products, our cash resources will be used to satisfy our
existing liabilities, and we will be unable to fund our operations, which may
result in significant delay of our planned activities or the cessation of
operations. Even if we are successful in these efforts to raise additional
funds, such funds may not be adequate to fund our operations on a long-term
basis.

      In addition, we may need additional capital to fund the redemption of our
Series D Preferred Stock or to pay accumulated dividends. The delisting of our
common stock from The Nasdaq National Market on February 2, 1999 constituted an
optional redemption event for our Series D Preferred Stock. Since we do not have
adequate resources to pay to redeem the Series D Preferred Stock, we have issued
a notice to the holders of the Series D Preferred Stock as required under our
charter that prevented the redemption of the Series D Preferred Stock. Under the
terms of our charter, the effect of preventing this redemption event by issuing
the notice was to increase the annual cumulative dividend payable to the Series
D Preferred Stock holders to $180 per share and to adjust the conversion price
of the Series D Preferred Stock to 72% of the lowest trading price for a
designated period prior to the conversion. The notice preventing the redemption
of the Series D Preferred Stock will remain in effect for as long as our
securities are not listed on any of The Nasdaq National Market, The Nasdaq
SmallCap Market, the American Stock Exchange or the New York Stock Exchange. In
connection with the issuance of such notice, we recorded a deemed dividend
charge in the amount of $2,273,614 in the first quarter of 1999.

      We will need to obtain additional funding through public or private equity
or debt financing, collaborative agreements or from other sources to continue
our research and development activities, fund operating expenses and prepare for
commercialization of products. If we raise additional funds by issuing equity
securities, current stockholders may experience significant dilution. If we
obtain additional funds through collaborative agreements, we may be required to
relinquish rights to certain of our technologies, product candidates, products
or marketing territories that we would otherwise seek to develop or
commercialize ourselves. We may be unable to obtain adequate financing on
acceptable terms when needed. If we are unable to obtain adequate funds, we may
be required to reduce significantly our spending and delay, scale back or
eliminate one or more of our research, development, or commercialization
programs, which would have a material adverse effect on our business, financial
condition and results of operations.

Year 2000 Compliance

      The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of our computer
programs or hardware that have date-sensitive software or embedded chips may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions or engage in similar normal business activities.

      Based on recent assessments, we have determined that we will be required
to modify portions of our software and certain hardware so that those systems
will properly utilize dates beyond December 31, 1999. We presently believe that


                                       11
<PAGE>

with modifications or replacements of existing software and certain hardware,
the Year 2000 issue can be mitigated. We believe that such modification and
replacements are not significant, and should such modification and replacements
be delayed there would be no material impact on our operations.

      We have completed the assessment of all internal information technology
and non-information technology systems that could be significantly affected by
the Year 2000. To date, we have not incurred any costs related to the Year 2000
compliance and we estimate that upgrades for those systems not in compliance
will total approximately $200,000. We expect to complete our internal Year 2000
readiness program in the third quarter of 1999. We are also in the process of
asking our significant suppliers and subcontractors that do not share
information systems with us (external agents) whether their systems are Year
2000 compliant. To date, we are not aware of any external agent with a Year 2000
Issue that would materially impact our results of operations, liquidity, or
capital resources. However, we have no means of ensuring that external agents
will be Year 2000 ready. The inability of external agents to complete their Year
2000 resolutions to process in a timely fashion could materially impact us.

      We currently have no contingency plans in place in the event we do not
complete all phases of the Year 2000 program. We plan to evaluate the status of
completion in third quarter of 1999 and determine whether such a plan is
necessary.

Item 3. Quantitative and Qualitative Disclosures About Market Risks

      None.

                                       12
<PAGE>

Certain Factors that May Affect Future Results

      This Form 10-Q contains, in addition to historical information,
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, that involve risks and uncertainties. The Company's actual results
could differ materially from the results discussed in the forward-looking
statements. Factors that could cause or contribute to such differences include
those discussed below and also in "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and elsewhere in our
Form 10-K for the fiscal year ended December 31, 1998, filed with the Securities
and Exchange Commission on March 31, 1999.

If we do not raise significant additional capital, we will be unable to
commercial our product or to fund continuing operations, and may be forced to
cease operations

      We need substantial working capital to fund our operations. As of June 30,
1999, we had cash, cash equivalents and short-term investment balances of
approximately $517,000. Our long-term capital requirements will depend on
numerous factors, including among others, the extent and progress of additional
development activities related to the botanicals products, the success of any
marketing efforts related to the botanicals products, the success of any
out-licensing efforts with respect to the pharmaceuticals programs. Our
projections show that cash on hand as of June 30, 1999 plus approximately $1.0
million we borrowed in July 1999 under a credit agreement entered into in April
1999 and $400,000 from the license and sale agreement entered into in August
1999 will be sufficient to fund operations at the current level through
mid-September 1999. Unless we are successful in our efforts to sell or
out-license our pharmaceutical products, or to sell or establish collaborative
agreements to sell our botanical products, we will be unable to fund our current
operations beyond mid-September 1999. In addition, unless we are successful in
our efforts to raise additional capital through our rights offering or other
offerings of equity securities, to sell or out-license our pharmaceutical
products, or to sell or establish collaborative agreements to sell our botanical
products, our cash resources will be used to satisfy our existing liabilities,
and we will be unable to fund our operations, which may result in significant
delay of our planned activities or the cessation of operations. Even if we are
successful in these efforts to raise additional funds, such funds may not be
adequate to fund our operations on a long-term basis.

      The delisting of our common stock from The Nasdaq National Market on
February 2, 1999 constituted an optional redemption event for our Series D
Preferred Stock. Since we do not have adequate resources to pay to redeem the
Series D Preferred Stock, we have issued a notice to the holders of the Series D
Preferred Stock as required under our charter that prevented the redemption of
the Series D Preferred Stock. Under the terms of our charter, the effect of
preventing this redemption event by issuing the notice was to increase the
annual cumulative dividend payable to the Series D Preferred Stock holders to
$180 per share and to adjust the conversion price of the Series D Preferred
Stock to 72% of the lowest trading price for a designated period prior to the
conversion. The notice preventing the redemption of the Series D Preferred Stock
will remain in effect for as long as our securities are not listed on any of The
Nasdaq National Market, The Nasdaq SmallCap Market, the American Stock Exchange
or the New York Stock Exchange

      We will need to obtain additional funding through public or private equity
or debt financing, collaborative agreements or from other sources to continue
our research and development activities, fund operating expenses and prepare for
commercialization of products. If we raise additional funds by issuing equity
securities, current stockholders, especially those who do not participate in the
rights offering, may experience significant dilution. If we obtain additional
funds through collaborative agreements, we may be required to relinquish rights
to certain of our technologies, product candidates, products or marketing
territories that we would otherwise seek to develop or commercialize ourselves.
We may be unable to obtain adequate financing on acceptable terms when needed.
If we are unable to obtain adequate funds, we may be required to reduce
significantly our spending and delay, scale back or eliminate one or more of our
research, development, or commercialization programs, which would have a
material adverse effect on our business, financial condition and results of
operations.

If we are unable to continue as a going concern, investors will loss their
investment

      We have suffered recurring and significant losses from operations. We have
also relied upon debt and equity financing to fund these losses and cash flow
deficits. Cash flows from future operations, if any, may not be sufficient to
enable us to continue our current level of operations, or to meet our debts as
they come due. As a result, we may not be able to continue as a going concern.
For the year ended December 31, 1998, our independent auditors have issued a
report which contains explanatory language for the uncertainty related to our
ability to continue as a going concern. If we are to remain as a going concern,
we will need to become and remain profitable and will also need financing in
addition to funds raised in the rights offering. We may not be successful in
achieving profitability or in obtaining new financing and may have to curtail or
cease operations, which could cause our stockholders to lose their investment.

                                       13
<PAGE>

We have a history of operating losses, expect continuing losses and may never
achieve profitability

      We have incurred significant operating losses in each year since our
founding in 1989 and expect to continue to incur losses for the foreseeable
future. We incurred a net loss of approximately $8.9 million for the six months
ended June 30, 1999 and additional non-cash expense of $2.3 million incurred in
connection with the issuance of the Control Notice to holders of Series D
Preferred Stock. As of June 30, 1999, our accumulated deficit was approximately
$162 million.

      If we are to become and remain profitable, we will need to, among other
things, generate product revenues. We have not generated any product sales to
date. We have changed the direction of our operations and are pursuing a new
business model in the botanical dietary supplement industry. Our botanical
dietary supplement products are being prepared for commercial introduction. In
order to generate revenues or profits, we must successfully market these
products or enter into collaborative agreements with others who can successfully
market them. Even if our products are introduced, they may not achieve market
acceptance or we may not achieve profitability.

      Our pharmaceutical product candidates and compounds are still in the
research and development stage and we have ceased all our pharmaceutical
operations. In order to generate revenues from these products, we must
out-license these product candidates. It is possible that our out-licensing
efforts may not be successful, and that we or our licensees may not obtain
required regulatory approvals. Even if our product candidates are developed and
introduced, they may not be successfully marketed and may not achieve market
acceptance or we may not achieve profitability.

The ownership interests of our common stockholders will be substantially reduced
by future issuances of stock upon exercises and conversions of currently
outstanding options, warrants and preferred stock

      We currently have outstanding many securities that are convertible into
shares of common stock. The holders of common stock will be diluted upon the
exercise of outstanding options and warrants and upon conversion of the Series C
Preferred Stock and the Series D Preferred Stock. The Series D Preferred Stock
is currently convertible into common stock at a price equal to 72% of the market
price of the common stock, and commencing in August 1999, the Series C Preferred
Stock will be convertible at a price equal to 85% of the market price of the
common stock and may be freely resold on the market. The common stock issued
upon conversion of the Series C and Series D Preferred Stock will substantially
dilute the common stock and will likely depress the price of the common stock if
large amounts are offered for sale in the open market. In addition, there are
currently outstanding 16,667 shares of Series R Preferred Stock and warrants to
purchase 73,112 shares of Series R Preferred Stock and we are conducting a
public rights offering of up to 1,000,000 shares of Series R Preferred Stock.
The exercise of these warrants and the sale of common stock underlying the
Series R Preferred Stock will also dilute the common stock.

If we are not successful in transitioning into the botanical dietary supplements
business, we may never achieve revenues or profitability

      We have transitioned our operations from pharmaceutical product
development to botanical dietary supplement development and commercialization.
We have no experience in this new industry segment and must create a new
business model. Some skills and relationships developed over time may not be
transferable to our new business. While we have been working with natural
products since our inception, we have no prior experience manufacturing or
marketing dietary supplements. We may not be successful in these activities and
may never generate revenues or profitability from our botanicals business.

      Our botanical products are at various stages of development, ranging from
initial research to final formulation. We will need to conduct additional
research and development to move our product candidates toward
commercialization. Our research and development efforts on potential products
may not lead to development of products that we can successfully commercialize.
In addition, we may not be able to produce our products in commercial quantities
at acceptable costs, or to market and sell our products successfully. Our
products may also prove to have undesirable or unintended side effects that may
prevent or limit their commercial use. Accordingly, we may curtail, redirect,
suspend or eliminate our product development or commercialization at any time.

If third party manufacturers on whom we rely fail to perform their services, our
supply of products would be delayed and possibly disrupted

      We currently produce products only in pilot scale quantities and do not
have the staff or facilities necessary to manufacture products in commercial
quantities. Therefore, we must rely on collaborative partners or third party
manufacturing facilities. We may not be successful in entering into third party
manufacturing arrangements on acceptable terms, if at all. In addition, should


                                       14
<PAGE>

we or our third party manufacturers encounter delays or difficulties in
producing, packaging and distributing our finished products, our clinical trials
and market introduction and subsequent sales of our products could be adversely
affected.

      Contract manufacturers must conform to certain Good Manufacturing
Practices regulations for foods on an ongoing basis. Our dependence on third
parties for the manufacture of our products may adversely affect our ability to
develop and deliver products on a timely and competitive basis.

Since we have only a limited marketing staff, we may never achieve adequate
sales and revenues to achieve profitability

      We currently have minimal marketing staff. If we are unable to
successfully establish, execute and finance a complete marketing plan for our
first product, SB-Normal Stool Formula, or subsequent products, we may not
achieve a successful product entry into the marketplace and may fail to achieve
adequate sales and revenues from our botanical products to achieve
profitability. It is unlikely we would ever achieve profitability if our first
product is not successfully marketed and sold.

We may incur material costs in connection with the termination of prior
research and development agreement

      The research and development efforts in our discontinued diabetes program
were dependent upon arrangements with Lipha/Merck. We are currently in
negotiations with Lipha/Merck for the discontinuation of their research
agreement. Lipha/Merck will make no further research payments, and may have a
claim against us in connection with the termination of the agreement. We may
never derive any significant revenues from any of our existing or future
collaborations and may incur a loss in connection with the termination of
existing collaborations.

If we fail to compete in the intensely competitive botanical dietary supplement
industry, we may never achieve profitability

      The dietary supplement business is highly competitive and is characterized
by significant pressure on pricing and heavy commitment of marketing resources
for commodity products. Although our products are proprietary, we may face
competition from start-up companies developing and marketing new commercial
products that have or claim to have similar functionality. Our failure to
successfully compete for customers would inhibit our future growth, revenues and
profitability.

If we do not succeed in marketing our botanical products over the Internet, we
may be unable to sell adequate volumes of our products or generate revenues
adequate to achieve profitability

      We intend to market our first product, SB-Normal Stool Formula, directly
to consumers through the Internet on our web site. We have no experience in
marketing any product on the Internet, and we have no market visibility or brand
name awareness on the Internet. Although Internet sites marketing dietary
supplements do exist, the Internet may never develop as a strong or viable
marketing and distribution channel for dietary supplements. We may not be
successful in using the Internet as a direct marketing and distribution channel
for our products, and if we do not succeed, we may be unable to generate
adequate revenues to achieve profitability.

Since our business plan relies substantially on marketing our future products
over the Internet, if our third party Internet access providers fail to keep our
web site operational, sales of our products would be disrupted and our marketing
efforts would be harmed.

      We intend to market our first product primarily over the Internet, and
will rely on third parties to provide us with access to the Internet and to
enable commerce over our web site, including providing adequate security of
information provided over the web site. Any failure by such third party
providers to provide uninterrupted access by our customers to our web site and
to ensure that commerce can be conducted on our web site would disrupt sales and
discourage use of our web site by customers, which would have a material adverse
effect on our revenues and profits.

                                       15
<PAGE>

On-line security breaches of our web site could harm our business by
substantially increasing our costs, exposing us to liability and harming our
sales and marketing efforts

      A significant barrier to electronic commerce and communications is the
secure transmission of confidential information over public networks. We plan to
rely on encryption and authentication technology licensed from third parties to
provide the security and authentication necessary to effect secure transmission
of confidential information to and from our web site. It is possible that
advances in computer capabilities, new discoveries or other developments will
result in a compromise or breach of the algorithms that we select for this
purpose. We may be required to expend significant capital and other resources to
protect against the threat of such security breaches or to alleviate problems
caused by such breaches. The public's concern over the security of Internet
transactions and the privacy of users may also inhibit the growth of the web as
a means of conducting commercial transactions. To the extent that our activities
or those of third party contractors involve the storage and transmission of
proprietary information, such as credit card numbers, security breaches could
expose us to a risk of loss or litigation and possible liability. Our security
measures may not be sufficient to prevent security breaches, and the failure to
prevent such security breaches could increase our costs, disrupt our sales and
marketing efforts and result in costly liability to Shaman.

Government regulation of dietary supplements could increase our costs or
prohibit or limit sales of our products

      The manufacturing, processing, formulating, packaging, labeling and
advertising of our botanical dietary supplement products are subject to
regulation in the United States by several federal agencies, including the Food
and Drug Administration, the Federal Trade Commission, the Consumer Product
Safety Commission, the Department of Agriculture and the Environmental
Protection Agency. Our activities are also regulated by various agencies of the
states and localities where we will distribute and sell our products.

      The composition and labeling of dietary supplements is most actively
regulated by the FDA under the provisions of the Federal Food, Drug, and
Cosmetic Act. The FFDC Act has been revised in recent years by the Nutrition
Labeling and Education Act of 1990 and by the Dietary Supplement Health and
Education Act of 1994.

      Our botanical product candidates are generally regulated as dietary
supplements under the 1994 Dietary Supplement Health and Education Act, and are,
therefore, generally not subject to pre-market approval by the FDA. However,
these product candidates are subject to FDA regulation, particularly relating to
adulteration and misbranding. For instance, we are responsible for ensuring that
all dietary ingredients in a supplement are safe, and must notify the FDA in
advance of putting a product containing a new dietary ingredient, defined as an
ingredient not marketed in the United States before October 15, 1994, on the
market and furnish adequate information to provide reasonable assurance of the
ingredient's safety. Currently, we are only pursuing products that are old
dietary ingredients and are therefore not subject to this procedure. Further, if
we make statements about a supplement's effects on the structure or function of
the body, we must, among other things, substantiate that the statements are
truthful and not misleading. In addition, our product labels must bear proper
ingredient and nutritional labeling and we must manufacture our supplements in
accordance with current Good Manufacturing Practices regulations for foods. A
product can be removed from the market if it is shown to pose a significant or
unreasonable risk of illness or injury. Moreover, if the FDA determines that the
"intended use" of any of the our products is for the diagnosis, cure,
mitigation, treatment or prevention of disease, the product would meet the
definition of a drug and would require pre-market approval of safety and
effectiveness prior to its manufacture and distribution. Our failure to comply
with applicable FDA regulatory requirements may result in, among other things,
injunctions, product withdrawals, recalls, product seizures, fines, and criminal
prosecution.

      In March 1999, new FDA regulations governing the labeling of dietary
supplements took effect. The new rules require that information such as the
complete list of ingredients and levels of vitamins and minerals be included on
product labels. While in our judgment these regulatory changes are generally
favorable to the dietary supplements industry, in the future we may be subject
to additional laws or regulations that could have an adverse effect on the
industry and on our business. In addition, existing laws and regulations may be
repealed and applicable regulatory authorities may interpret them stringently or
unfavorably.

      We cannot predict the nature of future laws, regulations, interpretations
or applications, nor can we determine what effect either additional government
regulations or administrative orders, when and if promulgated, or disparate
federal, state and local regulatory schemes would have on our business in the
future. Any change could materially and adversely affect our results of
operations and financial condition.

                                       16
<PAGE>

      Governmental regulations in foreign countries where we may commence or
expand sales may prevent or delay entry into the market or prevent or delay the
introduction, or require the reformulation, of our products. Compliance with
such foreign governmental regulations is generally the responsibility of our
partners or distributors in those countries, which distributors are independent
contractors over whom we have limited or no control.

The costs of compliance with environmental laws and regulations, or our
inability or failure to comply with environmental laws and regulations, could
substantially increase our costs of doing business or result in liability that
could use substantial amounts of our cash resources

      In connection with our research and development activities and
manufacturing of materials, we are subject to federal, state and local laws,
rules, regulations and policies governing the use, generation, manufacture,
storage, air emission, effluent discharge, handling and disposal of certain
materials and wastes. Although we believe we comply with these laws and
regulations in all material respects and have not been required to take any
action to correct any noncompliance, we may be required to incur significant
costs to comply with environmental and health and safety regulations in the
future. Our research, development, and manufacturing activities involve the
controlled use of hazardous materials and chemicals. Although we believe that
our safety procedures for handling and disposing of such materials comply with
the standards prescribed by state and federal regulations, we cannot eliminate
the risk of accidental contamination or injury from these materials completely.
In the event of an accident, we could be held liable for any resulting damages.
Although we have secured insurance to mitigate such expense, any such liability
could exceed our insurance coverage and resources. Such liability could require
us to use a large amount of cash, which would then not be available for funding
operations or development and commercialization of our products.

Product liability claims asserted against us in the future could exceed our
insurance coverage and result in substantial liability to Shaman

      Our business exposes us to potential product liability risks that are
inherent in the development, testing, manufacture, marketing and sale of
pharmaceutical and dietary supplement products. Product liability insurance for
the pharmaceutical and dietary supplement industries generally is expensive. Our
present product liability insurance coverage, which includes coverage for acts
by third parties, including manufacturers of our product candidates, may not be
adequate. We will also need to increase our insurance coverage as we further
develop our products, and we may be unable to obtain adequate insurance coverage
against all potential claims at a reasonable cost. Some of our development and
manufacturing agreements contain insurance and indemnification provisions
pursuant to which we could be held accountable for certain occurrences. If we
are subject to product liability claims for which we have inadequate insurance,
we could be required to use a large amount of cash, which would then not be
available for funding operations or development and commercialization of our
products.

Since the dietary supplement industry is particularly susceptible to public
perception of its products, negative publicity regarding the safety or quality
of our products could adversely impact our sales of these products

      Because we depend on consumers' perception of the safety and quality of
our products as well as similar products distributed by other companies, which
may not adhere to the same quality standards as ours, if our products or a
competitor's similar products were asserted to be harmful to consumers, our
sales and our ability to market our products could be adversely affected by that
negative publicity. In addition, because we depend on perceptions, adverse
publicity associated with illness or other adverse effects resulting from
consumers' failure to use our products as we suggest, other misuse or abuse of
our products or any similar products distributed by other companies could affect
the market acceptance of our products, decrease sales, and make it more
difficult to market and sell our products.

      Furthermore, we believe the recent growth experienced by the nutritional
supplement market is based in part on national media attention regarding recent
scientific research suggesting potential health benefits from regular
consumption of certain dietary supplements and other nutritional products. This
research has been described in major medical journals, magazines, newspapers and
television programs. The scientific research to date is preliminary, and in the
future scientific results and media attention may contain unfavorable or
inconsistent findings that could decrease sales and make it more difficult to
market and sell our products.

                                       17
<PAGE>

Our dependence on raw plant material from Latin and South America, Africa and
Southeast Asia makes us particularly susceptible to the risks of interruptions
in our supplies

      We currently import all of the plant materials for our products from
countries in Latin and South America, Africa and Southeast Asia. We are
dependent upon a supply of raw plant material to make our products. We do not
have formal agreements in place with all of our suppliers. Continued source of
plant supply risks include:

      ~ unexpected changes in regulatory requirements,
      ~ exchange rates, tariffs and barriers,
      ~ difficulties in coordinating and managing foreign operations,
      ~ political instability, and
      ~ potentially adverse tax consequences.

      Interruptions in supply or material increases in the cost of supply could
disrupt or delay sales of our products, inhibit our ability to market our
products, and have a material adverse effect on our business, financial
condition and results of operations. If the prices of raw materials rise, we may
not be able to raise prices quickly enough to offset the effect of these
increased raw material costs, if at all.

      In addition, tropical rainforests and irreplaceable plant resources found
only in such rainforests are currently threatened with destruction. The
destruction of portions of the rainforests which contain the source material
from which our current or future products are derived could disrupt supplies,
cause the cost of supplies to increase dramatically, and materially and
adversely affect our business, financial condition and results of operations.

If we fail to protect our intellectual property rights, we could lose our
ability to stop competitors from using our trademarks or selling our products

      Our success will be substantially dependent on our proprietary technology.
We rely primarily on a combination of patent, copyright and trademark laws,
trade secrets, confidentiality procedures and contractual provisions to protect
our intellectual property. These means of protecting our proprietary rights may
not be adequate. Our trademarks are valuable assets that are very important to
the marketing of our products. Our policy is to pursue registrations for all of
the trademarks associated with our key products. We currently have 20 U.S.
patents issued, 12 U.S. patent applications pending, and one international
application filed. The pending patents may never be approved or issued. Any
issued patents may not provide sufficiently broad protection or may not prove
valid or enforceable in actions against alleged infringers. Others may
independently develop similar products, duplicate any of our products or design
around any of our patents. In addition, many foreign countries may not protect
our products and intellectual property rights to the same extent as the laws of
the United States, and there is considerable variation between countries as to
the level of protection afforded under patents and other proprietary rights.
Such differences may expose us to increased risks of commercialization in each
foreign country in which we may sell products. We also depend on unpatented
trade secrets. All of our employees have entered into confidentiality
agreements. However, others may independently develop substantially equivalent
information and techniques or otherwise gain access to our trade secrets, our
trade secrets may be disclosed or we may be unable to effectively protect our
rights to unpatented trade secrets. To the extent that we or our consultants or
research collaborators use intellectual property owned by others in their work
for us, disputes also may arise as to the rights in related or resulting
know-how and inventions. Litigation may be necessary in the future to enforce
our intellectual property rights, protect our trade secrets or to determine the
validity and scope of the intellectual property rights of others. In the event
of litigation to determine the validity of any third party's claims, we could be
required to expend significant resources and divert the efforts of our technical
and management personnel, whether or not such litigation is determined in our
favor.

      Our success in outlicensing our pharmaceutical assets depends in large
part on our ability to obtain and maintain patents, protect trade secrets and
operate without infringing upon the proprietary rights of others. The patent
position of companies in the pharmaceutical industry generally is highly
uncertain, involves complex legal and factual questions, and has recently been
the subject of much litigation. No consistent policy has emerged from the U.S.
Patent and Trademark Office, or PTO, or the courts regarding the breadth of
claims allowed or the degree of protection afforded under pharmaceutical
patents.

      We are currently in a dispute in Europe regarding a patent for our
proanthocyanidin polymer composition, which covers the active ingredient in
SP-303/Provir. The European Patent Office, the French Patent Office, the German
Patent Office and the Australian Patent Office have each granted a patent
containing broad claims to proanthocyanidin polymer compositions and methods of
use of such compositions, which are similar to our specific composition, to Leon
Cariel and the Institut des Substances Vegetales. The effective filing date of
these patents is prior to the effective filing date of our foreign pending


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<PAGE>

patent application in Europe. Certain of the foreign patents have been granted
in jurisdictions where examination is not rigorous. We have instituted an
Opposition in the European Patent Office against granted European Patent No.
472531 owned by Leon Cariel and Institut des Substances Vegetales. We believe
that the granted claims are invalid and intend to vigorously prosecute the
Opposition. In the United States, the Patent and Trademark Office awarded
judgment to us in an Interference regarding this patent dispute.

      We may be unsuccessful in having the granted European patent revoked or
the claims sufficiently narrowed so that our proanthocyanidin polymer
composition and methods of use are not potentially covered. The holders of the
granted European patent may assert against us claims relating to this patent. If
they are successful, we may not be able to obtain a license to this patent at
all, or at reasonable cost, or be able to develop or obtain alternative
technology to use in Europe or elsewhere. If we cannot obtain licenses to the
patent, we may not be able to introduce or sell our SP-303/Provir product in
Europe. The earlier effective filing date of this patent could limit the scope
of the patents, if any, that we may be able to obtain or result in the denial of
our patent applications in Europe or elsewhere.

If a third party were to bring an infringement claim against us, we would need
to expend significant resources in our defense; if the claim were successful, we
would need to obtain licenses or develop non-infringing technology

      The pharmaceutical industry and, to a lesser extent, the dietary
supplement industry, is subject to frequent litigation regarding patent and
other intellectual property rights. Leading companies and organizations in these
industries have numerous patents that protect their intellectual property rights
in these areas. Third parties may assert claims against us with respect to our
existing and future products. In the event of litigation to determine the
validity of any third party's claims, we could be required to expend significant
resources and divert the efforts of our technical and management personnel,
whether or not such litigation is determined in our favor. In the event of an
adverse result of any such litigation, among other requirements, we could be
required to develop non-infringing technology or to obtain licenses to the
technology that is the subject of the litigation. We may not be successful in
developing non-infringing technology or in obtaining a license to use the
technology on commercially reasonable terms.

If any of our executive officers and key personnel leave Shaman, our ability to
launch our first product or to market our products, and our ability to develop
any new products, could be delayed or disrupted; we could also need to expend
significant resources to hire new personnel

      Our success depends in large part upon the continued contributions of our
key senior management. Our future performance also depends on our ability to
attract and retain qualified management and scientific personnel. Competition
for such personnel is intense, and we may be unable to continue to attract,
assimilate or retain other highly qualified technical and management personnel
in the future. The loss of key personnel or the failure to recruit additional
personnel or to develop needed expertise could delay and inhibit our ability to
launch and market our products, develop new products, or effectively manage our
business.

The recent delisting from the Nasdaq National Market may reduce the liquidity
and marketability of our stock and may depress the market price of our stock

      On February 2, 1999, Nasdaq delisted our common stock from The Nasdaq
National Market and moved our stock to the National Association of Securities
Dealers, Inc.'s OTC Bulletin Board. Although our securities are included on the
OTC Bulletin Board, there can be no assurance that a regular trading market for
the securities will be sustained in the future. The OTC Bulletin Board is an
unorganized, inter-dealer, over-the-counter market which provides significantly
less liquidity than The Nasdaq Stock Market, and quotes for stocks included on
the OTC Bulletin Board are not listed in the financial sections of newspapers as
are those for The Nasdaq Stock Market. Therefore, prices for securities traded
solely on the OTC Bulletin Board may be difficult to obtain. The reduced
liquidity of our stock and the reduced public access to quotations for our stock
could depress the market price of our stock.

"Penny Stock"  regulations  may impose  restrictions on  marketability  of our
stock

      The Securities and Exchange Commission has adopted regulations which
generally define "penny stock" to be any equity security that is not traded on a
national securities exchange or Nasdaq and that has a market price of less than
$5.00 per share or an exercise price of less than $5.00 per share, subject to
certain exceptions. Since our securities that are currently included on the OTC
Bulletin Board are trading at less than $5.00 per share at any time, our stock
may become subject to rules that impose additional sales practice requirements
on broker-dealers who sell such securities to persons other than established
customers and accredited investors. Accredited investors generally include
investors that have assets in excess of $1,000,000 or an individual annual


                                       19
<PAGE>

income exceeding $200,000, or, together with the investor's spouse, a joint
income of $300,000. For transactions covered by these rules, the broker-dealer
must make a special suitability determination for the purchase of such
securities and have received the purchaser's written consent to the transaction
prior to the purchase. Additionally, for any transaction involving a penny
stock, unless exempt, the rules require, among other things, the delivery, prior
to the transaction, of a risk disclosure document mandated by the SEC relating
to the penny stock market and the risks associated therewith. The broker-dealer
must also disclose the commission payable to both the broker-dealer and the
registered representative, current quotations for the securities and, if the
broker-dealer is the sole market-maker, the broker-dealer must disclose this
fact and the broker-dealer's presumed control over the market. Finally, monthly
statements must be sent disclosing recent price information for the penny stock
held in the account and information on the limited market in penny stocks.
Consequently, the penny stock rules may restrict the ability of broker-dealers
to sell our securities and may affect the ability of stockholders to sell our
securities in the secondary market.

Our stock price has been and may continue to be highly volatile

      The price of our common stock has been particularly volatile and will
likely continue to fluctuate in the future. Announcements of technological
innovations, regulatory matters or new commercial products by us or our
competitors, developments or disputes concerning patent or proprietary rights,
publicity regarding actual or potential product results relating to products
under development by us or our competitors, regulatory developments in both the
United States and foreign countries, public concern as to the safety of
pharmaceutical or dietary supplement products, and economic and other external
factors, as well as period-to-period fluctuations in financial results, may have
a significant impact on the market price of our common stock. In addition, from
time to time, the stock market experiences significant price and volume
fluctuations that may be unrelated to the operating performance of particular
companies or industries. The market price of our common stock, like the stock
prices of many publicly traded smaller companies, has been and may continue to
be highly volatile.

Anti-takeover provisions in our charter documents and Delaware law may inhibit
potential acquisition bids for Shaman, which may adversely affect the market
price of our common stock and the voting rights of the holders of the common
stock

      Certain provisions of our charter documents and Delaware law make it more
difficult for a third party to acquire, and may discourage a third party from
attempting to acquire us, even if a change in control would be beneficial to our
stockholders. These provisions could also limit the price that certain investors
might be willing to pay in the future for shares of the common stock. The
provisions include the division of our board of directors into two separate
classes, the ability of the board to elect directors to fill vacancies created
by an expansion of the board, the power of the board to amend our bylaws, and
the requirement that at least 66% of the outstanding shares are required to call
a special meeting of stockholders. Our board will also have the authority to
issue up to 93,715 additional shares of preferred stock, after giving effect to
the issuance of up to 1,300,000 shares of Series R Preferred Stock, and to fix
the price, rights, preferences, privileges and restrictions of those shares
without any further vote or action by the stockholders. The rights of the
holders of common stock will be subject to, and may be adversely affected by,
the rights of the holders of any preferred stock that may be issued in the
future. The issuance of preferred stock with voting rights could make it more
difficult for a third party to acquire a majority of the outstanding voting
stock. Certain provisions of Delaware law applicable to us could also delay or
make more difficult a merger, tender offer or proxy contest involving Shaman,
including Section 203 of the Delaware General Corporation Law, which prohibits a
Delaware corporation from engaging in any business combination with any
interested stockholder for a period of three years unless certain conditions are
met.

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<PAGE>

PART II    OTHER INFORMATION


Item 1.    Legal Proceedings

      As previously disclosed in our annual report on Form 10-K for the year
ended December 31, 1998, in November 1996, a demand for arbitration was filed by
the Company to address a claim by Dr. Tempesta over the scope and coverage, if
any, of the license agreement entered into in February 1999. On June 2, 1999,
the Company and Michael Tempesta entered into a Settlement Agreement and Release
pursuant to which, among other things, the Company (1) agreed to pay certain
royalties on sales of certain pharmaceutical products derived from SP-303, under
the License Agreement dated February 8,1990 between the Company and Dr.
Tempesta, and (2) issued 16,667 shares of its Series R Convertible Preferred
Stock to Dr. Tempesta in compromise of attorneys fees and costs incurred by Dr.
Tempesta in connection with the arbitration proceeding.

Item 2.    Changes in Securities and Use of Proceeds

      On July 22, 1999, the Company issued 16,667 shares of the Company's Series
R Convertible Preferred Stock to Michael Tempesta, in connection with a
settlement of a dispute between the Company and Dr. Tempesta. The purchase price
was $250,005, or $15.00 per share. In consideration of the issuance of the
shares, Dr. Tempesta agreed to release the Company from certain claims from
attorneys fees and costs he had incurred in connection with the arbitration
proceeding commenced by the Company with respect to the dispute between the
Company and Dr. Tempesta. The issuance of the shares to Dr. Tempesta was deemed
to be exempt from registration under the Securities Act of 1933 in reliance on
Section 4(2) thereof.

Item 3.    Defaults in Senior Securities

           None.

Item 4.    Submission of Matters to a Vote of Security Holders


      (a)  The Annual Meeting of Stockholders of Shaman Pharmaceuticals, Inc.
           was held on June 11, 1999.

      (b) The following Directors were elected to serve as Class II directors
          for two years or until their successors are elected and qualified:

                   Name                             Position
           ----------------------            ----------------------
           G. Kirk Raab                      Chairman of the Board
           Herbert H. McDade, Jr.            Class II Director
           M. David Titus                    Class II Director
           Loren D. Israelsen                Class II Director

           The following Directors continue to serve their two-year terms as
           elected at last year's Annual Meeting held on May 15, 1998:

                   Name                             Position
           ----------------------            ----------------------
           Lisa A. Conte                     Class I Director
           Adrian D.P. Bellamy               Class I Director
           Jeffrey Berg                      Class I Director

      (c) The matters voted upon at the meeting and voting of the stockholders
          with respect thereto are as follows:

          (i)   The election of Class II directors to hold office for a term of
                two years from the Annual Meeting.

                G. Kirk Raab
                For:  28,614,781              Withheld:  3,672,706

                Herbert H. McDade, Jr.
                For:  28,667,282              Withheld:  3,620,205



                                       21
<PAGE>

                M. David Titus
                For:  28,657,857              Withheld:  3,629,630

                Loren D. Israelsen
                For:  28,668,872              Withheld:  3,618,615

          (ii)  To approve an amendment to the Company's Amended and Restated
                Certificate of Incorporation (the "Restated Certificate") to
                effect a 1-for-20 reverse stock split of the Company's
                outstanding Common Stock.

                For:       27,154,581         Against:   4,978,977
                Abstain:      153,929

          (iii) To approve an amendment and restatement to the Restated
                Certificate to increase the number of authorized shares of the
                Company's Preferred Stock by 10,000,000 shares, from 2,000,000
                to 12,000,000 shares. (This proposal was adjourned to June 22,
                1999 at the June 11, 1999 Annual Meeting of Stockholders.)

                For:       13,693,008         Against:            5,412,060
                Abstain:      421,237         Broker non-votes:  13,803,773


          (iv)  To approve an amendment and restatement to the Restated
                Certificate to increase the number of authorized shares of the
                Company's Common Stock by 150,000,000 shares, from 70,000,000
                shares to 220,000,000 shares.

                For:       26,543,370         Against:    5,366,632
                Abstain:      377,485

          (v)   To approve an amendment  and  restatement  to the Restated
                Certificate to (i) delete the provision stating that a
                transaction or series of transactions  in which in excess of
                50% of the Company's  voting power is transferred  will be
                treated as a liquidation, dissolution or winding up of the
                Company, for purposes of causing a required liquidation
                preference distribution to the holders of the Company's
                preferred stock, and (ii) delete the reference to the Series D
                Preferred Stock from the section, to clarify that the section,
                as a result of the amendment in this proposal, no longer applies
                to the Series D Preferred  Stock. (This  proposal was  adjourned
                to June 22, 1999 at the June 11, 1999 Annual Meeting of
                Stockholders.)

                For:        14,387,756        Against:             4,482,325
                Abstain:       654,424        Broker  non-votes:  13,805,573

          (vi)  To approve amendments to the Company's 1992 Stock Option Plan
                (the "1992 Plan") which will result in a series of increases to
                the number of shares issuable thereunder, provide a special
                one-time option grant to the non-employee Board members, extend
                the terms of the 1992 Plan and increase the limit on the number
                of shares for which the participant may be granted options per
                calendar year.

                For:        25,162,454        Against:           6,012,307
                Abstain:       616,450        Broker non-votes:    496,276

          (vii) To ratify the Board of Director's selection of Ernst & Young LLP
                to serve as the Company's independent auditors for the year
                ending December 31, 1999.

                For:        30,936,926        Against:           1,121,258
                Abstain:       229,303


                                       22
<PAGE>


Item 5.    Other information

     In August 1999, we entered into a license and sale agreement with
Metabolix, Inc. whereby Metabolix, Inc. has licensed certain rights to Shaman's
library of extracts and compounds for research, development, and
commercialization purposes. We have received an up-front license payment of
$350,000 and additional $55,000 for an option fee to specific piece of
technology. We will receive royalties on any resutling products commercialized.
Metabolix, Inc. also has an option to license further technology for additional
up-front payments over the next four months.

Item 6.    Exhibits and Reports on Form 8-K

      (a)  Exhibits

           Exhibit No.                      Description
           -----------    ----------------------------------------------------
              27          Financial Data Schedule


       (b) Current reports on Form 8-K that were filed during the quarter ended
           June 30, 1999.

           None.

                                       23
<PAGE>



                                   SIGNATURES


      Pursuant to the requirements 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.

Dated:  August 13, 1999


                                 SHAMAN PHARMACEUTICALS, INC.
                                        (Registrant)



                                 /s/ Lisa A. Conte
                                 --------------------------------------
                                 Lisa A. Conte
                                 President, Chief Executive Officer and
                                 Chief Financial Officer
                                 (on behalf of the Company and as
                                 principal executive officer and principal
                                 financial officer)



                                       24
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