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 SEPTEMBER 30, 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 October 30, 1998:  22,693,653




                                       1
<PAGE>



                          SHAMAN PHARMACEUTICALS, INC.

                               INDEX FOR FORM 10-Q

                               September 30, 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 September  30,         3
                   1998 (unaudited) and December 31, 1997

                   Condensed  Statements of Operations  for the three
                   and nine months ended September 30, 1998 and           
                   September  30, 1997 (unaudited)                         4   

                   Condensed Statements of Cash Flows for the nine         
                   months ended September 30, 1998 and September 30,
                   1997  (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.            Qualitative and  Quantitative  Disclosure About    
                   Market Risk                                            12


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>
                                                                        
                                                 September 30,     December 31, 
                                                     1998             1997
                                                  ------------   ------------
                                                  (Unaudited)
ASSETS

Current assets:
   Cash and cash equivalents                       $  9,502,747   $  11,340,702
   Short-term investments                             1,014,058      10,079,943
   Amounts  due from related parties                    457,589         192,551
   Prepaid expenses and other current assets            838,314         553,507
                                                   ------------    ------------  
Total current assets                                 11,812,708      22,166,703
                                                                                
Property and equipment, net                           3,194,873       3,972,140
                                                                  
Other assets                                            610,724         613,657
                                                   ------------    ------------

Total assets                                       $ 15,618,305    $ 26,752,500
                                                   ============    ============

LIABILITIES AND STOCKHOLDERS' EQUITY
 (NET CAPITAL DEFICIENCY)

Current liabilities:
   Accounts payable and other accrued expenses     $  1,724,991      $  925,701
   Accrued clinical trial costs                       3,258,241       1,689,659
   Accrued professional fees                          1,025,723         718,625
   Accrued compensation                                 343,441         368,272
   Advances - contract research                         343,750       1,133,605
   Current installments of long-term obligations      2,571,953       2,783,976
                                                   ------------    ------------
Total current liabilities                             9,268,099       7,619,838

Long-term obligations, excluding current      
   installments                                       3,296,406       4,017,979
Senior convertible notes                              5,412,475       9,967,044

Stockholders' equity (net capital deficiency):
   Preferred stock                                          515             400
   Common stock                                          22,562          17,796
   Additional paid-in capital                       137,885,228     117,164,524
   Deferred compensation and other adjustments         (58,371)        (124,910)
   Accumulated deficit                             (140,208,609)   (111,910,171)
                                                   ------------    ------------

Total stockholders' equity (net capital deficiency)  (2,358,675)      5,147,639
                                                   ------------    ------------

Total liabilities and stockholders' equity         
   (net capital deficiency)                        $ 15,618,305    $ 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)
<S>     <C>    <C>    <C>    <C>    <C>    <C>


                                Three Months Ended         Nine Months Ended 
                                   September 30,              September 30,                       
                            ------------------------  -------------------------
                                 1998       1997         1998           1997
                             ----------- -----------  -----------    ----------

Revenue from collaborative 
  agreements                $  560,000   $  875,000  $  2,284,855  $  2,625,000

Operating expenses:
  Research and 
    development              8,537,221    5,525,369    24,277,208    17,078,567
  General and 
    administrative           1,589,399    1,207,184     4,273,012     3,916,530
                           -----------  -----------   -----------   -----------
Total operating expenses    10,126,620    6,732,553    28,550,220    20,995,097
                           -----------  -----------   -----------   -----------
Loss from operations        (9,566,620)  (5,857,553)  (26,265,365)  (18,370,097)

Other income (expense):
  Interest income               87,606      327,047       444,484       881,787
  Interest expense (cash)     (488,280)    (449,583)   (1,798,921)     (729,966)
  Interest expense (non-cash)        -   (3,692,140)            -    (3,692,140)
                            ----------  -----------    ----------    ----------
Net loss                  $ (9,967,294) $(9,672,229) $(27,619,802) $(21,910,416)
                               
Deemed dividend on  
  Preferred Stock             (678,636)          -      (678,636)            -
                            ----------  -----------    ----------    ----------
Net loss applicable to
  Common Stockholders      (10,645,930)  (9,672,229)  (28,298,438)  (21,910,416)
                     
Net loss per share            $  (0.55)    $  (0.55)      $ (1.54)      $ (1.31)
                           ===========  ===========   ===========   ===========
Shares used in calculation
  of net loss per share     19,255,000   17,555,000    18,414,000    16,758,000
                           ===========  ===========   ===========   ===========

</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)
<S>     <C>    <C>    <C>    <C>    <C>    <C>
                                                Nine Months Ended September 30,
                                               --------------------------------
                                                        1998           1997
                                                   -------------   ------------
Operating activities:

Net loss                                          $ (28,298,438)  $ (21,910,416)
                                                   

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

    Depreciation                                        985,697       1,312,983

    Amortization of warrants and deferred      
      equity costs                                      492,588         210,284

    Deemed dividend on Preferred Stock                  678,636               -

    Other compensation                                   72,145               -

    Interest expense on issuance of            
      sr. convertible notes                                   -       3,692,140

    Loss on disposal of fixed assets                     19,834               -

    Payment of interest in Common Stock                 569,229               -

Changes in operating assets and liabilities:

    Prepaid expenses, current assets and other assets      
      other assets                                     (546,912)        388,766
    Accounts payable, accrued expenses and
      contract research advances                      1,860,282      (1,382,593)
                                                  -------------    ------------
Net cash used in operating activities               (24,166,939)    (17,688,836)
                                                  -------------    ------------ 
                                                  
Investing activities:

    Purchases of available-for-sale investments      (1,999,049)     (7,039,457)
                                                                     
    Maturities of available-for-sale investments      5,058,784         986,097

    Sales of available-for-sale investments           6,030,149               -

    Capital expenditures                               (228,264)       (699,151)
                                                  -------------    ------------
Net cash provided by (used in) investing       
    activities                                        8,861,620      (6,752,511)
                                                  -------------    ------------

Financing activities:

  Proceeds from issuance of Series C         
    Convertible Preferred Stock, net                  13,052,260              -

  Proceeds from issuance of Common Stock, net          1,493,601     17,456,041

  Principal payments on long-term obligations         (1,589,620)    (2,512,287)

  Proceeds from issuance of senior convertible notes           -      9,531,013
    
  Proceeds from issuance of long-term obligations              -      5,000,000

  Proceeds from asset financing arrangements             511,123              -
                                                   -------------   ------------
Net cash provided by (used in) financing      
  activities                                          13,467,364     29,474,767
                                                   -------------   ------------

Net increase (decrease) in cash and cash     
  equivalents                                         (1,837,955)     5,033,420

Cash and cash equivalents at beginning of period      11,340,702     16,051,251
                                                   -------------   ------------
Cash and cash equivalents at end of period          $  9,502,747  $  21,084,671  
                                                   =============   ============
</TABLE>

See Notes to condensed financial statements.

                                       5
<PAGE>


                          SHAMAN PHARMACEUTICALS, INC.

                     NOTES TO CONDENSED FINANCIAL STATEMENTS

                               September 30, 1998
                                   (Unaudited)

1.    Basis of Presentation

      Shaman  discovers  and  develops  novel  pharmaceutical  products  for the
treatment  of human  diseases  and their  symptoms  through  the  isolation  and
optimization of active  compounds found in tropical  plants.  We believe that by
focusing on drugs  extracted  from plants with a history of  medicinal  use, our
drug  discovery  efforts  may be  quicker  and more  likely  to lead to safe and
effective  pharmaceuticals.   We  have  three  product  candidates  in  clinical
development:  SP-303/Provir,  an oral  product for the  treatment of diarrhea in
people 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.  We maintain an active Type
II diabetes  research  program  that  serves as the basis for our  collaboration
with Lipha S.A., a  wholly-owned  subsidiary of Merck KGaA,  Darmstadt,  Germany
("Lipha/Merck").

      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 our 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.    Series C Convertible Preferred Stock Financing

      In August 1998, we filed a registration  statement with the Securities and
Exchange  Commission  (the "SEC") for a public  offering of a minimum of 140,000
("the  Minimum")  and a maximum of 200,000  (the  "Maximum")  shares of Series C
Convertible Preferred Stock for gross proceeds of a minimum of $14.0 million and
a maximum of $20.0 million (the "1998 Public Offering").  Each share of Series C
Preferred  Stock  shall  be  entitled  to  receive  cumulative   dividends  paid
semi-annually  in each year to the  holders of record of such shares as follows:
(i) a stock-on-stock dividend of $10.00 per annum, paid in arrears, in shares of
Common Stock (valued at 85% of the average closing price of the Common Stock for
the 10 trading day period  ending three  trading days prior to the date on which
the  dividend  is  paid);  plus  (ii) a cash  amount  equaling  0.00005%  of the
Company's  United  States net sales,  if any,  for the  preceding  two  calendar
quarters of its SP-303/Provir  product for the treatment of diarrhea (equivalent
to a 7%  royalty  for the  Minimum  and a 10%  royalty  for the  Maximum  of the
aggregate  shares of Series C  Preferred  Stock)  less  $5.00  (the value of the
semi-annual  stock  dividend).  If, under Delaware law, the Company is unable to
pay the cash amount of the  Dividends,  then the cash  portion of the  Dividends
shall be payable in shares of Common Stock (valued at 85% of the average closing
price of the Common Stock for the 10 day trading  period  ending  three  trading
days  prior to the date on which the  dividend  is paid).  Each  share  shall be
convertible  at any time  commencing on the date on which any shares of Series C
Preferred  Stock  were  first  issued  and  continuing  for a period  of 30 days
thereafter,  and again  commencing 12 months after such initial issuance date at
the election of each holder,  and  automatically on the sixth anniversary of the
initial issuance date into greater of (i) 16.6667 shares of Common Stock or (ii)
such  number  of shares of Common  Stock as equals  $100  divided  by 85% of the
average  closing  price 



                                       6
<PAGE>


of the Common Stock  reported by the Nasdaq Stock Market for the 10  trading day
period  ending  three  trading  days  prior  to  the  date of  conversion.   The
registration statement was declared effective by the SEC on August 14, 1998.

      In September 1998 and October 1998, we completed two separate  closings of
the Series C Convertible Preferred Stock offering for aggregate gross proceed of
$14.1 million. Of the 200,000 maximum shares registered, an aggregate of 140,880
shares  were  sold  to the  investors  and  the  remaining  59,120  shares  were
deregistered.  During the initial 30 day  conversion  period,  a total of 24,922
shares of the  Series C  Convertible  Preferred  Stock  were  converted  into an
aggregate of 1,861,550 shares of Common Stock at a conversion  price of $1.33875
per share.

      In  connection  with the  issuance of the Series C  Convertible Preferred 
Stock, we recognized a non-cash charge in the amount of $679,000 in  the  third 
quarter ended September 30, 1998.  


3.    Series B Convertible Preferred Stock Financing

      In June  1998,  we entered  into  Stock Purchase  Agreements  (the  "Stock
Agreements") with certain of our stockholders  (the "Buyers")  pursuant to which
we acquired the right to sell to the Buyers,  subject to certain  conditions and
in one or two  tranches  closing  no later  than  February  28,  1999,  up to an
aggregate of 7,000 shares of Series B Custom  Convertible  Preferred  Stock (the
"Series B Preferred Stock") for an aggregate  purchase price of $7,000,000.  The
Stock Agreements  became  effective on June 22, 1998 (the "Effective  Date") but
were  terminated  upon the closing of the Series C Convertible  Preferred  Stock
Financing. See Note 2 - Series C Convertible Preferred Stock.

      As consideration for entering into the Stock  Agreements, we issued to the
Buyers on the Effective Date warrants to purchase an aggregate of 350,000 shares
of Common Stock (the "June  Warrants").  The June Warrants are exercisable for a
period of five years after the  Effective  Date at an  exercise  price per share
equal to 115% of the average  trading  price of Common  Stock  during  specified
measurement  periods.  The June Warrants provide for adjustment of the number of
shares of Common  Stock  issuable  upon  exercise  thereof,  including  upon the
distribution  of certain  dividends,  or upon the division or combination of the
our Common Stock. We filed a registration  statement with the SEC for the resale
of  shares  issued  upon  exercise  of the  June  Warrants,  which  registration
statement was declared effective on July 10, 1998. We have attributed a value of
$1.5 million to these June Warrants.


4.    Loss per Share

      Basic net loss per share is computed using the weighted  average number of
shares of common stock outstanding.  At September 30, 1998 and 1997, outstanding
stock options and other stock equivalents are antidilutive.


5.    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 including unrealized gains or losses on
available-for-sale securities;  however, adoption in the quarter and nine months
ended  September  30,  1998 did not have a material  impact on our net income or
stockholders' equity.

      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  



                                       7
<PAGE>


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 we 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 our reported segments and disclosures.





                                       8
<PAGE>



                          SHAMAN PHARMACEUTICALS, INC.

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

Overview

      Shaman  discovers  and  develops  novel  pharmaceutical  products  for the
treatment  of human  diseases  and their  symptoms  through  the  isolation  and
optimization of active  compounds found in tropical  plants.  We believe that by
focusing on drugs  extracted  from plants with a history of  medicinal  use, our
drug  discovery  efforts  may be  quicker  and more  likely  to lead to safe and
effective  pharmaceuticals.   We  have  three  product  candidates  in  clinical
development:  SP-303/Provir,  an oral  product for the  treatment of diarrhea in
people 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.  We maintain an active Type
II diabetes  research  program   that serves as the basis for our  collaboration
with Lipha S.A., a  wholly-owned  subsidiary of Merck KGaA,  Darmstadt,  Germany
("Lipha/Merck").

     We began  operations in March 1990. To date, we have not sold any products.
However,  patient  enrollment  in a Phase  III  human  clinical  trial  has been
completed for our lead compound,  SP-303/Provir for the treatment of diarrhea in
people with AIDS. If the results of this trial are  positive,  we expect to file
an NDA for commercial approval of SP-303/Provir in early 1999. With a fast track
designation  from the FDA for the indication of diarrhea in people with AIDS, we
are preparing for potential product launch in the second half of 1999 and intend
to retain U.S.  marketing  rights to this product.  Our  accumulated  deficit at
September 30, 1998, was approximately $140.2 million.  Since inception,  we have
financed our research, development and administrative activities through various
private and public equity  financings,  loan and debt financings,  collaborative
agreements  with  pharmaceutical  companies  and,  to a lesser  extent,  through
equipment and leasehold improvement lease financings.


Results of  Operations  for the Nine Months Ended  September 30, 1998 and 1997

     For the third quarter and nine months ended September 30, 1998, revenue was
$560,000  and $2.3  million,  respectively,  as compared  to  $875,000  and $2.6
million for the  corresponding  periods in 1997.  Revenue for the quarter  ended
September 30, 1998 resulted from research fees paid in conjunction with Shaman's
on-going  partnership  with  Lipha/Merck.  Revenue  for the  nine  months  ended
September 30, 1998 also resulted from our partnership  with  Lipha/Merck and our
partnership  with Ono  Pharmaceutical  Co. Ltd. of Osaka,  Japan ("Ono"),  which
expired in May 1998. Revenue for the quarter and nine months ended September 30,
1997 also resulted from our  partnerships  with  Lipha/Merck  and Ono. We expect
that revenues from  collaborative  agreements  will continue to fluctuate in the
future  as  development  of our  various  compounds  proceeds  and  new  product
candidates are partnered for development and commercialization. In May 1998, our
collaborative  agreement  with Ono (the  "Agreement")  expired  and the  ongoing
research and development funding has terminated under the original terms and the
Agreement  was not renewed.  Under the  Agreement,  Ono will continue to provide
milestone  payments and  royalties  to Shaman for any  resulting  products  they
develop from compounds identified during the three-year term of the Agreement.

      Research and development  expenses were $8.5 million and $24.3 million for
the third  quarter and nine  months  ended  September  30,  1998,  respectively,
compared to $5.5  million and $17.1  million  for the  corresponding  periods in
1997.  These  increases  were  primarily  attributable  to the  progress  in our
clinical  development  program,  particularly in the continuation of a Phase III
human clinical trial for  SP-303/Provir  for the treatment of diarrhea in people
with AIDS,  which was only partially  offset by a reduction of costs  associated
with our diabetes  program.  Research and  development  expenses are expected to
increase in 1998 as we continue our clinical development activities with respect
to SP-303/Provir and other product candidates.

      General and administrative expenses were $1.6 million and $4.3 million for
the third quarter and nine months ended  September 30, 1998,  compared with $1.2
million and $3.9  million for the 



                                       9
<PAGE>


third  quarter  and nine  months of 1997.  The  increase  in the  quarter  ended
September  30,  1998  compared  to the  quarter  ended  September  30,  1997 was
primarily  attributable  to  compensation,   costs  associated  with  commercial
development  activities and an increase in legal dispute costs  associated  with
our on-going  litigation.  The increase for the nine months ended  September 30,
1998  compared  to the  same  period  in  1997  was  primarily  attributable  to
compensation  and  costs  associated  with  commercial  development  activities,
partially  offset by a reduction in legal dispute costs.  Our expanded  research
and clinical  activities are not expected to require  commensurate  increases in
general and administrative support and expense.

      Interest  income was $88,000 and $444,000  for the third  quarter and nine
months ended  September  30, 1998,  compared  with $327,000 and $882,000 for the
quarter and nine months of 1997.  Interest income  decreased for the quarter and
nine months ended September 30, 1998,  compared with the quarter and nine months
ended  September 30, 1997, due to lower average cash and investment  balances as
we continue to fund our operations.

      Interest expense was $488,000  and $1.8 million for the third  quarter and
nine months  ended  September  30,  1998,  compared  with $4.1  million and $4.4
million for the quarter and nine months of 1997.  Interest expense decreased for
the quarter and nine months ended September 30, 1998,  compared with the quarter
and nine months ended  September 30, 1997  primarily due to a non-cash  interest
charge of $3.7 million in  conjunction  with our issuance of senior  convertible
notes in August 1997. In 1998, the Company incurred a non-cash  interest expense
of $374,000 in connection with certain debt financings closed in 1997.


Liquidity and Capital Resources

      As of September  30,  1998,  our cash,  cash  equivalents  and  short-term
investments totaled approximately $10.5 million,  compared with $21.4 million at
December 31, 1997.  We invest  excess cash  according to our  investment  policy
which provides guidelines with regard to liquidity,  type of investment,  credit
ratings and concentration limits.

     On October 16, 1998, we completed the sale to the public of an aggregate of
140,880 shares of our Series C Convertible  Preferred  Stock for aggregate gross
proceeds of $14.1 million.  (See Notes to Condensed Financial Statements -- Note
2 - Series C Convertible Preferred Stock Financing.)

      In June 1997,  we issued $10.4  million in 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 our option.  The notes are  convertible  into our Common  Stock at a 10%
discount from the low trading price during a designated time period prior to the
conversion.  We filed a  registration  statement  with the SEC for the resale of
shares issued upon conversion of these notes, which  registration  statement was
declared effective on August 29, 1997. As of October 31, 1998, a total principal
amount of $5.1  million of the notes had been  converted  into an  aggregate  of
2,080,804 shares of Common Stock.

      In March 1998, the Company and the purchasers of the notes entered into an
Amendment Agreement (the "Amendment Agreement"),  in order to prevent conversion
of the  notes  at a  price  that  would  be  unduly  dilutive  to  our  existing
stockholders.  As consideration  for entering into the Amendment  Agreement,  we
issued to the  purchasers  of the notes  warrants to purchase  an  aggregate  of
137,500  shares of Common Stock (the "March  Warrants").  The March Warrants are
exercisable  through March 18, 2001 at an exercise price of $7.50 per share.  We
filed a registration statement with the SEC for the resale of shares issued upon
exercise  of the March  Warrants,  which  registration  statement  was  declared
effective on July 10, 1998.

      In May 1997,  we obtained a $5.0  million  loan,  which amortizes  over 36
months,  to pay off pre-existing  debt,  finance capital asset  acquisitions and
finance  continued  research and clinical  development  of our 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
10-year  warrants to purchase  200,000 shares of our Common Stock at an exercise
price of $6.25  per  share.  We have  attributed  a value of  $648,000  to these
warrants. This amount has been 



                                       10
<PAGE>


recorded as a discount on the related  debt and is being  amortized  as interest
expense over the term of the loan.

      In  September 1996,  we  entered into a five-year collaborative  agreement
with  Lipha/Merck  to jointly  develop Shaman's  antihyperglycemic  drugs.  Upon
signing the collaboration,  we received an  annual research fee o f $1.5 million
which was amortized to revenue over 12 months,  as work was  performed.  We also
received approximately  $3.0  million for 388,918  shares of Common Stock priced
at $7.71 per share, representing a 20%  premium to the  weighted  average  price
of our Common 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 our Common Stock at the time of purchase.  The  agreement  also
provides  for additional  preclinical and  clinical  milestone payments to us in
excess  of  $10.0  million  per   compound   for  each   antihyperglycemic  drug
developed  and commercialized. Lipha/Merck will bear all pre-clinical, clinical,
regulator  and   other  development  expenses  associated   with  the  compounds
selected under the agreement.  In  addition,  as  products  are  commercialized,
we will receive royalties on all product sales outside the United  States and up
to 50% of the profits (if we exercise  our 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 us from sales of
products  developed  pursuant to the agreement.  As of October 31, 1998, we have
received an aggregate of $9.4 million  under the  agreement.  A balance of $10.1
million in committed capital remains under the agreement.

      In July 1996, we closed a private placement (the "1996 Private Placement")
pursuant to Regulation S under the Securities Act of 1933, as amended,  with one
investor in which we  received  gross  proceeds of $3.3  million for the sale of
400,000  shares of Series A Preferred  Stock and for the  issuance of a six-year
warrant to purchase  550,000  shares of our Common Stock at an exercise price of
$10.18  per  share.  The  Series A  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 our
Common  Stock  during  the  period  prior to  conversion.  Holders  of  Series A
Preferred Stock are entitled to a liquidation  preference of $8.15 per share. In
addition to the sale of Series A Preferred  Stock and the  warrant,  we have the
right,  from time to time during the period  beginning  January  1997 and ending
July 2000,  subject to certain  conditions,  including  continued listing of our
Common Stock on any national exchange, to sell up to 1,200,000 additional shares
of  Common  Stock  to the  investor  at a  formula  price  of  100% or 101% of a
multi-day  average of our Common Stock price at the time of sale. If we exercise
this right,  the  investor  has the option to  increase  the number of shares it
purchases by up to an aggregate of 527,500 shares.

      Over the next  year and potentially longer depending  on clinical  results
and regulatory reviews, we expect to incur substantial additional costs relating
to the continued preclinical and clinical  testing of our  products,  regulatory
activities and research and development  programs.  We anticipate that our cash,
cash equivalents and short-term  investment balances,  the collaborative revenue
committed  by  Lipha/Merck,  Lipha/Merck's  commitment  to  purchase  additional
equity, the proceeds of the 1998 Public Offering and Shaman's  additional rights
to sell Common Stock under the 1996 Private  Placement  will be adequate to fund
operations  through  the  filing of an NDA on  SP-303/Provir  for the fast track
indication  of  diarrhea  in people  with AIDS,  and at least  through the first
quarter of 1999.  Milestone  payments  which may be  received by us from Ono and
Lipha/Merck  would  extend our  capacity to finance our  operations  beyond that
time. However,  there can be no assurance that milestones will be achieved,  nor
that additional funding, if needed, will be available on reasonable terms, or at
all. As of September  30, 1998, we had cash,  cash  equivalent,  and  short-term
investment  balances of  approximately  $10.5  million.  In September  1998, our
expenses were  approximately  $2.5 million.  We expect this  expenditure rate to
continue  through  December 31, 1998.  Accordingly,  unless we are successful in
obtaining  additional  funds,  our current cash resources will be  substantially
used by the first quarter 1999. We will require substantial  additional funds to
conduct the development and testing of our potential products and to manufacture
and market any products that may be developed in the future.




                                       11
<PAGE>


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 we are
still a  relatively  young  company  and have not yet  completed a full cycle of
development,  regulatory approval and  commercialization  for any of our product
candidates.  The clinical and  regulatory  processes for testing and approval of
our products are complex,  lengthy,  uncertain and costly, and we cannot be sure
of the timing of clinical or regulatory processes or commercialization of any of
our product candidates.  These development processes require substantial amounts
of funding, and we are dependent on corporate partners and the equity markets to
finance such efforts. Where access to funding is difficult, our stockholders may
face  significant  dilution,  and our ability to proceed  with our  programs and
plans may be  significantly  and  adversely  affected.  Actions and  advances by
competitors  may  also  significantly  affect  our  prospects,  as  well  as the
existence  of patents held by such  competitors  or  potential  competitors.  In
addition,  there can be no assurance that any plants we use in our products will
be indefinitely  available or that any compounds derived from the plant material
will be protected by our proprietary rights.


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 certify portions of our software  and certain hardware  so that those systems
will properly utilize dates beyond December 31, 1999. We presently  believe that
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  are  approximately  85%  complete with  the assessment of all internal
systems that could be  significantly  affected by the Year 2000.   To date, cost
estimates for upgrades for those systems not in  compliance total  approximately
$200,000.  After the assessment phase is completed,    we will have to purchase,
install and test the upgrades to ensure they meet internal year 2000 compliance.
We expect to  complete our  internal  year 2000  readiness  program in the third
quarter of 1999.  We  have  evaluated our  financial and accounting  systems and
concluded  that they are not  and will not be  materially  affected by Year 2000
problem.   We  are  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 the  first  quarter  1999 and  determine  whether  such a plan is
necessary.


Item 3. Qualitative and Quantitative Disclosure About Market Risk.

      Not Applicable.




                                       12
<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  such as statements  regarding
our plans,  objectives,  expectations  and intentions.  Our 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 our Annual Report on Form
10-K/A for fiscal year ended  December 31, 1997,  filed with the  Securities and
Exchange Commission on May 28, 1998.


Risks Regarding Failure to Continue to Meet Nasdaq Listing Requirements

      On June 10,  1998,  we received  correspondence  from The Nasdaq  National
Market  ("Nasdaq")  stating  that we no longer met the  $4,000,000  net tangible
asset  requirement for continued listing on Nasdaq. As of September 30, 1998, we
had a net  capital  deficiency  of  ($2,359,000).  We believe we comply with all
other listing  requirements.  On September 3, 1998, we attended a formal hearing
and presented a plan to a Nasdaq Listing  Qualifications Panel (the "Panel") for
achieving and maintaining long-term compliance with Nasdaq listing requirements.
On October 14, 1998, we requested a waiver of Marketplace Rule 4310(H) to enable
us to  exchange  existing  debt for equity,  which will  assist us in  achieving
long-term compliance with the Nasdaq listing requirements.  This rule would have
required us to seek  stockholder  approval of this exchange  because we would be
selling greater than 20% of the common stock  outstanding prior to the issuance.
On October 26, 1998,  the Panel granted this waiver and stated we would continue
to be listed on Nasdaq providing:

         -  we must make a public filing with the SEC and Nasdaq on or 
            before December 15, 1998 showing an October 31, 199  balance        
            sheet with (i) pro  forma  adjustments for  any  significant
            transactions or events occurring on or before the filing date 
            and (ii) evidencing a minimum of $8.0 million in net tangible 
            assets;  and
             
         -  we must make a public  filing with the SEC and Nasdaq on or 
            before February 1, 1999 showing a November 30, 1998 balance
            sheet with (i) pro forma  adjustments for any  significant  
            transactions or events occurring on or before  the  filing  
            date and (ii) evidencing a minimum of $14.0 million in net 
            tangible assets.
             
      We must also issue a press  release  describing  the  exchange  of debt to
equity transaction and announce grant of the financial  viability  exception and
the  associated  audit  committee  determination.   We  must  also  notify  each
stockholder  with the same  information as contained in the press  release.  The
press  release  must be issued  and the  letter  must be mailed at least 10 days
prior to the closing of the transaction.

      Without  additional  financing,  the receipt of license  fees or milestone
payments  from   corporate   partnerships   or  the  conversion  of  outstanding
convertible notes, we will not satisfy the Nasdaq listing requirements,  and our
Common Stock will no longer be traded on Nasdaq. If that happens,  we would need
to seek listing on the Nasdaq  Over-the-Counter  Bulletin  Board.  If our Common
Stock were  traded on the Nasdaq  Over-the-Counter  Bulletin  Board,  our Common
Stock may be subject to reduced  liquidity  and reduced  analyst  coverage,  our
ability  to raise  capital  in the future  may be  inhibited  and our  business,
financial  condition  and results of operations  could be  materially  adversely
affected.   In   addition,   if  our  Common  Stock  is  listed  on  the  Nasdaq
Over-the-Counter  Bulletin Board rather than on a national exchange,  we will be
in  default  under  various   agreements  with  certain  of  our  investors  and
stockholders.  Under one such  agreement,  we will lose  rights to sell up to an
aggregate of 1,200,000 shares of our common stock.  Under other  agreements,  we
will  be  required  to  redeem  all or some  portion  of the  principal  balance
remaining under certain convertible  promissory notes ($5.4 million at September
30, 1998).  Redemption of these notes could  significantly  accelerate  our cash



                                       13
<PAGE>


expenditures and capital  requirements  beyond the levels currently  anticipated
and would  materially and adversely  affect our ability to conduct our business.
See "-- Continuing  Future  Capital Needs;  Uncertainty of Sources of Additional
Funding."


Continuing Future Capital Needs; Uncertainty of Sources of Additional Funding

      As of September 30, 1998, we had cash,  cash  equivalents  and  short-term
investment  balances of  approximately  $10.5  million.  In September  1998, our
expenses were  approximately  $2.5 million.  We expect this  expenditure rate to
continue  through  December 31, 1998.  Accordingly,  unless we are successful in
obtaining  additional  funds,  our current cash resources will be  substantially
used by the first quarter 1999. We will require substantial  additional funds to
conduct the development and testing of our potential products and to manufacture
and market any products that may be developed in the future.  Our future capital
requirements will depend on numerous factors, including:

         -   the progress of our 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 our existing collaborative and licensing relationships,
         -   our ability to establish additional collaborative relationships for
               the manufacture and marketing of our potential products, and
         -   our need to purchase additional capital equipment.

      In addition,  we entered into senior convertible note purchase  agreements
in  connection  with a  private  placement  which  provide  that  under  certain
circumstances  we  would  be  required  to  redeem  all or some  portion  of the
principal balance remaining ($5.4 million at September 30, 1998).  Redemption of
these notes could  significantly  accelerate our cash  expenditures  and capital
requirements  beyond the levels  currently  anticipated and would materially and
adversely affect our ability to conduct our business.

      Shaman will need to obtain  additional  funding  through public or private
equity or debt financings,  collaborative  arrangements or from other sources to
continue our research and development  activities,  fund operating  expenses and
pursue regulatory approvals for our products in development. If additional funds
are raised by issuing equity  securities,  current  stockholders  may experience
significant  dilution.  If additional funds are obtained  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. Additional financing
sources may not be available on  acceptable  terms if at all. If adequate  funds
are not  available,  significant  reductions in spending and the delay,  scaling
back or  elimination  of one or more of our research,  discovery or  development
programs  may be  necessary  which would have a material  adverse  effect on our
business, financial condition and results of operations.


RISKS DUE TO THE  EARLY STAGE OF DEVELOPMENT OF OUR PRODUCTS AND TECHNOLOGICAL 
UNCERTAINTY

      We have not yet completed  the  development  of any products.  Many of our
products still require significant additional clinical testing and investment of
capital before they can be commercialized. Products for therapeutic use in human
health care must be evaluated in extensive  human  clinical  trials to determine
their safety and efficacy.  These clinical  trials are part of a lengthy process
necessary to obtain government  approval.  Our  SP-303/Provir,  nikkomycin Z and
SP-134101 products are each in clinical development.  However,  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.



                                       14
<PAGE>


      Clinical trials may be terminated at any time for many reasons,  including
toxicity or adverse event reporting.  It is possible that Shaman's  products may
not be successfully  developed,  enter into human clinical  trials,  prove to be
safe and effective in clinical  trials,  meet applicable  regulatory  standards,
obtain required regulatory approvals, be capable of being produced in commercial
quantities  at  reasonable  costs,  be  successfully  marketed or may  encounter
problems  in  clinical  trials  that will cause us to delay or  suspend  product
development.  Failure of any of our products to be  commercialized  could have a
material  adverse  effect on our  business,  financial  condition and results of
operations.

      A significant  portion of our assets are dedicated to the  development and
commercialization  of  SP-303/  Provir.  Should we be  unable  to  commercialize
SP-303/Provir  there  could  be a  material  adverse  effect  on  our  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 our fiscal years since then. We incurred an operating  loss of
approximately  $27.6 million for the nine months ended September 30, 1998 and an
additional non-cash expense of $679,000 incurred in connection with the Series C
Convertible  Preferred  Stock  offering.  The  nine-month  loss  was  due to our
incurring  research and  development  expenses of  approximately  $24.3 million,
general and  administrative  expenses of approximately $4.3 million and interest
expense net of interest  income of  approximately  $1.4 million.  These expenses
were  partially  offset by  revenues  in the  first  three  quarters  of 1998 of
approximately  $2.3 million.  As of September 30, 1998, our accumulated  deficit
was  approximately  $140.2  million.  We have not generated any product sales to
date.  All  of our  products  and  compounds  are  still  in  the  research  and
development stage, which requires substantial expenditures. In order to generate
revenues or profits,  we must,  alone or with other third parties,  successfully
develop, test, obtain regulatory approval for and market our potential products.
It is possible that our product development  efforts may not be successful,  and
that we may not obtain required regulatory  approvals.  Even if our products are
developed  and  introduced,  they may not be  successfully  marketed  or may not
achieve market acceptance.


NO ASSURANCE OF SUCCESSFUL PRODUCT DEVELOPMENT

      Our  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 for us to move additional
product  candidates  into clinical  testing or to complete  clinical  testing of
current product  candidates.  Our research and  development  efforts on these or
other potential products,  including SP-303/Provir,  nikkomycin Z and SP-134101,
may not lead to  development of products that are shown to be safe and effective
in clinical trials.

      In addition, our products may not:

           -   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.

      Our products may also prove to have undesirable or unintended side effects
that may prevent or limit  their  commercial  use. At any stage of this  complex
product  development  process,  products that appeared  promising in preclinical
studies or Phase I and Phase II clinical trials may not demonstrate  efficacy in
larger-scale,   Phase  III  clinical  trials  and  will  therefore  not  receive
regulatory approvals.  Accordingly,  any of our product development programs may
be curtailed, redirected, suspended or eliminated at any time.




                                       15
<PAGE>



UNCERTAINTIES ASSOCIATED WITH CLINICAL TRIALS

      We have conducted,  and plan to continue conducting,  extensive and costly
clinical trials to assess the safety and efficacy of our potential products. The
rate of  completion  of these  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 our clinical
trial protocols,  existence of competing protocols,  size of patient population,
proximity of patients to clinical sites and eligibility  criteria for the study.
Any delay in patient enrollment will result in increased costs and delays, which
could have a material adverse effect on our ability to complete  clinical trials
in a timely fashion.


      In  addition,  any failure to meet our testing and  development  schedules
could have a material  adverse effect on our business,  financial  condition and
results of  operations.  Our  clinical  trials  may be delayed by many  factors,
including:

         -    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  each  of  our  products.  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 our business, financial condition and results of operations.

      Not all  patients  enrolled in our  clinical  trials  will  respond to our
product candidates.  Human clinical trials often experience setbacks. Failure to
comply with the 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 Shaman may suspend clinical
trials at any time if one or the other  concludes  that any  patients in a trial
are 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
our clinical trials to demonstrate  safety or efficacy in humans could cause the
delay,   suspension   or   termination   of  any  product   program,   including
SP-303/Provir,  nikkomycin Z and  SP-134101,  and could have a material  adverse
effect on our business, financial condition and results of operations.


DEPENDENCE ON COLLABORATIVE RELATIONSHIPS

      The research  and  development  efforts in our diabetes  program and, to a
lesser extent, in our other programs, have been dependent upon arrangements with
Lipha/Merck  and Ono and their  funding for  research  and  development  efforts
thereunder.  Funding from Ono has  concluded and therefore in the future we must
rely on continued  funding from Lipha/Merck or milestone  payments from products
developed  by  either  Ono or  Lipha/Merck,  if any.  We may  have  to seek  new
collaborations  to provide further funding for our diabetes  program.  We cannot
assure our current or future  stockholders that we can obtain further funding or
that  we  may  ultimately  derive  any  significant  revenues  from  any  of our
collaborations.

      We expect to seek additional collaborative agreements to commercialize our
other product  candidates  and will, in  particular,  need to rely on such third
party  arrangements  to  commercialize  our products,  including  SP-303/Provir,
outside the United  States.  We may not be successful in 



                                       16
<PAGE>


negotiating or entering into such agreements on terms favorable to us or at all,
and  any  agreement,  if  entered  into,  may  be  unsuccessful.  A  failure  to
successfully enter into such agreements and sell products  thereunder would have
a material  adverse effect on our business,  financial  condition and results of
operations.


RAPID TECHNOLOGICAL CHANGE AND SUBSTANTIAL COMPETITION

      Technological  changes  in  the  pharmaceutical  industry  are  rapid  and
substantial, and 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  us.   Developments  by  others  may  render  our  products  or
technologies  noncompetitive,  and  we  may  not  be  able  to  keep  pace  with
technological   developments.   Competitors   have,  and  continue  to  develop,
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 accomplishing the desired  therapeutic  effect than the products we may
develop. These competing products may be more effective and less costly than the
products we may develop. In addition, other forms of medical treatment may offer
competition to our products. The development of competing compounds could have a
material  adverse  effect on our  business,  financial  condition and results of
operations.


GOVERNMENT REGULATION; NO ASSURANCE OF REGULATORY APPROVALS

      All new drugs,  including our products under  development,  are subject to
extensive and rigorous  regulation by the federal  government,  principally  the
FDA,  as well as  comparable  agencies in state and local  jurisdictions  and in
foreign countries.  These authorities,  particularly the FDA, impose substantial
requirements upon 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:

        -    preclinical laboratory and animal tests,
        -    the submission to the FDA of an IND for human clinical testing,
        -    adequate and well controlled human clinical trials to establish the
              safety and efficacy of the drug,
        -    submission to the FDA of an NDA, and
        -    satisfactory completion of an FDA inspection of the manufacturing
              facility or facilities at which the drug is made to assess
              compliance with Good Manufacturing Practices,  or GMP.

      There are many costly and time-consuming  procedures required for approval
of a new drug,  including lengthy and detailed  preclinical and clinical testing
and validation of manufacturing and quality control processes. Several years may
be  needed  to  satisfy  these  requirements,  and  this  time  period  may vary
substantially  depending  on the type,  complexity  and  novelty of the  product
candidate.  Government  regulation  can delay or prevent  marketing of potential
products for a considerable period of time and impose costly procedures upon our
activities.  Moreover,  the FDA or any  other  regulatory  agency  may not grant
approval for any products developed or not grant approval on a timely basis, and
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.
Even if regulatory approval of a product is granted,  limitations may be imposed
on the  indicated  uses for a product.  Further,  later  discovery of previously
unknown problems with a product may result in added 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 our
business, financial condition and results of operations.



                                       17
<PAGE>


      The FDA also requires that a drug  manufacturer  (either  Shaman or one of
our  third-party  manufacturers)  must have quality  controls and  manufacturing
procedures which conform to GMP, a protocol which must be followed at all times.
The  FDA  strictly  enforces  GMP  requirements   through  periodic  unannounced
inspections.   The  FDA  could   determine  that  Shaman's  or  any  third-party
manufacturer's  facilities  and  manufacturing  procedures do not conform to GMP
requirements.  Additionally,  we or our  third-party  manufacturers  must pass a
pre-approval inspection of their manufacturing facilities by the FDA even before
we can obtain marketing approval.  Failure to comply with applicable  regulatory
requirements  may result in penalties such as  restrictions  on the marketing of
our products or withdrawal of a product from the market.

      The FDA's policies may change and additional  government  regulations  and
policies  may be  instituted,  both of which could  prevent or delay  regulatory
approval  of  our  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 our
business.  We are  unable to predict  the  likelihood  of  adverse  governmental
regulation that could arise from future  legislative or  administrative  action,
either in the United States or abroad.

      We will also be  subject to a variety  of  foreign  regulations  governing
clinical trials,  registration and sales of our 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  our  business,
financial condition and results of operations.


DEPENDENCE ON SOURCES OF SUPPLY

      We  currently  import all of the plant  materials  for our  products  from
countries in Latin and South America,  Africa and Southeast  Asia. To the extent
that our products cannot be economically  synthesized or otherwise produced,  we
will  continue to be dependent  upon a supply of raw plant  material.  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
have a material adverse effect on our 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 our current or future products are derived,  such  destruction  could
have a material adverse effect on our business,  financial condition and results
of operations.


LIMITED MANUFACTURING AND MARKETING EXPERIENCE AND CAPACITY

      We currently  produce  products only in quantities  necessary for clinical
trials 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. Should we or our third party manufacturers
encounter  delays or difficulties in producing,  packaging and  distributing our
finished products,  clinical trials, regulatory filings, market introduction and
subsequent sales of our products could be adversely affected.



                                       18
<PAGE>


   Contract  manufacturers must conform to GMP regulations  strictly enforced by
the FDA on an  ongoing  basis  through  their  facilities  inspection  programs.
Contract manufacturing  facilities must pass a pre-approval  inspection of their
manufacturing  facilities  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.  FDA or other regulatory agencies may not approve the
process or the facilities by which any of our products may be manufactured.  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. If we are required to manufacture our own products we will be required to
build or purchase a  manufacturing  facility,  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.  We  may  be  unable  to  manufacture  any  such  products
successfully or in a cost-effective manner.

      We  currently  have no  sales  staff  and may be  unable  to  successfully
establish  a  marketing  and  sales  force.  If we are  unable  to  successfully
establish a complete  marketing and sales force, we may not achieve a successful
product entry into the  marketplace.  Such failure would have a material adverse
effect on our business, financial condition and results of operations.


UNCERTAINTY REGARDING PATENTS AND PROPRIETARY RIGHTS; CURRENT LEGAL PROCEEDINGS
REGARDING PATENTS AND PROPRIETARY RIGHTS

      Our success  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.   Moreover,   others  may  have  filed  patent
applications,  may have been issued patents or may obtain additional patents and
proprietary  rights  relating to competitive  products or processes.  Our patent
applications  may  not be  approved,  we may be  unable  to  develop  additional
proprietary products that are patentable, issued patents may not provide us with
adequate  protection for our inventions or they may be challenged by others,  or
the patents of others may impair our ability to commercialize our products.  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.  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 differing risks of commercialization in each foreign country in
which we may sell products.  Others may independently  develop similar products,
duplicate any of our products or design around any of our patents.

      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 our  business.  Some of
these  technologies,  applications or patents may conflict with our technologies
or 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 our  specific
proanthocyanidin  polymer  composition  (which covers the active  pharmaceutical
ingredient  in  SP-303/Provir),  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 patent application in Europe.  Certain of the
foreign  patents have been granted in  jurisdictions  where  examination  is not
rigorous.  Shaman has  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.

      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.  There can be no
assurance  that  Daniel  Jean,  Leon  Cariel  and the  Institut  des  Substances
Vegetales  will not assert  against us claims  relating to this patent.  In that
event,  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.  The earlier  effective filing date of this patent 



                                       19
<PAGE>


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.

      In the United  States,  the PTO has rendered  judgment in an  Interference
declared  between  our issued  patent  covering  our  specific  proanthocyanidin
polymer  composition and certain claims of a 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 Shaman on July
14, 1997. Since the period for appeal has passed, this judgment is now final.

      Additionally,  in connection with the Interference proceeding, we have 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.  We believe  that this broad  claim is subject to attack as invalid in
view of prior art. Based on knowledge of our specific  proanthocyanidin  polymer
composition,  we  believe  that  the  manufacture,  use or sale of our  specific
proanthocyanidin  polymer composition would not constitute  infringement of this
broad  claim,  once it issues.  However,  if Daniel Jean or Leon Cariel bring an
action for  infringement  of this  claim,  we may not prevail in  defending  our
beliefs.  In  addition,  if patents that cover our  activities  have been or are
issued to other companies,  we may be unable to obtain licenses to these patents
at a  reasonable  cost,  or at all, or be able to develop or obtain  alternative
technology.

      If we  cannot  obtain  such  licenses,  we could  encounter  delays  or be
precluded  from  introducing  our  products  to the  market.  Litigation  may be
necessary to defend against or assert claims of infringement, to enforce patents
issued  to  us  or  to  protect  our  trade  secrets  or  know-how.   Additional
interference proceedings may be declared or become necessary to determine issues
of invention;  such litigation and/or  interference  proceedings could result in
substantial  cost to and  diversion  of  effort  by us and may  have a  material
adverse effect on our business,  financial  condition and results of operations.
In addition, our efforts may be unsuccessful.

      Our competitive  position is also dependent upon 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.

      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,  we  cannot  be  certain  that we were the  first  to  discover
compositions  covered by our pending  patent  applications  or the first to file
patent applications on such compositions. Our patent applications may not result
in issued  patents and issued  patents may not afford  comprehensive  protection
against potential infringement.

      We currently have 10 U.S.  patent  applications  pending with the U.S. PTO
and one international  application filed via PCT, but we do not know whether any
of these  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  for,  among other
things, 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 



                                       20
<PAGE>


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.

      We may not obtain  additional  patents and the 19 U.S.  patents  issued to
date may not provide  substantial  protection or be of commercial benefit to us.
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 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 us or  non-approval  of
pending patent applications could create increased  competition,  with potential
adverse effects on us and our business prospects.  In addition,  applications of
our  technology  may  infringe  on patents or  proprietary  rights of others and
licenses  that  might be  required  as a  result  of such  infringement  for our
processes or products may be unavailable on commercially reasonable terms, if at
all.

      We cannot predict whether we or our competitors'  patent applications will
result  in valid  patents  being  issued.  Litigation,  which  could  result  in
substantial  cost to us,  may  also be  necessary  to  enforce  our  patent  and
proprietary  rights  and/or  to  determine  the scope and  validity  of  others'
proprietary rights. We may, on a voluntary or involuntary basis,  participate in
interference  proceedings  that may in the future be declared by the PTO,  which
could result in substantial  costs to us. The outcome of any such  litigation or
interference  proceedings may not be favorable to us, we may be unable to obtain
licenses to required  technology or we may be unable to license such  technology
at a reasonable cost.


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 certify  portions of our software and certain  hardware so that those systems
will properly utilize dates beyond December 31, 1999. We presently  believe that
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 are  approximately  85% complete  with the  assessment  of all internal
systems that could be  significantly  affected by the Year 2000.  To date,  cost
estimates for upgrades for those systems not in compliance  total  approximately
$200,000.  After the  assessment  phase is completed,  we will have to purchase,
install and test the upgrades to ensure they meet internal year 2000 compliance.
We expect to complete  our  internal  year 2000  readiness  program in the third
quarter of 1999. We have  evaluated our  financial  and  accounting  systems and
concluded  that they are not and will not be  materially  affected  by Year 2000
problem.  We are  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 the  first  quarter  1999 and  determine  whether  such a plan is
necessary.




                                       21
<PAGE>


UNCERTAINTY OF PRODUCT PRICING, REIMBURSEMENT AND RELATED MATTERS

      The continuing  efforts of governmental  and third party payers to contain
or  reduce  the costs of  health  care  through  various  means  may  materially
adversely  affect us. 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 we expect  there will  continue  to be, a
number of federal and state proposals to implement similar  government  control.
Although we 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 our  ability  to  raise  capital  or  form
collaborations,  and therefore  the adoption of such  proposals or reforms could
have a material adverse effect on our business,  financial condition and results
of operations.

      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.  Even if we succeed in bringing one or more
products to the market, reimbursement from third-party payers may be unavailable
or may be  insufficient  to allow us to sell our  products on a  competitive  or
profitable basis.


POSSIBLE VOLATILITY OF STOCK PRICE

      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.  Thus, the market price of our 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 us or our competitors, developments or disputes concerning patent or
proprietary  rights,  publicity  regarding  actual or potential  medical 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  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.


ENVIRONMENTAL REGULATION

      In  connection   with  our  research  and   development   activities   and
manufacturing of clinical trial materials,  Shaman 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 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 and development  activities  involve the controlled use of
hazardous  materials,  chemicals,  viruses  and various  radioactive  compounds.
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 such 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  have a material  adverse  effect on our
business, financial condition and results of operations.


ANTI-TAKEOVER  EFFECT OF DELAWARE  LAW AND CERTAIN  CHARTER AND BYLAW PROVISIONS

      Certain  provisions of our Certificate of Incorporation and Bylaws make it
more  difficult for a third party to acquire,  and discourage a third party from
attempting to acquire, control of Shaman. These provisions could limit the price
that certain  investors  might be willing to pay in the future for 



                                       22
<PAGE>


shares of the Common Stock.  At October 30, 1998, our Board of Directors had the
authority to issue up to 459,120  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.

      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.  Issuance of Preferred Stock with voting rights,  while
providing  desirable  flexibility for possible  acquisitions and other corporate
purposes,  could make it more  difficult for a third party to acquire a majority
of the outstanding  voting stock. We may in the future issue shares of Preferred
Stock with voting  rights.  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.


PRODUCT LIABILITY EXPOSURE; LIMITED INSURANCE COVERAGE

      Our business  exposes us 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  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  under  all
circumstances.  Existing coverage will not be adequate as we further develop our
products,  and we do not know  that  adequate  insurance  coverage  against  all
potential  claims will be  available  in  sufficient  amounts or 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.  Such liability could have a material adverse effect on our
business, financial condition and results of operations.


LIMITATION OF LIABILITY AND INDEMNIFICATION

      Our 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.  Our Bylaws provide that we will
indemnify  our  officers,  directors,  employees  and agents to the full  extent
permitted  by the general  corporation  law of  Delaware.  We have  entered into
indemnification agreements with our 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 us, 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. We currently  maintain
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  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 our 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.


DILUTION

      The  biopharmaceutical  industry is capital  intensive.  In this regard we
have entered into a number of financings, many of which have included securities
that are  convertible  into shares of 



                                       23
<PAGE>


Common Stock.  Dilution may occur upon the exercise of  outstanding  options and
warrants and upon conversion of senior convertible notes, the Series A Preferred
Stock and the Series C Preferred Stock.  Stockholders may also suffer additional
dilution if we exercise our right to sell additional  shares of our Common Stock
to  Fletcher  International  Limited,  pursuant  to  our  agreements  with  such
investor.


DEPENDENCE ON KEY PERSONNEL

      Our ability to maintain our competitive  position depends in 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  the  necessary
expertise  could  have a  material  adverse  effect on our  business,  financial
condition and results of operations.




                                       24
<PAGE>


PART II    OTHER INFORMATION


Item 1.    Legal Proceedings

           None.

Item 2.    Changes in Securities

               In  August  1998,  we  filed a  registration  statement  with the
          Securities and Exchange  Commission  (the "SEC") for a public offering
          of a minimum of 140,000 ("the  Minimum") and a maximum of 200,000 (the
          "Maximum")  shares of Series C Convertible  Preferred  Stock for gross
          proceeds of a minimum of $14.0  million and a maximum of $20.0 million
          (the "1998 Public  Offering").  Each share of Series C Preferred Stock
          shall be entitled to receive  cumulative  dividends paid semi-annually
          in each year to the holders of record of such shares as follows: (i) a
          stock-on-stock  dividend  of $10.00 per  annum,  paid in  arrears,  in
          shares of Common Stock (valued at 85% of the average  closing price of
          the Common Stock for the 10 trading day period  ending  three  trading
          days  prior to the date on which the  dividend  is paid);  plus (ii) a
          cash amount  equaling  0.00005%  of the  Company's  United  States net
          sales,  if  any,  for  the  preceding  two  calendar  quarters  of its
          SP-303/Provir  product for the treatment of diarrhea  (equivalent to a
          7% royalty  for the  Minimum  and a 10% royalty for the Maximum of the
          aggregate shares of Series C Preferred Stock) less $5.00 (the value of
          the semi-annual  stock dividend).  If, under Delaware law, the Company
          is  unable  to pay the cash  amount  of the  Dividends,  then the cash
          portion of the  Dividends  shall be payable in shares of Common  Stock
          (valued at 85% of the average  closing  price of the Common  Stock for
          the 10 day trading  period ending three trading days prior to the date
          on which the dividend is paid). Each share shall be convertible at any
          time  commencing on the date on which any shares of Series C Preferred
          Stock  were  first  issued  and  continuing  for a  period  of 30 days
          thereafter, and again commencing 12 months after such initial issuance
          date at the election of each holder,  and  automatically  on the sixth
          anniversary  of the initial  issuance date into greater of (i) 16.6667
          shares of Common  Stock or (ii) such number of shares of Common  Stock
          as equals  $100  divided by 85% of the  average  closing  price of the
          Common  Stock  reported by the Nasdaq  Stock Market for the 10 trading
          day period ending three trading days prior to the date of  conversion.
          The registration statement was declared effective by the SEC on August
          14, 1998.

               In September  1998 and October  1998,  we completed  two separate
          closings of the Series C  Convertible  Preferred  Stock  offering  for
          aggregate  gross  proceed of $14.1  million.  Of the  200,000  maximum
          shares  registered,  an aggregate  of 140,880  shares were sold to the
          investors and the remaining  59,120 shares were  deregistered.  During
          the initial 30 day conversion  period, a total of 24,922 shares of the
          Series C Convertible  Preferred Stock were converted into an aggregate
          of 1,861,550  shares of Common Stock at a conversion price of $1.33875
          per share.

               In  connection  with the  issuance  of the  Series C  Convertible
          Preferred  Stock,  we  recognized  a non-cash  charge in the amount of
          $679,000 in the third quarter ended September 30, 1998.

Item 3.    Defaults in Senior Securities

           None.

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

           None.

Item 5.    Other information
     
           The  Company  accepted the resignation of Atul Khandwala, Senior Vice
           President,  Development  and  Regulatory Officer,  effective  October
           1998.

Item 6.    Exhibits and Reports on Form 8-K

(a)        Exhibits

           Exhibit No.         Description
           27.1           Financial Data Schedule

(b)        No current reports on Form 8-K were  filed  during  the quarter ended
           September 30, 1998.




                                       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:  November 13, 1998


                               Shaman Pharmaceuticals, Inc.
                                  (Registrant)



                               /s/   Lisa A. Conte
                               -------------------------------------
                               Lisa A. Conte
                               President and Chief Executive Officer
                               (principal executive officer)




                               /s/   Stephanie C. Diaz
                               -------------------------------------
                               Stephanie C. Diaz
                               Chief Financial Officer
                               (principal  financial  and  accounting officer)