UNITED STATES
                SECURITIES AND EXCHANGE COMMISSION

                      Washington, D.C. 20549


                            FORM 10-Q/A


(X)    QUARTERLY  REPORT  PURSUANT  TO  SECTION 13 OR 15(d) OF THE
       SECURITIES  EXCHANGE ACT OF 1934 FOR THE  QUARTERLY  PERIOD
       ENDED MARCH 31, 1998

                                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 or organization) (I.R.S. Employer
                                                          Identification Number)

213 East Grand Avenue, South San Francisco, California              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 April 30, 1998:  17,861,362




                                       1
<PAGE>





                    SHAMAN PHARMACEUTICALS, INC.

                         INDEX FOR FORM 10-Q

                           March 31, 1998
<TABLE>
<CAPTION>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

                                                                          PAGE
                                                                         NUMBER

PART I                FINANCIAL INFORMATION

Item 1.               Financial Statements and Notes

                      Condensed  Balance Sheets as of March 31, 1998          3
                      (Unaudited) and December 31, 1997

                      Condensed Statements of Operations for the              4
                      three months ended March 31, 1998 and March
                      31, 1997 (unaudited)

                      Condensed Statements of Cash Flows for the              5
                      three months ended March 31, 1998 and March
                      31, 1997 (unaudited)

                      Notes to Condensed Financial Statements                 6

Item 2.               Management's   Discussion   and   Analysis  of          8
                      Financial Condition and Results of Operations

Item 3.               Qualitative and Quantitative Disclosure About 
                      Market Risk                                            11


PART II               OTHER INFORMATION

Item 1.               Legal Proceedings                                      25

Item 2.               Changes in Securities                                  25

Item 3.               Defaults in Senior Securities                          25

Item 4.               Submission  of Matters  to a Vote of  Security         25
                      Holders

Item 5.               Other Information                                      25

Item 6.               Exhibits and Reports on Form 8-K                       25


SIGNATURES                                                                   26

</TABLE>




                                       2
<PAGE>




PART I   FINANCIAL INFORMATION

      Item 1.  Financial Statements and Notes
<TABLE>
<CAPTION>

                          SHAMAN PHARMACEUTICALS, INC.
                            CONDENSED BALANCE SHEETS
<S>     <C>    <C>    <C>    <C>    <C>    <C>

                                                   March 31,       December 31,
                                                     1998             1997
                                                 -----------       ------------
                                                 (Unaudited)
    ASSETS

Current assets:
   Cash and cash equivalents                   $   7,953,451      $  11,340,702
   Short-term investments                          6,245,679         10,079,943
   Amounts due from related parties                  179,447            192,551
   Prepaid expenses and other                        704,558            553,507
     current assets                            -------------      -------------

Total current assets                              15,083,135         22,166,703

Property and equipment, net                        3,597,846          3,972,140
Other assets                                         596,120            613,657
                                               -------------      -------------

Total assets                                   $  19,277,101      $  26,752,500
                                               =============      =============


LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIT)

Current liabilities:
   Accounts payable and other
      accrued expenses                         $   1,323,675      $     925,701
   Accrued clinical trial costs                    2,509,731          1,689,659
   Accrued professional fees                         726,056            718,625
   Accrued compensation                              836,929            368,272
   Advances - contract research                      289,855          1,133,605
   Current installments of long-term obligations   2,583,148          2,783,976
                                               -------------      -------------

Total current liabilities                          8,269,394          7,619,838

Long-term obligations, excluding
      current installments                         3,840,075          4,017,979
Senior convertible notes                          10,179,334          9,967,044

Stockholders' equity:
   Series A preferred stock                              400                400
   Common stock                                       17,861             17,796
   Additional paid-in capital                    117,451,608        117,164,524
   Deferred compensation and other
      adjustments                                    (82,663)          (124,910)
   Accumulated deficit                          (120,398,908)      (111,910,171)
                                               -------------      -------------
Total stockholders' equity (net capital deficit)  (3,011,702)         5,147,639
                                               -------------      -------------

Total liabilities and stockholders' equity
  (net capital deficit)                         $ 19,277,101       $ 26,752,500
                                               =============      =============

</TABLE>

   NOTE:  The balance  sheet at  December  31,  1997 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 March 31,
                                                -------------------------------
                                                     1998              1997
                                                 ------------      ------------
<S>     <C>    <C>    <C>    <C>    <C>    <C>
        
 Revenue from collaborative agreements           $    875,000      $    875,000
                                                                                 
 Operating expenses:
   Research and development                         7,513,098         6,015,368
   General and administrative                       1,276,111           991,099                          
                                                 ------------      ------------
 Total operating expenses                           8,789,209         7,006,467
                                                 ------------      ------------
 Loss from operation                               (7,914,209)       (6,131,467)

 Other income (expense):
   Interest income                                    232,368           251,112
   Interest expense                                  (806,896)         (101,394)
                                                 ------------      ------------
 Net loss                                        $ (8,488,737)     $ (5,981,749) 
                                                 =============    ============= 
 Net loss per share                              $      (0.48)     $      (0.39)                         
                                                 =============    ============= 
 Shares used in calculation of
    net loss per share                             17,836,000        15,455,000
                                                 =============    =============

</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 March 31,
                                               --------------------------------
                                                      1998              1997
                                                 -------------     -------------
<S>     <C>    <C>    <C>    <C>    <C>    <C>

Operating activities:

Net loss                                         $ (8,488,737)     $ (5,981,749)


Adjustments to reconcile net loss to net
  cash used in operating activities:

    Depreciation and amortization                     650,912           557,663

    Loss on disposal of fixed assets                   26,593                --

    Payment of interest in Common Stock               288,563                --


Changes in operating assets and liabilities:

    Prepaid expenses, other current assets
      and other assets                               (120,410)          119,630

    Accounts payable, accrued expenses and
      contract research advances                      850,384        (1,066,941)
                                                 ------------      ------------
Net cash used in operating activities              (6,792,695)       (6,371,397)
                                                 ------------      ------------

Investing activities:

  Purchases of short-term investments              (1,999,049)       (1,024,373)

  Maturities of available-for-sale investments      4,959,136                --

  Sales of available-for-sale investments             899,007                --

  Capital expenditures                                (33,143)         (210,057)
                                                 ------------      ------------
Net cash provided (used in)by investing activities  3,825,951        (1,234,430)
                                                 ------------      ------------

Financing activities:

  Proceeds from issuance of Common Stock               12,225         8,112,127

  Principal payments on long-term obligations        (643,964)         (544,694)

  Proceeds from asset financing arrangements          211,232                --
                                                 ------------      ------------
Net cash provided (used in) by financing activities  (420,507)        7,567,433
                                                 ------------      ------------

Net decrease in cash and cash equivalents          (3,387,251)          (38,394)

Cash and cash equivalents at beginning of period   11,340,702        16,051,251                                       
                                                 ------------      ------------
Cash and cash equivalents at end of period        $ 7,953,451      $ 16,012,857
                                                 ============      ============

</TABLE>


See Notes to condensed financial statements.




                                       5
<PAGE>




                          SHAMAN PHARMACEUTICALS, INC.

                     NOTES TO CONDENSED FINANCIAL STATEMENTS

                                 March 31, 1998
                                   (Unaudited)

1.    Basis of Presentation

     Shaman  Pharmaceuticals,  Inc.  ("Shaman" or the  "Company")  discovers and
develops of novel pharmaceutical  products for major human diseases by isolating
active  compounds  from  tropical  plants.  The Company has three  compounds  in
clinical   development:   Provir,   an  oral   product  for  the   treatment  of
Aids-associated  and watery  diarrhea  in  patients  with AIDS and other  watery
diarrhea  indications;  nikkomycin  Z, an oral  antifungal  for the treatment of
systemic fungal infections;  and SP-134101, an oral product for the treatment of
Type II diabetes.  Shaman maintains an active Type II diabetes  research program
which serves as the basis for its collaborations with Lipha s.a., a wholly-owned
subsidiary  of Merck  KGaA,  Darmstadt,  Germany  ("Lipha/Merck"),  and with Ono
Pharmaceutical Co., Ltd. ("Ono") of Osaka, Japan.

      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 the Company's Annual
Report on Form 10-K/A,  for the fiscal year ended December 31, 1997,  filed with
the Securities and Exchange Commission on May 28, 1998.


2.    Loss per Share   
     
     Basic net loss per share is computed  using the weighted  average number of
shares of common  stock  outstanding.  At March 31,  1998 and 1997,  outstanding
stock options and other stock equivalents are antidilutive.

3.    Recent Accounting Pronouncements

      In June 1997, the Financial Accounting Standards Board issued Statement of
Financial  Accounting  Standards  No.  130,  Reporting   Comprehensive   Income.
Statement  130   establishes   new  rules  for  the  reporting  and  display  of
comprehensive income and its components;  however, adoption in the quarter ended
March 31,  1998 did not have a material  impact on the  Company's  net income or
stockholders' equity.




                                       6
<PAGE>



      In June 1997, the Financial Accounting Standards Board issued Statement of
Financial  Accounting  Standards  No.  131,  Disclosures  about  Segments  of an
Enterprise and Related Information.  Statement 131 establishes standards for the
way that public business enterprises report information about operating segments
in annual  financial  statements  and  requires  that those  enterprises  report
selected  information about operating segments in interim financial reports.  It
also establishes  standards for related disclosures about products and services,
geographic  areas,  and major  customers.  Statement  131 is  effective  for the
financial  statements  for fiscal years  beginning  after December 15, 1997, and
therefore  the Company will adopt the new  requirements  retroactively  in 1998.
Management  has not  completed  its  review  of  Statement  131,  but  does  not
anticipate that the adoption of this statement will have a significant effect on
the Company's reported segments and disclosures.


4.    Subsequent Events

      Senior Convertible Notes

      In May 1998, persuant  to the terms of the  Senior  Convertible  Notes,  a
principal amount of $1.9 million was converted into a total of 472,861 shares of
the Company's Common Stock. As a result of converting these notes, the Company's
Senior  Convertible  Notes' balance has been reduced from $10.2  million,  as of
March 31, 1998, to $8.3 million. See "Liquidity and Capital Resources".





                                       7
<PAGE>








                          SHAMAN PHARMACEUTICALS, INC.

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

Overview

     Shaman  Pharmaceuticals,  Inc.  ("Shaman" or the  "Company")  discovers and
develops of novel pharmaceutical  products for major human diseases by isolating
active  compounds  from  tropical  plants.  The Company has three  compounds  in
clinical   development:   Provir,   an  oral   product  for  the   treatment  of
Aids-associated  and watery  diarrhea  in  patients  with AIDS and other  watery
diarrhea  indications;  nikkomycin  Z, an oral  antifungal  for the treatment of
systemic fungal infections;  and SP-134101, an oral product for the treatment of
Type II diabetes.  Shaman maintains an active Type II diabetes  research program
which serves as the basis for its collaborations with Lipha s.a., a wholly-owned
subsidiary  of Merck  KGaA,  Darmstadt,  Germany  ("Lipha/Merck"),  and with Ono
Pharmaceutical Co., Ltd. ("Ono") of Osaka, Japan.

      The Company began  operations in March 1990. To date,  Shaman has not sold
any  products  and does not  anticipate  receiving  product  revenue in the near
future. The Company's  accumulated  deficit at March 31, 1998, was approximately
$120.4 million.  Shaman expects to continue to incur  substantial and increasing
losses over the next several years,  due primarily to the expense of preclinical
studies,  clinical trials and its ongoing research program.  The Company expects
that losses will  fluctuate  from quarter to quarter and that such  fluctuations
could  be  substantial.  Shaman  has  financed  its  research,  development  and
administrative  activities  through various private and public equity financing,
collaborative  agreements with pharmaceutical companies and, to a lesser extent,
through equipment and leasehold improvement lease financings.

Results of Operations for the Quarters Ended March 31, 1998 and 1997

     The Company  recorded  collaborative  revenues of $875,000  for each of the
quarters ended March 31, 1998 and 1997.  Revenues for these three-month  periods
resulted  from the  Company's  on-going  research  funding from Ono and research
funding from Shaman's  collaboration with Lipha/Merck.  The Company expects that
revenues from collaborative  agreements will continue to fluctuate in the future
as development of its various compounds  proceeds and new product candidates are
partnered for  development  and  commercialization.  In May 1998,  the Company's
collaborative  agreement  with  Ono  expired  under  the  original  terms of the
agreement and was not renewed.

      The Company incurred research and development expenses of $7.5 million and
$6.0 million for the quarters ended March 31, 1998 and 1997, respectively.  This
increase  was  primarily   attributable  to  the  Company's  increased  clinical
development activities with respect to Provir. Research and development expenses
are  expected  to  increase  in  1998  as the  Company  continues  its  clinical
development  activities with respect to Provir,  other products continue through
development, and the Company maintains its diabetes research program.



                                       

                                       8
<PAGE>



     General and administrative  expenses were $1.3 million and $991,000 for the
quarters  ended  March  31,  1998 and  1997,  respectively.  This  increase  was
primarily  attributable  to increases in  compensation  and  marketing  research
related to late stage  clinical  products,  as well as additional  legal dispute
costs. The Company's expanded research and clinical  activities are not expected
to require  commensurate  increases  in general and  administrative  support and
expense.

      Interest income was $232,000 and $251,000 for the quarters ended March 31,
1998 and 1997,  respectively.  Interest  income  decreased  for the period ended
March 31, 1998,  compared  with the period  ended March 31,  1997,  due to lower
average  cash and  investment  balances  as the  Company  continues  to fund its
operations.  Interest  expense was $807,000 and $101,000 for the quarters  ended
March 31, 1998 and 1997, respectively. Interest expense increased for the period
ended  March 31,  1998,  compared  with the period  ended  March 31, 1997 due to
higher average debt balance and amoritzation of the non-cash interest expense of
$266,000 in connection with certain debt financing.

Liquidity and Capital Resources

     As of March 31, 1998, the Company's cash, cash equivalents, and investments
totaled approximately $14.2 million, compared with $21.4 million at December 31,
1997, with an average maturity of 2.3 months and 5.0 months,  respectively.  The
Company  invests excess cash  according to its  investment  policy that provides
guidelines  with regard to liquidity,  type of  investment,  credit  ratings and
concentration limits.

     In June  1997,  the  Company  privately  issued  $10.4  million  of  senior
convertible  notes (the "1997  Private  Placement").  The notes mature in August
2000 and bear interest at a rate of 5.5% per annum. Interest on the notes may be
paid in Common Stock or cash at the Company's option.  Initially,  the notes are
convertible  into Common  Stock of the Company at 100% of the low trading  price
during a designated time period prior to conversion provided that the conversion
price will not be less than $5.50 per share  until  November 7, 1997 (the "Fixed
Conversion Period").  Thereafter, the notes are convertible into Common Stock of
the Company at a 10%  discount  from the low trading  price  during a designated
time period prior to the conversion.  The Company filed a registration statement
with the Securities and Exchange Commission (the "SEC") for the resale of shares
issued upon conversion of these notes, which registration statement was declared
effective on August 29, 1997. In November  1997, a principal  amount of $220,666
was converted  into 55,102 shares of the  Company's  Common Stock.  In May 1998,
certain  note  holders  converted  a portion of their  notes into the  Company's
Common Stock. See "Notes to Condensed Financial Statements -- Note 4. Subsequent
Events".

     In March 1998,  the Company and the purchasers of the Notes entered into an
Amendment  Agreement  (the  "Amendment  Agreement")  which  extended  the  Fixed
Conversion Period to March 31, 1998. The Amendment Agreement was entered into in
order to avoid  conversion of the Notes at a price that would be unduly dilutive
to the Company's existing  Stockholders.  As consideration for entering into the
Amendment Agreement,  the Company issued to the Selling Stockholders Warrants to
purchase an  aggregate  of 137,500  shares of Common  Stock.  The  Warrants  are




                                       9
<PAGE>

                              


exercisable  through March 18, 2001 at an exercise price of $7.50 per share. The
Company has filed a registration statement with the SEC for the resale of shares
issued upon exercise of the Warrants,  which registration  statement has not, as
of the date of filing this  Quarterly  Report been  declared  effective.  

     In May 1997, the Company obtained a $5.0 million, 36-month term loan to pay
off pre-existing  debt, finance capital asset acquisitions and finance continued
research and clinical  development of the Company's existing product candidates.
The loan  carries  an annual  interest  rate of 14.58%  and is  payable in equal
monthly  installments  over the term of the loan.  The  lender  was  granted  an
exercise  price of 10 year warrants to purchase  200,000 shares of the Company's
Common Stock at $6.25 per share.  The Company has attributed a value of $648,000
to these  warrants.  This amount has been  recorded as a discount on the related
debt and is being amortized as interest expense over the term of the loan.

     In  September  1996,  the Company  entered  into a five-year  collaborative
agreement with Lipha/Merck to jointly develop Shaman's  antihyperglycemic drugs.
Upon signing the  collaboration,  the Company received an annual research fee of
$1.5  million  which  was  amortized  to  revenue  over 12  months,  as work was
performed.  The Company  also  received  approximately  $3.0 million for 388,918
shares of Common  Stock  priced at $7.71 per Common  share,  representing  a 20%
premium to the  weighted  average  price of the  Company's  Stock at the time of
purchase.  In exchange for  development  and  marketing  rights in all countries
except  Japan,  South  Korea,  and Taiwan  (which are  covered  under an earlier
agreement between Shaman and Ono),

     Lipha/Merck will provide up to $9.0 million in research  payments and up to
$10.5  million in equity  investments  priced at a 20%  premium  to a  multi-day
volume  weighted  average  price of the  Company's  Common  Stock at the time of
purchase.  The agreement also provides for additional  preclinical  and clinical
milestone  payments to the Company in excess of $10.0  million per  compound for
each antihyperglycemic drug developed and commercialized.  Lipha/Merck will bear
all pre-clinical, clinical, regulatory and other development expenses associated
with the compounds  selected under the agreement.  In addition,  as products are
commercialized,  Shaman will receive  royalties on all product sales outside the
United  States  and up to 50% of the  profits  (if  the  Company  exercises  its
co-promotion  rights) or  royalties on all product  sales in the United  States.
Certain of the  milestone  payments  will be  credited  against  future  royalty
payments,  if any, due to the Company from sales of products  developed pursuant
to the agreement.

     In July 1996,  the Company  closed a private  placement  (the "1996 Private
Placement")  pursuant  to  Regulation  S under the  Securities  Act of 1933,  as
amended,  in which it received  gross  proceeds of $3.3  million for the sale of
400,000 shares of Series A Convertible Preferred Stock and for the issuance of a
six-year  warrant to purchase 550,000 shares of the Company's Common Stock at an
exercise  price of  $10.18  per  share.  The  Preferred  Stock  does not carry a
dividend  obligation  and will  convert into Common Stock no later than July 23,
1999 at a price per share between $6.00 and $8.15, depending on the market value
of the Company's Common Stock during the period prior to conversion.  Holders of
preferred shares are entitled to a liquidation preference of $8.15 per share. In
addition to the sale of  Preferred  Stock and the  warrant,  the Company has the
right,  from time to time during the period  beginning  January  1997 and ending
July 2000,  to sell up to  1,200,000  additional  shares of Common  Stock to the


                                       10
<PAGE>


investor  at a  formula  price  of 100% or 101% of a  multi-day  average  of the
Company's Common Stock price at the time of sale. If the Company  exercises this
right,  the investor has the option to increase the shares purchased by up to an
aggregate of 527,500 shares.

      The Company expects to incur substantial  additional costs relating to the
continued   preclinical  and  clinical  testing  of  its  products,   regulatory
activities and research and development  programs.  The Company anticipates that
its cash,  cash  equivalents  and  investment  balances of  approximately  $14.2
million at March 31, 1998, the  collaborative  revenue committed by Lipha/Merck,
Lipha/Merck's  commitment to purchase  additional equity and Shaman's additional
rights to sell Common Stock under the 1996 Private Placement will be adequate to
fund operations, including payments due under long-term obligations, through the
end of 1998.  Milestone  payments  which may be received by the Company from Ono
and  Lipha/Merck  would extend the Company's  capacity to finance its operations
beyond that time. However,  there can be no assurance that these milestones will
be  achieved,  or that  additional  funding,  if needed,  will be  available  on
reasonable terms, or at all.


Future Outlook

     In addition to historical  information,  this report contains  predictions,
estimates and other  forward-looking  statements  that involve a number of risks
and uncertainties. These risks and uncertainties include the fact that Shaman is
still a  relatively  young  company  and has not yet  completed  a full cycle of
development,  regulatory approval and  commercialization  for any of its product
candidates.  The clinical and regulatory  processes  through which the Company's
products must proceed are complex, uncertain and costly, and no assurance can be
given  regarding  the timing of  clinical  or  regulatory  progress  or that the
Company will be successful  in  commercializing  any of its product  candidates.
These development  processes  require  substantial  amounts of funding,  and the
Company is  dependent on  corporate  partners and the equity  markets to finance
such efforts.  Where access to funding is difficult,  the Company's stockholders
may face  significant  dilution,  and the ability of the Company to proceed with
its programs and plans may be significantly and adversely affected.  Actions and
advances by competitors may also significantly  affect the Company's  prospects,
as  may  the  existence  of  patents  held  by  such  competitors  or  potential
competitors.  In addition, there can be no assurance that any plants required by
the Company will be  indefinitely  available or that any compounds  derived from
the plant material will result in protected proprietary rights for the Company.


Item 3.  Qualitative and Quantitative Disclosure About Market Risk.

         Not Applicable.


                                       11
<PAGE>

Risk Factors

      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 in "Risk  Factors,"  "Management's  Discussion  and Analysis of
Financial Condition and Results of Operations," and elsewhere in Form 10-K/A for
fiscal year ended  December 31,  1997,  filed with the  Securities  and Exchange
Commission on May 28, 1998.

      Early Stage of Development;  Technological Uncertainty. Shaman has not yet
completed the development of any products.  Many of the Company's  products will
require  significant   additional  clinical  testing  and  investment  prior  to
commercialization.  Products  for  therapeutic  use in human health care must be
evaluated  in extensive  human  clinical  trials to  determine  their safety and
efficacy  as part of a  lengthy  process  to  obtain  government  approval.  The
Company's  Provir,  nikkomycin  Z and  SP-134101  products  are each in clinical
development.  Positive  results for any of these products in a clinical trial do
not necessarily assure that positive results will be obtained in future clinical
trials  or that  government  approval  to  commercialize  the  products  will be
obtained.

      Clinical trials may be terminated at any time for many reasons,  including
toxicity or adverse event  reporting.  There can be no assurance that any of the
Company's  products will be  successfully  developed,  enter into human clinical
trials,  prove to be safe and  efficacious in clinical  trials,  meet applicable
regulatory standards,  obtain required regulatory approvals, be capable of being
produced  in  commercial  quantities  at  reasonable  costs  or be  successfully
marketed or that the Company will not encounter problems in clinical trials that
will cause the Company to delay or suspend product  development.  Failure of any
of the Company's  products to be  commercialized  could have a material  adverse
effect on the Company's business, financial condition and results of operations.

      History  of  Operating  Losses;  Products  Still  in  Development;  Future
Profitability  Uncertain.  Shaman was  incorporated  in 1989 and has experienced
significant operating losses in each of its fiscal years since operations began.
As of March 31, 1998, the Company's accumulated deficit was approximately $120.4
million. The Company has not generated any product revenues and expects to incur
substantial  operating  losses  over the next  several  years.  All of  Shaman's
products  and  compounds  are  in  research  and   development,   which  require
substantial expenditures of funds. In order to generate revenues or profits, the
Company,   alone  or  with  others,  must  successfully  develop,  test,  obtain
regulatory approval for and market its potential  products.  No assurance can be
given  that  Shaman's  product  development  efforts  will be  successful,  that
required  regulatory  approvals  will be  obtained,  or that  the  products,  if
developed and introduced,  will be successfully  marketed or will achieve market
acceptance.

     Future Capital Needs;  Uncertainty of Additional  Funding.  As of March 31,
1998,  the  Company  had cash,  cash  equivalents  and  investment  balances  of
approximately  


                                       12
<PAGE>

$14.2 million.  The Company will require substantial additional funds to conduct
the development and  testing of its potential  products  and  to manufacture and
market  any  products  that may  be  developed.  The  Company's  future  capital
requirements  will depend on numerous  factors,  including  the  progress of its
research and  development  programs,  the progress of  preclinical  and clinical
testing, the time and costs involved in obtaining regulatory approvals, the cost
of  filing,  prosecuting,  defending  and  enforcing  patent  claims  and  other
intellectual property rights,  competing  technological and market developments,
changes in the Company's existing collaborative and licensing relationships, the
ability of the Company to establish additional  collaborative  relationships for
the  manufacture  and marketing of its potential  products,  and the purchase of
additional capital equipment. In addition, Note Purchase Agreements entered into
by the Company in connection with the 1997 Private Placement, provide that under
certain  circumstances,  which include a failure to meet applicable NASD listing
requirements, the Company would be required to redeem all or some portion of the
$8.3 million principal due thereunder as of May 15, 1998, which redemption could
significantly   accelerate   the  Company's   cash   expenditures   and  capital
requirements beyond the levels currently  anticipated,  and would materially and
adversely affect the Company's ability to conduct its business.

     The Company will need to seek additional  funding through public or private
equity or debt financings,  collaborative arrangements or from other sources. If
additional funds are raised by issuing equity securities,  significant  dilution
to existing  stockholders  may result.  In the event that  additional  funds are
obtained  through  collaborative  agreements,  such  agreements  may require the
company to relinquish rights to certain of its technologies, product candidates,
products or  marketing  territories  that the Company  would  otherwise  seek to
develop or  commercialize  itself.  There can be no  assurance  that  additional
financing will be available on acceptable terms or at all. If adequate funds are
not available,  the  Company is likely to be  required  to delay,  scale back or
eliminate  one or more of its  research,  discovery or  development  programs or
otherwise reduce its levels of expenditures,  any of which could have a material
adverse  effect on the Company's  business,  financial  condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."

      No Assurance of Successful Product Development. The Company's research and
development  programs  are at various  stages of  development,  ranging from the
research  stage  to  clinical  trials.   Substantial   additional  research  and
development  will be  necessary  in order  for the  Company  to move  additional
product candidates into clinical testing, and there can be no assurance that any
of the Company's  research and  development  efforts on these or other potential
products, including Provir, nikkomycin Z, and SP-134101 will lead to development
of products that are shown to be safe and effective in clinical trials.

      In addition,  there can be no assurance  that any such  products will meet
applicable  regulatory  standards,  be capable of being  produced in  commercial
quantities at acceptable costs, be eligible for third party  reimbursement  from
governmental or private  insurers,  be  successfully  marketed or achieve market
acceptance.  Further,  the Company's  products may prove to have  undesirable or
unintended  side  effects  that may prevent or limit their  commercial  use. The
Company may find, at any stage of this complex product development process, that
products that appeared promising in


                                       13
<PAGE>

preclinical studies or Phase I and Phase II clinical trials  do not  demonstrate
efficacy  in  larger-scale,  Phase  III  clinical  trials  and  do  not  receive
regulatory approvals.   Accordingly, any product development program  undertaken
by  the  Company  may  be curtailed, redirected,  suspended or eliminated at any
time.

      In addition,  there can be no  assurance  that the  Company's  testing and
development schedules will be met. Any failure to meet such schedules could have
a material  adverse effect on the Company's  business,  financial  condition and
results of  operations.  The  Company's  clinical  trials may be delayed by many
factors,  including,  but  not  limited  to:  slower  than  anticipated  patient
enrollment;  difficulty in finding a sufficient  number of patients  fitting the
appropriate  trial  profile;  difficulties  in  the  acquisition  of  sufficient
supplies of clinical trial  materials;  or, failure to show efficacy in clinical
trials or adverse events  occurring  during the clinical  trials.  Completion of
testing,  studies  and trials  may take  several  years,  and the length of time
varies substantially with the type, complexity,  novelty and intended use of the
product. In addition, data obtained from preclinical and clinical activities are
susceptible  to varying  interpretations,  which could  delay,  limit or prevent
regulatory  approval.  Delays or rejections may be  encountered  based upon many
factors,  including  changes in  regulatory  policy during the period of product
development and could have a material adverse effect on the Company's  business,
financial condition and results of operations.


      Uncertainties  Associated with Clinical Trials. Shaman has conducted,  and
plans to continue to conduct, extensive and costly clinical trials to assess the
safety and efficacy of its  potential  products.  The rate of  completion of the
Company's  clinical trials is dependent upon,  among other factors,  the rate of
completion and approval of trial protocols, the availability of funds for trials
and the rate of patient  enrollment.  Patient  enrollment  is a function of many
factors,  including  the  nature  of the  Company's  clinical  trial  protocols,
existence  of  competing  protocols,  size of patient  population,  proximity of
patients to clinical  sites and  eligibility  criteria for the study.  Delays in
patient enrollment will result in increased costs and delays, which could have a
material adverse effect on the Company's  ability to complete clinical trials in
a timely fashion.

      The Company  cannot assure that patients  enrolled in its clinical  trials
will respond to the Company's product candidates. Setbacks are to be expected in
conducting  human  clinical  trials.   Failure  to  comply  with  the  U.S.  FDA
regulations  applicable  to such  testing  can  result in delay,  suspension  or
cancellation of such testing, and/or refusal by the FDA to accept the results of
such testing. In addition, the FDA or the Company may suspend clinical trials at
any time if either of them concludes that any patients participating in any such
trial are being exposed to unacceptable health risks.  Further,  there can be no
assurance  that human  clinical  testing  will  demonstrate  that any current or
future product candidate is safe or effective or that data derived from any such
study  will  be  suitable  for  submission  to  the  FDA  or  other   regulatory
authorities.  Failure of the Company's  clinical trials to demonstrate safety or
efficacy in humans  could cause the delay,  suspension,  or  termination  of any
product  program  and could  have a  material  adverse  effect on the  Company's
business, financial condition and results of operations.



                                       14
<PAGE>

      Dependence on  Collaborative  Relationships.  The  Company's  research and
development  efforts in its  diabetes  program and, to a lesser  extent,  in its
other programs,  is dependent upon its arrangements with Lipha/Merck and Ono and
the  compliance  of  such  partners  with  the  terms  and  conditions  of  such
collaborative  agreements including,  without limitation,  providing funding for
research and development efforts and the achievement of milestones and assisting
the Company in its research and development efforts.  These partners may develop
products  that may compete with those of the  Company.  The amount and timing of
resources they allocate to these  programs is not within the Company's  control.
There can be no assurance that these partners will perform their  obligations as
expected or that any  significant  revenues will ultimately be derived from such
agreements.  The Company's agreement with Ono may be terminated in the event Ono
determines further  development of compounds is not warranted,  provided certain
other conditions are met.  Termination of either agreement is subject to certain
surviving  obligations.  If one or more such partners elected to terminate their
relationships  with the  Company,  or if the  Company  or its  partners  fail to
achieve  targeted  milestones,  it could have a material  adverse  effect on the
Company's  ability  to fund such  programs,  or to  develop  any  products  on a
collaborative basis with such partners.

      The Company  licensed the use of  nikkomycin Z from Bayer AG in June 1995.
Under the terms of this  licensing  agreement,  the  Company  has paid  Bayer an
initial  milestone  payment and may be required,  upon the occurrence of certain
events,  to make  additional  milestone  payments  and to pay  royalties  on any
commercialized products derived from nikkomycin Z. The failure of the Company to
pay these milestone  payments or the termination of this license agreement could
cause the Company to forfeit its rights to utilized  nikkomycin Z and could have
a material  adverse  effect on the Company's  business, financial  condition and
results of operations.

      The  Company  expects  to  seek  additional  collaborative  agreements  to
commercialize its other product candidates and will, in particular, need to rely
on such third party  arrangements  to  commercialize  its  products  outside the
United States.  No assurance can be given that the Company will be successful in
negotiating or entering into such  agreements on terms  favorable to the Company
or at all, or that any such  agreement,  if entered  into by the Company will be
successful.  A failure  to  successfully  enter  into such  agreements  and sell
products  thereunder  would  have a  material  adverse  effect on the  Company's
business, financial condition and results of operations.

      Rapid Technological Change and Substantial Competition. The pharmaceutical
industry is subject to rapid and substantial technological change. Technological
competition from pharmaceutical and biotechnology  companies and universities is
intense.  Many  of  these  entities  have  significantly  greater  research  and
development  capabilities,  as well  as  substantial  marketing,  manufacturing,
financial and managerial resources,  and represent  significant  competition for
the Company.  There can be no  assurance  that  developments  by others will not
render the Company's products or technologies noncompetitive or that the Company
will be able to keep  pace with  technological  developments.  Competitors  have
developed or are in the process of developing  technologies  that are, or in the
future may be, the basis for  competitive  products.  Some of these products may
have an  entirely  different  approach  or means of  


                                       15
<PAGE>

accomplishing  the desired  therapeutic  effect than  products  developed by the
Company. These competing products may be more effective and less costly than the
products developed by the Company. In addition, other forms of medical treatment
may offer  competition to the Company's  products.  The development of competing
compounds  could  have a  material  adverse  effect on the  Company's  business,
financial condition or results of operations.

      Government  Regulation;  No Assurance  of  Regulatory  Approvals.  All new
drugs,  including  the  Company's  products  under  development,  are subject to
extensive and rigorous  regulation by the federal  government,  principally  the
FDA, and  comparable  agencies in state and local  jurisdictions  and in foreign
countries.   These  authorities   impose   substantial   requirements  upon  the
preclinical and clinical testing,  manufacturing and marketing of pharmaceutical
products.  The steps required before a drug may be approved for marketing in the
United States  generally  include (i)  preclinical  laboratory and animal tests,
(ii) the  submission  to the FDA of an IND for  human  clinical  testing,  (iii)
adequate and well  controlled  human clinical trials to establish the safety and
efficacy of the drug, (iv) submission to the FDA of an NDA, and (v) satisfactory
completion of an FDA inspection of the  manufacturing  facility or facilities at
which the drug is made to assess compliance with GMP.

      Lengthy and detailed  preclinical  and  clinical  testing,  validation  of
manufacturing and quality control processes, and other costly and time-consuming
procedures are required.  Satisfaction  of these  requirements  typically  takes
several years and the time needed to satisfy them may vary substantially,  based
on the type, complexity and novelty of the pharmaceutical product. The effect of
government  regulation  may be to delay or to  prevent  marketing  of  potential
products for a considerable  period of time and to impose costly procedures upon
the Company's  activities.  There can be no assurance  that the FDA or any other
regulatory agency will grant approval for any products  developed by the Company
on a timely basis,  or at all.  Success in  preclinical  or early stage clinical
trials does not assure success in later stage clinical trials.

      Data obtained from preclinical and clinical  activities are susceptible to
varying interpretations which could delay, limit or prevent regulatory approval.
If  regulatory  approval  of a product  is  granted,  such  approval  may impose
limitations on the indicated uses for which a product may be marketed.  Further,
even if regulatory  approval is obtained,  later discovery of previously unknown
problems  with a product may result in  restrictions  on the product,  including
withdrawal  of the product  from the market.  Any delay or failure in  obtaining
regulatory  approvals  would have a  material  adverse  effect on the  Company's
business, financial condition and results of operation.

      Among the conditions for FDA approval of a  pharmaceutical  product is the
requirement that the  manufacturer's  (either the Company's own or a third-party
manufacturer)  quality control and manufacturing  procedures  conform to current
GMP,  which  must be  followed  at all  times.  The FDA  strictly  enforces  GMP
requirements through periodic unannounced inspections. There can be no assurance
that the FDA will determine that the facilities and manufacturing  procedures of
the Company or any third-party  manufacturer of the Company's  planned  products
will conform to GMP requirements.  Additionally,  the Company or its third-party


                                       16
<PAGE>

manufacturer must pass a pre-approval inspection of its manufacturing facilities
by  the  FDA  before  obtaining  marketing  approval.  Failure  to  comply  with
applicable regulatory  requirements may result in penalties such as restrictions
on a product's marketing or withdrawal of a product from the market.

      The FDA's policies may change and additional government regulations may be
promulgated  which could prevent or delay  regulatory  approval of the Company's
potential products.  Moreover,  increased attention to the containment of health
care costs in the United States could result in new government  regulations that
could have a material adverse effect on the Company's  business.  The Company is
unable to predict the likelihood of adverse  governmental  regulation that might
arise from future  legislative or  administrative  action,  either in the United
States or abroad.

      The  Company  will also be subject  to a variety  of  foreign  regulations
governing clinical trials, registration and sales of its products. Regardless of
whether FDA approval is obtained, approval of a product by comparable regulatory
authorities of foreign countries must be obtained prior to marketing the product
in those countries.  The approval process varies from country to country and the
time needed to secure  approval may be longer or shorter than that  required for
FDA  approval.  Delays in the  approval  process or the  failure to obtain  such
foreign  approvals  would  have a  material  adverse  effect  on  the  Company's
business, financial condition and results of operations.

      Dependence on Sources of Supply.  The Company currently imports all of the
plant  materials from which its products are derived from countries in South and
Latin America, Africa and Southeast Asia. To the extent that its products cannot
be economically  synthesized or otherwise produced, the Company will continue to
be  dependent  upon a supply of raw plant  material.  The Company  does not have
formal agreements in place with all of its suppliers.  In addition,  a continued
source of plant supply is subject to the risks inherent in international  trade.
These 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 have a
material  adverse  effect on the  Company's  business,  financial  condition and
results  of  operations.  In  addition,   tropical  rain  forests,  and  certain
irreplaceable   plant   resources   therein,   are  currently   threatened  with
destruction.  In the event  portions  of the rain  forests are  destroyed  which
contain the source  material from which Shaman's  current or future products are
derived,  such destruction could have a material adverse effect on the Company's
business, financial condition and results of operations.

      Limited  Manufacturing and Marketing Experience and Capacity.  The Company
currently produces products only in quantities necessary for clinical trials and
does not have the staff or  facilities  necessary  to  manufacture  products  in
commercial  quantities.  As a result,  the  Company  must rely on  collaborative
partners or third-party manufacturing facilities,  which may not be available on
commercially  acceptable  terms adequate for Shaman's  long-term  needs.  If the
Company should  encounter  delays or difficulties in establishing  relationships
with  qualified  manufacturers  to produce,  package and distribute its finished
products,   clinical  trials,   regulatory  filings,   market  introduction  and
subsequent sales of such products could be adversely affected.



                                       17
<PAGE>

      Contract manufacturers must adhere to GMP regulations strictly enforced by
the FDA on an ongoing basis through its facilities inspection program.  Contract
manufacturing  facilities must pass a pre-approval  plant inspection  before the
FDA will approve an NDA. Certain material manufacturing changes that occur after
approval are also subject to FDA review and clearance or approval.  There can be
no assurance that the FDA or other regulatory  agencies will approve the process
or the  facilities by which any of the Company's  products may be  manufactured.
The Company's  dependence on third parties for the  manufacture  of products may
adversely  affect the  Company's  ability to develop and  deliver  products on a
timely and  competitive  basis.  Should the Company be  required to  manufacture
products  itself,  the Company  will be subject to the  regulatory  requirements
described above, to similar risks regarding  delays or difficulties  encountered
in  manufacturing  any such  products  and will require  substantial  additional
capital.  There can be no assurance that the Company will be able to manufacture
any such products successfully or in a cost-effective manner.

      The Company  currently has no sales staff.  To the extent that the Company
does not or is unable to enter into  co-promotion  agreements  or to arrange for
third party distribution of its products,  significant additional resources will
be required to develop a complete  marketing  and sales  force.  There can be no
assurance that the Company will be able to enter into  collaborative  agreements
or successfully establish a marketing and sales force.

     Uncertainty  Regarding  Patents  and  Proprietary  Rights;   Current  Legal
Proceedings Regarding Patents and Proprietary Rights. The Company's success will
depend in large  part on its  ability to obtain and  maintain  patents,  protect
trade secrets and operate  without  infringing  upon the  proprietary  rights of
others. Moreover,  competitors may have filed patent applications, may have been
issued patents or may obtain additional  patents and proprietary rights relating
to products or processes competitive with those of the Company.  There can be no
assurance  that the Company's  patent  applications  will be approved,  that the
Company will develop additional  proprietary products that are patentable,  that
any issued  patents will provide the Company with  adequate  protection  for its
inventions or will not be  challenged  by others,  or that the patents of others
will not impair the ability of the Company to  commercialize  its products.  The
patent  position of firms 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 (the "PTO") or the courts  regarding the breadth of
claims  allowed  or the  degree  of  protection  afforded  under  pharmaceutical
patents.  There is considerable  variation  between countries as to the level of
protection afforded under patents and other proprietary rights. Such differences
may expose the Company to differing risks of  commercialization  in each foreign
country in which it may sell  products.  There can be no  assurance  that others
will not independently develop similar products,  duplicate any of the Company's
products or design around any patents of the Company.

      A  number  of   pharmaceutical   companies   and   research  and  academic
institutions have developed technologies,  filed patent applications or received
patents on various  technologies that may be related to the Company's  business.
Some of these  technologies,  applications  or  patents  may  conflict  with the
Company's  technologies or 


                                       18
<PAGE>

patent  applications.  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 the  Company's
specific  proanthocyanidin polymer 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 the Company's foreign pending patent application in
Europe.  Certain of the foreign patents have been granted in jurisdictions where
examination  is not  rigorous.  The Company has  instituted an Opposition in the
European Patent Office against granted  European Patent No. 472531 owned by Leon
Cariel and Institut des  Substances  Vegetales.  The Company  believes  that the
granted claims are invalid and intends to vigorously prosecute the Opposition.

      There can be no assurance  that the Company will be  successful  in having
the granted  European patent revoked or the claims  sufficiently  narrowed so as
not to potentially cover the Company's  proanthocyanidin polymer composition and
methods of use.  There can be no assurance that Leon Cariel and the Institut des
Substances  Vegetales will not assert claims relating to this patent against the
Company.  There can be no assurance  that the Company  would 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.  The  earlier
effective  filing date of this patent could limit the scope of the  patents,  if
any,  that the  Company  may be able to obtain  or  result in the  denial of the
Company's patent applications in Europe or elsewhere.

     In the United  States,  the PTO has  rendered  judgment in an  Interference
declared   between  the   Company's   issued   patent   covering   its  specific
proanthocyanidin  polymer  composition  and certain  claims of U.S.  application
corresponding to the granted European patent of Leon Cariel and the Institut des
Substances Vegetales by Daniel Jean and Leon Cariel. Judgment was awarded to the
Company. Since the period for appeal has passed, this judgment is now final.

      Additionally,  in connection with the Interference proceeding, the Company
has had an  opportunity to review the claims and file history of the Daniel Jean
and Leon Cariel  patent  application  which,  under U.S.  patent  law,  are kept
confidential. One broad claim, in particular, of the Daniel Jean and Leon Cariel
patent  application,  which was not involved in the Interference  proceeding and
which  has  been   indicated  to  be  allowable,   covers  a  large  variety  of
proanthocyanidin polymers. The Company believes that this broad claim is subject
to attack as invalid in view of prior art.  Based on knowledge of the  Company's
specific  proanthocyanidin  polymer  composition,  the Company believes that the
manufacture,  use or sale of its specific  proanthocyanidin  polymer composition
would not constitute infringement of this broad claim, once it issues. There can
be no assurances,  however,  that the Company would prevail should an action for
infringement of such claim be commenced.  In addition, if patents that cover the
Company's activities have been or are issued to other companies, there can be no
assurance that the Company would be able to obtain  licenses to these patents at
a  reasonable  cost,  or at all,  or be able to  develop  or obtain  alternative
technology.

      If the Company does not obtain such licenses, it could encounter delays or
be  precluded  from  introducing  products  to  the  market.  Litigation  may be
necessary to defend against or assert claims of infringement, to enforce patents
issued to the  


                                       19
<PAGE>

Company or to protect trade secrets or know-how owned by the Company. Additional
interference  proceedings  may be declared or necessary  to determine  issues of
invention;  such  litigation  and/or  interference  proceedings  could result in
substantial  cost to and diversion of effort by, and may have a material adverse
effect  on, the  Company.  In  addition,  there can be no  assurance  that these
efforts by the Company will be successful.

      The Company's competitive position is also dependent upon unpatented trade
secrets.  All employees of the Company are bound by confidentiality  agreements.
However,  there can be no assurance that others will not  independently  develop
substantially  equivalent  proprietary  information  and techniques or otherwise
gain access to the Company's trade secrets,  that such trade secrets will not be
disclosed or that the Company can  effectively  protect its rights to unpatented
trade  secrets.  To the extent that the Company or its  consultants  or research
collaborators  use  intellectual  property owned by others in their work for the
Company,  disputes  also may arise as to the  rights  in  related  or  resulting
know-how and inventions.

      Patent  applications  in the United  States are  generally  maintained  in
secrecy  until  patents are issued.  Since  publication  of  discoveries  in the
scientific  or patent  literature  tends to lag  behind  actual  discoveries  by
several  months,  Shaman  cannot be  certain  that it was the first to  discover
compositions  covered by its pending  patent  applications  or the first to file
patent  applications  on such  compositions.  There can be no assurance that the
Company's patent  applications  will result in issued patents or that any of its
issued  patents  will  afford   comprehensive   protection   against   potential
infringement.

      The Company is prosecuting  its patent  applications  with the PTO but the
Company  does  not know  whether  any of its  applications  will  result  in the
issuance of any patents or, if any patents are issued, whether any issued patent
will provide  significant  proprietary  protection  or will be  circumvented  or
invalidated.  During the course of patent  prosecution,  patent applications are
evaluated, inter alia, for utility, novelty, non-obviousness and enablement. The
PTO may require that the claims of an  initially  filed  patent  application  be
amended if it is determined that the scope of the claims includes subject matter
that is not useful, novel, non-obvious or enabled.

      Furthermore,  in certain instances, the practice of a patentable invention
may require a license from the holder of dominant patent rights.  In cases where
one  party  believes  that it has a claim to an  invention  covered  by a patent
application  or  patent  of a second  party,  the first  party  may  provoke  an
interference  proceeding in the PTO or such a proceeding  may be declared by the
PTO.  In  general,  in an  interference  proceeding,  the PTO would  review  the
competing  patents and/or patent  applications  to determine the validity of the
competing  claims,   including  but  not  limited  to  determining  priority  of
invention.  Any such determination would be subject to appeal in the appropriate
U.S. federal courts.

      There can be no assurance that additional  patents will be obtained by the
Company or that issued  patents will provide a  substantial  protection or be of
commercial benefit to the Company. The issuance of a patent is not conclusive as
to its validity or  enforceability,  nor does it provide the patent  holder with
freedom to operate  without  infringing  the patent  rights of others.  A patent
could be challenged by 


                                       20
<PAGE>

litigation  and, if the outcome of such  litigation  were  adverse to the patent
holder,  competitors  could be free to use the  subject  matter  covered  by the
patent,  or the patent holder may license the technology to others in settlement
of such  litigation.  The  invalidation  of patents  owned by or licensed to the
Company or non-approval of pending patent  applications  could create  increased
competition,  with  potential  adverse  effects on the Company and its  business
prospects.  In addition,  there can be no assurance that any applications of the
Company's  technology will not infringe patents or proprietary  rights of others
or that licenses that might be required as a result of such infringement for the
Company's  processes or products would be available on  commercially  reasonable
terms, if at all.

     The  Company  cannot  predict  whether  its  or  its  competitors'   patent
applications will result in valid patents being issued. Litigation,  which could
result in substantial cost to the Company,  may also be necessary to enforce the
Company's  patent  and  proprietary  rights  and/or to  determine  the scope and
validity  of  others'   proprietary  rights.  The  Company  may  participate  in
interference  proceedings  that may in the future be declared  by the U.S.  PTO,
which could result in substantial cost to the Company. There can be no assurance
that the outcome of any such  litigation  or  interference  proceedings  will be
favorable to the Company or that the Company will be able to obtain  licenses to
technology  that it may require or that, if obtainable,  such  technology can be
licensed at a reasonable cost.

      Year 2000  Compliance.  The  Company is in the  process of  assessing  the
impact  of year  2000 on its  operations  and  systems,  including  those of its
suppliers  and  collaborators  and other  third  parties.  Management  is in the
process of  formalizing  its  assessment  procedures  and  developing  a plan to
address  identified  issues,  if any. To date,  the Company  has  evaluated  its
financial and accounting systems and concluded that they are not and will not be
materially  affected by the year 2000. The Company does not yet know the extent,
if any,  of the impact of the year 2000 on its other  systems and  equipment  or
those of third  parties  with which the Company does  business.  There can be no
assurance that third parties, such as suppliers, clinical research organizations
and collabortive parties, are using systems that are year 2000 compliant or will
address  any year 2000  issues  in a timely  fashion,  or at all.  Any year 2000
compliance problems of either the Company, its suppliers,  its clinical research
organizations,  or its  collaborative  partners  could have a  material  adverse
effect on the Company's business, operating results and financial conditions.

      Uncertainty of Product Pricing,  Reimbursement  and Related  Matters.  The
Company's  business  may be  materially  adversely  affected  by the  continuing
efforts of governmental and third party payers to contain or reduce the costs of
health care through various means. For example, in certain foreign markets,  the
pricing or  profitability  of health  care  products  is  subject to  government
control.  In the United States,  there have been, and the Company  expects there
will  continue  to be, a number of  federal  and state  proposals  to  implement
similar  government  control.  While the Company cannot predict whether any such
legislative or regulatory proposals or reforms will be adopted, the announcement
of such  proposals  or  reforms  could  have a  material  adverse  effect on the
Company's ability to raise capital or form  collaborations,  and the adoption of
such proposals or reforms could have a material  adverse effect on the Company's
business, financial condition or results of operations.



                                       21
<PAGE>

      In addition, in both the United States and elsewhere, sales of health care
products are dependent in part on the availability of  reimbursement  from third
party  payers,  such as  government  and private  insurance  plans.  Significant
uncertainty exists as to the reimbursement  status of newly approved health care
products, and third party payers are increasingly challenging the prices charged
for medical  products and services.  If the Company  succeeds in bringing one or
more products to the market,  there can be no assurance that  reimbursement from
third party payers will be available or will be  sufficient to allow the Company
to sell its products on a competitive or profitable basis.

      Possible  Volatility of Stock Price.  From time to time,  the stock market
has experienced  significant price and volume fluctuations that may be unrelated
to the operating performance of particular companies or industries. In addition,
the market price of the Company's  Common  Stock,  like the stock prices of many
publicly traded biotechnology and smaller pharmaceutical companies, has been and
may continue to be highly volatile.  Announcements of technological innovations,
regulatory matters or new commercial products by the Company or its competitors,
developments  or disputes  concerning  patent or proprietary  rights,  publicity
regarding  actual or  potential  medical  results  relating  to  products  under
development by the Company or its competitors,  regulatory  developments in both
the United  States and  foreign  countries,  public  concern as to the safety of
pharmaceutical  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 Shaman's Common Stock.

      Environmental  Regulation. In connection with its research and development
activities and manufacturing of clinical trial materials, the Company is 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 the Company
believes  that it has complied with these laws and  regulations  in all material
respects  and  has  not  been  required  to  take  any  action  to  correct  any
noncompliance,  there can be no assurance  that the Company will not be required
to incur  significant  costs to comply with  environmental and health and safety
regulations in the future.  The Company's  research and  development  activities
involve  the  controlled  use of  hazardous  materials,  chemicals,  viruses and
various  radioactive  compounds.  Although the Company  believes that its safety
procedures  for  handling  and  disposing  of such  materials  comply  with  the
standards  prescribed by state and federal  regulations,  the risk of accidental
contamination or injury from these materials cannot be completely eliminated. In
the event of such an accident,  the Company could be held liable for any damages
that result and such liability could exceed the resources of the Company.

      Anti-Takeover  Effect of  Delaware  Law and  Certain  Charter  and  Bylaws
Provisions. Certain provisions of the Company's Certificate of Incorporation and
Bylaws  may have the  effect of making it more  difficult  for a third  party to
acquire,  or discouraging a third party from  attempting to acquire,  control of
the Company.  Such provisions could limit the price that certain investors might
be willing to pay in the future for shares of the Company's  Common  Stock.  The
Company's Board of Directors has the authority to issue up to 600,000 additional
shares of  Preferred  Stock and to  determine  the price,  rights,  preferences,
privileges and  restrictions  of those shares without any further vote or action
by the stockholders.



                                       22
<PAGE>

     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,
while providing desirable  flexibility in connection with possible  acquisitions
and other corporate purposes,  could have the effect of making it more difficult
for a third party to acquire a majority of the  outstanding  voting stock of the
Company.  The Company has no present  plans to issue shares of  Preferred  Stock
with voting rights. Certain provisions of Delaware law applicable to the Company
could also delay or make more difficult a merger,  tender offer or proxy contest
involving the Company, 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.

      Product  Liability  Exposure;  Limited Insurance  Coverage.  The Company's
business exposes it to potential  product  liability risks which are inherent in
the  development,  testing,  manufacture,  marketing and sale of  pharmaceutical
products. Product liability insurance for the pharmaceutical industry generally,
which includes acts by third parties,  including  manufacturers of the Company's
product candidates,  is expensive.  There can be no assurance that the Company's
present product liability insurance coverage is adequate. Such existing coverage
will not be  adequate as the  Company  further  develops  its  products,  and no
assurance can be given that adequate  insurance  coverage  against all potential
claims will be available in sufficient  amounts or at a reasonable cost. Certain
of the Company's development and manufacturing  agreements contain insurance and
indemnification  provisions to which the Company could be held  accountable  for
certain occurrences.

      Limitation of Liability and Indemnification.  The Company's Certificate of
Incorporation  limits,  to the maximum  extent  permitted  by Delaware  Law, the
personal  liability  of  directors  for  monetary  damages  for  breach of their
fiduciary  duties as a director.  The Company's  Bylaws provide that the Company
shall  indemnify  its officers and directors and may indemnify its employees and
other  agents to the fullest  extent  permitted  by law. The Company has entered
into  indemnification  agreements  with its  officers and  directors  containing
provisions which are in some respects broader than the specific  indemnification
provisions contained in Delaware Law. The indemnification agreements may require
the Company,  among other  things,  to  indemnify  such  officers and  directors
against certain  liabilities that may arise by reason of their status or service
as directors or officers (other than liabilities arising from willful misconduct
of a culpable  nature),  to advance their  expenses  incurred as a result of any
proceeding  against  them as to which they could be  indemnified,  and to obtain
directors'  and  officers'  insurance,  if available on  reasonable  terms.  The
Company currently maintains directors' and officers' insurance.

      Section 145 of the Delaware Law provides that a corporation  may indemnify
a director,  officer, employee or agent made or threatened to be made a party to
an action by reason of the fact that he was a  director,  officer,  employee  or
agent of the  corporation  or was  serving  at the  request  of the  corporation
against expenses actually and reasonably incurred in connection with such action
if he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best  interests  of the  corporation,  and,  with  respect to any
criminal  action or proceeding,  had no reasonable  


                                       23
<PAGE>

cause to  believe  his  conduct  was  unlawful.  Delaware  Law does not permit a
corporation  to eliminate a director's  duty of care,  and the provisions of the
Company's  Certificate of  Incorporation  have no effect on the  availability of
equitable remedies, such as injunction or rescission, for a director's breach of
the duty of care.

      Dependence  on Key  Personnel.  The  Company's  ability  to  maintain  its
competitive position depends in part upon the continued contributions of its key
senior management.  The Company's future performance also depends on its ability
to attract and retain qualified management and scientific personnel. Competition
for such  personnel is intense,  and there can be no assurance  that the Company
will be able 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
have a material adverse effect on the Company's  business,  financial  condition
and results of operations.





                                       24
<PAGE>





<TABLE>
<CAPTION>
<S>     <C>    <C>    <C>    <C>    <C>    <C>


PART II    OTHER INFORMATION


Item 1.    Legal Proceedings

           None.

Item 2.    Changes in Securities

           None.

Item 3.    Defaults in Senior Securities

           None.

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

           None.

Item 5.    Other information

           None.

Item 6.    Exhibits and Reports on Form 8-K

(a)        Exhibits

           Exhibit No.         Description
           -----------         -----------
            4.2*               Form of Common Stock Purchase Warrant
           10.65*              Amendment Agreement
           27*                 Financial Data Schedule

(b)        No  current  reports  on Form 8-K were  filed  during  the
           quarter ended March 31, 1998.

</TABLE>
---------------------------
*  Previously filed


                                       25
<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:  May 28, 1998


                                        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 & principal
                                        financial and accounting officer)


   
                                       26