United
States
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
D.C. 20549
 
 FORM
10-Q
 
 
 QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR
15(d)
 OF
      THE SECURITIES EXCHANGE ACT OF 1934
 
 For the
Quarterly Period Ended March 31, 2008
 
 Commission
File Number 0-20791
 AMARILLO
BIOSCIENCES,
INC.
 (Exact name of registrant as
specified in its charter)
 
 TEXAS
              
              75-1974352(State
      or other jurisdiction of incorporation or organization)
              
              (IRS
      Employer Identification No.)4134
      Business Park Drive, Amarillo, Texas 79110(Address
      of principal executive offices) (Zip Code)(806)
      376-1741(Issuer’s
      telephone number, including area
code)
 
  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   [ ] No
  Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
 
 Large
      accelerated filer [ ]
              
              Accelerated
      filer [ ]Non-accelerated
      filer [ ] (do not check if smaller reporting company)
              
              Smaller
      reporting company [√]
 
  Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act)[ ] Yes   [√] No
  As of
March 31, 2008 there were 29,672,034 shares of the issuer's common stock and
1,000 shares of the issuer’s convertible preferred stock
outstanding.
 
  1
  AMARILLO
BIOSCIENCES, INC.
 
 INDEX
 PAGE NO.PART
      I:
              FINANCIAL
      INFORMATIONITEM
      1.
              Financial
      StatementsBalance
      Sheets– March 31, 2008  (unaudited) and December 31,
      2007.....................................................................
              3Statements
      of Operations - Three Months Ended March 31, 2008 and 2007
      (unaudited)..................................................................
              4Condensed
      Statements of Cash Flows – Three Months Ended March 31, 2008 and 2007
      (unaudited)................................................
              5Notes
      to Financial Statements
      (unaudited) .....................................................................
              6ITEM
      2.
              Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations............................................................
              8ITEM
      3.
              Quantitative
      and Qualitative Disclosures About Market
      Risk.....................................................................
              16ITEM
      4.
              Controls
      and
      Procedures.....................................................................
              19PART
      II:
              OTHER
      INFORMATIONITEM
      1.
              Legal
      Proceedings.....................................................................
              20ITEM
      2.
              Unregistered
      Sales of Equity Securities and Use of
      Proceeds.....................................................................
              20ITEM
      3.
              Defaults
      Upon Senior Securities.....................................................................
              21ITEM
      4.
              Submission
      of Matters to a Vote of Security
      Holders.....................................................................
              21ITEM
      5.
              Other
      Information.....................................................................
              21ITEM
      6.
              Exhibits.....................................................................
              21Signatures
              
              22
 
  2
  PART I - FINANCIAL
INFORMATION
 
 ITEM
      1.
              Financial
      Statements
 
 Amarillo
Biosciences, Inc.
 Balance
Sheets
 
 March
      31,
                2008
              
              
              December
      31,
                2007Assets
              
              (unaudited)Current
      assets:Cash
      and cash equivalents
              
              $
              255,635
              
              
              $
              47,184Other
      current assets
              
              
              17,449
              
              
              
              31,688Total
      current assets
              
              
              273,084
              
              
              
              78,872Property,
      equipment, and software, net
              
              
              13,763
              
              
              
              14,098Patents,
      net
              
              
              119,344
              
              
              
              120,925Total
      assets
              
              $
              406,191
              
              
              $
              213,895Liabilities
      and Stockholders' DeficitCurrent
      liabilities:Accounts
      payable and accrued expenses
              
              $
              161,050
              
              
              $
              98,203Accrued
      interest - related party
              
              
              505,150
              
              
              
              682,773Notes
      payable - related party
              
              
              2,000,000
              
              
              
              2,000,000Total
      current liabilities
              
              
              2,666,200
              
              
              
              2,780,976Total
      liabilities
              
              
              2,666,200
              
              
              
              2,780,976Commitments
      and contingenciesStockholders'
      deficitPreferred
      stock, $0.01 par value:Authorized
      shares - 10,000,000Issued
      and outstanding shares – 1,000 at March  31, 2008 and 0 at
      December 31, 2007, respectively
              
              
              10
              
              
              
              -Common
      stock, $0.01par value:Authorized
      shares - 100,000,000Issued
      and outstanding shares – 29,672,034 at March 31, 2008 and 29,465,261 at
      December 31, 2007, respectively
              
              
              296,720
              
              
              
              294,653Additional
      paid-in capital
              
              
              27,129,201
              
              
              
              25,598,217Accumulated
      deficit
              
              
              (29,685,940
              )
              
              
              (28,459,951
              )Total
      stockholders' deficit
              
              
              (2,260,009
              )
              
              
              (2,567,081
              )Total
      liabilities and stockholders’ deficit
              
              $
              406,191
              
              
              $
              213,895
 See
accompanying notes to financial statements.
  3
  Amarillo
Biosciences, Inc.
 Statements
of Operations - Unaudited
 
 Three
      months ended
                March
      31,2008
              
              
              2007Revenues:Dietary
      supplement sales
              
              $
              888
              
              
              $
              534Sublicense
      fee revenue
              
              
              -
              
              
              
              40,000Total
      revenues
              
              
              888
              
              
              
              40,534Operating
      expenses:Cost
      of sales
              
              
              301
              
              
              
              168Research
      and development expenses
              
              
              215,892
              
              
              
              131,012Selling,
      general and administrative expenses
              
              
              403,684
              
              
              
              633,575Total
      operating expenses
              
              
              619,877
              
              
              
              764,755Operating
      loss
              
              
              (618,989
              )
              
              
              (724,221
              )Other
      income (expense)Interest
      expense
              
              
              (22,474
              )
              
              
              (22,238
              )Interest
      income
              
              
              1,371
              
              
              
              1,253Net
      loss
              
              
              (640,092
              )
              
              
              (745,206
              )Deemed
      dividend for beneficial conversion feature
              
              
              (562,841
              )
              
              
              -Dividend
      on preferred stock
              
              
              (23,056
              )
              
              
              -Net
      loss applicable to common shareholders
              
              $
              (1,225,989
              )
              
              $
              (745,206
              )Basic
      and diluted net loss per share
              
              $
              (0.04
              )
              
              $
              (0.03
              )Weighted
      average shares outstanding
              
              
              29,508,069
              
              
              
              24,930,331
 
 See
accompanying notes to financial statements.
  4
  Amarillo
Biosciences, Inc.
 Condensed
Statements of Cash Flows - Unaudited
 
 Three
      months ended March 31,2008
              
              
              2007Net
      cash used in operating activities
              
              $
              (637,375
              )
              
              $
              (503,702
              )Cash
      from investing activitiesPurchases
      of equipment and software
              
              
              (980
              )
              
              
              (1,265
              )Patent
      expenditures
              
              
              (1,987
              )
              
              
              (1,673
              )Net
      cash used in investing activities:
              
              
              (2,967
              )
              
              
              (2,938
              )Cash
      from financing activities:Proceeds
      from sales of convertible preferred stock
              
              
              848,793
              
              
              
              -Proceeds
      from sale of common stock
              
              
              -
              
              
              
              449,100Net
      cash provided by financing activities
              
              
              848,793
              
              
              
              449,100Net
      increase (decrease) in cash
              
              
              208,451
              
              
              
              (57,540
              )Cash
      and cash equivalents at beginning of period
              
              
              47,184
              
              
              
              213,844Cash
      and cash equivalents at end of period
              
              $
              255,635
              
              
              $
              156,304Supplemental
      disclosure of cash flow informationCash
      paid for interest
              
              $
              200,096
              
              
              $
              107Cash
      paid for income taxes
              
              $
              -
              
              
              $
              -
 
 See
accompanying notes to financial statements.
  5
  Amarillo
Biosciences, Inc.
  Notes
To Financial Statements - Unaudited
 
 1.
              Basis
      of presentation. The accompanying financial statements, which should be
      read in conjunction with the financial statements and footnotes included
      in the Company's Form 10-KSB for the year ended December 31, 2007 filed
      with the Securities and Exchange Commission, are unaudited, but have been
      prepared in accordance with accounting principles generally accepted in
      the United States for interim financial information. Accordingly, they do
      not include all of the information and footnotes required by accounting
      principles generally accepted in the United States for complete financial
      statements. In the opinion of management, all adjustments (consisting only
      of normal recurring adjustments) considered necessary for a fair
      presentation have been included.
 
 Operating
results for the three months ended March 31, 2008 are not necessarily indicative
of the results that may be expected for the full year ending December 31,
2008.
 
 2.
              Financial
      Condition. The Company's viability is dependent upon successful
      commercialization of products resulting from its research and product
      development activities. The Company plans on working with commercial
      development partners in the United States and in other parts of the world
      to provide the necessary sales, marketing and distribution infrastructure
      to successfully commercialize the interferon alpha product for both human
      and animal applications. The Company's products will require significant
      additional development, laboratory and clinical testing and investment
      prior to the Company obtaining regulatory approval to commercially market
      its product(s). Accordingly, for at least the next few years, the Company
      will continue to incur research and development and general and
      administrative expenses and may not generate sufficient revenues from
      product sales to support its
operations.
 
 3.
              Common
      Stock.  In the first three months of 2007, the Company completed
      private equity financing by selling 998,000 restricted shares of common
      stock at a discount to 18 investors, generating $449,100 in
      cash.  During the quarter ended March 31, 2007, finder’s fees
      paid related to private placements of stock totaled $6,750, and are
      included as general and administrative expenses in the Company’s statement
      of operations. During the quarter ended March 31, 2007, the Board of
      Directors authorized stock grants to two consultants: 100,000 shares to
      Claus Martin on March 5.2007 ($84,000 fair value) and 100,000 shares to
      David Stewart on March 31, 2007 ($82,000 fair value).  The
      shares to David Stewart were issued in 25,000 share portions on March 31,
      June 30, September 30 and December 31 during fiscal
      2007.  During the quarter ended March 31, 2008, the Board of
      Directors authorized stock grants to two consultants: 90,000 shares to
      CEOcast on February 2, 2008 ($27,900 fair value) and 100,000 shares to
      David Stewart on March 31, 2008 ($29,000 fair value).  The 2008
      award to David Stewart is to be issued in 25,000 share portions on March
      31, June 30, September 30 and December 31 during fiscal
      2008.  Expense of $7,250 was recognized in the quarter ending
      March 31, 2008.  In February 2008, the Company entered into a 1
      year consulting agreement with CEOcast to provide investor relations,
      public relations and shareholder relations services.  The
      Company may terminate the agreement for the remaining nine months of
      services by giving notice on or before May 22, 2008.  The
      Company agreed to pay the Consultant $30,000 plus the above common stock
      grant of 90,000 shares for the first three months and if the agreement is
      continued the remainder of the term, an additional $7,500 per month for
      eight months plus a common stock grant for 270,000 shares.  In
      January
  6
  2008, the
Board of Directors awarded Joe Cummins a $2,500 cash bonus and a $2,500 stock
bonus (7,575 shares) for closing a $1 million funding with Firebird Global
Master Fund, Ltd.
 
 4.
              Common
      Stock Options.  During 2006, the Company issued 1,200,000
      options to employees of the Company. These options vest evenly over the
      four years following grant.  The Company recognized $58,287
      expense related to the options during the first quarter of 2007 and
      $55,661 expense during the first quarter of 2008.  The remaining
      cost expected to be recognized if these options vest is
      $571,065.  During the first quarter of 2008, the Company also
      recognized $5,060 expense for 100,000 options granted to two
      consultants.  25,000 options vested on March 31 and 25,000
      options each shall vest June 30, September 30 and December 31,
      2008.  The fair value of each option granted is estimated on the
      date of grant using the Black-Scholes option-pricing model with the
      following weighted average assumptions: dividend yield 0.0%, expected
      volatility of 111.96 - 138.31%, risk-free interest rate of 1.5 – 1.62% and
      expected life of  2 - 5
years.
 
 5.
              Preferred
      Stock Financing.  During the first three months of 2008, the
      Company completed a private placement by selling 1,000 shares of
      convertible preferred stock for $1,000 per share under the terms of a
      Stock Purchase Agreement; generating gross proceeds of $1,000,000 and net
      proceeds of approximately $849,000, net of commissions, estimated
      registration costs and closing costs.  The convertible preferred
      stock is convertible into 4,000,000 shares of common stock.  The
      investor also received 5 year warrants to purchase 4,000,000 shares of
      common stock at $0.30 per share. The Company evaluated this transaction in
      accordance with the EITF 00-19 and determined it should be recorded as
      equity. The investment banker was paid a commission of $80,000 plus
      received 5 year warrants to purchase 640,000 shares of common stock at
      $0.30 per share.
 
 Pursuant
to the Registration Rights Agreement entered into in connection with the Stock
Purchase Agreement, as amended, the Company is required to use best efforts to
have the registration statement declared effective by the Securities and
Exchange Commission by August 23, 2008.  In the event that the
registration statement is not timely filed, declared effective or not maintained
effective, the Company will be subject to liquidated damages up to 1% of the
aggregate subscription amount per 30 day period not to exceed a maximum of 10%
($100,000).  The conversion option of the preferred stock was
determined by the Company to represent a beneficial conversion feature, in
accordance with the Financial Accounting Standards Board (FASB) EITF
98-5.  The $561,842 intrinsic value of the beneficial conversion
feature was recorded as a deemed dividend to the preferred shareholders in
January 2008, the earliest date preferred shares could have been converted by
the holders.  The liquidated damages were determined to not be of a
likelihood to require recording of a liability under FASB statement No. 5, Accounting for
Contingencies.
 
 The
Company filed a registration statement with the SEC on April 24, 2008 for the
common stock reserved for the preferred stock and warrants.
 
 6.
              Notes
      Payable.  The Company had an unsecured loan agreement with
      Hayashibara Biochemical Laboratories (HBL), a related party, dated July
      22, 1999, which called for HBL to loan the Company $3,000,000 to be
      advanced in three installments. One of these three notes was converted
      into stock.  The annual interest rate on unpaid principal from
      the date of each respective advance was 4.5 percent, with accrued interest
      being payable at the maturity of the note. $1,000,000 was payable on or
      before December 3, 2007, or on or before the expiration of one (1) year
      after approval of the Company’s product by the FDA,
    whichever
  7
  occurs
first. This note has been extended and is payable on or before June 3, 2008, or
on or before the expiration of one (1) year after approval of the Company's
product by the FDA, whichever occurs first. The other $1,000,000 was payable on
or before February 29, 2008, or on or before the expiration of one year after
approval of the Company’s product by the FDA, whichever occurs
first.  This note has been extended and is payable on or before August
28, 2008, or on or before expiration or on or before the expiration of one year
after approval of the Company’s product by the FDA, whichever occurs first. HBL
was paid $200,000 of accrued interest in the first quarter of
2008.  HBL will extend the notes to December 3, 2009 and February 28,
2010, respectively, if $145,000 of accrued interest is paid on or before August
31, 2008.
 
 7.
              License
      and Sublicense Agreements.  Sublicense fee revenue is recognized
      upon completion of all significant initial services provided to the
      licensee and upon satisfaction of all material conditions of the license
      agreement.  In the first quarter of 2007 ABI received a $40,000
      sublicense fee. A $19,992 sublicense fee payable to HBL was included in
      accounts payable based on sublicense fee income earned by the Company
      during the first quarter of 2007.  A $7,500 minimum cash royalty
      fee was paid by the Company to Texas A&M University System during the
      first quarter of 2007 and also during the first quarter of
      2008.  In March 2008, we entered into a Supply Agreement for
      Animal Health with CytoPharm, Inc.  Under the terms of the
      Agreement, CytoPharm will conduct all clinical trials, and seek to obtain
      regulatory approvals in China and Taiwan (the “Territory”) to launch our
      low dose oral interferon in the Territory for treatment of diseases and
      other healthcare applications of swine, cattle and
      poultry.  CytoPharm will make payments to us upon reaching
      certain milestones and will also pay royalties on low dose oral interferon
      sales in the Territory.
 
 8.
              Related
      Party Transactions.  The Company engaged the law firm of Sanders
      Baker P.C. of which Mr. Morris is a partner.  Mr. Morris is also
      the Secretary of the Company.  During the three months ended
      March 31, 2008 the Company incurred approximately $15,000 of legal fees
      from Sanders Baker P.C.
 
 9.
              Subsequent
      Events.  On April 1, 2008, we issued Firebird Global Master
      Fund, Ltd. 84,198 shares of common stock, as a dividend on the Series A
      Preferred Stock valued at $23,056.  These shares are shown as
      issued on the balance sheet.  The price of the common stock was
      calculated at 90% of the average of the 2 lowest VWAP (volume weighted
      average price) for the 5 trading days prior to the dividend payment due
      date. Dividends on the Series A Preferred Stock, at the rate of 10% per
      annum, payable in cash or common stock in the discretion of the Company,
      are due quarterly on January 1, April 1, July 1 and October 1 beginning on
      the first such date after the original issue date (January 8,
      2008).
 
 On April
15, 2008, Dr. Peter R. Mueller joined the Company as Chief Operating Officer and
Director of Research.  Pursuant to an employment contract executed in
April 2008,  Dr. Mueller’s annual salary was set at $210,000 and he
was granted 700,000 share options with an exercise price of $0.32 (equal to the
closing price on April 15, 2008), 100,000 options vesting on April 15, 2008 and
the remaining options vesting annually every April 15 over 3 years.
 
  8
  
 ITEM
      2.
              Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
 
 The
following discussion should be read in conjunction with our financial statements
and the notes thereto which appear elsewhere in this report.  The
results shown herein are not necessarily indicative of the results to be
expected in any future periods.  This discussion contains
forward-looking statements based on current expectations, which involve
uncertainties.  Actual results and the timing of events could differ
materially from the forward-looking statements as a result of a number of
factors.  Readers should also carefully review factors set forth in
other reports or documents that we file from time to time with the Securities
and Exchange Commission.
  Company
Goal – FDA Approval and Commercialization of Oral Interferon.
  We are
engaged in developing biologics for the treatment of human and animal diseases.
We focus our research on human health diseases for the use of low-dose orally
administered natural human interferon alpha.
 
 We own or
license twelve issued United States patents relating to the use or composition
of low-dose oral natural interferon alpha and one patent on the dose formulation
of our dietary supplement. We have filed with the U.S. Food and Drug
Administration (“FDA”), and there now are in effect, six Investigational New
Drug (“IND”) Applications covering indicated uses for low-dose oral interferon
alpha, including treatment of Behcet’s disease, oral warts in HIV+ patients,
chronic cough, hepatitis C virus infection and influenza.
 
 Our
objective is to exploit our  proprietary technology to become a leader
in the field of low-dose oral applications of interferon alpha. Our business
strategy is to pursue those indications for low-dose oral interferon alpha
treatment for which initial clinical research has indicated the treatment is
efficacious and which, in our opinion, have the greatest commercial potential
and are most likely to be approved by the FDA.
 
 Chronic Cough in COPD
Patients.  Chronic obstructive pulmonary disease (COPD) is a
clinical condition with a progressive airflow limitation that is poorly
reversible and characteristic of chronic bronchitis and
emphysema.  The causes of COPD include tobacco smoke, occupational
dusts, chemicals, vapors and environmental pollutants.  COPD is
estimated to affect more that 600 million people worldwide. There are no
effective therapies for emphysema, nor are there efficient clinical management
strategies.  A Phase 2 study to confirm the ability of low-dose orally
administered interferon-alpha to reduce chronic coughing in COPD patients is
scheduled to launch in the second quarter of 2008, with results expected by the
end of 2008.
 
 Dr. Lorenz Lutherer of
Texas Tech University has obtained university funding for a proof-of-concept
study to evaluate orally administered IFNα in the treatment chronic cough
in COPD patients. This experimental clinical study will be a Phase 2 randomized,
double-blind, placebo-controlled, parallel trial in which 40 eligible volunteers
with COPD-associated chronic cough will be randomly assigned to one of two
groups in equalnumbers to receive either IFNα or placebo. Treatment will be given three times
daily for 4 weeks, and patients will be followed for 4 weeks post-treatment to
assess durability of response. The study will evaluate the ability of IFNα to
reduce the frequency and severity of chronic cough in COPD patients. The
study will launch in the next 30 days with conclusion targeted for the third
quarter of 2008.  With additional funding, some subjects with
Idiopathic Pulmonary Fibrosis (IPF) can be added to this study to confirm the
beneficial effects reported by Dr. Lutherer from a pilot study of low-dose oral
interferon treatment of patients with IPF.
  9
   
 Behcet’s
Disease.  Behcet’s disease is a severe chronic relapsing
inflammatory disorder marked by oral and genital ulcers, eye inflammation
(uveitis) and skin lesions, as well as varying multisystem involvement including
the joints, blood vessels, central nervous system, and gastrointestinal tract.
The oral lesions are an invariable sign, occurring in all patients at some time
in the disease. Behcet’s disease is found world-wide, and is a significant cause
of partial or total disability. The US patient population has been estimated as
15,000. The FDA’s Office of Orphan Drugs has granted AMAR orphan drug status for
low dose orally administered Interferon-alpha treatment in this condition. A
double-blind, placebo-controlled Phase 2 trial was completed in Turkey on April
2, 2008.  Results are expected by the end of the second quarter of
2008.
 
 Oral Warts in HIV+
Patients.  Oral warts are lesions in the mouth caused by the
human papillomaviruses. The FDA has granted Orphan Drug Designation to AMAR for
interferon in the treatment of oral warts in HIV+ patients. In Phase 1/2
clinical studies of 36 HIV+ patients with multiple oral warts who were receiving
highly active antiretroviral therapy (HAART), potential efficacy of oral
interferon was observed when some subjects achieved a complete or nearly
complete regression of their warts.
 
 AMAR
launched a placebo-controlled, Phase 2 study in the 1st quarter of 2007. The
protocol covers a 24-week, 80-patient study in which 20 patients will receive
placebo and 60 will receive active treatment at 1500 IU per day.  If
the current study is successful, a Phase 3 trial to confirm safety and efficacy
will be launched in 2009. As of today, 43 oral warts patients have been enrolled
at 12 active clinical sites.  Enrollment of a further 38 patients at a
cost of approximately $114,000 is anticipated by the end of the third quarter of
2008.
 
 Influenza.Influenza (the flu) is
a contagious respiratory illness caused by influenza viruses.  It can
cause mild to severe illness, and at times can lead to
death.  Influenza usually starts suddenly and may include the
following symptoms: 1) fever (usually high), 2) headache, 3) tiredness (can be
extreme), 4) cough, 5) sore throat, 6) runny or stuffy nose, 7) body aches, and
8) digestive problems such as diarrhea, nausea and
vomiting.  Complications of flu can include bacterial pneumonia, ear
infections, sinus infections, dehydration, and worsening of chronic medical
conditions, such as congestive heart failure, asthma, or diabetes.
 
 Flu
viruses spread mainly from person to person through coughing or
sneezing.   Sometimes people may become infected by touching
something with flu viruses on it and then touching their mouth or
nose.  Most healthy adults may be able to infect others beginning 1
day before symptoms develop and up to 5 days after becoming sick. That means
that a person may be able to pass on the flu to someone else before they know
they are sick, as well as while they are sick.
 
 Influenza
A viruses are divided into subtypes based on 2 proteins on the surface of the
virus: the hemagglutinin (H) and the neuraminidase (N).  There are 16
different H subtypes and 9 different N subtypes, all of which have been found
among influenza A viruses in wild birds.  Wild birds are the primary
natural reservoir for all subtypes of influenza A viruses and are thought to be
the source of influenza A viruses in all other animals. Most influenza viruses
cause asymptomatic or mild infection in birds; however, the range of symptoms in
birds varies greatly depending on the strain of virus.  Infection with
certain avian influenza A viruses (for example, some strains of H5 and H7
viruses) can cause widespread disease and death among some species of wild and
especially domestic birds such as chickens and turkeys.
  10
  
 Pigs can
be infected with both human and avian influenza viruses in addition to swine
influenza viruses.  Infected pigs get symptoms similar to humans, such
as cough, fever and runny nose.  Because pigs are susceptible to
avian, human and swine influenza viruses, they potentially may be infected with
influenza viruses of different species (e.g., ducks and humans) at the same
time.  If this happens, it is possible for the genes of these viruses
to mix and create a new virus.  For example if a pig were infected
with a human influenza virus and an avian influenza virus at the same time, the
viruses could mix (reassort) and produce a new virus with most of the genes from
the human virus, but a hemagglutinin and/or neuraminidase from the avian
virus.  The resulting new virus would likely to be able to infect
humans and spread from person to person, but it would have surface proteins
(hemagglutinin and/or neuraminidase) not previously seen in influenza viruses
that infect humans.  This type of major change in the influenza A
viruses is known as antigenic shift.  Antigenic shift results when a
new influenza A subtype to which most people have little or no immune protection
infects humans.  If this new virus causes illness in people and can be
transmitted easily from person to person, an influenza pandemic can
occur.
 
 Influenza
A viruses are found in many different animals, including ducks, chickens, pigs,
whales, horses and seals.  Influenza B viruses circulate widely only
among humans. While it is unusual for people to get influenza infections
directly from animals, sporadic human infections and outbreaks caused by certain
avian influenza A viruses have been reported.
 
 A number
of natural outbreak or challenge studies indicate that low doses of IFNα given
orally and/or intranasally are safe and effective at treating human
flu.  IFNα administered intranasally coats the oropharynx and comes in
contact with the same receptors as IFNα administered
orally.  Leukocyte interferon was given in low doses intranasally for
3 consecutive days to 374 subjects “at the height” of an influenza
outbreak.  Interferon-treated subjects had less severe illness than 382
subjects given placebo.  When interferon was given to 320 subjects
“before” the influenza outbreak, these subjects had less illness than the 317
subjects given placebo.  It was reported that the interferon treatment
was free of adverse events.
 
 In 1969,
approximately 14,000 people in Moscow participated in controlled studies of
placebo versus interferon treatment during a natural outbreak of Hong Kong
influenza.  Interferon (about 128 units) or placebo was dripped into
the nose daily for 5 days starting about the time of the first reported
influenza cases.  Interferon treatment significantly (P<0.01)
reduced the number of influenza cases.
 
 Intranasal
drops of human interferon alpha (5,000 units daily) given for 4 months reduced
the frequency and severity of diseases due to influenza A (H3N2 and H1N1) and
parainfluenza virus.  Data was collected on 83 volunteers in the
study.  Fever occurred in 6 of 40 volunteers given interferon and in
15 of 43 volunteers given placebo (P<0.01).  Subjective symptoms
such as headache, cough, fatigue, anorexia, myalgia, etc. occurred in 34% of
volunteers given interferon and in 67% of volunteers given placebo
(P<0.01).
 
 In 1982,
it was reported that human leukocyte interferon (10,000 units/day) or placebo
was dripped into the nostrils of 27 children daily for 60 days.  The
children lived in an orphanage where natural outbreaks of influenza A and
influenza B occurred during the treatment period.  Interferon did not
prevent illness but significantly reduced the duration of fever and reduced the
main peak fever.  Clinical manifestations of influenza were milder in
children given interferon compared to placebo.  Adverse events due to
interferon therapy were not observed.
  11
  During
influenza epidemics in 1983, 1984 and 1985, 140 children were treated with a
spray of natural human interferon alpha into the nose and mouth twice daily for
3-4 days.  The total daily dose was reported to be 700-1600
units.  The 53 control children were given traditional Chinese
herbs.  Children given interferon had a significantly (P<0.01)
faster normalization of temperature at 24, 36 and 48 hours after the first
treatment.  The clinicians reported that pharyngitis and lymphadenosis
of the posterior pharynx improved when fever subsided.
 
 Low doses
of interferon probably do not have a direct antiviral effect but instead exert
an immune modulatory effect through interferon stimulated
genes.  Influenza studies conducted in the USA, Australia and Germany
have shown that oral interferon protects mice against an otherwise fatal
influenza infection.  In February 2008, the Company filed an IND
application with the FDA and plans to launch a Phase 2 clinical study for the
2008 - 2009 influenza season.
 
 Strategic Alliancewith HBL.Hayashibara
Biochemical Laboratories, Inc. (“HBL”) was established in 1970 to engage in
research and development. It is a subsidiary of Hayashibara Company, Ltd., a
privately-owned Japanese holding corporation with diversified subsidiaries. For
more than 130 years the Hayashibara Company, Ltd. and its predecessors have been
applying microbiological technology in the starch industry for the production of
maltose and other sugars.
 
 In 1981,
HBL established the Fujisaki Institute to accelerate development of industrial
methods for the production of biologics and to sponsor clinical trials for such
products. In 1985, HBL built the Fujisaki Cell Center to support basic research.
In 1987, HBL successfully accomplished the mass production of human cells in an
animal host by producing human cells in hamsters. This made it possible to
economically produce a natural form of human interferon alpha and other
biologics. HBL also has developed and obtained patents for technology relating
to the production of interferon alpha-containing lozenges by which the stability
of the interferon alpha activity can be maintained for up to 24 months at room
temperature and up to five years if the product is refrigerated. The Company
believes that the use of such lozenges gives it advantages over competitive
technologies in terms of cost, taste and ease of handling. On March 13, 1992,
the Company entered into a Joint Development and Manufacturing/Supply Agreement
with HBL (the “Development Agreement”). Such Development Agreement was
subsequently amended on January 17, 1996; May 10, 1996; and September 7,
2001.  The current expiration date of the Development Agreement is
March 12, 2011, at which time it will automatically renew for an additional
three (3) years, unless the parties agree otherwise. Among other things, the
Development Agreement provides the Company with a source of natural human
interferon alpha for use in the Company’s interferon alpha-containing
products.
 
 Strategic Alliance with
Nobel.  We signed a licensing and supply agreement in September
2004 with a Turkish pharmaceutical company, NOBEL ILAC SANAYII VE TICARET A.S.,
providing the rights to oral low-dose interferon-alpha for the treatment of
Behcet’s disease in Turkey and in Azerbaijan, Bosnia & Herzegovina,
Bulgaria, Croatia, Georgia, Kazakhstan, Kyrghyzstan, Macedonia, Romania, Russia,
Saudi Arabia, Slovenia, Tajikistan, Turkmenistan, Uzbekistan, and Federal
Republic of Yugoslavia.
  The
license agreement covers a territory whose population is approximately 365
million. In Turkey, where the disease is more than 600 times more prevalent than
in the United States, there are from 56,000 to 259,000 people who are afflicted
with the disease, according to a review published in the New England Journal of
Medicine. The U.S. Food and Drug Administration (FDA) has granted Orphan Drug
Designation for this product for the clinical indication of Behcet’s Disease to
us. The Orphan Drug Designation is designed to promote the development of
treatments for diseases rare in the United States and provides certain marketing
exclusivity incentives outlined under the Orphan Drug Act.
  12
    Under the
terms of the agreement, Amarillo and NOBEL will conduct Behcet’s disease studies
in Turkey under an Investigating New Drug (IND) Application submitted by ABI to
the U.S. FDA. U.S. FDA approval will be sought and this FDA approval will be
owned by ABI, but will be used by NOBEL to seek regulatory approval in each
country to which the licensing rights apply.
  A 12 week
Phase II, placebo-controlled dose-ranging study of 85 patients with Behcet’s
disease was completed in Turkey on April 2, 2008.  Final results are
expected to be available by the end of the second quarter of 2008. If the Phase
2 data are encouraging, then NOBEL will conduct a Phase 3 study before a New
Drug Application (NDA) can be submitted to the US FDA.
 
 Strategic Alliance
with Bumimedic.In January 2006 we entered into a
license and distribution agreement with Bumimedic (Malaysia) Sdn. Bhd, a
Malaysian pharmaceutical company that is a part of the Antah HealthCare Group,
to market our low-dose interferon (natural human IFN) in Malaysia. Bumimedic
will seek registration for the Company’s natural human IFN and commence
marketing the product after approval. The terms of the agreement call for
Bumimedic to manufacture lozenges from our bulk natural human IFN (which is
supplied by Hayashibara Biochemical Laboratories); package the lozenges and
distribute them to local hospitals, pharmacies and clinics in Malaysia. Pursuant
to the agreement, we will receive a series of payments, in three stages: upon
formal execution of the distribution agreement, upon regulatory approval, and
upon production. We will also receive a royalty on the sale of the natural human
IFN.
 
 Strategic Alliance with
CytoPharm.In November 2006, we entered into a License and
Supply Agreement with CytoPharm, Inc., a Taipei, Taiwan-based biopharmaceutical
company whose parent company is Vita Genomics, Inc., the largest biotech company
in Taiwan specializing in pharmacogenomics and specialty Clinical Research
Organization. Under the terms of the Agreement, CytoPharm and its subsidiary
will conduct all clinical trials, and seek to obtain regulatory approvals in
both China and Taiwan (the “Territory”) to launch our low dose oral interferon
in the Territory for influenza and hepatitis B (“HBV”) and hepatitis C
(“HCV”)  indications. CytoPharm has entered into discussions with
regulatory agencies in the Territory to conduct clinical trials for oral
interferon treatment of hepatitis B and influenza, which are expected to
commence in 200 8. According to the Agreement, CytoPharm will make payments to
us upon reaching certain milestones and will also pay royalties on low dose oral
interferon sales in the Territory.
 
 Cytopharm
plans to launch a Phase II, placebo-controlled, dose-ranging study of 165
hepatitis C virus infected patients in Taiwan in the third quarter of
2008.  The study is designed to test the ability of low-dose orally
administered interferon-alpha to reduce the virolgic relapse rate of patients
who have completed standard therapy with pegylated interferon plus
ribavirin.  Treatment time is 6 months with 6 months of post treatment
observation.  Results are expected by the end of 2009.
 
 In March
2008, we entered into a Supply Agreement for Animal Health with CytoPharm,
Inc.  Under the terms of the Agreement, CytoPharm will conduct all
clinical trials, and seek to obtain regulatory approvals in China and Taiwan
(the “Territory”) to launch our low dose oral interferon in the Territory for
treatment of diseases and other healthcare applications of swine, cattle and
poultry.  CytoPharm will make payments to us upon reaching certain
milestones and will also pay royalties on low dose oral interferon sales
in the Territory.
   13
    Nutraceutical
Product.  The Company sells anhydrous crystalline maltose (ACM)
as Maxisal® to individuals and to pharmacies in the USA and to licensed
distributors overseas. The company seeks to out-license Maxisal®.
  Equity Funding.In
January 2008, we entered into agreements with Firebird Global Master Fund, Ltd.
for the sale of  1,000 shares of our Series A Preferred Stock, which
is convertible into 4,000,000 shares of common stock, and warrants to purchase
an additional 4,000,000 shares of common stock at $0.30 per share. We also
issued to MidSouth Capital Markets Group, Inc. (“MidSouth”), the
selling/placement agent in the private placement, warrants to purchase 640,000
shares of our common stock on the same terms and conditions as the warrants
issued to Firebird.  The warrants were issued to MidSouth pursuant to
an agreement entered into with MidSouth in September 2007 to engage MidSouth to
act as our placement agent in connection with a future private
placement.  Pursuant to the agreement, MidSouth was to receive for its
services a warrant to purchase shares of our common stock equal to 8% of the
number of common shares to be issued on an as converted basis in the private
placement, with an exercise price of $.30 per share and exercisable for 5 years
from the date of issuance.
 
  Results
of Operations:
  Revenues.  During
the three-month period ended March 31, 2008, $888 from dietary supplement sales
was generated compared to dietary supplement sales for the three-month period
ended March 31, 2007, of $534, an increase of $354 or approximately
66%.  In the three-month period ended March 31, 2007 a $40,000
sublicense fee was collected.  No license fees were collected during
the first quarter of 2008. There were no sales of interferon products during the
first three months of 2007 or 2008.
  Research
and Development Expenses. Research and development expenses of $215,892 were
incurred for the three month period ended March 31, 2008, compared to $131,012
for the three month period ended March 31, 2007, an increase of $84,880
(65%).  The increase was mostly from $90,000 of advertising costs for
patient recruitment in the clinical trials.
  Selling,
General and Administrative Expenses. Selling, general and administrative
expenses of $403,684 were incurred for the three-month period ended March 31,
2008, compared to $633,575 for the three-month period ended March 31, 2007, a
decrease of $229,891 (36%).  Approximately half of this decrease is
from non-cash items.  Black-Scholes option, stock grant and stock for
service expenses were $95,871 during the first quarter of 2008 compared to
$224,287 the first quarter of 2007, a decrease of $128,416 (57%).  The
other half of the decrease in selling, general and administrative expenses in
the first quarter of 2008 compared to the first quarter in 2007 is from several
items.  Vacation expense was $6,276 for the three-month period ended
March 31, 2008 compared to $34,522 for the three-month period ended March 31,
2007, a reduction of $28,246 (82%).  License fee and royalty expenses
were $7,500 in the three-month period ended March 31, 2008 compared to $27,491
in the three-month period ended March 31, 2007, a $19,991 decrease
(73%).  Travel expenses were $8,795 in the three-month period ended
March 31, 2008 compared to $17,280 in the three-month period ended March 31,
2007, a decrease of $8,485 (49%).  General legal expenses were $6,934
lower in Q1 2008 than Q1 2007.  Selling, general and administrative
expenses for employee compensation during the first quarter of 2008 were
$112,816 compared to $120,401 in Q1 2007, a decrease of $7,585.
   14
  Non-cash
Consulting Activities.  During the first quarter of 2008, the Board of
Directors authorized the issuance of 190,000 shares of common stock to
consultants: 90,000 shares to CEOcast on February 26, 2008 ($27,900 fair value)
and 100,000 shares to David Stewart on March 31, 2008 ($29,000 fair
value).  The shares to David Stewart were issued in a 25,000 share
portion on March 31 and are to be issued on June 30, September 30 and December
31 during fiscal 2008.  The accumulated value of the above mentioned
stock for the first three months of 2008 is $56,900 for non-cash consulting
compensation.  The Board of Directors also authorized the issuance of
50,000 options ($10,121) each to two consultants, Dr. Kimball Austin Miller and
Dr. Elaine King Miller. 12,500 Options each vested on March 31, 2008 and 12,500
options each will invest on June 30, September 30 and December 31 during fiscal
2008.  As of March 31, 2008, $5,060 of expense has been recognized
from these options.   Non-cash consulting activities totaled
$40,210 during the first three months of 2008.  In the first three
months of 2007, non-cash consulting compensation was $166,000.
  Other
Income.  During the three-month period ended March 31, 2008, $1,371
from interest and investment income was generated compared to $1,253 from
interest income for the three-month period ended March 31, 2007, an increase of
$118 or approximately 9%.
  Net
Loss.  As a result of the above, in the three-month period ended March
31, 2008, the Company's net loss was $640,092 compared to a net loss for the
three-month period ended March 31, 2007 of $745,206.
  Liquidity
Needs:  On March 31, 2008, the Company had available cash and
short-term treasuries of $255,635 and had a working capital deficit (current
assets less current liabilities) of approximately $2,400,000.  Current
liabilities include two $1 million notes plus $505,150 of accrued interest owed
to Hayashibara Biochemical Laboratories, Inc. (HBL), the Company’s largest
shareholder.  Assuming there is no decrease in current accounts
payable, and accounting for various one–time expenses, the Company’s negative
cash flow for operating activities plus equipment purchases, patent filings and
excluding payment of $200,000 of accrued interest to HBL (burn rate) is
approximately $150,000 per month.  The Company's continued losses and
lack of liquidity raise substantial doubt about whether the Company is able to
continue as a going concern for a reasonable period of time. The Company's
ability to continue as a going concern is dependent upon several factors
including, but not limited to, the Company's ability to generate sufficient cash
flows to meet its obligations on a timely basis, obtain additional financing and
continue to obtain supplies and services from its vendors. The Company will need
to raise additional funds in order to fully execute its 2008 Plan.
  Forward-Looking
Statements: Certain statements made in this Plan of Operations and elsewhere in
this report are "forward-looking statements" within the meaning of the Private
Securi­ties Litigation Reform Act of 1995 (the "Act"). Forward-looking
statements include, without limitation, any statement that may predict,
forecast, indicate or imply future results, performance, achievements, costs or
expenses and may contain words such as "believe," "anticipate," "expect,"
"estimate," "project," "budget," or words or phrases of similar meaning.
Forward-looking statements involve risks and uncertainties which may cause
actual results to differ materially from those projected in the forward-looking
statements. Such risks and uncertain­ties are detailed from time to time in
reports filed by the Company with the Securities and Exchange Commission,
including Forms 8-K, 10-Q and 10-KSB and include among others the following:
promulga­tion and imple­mentation of regulations by the U.S. Food and
Drug Administra­tion ("FDA"); promul­gation and implementation of
regulations by foreign governmen­tal instru­mentalities with functions
similar to those of the FDA; costs of research and develop­ment and clinical
trials, including without limitation, costs of clinical supplies, packaging and
inserts,
   15
  patient
recruitment, trial monitoring, trial evaluation and publication; and possible
difficulties in enrolling a sufficient number of qualified patients for certain
clinical trials. The Company is also dependent upon a broad range of general
economic and financial risks, such as possible increases in the costs of
employing and/or retaining qualified personnel and consultants and possible
inflation which might affect the Company's ability to remain within its budget
forecasts. The principal uncertainties to which the Company is presently subject
are its inability to ensure that the results of trials performed by the Company
will be sufficiently favorable to ensure eventual regulatory approval for
commercial sales, its inability to accurately budget at this time the possible
costs associated with hiring and retaining of additional personnel,
uncertainties regarding the terms and timing of one or more commercial partner
agreements and its ability to continue as a going concern.
  The risks
cited here are not exhaustive. Other sections of this report may include
additional factors which could adversely impact the Company's business and
future prospects. Moreover, the Company is engaged in a very competitive and
rapidly changing industry.
  New risk
factors emerge from time to time and it is not possible for management to
predict all such risk factors, nor can it assess the impact of all such risk
factors on the Company's business, or the extent to which any factor or
combination of factors may cause actual results to differ materially from those
projected in any forward-looking statements. Given these risks and
uncertainties, investors should not place undue reliance on forward-looking
statements as a prediction of actual future events.
 
  ITEM
3.                      Quantitative
and Qualitative Disclosures About Market Risk.
  We may not be able to adequately
protect and maintain our intellectual property.Our
success will depend in part on our ability to protect and maintain our patents,
intellectual property rights and licensing arrangements for our products and
technology.  We currently own      four
patents and license      ten
patents.  No assurance can be given that such licenses or rights used
by us will not be challenged, infringed or circumvented or that the rights
granted thereunder will provide competitive advantages to us. Furthermore, there
can be no assurance that we will be able to remain in compliance with our
existing or future licensing arrangements. Consequently, there may be a risk
that licensing arrangements are withdrawn with no penalties to the licensee or
compensation to us.
 
 We rely on third parties for the
supply, manufacture and distribution of our products.  Third
parties manufacture and distribute all of our products. We do not currently have
manufacturing facilities or personnel to independently manufacture our products.
Currently, Marlyn Nutraceutical manufactures our nutraceutical products. Our
licensed distributors, located in the United States and internationally,
distribute the products.  Except for any contractual rights and
remedies that we may have with our manufacturer and our distributors, we have no
control over the availability of our products, their quality or cost or the
actual distribution of our products. If for any reason we are unable to obtain
or retain third-party manufacturers and distributors on commercially acceptable
terms, we may not be able to produce and distribute our products as
planned.  If we encounter delays or difficulties with our contract
manufacturer in producing or packaging our products or with our distributor in
distributing our products, the production, distribution, marketing and
subsequent sales of these products would be adversely affected, and we may have
to seek alternative sources of supply or distribution or abandon or sell product
lines on unsatisfactory terms. We may not be able to enter into alternative
supply, production or distribution arrangements on commercially acceptable
terms, if at all. There can be no assurance that the manufacturer that we have
engaged will be able to provide sufficient quantities of these products or that
the products supplied will meet with our specifications or that our distributor
will be able to distribute our products in accordance with our
requirements.
  16
   
 We are dependant on funding from
private placements of stock.Our sales revenue, sublicense
fees and royalty income are low compared to expenses.  Our primary
focus is to achieve FDA approval of oral interferon for one or more disease
indications.  We do not expect significant sales or royalty revenue in
the near term as Phase 2 and Phase 3 clinical studies must be completed before a
NDA (New Drug Application) may be submitted to the FDA.  We operate at
a net loss and current liabilities exceed current assets mostly by the amount
owed to HBL for two $1 million notes plus $505,150 of accrued interest on March
31, 2008.  We paid HBL $200,000 of accrued interest in January of 2008
and HBL extended the notes and remaining accrued interest until June 3, 2008 and
August 28, 2008.  HBL will extend the notes and accrued interest until
December 3, 2009 and February 28, 2010 if payment of $145,000 of accrued
interest is received by August 31, 2008.  We do not have sufficient
liquidity to pay off the notes or to fund operating losses unless funding is
obtained from private placements of stock.  There can be no assurance
that private placement funding will always be available on terms acceptable to
us, or at all.
 
 We are dependent on certain key
existing and future personnel.Our success will depend, to a
large degree, upon the efforts and abilities of our officers and key management
employees such as Joseph M. Cummins, our President and Chief Executive Officer,
Peter R. Mueller, our Chief Operating Officer and Director of Research, Gary W.
Coy, our Chief Financial Officer, and Martin J. Cummins, our Vice President of
Clinical and Regulatory Affairs. The loss of the services of one or more of our
key employees could have a material adverse effect on our operations. We do
currently have employment agreements with our executive officers. We do not
currently maintain key man life insurance on any of our key
employees.  In addition, as our business plan is implemented, we will
need to recruit and retain additional management and key employees in virtually
all phases of our operations. We cannot assure that we will be able to
successfully attract and retain key personnel.
 
 If we do not successfully develop,
acquire or license new drugs our business may not grow.We
must invest substantial time, resources and capital in identifying and
developing new drugs, dosage and delivery systems, either on our own or by
acquiring and licensing such products from third parties. Our growth depends, in
part, on our success in such process.  If we are unable to either
develop new products on our own or acquire licenses for new products from third
parties, our ability to grow revenues and market share may be adversely
affected. In addition, we may not be able to recover our investment in the
development of new drugs, given that projects may be interrupted, unsuccessful,
not as profitable as initially contemplated or we may not be able to obtain
necessary financing for such development if we are unable to fund such
development from our future revenues. Similarly, there is no assurance that we
can successfully secure such rights from third parties on an economically
feasible basis.
 
 Our competitors are much larger and
more experienced than we are and, even if we complete the development of our
drugs, we may not be able to successfully compete with
them.The pharmaceutical industry is highly competitive. 
Our biologics and low-dose oral interferon alpha applications compete with high
dose injectable interferon manufactured by Roche, Schering, InterMune, Serono,
Biogen, Berlex and Hemispherx. High dose injectable interferon has been widely
accepted by the medical community for many years.  Companies who
manufacture injectable interferon alpha applications are more established than
we are and have far greater financial, technical, research and development,
sales and marketing, administrative and other
  17
  resources
than we do.  Even if we successfully complete the development of our
tests, we may not be able to compete effectively with these much larger
companies and their more established products.
 
 We have been the subject of a going
concern opinion by our independent auditors who have raised substantial doubt as
to our ability to continue as a going concern.Our Independent
Registered Public Accountants have added an explanatory paragraph to their
audit reports issued in connection with our consolidated financial
statements which states that our recurring losses from operations and the need
to raise additional financing in order to execute our business plan raise
substantial doubt about our ability to continue as a going concern. We have
experienced net losses from operations of $724,221 for the quarter ended March
31, 2007 and $618,989 for the Quarter ended March 31, 2008.  In
addition, as of March 31, 2007 we had an accumulated deficit of $26,699,085 and
$29,685,940 for the quarter ended March 31, 2008. These factors, among others,
raise substantial doubt about our ability to continue as a going concern. Our
consolidated financial statements do not include any adjustment that might
result from the outcome of this uncertainty. Assurances cannot be given that
adequate financing can be obtained to meet our capital needs. If we are unable
to generate profits and unable to continue to obtain financing to meet our
working capital requirements, we may have to curtail our business sharply or
cease operations altogether. Our continuation as a going concern is dependent
upon our ability to generate sufficient cash flow to meet our obligations on a
timely basis to retain our current financing, to obtain additional financing,
and, ultimately, to attain profitability. Should any of these events not occur,
we will be adversely affected and we may have to cease operations.
 
 Risk Relating to Our January 2008
Financing Arrangement.There
are a large number of shares underlying our preferred stock and warrants that
may be available for future sale and the sale of these shares may depress the
market price of our common stock.As of March 31,
2008, we had 29,672,034 shares of common stock issued and outstanding and 1,000
shares of our 10% Series A Convertible Preferred Stock issued and outstanding.
We filed a registration statement with the SEC on April 24, 2008 that covers
10,024,198 shares of common stock, including 4,000,000 shares underlying the
Series A Preferred Stock, 4,640,000 shares underlying Series A Warrants,
1,300,000 shares underlying options and other warrants issued to certain of the
selling stockholders, and 84,198 shares issued as a dividend on the Series A
Preferred Stock. The sale of these shares may adversely affect the market price
of our common stock.
  Risks Related to our Common
Stock.There is only a limited market for our common stock and
the price of our common stock may be affected by factors that are unrelated to
the performance of our business.  If any of the risks described in
these Risk Factors or other unseen risks are realized, the market price of our
common stock could be materially adversely affected.  Additionally, market
prices for securities of biotechnology and diagnostic companies have
historically been very volatile.  The market for these securities has from
time to time experienced significant price and volume fluctuations for reasons
that are unrelated to the operating performance of any one company.  In
particular, and in addition to the other risks described elsewhere in these Risk
Factors, the following factors can adversely affect the market price of our
common stock:
  ·
              announcements
      of technological innovation or improved or new diagnostic products by
      others;
 ·
              general
      market conditions;
 ·
              changes
      in government regulation or patent
decisions;
 ·
              changes
      in insurance reimbursement practices or policies for diagnostic
      products.
  18
  
 Our
common shares have traded on the Over the Counter Bulletin Board at prices below
$5.00 for several years. As a result, our shares are characterized as “penny
stocks” which could adversely affect the market liquidity of our common
stock.
 
 The
Securities Enforcement and Penny Stock Reform Act of 1990 requires additional
disclosure relating to the market for penny stocks in connection with trades in
any stock defined as a penny stock. Securities and Exchange Commission
regulations generally define a penny stock to be an equity security that has a
market price of less than $5.00 per share, subject to certain exceptions. Such
exceptions include any equity security listed on NASDAQ or a national securities
exchange and any equity security issued by an issuer that has:
 
 ·
              net
      tangible assets in excess of $2,000,000, if such issuer has been in
      continuous operation for three
years;
 ·
              net
      tangible assets in excess of $5,000,000, if such issuer has been in
      continuous operation for less than three years;
  or
 ·
              average
      revenue of at least $6,000,000, for the last three
  years.
 
 Unless an
exception is available, the regulations require, prior to any transaction
involving a penny stock, that a disclosure schedule explaining the penny stock
market and the risks associated therewith is delivered to a prospective
purchaser of the penny stock.  We currently do not qualify for an
exception, and, therefore, our common stock is considered to be penny stock and
is subject to these requirements.  The penny stock regulations adversely
affect the market liquidity of our common shares by limiting the ability of
broker/dealers to trade the shares and the ability of purchasers of our common
shares to sell in the secondary market.  In addition, certain institutions
and investors will not invest in penny stocks.
 
 Future
sales of a significant number of shares of our common stock by existing
stockholders may lower the price of our common stock, which could result in
losses to our stockholders.
 
 We
estimate there that are approximately 14,000,000 restricted shares outstanding
which, upon becoming freely tradable under Rule 144 or 144(k) of the Securities
Exchange Act of 1934, may lower the price of our common stock.
 
  ITEM
4.                      Controls
and Procedures
  As
required by Rule 13a-15 under the Exchange Act, we have carried out an
evaluation of the effectiveness of the design and operation of our company’s
disclosure controls and procedures as of the end of the period covered by this
quarterly report, being March 31, 2008. This evaluation was carried out under
the supervision and with the participation of our company’s management,
including our company’s president and chief executive officer. Based upon that
evaluation, our company’s president and chief executive officer concluded that
our company’s disclosure controls and procedures are effective as at the end of
the period covered by this report. There have been no significant changes in our
company’s internal controls or in other factors, which could significantly
affect internal controls subsequent to the date we carried out our
evaluation.
  Disclosure
controls and procedures are controls and other procedures that are designed to
ensure that information required to be disclosed in our company’s reports filed
or submitted under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission’s rules and forms. Disclosure controls and
  19
  procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed in our company’s reports filed under the
Exchange Act is accumulated and communicated to management, including our
company’s president and chief executive officer as appropriate, to allow timely
decisions regarding required disclosure.
 
  PART
II - OTHER INFORMATION
  ITEM
1.                      Legal
Proceeding.
  From time
to time, we may become involved in various lawsuits and legal proceedings which
arise in the ordinary course of business. Litigation is subject to inherent
uncertainties, and an adverse result in these or other matters may arise from
time to time that may harm our business.  As of the date of this
report, we were not aware of any such legal proceedings or claims against
us.
  ITEM
      2.
              Unregistered
      Sales of Equity Securities and Use of
Proceeds
  During
the quarter ended March 31, 2008, the Board of Directors authorized stock grants
to two consultants: 90,000 shares to CEOcast on February 26, 2008 ($27,900 fair
value) and 100,000 shares to David Stewart on March 31, 2008 ($29,000 fair
value).  The shares to David Stewart are to be issued in 25,000 share
portions on March 31, June 30, September 30 and December 31 during fiscal
2008.  Expense of $7,250 was recognized in the quarter ending March
31, 2008.  In January 2008, the Board of Directors awarded Joe Cummins
a $2,500 cash bonus and a $2,500 stock bonus (7,575 shares) for closing a $1
million funding with Firebird Global Master Fund, Ltd.
 
 During
the first three months of 2008, the Company completed a private placement by
selling 1,000 shares of convertible preferred stock for $1,000 per share in a
private placement offering; generating gross proceeds of $1,000,000 and net
proceeds of approximately $849,000, excluding commissions, estimated
registration costs and closing costs.  The convertible preferred stock
is convertible into 4,000,000 shares of common stock.  The investor
also received 5 year warrants to purchase 4,000,000 shares of common stock at
$0.30 per share. The investment banker was paid a commission of $80,000 plus
received 5 year warrants to purchase 640,000 shares of common stock at $0.30 per
share. The Company filed a registration statement with the SEC on April 24, 2008
for the common stock reserved for preferred stock and
warrants.  Pursuant to the Registration Rights Agreement entered into
in connection with the Stock Purchase Agreement, as amended, the Company is
required to file a registration statement covering the shares of common stock
underlying the Series A Preferred Stock and Series A Warrants, and issuable as
dividends on the Series A Preferred Stock, in an amount permissible under Rule
415 under the Securities Act of 1933, as amended, by April 25, 2008, and to use
best efforts to have the registration statement declared effective by the
Commission by August 23, 2008.  In the event that the registration
statement is not timely filed, declared effective or maintained effective, the
Company will be subject to liquidated damages up to 1% of the aggregate
subscription amount per 30 day period not exceed to a maximum of
10%.
 
 On April
1, 2008, we issued Firebird Global Master Fund, Ltd. 84,198 shares of common
stock, as a dividend on the Series A Preferred Stock., valued at
$23,056.  These shares are included as issued on the balance sheet as
of March 31, 2008.  The price of the common stock was calculated at
90% of the average of the 2 lowest VWAP (volume weighted average price) for the
5 trading days prior to the dividend payment due date. Dividends on the Series A
Preferred Stock, at the
  20
  rate of
10% per annum, payable in cash or common stock in the discretion of the Company,
are due quarterly on January 1, April 1, July 1 and October 1 beginning on the
first such date after the original issue date (January 8, 2008).
 
 Date
      (2008)
              Shares
      of Common Stock
              Purchaser
              Discount*Issue
      Price
              Number
              Per
      Share
              Total1
              January
      8
              .33
              7,575
              Joseph
      Cummins
              .00
              02
              February
      26
              .31
              86,400
              Rachel
      Glicksman (CEOcast)
              .00
              03
              February
      26
              .31
              3,600
              Dan
      Schustack (CEOcast)
              .00
              04
              March
      31
              .29
              25,000
              David
      Stewart
              .00
              05
              April
      1
              .2738
              84,198
              Firebird
      Global Master Fund
              .0305
              2,568
 *Discounts
were calculated based on the last transaction on each date except dividend
payment was calculated on the average of the 2 lowest VWAP during the 5 trading
days prior to the payment due date.
 
 
 Date
      (2008)
              Shares
      of Convertible Preferred Stock
              Purchaser
              Discount*Issue
      Price
              Number
              Per
      Share
              Total1
              January
      8
              1,000
              1,000
              Firebird
      Global Master Fund
              .00
              0
 
  ITEM
      3.
              Defaults
      Upon Senior Securities.
  None.
  ITEM
      4.
              Submission
      of Matters to a Vote of Security
Holders.
  None.
  ITEM.5.
              Other
      Information
  None.
  ITEM
      6.
              Exhibits.
  None.
   21
  
  SIGNATURES
  Pursuant
to the requirements of Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
  AMARILLO
BIOSCIENCES, INC.
  
  Date:
      May 12, 2008
              By:/s/
      Joseph M. Cummins
  Joseph
      M. Cummins
                President
      and Chief Executive
Officer
   
  Date:
      May 12, 2008
              By:/s/
      Gary W. Coy
  Gary
      W. Coy
                Vice
      President and Chief Financial
  Officer
    
  22