SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                ----------------

                                    FORM 10-K
                        For Annual and Transition Reports
                     Pursuant to Sections 13 or 15(d) of the
                       Securities and Exchange Act of 1934

[X]   ANNUAL  REPORT  PURSUANT  TO  SECTION  13 OR  15(d)  OF  THE  SECURITIES
      EXCHANGE ACT OF 1934

                   For the fiscal year ended December 31, 1998

[  ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934
             For the transition period from                    to

                           Commission File No. 0-21022

                          Shaman Pharmaceuticals, Inc.
             (Exact name of registrant as specified in its charter)

             Delaware                                  94-3095806
      (State or other jurisdiction of       (IRS Employer Identification Number)
      incorporation or organization)

   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

SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT:    NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:

                          COMMON STOCK $.001 PAR VALUE
                                (Title of Class)

   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 [ ]

   Indicate by check mark if disclosure of  delinquent  filers  pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained,  to the best of registrant's knowledge, in definitive
proxy or information  statements  incorporated  by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]

   The aggregate market value of the voting stock held by  non-affiliates of the
Registrant  based upon the closing sales price of the Common Stock on the Nasdaq
OTC Bulletin Board on February 26, 1999 was $0.343.*

   The  number  of shares  of the  Registrant's  Common  Stock  outstanding  was
33,277,402 as of February 26, 1999.


                       DOCUMENTS INCORPORATED BY REFERENCE

   Portions of  Registrant's  Definitive  Proxy Statement to be filed with the
Commission  pursuant to Regulation  14A in connection  with the Company's 1999
Annual  Meeting  are  incorporated  herein  by  reference  into Part III of this
Report.
----------

*  Excludes  629,060 shares of the  Registrant's  Common Stock held by executive
   officers, directors and affiliated parties at February 26, 1999. Exclusion of
   such  shares  should  not be  construed  to  indicate  that any  such  person
   possesses the power, direct or indirect,  to direct or cause the direction of
   the  management  or  policies  of the  Registrant  or  that  such  person  is
   controlled by or under common control with the Registrant.




<PAGE>


PART I

Item 1. Business

      In addition to historical  information,  this report contains predictions,
estimates and other  forward-looking  statements  that involve a number of risks
and  uncertainties  that are described more fully in "Risk  Factors." While this
outlook  represents  our  judgment on the current  and future  direction  of the
business,  these risks and  uncertainties  are only some of the factors that may
ultimately affect the success of Shaman Pharmaceuticals, Inc. Actual results may
differ materially from any future performance suggested in this report.

BUSINESS

Overview

      Shaman Pharmaceuticals, Inc. ("Shaman" or the "Company") is focused on the
discovery,  development,  and marketing of novel,  proprietary botanical dietary
supplements  derived from tropical  plant  sources.  Until  December  1998,  the
Company was solely focused on developing  pharmaceuticals  products derived from
tropical  plant  sources.  As a result of the U.S. Food and Drug  Administration
("FDA")   response  to  its  leading   pharmaceutical   product   candidate  and
insufficient   resources  to  continue  the  costly  process  of  pharmaceutical
development,  the Company  restructured its business to focus on the development
and marketing of dietary supplements. As a result, the Company now has available
for out-licensing its pipeline of novel  pharmaceutical  product  candidates for
major human  diseases  developed by isolating  active  compounds  from  tropical
plants with a history of medicinal use.

Background

Pharmaceuticals

      The  worldwide  market for  pharmaceuticals  continues  to grow at a rapid
pace. Much of this growth is driven by new product development,  including novel
compounds  and  formulations.   Technological  advances  in  the  pharmaceutical
industry  are  rapid  and   substantial,   and   competition  is  intense  among
pharmaceutical  and  biotechnology  companies  and  universities  to develop and
introduce new products.

      Pharmaceutical companies, both large and small, are looking for innovative
products available for in-license to enhance their existing product  portfolios.
Products that have an entirely  different approach or means of accomplishing the
desired therapeutic effect than products currently available are particularly in
demand.  In addition,  companies are looking to develop or  in-license  products
that may be more effective and/or less costly than those currently available, or
those that could offer an alternative  to other,  more invasive forms of medical
treatment.

Botanicals

      In 1997, the U.S. dietary  supplement  market was $12.9 billion.  Of this,
nearly $4.0 billion were herbal or botanical dietary  supplements  ("BDSs").  In
1998, this number was projected to reach $5.0 billion,  with a compounded yearly
growth rate of 15% to 25%. In 1997, 24% of U.S.  households reported using BDSs.
The  growth of this  market  has been led by  consumers  who are  interested  in
alternative,  non-pharmaceutical options for treating symptoms, fulfilling unmet
dietary  needs,  and  optimizing  health,  either  as an  alternative  to, or in
conjunction with, more  conventional  medical  approaches.  The Company believes
that the use of these  products  will continue to expand based upon the aging of
the   population,   increasing   scientific   evidence  and  acceptance  by  the
conventional medical establishment, and the recent entrance of powerful consumer
companies which provide greater  product  confidence,  while growing the base of
consumer users.

      Based upon  market  forces,  the  Company  believes  that room  exists for
significant  continuing growth of the dietary  supplement market and expects the
two key  drivers of market  growth to be (1) growth in the number and breadth of
consumers  utilizing  these  products;  and  (2)  continuing  effective  product
innovation to fuel both trial and repurchase.



                                       2
<PAGE>

      Growth in the number and breadth of consumers utilizing these products has
already  begun,  and is based in part upon the  entrance  of the large  consumer
healthcare  companies  into the BDS market.  These  companies have increased the
visibility  of BDSs,  placing them not only in local health food stores but also
in  neighborhood   grocery  stores,   drug  stores,   and  mass   merchandisers.
Additionally,   these   companies  are  spending  on  large   direct-to-consumer
advertising campaigns, placing advertisements during primetime television and in
mainstream newspapers and magazines.  Consumer surveys show this has resulted in
a broader base of consumers being educated about,  trying and utilizing  dietary
supplements.

      Simultaneous  with the broadening of the consumer base, the BDS market has
grown partially as a result of the media highlighting new products. For example,
in 1997,  ABC's  20/20,  The New York  Times  and  Newsweek  carried a series of
stories  about  St.  John's  wort,  increasing  trial  and  usage  dramatically.
Interestingly,  while  the  month-on-month  growth  of St.  John's  wort has now
slowed,  this  initial  increase  in sales has been  maintained  throughout  the
industry.  These new product  "bursts" have fueled episodic but sustained market
growth by driving new  purchases,  and in the process,  the  repurchase of other
products once the consumer is at the point of purchase.  Hence,  the  industry's
view is that the  media and  consumers  are  looking  for  continuing  effective
product  innovation--for  the next St.  John's  wort--to  fuel  both  trial  and
repurchase.  Products with a proprietary position have proven to be particularly
successful in the past.

      Finally,  as more  consumers have entered the dietary  supplement  market,
they  have  also  begun  to  demand  better   quality,   more   consistency  and
standardization  of products,  and scientific  evidence regarding the safety and
efficacy of products.  Increased  demand has also strained the supply of natural
plant material for some popular products. Not all companies in the industry have
proven capable of meeting these consumer demands.

Strategy

Pharmaceuticals

      To date, Shaman  Pharmaceuticals has been primarily focused on discovering
and  developing  novel  pharmaceutical  products  for major  human  diseases  by
isolating  and  optimizing  active  compounds  found in  tropical  plants with a
history of medicinal use. The Company has conducted  human clinical  trials with
its three lead product candidates -- SP-303/Provir (Phase III/II),  nikkomycin Z
(Phase  I)  and  SP-134101  (Phase  I) --  targeting  five  indications.  Due to
unforeseen delays and costs necessary to complete additional trials for its lead
compound,  SP-303/Provir  for the treatment of diarrhea in people with AIDS, the
Company has chosen to discontinue all pharmaceutical development,  manufacturing
and marketing activities.  See "Business--Product  Candidates--Pharmaceuticals."
The Company now intends to sell or outlicense  worldwide marketing rights to its
pharmaceutical  assets.  The  Company  now  plans to focus  its  efforts  on its
Botanicals division.

Botanicals

      The concept for Shaman's Botanicals division was developed in 1998, and it
has  become  the  focus of  Shaman's  operations  in 1999.  The  purpose  of the
Botanicals  business  is to  discover,  develop  and market  novel,  proprietary
botanical dietary  supplements  derived from tropical plant sources.  The unique
positioning of Shaman's  Botanicals  business stems from  significant  financial
investment,  more  than 10 years of  extensive  field  research  by its teams of
ethnobotanists    and    physicians,    and    pharmaceutical-level     chemical
standardization, biological and clinical testing. In the last decade, Shaman has
amassed a large body of  information  on the health  benefits  of  thousands  of
tropical  plant species that have a history of human use and has organized  this
into an  extensive  relational  database.  This  database  includes  over  2,600
tropical  plants,  many of which have not been  introduced or fully developed in
the  U.S.  dietary  supplement  market.  Shaman  has  identified  plants  with a
documented ethnomedical history of use in its library and database of botanicals
for use in key market categories with significant commercial potential.  Because
many of these plants reflect the previously untapped plant diversity of the rain
forests,  many represent novel  botanical  products that have the opportunity to
attain a strong, proprietary market position.



                                       3
<PAGE>

      Shaman has the  opportunity  to  differentiate  its product  candidates in
consumers'  minds  relative  to those of  Shaman's  competitors.  Key  points of
differentiation include:

      1) Novel plants/products for unmet needs;
      2) Documented, first-hand field experience with traditional use;
      3) Rainforest-based plants and products (most plants currently come from
          temperate areas);
      4) Shaman's commitment to conservation and reciprocity;
      5) Sustainable sourcing and supply;
      6) Quality manufactured, standardized products; and
      7) Science-backed, clinically-tested products.

      Shaman's marketing strategy for dietary  supplements  involves a step-wise
product introduction and distribution approach. First, Shaman plans to launch by
themselves  their  first  product,  SB-300,  a product to promote  normal  bowel
function,  to the  HIV/AIDS  Community  through  Internet  and  direct  response
marketing.  Next, Shaman plans to partner and possibly co-brand with first-rate,
quality partners in the two key growth channels of distribution: mass market and
multi-level (or network)  marketing.  Finally,  building on the expected growing
recognition of the Shaman brand name (built by product introduction particularly
in the mass market),  Shaman plans to broaden its Internet  presence  beyond the
HIV/AIDS  niche to  include  a full  line of  Shaman  botanicals,  and will also
explore niche retail  opportunities.  Shaman currently does not intend to target
the traditional health food channel.

Product Discovery and Development Process

      Shaman  builds  on  the  knowledge  and  expertise  of  ethnobotanist  and
physician  teams  who  work  with  traditional  healers  to  identify  effective
treatments in the therapeutic areas targeted by the Company.  These teams gather
comparative  data on  traditional  medicinal  and  health  uses of  plants  from
geographically  diverse  tropical areas and prioritize plant candidates based on
common use among cultures and other factors. The prioritization process includes
cross-checking  field-derived  information  against  the  results of  literature
searches as to chemical constituents,  previously discovered biological activity
and other  reported  medicinal  uses.  This process is integral to both Shaman's
pharmaceutical and dietary supplement discovery and development programs.

Pharmaceuticals

      The Company  believed that by focusing on drugs extracted from plants with
a long history of medicinal use, its drug discovery efforts would be quicker and
more likely to lead to safe and effective pharmaceuticals.

      Shaman's  strategy  was to  employ a drug  discovery  process  focused  on
diseases that:
         -- appear to result from multiple and, in many cases,  unknown causes
            and  therefore  may not be  amenable  to a  targeted  in vitro drug
            discovery process;
         -- occur in the rain forests and are readily  recognized  and treated
            by  traditional  healers  (e.g.,  foot ulcers,  sweet  urine,  poor
            eyesight  and fungal  infections  are often  predictive  of Type II
            diabetes); and
         -- allow the  plant  extract  treatment  to be  confirmed  in a whole
            animal model and then purified to isolate the active compound.

      Shaman  believed  this  drug  discovery   process  provided  it  with  the
opportunity to:
         -- identify  novel  methods of treating diseases with  therapeutic
            relevance;
         -- discover  new  chemical  entities or new classes of compounds to
            treat disease; and
         -- provide early confirmation of efficacy and safety.


                                       4
<PAGE>


      Through its process,  the Company had  significant  success in identifying
and developing pharmaceutical  candidates,  particularly through the preclinical
and early  clinical  stages.  These efforts have produced a portfolio of product
candidates for outlicense.

Botanicals

      Shaman was able to initiate its Botanicals  business by further  exploring
the botanical  library and pipeline it has developed over the past 10 years.  In
the last decade,  Shaman has amassed a large body of  information on the healing
benefits of thousands of tropical plant species that have a history of human use
and has  organized  this into an extensive  relational  database.  This database
includes over 2,600 tropical  plants,  many of which have not been introduced or
fully developed in the U.S. dietary supplement market.  Currently,  most dietary
supplements  come from  plants from  temperate  regions.  Shaman has  identified
plants with a documented ethnomedical history of use in its library and database
of  botanicals  for use in key market  categories  with  significant  commercial
potential.

      Shaman  intends to  differentiate  itself  within the BDS  marketplace  by
backing novel  products and promotion  with quality  research,  development  and
manufacturing,  a  carry-over  from its  pharmaceutical  culture and skill base.
Given consumer  demand for quality and the relative lack of specific  regulatory
standards  in the dietary  supplement  industry,  Shaman  intends to set its own
standard for quality and product  standardization  for its botanicals  products.
The Company will develop chemical markers and standardization  processes for all
its  products,  including  safety  verification  and  where  appropriate,  human
clinical testing of potential products. Once completed,  published clinical data
can be utilized for  educational  purposes with consumers and retailers  seeking
more  information  about  our  products.   These  elements,  along  with  unique
formulations,  and existing and future  patents,  should add to the  proprietary
position of Shaman's products.

Product Candidates

Pharmaceuticals

      The  Company  has  conducted  human  clinical  trials  with its three lead
product candidates -- SP-303/Provir (Phase III/II),  nikkomycin Z (Phase I), and
SP-134101 (Phase I) -- targeting five indications.

      Of these, the most  advanced,  SP-303/Provir,  was being  developed for an
initial  indication  for the  treatment  of  diarrhea  in people  with AIDS.  In
December 1998,  the Company  completed a positive Phase III human clinical trial
of  SP-303/Provir  for the AIDS  indication.  These results came at the end of a
two-year  history of  positive  communication  and  collaboration  with the FDA,
during which time the product had been granted "fast track" designation, and the
FDA had advised the Company that upon completion, data from its single Phase III
study, along with corroborative information from a previously completed positive
Phase II  trial,  could  serve as the  basis  for the  submission  of a New Drug
Application  ("NDA").  However,  subsequent  advice from the FDA in January 1999
indicated that additional  studies and/or data may be necessary for a successful
filing. This advice led the Company to believe it did not have adequate data for
a successful NDA package in 1999. Given the time delay and additional investment
necessary to complete  additional  trials,  the Company  determined it could not
meet these requirements.

      The  Company  now  intends to  outlicense  worldwide  marketing  rights to
SP-303/Provir.  Further,  it has  discontinued all  pharmaceutical  development,
manufacturing  and marketing  activities  and plans to outlicense or sell all of
its pharmaceutical assets.

      The following  table  describes the major  therapeutic  areas in which the
Company has had active product development and research. Efforts will be made to
outlicense all of these pharmaceutical programs:


                                       5
<PAGE>


<TABLE>
<CAPTION>

Product         Indication          Status                    Commercial Rights
-------         ----------          ------                    -----------------
<S>             <C>                 <C>                       <C>
Provir          AIDS-associated     Completed Phase III       Shaman
                 diarrhea           study in Q4, 1998.
                                    Completed a Phase II
                                    efficacy study in Q4, 1997

Provir          Watery diarrhea     Completed two Phase II    Shaman
                                    efficacy trials in Q3,
                                    1998. Completed
                                    initial Phase II
                                    efficacy studies in
                                    1996 & 1997

Provir          Pediatric           Formulation to be         Shaman
                 diarrhea           developed

Nikkomycin Z    Endemic mycoses     Completed Phase I study   Shaman
                                    in Q2, 1997.

Nikkomycin Z    Azole-resistant     Initiation of clinical    Shaman
 and Azoles      Candida            program pending pre-
                                    clinical development
                                    by Pfizer

SP-134101       Type II Diabetes    Completed Phase I study   Shaman
                                    in Q1, 1998

Oral            Type II Diabetes    Preclinical,              Ono; Lipha/Merck;
 antihyperglycemic                  29 compounds              and Shaman. Shaman
 compounds                                                    receives royalties
                                                              on sales outside
                                                              the U.S. and
                                                              profit sharing in
                                                              the U.S.

</TABLE>


SP-303/Provir

      The   Shaman-patented   compound  SP-303  is  the  active   ingredient  in
SP-303/Provir.  SP-303 is extracted from the latex of the Croton  lechleri tree,
which grows  abundantly  in Latin  America.  Croton latex  extractions  are used
orally by many  native  cultures  throughout  Latin  America  for a  variety  of
medicinal purposes,  including  gastrointestinal problems as well as respiratory
infections.

      Preclinical studies indicate that SP-303/Provir  inhibits the secretion of
chloride  ions from  intestinal  cells,  specifically  countering  fluid loss, a
fundamental  mechanism  causing  diarrhea.  Based on its mechanism of action and
results of initial  clinical  testing,  it appears that  SP-303/Provir  does not
affect the normal  motility of the intestine.  In clinical  trials,  the Company
determined that SP-303/Provir is not appreciably  absorbed, a critical advantage
in that it reduces the potential for interactions with other drugs and minimizes
side effects.

Diarrhea in People with AIDS/HIV

      SP-303/Provir  demonstrated positive results in a Phase III human clinical
trial for the treatment of diarrhea in people with AIDS,  which was completed in
December  1998.  This  double-blind,  randomized,  placebo-controlled  study was
divided  into  two  treatment  phases:  an  inpatient  phase  of six days and an
outpatient  phase of three weeks.  During the inpatient phase, 400 patients were
enrolled,  and patients  were  randomized  to treatment for six days with either
placebo  or one of three  SP-303  doses/formulations  given  four times per day:
250mg tablets or 500mg tablets or 500mg beads. Responders in the inpatient phase
were allowed to continue on their same regimen during the outpatient  phase.  In
the primary efficacy endpoint,  reduction in total daily stool weight during the
inpatient  phase,  the 500mg  tablet group  achieved a favorable  result  versus
placebo by two different methods of  intent-to-treat  statistical  analysis.  An
analysis of



                                       6
<PAGE>

the reduction from baseline to the end of treatment  yielded a value of p=0.075.
A random  regression  analysis (which measures rate of reduction over the course
of  treatment),  yielded a value of p=0.033.  Other  doses/formulations  did not
produce a meaningful change during the inpatient phase. In the outpatient phase,
the 500mg  tablet group saw a sustained  effect and the drug was well  tolerated
throughout  the study.  The study includes both an in-patient and an out-patient
phase for a total of four weeks of  treatment.  The  primary  endpoint  for this
study is a reduction in stool  weight,  data for which is  collected  during the
in-patient phase of the study.

       A Phase II study, which was completed in October 1997, and data therefrom
presented at the 12th World AIDS Conference in Geneva, Switzerland in July 1998,
demonstrated a significant  treatment effect for chronic diarrhea in people with
AIDS.  The results of the study  suggested  that  SP-303/Provir  is effective in
reducing  stool  weight and  abnormal  stool  frequency  in people with AIDS and
diarrhea.  In addition,  treatment with SP-303/Provir was well tolerated with no
imbalance  between  treated  and  placebo  groups in the  occurrence  of adverse
events.

Watery Diarrhea

       In  July  1998,  the  Company   completed  two  separate  Phase  II  dose
optimization studies of SP-303/Provir in acute watery diarrhea patients from two
different   populations.    Both   studies   were   double-blind,    randomized,
placebo-controlled.

      The  first  study  further  validated  SP-303/Provir's  ability  to  treat
traveler's  diarrhea in Americans  travelling  in Jamaica and Mexico.  The study
involved 184 patients  treated for two days on an  outpatient  basis with either
placebo or one of three  SP-303/Provir  doses  given four times per day:  125mg,
250mg or  500mg.  In the key  efficacy  endpoint,  time to last  unformed  stool
("TLUS") over 48 hours (the standard for  measurement  in acute watery  diarrhea
studies),  all doses reached a highly statistically  significant (p=0.01) result
versus placebo. The study showed  SP-303/Provir to be well tolerated.  More than
35 million  individuals  travel  annually to countries  that present the risk of
traveler's diarrhea.

      The second study  evaluated  SP-303/Provir  in  Venezuelan  nationals  who
locally contracted acute watery diarrhea.  A total of 140 patients were enrolled
in the trial,  which took place in a hospital setting.  SP-303/Provir  treatment
with 125mg four times per day for two days resulted in statistically significant
earlier resolution of diarrhea as compared to placebo,  as measured by TLUS over
48 hours.  Results  for  patients  treated  with  250mg and 500mg  doses did not
achieve  statistical  significance.  This study also showed  SP-303/Provir to be
well tolerated.

Nikkomycin Z

      Nikkomycin Z was licensed in 1995 from Bayer AG. See  "Business--Customers
and  Partners--Pharmaceuticals."  Nikkomycin Z is an orally administered product
candidate  designed  for the  treatment  of endemic  mycoses and other  systemic
fungal  infections.  Nikkomycin Z is novel in its  mechanism  of action  against
fungal  infections.  Preclinical  studies of  nikkomycin  Z indicate  that it is
fungicidal and could prove superior to current treatments.  By inhibiting chitin
synthetase, which is found in the cell walls of most fungi, but not in mammalian
cells,  nikkomycin Z inhibits cell wall  synthesis,  ultimately  causing  fungal
cells to expand and burst.  The lack of chitin in mammalian cells should prevent
similar damage to normal cells in tissues affected by these fungal infections. A
single-dose Phase I trial in the United Kingdom was completed in 1997.

SP-134101

      SP-134101 is a Shaman oral product  candidate for the treatment of Type II
diabetes.  It is covered by an allowed patent application for methods of use. In
January 1998, Shaman completed a Phase I human clinical trial for SP-134101, the
first  product  to emerge  from the  Company's  diabetes  discovery  effort.  In
preclinical   studies,   SP-134101  has  been  shown  to  lower  blood  glucose,
triglycerides,  and  blood  pressure,  in  vivo.  SP-134101  appears  to work by
increasing glucose uptake in the peripheral tissues and decreasing  triglyceride
output from the liver.




                                       7
<PAGE>


Diabetes Discovery

      Shaman focused on the development of oral antihyperglycemic (blood glucose
lowering) agents for the treatment of Type II diabetes.  Since the start of this
program,  the Company identified 29 orally-active  compounds for which, to date,
19  original  U.S.  patent  applications  have been filed (10 of which have been
issued)  and  11  international  patent  applications  have  been  filed.  These
compounds represent new classes and, potentially,  new methods for treating Type
II diabetes.

      The diabetes  research and  development  program served as the basis for
Shaman's  collaborations  with Lipha S.A., a wholly-owned  subsidiary of Merck
KgaA,  Darmstadt,  Germany  ("Lipha/Merck") and Ono Pharmaceutical Co. Ltd. of
Osaka Japan ("Ono").  See "Business--Customers and Partners--Pharmaceuticals."

Botanicals

      Shaman has strategically  identified  multiple areas of dietary supplement
product interest and has identified specific priority product candidates focused
on the  overlap  of:  (1) key  market  categories  with  significant  commercial
potential,  (2) the needs of an aging  demographic in the U.S.  population,  (3)
areas where quick, symptomatic relief could be observed, and (4) areas where the
Company has  first-hand  ethnomedical  experience and where  sustainable  supply
exists.  Some of these proposed product areas include  gastrointestinal  relief,
energy  boosters,  sexual function aids,  antioxidants,  sleeping aids,  calming
agents and weight management.

      Shaman expects that its first dietary  supplement  product will be SB-300,
for promoting normal bowel function.  SB-300 is an extract of Croton lechleri, a
plant used by indigenous  people for relief of  gastrointestinal  symptoms,  and
contains a chemical marker, SP-303, a patented, clinically proven antidiarrheal.
SB-300 also has a patented  formulation.  Shaman  plans to market  this  product
themselves  initially to the HIV/AIDS  Community through the direct response and
Internet channels.  The Company is also exploring other products appropriate for
use by the HIV/AIDS consumer which could be sold on its website,  including some
products  currently  available on the market, as well as future  applications of
our own novel, proprietary products.

      In  addition  to SB-300,  Shaman's  two  near-term  product  lines are the
"Croton  Line,"  which  currently  includes  four  product  candidates,  and the
"EthnoEssentials  Line" which includes  multiple product  candidates culled from
the Company's ethnomedical library.

      The Croton Line is currently a series of four product  candidates,  all of
which are derived from the Croton  lechleri tree that grows  abundantly in South
America. Drawing from knowledge of traditional uses, the material from different
parts of the tree  will  serve as the  basis for the  Company's  products.  This
concept  of basing a line of  products  on a single  plant with  multiple  known
traditional  uses has been a successful  model in the natural  products  sector,
including  product lines based on hemp and the tea tree. Shaman expects that its
Croton Line of products could include:
     *  GI-300,  an oral dietary  supplement to promote  normal bowel  function
        made from a portion  of the  latex or sap of the tree  that  includes  a
        compound with clinically proven antidiarrheal activity;
     *  IBS-400,  an oral dietary  supplement that helps support normal stomach
        and bowel  function  and  includes  a  clinically  proven  antidiarrheal
        component along with three other recognized  products  clinically proven
        to relieve  common  symptoms  of  irritable  bowel  syndrome in a unique
        patented formulation;
     *  Cold  Sore-CL,  a topical  cold sore product made from a broader cut of
        the latex (a  by-product of making GI-300 and IBS-400) that includes two
        active compounds,  one with  clinically-tested  anti-herpes activity and
        another with documented wound healing effects;
     *  AntiOx-CL,  an oral dietary  supplement  made from bark remaining after
        extracting   the  latex  and  which  includes   recognized   antioxidant
        compounds.

      In addition to the attractive single plant theme of the Croton Line, it is
also a  compelling  conservation  story.  Nearly  every part of the plant can be
efficiently utilized in the production process.



                                       8
<PAGE>

      The  EthnoEssentials  Line is  expected  to  initially  be a series of six
products,  with  additional  products  from the  botanical  library  expected to
follow.  The  common  denominators  in the  line  will  the  products'  tropical
rainforest  origins,  history of  traditional  use and  first-hand  ethnomedical
validation,  and the sustainably  harvested,  responsible  sourcing of their raw
material. According to Shaman's research in the botanicals industry, the Company
believes  there are currently no other product lines in the U.S. based solely on
rainforest and ethnomedical  roots.  Shaman therefore should be able to create a
novel space in the market,  similar to what has previously  been done by product
lines focused on Chinese herbs or Ayurvedic botanicals.

      The EthnoEssentials Line of products is expected to include:
      *   Ethno-Energy, a dietary supplement to promote and maintain energy;
      *   Ethno-Ox,   a  dietary   supplement  with  antioxidant   properties;
      *   Ethno-Calm, a dietary supplement to promote and maintain a sense
           of well-being;
      *   Ethno-Rest,   a  dietary   supplement  to  promote   restful  sleep;
      *   Ethno-Fit, a dietary supplement to maintain weight; and
      *   Ethno-Vigor, a dietary supplement to promote vigor and performance,
           for both males and females.

      The EthnoEssentials Line could feature packaging that includes stories and
pictures  relating  to  the  traditional  origins  of  the  products,  including
geography,  tribes, and folklore.  In addition to the attractive  rainforest and
traditional  use  themes of this  line,  the  EthnoEssentials  Line can  feature
packaging and labeling  highlighting  Shaman's  commitment to reciprocity of the
cultures  and  peoples  with  which it works,  as well as its  attitude  towards
conservation and sustainable  harvesting.  The Company can further highlight the
Healing Forest Conservancy,  a non-profit  organization  supported by Shaman and
dedicated to maintaining  biological and cultural diversity in rainforest areas.
See   "Business--Community    Commitment--The   Healing   Forest   Conservancy."
Highlighting  a  company's  commitment  to causes has been  successful  in other
consumer products models,  such as Ben & Jerry's Homemade Inc.'s "1% for Peace,"
a  commitment  to give  one  percent  of  profits  to  organizations  supporting
disarmament.

      Another   potential  product   opportunity  is  a  proprietary,   enhanced
formulation of one of the world's leading phytomedicines. All of these potential
products  are  based  on  plant  material  on  the  grand-fathered  old  dietary
ingredient ("ODI") list, allowing for immediate product  introduction  without a
need  for  regulatory   application  or  approval.   See   "Business--Government
Regulation--Botanicals."

      The  Company  believes  its  current and prior  research  and  development
efforts would allow it to introduce up to ten products, including human clinical
testing,  within the first two years of its Botanicals operations.  All of these
product areas offer significant opportunity for growth.

Sales and Marketing

Pharmaceuticals

      The Company intends to sell or outlicense  worldwide  marketing  rights to
its   pharmaceutical   assets.   See   "Risk    Factors--Pharmaceuticals    Risk
Factors--Dependence on Collaborative Relationships."

Botanicals

      Shaman's marketing strategy for dietary  supplements  involves a step-wise
product introduction and distribution approach.  Shaman first plans to launch by
themselves SB-300 to the HIV/AIDS Community through Internet and direct response
marketing.  Next, Shaman plans to partner and possibly co-brand with first-rate,
quality partners in the two key growth channels of distribution: mass market and
multi-level (or network)  marketing.  Finally,  building on the expected growing
recognition of the Shaman brand name (built by product introduction particularly
in the mass market),  Shaman plans to broaden its Internet  presence  beyond the
HIV/AIDS  niche to  include  a full  line of  Shaman  botanicals,  and will also
explore niche retail  opportunities.  Shaman currently does not intend to target
the traditional health food channel.



                                       9
<PAGE>

       With respect to promotion,  Shaman anticipates it will be responsible for
the cost of promotion only in the Internet/direct  response channel. It behooves
Shaman, both in terms of cost and expertise, to allow partners in other channels
to be  responsible  for  promotion.  One of the key  points  of  negotiation  in
outlicensing  to other  channels is expected to be a commitment  to a sufficient
level of promotional  support for Shaman's products,  including prominent use of
the Shaman brand name.

Customers and Partners

Pharmaceuticals

      The Company  continues to pursue  discussions for the  outlicensing of its
pharmaceutical assets.

      In September  1996,  the Company  entered  into a five-year  collaborative
agreement with Lipha/Merck to develop jointly Shaman's  antihyperglycemic drugs.
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  agreed to provide up to $9.0  million in research
payments and up to $10.5 million in equity  investments  priced at a 20% premium
to a multi-day  volume weighted  average price of the Company's  Common Stock at
the time of  purchase.  Of the $4.5 million  received on signing the  agreement,
$1.5 million was an up-front research payment and $3.0 million was structured as
an equity investment. The agreement also provided for additional preclinical and
clinical milestone payments (certain of which clinical milestones are creditable
against future  royalty  payments) to the Company in excess of $10.0 million per
compound for each antihyperglycemic drug developed and commercialized.

      Lipha/Merck was to bear all  preclinical,  clinical,  regulatory and other
development expenses associated with the compounds selected by Lipha/Merck under
the agreement.  In addition,  as products were  commercialized  by  Lipha/Merck,
Shaman would  receive  royalties on all product  sales outside the United States
and up to 50% of the profits (if the  Company was to exercise  its  co-promotion
rights,  which does not require any clinical  development cost reimbursement) or
royalties on all product  sales in the United  States.  Certain of the milestone
payments will be credited  against future royalty  payments,  if any, due to the
Company from sales of products developed pursuant to the agreement.

      On December 2, 1998,  the Company  renegotiated  the terms of the existing
agreement  with  Lipha/Merck.  Under the new terms,  the  Company  forgave  $6.0
million  in  aggregate  payments  due over the  remaining  term of the  original
agreement  in exchange for a one-time  up-front  payment of an aggregate of $2.0
million,  consisting of a $1.0 million  research payment (which remains recorded
as deferred  revenue  that the  Company  has not yet earned) and a $1.0  million
equity investment.

      The  Company  is  currently  in  negotiations  with  Lipha/Merck  for  the
discontinuation  of their research  agreement.  Lipha/Merck will make no further
research  payments,  and unless the  Company  was to  conduct  further  internal
development  efforts, it is not clear whether there would be any continuation of
payment for development costs, milestone and royalty payments, for the compounds
that have already been  discovered if any of these product  candidates  continue
into  development  and  clinical   trials,   or   commercialization,   based  on
Lipha/Merck's  efforts. The Company and Lipha/Merck are in discussions regarding
the dissolution of this relationship.

      In May 1995, the Company entered into a  collaborative  agreement with Ono
providing for,  among other things,  three years of funding for the research and
development of compounds for the treatment of Type II diabetes.  Under the terms
of the agreement, Shaman screened 100 diabetes-specific plants per year in vivo,
isolated and  identified  active  compounds,  and  participated in any medicinal
chemistry  modification.  In turn,  Ono  provided  Shaman  with  access to Ono's
preclinical and clinical  development  capabilities through proprietary in vitro
assays and medicinal chemistry efforts.  Ono's development and commercialization
rights were for the countries of Japan, South Korea and Taiwan.  Under the terms
of the agreement,  Ono provided $7.0 million in  collaborative  research funding
and agreed to pay  preclinical and clinical  milestone  payments of $4.0 million
per compound for each antidiabetic drug that may be selected and commercialized.
Of the $3.0  million  received on signing  the  agreement,  $1.0  million was an
up-front  research



                                       10
<PAGE>

payment.  Shaman  received an additional  $1.0 million  payment (beyond the $7.0
million  commitment)  in  December  1996 for  enhanced  access  rights  to these
compounds.  In May 1998, the Company's  collaborative agreement with Ono expired
under the original  terms of the  agreement  and was not  renewed.  Although the
on-going research funding period under such agreement has expired, Ono continues
to have  contractual  obligations  to the Company for the  potential  payment of
milestones and royalties. There can be no assurance that such milestones will be
attained  or that the Company  will  receive  any future  milestone  payments or
royalties from Ono.

      In June 1995, the Company  licensed several patents from Bayer AG relating
to the use of  nikkomycin  Z and the  composition  and  use of  nikkomycin  Z in
combination  with other  antifungal  compounds for the development of antifungal
agents.  Under the terms of the  agreement,  the  Company  has paid  Bayer AG an
initial  milestone  payment and may be required,  upon the occurrence of certain
events,  to make  additional  milestone  payments  and to pay  royalties  on any
commercialized  products  derived  from the  agreement.  In order to  outlicense
nikkomycin Z, further negotiation with Bayer would be required.

      In February  1990, the Company  entered into a license  agreement with Dr.
Michael  Tempesta.  There currently  exists a dispute with Dr. Tempesta over the
scope and coverage,  if any, of the license.  The maximum royalty claimed by Dr.
Tempesta is two percent on net sales of a certain  antiviral  agent. In November
1996,  a demand for  arbitration  was filed by the Company to address a claim by
Dr.  Tempesta that the royalty will be payable with respect to either or both of
Provir and Virend. See "Legal Proceedings."

Botanicals

      The customer base for dietary supplements in the United States is growing.
In recent  consumer  surveys,  25% to 30% of consumers  report having utilized a
BDS, and 36% report moderate to heavy use of alternative medicine.

      Shaman  believes  that  its  Botanicals  business  has two  key  near-term
customers:  consumers,  initially targeted in the HIV/AIDS Community,  who could
purchase its first product,  SB-300,  for normalizing  bowel function,  and mass
market and multi-level  companies that are interested in licensing or partnering
with Shaman for the marketing of its products.

Potential SB-300 Customers

      Diarrhea in people with HIV and AIDS is a devastating syndrome. In 1997 in
the United  States,  there were an estimated  225,000 people with AIDS. In 1997,
between 650,000 and 900,000 individuals in the United States were believed to be
infected with HIV.  While fewer people are dying of AIDS,  new cases of AIDS and
HIV are still  increasing  and people are now living  longer  with both AIDS and
HIV.  Sources  indicate  that,  of the combined HIV and AIDS  population  in the
United States,  approximately 20% to 40% suffer with diarrhea at any given time,
with an average duration of 90 days per year.  Although protease  inhibitors and
highly  active  antiretroviral  therapy have  improved the  prognosis for people
living with HIV and AIDS the problem of diarrhea persists,  and in many cases is
drug-related, representing a serious unmet medical need.

      Diarrhea in people with AIDS and HIV not only  compromises  the health and
quality of life of  individuals  attempting to live a normal  lifestyle but also
has been shown to dramatically  increase the cost of these individuals'  medical
care.  Furthermore,  people with chronic  diarrhea are forced to restrict  their
daily activities to accommodate the disruptions caused by this condition because
current  symptomatic   therapies  provide  either  poor  relief  or  undesirable
side-effects.

      The Company  believes that a product that normalizes  bowel function while
positively impacting health,  quality of life and/or the cost of care represents
a focused,  large,  and untapped  market  opportunity.  Shaman believes that the
competitive promotional response will be limited in this discrete market because
currently  neither any specific  dietary  supplements  nor any  over-the-counter
antidiarrheals  have targeted promotion to this population,  likely because they
have no indication or studies in this patient population.  Further, Shaman hopes
eventually  to build a niche  market  position by catering  specifically  to the
needs of the HIV/AIDS Community with eventually a full product line.



                                       11
<PAGE>

Potential Partners

        Shaman is  actively  engaged  in  partnering  discussions  with top tier
companies in both the mass market and multi-level  dietary supplement arenas. No
agreements have been reached or entered into to date.

Potential Partners: Mass Market

      The entrance of large healthcare and consumer products  companies into the
dietary  supplement  industry has fueled the  expanded  placement of BDSs beyond
local health food stores, and into neighborhood  grocery stores, drug stores and
mass merchandisers. To promote this placement, these companies are spending huge
sums on advertising  and promotion  relative to previous  marketing  budgets for
dietary  supplements  that  rarely  topped $1  million.  For  example,  in 1998,
American  Home  Products  Corporation  spent an  estimated  $12  million  on its
Centrum(R)  line,  Bayer  Corporation  spent an  estimated  $35  million  on its
One-A-Day(R)  line of  eight  products,  and  Warner-Lambert  Company  spent  an
estimated  $15  million  on  its  Quanterra(R)  line  of  two  products.   Large
expenditures  like these would have been unwise  historically  because  sales of
single products or even lines of products rarely passed the single-digit million
mark.  However,  industry  analysts  now report much higher sales  figures.  For
example,  American  Home  Products,  Bayer and  Warner-Lambert  are  forecasting
combined  first  year  sales of over $100  million  for their  botanical  lines,
largely  a  result  of  significant  promotion.  Through  increased  promotional
budgets, companies such as these are educating more consumers about the benefits
of herbal and botanical  products,  thereby increasing trial and repurchase.  If
these trends continue,  the growth of the BDS market could far surpass growth in
the past.

      The Company  believes that another key driver of continued  growth will be
the  introduction  of new BDS products.  Introduction of new products has in the
past not  only  brought  new  consumers  into the  market  but also  fueled  the
repurchase  of other  existing  botanicals.  The large  healthcare  and consumer
products  companies  are  currently  tapping into the commonly  known  commodity
botanical products,  primarily of European origin. Once growth of these products
is maximized,  novel proprietary products will be needed, and Shaman believes it
is uniquely positioned to meet this need in certain market areas.

      Shaman plans to partner with mass market  companies in order to expand the
advertising and promotion of its BDS products.  Such a partnership would combine
the  benefits of Shaman's new products  with the  partner's  ability to generate
large  advertising  and public  relations  campaigns  for its new product  lines
similar to those  created for  existing  consumer  product  lines.  In addition,
Shaman  could pursue a licensing  arrangement,  such as that  completed  between
PharmaPrint,  Inc. and American Home Products,  in which Shaman could co-brand a
product or product line with a partner.

Potential Partners: Multi-Level

      Multi-level  marketing,  or  "MLM,"  is  a  system  of  network  marketing
comprised of two components:  one-on-one  selling and yearly sales  conventions.
Distributors,  usually  individuals  looking  for a  home-based  business or the
opportunity  to supplement  their regular  income,  sell products to friends and
relatives.   Distributors   are   incentivized   to  sign-up  their  friends  as
distributors, and they receive in return an incentive for all the sales in their
network.  Hence,  the impact is that of an  ever-growing  customer  base that is
somewhat  captive  and more  predisposed  to  purchase  than the broad  consumer
public. In addition,  this type of selling makes product stories very important,
as distributors need to believe in the products they are selling to friends.

      The  primary  form of  promotion  in the MLM  channel,  beyond  one-on-one
selling, is the yearly sales convention. Each year, all distributors are brought
together for a multi-million dollar sales convention. On-stage presentations are
given on four to five key new products, or a product line, being launched in the
coming  year.  The  history  of the  products,  testimonials  and their uses are
discussed.  Then,  distributors are sent back to their homes for another year of
selling.  During the year,  incentives  may be given for reaching  certain sales
quotas on a particular product or product line.

      Dietary  supplements  have been a mainstay of the MLM  industry.  However,
botanicals are a newer player on the scene. Some multi-level firms such as AmWay
Corporation,  with  its  NutriLite  line,  and Nu Skin  Enterprises,  Inc.  have
embraced the commonly used  commodity  botanicals.  However,  it is new products
that fuel the growth in MLM.



                                       12
<PAGE>

      Shaman's  products  lend  themselves  to this market for several  reasons.
Shaman has truly novel  products--the  lifeblood of this channel.  Further,  the
origins of  Shaman's  products  are unique  and lend  themselves  to the type of
interesting selling stories required for peer-to-peer selling.  These would make
for entertaining sales convention presentations, featuring famous ethnobotanists
and the rainforest. Additionally, Shaman's reciprocity and conservation policies
are further material for story-based selling.

Competition

Pharmaceuticals

      The outlicense of  pharmaceuticals is a competitive  enterprise.  Although
many companies consider licensing opportunities, they often investigate multiple
opportunities  before  settling on a select few. While Shaman is subject to this
competition, the Company has had significant interest in its products based upon
their novelty, safety, efficacy, and advanced stages of development. The Company
is  actively  seeking to  outlicense  its  products  and has  multiple  on-going
discussions.  To date, these  discussions have not resulted in any out-licensing
agreements.  See  "Risk  Factors--Pharmaceuticals  Risk  Factors--Dependence  on
Collaborative Relationships."

Botanicals

      Competition in  the  BDS  market  differs  by  channel  of   distribution.
Historically, competition within the health food channel was fragmented and made
up of over 200 small,  mostly privately held companies.  More recently,  several
large  consumer  healthcare  companies have opened up the  mass-market  channel,
including  American  Home  Products  with  its  Centrum  Herbal  brand,  Bayer's
introduction   of  botanical   ingredients   in  their   One-A-Day   line,   and
Warner-Lambert's introduction of their Quanterra brand. Overall, the entrance of
these companies is expected to broaden consumer acceptance of botanical products
and  grow  the  total  BDS  market,  with  mass  market  becoming  the  largest,
fastest-growing  channel. In order to enter this key channel,  Shaman intends to
partner with a company with extensive  experience.  The Company  believes that a
partner in this  channel  will value the quality  and  scientific  rigor  behind
Shaman's products.

      In  the  multi-level   marketing  channel,  key  players  include  Shaklee
Corporation,  Nu  Skin  Enterprises,  Inc.,  USANA,  Inc.  and  Rexall  Showcase
International.  Again, Shaman intends to partner with a top-tier company in this
channel.  The Company believes that partners in this channel will appreciate the
novel  products  Shaman  has to  offer  and  the  compelling  stories  of  their
rainforest and traditional use origins.

      The Internet channel does not currently have an established  leader in the
dietary   supplement  market,   although  several  sites  do  exist,   including
AllHerb.com  and  Greentree.com.   The  emerging  "drugstore  "  sites  such  as
Drugstore.com  and  PlanetRx.com  also carry some  dietary  supplements.  Shaman
intends to start its own site within this channel, with the unique attraction of
it own,  novel  products  available  on the  site,  particularly  targeting  the
HIV/AIDS   Community.   Shaman   has   reserved   the   internet   domain   name
"ShamanBotanicals.com." If appropriate, Shaman may also consider partnerships in
this channel.

Government Regulation

Pharmaceuticals

      The  research  and  development,  manufacture  and  marketing  of Shaman's
pharmaceutical  products are subject to substantial regulation by the FDA in the
United States and by comparable  authorities in other countries.  These national
agencies  and other  federal,  state and local  entities  regulate,  among other
things,  research  and  development  activities  and the  testing,  manufacture,
safety, effectiveness,  labeling, storage, record keeping, approval, advertising
and promotion of the Company's products.



                                       13
<PAGE>

      The process  required  by the FDA before  the  Company's  products  may be
marketed in the United States generally involves the following:  (i) preclinical
laboratory  and animal tests;  (ii)  submission to the FDA of an IND, which must
become effective before human clinical testing may commence;  (iii) adequate and
well-controlled  human  clinical  trials to establish the safety and efficacy of
the  proposed  drug for its intended  indications;  (iv) the  submission  to and
acceptance  by  the  FDA  of an  NDA;  (v)  satisfactory  completion  of an  FDA
inspection  of the  manufacturing  facilities  at which the  product  is made to
assess  compliance with Good  Manufacturing  Practice  ("GMP").  The testing and
approval process requires substantial time, effort and financial resources.

      Shaman's botanical products are not subject to this regulatory process.

Botanicals

      "Botanical dietary supplement" ("BDS") is a specific term meaning "an herb
or other botanical or a concentrate,  constituent, extract or combination of any
botanical that is intended for ingestion as a tablet, capsule, or in liquid form
and is not  represented  for use as a  conventional  food or as a sole item of a
meal or the diet and is labeled as a dietary  supplement." This definition comes
from the 1994 Dietary  Supplement  Health and  Education  Act  ("DSHEA"),  which
specifically  outlines how  botanical  products are to be regulated and treated.
Some commonly known commodity BDS products include:  ginseng, gingko biloba, St.
John's Wort, and echinacea.  This statutory definition also differentiates BDSs,
vitamins,  minerals,  from conventional foods or food additives.  Under the law,
botanicals can be sold as dietary  supplements with claims as to their effect on
the  structure  or  function of the human body,  providing  Shaman has  adequate
documentation  for the claim.  BDSs are under the  purview of the FDA.  However,
some BDS  products  require no review or  approval to enter the market (see ODIs
below),  while others need only submit safety data prior to marketing  (see NDIs
below).  Hence,  the  oversight  by the FDA in the  BDS  industry  is much  less
rigorous than in the  pharmaceutical  industry,  allowing for much faster market
introduction.

      One of the  unique  provisions  of DSHEA is the  distinction  between  new
dietary  ingredients ("NDI") and old dietary  ingredients  ("ODI"),  which had a
history of being  marketed in the United  States prior to DSHEA.  ODIs have been
"grand-fathered"  under  the law,  allowing  them to be  commercialized  without
further  FDA  review.  The  Shaman  pipeline  includes  more than 400  botanical
candidates that are ODIs,  including several near-term product  candidates,  and
numerous NDI candidates.

Patents and Proprietary Rights

      Proprietary protection for the Company's product candidates, processes and
know-how is important to the Company's business. The Company's policy is to file
patent applications to protect technology,  inventions and improvements that are
considered  commercially  important  to the  development  of its  business.  The
Company also relies upon trade secrets,  know-how and  continuing  technological
innovation  to develop  and  maintain  its  competitive  position.  The  Company
aggressively prosecutes and defends its patents and proprietary technology.

      Shaman has 20 U.S.  patents issued to date. In addition,  Shaman currently
has 12 U.S.  patent  applications  pending  with the U.S.  Patent and  Trademark
Office  ("PTO") and  multiple  applications  filed under the Patent  Cooperation
Treaty.  The Company does 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.

      The  Company  has  been  issued  a U.S.  patent  related  to its  specific
proanthocyanidin  polymer compositions designated  SP-303/Provir.  Specifically,
the patent  contains  composition  of matter  claims  related  to  SP-303/Provir
contained in the  Company's  SP-303/Provir  product.  The Company has also filed
foreign  applications  corresponding  to its issued U.S. patents relating to its
proanthocyanidin  polymer  composition.  The Company has been granted patents in
Australia, Mexico and New Zealand and has patent applications pending in Canada,
Europe, Japan, the Republic of Korea and Singapore.



                                       14
<PAGE>

      The  Company  has also filed a U.S.  patent  application  directed  to new
formulations  and  methods  of  using  its  specific   proanthocyanidin  polymer
composition for treatment of watery diarrhea.  These  formulations are contained
in the Company's SP-303/Provir product.

      The Company  has 10 issued  U.S.  patents  relating  to  compositions  and
methods  for  treating  Type II  diabetes,  as well  as  reducing  hyperglycemia
associated  with other  etiologies.  The Company also has eight  additional U.S.
patent applications pending that relate to compositions and methods for treating
Type II  diabetes,  as well as  reducing  hyperglycemia  associated  with  other
etiologies.  The Company has filed 11 foreign applications,  i.e., international
applications under the Patent Cooperation Treaty designating a number of foreign
countries,  as well as  applications  in Taiwan,  corresponding  to eleven  U.S.
applications  and plans to file additional  corresponding  foreign  applications
within the relevant convention periods.

      The   Company   also  has  one  issued  U.S.   patent  and   corresponding
international  patent  applications in a number of foreign countries relating to
methods for  administering  and sustained  release  formulations for anti-fungal
agents like nikkomycin Z. The methods and  compositions are useful for treatment
of fungal infections,  particularly candidiasis, the most frequently encountered
life-threatening mycoses. The Company has licensed several patents from Bayer AG
relating to the use of nikkomycin Z and the  composition and use of nikkomycin Z
in combination with other antifungal compounds for the development of antifungal
agents.

      There can be no assurance that the Company's  pending patent  applications
will result in patents  being  issued or that,  if issued,  patents  will afford
protection  against  competitors with similar  technology;  nor can there be any
assurance  that others will not obtain  patents  that the Company  would need to
license    or    circumvent.    See    "Risk     Factors--Pharmaceutical    Risk
Factors--Uncertainty  Regarding  Patents and Proprietary  Rights;  Current Legal
Proceedings Regarding Patents and Proprietary Rights."

Community Commitment

The Healing Forest Conservancy

      In  January  1990,  Shaman  formed  The  Healing  Forest  Conservancy,   a
California not-for-profit public benefit corporation (the "Conservancy"),  which
is  dedicated to  maintaining  global  biocultural  diversity.  The  Conservancy
focuses on conserving plants that have been used traditionally for medicinal and
health  purposes and  conserving  the  knowledge of cultures  that utilize them.
Shaman has donated 13,333 shares of Common Stock to the Conservancy's  endowment
fund.  The Company  also plans to donate  additional  funds when it has achieved
profits from product sales, if any, to provide benefits to indigenous peoples in
the countries where Shaman's source plants are obtained.

The Shaman HIV Investment Trust

      In 1998,  Shaman  made a  commitment  to create the Shaman HIV  Investment
Trust,  which  provides  funding  for  charitable  causes  within  the  HIV/AIDS
Community,  including services,  education and research. Shaman has committed to
the Trust a royalty on the first five years of U.S. product net sales of SB-300.
The  Trust  will  be  administered  independently  by a  committee  of  HIV/AIDS
Community leaders.

Employees

      On February 1, 1999,  the Company  announced  it would  immediately  cease
operations in its  pharmaceuticals  business and would downsize by approximately
60 people, or 65% of its workforce.  As of February 26, 1999, the Company had 30
employees.  Of these  employees,  five are dedicated to closing down some of the
Company's  pharmaceutical  operations  and will remain  employed only until such
activities are accomplished.  The remaining  employees are expected to remain at
Shaman and will primarily focus their activities on the Botanicals business.




                                       15
<PAGE>


Item 2.  Risk Factors

      This  Form  10-K   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.  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 this Form 10-K.

General Risk Factors

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  a net loss of
approximately  $36.8  million  for the  year  ended  December  31,  1998  and an
additional  non-cash  expense of $1.7 million  incurred in  connection  with the
Series C  Convertible  Preferred  Stock  offering  in August  1998 and  Series D
Convertible  Preferred  Stock in December  1998.  As of December 31,  1998,  our
accumulated deficit was approximately  $150.4 million. We have not generated any
product sales to date.

      Our  pharmaceutical  product  candidates  and  compounds  are still in the
research  and  development  stage  and we have  ceased  all  our  pharmaceutical
operations.  In order to generate revenues or profits,  we must outlicense these
product candidates,  or, with other third parties,  successfully develop,  test,
obtain  regulatory  approval  for and  market  them.  It is  possible  that  our
out-licensing or product development efforts may not be successful,  and that we
or our  licensees  may not obtain  required  regulatory  approvals.  Even if our
product  candidates are developed and  introduced,  they may not be successfully
marketed or may not achieve market acceptance.  In addition, as licensor, we may
receive  a less  substantial  royalty  revenue  than had we  commercialized  the
products ourselves.

      Our botanical dietary supplement  products are likewise in the development
stage. In order to generate revenues or profits,  we must  successfully  develop
and market these  products.  Even if our products are developed and  introduced,
they may not be successfully marketed or may not achieve market acceptance.

DELISTING FROM THE NASDAQ NATIONAL MARKET

      On February 1, 1999, Nasdaq informed us that our Common Stock was delisted
from The Nasdaq  National  Market and moved to the OTC Bulletin Board  effective
February 2, 1999.  Although  our  securities  are  included on the OTC  Bulletin
Board,  there  can be no  assurance  that  a  regular  trading  market  for  the
securities  will be  sustained  in the  future.  The OTC  Bulletin  Board  is an
unorganized, inter-dealer,  over-the-counter market which provides significantly
less liquidity than The Nasdaq Stock Market,  and quotes for stocks  included on
the OTC Bulletin Board are not listed in the financial sections of newspapers as
are those for The Nasdaq Stock Market.  Therefore,  prices for securities traded
solely on the OTC Bulletin  Board may be  difficult to obtain.  In the event the
securities are not included on the OTC Bulletin Board, quotes for the securities
may be included in the "pink sheets" for the over-the-counter market.

"PENNY STOCK" REGULATIONS MAY IMPOSE CERTAIN RESTRICTIONS ON MARKETABILITY

      The  Securities  and Exchange  Commission  has adopted  regulations  which
generally define "penny stock" to be any equity security that is not traded on a
national  securities exchange or Nasdaq and that has a market price of less than
$5.00 per share or an  exercise  price of less than $5.00 per share,  subject to
certain  exceptions.  If our securities  that are currently  included on the OTC
Bulletin  Board are  trading at less than $5.00 per  security  at any time,  our
securities  may become  subject to rules that impose  additional  sales practice
requirements  on  broker-dealers  who sell such securities to persons other than
established customers and accredited investors  (generally,  such investors have
assets  in  excess  of  $1,000,000  or an  individual  annual  income  exceeding
$200,000,  or, together with the investor's spouse, a joint income of $300,000).
For transactions  covered by these rules, the broker-dealer  must make a special
suitability  determination for the purchase of such securities and have received
the  purchaser's  written  consent  to the  transaction  prior to the  purchase.
Additionally,  for any transaction  involving a penny stock,  unless exempt, the
rules require, among other things, the



                                       16
<PAGE>

delivery,  prior to the transaction,  of a risk disclosure  document mandated by
the SEC relating to the penny stock market and the risks  associated  therewith.
The  broker-dealer  must  also  disclose  the  commission  payable  to both  the
broker-dealer  and the  registered  representative,  current  quotations for the
securities and, if the broker-dealer is the sole market-maker, the broker-dealer
must  disclose  this  fact and the  broker-dealer's  presumed  control  over the
market.  Finally,  monthly  statements  must be  sent  disclosing  recent  price
information  for the penny  stock held in the  account  and  information  on the
limited market in penny stocks. Consequently, the penny stock rules may restrict
the ability of  broker-dealers to sell our securities and may affect the ability
of stockholders to sell our securities in the secondary market.

CONTINUING FUTURE CAPITAL NEEDS; UNCERTAINTY OF SOURCES OF ADDITIONAL FUNDING

      As of December 31, 1998,  we had cash,  cash  equivalents  and  short-term
investment  balances of approximately $9.2 million.  Unless we are successful in
our  efforts to sell or  outlicense  the  clinical  research  program,  our cash
resources will be substantially used in satisfying our existing liabilities, and
hence, we will be unable to fund the operations of our Botanicals business.

      In addition,  the  delisting of our Common Stock from The Nasdaq  National
Market  constituted an Optional  Redemption Event (as defined in our Certificate
of Designation of Series D Preferred Stock) for our Series D Preferred Stock. In
connection  therewith,  on  February  4,  1999,  we issued a Control  Notice (as
defined in our  Certificate  of  Designation  of Series D Preferred  Stock) that
prevented the  redemption of the Series D Preferred  Stock.  This Control Notice
will remain in effect for as long as our securities are not listed on any of The
Nasdaq National Market,  The Nasdaq SmallCap Market, the American Stock Exchange
or the New York Stock Exchange. Delivery of the Control Notice had the effect of
increasing  the annual  dividend to $180 per share and adjusting the  conversion
price of the Series D Preferred Stock to 80% of the amount the conversion  price
would  otherwise be without regard to any  adjustments  under the Certificate of
Designation of Series D Preferred Stock.

      We 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 prepare for
commercialization of products.  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,  development,  or commercialization programs may be
necessary which would have a material adverse effect on our business,  financial
condition and results of operations.

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 Common Stock.  Dilution may occur upon the
exercise of outstanding options and warrants and upon conversion of the Series A
Preferred  Stock, the Series C Preferred Stock and the Series D Preferred Stock.
Should  our  stock  again be  listed  on any  national  stock  exchange  market,
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.

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 smaller  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  product  results  relating  to  products  under
development by us or our competitors, regulatory developments in both the United
States and foreign countries,  public concern as to the safety of pharmaceutical
or dietary supplement products, and economic and



                                       17
<PAGE>

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.

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 discourages 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 shares of the
Common Stock.  At December 31, 1998, our Board of Directors had the authority to
issue up to 393,715  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. For example,  holders of Series A, Series C and
Series D Preferred Stock  currently have preferred  rights on any liquidation of
Shaman.  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.

LIMITATION OF LIABILITY AND INDEMNIFICATION

      Shaman's  Certificate  of  Incorporation  limits,  to the  maximum  extent
permitted  by Delaware  Law, the  personal  liability of directors  for monetary
damages for breach of their fiduciary  duties as a director.  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.

PRODUCT LIABILITY EXPOSURE; LIMITED INSURANCE COVERAGE

      Our business  exposes us to  potential  product  liability  risks that are
inherent  in the  development,  testing,  manufacture,  marketing  and  sale  of
pharmaceutical and dietary supplement products.  Product liability insurance for
the pharmaceutical and dietary supplement industries generally is expensive. Our
present product liability insurance  coverage,  which includes coverage for acts
by third parties,  including manufacturers of our product candidates, may not be
adequate 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



                                       18
<PAGE>

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.

ENVIRONMENTAL REGULATION

      In  connection   with  our  research  and   development   activities   and
manufacturing of 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,  development,  and manufacturing  activities  involve the
controlled use of hazardous  materials and  chemicals.  Although we believe that
our safety  procedures for handling and disposing of such materials  comply with
the standards prescribed by state and federal  regulations,  we cannot eliminate
the risk of accidental  contamination or injury from these materials completely.
In the event of 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.

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 needed expertise could
have a material adverse effect on our business,  financial condition and results
of operations.

YEAR 2000 COMPLIANCE

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

      Based on recent  assessments,  we have determined that we will be required
to 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 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  second  quarter  of 1999 and  determine  whether  such a plan is
necessary.




                                       19
<PAGE>


Pharmaceuticals Risk Factors

DEPENDENCE ON COLLABORATIVE RELATIONSHIPS

      We expect to seek  collaborative  agreements to develop and  commercialize
our pharmaceutical  product candidates.  We may not be successful in negotiating
or entering  into such  agreements  on terms  favorable to us or at all, and any
agreement, if entered into, may be unsuccessful.

      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.  Research  funding  from  Ono has  concluded.  We are  currently  in
negotiations  with  Lipha/Merck  for  the   discontinuation  of  their  research
agreement.  Lipha/Merck  will make no further research  payments,  and unless we
were to conduct further internal  development  efforts,  it is not clear whether
there would be any continuation of payment for development costs,  milestone and
royalty payments,  for the compounds that have already been discovered if any of
these product  candidates  continue into  development  and clinical  trials,  or
commercialization, based on Lipha/Merck's efforts. Shaman and Lipha/Merck are in
discussions regarding the dissolution of this relationship.

      However, we cannot assure our current or future  stockholders that we will
ultimately  derive any  significant  revenues from any of our existing or future
collaborations  or will not incur a loss in connection  with the  termination of
existing collaborations.

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

      We have not yet completed the  development of any  pharmaceutical  product
candidates.  Many of our product candidates 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  product  candidates  have each
successfully completed some clinical development.  However, positive results for
any of these products in clinical trials to date do not necessarily  assure that
positive  results will be obtained in future  clinical trials or that government
approval to commercialize these product candidates will be obtained.

      It is  possible  that  our  product  candidates  may  not be  successfully
outlicensed,  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. Therefore, we cannot assure our current or future stockholders that
we will ultimately derive any significant  revenue from the outlicense of any of
our product candidates.

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

      Our success in  outlicensing  our  pharmaceutical  assets depends in large
part on our ability to obtain and maintain  patents,  protect  trade secrets and
operate  without  infringing upon the  proprietary  rights of others.  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



                                       20
<PAGE>

level of protection  afforded under patents and other proprietary  rights.  Such
differences  may expose Shaman 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 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.



                                       21
<PAGE>

      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 12 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 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 20 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.

Botanicals Risk Factors

GOVERNMENT REGULATION

      The  manufacturing,   processing,  formulating,  packaging,  labeling  and
advertising of our BDS products are subject to regulation by one or more federal
agencies,  including the FDA, the Federal Trade Commission, the Consumer Product
Safety  Commission,   the  United  States  Department  of  Agriculture  and  the
Environmental  Protection  Agency.  Our activities are also regulated by various
agencies  of the states and  localities  where we will  distribute  and sell our
products.

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



                                       22
<PAGE>

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

      In  December  1995,  the FDA  issued  proposed  regulations  to govern the
labeling of dietary  supplements.  These rules  officially took effect,  after a
grace period for industry  compliance,  on March 23, 1999.  The new  "Supplement
Facts" panel is similar to the  "Nutrition  Facts" panel on foods,  and includes
information  such as the complete list of ingredients and levels of vitamins and
minerals. While in our judgment these regulatory changes are generally favorable
to the dietary supplements  industry,  we can give no assurance that we will not
in the future be subject  to  additional  laws or  regulations  administered  by
various  regulatory  authorities.  In addition,  we can give no  assurance  that
existing laws and regulations will not be repealed or that applicable regulatory
authorities will not interpret them stringently or unfavorably.

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

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

TRANSITION  OF  BUSINESS TO  NEW  INDUSTRY SEGMENT;  NO ASSURANCE OF SUCCESSFUL
PRODUCT DEVELOPMENT

      We are in the process of transitioning  our operations from pharmaceutical
product   development   to  botanical   dietary   supplement   development   and
commercialization. This requires that we learn a new industry segment and create
a new business model. Some skills and relationships  developed over time may not
be  transferable  to our new  business.  While we have been working with natural
products  since our  inception,  we have no prior  experience  manufacturing  or
marketing  dietary  supplements.  There is no assurance we will be successful in
these activities.

      Our  products  are at various  stages of  development,  ranging from final
initial  research to formulation.  Additional  research and development  will be
necessary  for us to move  additional  products  toward  commercialization.  Our
research and development  efforts on these or other  potential  products may not
lead to  development  of products  that are shown to be safe and  effective.  In
addition,  our  products  may not be capable  of being  produced  in  commercial
quantities at acceptable  costs,  may not be successfully  marketed,  or may not
achieve market  acceptance.  Our products may also prove to have  undesirable or
unintended  side  effects  that may  prevent  or  limit  their  commercial  use.
Accordingly,   any  of  our  product  development  programs  may  be  curtailed,
redirected, suspended or eliminated at any time.



                                       23
<PAGE>

DEPENDENCE ON PARTNERS

      Our success in the  botanicals  market depends in part upon our ability to
attract,  retain and motivate key strategic partners in each major channel.  See
"Business--Customers  and  Partners--Botanicals."  We may not be  successful  in
negotiating or entering into such agreements on terms favorable to us or at all,
and any agreement,  if entered into,  may be  unsuccessful.  However,  we cannot
assure our current or future  stockholders  that we will  ultimately  derive any
significant revenues from any of our existing or future collaborations.


COMPETITION

      The business of developing,  manufacturing and selling dietary supplements
is highly competitive.  Certain of our competitors are substantially  larger and
have greater financial, research and development,  production,  marketing, sales
and other  resources than we do. Such  companies  offer a variety of competitive
products  and  services  and much  broader  product  lines.  We face  actual and
potential competition not only from these established  companies,  but also from
start-up companies developing and marketing new commercial products. Our failure
to successfully  compete for customers could adversely affect our future growth,
revenues and profitability. See also "Business--Competition--Botanicals."

EFFECT OF PUBLICITY

      Our products consist of botanical  dietary  ingredients that we believe as
safe  when  taken as we  suggest.  However,  because  we  depend  on  consumers'
perception of the safety and quality of our products as well as similar products
distributed  by other  companies  (which  may not  adhere  to the  same  quality
standards as ours),  if our products or a  competitor's  similar  products  were
asserted to be harmful to consumers,  our business could be adversely  affected.
In addition, because we depend on perceptions, adverse publicity associated with
illness or other adverse effects  resulting from  consumers'  failure to use our
products as we  suggest,  other  misuse or abuse of our  products or any similar
products  distributed by other companies could  materially and adversely  affect
our business.

      Furthermore,  we believe the recent growth  experienced by the nutritional
supplement market is based in part on national media attention  regarding recent
scientific   research   suggesting   potential   health  benefits  from  regular
consumption of certain dietary supplements and other nutritional products.  This
research has been described in major medical journals, magazines, newspapers and
television programs. The scientific research to date is preliminary,  and we can
give no assurance of future favorable  scientific results and media attention or
of the absence of unfavorable or inconsistent findings.

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.  We are
dependent  upon a supply of raw plant  material to make our products.  We do not
have formal  agreements in place with all of our suppliers.  Continued source of
plant supply risks include:

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

      Interruptions in supply or material  increases in the cost of supply could
have a material adverse effect on our business,  financial condition and results
of  operations.  Although  we should be able to raise our prices in  response to
significant  increases in the cost of these  ingredients,  we may not be able to
raise prices quickly enough to offset the effect of these increased raw material
costs, if at all.

      In  addition,  tropical  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



                                       24
<PAGE>

current or future products are derived,  such  destruction  could materially and
adversely affect our business, financial condition and results of operations.

LIMITED MANUFACTURING CAPACITY; LIMITED MARKETING STAFF

      We currently  produce  products only in pilot scale  quantities and do not
have the staff or  facilities  necessary to  manufacture  products in commercial
quantities.  Therefore,  we must rely on  collaborative  partners or third-party
manufacturing  facilities.  Should we or our third-party manufacturers encounter
delays or difficulties  in producing,  packaging and  distributing  our finished
products,  clinical trials and market  introduction  and subsequent sales of our
products could be adversely affected.

      Contract  manufacturers  must conform to certain GMP regulations for foods
on an ongoing basis.  Our dependence on third parties for the manufacture of our
products may adversely  affect our ability to develop and deliver  products on a
timely  and  competitive  basis.  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 mentioned 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  minimal   marketing   staff.  If  we  are  unable  to
successfully  establish,  execute and finance a complete  marketing plan, 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.

INTELLECTUAL PROPERTY PROTECTION

      Our  trademarks  are  valuable  assets  that  are  very  important  to the
marketing of our products.  Our policy is to pursue registrations for all of the
trademarks associated with our key products.

      We hold  certain  patents  related to our  products and intend to pursue
future  patents.  To  the  extent  we do not  have  patents  on our  products,
another  company  may  replicate  one or  more  of  our  products.  See  "Risk
Factors--Pharmaceuticals   Risk  Factors--Uncertainty   Regarding  Patents  and
Proprietary   Rights;   Current  Legal   Proceeding   Regarding   Patents  and
Proprietary Rights."

Item 2. Properties

      Shaman's headquarters are located in South San Francisco,  California.  We
lease  approximately  73,000  square  feet  for  offices,  laboratories,   pilot
manufacturing and storage in three adjacent  buildings.  An additional  building
with approximately  43,000 square feet becomes available to us in late 1999. The
lease on these spaces expires  February 28, 2003, and we have an option to renew
the lease for two additional five-year periods. The South San Francisco facility
serves as the principal site for research,  clinical trial  management,  process
development,   quality   assurance   and   quality   control,   regulatory   and
commercialization  activities.  We  believe  that  our  current  facilities  are
suitable and adequate to meet our needs for the foreseeable  future. In fact, as
a result  of our  recent  restructuring,  we  intend  to  sub-lease  some of our
facilities.  However,  there is no assurance we will be  successful  sub-leasing
these facilities.

Item 3. Legal Proceedings

      We have initiated  arbitration against Dr. Michael Tempesta with respect
to  a  February  1990  license  agreement.   See  "   Business--Customers   and
Partners--Pharmaceuticals."

      Ms.  Jacqueline  Cossmon,  Shaman's  former Vice President of Investor and
Public  Relations  filed a complaint  against us with the Superior  Court of the
State of  California,  County of San Mateo on  December  31,  1997 for  wrongful
termination,  seeking monetary  damages.  Pursuant to a confidential  settlement
agreement reached between the parties, this matter will be dismissed.



                                       25
<PAGE>

      With the  exception  of the  patent  opposition  proceeding  in  Europe,
arbitration  against Dr. Tempesta and Ms. Cossmon's  action,  we are not party
to any other  material  legal  proceedings.  See "Risk  Factors--Pharmaceutical
Risk  Factors--Uncertainty  Regarding Patents and Proprietary Rights;  Current
Legal Proceedings Regarding Patents and Proprietary Rights."

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

   No matters were  submitted to a vote of securities  holders during the fourth
quarter of the fiscal year ended December 31, 1998.



                                       26
<PAGE>


                                   PART II

Item 5. Market for Registrant's Common Stock and Related Stockholder Matters

      Our Common Stock was traded on The Nasdaq National Market under the symbol
SHMN since we began  trading on January 26,  1993.  Effective  with the close of
business on  February 1, 1999,  our Common  Stock was  delisted  from The Nasdaq
National Market and moved to the OTC Bulletin Board effective February 2, 1999.

      Set forth below is the range of high and low  closing  sale prices for our
Common Stock for each quarter in the two most recent fiscal years,  as regularly
quoted in The Nasdaq National Market.

<TABLE>
<CAPTION>
                                                  High     Low
                                                 ------  ----
<S>        <C>  <C>                               <C>     <C>
          Q1 FY 97                                6.25    3.88
          Q2 FY 97                                6.19    4.69
          Q3 FY 97                                7.00    5.12
          Q4 FY 97                                7.06    4.25
          Q1 FY 98                                5.50    4.13
          Q2 FY 98                                5.00    4.41
          Q3 FY 98                                4.00    3.19
          Q4 FY 98                                3.31    1.09
          Q1  FY99 (through March 26, 1999)       2.03    0.17

</TABLE>


      Each share of Series C Preferred  Stock is entitled to receive  cumulative
dividends  paid  semi-annually  on May 31 and  November  30 of each  year to the
holders of record of such  shares on March 31 and  September  30 of such year as
follows: (i) a stock-on-stock  dividend of $10.00 per annum, paid in arrears, in
shares of the 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);  plus  (ii) a cash  amount  equaling
0.00005%  of our net sales in  United  States,  if any,  for the  preceding  two
calendar  quarters of our  SP-303/Provir  product for the  treatment of diarrhea
less $5.00 (the value of the semi-annual stock dividend). We intend to honor the
royalty portion of the dividend through sales of our first botanical product, if
any.  If,  under  Delaware  law,  we are  unable  to pay the cash  amount of the
dividends,  then the cash  portion  of the  dividends  will be paid 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 of Series D Convertible Preferred Stock is entitled to receive,
when,  as,  and if  declared  by the  Board of  Directors  out of funds  legally
available for such purpose,  cumulative  dividends at the rate of $55 per annum.
Dividends  on the  Series D  Preferred  Stock are  payable  in cash or shares of
Common  Stock or any  combination  of cash and  shares of Common  Stock,  at our
option and are payable  quarterly  on February 1, May 1, August 1 and November 1
of each year.

      The  delisting  of our  Common  Stock  from  The  Nasdaq  National  Market
constituted  an  Optional  Redemption  Event (as defined in the  Certificate  of
Designation of Series D Preferred  Stock) for our Series D Preferred  Stock.  In
connection  therewith,  on  February  4,  1999,  we issued a Control  Notice (as
defined in the  Certificate  of  Designation  of Series D Preferred  Stock) that
prevented the  redemption of the Series D Preferred  Stock.  This Control Notice
will remain in effect for as long as our securities are not listed on any of The
Nasdaq National Market,  The Nasdaq SmallCap Market, the American Stock Exchange
or the New York Stock Exchange. Delivery of the Control Notice had the effect of
increasing  the annual  dividend to $180 per share and adjusting the  conversion
price of the Series D  Preferred  Stock to 80% of the  amount of the  conversion
price would otherwise be without regard to any adjustments under the Certificate
of Designation of Series D Preferred Stock.

      No dividends have been paid on the Common Stock since our  inception,  and
we do not anticipate  paying any such dividends in the foreseeable  future.  The
terms of our loan agreement with MMC/GATX Partnership No. 1 restrict the payment
of dividends on any equity  security so long as any amount  remains  outstanding
under such loan agreement.  However,  MMC/GATX has waived such requirements with
respect to the payment of dividends on the Series C



                                       27
<PAGE>

Preferred Stock. We have not received a waiver from MMC/GATX with respect to the
payment of dividends on the Series D Preferred  Stock.  We are in the process of
seeking  such  a  waiver.  In  addition,   the  Certificate  of  Designation  of
Preferences  of Series A Preferred  Stock,  the  Certificate  of  Designation of
Preferences  of Series C  Preferred  Stock and  Certificate  of  Designation  of
Preferences of Series D Preferred Stock require that we pay equivalent per share
dividends  to the  holders of our Series A Preferred  Stock,  Series C Preferred
Stock and  Series D  Preferred  Stock,  respectively,  prior to the  payment  of
dividends to the holders of the Common Stock.


                                       28
<PAGE>


Item 6. Selected Financial Data

<TABLE>
<CAPTION>

                                         Year Ended December 31,
                            --------------------------------------------------
                              1998       1997       1996       1995       1994
                            --------   --------   --------   --------  --------
                                    (in thousands, except per share data)
<S>                         <C>       <C>         <C>       <C>        <C>

Statements of Operations Data:
  Revenue from collaborative
     agreements           $   2,660   $  3,500   $  3,406   $  2,210   $  1,360

  Operating expenses:
     Research and
        development          32,393     24,140     19,138     17,635     18,643
     General and
        administrative        5,565      4,833      3,537      3,705      3,545
                           --------   --------   --------   --------   --------
 Total operating expenses    37,958     28,973     22,675     21,340     22,188
                           --------   --------   --------   --------   --------
 Loss from operations       (35,298)   (25,473)   (19,269)   (19,130)   (20,828)
 Interest income                550      1,218      1,082      1,695      2,045
 Interest expense            (2,033)    (5,033)      (603)      (569)      (698)
                           --------   --------   --------   --------   --------
 Net loss                   (36,781)   (29,288)   (18,790)   (18,004)   (19,481)
                           --------   --------   --------   --------   --------
 Deemed dividend on
   Preferred Stock           (1,742)         -          -           -         -
                           --------   --------   --------   --------   --------
 Net loss applicable to
   Common Stockholders     $(38,523)  $(29,288)  $(18,790)  $(18,004)  $(19,481)
                          =========  =========  =========  =========  =========
 Basic and diluted net loss
   per Common  Share (1)   $  (1.92)  $  (1.72)  $  (1.39)  $  (1.37)  $(  1.50)
                          =========  =========  =========  =========  =========
 Shares used in calculation of
   basic and diluted net loss
   per Common Share (1)      20,114     17,010     13,496     13,161     12,986
                          =========  =========  =========  =========  =========

</TABLE>


<TABLE>
<CAPTION>
                                               At December 31,
                              ------------------------------------------------
                              1998       1997       1996       1995       1994
                              ----       ----       ----       ----       ----
<S>                         <C>        <C>        <C>        <C>        <C>

Balance Sheet Data:
  Cash, cash equivalents,
    and investments        $  9,165   $ 21,421   $ 16,533   $ 26,665   $ 39,843
  Working capital             1,043     14,547      9,641     22,850     33,422
  Total assets               13,139     26,753     22,377     33,810     49,673
  Long-term obligations,
    including current
      installments            5,219      6,802      4,816      6,041      5,017
  Senior convertible notes        -      9,967          -          -          -
  Accumulated deficit      (150,434)  (111,910)   (82,622)   (63,832)   (45,828)
  Total stockholders'
    equity                 $  2,110   $  5,148   $ 11,977   $ 24,205   $ 41,300

</TABLE>

----------

(1)Basic and diluted net loss per share is based on the weighted  average number
   of Common  Shares  outstanding  during the period.  We have not paid any cash
   dividends on our capital stock since inception.



                                       29
<PAGE>


Item 7.  Management's  Discussion  and  Analysis of  Financial  Condition  and
Results of Operations

Overview of Historical Operations

      To date, Shaman  Pharmaceuticals has been primarily focused on discovering
and  developing  novel  pharmaceutical  products  for major  human  diseases  by
isolating  and  optimizing  active  compounds  found in  tropical  plants with a
history of medicinal use. We have conducted human clinical trials with our three
lead product candidates -- SP-303/Provir (Phase III/II),  nikkomycin Z (Phase I)
and SP-134101 (Phase I) -- targeting five indications.  Due to unforeseen delays
and  costs  necessary  to  complete  additional  necessary  trials  for our lead
compound,  SP-303/Provir  for the  treatment of diarrhea in people with AIDS, we
have chosen to discontinue all  pharmaceutical  development,  manufacturing  and
marketing activities. We intend to sell or outlicense worldwide marketing rights
to our  pharmaceutical  assets.  We plan to focus our efforts on our  Botanicals
division.

      Effective with the close of business on February 1, 1999, our Common Stock
was delisted from the Nasdaq National Market and moved to the OTC Bulletin Board
effective February 2, 1999.

      On  February 1, 1999,  we  announced  and  initiated  implementation  of a
restructuring  plan which  resulted in the closing down of the operations of our
pharmaceutical  business. We now intend to outlicense worldwide marketing rights
to  all  our  pharmaceutical  compounds  and  will  focus  our  efforts  on  the
development and  commercialization  of botanical dietary supplements through our
Botanicals   division.   The   restructuring   plan   includes:   cessation   of
pharmaceutical research and development activities and related operations;  sale
or  outlicensing  of  all  of  our  current  pharmaceutical  research  programs;
reduction in force of approximately 60 employees (65% of workforce);  dedication
of initially 12 employees  (as of February 26, 1998, 5 employees  remain) to the
process of closing down the pharmaceutical  business;  negotiating a termination
of the  research  and  development  contract  with Lipha  S.A.,  a  wholly-owned
subsidiary  of Merck KgaA,  Darmstadt,  Germany  ("Lipha/Merck");  settlement of
outstanding long-term equipment financing  obligations;  sale or disposal of all
of our  fixed  assets  that are not  needed  for our  botanicals  business;  and
sub-lease a portion of the facility.

      The  termination  of 60 employees  occurred on February 1, 1999. We are in
the process of finalizing an estimate of the costs of the  restructuring  which
will be recorded in the first  quarter of 1999.  We expect that such charge will
range from $2.4 million to $5.0 million.

Overview of Current Operations

      The concept for Shaman's Botanicals division was developed in 1998, and it
has become the focus of our  operations in 1999.  The purpose of the  botanicals
business is to discover, develop and market novel, proprietary botanical dietary
supplements  derived from tropical plant sources.  The unique positioning of our
botanicals business stems from significant  financial  investment,  more than 10
years of extensive field research by our teams of ethnobotanists and physicians,
and  pharmaceutical-level  chemical  standardization,  biological  and  clinical
testing.  In the last decade, we have amassed a large body of information on the
health  benefits of thousands of tropical  plant  species that have a history of
human use and have organized this into an extensive  relational  database.  This
database  includes  over  2,600  tropical  plants,  many of which  have not been
introduced or fully developed in the U.S.  dietary  supplement  market.  We have
identified plants with a documented  ethnomedical  history of use in our library
and database of botanicals  for use in key market  categories  with  significant
commercial  potential.  Because  many of these  plants  reflect  the  previously
untapped plant  diversity of the rain forests,  many represent  novel  botanical
products  that  have the  opportunity  to attain a  strong,  proprietary  market
position.

      We began our pharmaceutical operations in March 1990. To date, we have not
sold any products and do not anticipate  receiving  product  revenue in the near
future from our  pharmaceutical  operations.  We  anticipate  receiving  product
revenue  from our  botanical  operations  in 1999.  Our  accumulated  deficit at
December 31, 1998, was  approximately  $150.4 million.  We expect to continue to
incur losses in 1999 as we close down our pharmaceutical  business and focus our
efforts to discover,  develop,  and market botanical dietary supplements derived
from tropical plant sources through our botanicals division.  As of December 31,
1998,  we had cash,  cash  equivalents  and  short-term  investment  balances of
approximately  $9.2 million.  Unless we are successful in our efforts to sell or
outlicense the clinical



                                       30
<PAGE>

research  program  or obtain  additional  funding,  our cash  resources  will be
substantially used in satisfying our existing liabilities, and hence, we will be
unable to fund the operations of our botanicals business.

Results of Operations for the Years Ended December 31, 1998, 1997 and 1996

      The results of operations for the years ended December 31, 1998,  1997 and
1996 were for our  pharmaceutical  operations.  Our  results of  operations  for
fiscal  year  1999  will  not be  comparable,  as we  ceased  operations  of our
pharmaceutical  business  and focused our efforts in our  botanical  business in
first quarter of 1999.

      We recorded  collaborative revenues of $2.7 million, $3.5 million and $3.4
million for 1998, 1997, and 1996, respectively.  Revenues for 1998 resulted from
research  funding from our  collaboration  with Lipha/Merck and research funding
from our collaboration with Ono Pharmaceutical Co. Ltd. of Osaka, Japan ("Ono"),
which expired in May 1998. Revenues for 1997 also resulted from research funding
from our collaboration with Lipha/Merck and Ono. Revenues for 1996 resulted from
research  funding from our  collaboration  with Ono, an additional  $1.0 million
payment from Ono for enhanced rights to our antidiabetic compounds, and research
payments and access fees from our collaboration with Lipha/Merck.

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

      We incurred  research and  development  expenses of $32.4  million,  $24.1
million, and $19.1 million for 1998, 1997 and 1996, respectively. These expenses
include  salaries  for  scientific   personnel,   clinical   development  costs,
laboratory  supplies,  patent  protection and  consulting  fees,  travel,  plant
collections, facilities expenses and other expenditures relating to research and
product development. Research and development expenses increased $8.3 million in
1998 compared with 1997,  and increased $5.0 million in 1997 compared with 1996.
The increases in 1998 were  primarily  attributable  to the completion of a $7.0
million Phase III human  clinical trial for  SP-303/Provir  for the treatment of
diarrhea in people with AIDS and $2.4 million of the manufacturing  scale-up and
to increased scientific salaries of $1.2 million, which were partially offset by
a reduction of costs associated with our diabetes  program of $2.8 million.  The
increase  in  1997  was  primarily  attributable  to  an  increase  in  clinical
development  activities  with  respect to  SP-303/Provir  of $3.8 million and to
increased  scientific  salaries of $1.2 million,  which were partially offset by
reduced  expenses for clinical  development  activities for nikkomycin Z of $1.1
million.  Research and development  expenses are expected to decrease in 1999 as
we ceased operations in our  pharmaceutical  business and focused our efforts in
our botanicals business, effective February 1, 1999.

      General and  administrative  expenses were $5.6 million,  $4.8 million and
$3.5  million for 1998,  1997 and 1996,  respectively.  These  expenses  include
administrative salaries, consulting, legal, travel and other operating expenses.
General and  administrative  expenses increased $0.7 million in 1998 compared to
1997,  and increased $1.3 million in 1997 compared to 1996. The increase in 1998
over 1997 was primarily  attributable to additional costs, including an increase
in compensation,  consulting expenses and commercial  development  activities of
$530,000, related to the development of SP-303/Provir.  The increase in 1997 was
primarily  attributable to an increase in compensation and marketing research of
$388,000  related to development of  SP-303/Provir,  as well as additional legal
expenses  of  $631,000  primarily  related  to certain  disputes  related to our
intellectual property rights.  General and administrative  expenses are expected
to decrease in 1999 as we ceased operations in our  pharmaceutical  business and
focused our efforts in our botanicals business, effective February 1, 1999.

        Interest  income was $0.6  million,  $1.2  million and $1.1  million for
1998, 1997 and 1996,  respectively.  Interest income decreased  $700,000 in 1998
compared with 1997 and increased  $100,000 in 1997 compared with 1996.  Interest
income  fluctuations  have been  consistent  with  changes in  average  cash and
investment  balances with which we substantially  funded our operations in 1998,
1997 and 1996. The balances of cash, cash  equivalents and investments were $9.2
million,  $21.4 million and $16.5  million at December 31, 1998,  1997 and 1996,
respectively.



                                       31
<PAGE>

      Interest  expense was $2.0  million,  $5.0  million and $603,000 for 1998,
1997 and 1996,  respectively.  Interest expense  decreased in 1998 compared with
1997 principally due to a $3.7 million  non-cash  interest charge related to the
issuance of senior  convertible  notes in June 1997,  offset by interest expense
related to capital lease  agreements  and the secured debt  financing.  Interest
expense  increased in 1997 compared with 1996  principally due to a $3.7 million
non-cash interest charge related to the issuance of senior  convertible notes in
June 1997, as well as the interest expense related to our secured debt financing
in May 1997.  Interest  expense in the future will be  dependent  in part on our
capacity to finance future operating and equipment needs.

      At December 31, 1998, we had federal net operating loss  carryforwards  of
approximately  $48.6 million.  The federal net operating loss carryforwards will
expire at various dates beginning in 2004 through 2013, if not sooner  utilized.
Utilization of the net operating  losses and credits is subject to a substantial
annual  limitation  due to the "change in ownership"  provisions of the Internal
Revenue  Code of 1986,  as  amended.  The  annual  limitation  may result in the
expiration of net operating losses and credits before utilization.

Liquidity and Capital Resources

      As of December 31,  1998,  our cash,  cash  equivalents,  and  investments
totaled approximately $9.2 million,  compared with $21.4 million at December 31,
1997. We invest  excess cash  according to our  investment  policy that provides
guidelines  with regard to liquidity,  type of  investment,  credit  ratings and
concentration limits.

      On December 10, 1998, we and certain institutional  investors exchanged an
aggregate of $4.8 million (including accrued interest) of the Senior Convertible
Notes for an  aggregate of 4,784  shares of our Series D  Convertible  Preferred
Stock.  Each  share of  Series D  Convertible  Preferred  Stock is  entitled  to
receive,  when,  as,  and if  declared  by the Board of  Directors  out of funds
legally available for such purpose,  cumulative dividends at the rate of $55 per
annum.  Dividends on the Series D Preferred  Stock are payable in cash or shares
of Common Stock or any  combination  of cash and shares of Common Stock,  at our
option and are payable  quarterly  on February 1, May 1, August 1 and November 1
of each year.  Each share of Series D  Preferred  Stock is  convertible,  at any
time,  into the Common Stock at the lesser of (a) $1.125 per share or (b) 90% of
the low trading price during a designated  time period prior to the  conversion.
In addition,  the holders  received an aggregate of 767,469 warrants to purchase
additional  shares of Common Stock in exchange for  surrendering  the redemption
rights previously held by them under the Notes. The warrants were priced at 150%
of the average  closing price for the month of December 1998. We have attributed
a value of $943,680 to these warrants.

      The  delisting  of our  Common  Stock  from  The  Nasdaq  National  Market
constituted  an  Optional  Redemption  Event (as defined in the  Certificate  of
Designation of Series D Preferred  Stock) for the Series D Preferred  Stock.  In
connection  therewith,  on  February  4,  1999,  we issued a Control  Notice (as
defined in the  Certificate  of  Designation  of Series D Preferred  Stock) that
prevented the  redemption of the Series D Preferred  Stock.  This Control Notice
will  remain in  effect  for as long as we are not  listed on any of The  Nasdaq
National Market,  The Nasdaq SmallCap Market, the American Stock Exchange or the
New York  Stock  Exchange.  Delivery  of the  Control  Notice  had the effect of
increasing  the annual  dividend to $180 per share and adjusting the  conversion
price of the Series D  Preferred  Stock to 80% of the  amount of the  conversion
price would otherwise be.

      In December  1998,  we  completed a private  sale of  4,812,071  shares of
Common  Stock for  aggregate  net proceeds of  approximately  $7.1  million.  In
connection  with this offering,  we have committed a five-year,  3.6% royalty on
net sales of  SP-303/Provi,  if any, in the United  States for  distribution  to
HIV/AIDS charities.  We intend to honor this royalty payment through the sale of
our first botanical product, if any.

      In December 1998, we issued 747,206 shares of Common Stock to consultants
for services  rendered.  We recorded an expense of approximately $1.1 million in
conjunction with the consulting services.

      In October  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. Each share of Series C Preferred Stock is entitled to
receive cumulative dividends paid semi-annually to the holders of record of such
shares as follows: (i) an annual  stock-on-stock  dividend,  paid in arrears, in
shares of Common Stock  (calculated  as the quotient of $10.00 divided by 85% of
the average



                                       32
<PAGE>

closing  price of the Common Stock for the 10-day  trading  period  ending three
trading  days prior to the date the  dividend is paid);  plus (ii) a cash amount
equaling  0.00005% of our U.S.  net sales of our  SP-303/Provir  product for the
treatment of diarrhea,  if any, for the  preceding  two calendar  quarters  less
$5.00.  If,  under  Delaware  law, we are unable to pay the cash  portion of the
dividends,  then the cash portion will be paid 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). We intend to honor this royalty portion of the dividend  through the sale
of our first  botanical  product,  if any.  Each share of the Series C Preferred
Stock was convertible  for a period of 30 days after the first issuance  (August
18, 1998) and will be convertible  again  commencing 12 months after the initial
issuance  date at the election of each holder,  and  automatically  on the sixth
anniversary of the initial  issuance date into the greater of (a) 16.6667 shares
of Common Stock or (b) such number of shares of Common Stock as equals $100 (the
price paid per share of Series C Preferred  Stock) divided by 85% of the average
closing  price of the Common  Stock  reported  by Nasdaq for the 10-day  trading
period  ending three  trading days prior to the date of  conversion.  The Common
Stock is currently trading on the OTC Bulletin Board.  During the initial 30-day
conversion period for the Series C Preferred Stock,  24,922 shares of the Series
C Preferred Stock were converted into an aggregate of 1,861,550 shares of Common
Stock.  In  connection  with the  issuance of the Series C Preferred  Stock,  we
recognized a non-cash charge in the amount of $679,000.

     In June 1998, we entered into Stock Purchase Agreements with certain of our
stockholders  (the "Buyers")  pursuant to which we acquired the right to sell to
the Buyers,  subject to certain conditions up to an aggregate of 7,000 shares of
Series B Custom  Convertible  Preferred Stock for an aggregate purchase price of
$7,000,000.  The Stock Purchase  Agreements  were terminated upon the closing of
the  Series  C  Convertible  Preferred  Stock  Financing  in  October  1998.  As
consideration for entering into the Stock Purchase Agreements,  we issued to the
Buyers warrants to purchase an aggregate of 350,000 shares of Common Stock.  The
warrants  are  exercisable  for a period of five years at an exercise  price per
share  equal to 115% of the average  trading  price of the Common  Stock  during
specified  measurement  periods.  We have  attributed a value of $1.5 million to
these warrants.

      In June 1997, we issued $10.4  million of Senior  Convertible  Notes.  The
notes  mature  in August  2000 and bear  interest  at a rate of 5.5% per  annum.
Interest  on the  notes  was  payable  in  Common  Stock or cash at our  option.
Initially,  the notes  were  convertible  into  Common  Stock at 100% of the low
trading price during a designated time period prior to conversion  provided that
the  conversion  price  would not be less  than  $5.50 per  share.  Starting  in
November  1997, the notes were  convertible  into Common Stock at a 10% discount
from  the low  trading  price  during  a  designated  time  period  prior to the
conversion, with a floor of $5.50 through March 31, 1998, pursuant to a November
1997  understanding  with the note holders to revise the terms of the notes (see
next paragraph). Of the notes issued, $400,000 was issued to the placement agent
as part of the placement fee. We paid the placement agent an additional $300,000
in cash. The placement  fees and other offering costs were  capitalized in other
assets as deferred  issuance costs and were  amortized to interest  expense over
the life of the notes to the  extent  the  notes  were not  converted  to Common
Stock. The net proceeds totaled  approximately  $9.5 million after the placement
agent's fees and other offering expenses.

     In March 1998, we and the purchasers of the notes entered into an Amendment
Agreement (the "Amendment  Agreement") with the purchasers of the notes in order
to avoid 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  warrants  are  exercisable
through  March  18,  2001 at an  exercise  price of  $7.50  per  share.  We have
attributed  a value of $309,000 to these  warrants.  On December  10,  1998,  we
issued  to the note  holders  an  aggregate  of  4,784  shares  of the  Series D
Convertible  Preferred Stock in exchange for the cancellation of an aggregate of
$4.8 million (including accrued interest) of the notes.

      In May 1997,  we obtained a $5.0  million,  36-month  term loan to pay off
pre-existing  debt,  finance capital asset  acquisitions  and finance  continued
research and clinical development of our product candidates. The loan carries an
interest  rate of 14.58% and is payable in equal monthly  installments  over the
term of the loan. The lender was granted  ten-year  warrants to purchase 200,000
shares  of  Common  Stock at $6.25  per  share.  We have  attributed  a value of
$648,000 to these warrants.

      In April 1997, we sold 1,600,000 shares of Common Stock at $4.97 per share
in a registered  direct public  offering,  which yielded gross proceeds of $7.95
million.  The net proceeds of approximately $7.8 million from this offering were
used  for  the  continued  research  and  clinical  development  of our  product
candidates.



                                       33
<PAGE>

      In January 1997, we sold 2,000,000  shares of Common Stock in a registered
direct public  offering for gross proceeds of $9.0 million.  The net proceeds of
approximately  $8.1  million  from this  offering  were  used for the  continued
research and clinical development of our product candidates.

      In September  1996,  we entered into a five-year  collaborative  agreement
with Lipha/Merck to jointly develop our  antihyperglycemic  drugs.  Upon signing
the collaboration,  we received an annual research fee of $1.5 million which was
amortized to revenue over twelve 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 the
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  agreed to
provide  up to $9.0  million in  research  payments  and up to $10.5  million in
equity  investments  priced at a 20%  premium  to a  multi-day  volume  weighted
average price of the Common Stock at the time of purchase.  The  agreement  also
provided 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  agreed  to bear all  pre-clinical,  clinical,
regulatory and other development expenses associated with the compounds selected
under the  agreement.  In  addition,  as products are  commercialized,  we would
receive  royalties on all product  sales outside the United States and up to 50%
of the profits (if we  exercised  our  co-promotion  rights) or royalties on all
product sales in the United States.  Certain of the milestone  payments would be
credited  against  future  royalty  payments,  if any,  due to us from  sales of
products developed pursuant to the agreement.

      In December 1998, we renegotiated the terms of the existing agreement with
Lipha/Merck.  Under the new terms, we forgave $6.0 million in aggregate payments
due over the remaining term of the original agreement in exchange for a one-time
up-front  payment of an aggregate of $2.0 million,  consisting of a $1.0 million
research  payment (which remains  recorded as deferred  revenue that we have not
yet earned) and a $1.0 million equity investment.

      For the year ended  December  31,  1998,  we  recognized  $1.9  million in
revenue from the  Lipha/Merck  collaboration.  In addition,  we received a total
$2.5 million for issuance of 1,155,239  shares of Common Stock  (813,008  shares
priced at $1.85 per share in September  1998 and 342,231  shares priced at $2.92
per share in December  1998),  each  representing  a 20% premium to the weighted
average price of the Common Stock at the time of purchase.

      On February 1, 1999,  we  discontinued  all the research  and  development
activities  related  to  the  collaborative   agreement.  We  are  currently  in
negotiations  with  Lipha/Merck  for  the   discontinuation   of  this  research
agreement. There will be no further research payments from Lipha/Merck.

      In July 1996, we closed a private placement pursuant to Regulation S under
the Securities  Act of 1933, as amended,  in which we received gross proceeds of
$3.3 million for the sale of 400,000  shares of Series A  Convertible  Preferred
Stock and for the issuance of a six-year  warrant to purchase  550,000 shares of
Common Stock at an exercise price of $10.18 per share.  The Preferred Stock does
not carry a dividend obligation and will convert into Common Stock no later than
July 23, 1999 at a price per share  between  $6.00 and $8.15,  depending  on the
market value of Common Stock during the period prior to  conversion.  The holder
of preferred shares is entitled to a liquidation preference of $8.15 per share.

      We expect to incur substantial  additional  costs in the first  quarter of
1999 relating to our  restructuring  in February  1999. We expect to continue to
incur losses at least through 1999. Our cash,  cash  equivalents  and investment
balances are approximately $9.2 million at December 31, 1998 will be adequate to
fund  operations  through  June 1999.  We will need to seek  additional  funding
through public or private equity or debt financings, collaborative arrangements,
the sale or out-license of the clinical  research programs or from other sources
to discover, develop and market our botanical dietary supplements. If additional
funds are raised by issuing equity securities,  significant dilution to existing
stockholders  may result and there can be no assurance that  additional  funding
will be available on reasonable terms, or at all.



                                       34
<PAGE>

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 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  second  quarter  1999  and  determine  whether  such a  plan  is
necessary.


Item 7A - Qualitative and Quantitative Disclosure About Market Risk

     We are  exposed to market  risk,  including  changes to interest  rates.  A
discussion  of our  accounting  polices for  financial  instruments  and further
disclosures  relating  to  financial  instruments  is included in the Summary of
Significant Accounting Policies in the Notes to Financial Statements.

     We monitor the risks  associated  with intrest  rates and foreign  currency
exchange  rate risks and have established policies  and  business  practices to
protect  against  these  and  other  exposures.  We  place  our  investments  in
instruments  that  meet high  credit  quality  standards,  as  specified  in our
investment  policy  guidelines;  the  policy  also  limits  the amount of credit
exposure  to any one issue,  isuer,  or type of  instrument  and does not permit
derivative financial instruments in our investment portfolio.  As the result, we
do not expect any material loss with respect to our investment portfolio.



                                       35
<PAGE>

     The following table provides  information  about our financial  instruments
that are sensitive to changes in interest rates. For investment securities,  the
table presents principal cash flows and related weighted-average  interest rates
by expected maturity dates.

<TABLE>
<CAPTION>
ASSETS
(in thousands)
                                                                      Fair Value
                                                                           at
                  1999    2000   2001    2002  2003  Thereafter  Total  12/31/98
                  ----    ----   ----    ----  ----  ----------  -----  --------
<S>             <C>        <C>    <C>    <C>    <C>    <C>
Cash
 equivalents    $2,955       -     -       -      -        -     $2,955   $2,945
Weighted
 average
 interest rate    5.28%

Short-term
 investments    $3,282       -     -       -      -        -     $3,282   $3,277
Weighted
 average
 interest rate    5.76%

LIABILITES
(in thousands)

Long-term debt,
 including
 current portion
----------------
Fixed rate       $2,973   $1,371    $540    $540    -      -     $5,424   $4,628
Weighted
 average
 interest rate    13.64%   13.56%  12.00%  12.00%

</TABLE>


                                       36
<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,  have  not yet  completed  a full  cycle of
development,  regulatory approval and  commercialization for any of our products
and  are  changing  our  business.  There  can be no  assurance  that we will be
successful with our new business.  Our botanical  products are at various stages
of development.  Additional research and development will be necessary for us to
move additional  products toward  commercialization.  The botanical  business is
highly competitive. Certain of our competitors are substantially larger and have
greater  financial  resources  than our company.  In  addition,  there can be no
assurance that any plants required by us will be  indefinitely  available to us.
Also,  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.





                                       37
<PAGE>


Item 8.  Financial Statements and Supplementary Data


              REPORT OF ERNST & YOUNG, LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders of
Shaman Pharmaceuticals, Inc.

      We have audited the accompanying balance sheets of Shaman Pharmaceuticals,
Inc. as of December 31, 1998 and 1997, and the related statements of operations,
stockholders'  equity,  and cash flows for each of the three years in the period
ended December 31, 1998. These financial  statements are the  responsibility  of
the Company's  management.  Our responsibility is to express an opinion on these
financial statements based on our audits.

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

      In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Shaman Pharmaceuticals, Inc.
at December 31, 1998 and 1997,  and the results of our  operations  and our cash
flows for each of the three years in the period  ended  December  31,  1998,  in
conformity with generally accepted accounting principles.

      The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 1, the
Company had cash, cash  equivalents  and short-term  investments at December 31,
1998  aggregating $9.2 million which are not sufficient to enable the Company to
pay its existing  liabilities  and to fund its operations  through  December 31,
1999.  The  Company  has  incurred  recurring  operating  losses  and has  total
liabilities  at December  31, 1998 in excess of its  available  cash  resources.
These conditions raise substantial doubt about the Company's ability to continue
as a going  concern.  Management's  plans in  regard to these  matters  are also
described in Note 1. The financial  statements  referred to above do not include
any adjustments to reflect the possible future effects on the recoverability and
classification  of assets or the amounts and  classification of liabilities that
may result from the outcome of this uncertainty.



                                                        ERNST & YOUNG LLP

Palo Alto, California
February 11, 1999




                                       38
<PAGE>


                          SHAMAN PHARMACEUTICALS, INC.

                                 BALANCE SHEETS
<TABLE>
<CAPTION>

                                                            December 31,
                                                   ----------------------------
                                                       1998             1997
                                                   -----------      -----------
                         ASSETS
<S>                                              <C>             <C>

Current assets:
  Cash and cash equivalents                      $   5,887,496   $   11,340,702
  Short-term investments                             3,277,197       10,079,943
  Amounts due from related parties                     208,898          192,551
  Prepaid expenses and other current assets            283,804          553,507
                                                   -----------      -----------
         Total current assets                        9,657,395       22,166,703

  Property and equipment:
     Laboratory equipment                            6,336,564        6,211,182
     Computer equipment and furniture                1,474,914        1,158,869
     Leasehold improvements                          7,266,066        7,351,827
                                                   -----------      -----------
                                                    15,077,544       14,721,878
     Less: accumulated depreciation and
              amortization                         (11,963,876)     (10,749,738)
                                                   -----------      -----------
                                                     3,113,668        3,972,140
   Other assets                                        368,080          613,657
                                                   -----------      -----------
         Total assets                            $  13,139,143    $  26,752,500
                                                 =============    =============


               LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable and other accrued expenses    $   1,515,230    $     925,701
  Accrued clinical trial costs                       2,051,134        1,689,659
  Accrued professional fees                            948,374          718,625
  Accrued compensation                                 326,797          368,272
  Advances--contract research                          968,750        1,133,605
  Current installments of long-term obligations      2,803,861        2,783,976
                                                 -------------    -------------
         Total current liabilities                   8,614,146        7,619,838

Long-term obligations, excluding current
  installments                                       2,415,137        4,017,979
Senior convertible notes                                     -        9,967,044
Stockholders' equity:
  Preferred stock, $0.001 par value; issuable in
    series; 1,000,000 shares authorized; 519,533
    and 400,000 convertible shares issued and
    outstanding at December 31, 1998 and 1997,
    respectively (Liquidation preference at
    December 31, 1998 and 1997 -- $18,429,310 and
    $3,258,800, respectively)                              520              400
  Common stock, $0.001 par value; 40,000,000 shares
    authorized; 30,382,948 shares and 17,796,045
    shares issued and outstanding at December 31,
    1998 and 1997, respectively                         30,383           17,796
  Additional paid-in capital                       152,698,580      117,164,524
  Deferred compensation and other adjustments         (185,850)        (124,910)
  Accumulated deficit                             (150,433,773)    (111,910,171)
                                                 -------------    -------------
          Total stockholders' equity                 2,109,860        5,147,639
                                                 -------------    -------------
          Total liabilities and stockholders'
             equity                              $  13,139,143    $  26,752,500
                                                 =============    =============
</TABLE>

               See accompanying notes to financial statements.



                                       39
<PAGE>


                          SHAMAN PHARMACEUTICALS, INC.

                            STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>

                                                Years Ended December 31,
                                    -------------------------------------------
                                          1998           1997           1996
                                    -------------  -------------  -------------
<S>                                  <C>            <C>            <C>
Revenue from collaborative
  agreements                         $  2,659,856   $  3,500,000   $  3,406,250
Operating expenses:
  Research and development             32,393,374     24,140,246     19,138,190
  General and administrative            5,565,066      4,833,489      3,537,157
                                    -------------  -------------  -------------
     Total operating expenses          37,958,440     28,973,735     22,675,347
Loss from operations                  (35,298,584)   (25,473,735)   (19,269,097)
Interest income                           550,227      1,217,884      1,082,618
Interest expense                       (2,033,004)    (5,032,684)      (603,330)
                                    -------------  -------------  -------------
Net loss                              (36,781,361)   (29,288,535)   (18,789,809)
Deemed dividend on Preferred Stock     (1,742,241)             -              -
Net loss applicable to
  Common Stockholders                $(38,523,602)  $(29,288,535)  $(18,789,809)
                                    =============   ============   ============
Basic and diluted net loss per
  common share                       $      (1.92)  $      (1.72)  $      (1.39)
                                     =============  ============   ============
Shares used in calculation of
  basic and diluted net loss
  per common share                     20,114,000     17,010,000     13,496,000
                                    =============   ============   ============
</TABLE>

               See accompanying notes to financial statements.




                                       40
<PAGE>

                          SHAMAN PHARMACEUTICALS, INC.

                       STATEMENTS OF STOCKHOLDERS' EQUITY
              For the Years Ended December 31, 1996, 1997 and 1998

<TABLE>
<CAPTION>

                                             Deferred
             Convertible         Addition  Compensation              Total
              Preferred  Common  Paid-In     and     Accumulated  Stockholders'
                Stock    Stock   Capital     Other      Deficit       Equity
                                           Adjustments
             ------------------------------------------------------------------
<S>           <C>    <C>     <C>          <C>         <C>            <C>
Balance at
  December 31,
    1995       $ -  $13,258  $88,170,926  $(146,956)  $(63,831,827)  $24,205,401
Issuance of
  273,978 shares
  of common
  stock upon
  the exercise
  of stock
  options        -      274     439,806         -              -        440,080

Issuance of
  400,000 shares
  of series A
  convertible
  preferred
  stock        400        -   3,057,823         -              -      3,058,223
Issuance of
  388,918 shares
  of common
  stock in
  connection with
  Lipha/Merck
  collaboration  -      389   2,971,833          -             -      2,972,222
Unrealized
  loss on
  available-for-sale
  securities     -        -           -    (26,458)            -        (26,458)
Amortization and
  reversals of
  deferred
  compensation   -        -     (35,933)   153,164             -        117,231
Net loss         -        -           -          -   (18,789,809)   (18,789,809)
            ------   ------     --------  --------    ----------     ----------
Balance at
  December 31,
    1996       400   13,921  94,604,455    (20,250)  (82,621,636)    11,976,890
Issuance of
  19,472 shares
  of common
  stock upon
  the exercise
  of stock
  options        -       19      64,137          -             -         64,156
Issuance of
  2,000,000 shares
  of common
  stock in
  connection with
  a registered
  direct public
  offering in
  January 1997,
  net of issuance
  costs of $.93
  million        -    2,000    8,068,410         -             -      8,070,410
Issuance of
  1,600,000 shares
  of common
  stock in
  connection with
  a registered
  direct public
  offering in
  April 1997,
  net of issuance
  costs of $.13
  million        -    1,600    7,822,654         -             -      7,824,254
Issuance of
  200,787 shares
  of common
  stock in
  connection with
  Lipha/Merck
  collaboration  -      201    1,492,338         -             -      1,492,539
Issuance of
  55,102 shares
  of common
  stock upon
  conversion
  of senior
  convertible
  notes in
  November 1997  -       55      223,108         -             -        223,163
Unrealized
  loss on
  available-for-sale
  securities     -        -            -    (9,720)            -         (9,720)
Deferred
  compensation
  related to
  granting of
  options to
  non-employees,
  net of
  amortization
  and reversals  -        -      240,282   (94,940)            -        145,342
Value ascribed
  to warrants
  issued in
  conjunction
  with secured
  loan           -        -      648,000         -             -        648,000
Value ascribed to
  in-the-money
  conversion
  option of
  senior
  convertible
  notes          -        -    3,692,140         -             -      3,692,140
Value ascribed
  to warrants
  issued in
  conjunction
  with senior
  convertible
  notes          -        -      309,000        -              -        309,000
Net loss         -        -            -        -    (29,288,535)   (29,288,535)
             -----    -----    --------- --------     ----------     ----------
Balance at
  December 31,
    1997      $400  $17,796 $117,164,524 $(124,910) $(111,910,171)   $5,147,639

</TABLE>



                                       41
<PAGE>

                          SHAMAN PHARMACEUTICALS, INC.

                STATEMENTS OF STOCKHOLDERS' EQUITY (continued)
              For the Years Ended December 31, 1996, 1997, and 1998
<TABLE>
<CAPTION>

                                              Deferred
             Convertible          Addition  Compensation              Total
              Preferred   Common  Paid-In     and     Accumulated  Stockholders'
                Stock     Stock   Capital     Other      Deficit       Equity
                                             Adjustments
             ------------------------------------------------------------------
<S>            <C>    <C>    <C>          <C>        <C>              <C>
Balance at
  December 31
    1997       400   17,796  117,164,524 (124,910)  (111,910,171)     5,147,639
Issuance of
  15,843 shares
  of common
  stock upon
  the exercise
  of stock
  options        -       16       21,699        -              -         21,715
Issuance of
  62,312 shares
  of common
  stock to
  employees from
  the 1998 special
  issuance
  plan           -       63       80,696        -              -         80,759
Issuance of
  747,206 shares
  of common
  stock to
  consultants for
  consulting
  services
  rendered       -      747    1,073,363        -              -      1,074,110
Sale of
  1,155,239 shares
  of common
  stock in
  connection with
  Lipha/Merck
  collaboration  -    1,155    2,498,845        -              -      2,500,000
Deferred
  compensation
  related to
  granting of
  options to
  non-employees,
  net of
  amortization
  and reversals  -        -      162,464  (75,849)             -         86,615
Change in unrealized
  gain/loss on
  available-for-sale
  securities     -        -            -   14,909              -         14,909
Value ascribed to
  Warrants issued
  in conjunction
  with Series B
  Convertible
  Preferred Stock
  ($1,462,860)   -        -            -        -              -              -
Issuance of
  201,645 shares
  of common
  stock  in
  connection with
  senior convertible
  notes quarterly
  interest
  payment        -      202      650,339        -              -        650,541
Issuance of
  1,076,202 shares
  of common
  stock upon
  the conversion
  of 1,209 shares
  of Series D
  Convertible
  Preferred
  Stock         (1)   1,076       (1,075)        -             -              -
Issuance of
  2,571,252 shares
  of common
  stock upon
  the conversion
  of senior
  convertible
  notes          -    2,571    5,450,613        -              -      5,453,184
Sale of
  140,880 shares
  of convertible
  preferred stock
  in connection
  with the
  Series C
  Convertible
  Preferred
  Stock
  Offering,
  net of
  issuance
  costs of $1.5
  million      141        -    12,598,553       -              -     12,598,694
Value ascribed
  to in-the-money
  conversion
  option of
  Series C
  Convertible
  Preferred
  Stock          -        -       678,636       -              -        678,636
Issuance of
  1,861,550 shares
  of common
  stock
  upon the
  conversion of
  24,922 shares
  of Series C
  Convertible
  Preferred
  Stock        (25)   1,862        (1,837)      -              -              -
Issuance of
  83,583 shares
  of common
  stock in
  payment of
  Dividends on
  Series C
  Convertible
  Preferred
  Stock          -       83           (83)      -              -              -
Sale of
  4,812,071 shares
  of common stock
  in connection
  with the
  private
  placement
  offering in
  December 1998,
  net of issuance
  costs of $.13
  million        -    4,812     7,082,132       -              -      7,086,944
Issuance of
  4,784 shares
  of Series D
  Convertible
  Preferred Stock
  in exchange
  for cancellation
  of senior
  convertible
  note           5        -     4,176,106       -              -      4,176,111
Value ascribed to
  in-the-money
  conversion option
  of Series D
  Convertible
  Preferred
  Stock          -        -     1,063,605        -              -     1,063,605
Value ascribed to
  Warrants issued in
  conjunction with
  Series D
  Convertible
  Preferred Stock
  ($943,680)     -        -             -        -              -             -
Net loss         -        -             -        -    (38,523,602)  (38,523,602)
             -----    -----    ----------    -----    ------------ ------------
Balance at
 December 31,
   1998       $520  $30,383  $152,698,580 $(185,850) $(150,433,773) $(2,109,860)
             =====  =======   ===========  =========  =============  ===========
</TABLE>
               See accompanying notes to financial statements.




                                       42
<PAGE>

                          SHAMAN PHARMACEUTICALS, INC.

                            STATEMENTS OF CASH FLOWS
                Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
                                              Years ended December 31,
                                   ---------------------------------------------
                                        1998            1997           1996
                                  -------------   -------------   --------------
<S>                               <C>             <C>             <C>
Operating activities:
  Net loss applicable to
    Common Shareholders           $ (38,523,602)  $ (29,288,$35)  $ (18,789,809)
  Adjustments to reconcile net
    loss to net cash used in
    operating activities:
      Depreciation                    1,214,139       1,718,167       2,245,860
      Amortization of warrants and
        deferred equity costs           286,664         390,729         117,231
      Loss on disposal of fixed assets   19,834               -               -
      Interest expense on issuance of
        senior convertible notes              -       3,692,140               -
      Deemed dividend on
        preferred stock               1,742,241               -               -
      Issuance of common stock to
        consultants for services
        rendered                      1,074,110               -               -
      Other compensation                 80,759               -               -
      Payment of interest in
        common stock                    328,743               -               -
  Changes in operating assets
    and liabilities:
      Prepaid expenses, current
        assets and other assets         755,280         628,198         (80,148)
      Accounts payable, accrued
        professional fees,
        accrued compensation,
        accrued clinical trial
        costs and contract
        research advances               974,423        (748,327)      2,021,220
                                    ------------    ------------    ------------
Net cash used in operating
  activities                        (32,047,409)    (23,607,628)    (14,485,646)
                                    ------------    ------------    ------------
Investing activities:
  Purchases of
    available-for-sale investments   (5,255,947)    (14,562,627)    (10,872,811)
  Maturities of
    available-for-sale investments    5,032,892       4,954,640      26,325,454
  Sales of available-for-sale
    investments                       7,040,710               -       1,494,000
  Capital expenditures                 (375,501)       (913,382)       (864,729)
  Employee loans, net of repayments     (256,347)              -               -
                                    ------------    ------------    ------------
Net cash provided by (used in)
  investing activities                6,185,807     (10,521,369)     16,081,914
                                    ------------    ------------    ------------
Financing activities:
  Proceeds from issuance of
    preferred stock, net             12,598,694               -       3,058,223
  Proceeds from issuance of
    common stock, net                 9,608,659      17,446,683       3,412,302
  Proceeds from issuance of
    long-term  obligations                    -       5,000,000         600,000
  Proceeds from issuance of
    senior convertible notes, net             -       9,479,039               -
  Principal payments on
    long-term obligations            (2,310,080)     (2,936,297)     (1,825,665)
  Proceeds from asset financing
    arrangements                        511,123         429,023               -
                                    ------------    ------------    ------------
Net cash provided by financing
  activities                         20,408,396      29,418,448       5,244,860
                                    ------------    ------------    ------------
Net increase (decrease) in cash
  and cash equivalents               (5,453,206)     (4,710,549)      6,841,128
Cash and cash equivalents at
  beginning of period                11,340,702      16,051,251       9,210,123
Cash and cash equivalents at end
  of period                        $  5,887,496    $ 11,340,702    $ 16,051,251
                                   ============   =============    =============

Supplemental information
  Interest paid                    $    605,069    $    538,891    $    603,330
                                   ============   =============    =============

</TABLE>
               See accompanying notes to financial statements.




                                       43
<PAGE>


                         SHAMAN PHARMACEUTICALS, INC.

                        NOTES TO FINANCIAL STATEMENTS

1.  Summary of Significant Accounting Policies

General

      To date, Shaman  Pharmaceuticals has been primarily focused on discovering
and  developing  novel  pharmaceutical  products  for major  human  diseases  by
isolating  and  optimizing  active  compounds  found in  tropical  plants with a
history of medicinal use. We have conducted human clinical trials with our three
lead product candidates -- SP-303/Provir (Phase III/II),  nikkomycin Z (Phase I)
and SP-134101 (Phase I) -- targeting five indications.  Due to unforeseen delays
and  costs  necessary  to  complete  additional  necessary  trials  for our lead
compound,  SP-303/Provir  for the  treatment of diarrhea in people with AIDS, we
have chosen to discontinue all  pharmaceutical  development,  manufacturing  and
marketing activities. We intend to sell or outlicense worldwide marketing rights
to our  pharmaceutical  assets.  We plan to focus our efforts on our  Botanicals
division.

Matters Affecting Ongoing Operations

      The accompanying financial  statements have been prepared assuming that we
will continue as a going concern.  We have cash, cash equivalents and short-term
investments  at  December  31,  1998  aggregating  $9.2  million  which  are not
sufficient  to enable us to pay  existing  liabilities  and fund our  operations
through December 31, 1999. We have total  liabilities in excess of our available
cash resources at December 31, 1998. We have had recurring net losses, including
a net loss applicable to common  stockholders of $38.5 million in the year ended
December 31, 1998, and have an accumulated deficit of $150.4 million at December
31, 1998. These conditions raise substantial doubt about our ability to continue
as a going concern.

      To address these matters,  on February 1, 1999, we announced and initiated
the  implementation  of a  Restructuring  Plan which  resulted in the  immediate
cessation of all pharmaceutical research and development activities, a reduction
in workforce of 60 employees,  and will result in the closing down of all of the
operations of our pharmaceutical business (see Note 2). After the implementation
of the  Restructuring  Plan,  we  expect  our  available  cash  resources  to be
substantially used before the end of June 1999.
      Further,  we intend to sell or enter  into  outlicensing  agreements  with
respect  to  all of  our  current  pharmaceutical  research  programs  including
SP-303/Provir,  nikkomycin Z and SP-134101. We are currently negotiating for the
termination of our remaining  research and development  collaboration  agreement
with Lipha S.A., a  wholly-owned  subsidiary of Merck KGaA,  Darmstadt,  Germany
("Lipha/Merck").  We intend to focus our future efforts on the  development  and
commercialization  of botanical dietary  supplements derived from tropical plant
sources.

Revenue Recognition

      Revenue under our collaborative  research agreements is recognized ratably
as costs are incurred by us in accordance with the  performance  requirements of
the  agreements.  Non-refundable  payments  that  are not  dependent  on  future
performance  under  collaborative  agreements  are  recognized  as revenue  when
received.  Payments  received  which are  still  subject  to future  performance
requirements  are deferred until earned.  Revenues from achievement of milestone
events are  recognized  when the funding  party  agrees that the  scientific  or
clinical  results  stipulated in the agreement  have been met. Costs of contract
revenue  approximate  such revenue and are included in research and  development
expenses.

Research and Development Expense

      Research and  development  expense  consists of  independent  research and
development   costs  and  the  costs   associated   with  work  performed  under
collaborations.    Research   and   development   costs   include   direct   and
research-related overhead expenses and are expensed as incurred.


                                       44
<PAGE>


Stock-Based Compensation

      In October 1995, the Financial  Accounting Standards Board ("FASB") issued
Statement  of  Financial  Accounting  Standards,   "Accounting  for  Stock-Based
Compensation" ("SFAS 123") which encourages,  but does not require, companies to
record compensation expense for stock-based employee  compensation plans at fair
value. We have elected to follow the disclosure requirements of SFAS 123 for the
year  ended  December  31,  1998,  1997 and 1996 and will  continue  to  measure
stock-based  compensation  to employees in  accordance  with APB Opinion No. 25,
"Accounting for Stock Issued to Employees." Note 8 contains a summary of the pro
forma  effects to reported net loss  applicable to common  stockholders  and net
loss per common share for 1998,  1997 and 1996 as if we had elected to recognize
compensation  expense based on the fair value of options granted as described by
SFAS 123.

      We grant stock  options to employees  and  directors for a fixed number of
shares  with an exercise  price equal to the fair market  value of shares at the
date of grant.  We account for stock option grants to employees and directors in
accordance  with APB Opinion No. 25,  Accounting  for Stock  Issued to Employees
and, accordingly,  recognize no compensation expense for the stock option grants
to employees and directors.

Per Share Data

      Net loss per share is computed using the weighted average number of shares
of common stock outstanding.  The impact of stock options and other common stock
equivalents  have been excluded from the  computation in all years  presented as
they are antidilutive.

Comprehensive Loss

      As of January 1, 1998, we adopted  Financial  Accounting  Standards  Board
("FASB")  Statement No. 130, Reporting  Comprehensive  Income ("SFAS 130"). SFAS
130  established  new rules for the  reporting and  displaying of  comprehensive
income and its components; however, the adoption of this statement had no impact
on our net loss or total  stockholders'  equity.  SFAS 130  requires  unrealized
gains or losses on our  available for sale  securities,  which prior to adoption
were reported in  stockholder's  equity,  to be included in other  comprehensive
income (loss). Our comprehensive loss was not materially  different from our net
loss applicable to common stockholders in 1998, 1997 and 1996.

Cash, Cash Equivalents, Investments and Concentration of Credit Risk

      We consider all highly liquid  investments  with  remaining  maturities of
three  months or less at time of  purchase to be cash  equivalents.  Investments
with  maturities  of less than one year  from the  balance  sheet  date and with
original maturities greater than 90 days are considered short-term  investments.
Investments  with  maturities  greater than one year from the balance sheet date
are  considered   long-term   investments.   Investments  consist  primarily  of
commercial  paper,  investments in government  securities,  corporate  bonds and
asset-backed  securities.  These  investments  typically bear minimal risk. This
diversification of risk is consistent with our policy to maintain high liquidity
and ensure  safety of  principal.  We maintain our cash,  cash  equivalents  and
investments in accounts with several United States banks and brokerage houses.

      We determine the appropriate classification of debt securities at the time
of purchase and re-evaluate such determination as of each balance sheet date. As
of  December  31,  1998 and  1997,  we have  classified  our  entire  investment
portfolio as  available-for-sale.  Available-for-sale  securities are carried at
fair value, with the unrealized gains and losses,  net of tax, included in other
comprehensive  income. The amortized cost of debt securities in this category is
adjusted for  amortization  of premiums and  accretion of discounts to maturity.
Such amortization is included in interest income.  Realized gains and losses and
declines  in  value  judged  to be  other-than-temporary  on  available-for-sale
securities  are included in interest  income or expense.  The cost of securities
sold is based on the specific  identification method.  Interest and dividends on
securities classified as available-for-sale are included in interest income.



                                       45
<PAGE>

Property and Equipment

      Property and equipment are stated at cost.  Depreciation  of equipment and
furniture is provided on a straight-line  basis over the estimated  useful lives
of the  respective  assets,  which  range from  three  (computer  equipment  and
furniture) to five (laboratory  equipment)  years.  Equipment held under capital
leases is amortized using the straight-line method over the shorter of the lease
term or estimated useful life of the asset. Leasehold improvements are amortized
on a straight-line basis over the remaining life of the lease.

Use of Estimates

      The  preparation  of financial  statements  in conformity  with  generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that affect the amounts  reported in the financial  statements  and
accompanying notes. Actual results could differ from those estimates.

Carrying Value of Long-Lived Assets and Long-Lived Assets to be Disposed Of

      In accordance with Financial Accounting Standards Board Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long Lived Assets to
be Disposed Of," we record  impairment  losses on long-lived  assets when events
and   circumstances   indicate  that  the  assets  might  be  impaired  and  the
undiscounted  cash flows estimated to be generated by those assets are less than
the  carrying  amounts  of  those  assets.  Based  on  our  estimate  of  future
undiscounted  cash  flows,  except  for a  reserve  included  in  the  estimated
restructuring  charge (see Note 2), we expect to recover the carrying amounts of
our long-lived assets.  Nonetheless, it is reasonably possible that the estimate
of undiscounted  cash flows may change in the near term resulting in the need to
write-down those assets to fair value.

Segment Reporting

      In June 1997, the FASB issued SFAS No. 131,  Disclosures about Segments of
an Enterprise and Related Information ("FAS131"). SFAS 131 establishes standards
for the way that public business  enterprises report information about operating
segments in annual  financial  statements  and requires  that those  enterprises
report  selected  information  about  operating  segments  in interim  financial
reports.  It also establishes  standards for related  disclosures about products
and services,  geographic areas, and major customers. We have determined that in
1998, 1997 and 1996, we operated in only one segment.

Reclassification

      Certain prior year amounts have been reclassified to conform to current
year's presentation.

2.  Restructuring Plan

      On February  1, 1999,  we  announced  and  initiated  implementation  of a
restructuring  plan which  resulted in the closing down of the operations of our
pharmaceutical  business. We now intend to outlicense worldwide marketing rights
to  all  our  pharmaceutical  compounds  and  will  focus  our  efforts  on  the
development  and  commercialization  of botanical  dietary  supplements  through
botanicals   division.   The   restructuring   plan   includes:   cessation   of
pharmaceutical research and development activities and related operations;  sale
or  outlicensing  of  all  of  our  current  pharmaceutical  research  programs;
reduction  in  force  of  approximately  60  employees  (65% of our  workforce);
dedication  of  initially  12  employees (as of February  26,  1999, 5 employees
remain) to the process of closing down the pharmaceutical business;  termination
of the  research  and  development  contract  with  Lipha/Merck;  settlement  of
outstanding long-term equipment financing  obligations;  sale or disposal of all
of our  fixed  assets  that are not  needed  for our  botanicals  business;  and
sub-lease a portion of the facility.

      The  termination  of 60 employees  occurred on February 1, 1999. We are in
the process of determining an estimate of the costs of the  restructuring  which
will be recorded in the first  quarter of 1999.  We expect that such charge will
range from $2,400,000 to $5,000,000.



                                       46
<PAGE>


3.   Collaborative Relationships

      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 of $1.5 million
which was amortized to revenue over twelve months as the work was performed.  We
also received approximately $3 million for 388,918 shares of Common Stock priced
at $7.71 per share,  representing a 20% premium to the weighted average price of
the 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 Pharmaceutical Co.
Ltd. Osaka,  Japan ("Ono"),  Lipha/Merck agreed to 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 Common Stock at the time
of purchase.  The research  payments were  recognized as revenue  ratably as the
related  costs are  incurred  by us in the  performance  of our  obligations  to
perform  certain  research and clinical  trial  activities.  The agreement  also
provided 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  agreed  to bear all  pre-clinical,  clinical,
regulatory and other development expenses associated with the compounds selected
under the  agreement.  Preclinical  and  clinical  milestone  payments  would be
recognized  as  revenue as certain  preclinical  hurdles  are met and as certain
phases of the clinical trials and the FDA approval  process were  completed.  In
addition, as products were commercialized, Shaman would 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  would be credited  against
future  royalty  payments,  if any,  due to us from sales of products  developed
pursuant to the agreement.

      In December 1998, we renegotiated the terms of the existing agreement with
Lipha/Merck.  Under the new terms, we forgave $6.0 million in aggregate payments
due over the remaining term of the original agreement in exchange for a one-time
up-front  payment of an aggregate of $2.0 million,  consisting of a $1.0 million
research  payment (which remains  recorded as deferred  revenue that we have not
yet earned) and a $1.0 million equity investment.

      For the year ended December 31, 1998,  Shaman  recognized  $1.9 million in
revenue from the  Lipha/Merck  collaboration.  In addition,  we received a total
$2.5 million for issuance of 1,155,239  shares of Common Stock  (813,008  shares
priced at $1.85 per share in September  1998 and 342,231  shares priced at $2.92
per share in December  1998),  each  representing  a 20% premium to the weighted
average  price of Common  Stock's  stock at the time of purchase.  Revenues from
Lipha/Merck  accounted  for 70%, 43% and 12% of total  revenues  earned in 1998,
1997 and 1996 respectively.

      On  February  1,  1999,  we  discontinued  all  research  and  development
activities  related  to  the  collaborative   agreement.  We  are  currently  in
negotiations  with  Lipha/Merck,   for  the  discontinuation  of  this  research
agreement. There will be no further research payments from Lipha/Merck.

      In May 1995, we entered into a collaborative  agreement with Ono providing
for, among other things, three years of funding for the research and development
of compounds for the treatment of Type II diabetes. Under the agreement,  Shaman
was obligated to screen 100  diabetes-specific  plants per year in vivo, isolate
and identify  active  compounds,  and  participate  in any  medicinal  chemistry
modification.  In turn,  Ono  provided us with access to Ono's  preclinical  and
clinical  development  capabilities  through  proprietary  in vitro  assays  and
medicinal chemistry effort. Ono's development and  commercialization  rights are
for the  countries  of Japan,  South  Korea and  Taiwan.  Under the terms of the
agreement,  Ono provided $7.0 million in collaborative research funding and will
pay preclinical and clinical milestone payments of $4.0 million per compound for
each antidiabetic drug that is commercialized.

      We received an additional  $1.0 million  payment  (beyond the $7.0 million
commitment) in December 1996 for enhanced access rights to these compounds.  For
the years ended December 31, 1998, 1997 and 1996,  Shaman  recognized  $790,000,
$2.0  million  and  $3.0   million,   respectively   in  revenue  from  the  Ono
collaboration.  Revenues  from  Ono  accounted  for  30%,  57% and 88% of  total
revenues earned in 1998, 1997 and 1996, respectively.

       In May  1998,  our  collaborative  agreement  with Ono,  and the  ongoing
research and development  funding received pursuant  thereto,  expired under the
original  terms  thereof  and was not  renewed.  Under the  agreement,  Ono will


                                       47
<PAGE>

continue to provide  milestone  payments and  royalties  to us on any  resulting
products Ono develops from compounds  identified  during the three-year  term of
the agreement.

      Costs  associated  with  revenue  from these  collaborations  totaled $8.2
million,  $11.4 million and $11.6 million for the year ended  December 31, 1998,
1997 and 1996,  respectively,  and are  included  in  research  and  development
expenses in the accompanying financial statements.

4.  Investments

    The following is a summary of available-for-sale securities (in thousands):

<TABLE>
<CAPTION>
                                                December 31, 1998
                                  --------------------------------------------
                                            Gross        Gross      Estimated
                                          Unrealized   Unrealized     Fair
                                    Cost    Gains       Losses       Value
                                  ------- ----------   ----------   ----------
<S>                               <C>       <C>         <C>           <C>
   U.S. Treasury securities
     and government obligations   $ 2,255   $     --    $     (5)     $ 2,250
   U.S. corporate bonds             1,000         --          --        1,000
   U.S. corporate commercial
     paper and other                4,984         --         (10)       4,974
                                  -------   --------     --------    --------
        Total                     $ 8,239   $     --    $    (15)     $ 8,224
                                  =======   ========     ========    ========


 Above amounts are included in the balance sheet as follows:

    Cash and cash equivalents     $ 4,957        --     $    (10)     $ 4,947
    Short-term investments          3,282        --           (5)       3,277
                                  -------   --------     --------    --------
        Total                     $ 8,239   $     --    $    (15)     $ 8,224
                                  =======   ========     ========    ========




                                               December 31, 1997
                                  --------------------------------------------
                                            Gross        Gross      Estimated
                                          Unrealized   Unrealized     Fair
                                    Cost    Gains       Losses       Value
                                  ------- ----------   ----------   ----------
  U.S. Treasury securities
     and government obligations   $ 4,625   $     --    $    (10)     $ 4,615
   U.S. corporate bonds             3,000         --          --        3,000
   U.S. corporate commercial
     paper and other               10,810         --         (20)      10,790
                                  -------   --------     --------    --------
        Total                     $18,435   $     --    $    (30)     $18,405
                                  =======   ========     ========    ========


 Above amounts are included in the balance sheet as follows:

    Cash and cash equivalents     $ 8,345        --     $    (20)     $ 8,325
    Short-term investments         10,090        --          (10)      10,080
                                  -------   --------     --------    --------
        Total                     $18,435   $     --    $    (30)     $18,405
                                  =======   ========     ========    ========

</TABLE>


       The average  remaining  maturity of the portfolio was  approximately less
than one month as of December  31,  1998,  and  approximately  four and one-half
months at December 31, 1997, respectively.

      The  estimated  fair  value  amounts  have  been  determined  by us  using
available market information and appropriate valuation  methodologies.  However,
judgment is required in  interpreting  market data to develop the  estimates  of
fair value.



                                       48
<PAGE>

5.  Long-Term Obligations

      At  December  31,  1998,  long-term  obligations  consist of  secured  and
unsecured  term  loans and  secured  borrowings  used to  acquire  property  and
equipment,  capital lease  arrangements  and a leasehold  improvement  financing
obligation.

      In May 1997,  we obtained a $5.0 million term loan to payoff  pre-existing
debt,  finance capital asset  acquisitions  and finance  continued  research and
clinical   development.   The  loan  is  payable  in  thirty-six  equal  monthly
installments and the interest rate is 14.58%. The lender was granted warrants to
purchase  200,000  shares  of  Common  Stock  at  $6.25  per  share,  which  are
exercisable  over a ten-year  period.  We have attributed a value of $648,000 to
these warrants.  This amount has been recorded as a discount on the related debt
and is being amortized as interest expense over the term of the loan.

      In June 1997, we issued $10.4 million of senior convertible notes, with an
original  maturity of August  2000.  Interest at 5.5% per annum on the notes was
payable  in  Common  Stock or cash at our  option.  Initially,  the  notes  were
convertible  into  Common  Stock  at 100%  of the low  trading  price  during  a
designated  time period prior to conversion  provided that the conversion  price
would not be less than $5.50 per share.  Starting  in November  1997,  the notes
were  convertible into Common Stock at a 10% discount from the low trading price
during a designated time period prior to the  conversion,  with a floor of $5.50
through March 31, 1998,  pursuant to a March 1998  amendment  agreement with the
note  holders  whereby  we issued to the note  holders  three-year  warrants  to
purchase an aggregate of 137,500  shares of Common Stock at an exercise price of
$7.50 per share as consideration for entering into the amendment  agreement.  We
have attributed a value of $309,000 to these warrants.  This amount was recorded
as a discount on the related debt and was amortized as interest expense over the
term of the loan.  Of the notes  issued,  $400,000  was issued to the  placement
agent as part of the placement  fee. We paid the  placement  agent an additional
$300,000  in cash.  The  placement  fees and  other  offering  costs  have  been
capitalized  in other assets as deferred  issuance  costs and were  amortized to
interest  expense  over the life of the notes to the  extent  the notes were not
converted to Common Stock. The net proceeds totaled  approximately  $9.5 million
after the placement agent's fees and other offering expenses. In connection with
the  issuance of the notes,  we  recognized  a non-cash  charge in the amount of
$3,692,000,  representing the value  attributed to the  in-the-money  conversion
feature of the senior convertible notes.

      Through December 9, 1998, an aggregate  principal balance of approximately
$5.6  million of senior  convertible  notes was  converted  into an aggregate of
2,571,252  shares of common  stock.  On December 10, 1998, we issued to the note
holders an aggregate of 4,784 shares of our Series D Convertible Preferred Stock
in exchange for the  cancellation  of an  aggregate  of $4.8 million  (including
accrued interest) of the notes.

      Equipment  borrowings  totaled $0 and  $401,555 at  December  31, 1998 and
1997, respectively.  The borrowings carried interest at rates ranging from 10.7%
to 12.75% at December 31, 1997, were secured by the equipment acquired, and were
payable  in monthly  installments  ranging  from  $10,000  to  $156,000  through
December 1998.

      We also acquired certain equipment and furniture pursuant to capital lease
arrangements.  The gross  amount of  equipment  and  furniture  and the  related
accumulated  amortization recorded under capital leases included in property and
equipment are as follows:

<TABLE>
<CAPTION>
                                                   1998           1997
                                               ------------    ------------
<S>                                            <C>             <C>
             At December 31,
               Equipment and furniture         $ 2,401,286     $ 1,890,164
               Less accumulated amortization    (1,668,460)     (1,354,475)
                                               ------------    ------------
                                               $   732,826     $   535,689
                                               ============    ============
</TABLE>

      Amortization  of assets  acquired  under  capital  leases is  included  in
depreciation and amortization expense.



                                       49
<PAGE>

      In connection with the facility lease described in Note 6, we entered into
an agreement  with the former  tenant of the  facility to acquire  approximately
$1.5  million of tenant  improvements  by making  annual  payments to the former
tenant,  including  accrued  interest of $540,000 in 1999 through 2002. The 1998
payment was not paid until January 1999.

Fair  Value of  Long-Term  Obligations

      The  fair  values  of  our  long-term   obligations  are  estimated  using
discounted  cash flow analyses based on our current  incremental  borrowing rate
for similar  types of  borrowing  arrangements.  The  carrying  amounts and fair
values of long-term obligations consisted of the following at December 31, 1998:

<TABLE>
<CAPTION>
                                            Carrying Value        Fair Value
                                            --------------        ----------
<S>                                          <C>                  <C>
      Leasehold improvements financings      $ 2,032,045          $ 2,213,059
      Secured Loan                           $ 2,724,189          $ 2,414,913

</TABLE>

      The carrying  value of our term loan  approximates  our fair value because
the interest rates on the note takedowns are periodically reset.

      At December 31, 1998,  future  payments on  long-term  obligations  are as
follows:

<TABLE>
<CAPTION>
                                                         Leasehold
                              Secured        Capital     Improvement
                               Loan          Leases      Financing       Total
                            -----------     --------     ------------    -----
<S>                       <C>              <C>          <C>          <C>

   1999                      $1,893,219    $ 257,889    $1,080,000   $3,231,108
   2000                         830,970      281,333       540,000    1,652,303
   2001                               -      270,635       540,000      810,635
   2002                               -       60,673       540,000      600,673
   2003                               -            -             -            -
                            -----------   ----------   -----------  -----------
   Total minimum payments    $2,724,189    $ 870,530    $2,700,000   $6,294,719
   Less amount representing
     interest (at rate
     ranging from 9.5%
     to 12.0%)                        -     (119,766)     (667,955)    (787,721)
                            -----------   ----------   -----------  -----------
                             2,724,189       750,764     2,032,045    5,506,998
   Less current
     installments           (1,893,219)     (219,232)     (691,410)  (2,803,861)
                            -----------   ----------   -----------  -----------
   Long-term obligations,
     excluding current
     installments            $ 890,970     $ 531,532    $1,340,635   $2,703,137
                            ===========   ==========   ===========   ==========

</TABLE>

6.   Commitments and Contingencies

      We  lease  our  research  and  office  facility  in South  San  Francisco,
California under a noncancellable agreement expiring 2003, with options to renew
for a total of ten years.  We are  required to pay  operating  costs,  including
property taxes, utilities, insurance and maintenance.

      At December 31, 1998, the minimum  noncancellable  future rental  payments
under our operating leases are:

<TABLE>
<CAPTION>
<S>                      <C>       <C>
                         1999      $ 1,210,837
                         2000        1,544,555
                         2001        1,590,892
                         2002        1,638,618
                         2003          281,296
                                  ------------
                                   $ 6,266,198
                                  ============
</TABLE>



                                       50
<PAGE>

      Rent expense for each of the three years ended December 31, 1998, 1997 and
1996 was approximately $1,189,000 $1,154,000 and $1,348,000, respectively.

      We are involved in a litigation  and disputes  which are incidental to our
business.  While it is not possible to predict or determine  the outcome of such
litigation and disputes,  or to provide an estimate of the losses,  if any, that
may arise,  we believe the costs  associated  with all of these actions will not
have a material effect on our consolidated financial position or liquidity,  but
could possibly be material to the consolidated results of operations.

      Further,  product  liability claims may be asserted in the future relative
to  events  not known to  management  at the  present  time.  We have  insurance
coverage which we believe is adequate to protect against such product  liability
losses as could materially affect our financial position.

7.  Contractual Agreements

      We have entered into license,  clinical trial and supply  agreements  with
universities,  research organizations and commercial companies. Certain of these
agreements  require payments of royalties on future sales of resulting  products
and may subject us to minimum  annual  payments  to our  contract  partners.  In
addition,  we signed an  agreement  in 1995 which could result in the payment of
milestone  installments if certain development objectives are achieved. To date,
payments under these  agreements have not been  significant and, at December 31,
1998, related noncancellable commitments are immaterial.

8. Stockholders' Equity

Preferred Stock

      We are  authorized to issue  1,000,000 shares of preferred  stock (519,533
shares of which are issued and  outstanding at December 31, 1998).  Our Board of
Directors may set the rights and privileges of any preferred stock issued.

      On December 10, 1998, we and certain institutional  investors exchanged an
aggregate of $4.8 million (including accrued interest) of the Senior Convertible
Notes (the "Notes") for an aggregate of 4,784 shares of our Series D Convertible
Preferred Stock. Each share of Series D Convertible  Preferred Stock is entitled
to receive,  when,  as, and if declared by the Board of  Directors  out of funds
legally available for such purpose,  cumulative dividends at the rate of $55 per
annum.  Dividends on the Series D Preferred  Stock are payable in cash or shares
of our Common Stock or any  combination  of cash and shares of Common Stock,  at
our option and are payable quarterly on February 1, May 1, August 1 and November
1 of each year. Each share of Series D Preferred  Stock is  convertible,  at any
time,  into Common Stock at the lesser of (a) $1.125 per share or (b) 90% of the
low trading price during a designated  time period prior to the  conversion.  In
addition,  the holders  received an  aggregate  of 767,469  warrants to purchase
additional  shares of Common Stock in exchange for  surrendering  the redemption
rights previously held by them under the Notes. The warrants were priced at 150%
of the average  closing price for the month of December 1998. We have attributed
a value of $943,680 to these  warrants.  In connection  with the issuance of the
Series D Preferred  Stock, we also recognized a non-cash charge in the amount of
$1,063,605,  representing the value  attributed to the  in-the-money  conversion
feature of the Series D Preferred Stock.

      The  delisting  of our  Common  Stock  from  The  Nasdaq  National  Market
constituted  an  Optional  Redemption  Event (as defined in the  Certificate  of
Designation of Series D Preferred  Stock) for the Series D Preferred  Stock.  In
connection  therewith,  on  February  4,  1999,  we issued a Control  Notice (as
defined in the  Certificate  of  Designation  of Series D Preferred  Stock) that
prevented the  redemption of the Series D Preferred  Stock.  This Control Notice
will  remain in  effect  for as long as we are not  listed on any of The  Nasdaq
National Market,  The Nasdaq SmallCap Market, the American Stock Exchange or the
New York  Stock  Exchange.  Delivery  of the  Control  Notice  had the effect of
increasing  the annual  dividend to $180 per share and adjusting the  conversion
price of the Series D Preferred Stock to 80% of the amount the conversion  price
would otherwise be.



                                       51
<PAGE>

      In October 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. Each share of Series C Preferred Stock is entitled to
receive cumulative dividends paid semi-annually to the holders of record of such
shares as follows: (i) an annual  stock-on-stock  dividend,  paid in arrears, in
shares of Common Stock  (calculated  as the quotient of $10.00 divided by 85% of
the average  closing  price of the Common  Stock for the 10-day  trading  period
ending three  trading days prior to the date the dividend is paid);  plus (ii) a
cash amount equaling 0.00005% of our U.S. net sales of our SP-303/Provir product
for the treatment of diarrhea,  if any, for the preceding two calendar  quarters
less $5.00. If, under Delaware law, we are unable to pay the cash portion of the
dividends,  then the cash portion will be paid 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). We intend to honor this royalty portion of the dividend  through the sale
of our first  botanical  product,  if any.  Each share of the Series C Preferred
Stock was  convertible for a period of 30 days after the first issuance and will
be  convertible  again  commencing  12 months  after the initial  issuance  date
(August 18, 1998) at the election of each holder, and automatically on the sixth
anniversary  of the initial  issuance date into greater of (a) 16.6667 shares of
Common  Stock or (b) such  number of shares of Common  Stock as equals $100 (the
price paid per share of Series C Preferred  Stock) divided by 85% of the average
closing  price of the Common  Stock  reported  by Nasdaq for the 10-day  trading
period  ending three  trading days prior to the date of  conversion.  The Common
Stock is currently trading on the OTC Bulletin Board.  During the initial 30-day
conversion period for the Series C Preferred Stock,  24,922 shares of the Series
C Preferred Stock were converted into an aggregate of 1,861,550 shares of Common
Stock.  In  connection  with the  issuance of the Series C Preferred  Stock,  we
recognized a non-cash charge in the amount of $678,636.

     In June 1998, we entered into Stock Purchase Agreements with certain of our
stockholders  (the "Buyers")  pursuant to which we acquired the right to sell to
the Buyers,  subject to certain conditions up to an aggregate of 7,000 shares of
Series B Custom  Convertible  Preferred Stock for an aggregate purchase price of
$7,000,000.  The Stock Purchase  Agreements  were terminated upon the closing of
the  Series  C  Convertible  Preferred  Stock  Financing  in  October  1998.  As
consideration for entering into the Stock Purchase Agreements,  we issued to the
Buyers warrants to purchase an aggregate of 350,000 shares of Common Stock.  The
warrants  are  exercisable  for a period of five years at an exercise  price per
share  equal to 115% of the average  trading  price of the Common  Stock  during
specified  measurement  periods.  We have  attributed a value of $1.5 million to
these warrants.

      In July 1996, we closed a private placement pursuant to Regulation S under
the Securities  Act of 1933, as amended,  in which it received gross proceeds of
$3.3 million for the sale of 400,000  shares of Series A  Convertible  Preferred
Stock and for the issuance of a six-year  warrant to purchase  550,000 shares of
Common Stock at an exercise price of $10.18 per share.  The Preferred Stock does
not carry a dividend obligation and will convert into Common Stock no later than
July 23, 1999 at a price per share  between  $6.00 and $8.15,  depending  on the
market value of Common Stock during the period prior to  conversion.  The holder
of preferred shares is entitled to a liquidation preference of $8.15 per share.

Common Stock

      In December  1992,  we adopted the 1992 Stock  Option Plan ("the Plan") as
the successor plan to our 1990 Stock Option Plan. The Plan will terminate on the
earlier  of  December  31,  2002 or the date on which all shares  available  for
issuance under the Plan have been issued or canceled.  The Plan provides for two
separate  components:  the Discretionary  Option Grant Program and the Automatic
Option Grant Program.

      Under the Discretionary  Option Grant Program,  options granted may either
be incentive options or non-statutory options.  Incentive options may be granted
to  employees  at a price not less than the fair market value of Common Stock on
the grant date.  Non-statutory  options may be granted at a price  determined by
the plan administrator.  Each option granted is exercisable as determined by the
plan  administrator,  with a term not to exceed ten years.  The Plan also allows
for the granting of options with repurchase rights and stock appreciation rights
at the discretion of the plan administrator.

      Under the Automatic  Option Grant Program,  each  individual who becomes a
non-employee  board  member  on or  after  the  effective  date  of the  Plan is
automatically  granted a non-statutory stock option to purchase 20,000 shares of
common stock. Further, each non-employee board member who has served as a member
for  at  least  six  months  prior  to  the  annual  stockholders'   meeting  is
automatically  granted an annual non-statutory stock option to purchase not more



                                       52
<PAGE>

than  7,500  nor  less  than  5,000  shares  of  common  stock,  depending  on a
calculation based on the average selling price of the common stock. The exercise
price of each option  granted is the fair value of the Common  Stock on the date
of grant. These options have a ten-year term and vest over 24 months.

      On  September  18,  1998,  the Plan  Administrator  implemented  an option
cancellation/regrant  program for all  employees of the Company,  including  our
executive officers.  Pursuant to that program,  each such employee was given the
opportunity  to surrender  his or her  outstanding  options  under the Plan with
exercise  prices in excess of $1.281 per share in return for a new option  grant
for the same  number of shares but with an  exercise  price of $1.281 per share,
the closing  selling  price per share of Common  Stock as reported on the Nasdaq
National Market on the September 18, 1998 grant date of the new option.  Options
for a total of 1,855,205 shares with a weighted average exercise price of $5.275
per share were surrendered for cancellation, and new options for the same number
of shares were granted with the $1.281 per share exercise  price.  To the extent
the higher-priced  option was exercisable for any option shares on the September
18, 1998 cancellation date, the new option granted in replacement of that option
will become  exercisable  for those shares in a series of twelve (12) successive
equal  monthly  installments  upon the  optionee's  completion  of each month of
service over the one (1) year period  measured from the September 18, 1998 grant
date. The option will become  exercisable for the remaining option shares in one
or more installments over the optionee's period of continued service,  with each
such installment to vest on the same vesting date in effect for that installment
under the cancelled higher-priced option.

      On  October  20,  1998,  the  Plan  Administrator  implemented  an  option
cancellation/regrant  program for the non-employee  Board members (excluding the
Plan  Administrator)  and certain key  independent  consultants  holding options
under the Plan. Pursuant to the October program,  each such individual was given
the opportunity to surrender his or her outstanding  options under the Plan with
exercise  prices in excess of $1.4375 per share in return for a new option grant
for the same number of shares but with an  exercise  price of $1.4375 per share,
the closing  selling  price per share of Common  Stock as reported on the Nasdaq
National  Market on the October  20, 1998 grant date of the new option.  Options
for a total of 584,639 shares with a weighted  average  exercise price of $6.123
per share were surrendered for cancellation, and new options for the same number
of shares were granted with the $1.4375 per share exercise  price. To the extent
the  higher-priced  option was  exercisable for any option shares on the October
20, 1998 cancellation date, the new option granted in replacement of that option
will become  exercisable  for those shares in a series of twelve (12) successive
equal  monthly  installments  upon the  optionee's  completion  of each month of
service  over the one (1) year period  measured  from the October 20, 1998 grant
date. The option will become  exercisable for the remaining option shares in one
or more installments over the optionee's period of continued service,  with each
such installment to vest on the same vesting date in effect for that installment
under the cancelled higher-priced option.

      Both programs provide for automatic acceleration of the exercise period in
the event of certain corporate  transactions,  including a merger, asset sale or
change in control of the Company.

      The 1990 Stock Option Plan  provided  for the  granting of  incentive  and
non-statutory stock options. Both types of options were immediately  exercisable
and  expire ten years from the date of grant.  Vesting  of  optioned  shares was
determined  by the board of  directors  and  generally  occurred  over a two- to
four-year  period from the date of grant.  At December 31, 1998,  all options to
purchase Common Stock issued under this plan were vested.



                                       53
<PAGE>

      A summary of stock option activity is as follows:

<TABLE>
<CAPTION>

                                     Options Outstanding
                             --------------------------------------------------
                                                         Weighted      Weighted
                                                         Average        Average
                              Number      Price Per      Exercise    Fair Value
                             of Shares     Share         Price         At Grant
                                                                        Date
                             ---------   ------------    ---------   ----------
<S>                         <C>           <C>               <C>       <C>
Balance at
   December 31, 1996        2,101,976     $.06--$13.25      $5.48
  Granted at fair value       951,400     4.13--  6.81       5.41        $3.46
  Exercised                   (19,472)     .24--  5.88       3.29
  Forfeited                  (242,299)    3.50-- 13.25       6.40
                           -----------
Balance at
   December 31, 1997        2,791,605       .06--13.25       5.40
  Granted at fair value     4,420,244      1.28-- 4.94       1.48        $1.49
  Exercised                   (15,841)     0.06-- 3.50       0.37
  Forfeited                (2,782,587)     1.28--13.25       5.54
                          -----------
Balance at
   December 31, 1998        4,413,421       .06--10.75      $1.41
                          ===========
</TABLE>

      At December 31, 1998,  607,719 shares under options were  exercisable at a
weighted  average  exercise  price of $1.66 per share  (1,310,036  shares  under
options were exercisable at a weighted average exercise price of $5.25 per share
at December 31, 1997). A stock option grant of 1,500,000  shares of Common Stock
granted  on  September  18,  1998 at an  exercise  price of $1.281 per share was
pending stockholder approval.

   The  following   table   summarizes   information   regarding  stock  options
outstanding at December 31, 1998:

<TABLE>
<CAPTION>

                              Weighted                     Shares under Options
                               Average                        Exercisable at
             Option Shares   Contractual     Weighted         December 31, 1998
  Range of    Outstanding at   Remaining     Average       ---------------------
  Exercise    December 31,       Life        Exercise           Weighted Average
  Prices         1998          (Years)        Price     Number    Exercise Price
  ---------  --------------  -------------  ----------  -------   --------------
<S>    <C>        <C>             <C>          <C>       <C>          <C>
  $0.06 - $1.50   4,195,223       9.36         $1.27     532,581      $ 1.04
   2.03 -  3.63     145,500       9.32          2.64      23,542        3.52
   4.13 -  5.38      25,417       8.87          5.01      13,231        5.03
   6.38 -  8.13      37,241       7.81          7.04      28,325        7.13
  10.50 - 10.75      10,040       4.00         10.50      10,040       10.50
                 ----------                             --------
 $ 0.06 -$10.75   4,413,421       9.33         $1.41     607,719      $ 1.66
                 ==========                             ========
</TABLE>


      For certain  options  issued during the years ended  December 31, 1993 and
1994, we recorded deferred  compensation for the difference between the exercise
price  and the fair  market  value of  Common  Stock at the date of  grant.  For
certain  additional  options issued during the years ended December 31, 1997 and
1998 to non-employees,  we recorded deferred  compensation  expense for the fair
value of the options at the date of grant. Deferred compensation is amortized to
expense on a straight-line basis over the vesting period of the options.

Pro Forma Information

      We have  elected to follow  Accounting  Principles  Board  Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25"), and related interpretations
in accounting for our employee stock options  because,  as discussed  below, the
alternative  fair value  accounting  provided for under SFAS 123 requires use of
option  valuation  models that were not  developed  for use in valuing  employee
stock  options.  Under APB 25,  because the exercise price of our employee stock
options equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.


                                       54
<PAGE>

      Pro  forma  information  regarding  net loss  and net  loss  per  share is
required by SFAS 123, and has been  determined  as if we had  accounted  for our
employee  stock options  granted  subsequent to December 31, 1994 under the fair
value method of SFAS 123. The fair value for these  options was estimated at the
date of grant using the  Black-Scholes  option pricing model.  The following are
the  weighted-average   assumptions  for  1998,  1997  and  1996,  respectively:
risk-free  interest  rates  of  4.57%,  6.27%  and  5.73%;  no  dividends  paid;
volatility  factors of the  expected  market  price of Common Stock of .75 and a
weighted-average  expected life of the options of 3.84, 5.0 and 3.85 years.  The
effects of applying FAS 123 for recognizing  compensation  expense and providing
pro forma disclosures in 1998, 1997 and 1996 are not likely to be representative
of the effects on reported net income in future years.

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

      For purposes of pro forma  disclosures,  the  estimated  fair value of the
options is amortized to pro-forma  net loss over the options'  vesting  periods.
Our pro forma  information  follows (in thousands  except for net loss per share
information):

<TABLE>
<CAPTION>
                                             1998         1997         1996
                                          ---------     ---------    ---------
<S>                                        <C>          <C>          <C>
          Net loss applicable to
            Common Stockholders
              Historical                   $(38,524)    $(29,289)    $(18,790)
              Pro forma                    $(40,734)    $(31,101)    $(20,280)
          Net loss per common share
              Historical                   $  (1.92)    $  (1.72)    $  (1.39)
              Pro forma                    $  (2.03)    $  (1.83)    $  (1.50)

</TABLE>

Reserved Shares

      At December 31, 1998,  7,735,623  shares of Common Stock were reserved for
conversion  of  outstanding  preferred  stock and for issuance  upon exercise of
outstanding  options,  warrants  and options  available  for future  grant.  The
reserved  shares  excluded shares issuable upon conversion of Series C Preferred
Stock and 2,903,785 shares issuable upon exercise of the Company's stock options
which are exercisable after May 31, 1999.

Warrants

      A summary of outstanding warrants to purchase Common Stock at December 31,
1998 is as follows:

<TABLE>
<CAPTION>
                               Number of    Exercise      Term
            Description        Warrants       Price      in Year    Expiration
            -----------        --------    ---------     -------    ----------
<S>                           <C>        <C>               <C>     <C>
       Lease financing
         arrangements           91,706   $2.40 - $10.83    5 - 7    2000 - 2002
       Series A Convertible
         Preferred Stock       550,000   $10.184             6         2002
       Secured term loan       200,000   $6.25              10         2007
       Senior convertible
         notes                 137,500   $7.50               3         2001
       Series B Convertible
         Preferred Stock       350,000   $2.65 - $4.82       5         2003
       Series D Convertible
         Preferred Stock       767,469   $3.07               5         2003
                             ---------
                             2,096,675
</TABLE>



                                       55
<PAGE>

9.  Taxes

      As of December 31, 1998, we had federal net operating  loss  carryforwards
of approximately $141.2 million. The net operating loss and credit carryforwards
will expire at various  dates  beginning  in 2004  through  2013,  if not sooner
utilized.

      Deferred income taxes reflect the net tax effects of temporary differences
between the carrying  amounts of assets and liabilities for financial  reporting
and the amounts used for income tax purposes.

      Significant  components  of our  deferred tax assets and  liabilities  for
federal and state income taxes as of December 31, 1998, and 1997 are as follows:

<TABLE>
<CAPTION>
                                                      1998             1997
                                                  ------------     ------------
<S>                                               <C>             <C>
   Deferred tax assets:
     Net operating  loss carryforwards            $ 48,600,000    $  35,200,000
     Research credits (expiring  in 2004--2013)      3,900,000        2,800,000
     Capitalized research and development costs      6,400,000        4,700,000
     Other                                          (1,200,000)         400,000
                                                   ------------    ------------
         Total deferred tax assets                  57,700,000       43,100,000
      Valuation allowance for deferred tax assets  (57,700,000)     (43,100,000)
                                                   ------------    ------------
      Net deferred tax asset                      $          -    $           -
                                                  =============   =============

</TABLE>

      The net valuation  allowance  increased by $14.6  million  during the year
ended December 31, 1998.

      Utilization  of the net  operating  losses and credits may be subject to a
substantial annual limitation due to the "change in ownership" provisions of the
Internal  Revenue  Code  of  1986  and  similar  state  provisions.  The  annual
limitation  may result in the  expiration  of net  operating  losses and credits
before utilization.

Item 9.  Changes in and  Disagreements  with  Accountants  on  Accounting  and
Financial Disclosure

   Not applicable.

                                   PART III

Item 10.  Directors and Executive Officers of the Registrant

Identification of Directors and Executive Officers

      The  information  required by this Item 10  concerning  the  directors and
executive  officers  of the  Company  is  incorporated  by  reference  from  the
information  under the  captions  "Proposal  One --  Election  of  Directors  --
Information  With Respect to Nominees"  and  "Executive  Compensation  and Other
Information  -- Directors and Executive  Officers" in the our  Definitive  Proxy
Statement  to be  filed  with  the  Commission  pursuant  to  Regulation  14A in
connection with our 1999 Annual Meeting of Stockholders (the "Proxy Statement").

Compliance with Section 16(a) of the Securities Exchange Act of 1934

      The  information  required by this Item 10 as to  compliance  with Section
16(a) of the Securities  Exchange Act of 1934 is  incorporated by reference from
the  information  under  the  caption  "Compliance  with  Section  16(a)  of the
Securities Exchange Act of 1934" in the Proxy Statement.



                                       56
<PAGE>

Item 11.  Executive Compensation

      The information required by this Item 11 is incorporated by reference from
the information under the caption "Executive Compensation and Other Information"
in the Proxy Statement.

Item 12.  Security Ownership of Certain Beneficial Owners and Management

      The information required by this Item 12 is incorporated by reference from
the information under the caption "Security  Ownership of Management and Certain
Beneficial Owners" in the Proxy Statement.

Item 13.  Certain Relationships and Related Transactions

      In March  1996,  we loaned  to Dr.  Atul S.  Khandwala,  our  Senior  Vice
President,  Development and Chief  Regulatory  Officer,  the principal amount of
$268,000 in connection  with the purchase of his residence in the Bay Area.  The
loan bears interest at the minimum rate imputed by the Internal  Revenue Service
per annum.  Subject to Dr. Khandwala's  continued  employment,  the loan will be
forgiven  in a series  of  annual  installments  over the term of the  loan.  We
forgave $61,461 and $82,217 of such  indebtedness in fiscal years 1998 and 1997,
respectively.

     On June 17, 1998, we loaned $300,000 to John W.S. Chow, the Vice President,
Technical  Operations,  to reimburse him for a reasonable difference between the
purchase  price of his  residence  in the Bay  Area  and the cost of  comparable
housing in New Jersey,  his former state of residence.  The loan is evidenced by
his  promissory  note of the same date  which will  become due and  payable in a
series  of five  successive  equal  annual  installments,  with the  first  such
installment  due on June 25, 1999. The note will bear interest at a variable per
annum rate equal to the short-term  applicable  federal rate in effect under the
federal tax laws for January of each calendar year the loan remains outstanding.
Accordingly,  the  interest  rate in effect for the period Dr.  Chow's  note was
outstanding during the 1998 calendar year was 5.52%. Accrued and unpaid interest
will become due and payable each year on the same date the principal installment
for that year  becomes  payable.  Each  installment  of  principal  and  accrued
interest  will  automatically  be  forgiven  as that  installment  becomes  due,
provided Dr. Chow continues in our employ. However, the entire unpaid balance of
the note, together with all accrued and unpaid interest, will become immediately
due and payable upon Dr. Chow's  termination of employment with us prior to June
25, 2003, unless Dr. Chow's  employment is involuntarily  terminated by us other
than for cause.  In the event (i) we terminate  Dr.  Chow's  employment  for any
reason other than for cause or (ii) Dr. Chow's  employment  terminates by reason
of his death or disability,  then the entire principal  balance of the note plus
accrued interest will be forgiven. The amount outstanding on Dr. Chow's note was
approximately $308,700 as of December 31, 1998.

      Each of the foregoing loans was a result of arms length  negotiations with
the individuals involved.

      Additional  information  required  by  this  Item  13 is  incorporated  by
reference from the information  under the caption  "Executive  Compensation  and
Other Information -- Certain Relationships and Related Transactions" in the
Proxy Statement.



                                       57
<PAGE>

                                   PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a)   (1) Financial Statements

   The following  Financial  Statements  together with the Report of Independent
Auditors are filed as part of this Form 10-K under Item 8 above:

    Report of Independent Auditors

    Balance Sheets at December 31, 1998 and 1997

    Statements  of  Operations  for  each  of the  years ended December 31, 1998
    and 1997

    Statements of  Stockholders' Equity for each of the years ended December 31,
    1998, 1997 and 1996

    Statements  of Cash Flows for each of the years ended  December  31, 1998,
    1997 and 1996

    Notes to Financial Statements

(a)   (2) Financial Statement Schedules

    No financial  statement schedules are included because they are not required
    or the required information is included in the financial statements or notes
    thereto.

(b) Reports on Form 8-K

    (1)  A current Report on Form 8-K was filed on December 11, 1999 containing
    information required by Item 5, Other Events.

    (2)  A current Report on Form 8-K was filed on December 15, 1999 containing
    information required by Item 5, Other Events.



                                       58
<PAGE>


(c)  Exhibits

Exhibit No.                             Description
----------   -------------------------------------------------------------------
3.1(12)      Restated Certificate of Incorporation, as filed with the
             Delaware Secretary of State on June 3, 1997.
3.2(9)       Amended and Restated By-Laws, as amended March 29, 1996.
3.3(14)      Form of Certificate of Designations of Series B Custom
             Convertible Preferred Stock.
3.4(15)      Form of Certificate of Designations of Series C Convertible
             Preferred Stock.
3.5(15)      Form of Restated Certificate of Designation of Preferences of
             Series C Preferred Stock.
3.6(17)      Form of Certificate of Designation of Preferences of Series D
             Preferred Stock.
4.1(9)       Certificate  of  Designation  of  Preferences of Series A Preferred
             Stock of the  Registrant,  as filed with the Delaware  Secretary of
             State on July 27, 1996.
10.1(1)(19)  1990 Stock Option Plan, as amended.
10.2(1)(19)  401(k) Plan.
10.3(1)(19)  Form of Stock Purchase Agreement.
10.6(1)      Form of Indemnification Agreement.
10.8(1)      Form of Agreement with Scientific Strategy Team Members.
10.9(1)      Form of Proprietary Information and Inventions
             Agreement-Employees.
10.10(1)     Form of Proprietary Information and Inventions
             Agreement-Consultants.
10.12(1)(18) License Agreement dated February 8, 1990, between Shaman and
             Dr.  Michael Tempesta.
10.13(1)(18) Stock Purchase Agreement dated June 15, 1990, between Shaman and
             Lisa A. Conte.
10.17(1)     Master Equipment Lease Agreement dated December 26, 1990,
             between Shaman and Lease Management Services, Inc.
10.24(1)(18) Supply Agreement dated June 1, 1992.
10.29(1)     Registration  Rights  Agreement  dated October 22, 1992, as amended
             December 14, 1992,  between Shaman and certain holders of preferred
             stock of Shaman.
10.30(1)     Industrial  Lease Agreement  dated January 1, 1993,  between Shaman
             and Grand/Roebling Investment Company.
10.37(4)     Loan and Security  Agreement  dated  September  27,  1993,  between
             Shaman and Household Commercial of California.
10.39(4)     Common Stock Warrant dated September 30, 1993, issued to
             MMC/GATX Partnership No. I.
10.40(4)     Common  Stock  Warrant  dated  October  5,  1993,  issued  to Meier
             Mitchell & Co.
10.41(6)(18) Joint Research and Product Development Agreement, dated May 24,
             1995,  by and between Ono Pharmaceutical Co., Ltd. and
             Registrant.
10.41(a)(10) Amendment Agreement, dated December 4, 1996, to the Joint
             Research and Product Development Agreement by and between Ono
             Pharmaceutical Co.,  Ltd. and Registrant.
10.42(6)(18) License Agreement,  dated June 8, 1995, by and between Bayer AG and
             Registrant.
10.43(7)(18) Development  Agreement,  dated  January  11,  1996,  by and between
             Abbott Laboratories and Registrant.
10.47(9)(18) Subscription  Agreement  dated  July 25,  1996 by and  between  the
             Registrant and Fletcher International Limited.
10.48(10)(18)Joint Research and Product Development and Commercialization
             Agreement dated September 23, 1996, by and between Lipha,
             Lyonnaise Industrielle Pharmaceutique s.a. and the Registrant.
10.49(10)(18)Stock Purchase Agreement dated September 23, 1996, by and
             between Lipha, Lyonnaise Industrielle Pharmaceutique s.a. and
             the Registrant.
10.50(11)(19)Shaman Pharmaceuticals, Inc. 1992 Stock Option Plan (as Amended
             and Restated on February 14, 1997).
10.51(3)(19) Form of Notice of Grant with Stock Option Agreement.
10.52(3)(19) Form of Addendum to Stock Option Agreement (Special Tax Elections).



                                       59
<PAGE>

10.53(3)(19) Form of Addendum to Stock Option Agreement (Limited Stock
             Appreciation Rights).
10.54(11)(19)Form of Non-Employee Director Automatic Stock Option Agreement.
10.55(12)    Masoprocol License Agreement, dated as of March 19, 1997, by and
             between Access Pharmaceuticals, Inc. and the Registrant.
10.56(12)(18)Amended and Restated Masopracol License Agreement, dated as of
             April , 1997, by and between Access Pharmaceuticals, Inc. and
             the Registrant.
10.57(12)    Loan  and  Security  Agreement,  dated as of May 7,  1997,  between
             MMC/GATX Partnership I and Registrant.
10.57A(12)   Amendment No. 1 to Loan and Security Agreement, dated as of June
             30,  1997, by and between Registrant and MMC/GATX Partnership
             No. I.
10.57B(15)   Waiver letter dated July 16, 1998, executed by Shaman
             Pharmaceuticals, Inc. and approved by MMC/GATX Partnership No. I
             as to the payment of dividends on the Series C Preferred Stock.
10.58(12)    Secured Promissory Note, dated May 16, 1997, issued in favor of
             MMC/GATX Partnership No. I.
10.59(12)    Warrant, granted May 7, 1997, in favor of MMC/GATX Partnership
             No. I.
10.60(12)    Amendment to Warrants, dated May 7, 1997, MMC/GATX Partnership
             No. I and Registrant.
10.61(12)    Engagement   Agreement,   dated  April  7,  1997,  by  and  between
             Registrant and Diaz & Altschul Capital, LLC.
10.62(12)    Amended Engagement  Agreement,  dated June 30, 1997, by and between
             Registrant and Diaz & Altschul Capital, LLC.
10.63(12)    Form of Note Purchase Agreement,  dated as of June 30, 1997, by and
             between Registrant and certain investors.
10.64(13)    Master Lease Agreement, dated September 15, 1997, between Shaman
             and Transamerica Business Credit Corporation, with related
             schedules.
10.65(13)    Amendment to Note Purchase Agreement, dated as of June 30, 1997, by
             and between Registrant and certain investors.
10.66(14)    Amendment  Agreement,  dated as of March 18,  1998,  by and between
             Registrant and certain investors.
10.67(14)    Form of Common Stock Purchase Warrant,  dated as of March 18, 1998,
             by and between Registrant and certain investors.
10.69(14)    Second  Amendment  Agreement,  dated  as of June 30,  1998,  by and
             between Registrant and certain investors.
10.70(17)    Exchange  Agreement,  dated as of December 10, 1998, by and between
             Registrant and certain entities.
10.71(19)    Common Stock Purchase Agreement dated as of November 18, 1998.
10.72(19)*   Employment Agreement dated as of April 1, 1998, by and between
             Registrant and John W.S. Chow
10.73(19)*   Promissory Note dated as of June 17, 1998, by and between
             Registrant and John W.S. Chow
10.74*       Development and Commercial Supply  Agreement,  dated as of December
             1, 1998, by and between Registrant and Nycomed Inc.
23.1*        Consent of Ernst & Young LLP, Independent Auditors.
24.1*        Power of Attorney (included under the caption "Signatures").
27*          Financial Data Schedule.

*   Filed herewith.

(1)  Incorporated   by  reference  to  exhibits   filed  with  the  Registrant's
     Registration  Statement on Form S-1,  File No. 33-55892  which was declared
     effective January 26, 1993.

(2)  Intentionally omitted.



                                       60
<PAGE>

(3)  Incorporated by reference to exhibits filed on July 23, 1993 with
     Registrant's Registration Statement on Form S-8, File No. 33-66450.

(4)  Incorporated by reference to exhibits filed on November 10, 1993 with
     Registrant's Registration Statement on Form S-1, File No. 33-71506.

(5)  Intentionally omitted.

(6)  Incorporated  by reference  to exhibits  filed with  Registrant's Quarterly
     Report on Form 10-Q for the quarter ended June 30, 1995, as amended.

(7)  Incorporated by reference to exhibits filed with Registrant's Annual Report
     on Form 10-K for the year ended December 31, 1995.

(8)  Intentionally omitted.

(9)  Incorporated  by reference  to exhibits  filed with Registrant's  Quarterly
     Report on Form 10-Q for the quarter ended June 30, 1996, as amended.

(10) Incorporated  by reference to exhibits  filed with  Registrant's  Quarterly
     Report on Form 10-Q for the quarter ended September 30, 1996, as amended.

(11) Incorporated by reference to exhibits filed on June 30, 1997 with
     Registrant's Registration Statement on Form S-8, File No. 333-30365.

(12) Incorporated by reference to exhibits filed with Registrant's
     Registration Statement on Form S-3, File No. 333-31843.

(13) Incorporated by reference to exhibits filed with Registrant's Annual Report
     on Form 10-K for the year ended December 31, 1997.

(14) Incorporated by reference to exhibits filed with Registrant's
     Registration Statement on Form S-3, File No. 333-49025.

(15) Incorporated by reference to exhibits filed with Registrant's
     Registration Statement on Form S-2, File No. 333-59053.

(16) Incorporated by reference to exhibits filed with Registrant's
     Registration Statement on Form S-3, File No. 333-67023.

(17) Incorporated  by  reference  to exhibits  filed on December  11, 1998 with
     Registrant's Current Report on Form 8-K.

(18) Confidential treatment has been granted with respect to certain portions of
     these agreements.

(19) Management contract or compensation plan.



                                       61
<PAGE>

                                  SIGNATURES

      Pursuant  to the  requirements  of Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

Dated: March 31, 1999                   SHAMAN PHARMACEUTICALS, INC.

                                        By: /s/ Lisa A.  Conte
                                              _______________________________
                                              Lisa A. Conte
                                              President, Chief Executive Officer
                                              and Chief  Financial Officer


                              POWER OF ATTORNEY

      KNOW ALL MEN BY THESE  PRESENTS,  that each person who  signature  appears
below constitutes and appoints jointly and severally,  Lisa A. Conte and G. Kirk
Raab,  or either  of them as his or her true and  lawful  attorneys-in-fact  and
agents, with full power of substitution and  resubstitution,  for him or her and
in his or her name, place and stead, in any and all capacities,  to sign any and
all  amendments  to this  Report on Form  10-K,  and to file the same,  with all
exhibits  thereto,  and  other  documents  in  connection  therewith,  with  the
Securities and Exchange  Commission,  granting unto said  attorneys-in-fact  and
agents,  and each of them,  full power and  authority to do and perform each and
every act and thing requisite and necessary to be done in connection  therewith,
as fully to all intents and  purposes as he might or could do in person,  hereby
ratifying and confirming all that said  attorneys-in-fact  and agents, or any of
them, or their or his substitute or substitutes,  may lawfully do or cause to be
done by virtue hereof.

      IN WITNESS  WHEREOF,  each of the  undersigned  has executed this Power of
Attorney as of the date indicated.

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

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


/s/Lisa A. Conte           President, Chief Executive Officer,    March 31, 1999
____________________       Chief Financial Officer and Director
Lisa A. Conte             (principal executive and financial officer)


/s/Adrian D. P. Bellamy    Director                               March 31, 1999
________________________
Adrian D.P. Bellamy


/s/Jeffrey Berg            Director                               March 31, 1999
______________________
Jeffrey Berg


/s/Herbert H. McDade, Jr.  Director                               March 31, 1999
______________________
Herbert H. McDade, Jr.


/s/G. Kirk Raab            Chairman of the Board                  March 31, 1999
______________________
G. Kirk Raab


/s/M. David Titus           Director                              March 31, 1999
_____________________
M. David Titus




                                       62
<PAGE>

                                  EXHIBIT INDEX

Exhibit No.                             Description
----------   -------------------------------------------------------------------
3.1(12)      Restated Certificate of Incorporation, as filed with the
             Delaware Secretary of State on June 3, 1997.
3.2(9)       Amended and Restated By-Laws, as amended March 29, 1996.
3.3(14)      Form of Certificate of Designations of Series B Custom
             Convertible Preferred Stock.
3.4(15)      Form of Certificate of Designations of Series C Convertible
             Preferred Stock.
3.5(15)      Form of Restated Certificate of Designation of Preferences of
             Series C Preferred Stock.
3.6(17)      Form of Certificate of Designation of Preferences of Series D
             Preferred Stock.
4.1(9)       Certificate  of  Designation  of  Preferences of Series A Preferred
             Stock of the  Registrant,  as filed with the Delaware  Secretary of
             State on July 27, 1996.
10.1(1)(19)  1990 Stock Option Plan, as amended.
10.2(1)(19)  401(k) Plan.
10.3(1)(19)  Form of Stock Purchase Agreement.
10.6(1)      Form of Indemnification Agreement.
10.8(1)      Form of Agreement with Scientific Strategy Team Members.
10.9(1)      Form of Proprietary Information and Inventions
             Agreement-Employees.
10.10(1)     Form of Proprietary Information and Inventions
             Agreement-Consultants.
10.12(1)(18) License Agreement dated February 8, 1990, between Shaman and
             Dr.  Michael Tempesta.
10.13(1)(18) Stock Purchase Agreement dated June 15, 1990, between Shaman and
             Lisa A. Conte.
10.17(1)     Master Equipment Lease Agreement dated December 26, 1990,
             between Shaman and Lease Management Services, Inc.
10.24(1)(18) Supply Agreement dated June 1, 1992.
10.29(1)     Registration  Rights  Agreement  dated October 22, 1992, as amended
             December 14, 1992,  between Shaman and certain holders of preferred
             stock of Shaman.
10.30(1)     Industrial  Lease Agreement  dated January 1, 1993,  between Shaman
             and Grand/Roebling Investment Company.
10.37(4)     Loan and Security  Agreement  dated  September  27,  1993,  between
             Shaman and Household Commercial of California.
10.39(4)     Common Stock Warrant dated September 30, 1993, issued to
             MMC/GATX Partnership No. I.
10.40(4)     Common  Stock  Warrant  dated  October  5,  1993,  issued  to Meier
             Mitchell & Co.
10.41(6)(18) Joint Research and Product Development Agreement, dated May 24,
             1995,  by and between Ono Pharmaceutical Co., Ltd. and
             Registrant.
10.41(a)(10) Amendment Agreement, dated December 4, 1996, to the Joint
             Research and Product Development Agreement by and between Ono
             Pharmaceutical Co.,  Ltd. and Registrant.
10.42(6)(18) License Agreement,  dated June 8, 1995, by and between Bayer AG and
             Registrant.
10.43(7)(18) Development  Agreement,  dated  January  11,  1996,  by and between
             Abbott Laboratories and Registrant.
10.47(9)(18) Subscription  Agreement  dated  July 25,  1996 by and  between  the
             Registrant and Fletcher International Limited.
10.48(10)(18)Joint Research and Product Development and Commercialization
             Agreement dated September 23, 1996, by and between Lipha,
             Lyonnaise Industrielle Pharmaceutique s.a. and the Registrant.
10.49(10)(18)Stock Purchase Agreement dated September 23, 1996, by and
             between Lipha, Lyonnaise Industrielle Pharmaceutique s.a. and
             the Registrant.
10.50(11)(19)Shaman Pharmaceuticals, Inc. 1992 Stock Option Plan (as Amended
             and Restated on February 14, 1997).
10.51(3)(19) Form of Notice of Grant with Stock Option Agreement.
10.52(3)(19) Form of Addendum to Stock Option Agreement (Special Tax
             Elections).
10.53(3)(19) Form of Addendum to Stock Option Agreement (Limited Stock
             Appreciation Rights).


                                       63
<PAGE>

10.54(11)(19)Form of Non-Employee Director Automatic Stock Option Agreement.
10.55(12)    Masopracol License Agreement, dated as of March 19, 1997, by and
             between Access Pharmaceuticals, Inc. and the Registrant.
10.56(12)(18)Amended and Restated Masopracol License Agreement, dated as of
             April , 1997, by and between Access Pharmaceuticals, Inc. and
             the Registrant.
10.57(12)    Loan  and  Security  Agreement,  dated as of May 7,  1997,  between
             MMC/GATX Partnership I and Registrant.
10.57A(12)   Amendment No. 1 to Loan and Security Agreement, dated as of June
             30,  1997, by and between Registrant and MMC/GATX Partnership
             No. I.
10.57B(15)   Waiver letter dated July 16, 1998, executed by Shaman
             Pharmaceuticals, Inc. and approved by MMC/GATX Partnership No. I
             as to the payment of dividends on the Series C Preferred Stock.
10.58(12)    Secured Promissory Note, dated May 16, 1997, issued in favor of
             MMC/GATX Partnership No. I.
10.59(12)    Warrant, granted May 7, 1997, in favor of MMC/GATX Partnership
             No. I.
10.60(12)    Amendment to Warrants, dated May 7, 1997, MMC/GATX Partnership
             No. I and Registrant.
10.61(12)    Engagement   Agreement,   dated  April  7,  1997,  by  and  between
             Registrant and Diaz & Altschul Capital, LLC.
10.62(12)    Amended Engagement  Agreement,  dated June 30, 1997, by and between
             Registrant and Diaz & Altschul Capital, LLC.
10.63(12)    Form of Note Purchase Agreement,  dated as of June 30, 1997, by and
             between Registrant and certain investors.
10.64(13)    Master Lease Agreement, dated September 15, 1997, between Shaman
             and Transamerica Business Credit Corporation, with related
             schedules.
10.65(13)    Amendment to Note Purchase Agreement, dated as of June 30, 1997, by
             and between Registrant and certain investors.
10.66(14)    Amendment  Agreement,  dated as of March 18,  1998,  by and between
             Registrant and certain investors.
10.67(14)    Form of Common Stock Purchase Warrant,  dated as of March 18, 1998,
             by and between Registrant and certain investors.
10.69(14)    Second  Amendment  Agreement,  dated  as of June 30,  1998,  by and
             between Registrant and certain investors.
10.70(17)    Exchange  Agreement,  dated as of December 10, 1998, by and between
             Registrant and certain entities.
10.71(19)    Common Stock Purchase Agreement dated as of November 18, 1998.
10.72(19)*   Employment Agreement dated as of April 1, 1998, by and between
             Registrant and John W.S. Chow
10.73(19)*   Promissory Note dated as of June 17, 1998, by and between
             Registrant and John W.S. Chow
10.74*       Development and Commercial Supply  Agreement,  dated as of December
             1, 1998, by and between Registrant and Nycomed Inc.
23.1*        Consent of Ernst & Young LLP, Independent Auditors.
24.1*        Power of Attorney (included under the caption "Signatures").
27*          Financial Data Schedule.

*   Filed herewith.

(1)  Incorporated   by  reference  to  exhibits   filed  with  the  Registrant's
     Registration  Statement on Form S-1,  File No. 33-55892  which was declared
     effective January 26, 1993.

(2)  Intentionally omitted.

(3)  Incorporated by reference to exhibits filed on July 23, 1993 with
     Registrant's Registration Statement on Form S-8, File No. 33-66450.



                                       64
<PAGE>

(4)  Incorporated by reference to exhibits filed on November 10, 1993 with
     Registrant's Registration Statement on Form S-1, File No. 33-71506.

(5)  Intentionally omitted.

(6)  Incorporated  by reference  to exhibits  filed with  Registrant's Quarterly
     Report on Form 10-Q for the quarter ended June 30, 1995, as amended.

(7)  Incorporated by reference to exhibits filed with Registrant's Annual Report
     on Form 10-K for the year ended December 31, 1995.

(8)  Intentionally omitted.

(9)  Incorporated  by reference  to exhibits  filed with Registrant's  Quarterly
     Report on Form 10-Q for the quarter ended June 30, 1996, as amended.

(10) Incorporated  by reference to exhibits  filed with  Registrant's  Quarterly
     Report on Form 10-Q for the quarter ended September 30, 1996, as amended.

(11) Incorporated by reference to exhibits filed on June 30, 1997 with
     Registrant's Registration Statement on Form S-8, File No. 333-30365.

(12) Incorporated by reference to exhibits filed with Registrant's
     Registration Statement on Form S-3, File No. 333-31843.

(13) Incorporated by reference to exhibits filed with Registrant's Annual Report
     on Form 10-K for the year ended December 31, 1997.

(14) Incorporated by reference to exhibits filed with Registrant's
     Registration Statement on Form S-3, File No. 333-49025.

(15) Incorporated by reference to exhibits filed with Registrant's
     Registration Statement on Form S-2, File No. 333-59053.

(16) Incorporated by reference to exhibits filed with Registrant's
     Registration Statement on Form S-3, File No. 333-67023.

(17) Incorporated  by  reference  to exhibits  filed on December  11, 1998 with
     Registrant's Current Report on Form 8-K.

(18) Confidential treatment has been granted with respect to certain portions of
     these agreements.

(19) Management contract or compensation plan.



                                       65
<PAGE>


                                                                    EXHIBIT 23.1





CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS



We consent to the  incorporation  by  reference in the  Registration  Statements
(Form  S-8  No.  33-66450,  No.  33-93938,  No.  333-09169  amd  No.  333-30365)
pertaining  to the  Company's  1992  Stock  Option  Plan,  in  the  Registration
Statements (Form S-3, No. 333-49025,  No. 333-67023) pertaining to the Company's
Common  Stock  and  in the  Registration  Statement  Form  S-2  (No.  333-61261)
pertaining to the Company's  Series C Convertible  Preferred Stock of our report
dated  February 11, 1999,  with respect to the  financial  statements  of Shaman
Pharmceuticals,  Inc.  included  in the Annual  Report  (Form 10-K) for the year
ended December 31, 1998.


                                                       ERNST & YOUNG, LLP

Palo Alto, California
March 31, 1999


                                       66
<PAGE>




                                                               EXHIBIT 10.72(19)

March 30, 1998


John Wing-Sun Chow, Ph.D.
19 Pleasant Place
North Brunswick, NJ 08902


Dear John:

It is with great  pleasure  that  Shaman  Pharmaceuticals,  Inc.  offers you the
position of Vice President,  Product  Development and  Manufacturing,  reporting
directly to Lisa A. Conte,  President & Chief Executive  Officer.  The effective
date of your employment is expected to be on or around May 1, 1998.

Your  starting  salary  will be $165,000  per annum,  payable  semi-monthly,  in
arrears. In addition,  you will be eligible for the Executive Bonus Plan. Shaman
will grant you an option to  purchase  50,000  shares of Common  Stock under the
company's  employee  stock option  program.  Following six month cliff  vesting,
these  options  vest  monthly  over four years 20% vesting in years 1 and 2, 30%
vesting in years 3 and 4. The detailed  terms of the option and vesting schedule
will be set forth in the  company's  stock option plan  agreement.  In addition,
Shaman agrees to grant you an additional 15,000 shares of Common Stock under the
Company's  employee  stock option  program.  These shares will vest 7,500 end of
year  three and 7,500 end of year  four.  The  stock  option  grants  will be an
incentive  stock option and have a ten year term.  Both stock option grants are
contingent  upon approval by the company's  Board of Directors,  the approval of
which we would anticipate occurring at their next scheduled meeting.

This offer includes a relocation  package to assist with your  transition to the
Bay Area. This includes a $10,000 sign on bonus which will be payable  following
your first 30 days of employment.  Shaman agrees to pay the closing costs on the
sale of your home in New Jersey as well as the  non-recurring  closing  cost on
your purchase of a new home in the Bay Area in an amount not to exceed  $25,000.
The sign on bonus and closing  costs are repayable to Shaman,  prorated,  should
you resign from the Company within two years of your date of hire.

In addition, Shaman will provide you with $300,000 eight year forgivable loan to
reimburse  you  for a  reasonable  difference  in the  purchase  price  of  your
residence  here in the Bay Area.  The loan will be  interest  bearing.  The loan
interest rate will be the midterm adjusted  applicable  Federal rate for deemed
demand  loans.  Both  loan  and  accrued  interest  will be  forgiven  in equal
installments  over eight years as long as you remain employed by Shaman at least
five  years.  If you  terminate  from Shaman  before  five  years,  the loan and
interest become immediately due and payable.  If you terminate from Shaman after
five years, the remaining balance of the loan and interest will be forgiven over
the remaining time of the eight year period.  The loan and accrued interest will
be completely  forgiven  should Shaman terminate your employment for any reason.
The loan and accrued interest will be taxable according to the current tax law.

This offer  includes  reasonable  moving  expenses  to relocate  your  household
furnishings to the Bay Area, in an amount not to exceed $20,000,  as long as you
coordinate all activities  through our travel  consultant.  In addition,  Shaman
agrees to pay for two house hunting trips for you and your spouse. Shaman agrees
to pay for your  flight  expenses  to visit  your  family or for your  family to
travel to visit you once a month,  for up to  twelve  months.  To assist in your
search for  housing,  Shaman  will  provide  you with a  furnished  two  bedroom
apartment  for up to 4 months,  not to exceed  $2,500  per month.  In  addition,
Shaman will provide you with executive relocation consulting services.

You are also eligible to participate in  the company's Employee Benefits program
which  includes  four weeks paid  vacation,  medical and dental  coverage,  life
insurance,  long term disability benefits and a 401(k) plan. Benefit coverage is
effective on your first day of employment.  Details of the coverage and benefits
will be outlined for you upon employment.

While we expect  that our  relationship  will be long and  mutually  beneficial,
please be aware that the duration of your employment  will be for an unspecified
term.  In  addition,  you are an  at-will  employee  and you  may  resign  or be
terminated at any time either with or without  notice and with or without cause.
Should you decide to leave the company for any reason,  you agree to provide the
Company with three months notice.

In the event that the  Company  decides to  terminate  your  employment  for any
reason,  except for cause (for  definition  see section 5e. of the Shaman  Stock
Option  Agreement)  prior to May 1, 2001,  we agree to continue your base salary
plus  benefits on a monthly  basis for up to six months or until you obtain near
full-time  employment  or  consulting  of at least 80% of your time,  which ever
occurs sooner.

The Immigration Reform and Control Act makes it unlawful for an employer to hire
an  individual  who is not  authorized to work in the United  States.  You will,
therefore,  be required to present documentation on your first day to prove your
employment  authorization  and  identity.  If you have any  questions  regarding
acceptable  documentation,   please  call  our  Human  Resources  department  at
650-266-7435.

Please  confirm  your  acceptance  of this offer by signing  and  returning  the
original letter to our Human Resource  Department,  attention of Gina Morhun.  A
copy is enclosed for your own records. This offer expires on Wednesday, April 1,
1998.

We look forward to having you join us at Shaman.  As you know we are entering an
exciting  growth  phase,  and we are  certain  that you will make a  significant
contribution to our success.


Sincerely,                               Sincerely,

/s/ Gina D. Morhun                       /s/ Lisa A. Conte
-------------------------------          ----------------------------------
Gina D. Morhun                           Lisa A. Conte
Vice President, Human Resources          President & Chief Executive Officer


                                         I understand and accept this offer

                                         /s/ John Wing-Sun Chow
                                         -----------------------
                                         John Wing-Sun Chow

                                         April 1, 1998
                                         -------------


<PAGE>


                                                               EXHIBIT 10.73(19)


                                 PROMISSORY NOTE
                          PAYABLE ON A DESIGNATED DATE


$300,000                                         South San Francisco, California

           1. For value received,  the undersigned  ("Maker") promises to pay to
Shaman  Pharmaceuticals,  Inc.  ("Payee"),  or order, at its offices at 213 East
Grand  Avenue,  South San  Francisco,  California,  the  principal  sum of Three
Hundred  Thousand  Dollars  ($300,000),  together  with  interest  at  the  rate
hereinafter  provided  for on the unpaid  balance of this note from time to time
outstanding until paid in full.

           2. Interest shall accrue at the annual adjusted short-term Applicable
Federal  Rate (AFR) for  January of each year  payment of  principal  is due, as
referenced  in Table 1 in the CCH-EXP,  Tax Rates and Tables P. 430,  Applicable
Federal Rates Part 01 OP 02, per annum on the unpaid and  outstanding  principal
balance  of this  note  commencing  on the  date  hereof  and  continuing  until
repayment of this note in full.

           3.   Principal shall be payable as follows:
<TABLE>
<CAPTION>

                       Date         Principal Amount
                   -------------    ----------------
<S>                <C>                  <C>
                   June 25, 1999        60,000.00
                   June 25, 1999        60,000.00
                   June 25, 2000        60,000.00
                   June 25, 2001        60,000.00
                   June 25, 2002        60,000.00
                   June 25, 2003        60,000.00

</TABLE>

Accrued  interest to the date of payment  shall be payable  with each  principal
payment.

           4. Notwithstanding the terms of the preceding paragraph, Payee agrees
to forgive  each  payment of  principal  and  interest due as set forth above in
paragraph 3 provided  Maker is employed by Payee on the date that the payment is
due.

           5. The  entire  principal,  together  with  accrued  interest,  shall
immediately become due and payable in the following circumstances:

              (a)  In the event that Maker terminates his employment with Payee
                   prior to June 25, 2003, for any reason other than those
                   listed in Paragraph 5(b) and 5(c)of this Promissory Note; and

              (b)  In the event that Payee terminated Maker's employment for
                   cause, as defined in Section 5c of the Shaman Stock Option
                   Agreement, prior to June 25, 2003.

           6. The entire  principal,  together with accrued  interest,  shall be
completely forgiven by Payee in the following circumstances:

              (a)  In the event that Maker's employment at Payee is terminated
                   for any reason by Payee, except for cause, as defined  in
                   Section 5e of the Shaman Stock Option Agreement;

              (b)  In the event that Maker dies; and

              (c)  In the even that Maker, owing to disability,  in the sole
                   opinion  of Payee,  can no longer perform the essential
                   functions of his position.

           7. Maker shall make all  payments  hereunder to Payee in lawful money
of the united States and in immediately available funds.

           8. Maker  waives  presentment,  demand,  notice of  demand,  protest,
notice of protest  or notice of  nonpayment  in  connection  with the  delivery,
acceptance,  performance, default or enforcement of this note or of any document
or instrument evidencing any security for payment of this note.

           9.  Failure  at any  time to  exercise  any of the  rights  of  Payee
hereunder  shall not  constituted a waiver of such rights and shall not be a bar
to exercise of any such rights at a later date. in the event of  commencement of
suit to enforce payment of this note, the prevailing  party shall be entitled to
receive the costs of collection including  reasonable  attorneys' fees and court
costs.

           10.  Nothing  contained  in this note shall be deemed to require  the
payment of interest or other  charges by Maker or any other  person in excess of
the amount which the Payee shall collect  moneys which are deemed to constituted
interest which would increase the effective interest rate to a rate in excess of
that  permitted  to by  charged  by  applicable  law,  all such  sums  deemed to
constitute  interest in excess of the legal rate shall be  credited  against the
principal  balance  of this  note  then  outstanding,  and any  excess  shall be
returned to Maker.

           11. Nothing in this Promissory Note shall be interpreted to alter the
employment  relationship between Maker and Payee, which remains, at all time, at
will.

           12.  The terms of this Promissory Note supersede any terms that are
inconsistent  or  to  the  contrary  in the letter  agreement between Shaman
Pharmaceuticals, Inc. and John Wing-Sun Chow, dated March 30, 1998.

           IN WITNESS  WHEREOF,  the undersigned has caused this promissory note
to be duly executed as of the date first written below.


Dated:   June 7, 1998                               JOHN WING-SUN CHOW

                                                    /s/ John Wing-Sun Chow
                                                    ----------------------




<PAGE>

                                                                   EXHIBIT 10.74


                         DEVELOPMENT & COMMERCIAL SUPPLY

                                    AGREEMENT



      THIS  AGREEMENT  entered  into  this 1st day  of  December  1998  by  and
between NYCOMED INC.,  doing business as Nycomed  Amersham,  with offices at 101
Carnegie   Center,   Princeton,   New  Jersey  08540   ("NYCOMED")   and  SHAMAN
PHARMACEUTICALS  INC.,  with  offices  at  213  East  Grand  Avenue,  South  San
Francisco, California 94080 ("SHAMAN").

      WHEREAS, NYCOMED and SHAMAN,  collectively referred to as (the "Parties"),
desire to establish mutually agreeable terms for the commercial supply of SP-303
by NYCOMED to SHAMAN.

      WHEREAS  SHAMAN has  provided  NYCOMED with  certain  process  information
relating to the manufacture of SP-303,  which process has not been  demonstrated
to manufacture SP-303 on a commercial scale.

      NOW,  THEREFORE,  in consideration of (i) NYCOMED's  agreement to contract
manufacture  SP-303,  and supply to SHAMAN for the monetary amounts set forth in
this  Agreement,  (ii) the promises,  covenants,  agreements  and other valuable
consideration hereinafter set forth, the parties thereby agree as follows:

ARTICLE 1.  DEFINITIONS

As used in this  Agreement,  the  following  words and  phrases  shall  have the
following meanings:

A.    "Act" shall mean the United States Food Drug and Cosmetic Act, as amended,
      and  rules  and  regulations  promulgated thereunder;

B.    "Affiliate"  of a party  hereto  shall mean any entity which controls,  is
      controlled by, or is under common control with such party. For purposes of
      this  definition,  a party shall be deemed to control  another  entity if
      it owns or controls, directly or indirectly, more than fifty percent (50%)
      of the voting  equity of  the other entity (or other parable ownership
      interest  for  an entity  other than a  corporation) or if it  possesses,
      directly or  indirectly, the power to direct or cause the direction of the
      management and policies of such other entity;

C.    "API"  shall  mean bulk  quantities  of the milled  and  completed  active
      pharmaceutical  ingredient,  SP-303,  manufactured in accordance with cGMP
      and according to the  Specifications  provided  under this Agreement or as
      amended and mutually agreed by both parties.

D.    "Step-1 Intermediate"  shall  mean  the dried  material resulting from the
      butanol extraction manufacturing process;

E.    "Step-2 Intermediate"  shall mean the  dried  material resulting from  the
      column  chromatography  manufacturing process;

F.    "Certificate  of Analysis (COA)" shall mean the certificate for each batch
      of API delivered hereunder;

G.    "cGMP"  shall mean current  Good Manufacturing Practice as promulgated by
       the United States Food and Drug Administration;

H.    "DMF" shall mean a Drug Master  File for the  manufacture  of API filed by
      NYCOMED  and to be  maintained  by NYCOMED  with the  FDA  or registration
      documents  for  other  regulatory authorities;

I.    "Drug  Product"   shall  mean  any  and  all  pharmaceutical  preparations
      suitable for human use which contain API;

J.    "FDA"  shall  mean  the  United   States   Food  and  Drug Administration,
      or any successor entity thereto;

K.    "Latex"  shall mean the supernatant  portion of Crude  Plant Latex meeting
      the  Specifications in  Appendix  A,  which  is the starting  material for
      manufacturing the API;

L.    "CPL By-Product" shall mean the remaining  material after the  supernatant
      Latex is separated from the CPL;

M.    "Crude Plant Latex (CPL)" shall mean the entire, unprocessed raw material,
      including both the  supernatant  Latex and the  remaining CPL By-Product;

N.    "NDA" shall mean SHAMAN's New Drug  Application for SP-303 filed by SHAMAN
      with the FDA for the  treatment  of diarrhea in people with AIDS  pursuant
      to section 505 of the Act;

O.    "Specifications" shall  mean the  specifications  for Step-1 Intermediate,
      Step-2 Intermediate,  Latex, and API set forth in  Appendix  A  hereof, or
      as  amended  and  agreed by both parties,  which Appendix is  incorporated
      in and made a part of this Agreement;

P.    "Facility"   shall   mean   the   facility   consisting   of  one  set of
      chromatographic  columns  that  NYCOMED will put in  place for  commercial
      manufacturing of API as described in Appendix B;

Q.    "Facility  Production  Capacity"  shall  be  the  good  faith  estimate of
      the annual production capacity of the Facility:
      (i)  The  initial annual Facility  Production  Capacity is estimated to be
           5,400 kg  of API per year or an amount  estimated  by NYCOMED and
           advised to SHAMAN after three (3) months  manufacturing, but no later
           than June 1, 1999.

      (ii) Starting  October 1, 1999 and every year  thereafter,  NYCOMED  shall
           inform SHAMAN of the annual Facility Production Capacity for the next
           calendar year.

ARTICLE 2.  TERM

2.01  This  Agreement  enters  into  effect on the date of  execution  and shall
      remain  in full  force  and  effect  for five (5)  years  from the date of
      execution and shall automatically renew for an additional two (2) years on
      the fifth year  anniversary  date of the Agreement,  unless  terminated by
      either  party by giving no less than twenty four (24) months  prior notice
      to the other party prior to the end of the initial  term or for reasons as
      described in Articles 8.01, 8.02, 16.06 and 19.01 below.

ARTICLE 3.  FACILITY, SUPPLY, FORECAST AND PURCHASE

3.01  Pursuant to the terms and conditions of this Agreement,  NYCOMED agrees to
      manufacture API for SHAMAN.

3.02  SHAMAN  agrees to place firm  orders as noted in Article  3.08 to purchase
      from  NYCOMED in each  calendar  year the  smaller of: (i) 80% of SHAMAN's
      commercial  requirements  of API  under  the  NDA,  or (ii)  the  Facility
      Production Capacity.

3.03  NYCOMED  and SHAMAN agree to meet and discuss the terms for  potential
      expansion or modification  of the Facility to supply quantities  in excess
      of the Facility  Production  Capacity.  These terms shall be  incorporated
      as an amendment to this Agreement.

3.04  As commercial  planning commences for  additional new drug  indications,
      SHAMAN and NYCOMED will meet to discuss  NYCOMED's ability to supply cGMP
      API for these indications.

3.05  NYCOMED shall have the Facility  described in Appendix B manufacturing API
      by March 31, 1999 and validated and fully  operational  by April 15, 1999,
      including acetone recovery.

3.06  NYCOMED  agrees to  manufacture  for SHAMAN  only from the  location at 33
      Riverside Avenue, Rensselaer, New York 12144.

3.07  Beginning  March 1, 1999 SHAMAN will provide  NYCOMED  with a  non-binding
      forecast showing SHAMAN's estimated  requirements of API for the following
      twelve (12) months.  Thereafter,  SHAMAN will provide  NYCOMED every month
      with a revised twelve-month non-binding forecast ("Rolling Forecast").

3.08  Firm  orders  for API shall be placed  by SHAMAN in  conjunction  with the
      Rolling  Forecast  a minimum  of ninety  (90)  days  prior to the  desired
      delivery date.

3.09  Should  any  batch  of  API  fail  to  meet  Specifications  or be  deemed
      unacceptable for any reason,  NYCOMED will produce a replacement  batch at
      no cost to SHAMAN.  The Quality  Agreement as noted in Article  10.01 will
      delineate the process for disputes related to batch test results.  Article
      4.07 describes the impact of failed batches on CPL.

3.10  NYCOMED  shall   manufacture   API  in  accordance  with  the  assurances,
      representations,  warranties and covenants set forth in this Agreement and
      the Quality Agreement described in Article 10.01.

ARTICLE 4. CRUDE PLANT LATEX (CPL) SUPPLY

4.01  SHAMAN  will provide  a quantity  of CPL sufficient to yield the ordered
      quantity of API at no charge to NYCOMED.

4.02  The  CPL  supplied  by SHAMAN  for  production  of API is  derived  from
      plant material  grown and  collected  at several  locations in South and
      Central America.  The CPL is sealed in drums and shipped,  at SHAMAN's
      expense  and  risk,  to  NYCOMED's  Facility, either directly from the
      collection locations or from SHAMAN.

4.03  NYCOMED will store, handle and consume the CPL, Latex, and CPL  By-Product
      consistent with written instructions from SHAMAN.

4.02  NYCOMED will promptly notify SHAMAN of any deficiencies or abnormalities
      in any incoming shipment of CPL.

4.03  With regard to the CPL  By-Product, NYCOMED  will,  as directed  by SHAMAN
      in writing,  either:  (i)  dispose  of the CPL  By-Product  with no charge
      to SHAMAN, or (ii) return the CPL By-Product to SHAMAN.

4.04  At all times,  the CPL, Latex, and CPL By-Product will remain the property
      of SHAMAN.   Upon termination of this Agreement,  or at any time,  upon
      written instruction by SHAMAN, NYCOMED will return all CPL,  Latex, and/or
      CPL By-Product.

4.05  If at any time in the storage, handling, or  manufacturing, NYCOMED causes
      through  negligence CPL, Latex,  or CPL  By-Product,  to become  unusable,
      NYCOMED shall  promptly  notify SHAMAN and will  reimburse  SHAMAN for the
      lost material at a cost not to exceed U.S. $50.00 per gallon of CPL.

ARTICLE 5.  SHIPPING AND DELIVERY

5.01  Unless otherwise agreed upon in writing,  shipping and delivery dates will
      be provided by SHAMAN at the time firm orders are placed.

5.02  NYCOMED shall package,  label and otherwise  prepare API for bulk delivery
      in  accordance  with  applicable  transport  regulations  and  guidelines.
      NYCOMED  shall deliver API, to a carrier  mutually  agreed upon by NYCOMED
      and SHAMAN, FOB Rensselaer, New York.

5.03  Each shipment of API hereunder will be delivered to a location  designated
      by  SHAMAN  on  the  SHAMAN  Purchase  Order  or  by  subsequent   written
      instruction  given by SHAMAN,  and in accordance with the instructions for
      shipping and packaging  included in such SHAMAN  Purchase  Order.  NYCOMED
      will  include  the  current   Material  Safety  Data  Sheet  ("MSDS")  and
      Certificate of Analysis ("COA"), as required with each shipment, for API.

5.04  SHAMAN shall  notify  NYCOMED in writing of any loss,  damage,  defects or
      non-delivery  of any separate part of a shipment  promptly after delivery,
      and if loss,  damage,  defects or partial  non-delivery are not evident to
      SHAMAN at the time of  delivery,  such  notification  by SHAMAN to NYCOMED
      shall be made no later than sixty (60) days after delivery to SHAMAN.

5.05  In the event of partial or full loss of such  shipment,  the parties  will
      cooperate  to insure that  notification  and  follow-up  with the involved
      ground and air carriers and customs or other  warehouses  is made in order
      to determine if such missing shipment can be located.

ARTICLE 6.  PRICE FOR API

6.01  Validation and commercial requirements F.O.B. Rensselaer, New York pricing
      is shown in  Appendix  C.  NYCOMED  shall  include  in this  price with no
      additional charge:

           1)   all validation requirements leading to  FDA approval of NYCOMED,

           2)   Pre-Approval Inspection readiness  and  participation in audits,

           3)   engineering modification and qualification of process  equipment
                and facilities described in Appendix B.


6.02  SHAMAN  shall  provide  at  no cost  to  NYCOMED  Crude  Plant  Latex  in
      sufficient quantities to produce the API.

6.03  NYCOMED  shall  provide initial  chromatographic media. SHAMAN shall be
      responsible for all losses of such media except in the case of  negligence
      on the part of NYCOMED.

6.04  SHAMAN and NYCOMED shall exercise best efforts to insure acetone  recovery
      is  included in the commercial  production of API by May 1, 1999.  In the
      event that  such  acetone  recovery  is not in place by May 1,  1999  then
      both parties agree to  renegotiate  the price and purchase  commitments in
      this Agreement until such recovery is included.

6.05  Beginning  October 1, 1999 and every  October 1  thereafter,  NYCOMED  and
      SHAMAN  will  negotiate  a per kg price  for API to be  effective  for the
      subsequent  calendar  year. Any increase in this price will not exceed the
      increase in the Producer Price Index for  Pharmaceutical  Chemicals in the
      twelve months  preceding the most recently  published  index,  except as a
      result of documented  extraordinary  expenses not under the direct control
      of NYCOMED (e.g., new regulations,  testing requirements,  etc. enacted by
      the U.S. FDA or any other governmental regulatory body).

6.06  In October of each year,  NYCOMED  and SHAMAN  shall meet and  discuss the
      management of manufacturing  yield and other parameters that could lead to
      improved  efficiencies.  NYCOMED and SHAMAN also agree to work together to
      achieve  efficiencies which could lead to a 10% API price reduction target
      in each of the calendar years 2000 and 2001.

6.07  In  order  to   manufacture   API,   NYCOMED  must  proceed  with  certain
      modifications  and updates to its  production  facility and therefore will
      incur certain capital, engineering, construction and materials costs. Such
      capital  related  items  required for the API will be purchased by NYCOMED
      via direct payment made by NYCOMED (the "Advances") to vendors selected by
      NYCOMED after consultation with SHAMAN. The planned Advances are listed in
      Appendix B and will be limited to a total of U.S. $3 million. NYCOMED must
      obtain prior written approval from SHAMAN for Advances of U.S. $100,000 or
      more.  SHAMAN  will  respond to  requests  from  NYCOMED  for  approval of
      Advances in writing within twenty-four (24) hours of receipt of a request.
      Such Advances will be recorded and reported to SHAMAN on a monthly  basis,
      and all supporting  documents  (purchase orders,  invoices,  etc.) will be
      provided on request to SHAMAN.

      SHAMAN will reimburse  NYCOMED for 100% of the Advances.  Advances will be
      repaid through  payments  amortized  equally as a per kilogram charge over
      the first 7,000 kilograms of API produced by NYCOMED.  This quantity shall
      not include any API produced as a result of registration batches. SHAMAN's
      repayment of the  amortized  Advances  shall be due with payments for API,
      commencing   with  the  first  payment  SHAMAN  makes  for  production  of
      commercial quantities of API pursuant to this Agreement. In the event that
      7,000  kilograms  of API is not  purchased by SHAMAN by December 31, 1999,
      SHAMAN agrees to pay in cash the remaining of any Advances due NYCOMED.

      In the event that  SHAMAN  notifies  NYCOMED  that SHAMAN will not proceed
      with the production of API, SHAMAN will reimburse  NYCOMED for 100% of the
      Advances as follows:  Within  thirty (30) days of receipt of such  notice,
      NYCOMED  shall  provide an  accounting  of  Advances to SHAMAN in writing,
      accompanied   by   receipts   and  proof  of  payment   by  NYCOMED   (the
      "Accounting").  Within  thirty  (30)  days  of  SHAMAN's  receipt  of  the
      Accounting,  SHAMAN  shall  reimburse  NYCOMED  the  total  amount  of the
      Advances,  less any amounts  previously repaid to NYCOMED (i) as a portion
      of the  per  kilogram  pricing  as  described  in  Article  6.01  of  this
      Agreement,  or (ii) pursuant to a letter of credit or escrow  agreement as
      described in this Article.

      Prior to  reimbursement  of 100% of the  Advances  payable  by  SHAMAN  to
      NYCOMED,  SHAMAN agrees to maintain  unrestricted cash in SHAMAN's deposit
      and short-term  investment accounts (the "Accounts") to not less than U.S.
      $4.0  million or such amount as may be  currently  owed under the Advances
      (the "Required  Balance").  NYCOMED shall have the right to obtain current
      balance  information  upon  NYCOMED's  request  at any  time  prior to the
      reimbursement of 100% of the Advances due from SHAMAN to NYCOMED.

      The Required  Balance shall be maintained in the Accounts at all times. In
      the event that NYCOMED determines that the balance in the Accounts is less
      than the Required  Balance and gives  notice to SHAMAN in writing,  SHAMAN
      will promptly deposit $250,000 in an escrow account  established with U.S.
      Bank Trust N.A.  SHAMAN  shall then also (i) obtain a letter of credit for
      an amount  equivalent to the then current  balance payable on the Advances
      less the amount  currently in escrow or (ii)  execute an escrow  agreement
      with NYCOMED for such amount.

6.08  Payment  shall be made to NYCOMED  net  thirty  (30) days from the date of
      invoice for API from NYCOMED to SHAMAN.

ARTICLE 7.   TECHNOLOGY

7.01  NYCOMED   acknowledges  and   agrees that the process,  technology  and
      information provided  to  NYCOMED  by SHAMAN  pursuant  to this  Agreement
      belongs to SHAMAN, and that any process  improvements,  process inventions
      or  process  know-how developed  by  NYCOMED,  or  by SHAMAN and  NYCOMED
      together,  pursuant to this Agreement will  be owned by  SHAMAN,  and if
      necessary,  assigned  to  SHAMAN.  The  Parties  acknowledge  that  the
      information regarding any such process improvements, process inventions or
      process know-how is subject to the terms of the confidentiality provisions
      of this Agreement.

7.02  Subject  to  the terms of this  Agreement,  SHAMAN  grants to  NYCOMED a
      paid-up, non-exclusive,  limited   license  (the  "License")  to  use  all
      SHAMAN  technology,  information and know-how  (the "Shaman Technology")
      transferred by SHAMAN to NYCOMED.  The License is granted for the specific
      purpose of fulfilling  NYCOMED's  obligations under this Agreement.  Any
      other use of the Shaman Technology is prohibited. Upon termination of this
      Agreement, the License  terminates  and NYCOMED must return all  Shaman
      Technology to SHAMAN.

ARTICLE 8. TERMINATION

8.01  Upon the  occurrence of either of the following  events,  either party may
      terminate  this  Agreement by giving the other party sixty (60) days prior
      written notice:

      (a)  If the other  party is  unable  to pay its  debts, becomes   bankrupt
           or  insolvent  or  enters  into liquidation  whether  compulsory or
           voluntary,  or convenes  a  meeting  of  its  creditors,  or has a
           receiver  appointed over all or part of its assets, or  takes  or
           suffers  any similar action  in consequence  of a debt, or ceases for
           any reason to carry on business; or

      (b)  Upon the breach of any material  provision  of this  Agreement by the
           other party if the breach is not cured  within  sixty (60) days after
           written  notice  thereof  to the party in  default  and the  material
           breach continues to exist at the time of notice of termination.

8.02  (a)  SHAMAN may terminate this  Agreement at any time by giving sixty (60)
           days  written  notice  to  NYCOMED  if  SHAMAN,   in  its  sole
           discretion,  determines  that it will no longer develop or market API
           for the NDA, or if the FDA withholds  approval of the  manufacture or
           marketing of API for the NDA.

      (b)  In  the  event  SHAMAN  elects  to terminate  this Agreement, NYCOMED
           shall take reasonable  measures to cease any ongoing  production  and
           limit further expenses  associated with such ongoing  production.
           SHAMAN shall pay NYCOMED for the amount of any lot produced  pursuant
           to a Purchase   Order, for reasonable  expenses  incurred by  NYCOMED
           with  respect to the  remainder  of said  Purchase  Order and for the
           value of raw materials  purchased  in reasonable  expectation  of the
           forecast  prior to the effective termination  date.  Capital  related
           expenses will be reimbursed as per Article 6.07.

8.03  Termination,  expiration,  or cancellation  of this Agreement  through any
      means and for any reason  shall not relieve the parties of any  obligation
      accruing prior thereto,  including but not limited, to the confidentiality
      and  proprietary  ownership  provisions  herein and the  obligation to pay
      money, and shall be without prejudice to the rights and remedies of either
      party with respect to the  antecedent  breach of any of the  provisions of
      this Agreement.

8.04  Upon  termination,  expiration or  cancellation  of this Agreement for any
      reason,  NYCOMED  shall  promptly  return to SHAMAN any and all  technical
      information and know-how  relating to or including any modification to the
      production of API provided by SHAMAN to NYCOMED hereunder, if requested in
      writing by SHAMAN.

8.05  Upon  termination,  expiration or cancellation of this Agreement  for any
      reason, SHAMAN shall have the right to remove  capital equipment described
      in Appendix  B,  provided  such items  are  capable of being removed  from
      NYCOMED's  facility  without material  disruption or damage,  and provided
      SHAMAN shall be responsible for all dismantling charges.

8.06  Upon  termination,  expiration or  cancellation  of this Agreement for any
      reason, NYCOMED shall transfer ownership of the DMF to SHAMAN.

ARTICLE 9.  REPRESENTATIONS, WARRANTIES AND COVENANTS

NYCOMED  makes  the  following  assurances,   representations,   warranties  and
covenants:

9.01  API shall be merchantable,  free from defects and meet the  Specifications
      and shall not be adulterated or misbranded within the meaning of the Act.

9.02  NYCOMED  shall be cognizant  of "cGMP" as provided in the Act.  NYCOMED is
      able to, and shall  manufacture API in conformity with the  Specifications
      and in a manner which fully complies with "cGMP" guidelines and practices.
      NYCOMED  shall meet the  requirements  as provided for in the FDA Guide to
      Inspection of Bulk Pharmaceutical  Chemicals,  revised September 1991, and
      any subsequently enacted official guidance documents.

9.03  NYCOMED shall not change the manufacturing  process,  the  Specifications,
      the raw  materials or sources of raw  materials  used,  or the  analytical
      testing  method in a manner which may or may not require FDA or other U.S.
      or foreign/international  regulatory approval by NYCOMED OR SHAMAN without
      the  prior  written  consent  of  SHAMAN,   which  consent  shall  not  be
      unreasonably  withheld or delayed.  NYCOMED  shall  provide  SHAMAN with a
      detailed  written  report of all  proposed  changes  to the  manufacturing
      process, the Specifications, the raw materials, or the analytical method:

           (i)  that require FDA or other U.S. or foreign/international
                regulatory  approval,  prior  to  the  implementation
                thereof; or

           (ii) that  do  not  require  FDA  or  other  U.S.  or
                foreign/international regulatory approval, unless
                agreed to by SHAMAN.

9.04  (a)  If SHAMAN  requests  in  writing  a change  in the  manufacturing
           process,  the  Specifications,  the  raw  materials,  source  of  raw
           material or analytical testing method with respect to the API that is
           not  the  result  of a  requirement  of FDA or  some  other  U.S.  or
           foreign/international  regulatory  agency,  NYCOMED  shall  use  best
           efforts to accommodate such request.

      (b)  If NYCOMED requests in writing a change in the manufacturing process,
           the  Specifications,  the raw  materials,  source of raw  material or
           analytical  testing method with respect to API that is not the result
           of a requirement  of FDA or some other U.S. or  foreign/international
           regulatory  agency SHAMAN shall use best efforts to accommodate  such
           request.

      (c)  If the result of either of these changes is a  significant  change in
           the  manufacturing  cost of the API,  both parties  agree to meet and
           negotiate a change in the pricing included in Appendix C.

9.05  Each party  agrees to promptly  forward to the other  party  copies of any
      such  written  communication  received by such party from the FDA or other
      U.S. or foreign regulatory agency which will affect the manufacture of API
      as contemplated herein.

9.06  NYCOMED  shall  conduct  its API  manufacturing  operations  hereunder  in
      compliance  with  all  U.S./foreign/international   laws  and  regulations
      including,  but not limited to, those dealing with occupational safety and
      health,  those dealing with public  safety and health,  those dealing with
      protecting the environment, and those dealing with disposal of wastes.

9.07  NYCOMED shall be responsible for all process and equipment  validation and
      shall take all reasonable  steps necessary to pass government  inspection
      by the FDA.

9.08  Each party hereby represents and warrants to the other
      party as follows:
      (a)  Existence  and  Power.  Such  party  (i)  is  duly organized, validly
           existing and in good  standing  under the laws of the state in which
           it is organized;  (ii) has the  power and  authority  and  the legal
           right to own and  operate  its  property and  assets,  to lease the
           property  and assets it operates under lease,  and to carry on  its
           business as it is now  being  conducted;  and  (iii) is in compliance
           with  all requirements of  applicable law,  except to the extent that
           any noncompliance would not materially  adversely affect such party's
           ability  to  perform  its  obligations   under  the  Agreement.
      (b)  Authorization and Enforcement of Obligations.  Such  party  (i)  has
           the  power  and authority  and the legal  right to enter  into this
           Agreement and to perform its obligations hereunder and thereunder and
           (ii) has taken  all  necessary action on its part to authorize  the
           execution and delivery of the  Agreement and the  performancem of its
           obligations  hereunder.  The Agreement has been duly  executed  and
           delivered on  behalf of such party,  and constitutes  a legal, valid,
           binding obligation,  enforceable  against  such  party  in accordance
           with its terms.
      (c)  No Consents. All necessary consents,  approvals and authorizations of
           all  governmental  authorities  and  other  persons  required  to  be
           obtained by such party in  connection  with the  Agreement  have been
           obtained,  except for those  which  cannot be  obtained  prior to the
           filing of the NDA.
      (d)  No Conflict.  The  execution  and  delivery of the Agreement  and the
           performance  of  such party's obligations  hereunder  and  thereunder
           (i) do not conflict  with or  violate any  requirement  of applicable
           laws or regulations or any  material  contractual obligation  of such
           party and (ii) do not  materially  conflict  with,  or  constitute  a
           material  default  or  require  any  consent under,  any   material
           contractual obligation  of  such  party.  NYCOMED  shall  not in any
           event enter into any agreement or arrangement with any other party
           that would  prevent  or  in  any  way   interfere   with  NYCOMED's
           obligations pursuant to this Agreement.


ARTICLE 10.  QUALITY AGREEMENT

10.01 NYCOMED and SHAMAN  agree to enter into a Quality  Agreement  within sixty
      (60) days of the signing of this Agreement.  Such agreement shall describe
      the amount and type of testing required,  the process for batch review and
      release,  the process for independent  review in the event of disagreement
      on test results,  the process for  modification of processes,  procedures,
      specifications and test methods, and the authority and responsibilities of
      each party. If a Quality  Agreement  cannot be negotiated  satisfactorily,
      the terms of this Agreement may be renegotiated.


ARTICLE 11.  INDEMNIFICATION

11.01 SHAMAN shall indemnify,  defend and hold harmless  NYCOMED,  its officers,
      directors,  agents,  servants,  and employees harmless against all claims,
      losses,  damages and  liabilities,  including  reasonable  legal expenses,
      arising out of SHAMAN's acts or omissions under this Agreement,  and which
      is not attributable to:

      (i)   any act or  negligence  of NYCOMED or its agents or employees;

      (ii)  the  failure  of  NYCOMED  to  follow  the  written instructions and
            Specifications of SHAMAN;

      (iii) NYCOMED's breach of this Agreement.

      NYCOMED shall not settle any such claim without the prior written approval
      of SHAMAN  and that  SHAMAN  shall have the  right,  if it so  wishes,  to
      conduct  negotiations  to  settle,  settle or to  conduct  any  litigation
      arising out of, any such claim.  NYCOMED shall provide  prompt and written
      notice of any claim to SHAMAN and shall  cooperate  in the  defense of the
      claim.

11.02 NYCOMED shall indemnify,  defend and hold harmless  SHAMAN,  its officers,
      directors,  agents,  servants,  and employees harmless against all claims,
      losses,  damages,  and liabilities  including  reasonable  legal expenses,
      arising out of NYCOMED's acts or omissions  under this Agreement and which
      is not attributable to:

      (i)  any act of  negligence  of SHAMAN or its  agents or  employees; or

      (ii) the  failure of SHAMAN or its  employees  to comply with applicable
           law or regulations.

      SHAMAN shall not settle any such claim without the prior written  approval
      of NYCOMED,  and that NYCOMED  shall have the right,  if it so wishes,  to
      conduct  negotiations to settle, or to conduct any litigation  arising out
      of, any such claim.  SHAMAN shall provide prompt and written notice of any
      such claim to NYCOMED and shall cooperate in the defense of the claim.

11.03 The indemnification obligations set forth in this Article 11 shall survive
      the termination of this Agreement.


ARTICLE 12.  PATENT INFRINGEMENT INDEMNIFICATION

12.01 SHAMAN shall  indemnify,  defend and hold NYCOMED  harmless and accept all
      legal and financial  responsibility for any liability,  damage, loss, cost
      or expense arising out of any patent infringement claims in respect of the
      manufacture of the API against NYCOMED  hereunder.  NYCOMED shall promptly
      notify  SHAMAN  of said  claims  and at  SHAMAN's  cost,  permit  SHAMAN's
      attorneys  to handle and control such claims or suits.  NYCOMED  agrees to
      provide SHAMAN with reasonable  assistance in defending such  infringement
      action or in prosecuting any related action, at SHAMAN's cost and expense.

12.02 SHAMAN  represents  that it is not aware of any issued U.S.  patents  that
      would be  infringed  by the  manufacture  or use of the API, or the SHAMAN
      know-how or SHAMAN  Confidential  Information as defined in this Agreement
      and to be used in the  manufacture  of API.  NYCOMED will promptly  notify
      SHAMAN of any potential  infringement of which it becomes aware during the
      course of this Agreement.

ARTICLE 13.  CONFIDENTIALITY AND NON-USE

13.01 (a) NYCOMED will not disclose to any third party,  or utilize  for  its
          own  benefit or the  benefit  of any third  party,  any  confidential
          product information, product formula or other information, including,
          but  not  limited  to  propriety  information  obtained  from  SHAMAN
          (hereinafter  referred  to  as  "INFORMATION").   However,  that  the
          foregoing provisions shall not apply to any information:

          (i)   which is now public knowledge or which becomes public knowledge
                through  no  fault of NYCOMED; or

          (ii)  which is properly provided to NYCOMED without restriction by a
                legally entitled independent third party; or

          (iii  which NYCOMED  can show was  already in its possession  at the
                time of receipt from SHAMAN, as evidenced by written records in
                NYCOMED's possession.

      (b)  NYCOMED's obligation to maintain a secret and confidential status for
           the  disclosed  INFORMATION  shall  endure  for five (5)  years  from
           termination of this  Agreement.  The disclosed  INFORMATION  shall be
           disclosed  only  to  employees  of  NYCOMED  who  need  to  know  the
           INFORMATION for the purposes of this Agreement.

      (c)  Any and all INFORMATION in tangible form passed to NYCOMED  hereunder
           shall, on request, be immediately returnable to SHAMAN.

      (d)  The INFORMATION passed to NYCOMED shall not be used by NYCOMED except
           as hereinafter permitted, under terms of this Agreement.

      (e)  The provisions of Article 13 shall  survive  the  termination of this
           Agreement.



ARTICLE 14.  GOVERNMENT INSPECTION

14.01 NYCOMED will notify SHAMAN within twenty-four (24) hours of notification
      of any pending  or  ongoing  FDA  or  any  other  regulatory   government
      inspection  related to  API for the facilities  used to produce,  test or
      warehouse API. NYCOMED shall immediately provide copies of any FDA  Form
      483 Observations, Warning Letter, or associated  correspondence to and
      received from the FDA with regard to API within seven (7) days of receipt
      and in addition  shall provide a facsimile copy within forty-eight (48)
      hours to SHAMAN.  NYCOMED shall allow SHAMAN to assist in any response to
      the FDA  including  review of any written response made to the FDA by
      NYCOMED at SHAMAN's discretion.

14.02 NYCOMED will notify  SHAMAN within seven (7) days of receipt of any FDA
      Form 483 Observations, Warning Letter, or associated correspondence to and
      received from  the FDA  with regard  to any  topics  other  than  API that
      could potentially impact API. NYCOMED will  provide  any  such   pertinent
      information in such a manner that  confidentiality for any other client(s)
      is protected.


ARTICLE 15.  RIGHT TO INSPECT

15.01 In performing its obligations  under this Agreement,  NYCOMED
      shall:

      (i)  permit SHAMAN or its designated representative to inspect on a
           regular  basis or as  needed  but not less than once per year that
           portion of  NYCOMED's facilities  where  API is  manufactured, tested
           or stored to evaluate NYCOMED's work practices, supporting   systems,
           documents   and   records  associated  with API for the  purpose of
           assessing NYCOMED's  compliance with  applicable  regulations and
           cGMP as  described  and provided in the Act, and SHAMAN's  quality
           standard. Such review  shall be conducted  upon  reasonable prior
           notice by SHAMAN but not less than  fourteen (14) days prior to the
           inspection;

      (ii) At least  once  during  each  contract  year,  permit  SHAMAN  or its
           designated  representative  to review NYCOMED's  licenses and permits
           relating to the manufacture of API. Any review at NYCOMED's  facility
           shall be conducted during ordinary business hours, on dates agreeable
           to SHAMAN and NYCOMED.

15.02 NYCOMED shall keep SHAMAN fully  informed of the steps taken by NYCOMED to
      resolve any outstanding issues with the FDA and the anticipated  timetable
      of resolution of such issues as it applies to API.


ARTICLE 16.  RECALL OR SEIZURE

16.01 NYCOMED  shall keep SHAMAN  fully  informed of any  notification  or other
      information;  whether  received  directly or indirectly which might affect
      the  marketability,  safety or  effectiveness  of API and/or  which  might
      result in the recall or seizure of API or the finished dosage form.

16.02 In the event of any "recall" or "seizure" arising out of or resulting from
      NYCOMED's breach of any provision of this Agreement, NYCOMED shall, at the
      election of SHAMAN, either:

      (i)  supply API,  without  charge to SHAMAN,  in an amount  sufficient  to
           replace  (a) the amount of API  recalled or seized and (b) the amount
           of API contained in recalled or seized Drug Product; or

      (ii) refund  to  SHAMAN,  or give  credit to  SHAMAN  against  outstanding
           receivable  due  from  SHAMAN  or  against  the  price  of  API to be
           delivered  to SHAMAN in the  future,  in amounts  equal to  NYCOMED's
           price  paid by  SHAMAN  for API so  recalled  or  seized  and the API
           contained  in the  Drug  Product  so  recalled  or  seized  plus  all
           transportation  costs and export import duties incurred by SHAMAN and
           not  recovered by SHAMAN in respect of such recalled or seized API or
           Drug Product.

16.03 In the event of any recall or seizure  arising  out of or  resulting  from
      NYCOMED's  breach  of this  Agreement,  NYCOMED  shall pay to  SHAMAN,  in
      addition  to  the  amounts  set  out  in  Article   16.02  (i),   SHAMAN's
      out-of-pocket  expenses incurred in connection with such recall or seizure
      including loss of CPL or Drug Product.

16.04 SHAMAN  shall use its best  efforts  to notify  NYCOMED  of any  recall or
      seizure that is likely to affect the manufacture of API as contemplated by
      this  Agreement  promptly  following the time SHAMAN  becomes aware of the
      reasonable likelihood of such recall or seizure.

For   purposes of this  Article 16  "recall"  shall mean any action by SHAMAN or
      any Affiliate or subsidiary of SHAMAN to recover title to or possession of
      API or Drug Product sold or shipped to third  parties.  The term  "recall"
      also includes the failure by SHAMAN to sell or ship API or Drug Product to
      third  parties which would have been subject to recall if it had been sold
      or shipped.  For  purposes of this  Article 16,  "seizure"  shall mean any
      action  by any  government  agency to detain  or  destroy  API or  prevent
      release of API drug substance or Drug Product.

In    the event of a recall as defined in Article  16.05,  arising or  resulting
      from NYCOMED's breach of this Agreement, that has the effect of disrupting
      commercial drug supply for a period of sixty (60) days,  SHAMAN shall have
      the right to terminate this Agreement.

ARTICLE 17.  ASSIGNMENT

17.01 Neither of the parties  hereto  shall  assign or transfer  its interest or
      obligation  under this Agreement  without the prior written consent of the
      other party,  which shall not be unreasonably  withheld.  Notwithstanding,
      either party shall have the right to assign this Agreement,  or any of its
      rights or obligations  thereunder,  to any successor in interest to all or
      substantially  all of such  party's  business  or assets  related  to this
      Agreement.  Subject to the foregoing,  this Agreement will be binding upon
      and inure to the  benefit of the  parties  hereto,  their  successors  and
      assigns.

ARTICLE 18.  GOVERNING LAW AND DISPUTE RESOLUTION

18.01 This Agreement is made in accordance  with and shall be governed under the
      laws of the State of Delaware, without regard to conflicts of laws rules.

18.02 In the  event  that,  at any  time  during  the term of the  Agreement,  a
      disagreement, dispute controversy or claim should arise out of or relating
      to the interpretation of or performance under this Agreement,  the Parties
      will attempt in good faith to resolve their  differences  before resorting
      to the termination  procedures  provided herein.  If the applicable senior
      managers of SHAMAN and NYCOMED  cannot  resolve any matter  within  thirty
      (30) days, such matter shall be referred to the Chief  Executive  Officers
      of the Parties (or their  designees)  for an additional  thirty (30) days,
      following which either party shall be free to take any action and seek any
      remedy it may have at law or in equity, including specific performance and
      injunctive relief.

ARTICLE 19.  FORCE MAJEURE

19.01 Any delay in the performance of any of the duties or obligations of either
      party (except the payment of money due hereunder)  shall not be considered
      a breach of this Agreement and the time required for performance  shall be
      extended  for a period  equal to the period of such delay;  provided  that
      such delay has been caused by or is the result of any acts of God, acts of
      the  public  enemy,  insurrections,   riots,  embargoes,  labor  disputes,
      including strikes, lockouts, job actions, or boycotts,  equipment failure,
      fires,  explosions,  floods,  shortages  of  material  or  energy or other
      unforeseen  causes beyond the reasonable  control and without the fault or
      negligence  of the party so  affected.  The party so  affected  shall give
      prompt  notice to the other party of such cause,  and shall take  whatever
      reasonable  steps are  necessary  to  relieve  the effect of such cause as
      rapidly as reasonably possible.  Not withstanding the forgoing, if NYCOMED
      is unable to perform its  obligations  under this Agreement for any of the
      above enumerated  reasons for a period longer than six (6) months,  SHAMAN
      shall have a right to terminate this Agreement.

ARTICLE 20.  SEVERABILITY

20.01 In the event that any provision of this Agreement is judicially determined
      to be void or  unenforceable,  such  provision  shall be  construed  to be
      separable from the other  provisions of this Agreement  which shall retain
      full force and effect.

ARTICLE 21.  HEADINGS

21.01 All titles and captions in this  Agreement  are for  convenience  purposes
      only and shall not be of any force or substance.

ARTICLE 22.  USE OF NAMES

22.01 Except as  expressly  required  pursuant to the Act,  neither  party will
      without the prior written consent of the other:
      (a)  use in advertising, publicity, promotional  premiums or  otherwise,
           any trade  name,  trademark,  trade  device,  service mark, symbol,
           or any abbreviation,  contraction or simulation thereof owned by
           either party, or

      (b)  represent, either directly or indirectly, that any product or service
           of one party is a product or service of the other party.

ARTICLE 23.  INDEPENDENT CONTRACTOR

23.01 Each party is acting under this Agreement as an independent contractor and
      not as the agent or employee of the other  party.  Each party  understands
      and agrees that it has no authority to assume any  obligation on behalf of
      the other  party and that it shall not hold out to third  parties  that it
      has any authority to act on the other  party's  behalf except as expressly
      permitted  herein.  Unless otherwise  expressly stated herein,  each party
      shall be  responsible  for its own  expenses  relating to its  performance
      under this  Agreement  and shall not incur  expenses for the other party's
      account  unless  expressly  authorized  herein  or by  subsequent  written
      agreements.


ARTICLE 24. WAIVER

24.01 No waiver or  modification  of any of the terms of this Agreement shall be
      valid unless in writing and signed by an authorized representative of both
      parties  hereto.  Failure by either party to enforce any rights under this
      Agreement  shall not be  construed  as a waiver of such rights nor shall a
      waiver  by  either  party  in  one  or  more  instances  be  construed  as
      constituting a continuing waiver or as a waiver in other instances.

ARTICLE 25.  PUBLIC DISCLOSURE

25.01 Neither  party  shall  disclose  to  any  third  party  or  originate  any
      publicity,  news release or public announcement,  written or oral, whether
      to the public or the press,  or otherwise,  referring to the terms of this
      Agreement,  including  its  existence,  the  subject  matter  to  which it
      relates,  the  performance  under  it or  any of its  specific  terms  and
      conditions, except by such announcements as are:

      (i)  mutually agreed upon by the parties in writing; or

      (ii) in the opinion of Counsel for the party making such  announcement are
           required  by law.  If a party  believes a public  announcement  to be
           required  by law with  respect  to this  Agreement,  it will give the
           other  party  such  notice  as  is  reasonably   practicable  and  an
           opportunity to comment upon the announcement.

ARTICLE 26.  NOTICES

26.01 Unless otherwise specified herein, all notices required or permitted to be
      given  under this  Agreement  shall be in writing  and shall be  delivered
      either  personally and promptly  confirmed by such registered or certified
      mail or overnight courier service or sent by registered or certified mail,
      return receipt requested, or by overnight facsimile and promptly confirmed
      by such registered  courier  service,  postage prepaid in each case, or by
      certified mail or overnight courier service to the receiving party at such
      party's address set forth below, or at such other address as may from time
      to time be furnished by similar notice by either party. Any notice sent by
      registered  or certified  mail as  aforesaid  shall be deemed to have been
      given when mailed, and shall be effective upon receipt.

      If to NYCOMED:
      John Fallone
      Vice President Manufacturing
      Nycomed Amersham
      33 Riverside Avenue
      Rensselaer, New York 12144

      If to SHAMAN:
      Lisa Conte
      President and CEO
      Shaman Pharmaceuticals, Inc.
      213 East Grand Avenue
      South San Francisco, CA 94080

      Or to such other  address as the  addressee  shall have last  furnished in
      writing to the addresser.

ARTICLE 27.  ENTIRE AGREEMENT

27.01 This  Agreement  constitutes  the entire  Agreement  between  the  parties
      concerning  the supply of API by NYCOMED to  SHAMAN,  and  supersedes  all
      written or oral agreements or understandings with respect thereto.

27.02 Neither party shall claim any amendment, modification, or release from any
      provision  hereof  unless  such an  amendment  is in writing  signed by an
      authorized representative of each party.


ARTICLE 28.  EXECUTION BY FACSIMILE AND COUNTERPART

28.01 This  Agreement  may  be  executed  by the  parties  by  facsimile  with a
      conforming original document.

      Please signify your  acceptance of the terms and conditions of this Supply
      Agreement by signing and dating below.

ACKNOWLEDGED, ACCEPTED AND AGREED TO:

                          SHAMAN PHARMACEUTICALS, INC.



By:        /s/ Lisa A. Conte
           __________________________________
Name:      Lisa Conte
Title:     President and CEO


Date:      December 2, 1998


                                  NYCOMED, INC.




By:        /s/ John Fallone
           __________________________________
Name:      John Fallone
Title:     Vice President Manufacturing


Date:      December 4, 1998


<PAGE>


                                   APPENDIX A

                                 Specifications
                                (6 pages follow)

                           Crude Plant Latex (1 page)
                          Step-1 Intermediate (1 page)
                          Step-2 Intermediate (2 pages)
                                  API (2 pages)




<PAGE>


                                   APPENDIX B

                                      Plan
                                (1 page follows)


<PAGE>



                                   APPENDIX C

                                    API Price




Pricing is FOB Rensselaer NY

Pricing for the first initial SP-303
      Using fresh acetone                   $2,896/kg
      Acetone recovery and recycle          $2,039/kg

      This initial price  includes  amortization  of the $3 million on the first
      7,000 kg purchased by SHAMAN.



Pricing without capital amortization
      Using fresh acetone                   $2,467/kg
      Acetone recovery and recycle          $1,610/kg

      The price without  amortization is the price after all $3 million has been
      recovered by NYCOMED either through amortized purchase or direct payment



<PAGE>