United
        States
 **SECURITIES
        AND EXCHANGE COMMISSION**
 WASHINGTON,
        D.C. 20549
 
 **FORM
        10-QSB**
 
 [
                  X
                  ]
              QUARTERLY
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934
 
 For
        the
        quarterly period ended **September
        30, 2006**
 
 [   
                  ]
              TRANSITION
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934
 
 Commission
        File Number 0-20791
 
 **AMARILLO
        BIOSCIENCES, INC.**
 (Exact
        name of small business issuer as specified in its charter)
 
 TEXAS
              75-1974352(State
                  or other jurisdiction of
              (IRS
                  Employer Identification No.)incorporation
                  or organization)
 
  4134
                  Business Park Drive, Amarillo, Texas
              79110(Address
                  of principal executive offices)
              (Zip
                  Code)
 
 806-376-1741
              FAX
                  806-376-9301(Issuer's
                  telephone number, including area code)
 
 Check
        whether the issuer (1) filed all reports required to be filed by Section
        13 or
        15(d) of the Exchange Act during the past 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 whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act) Yes  No X .
 
 As
        of
        September 30, 2006 there were 24,326,767 shares of the issuer's common stock
        outstanding.
 
 Transitional
        Small Business Disclosure Format (check one) Yes __. No X .
 
  1
  **AMARILLO
        BIOSCIENCES, INC.**
 
 INDEX
 
 
 PAGE
                  NO.PART
                  I:
              FINANCIAL
                  INFORMATIONITEM
                  1.
              Financial
                  StatementsConsolidated
                  Balance Sheet - September 30, 2006 (unaudited)
              3Consolidated
                  Statements of Operations - Three and Nine Months Ended September
                  30, 2006
                  and September 30, 2005(unaudited)
              4Condensed
                  Consolidated Statements of Cash Flows - Nine Months Ended September
                  30,
                  2006 and 2005 (unaudited)
              5Notes
                  to Consolidated Financial Statements (unaudited)
              6ITEM
                  2.
              Management's
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              9ITEM
                  3.
              Controls
                  and Procedures
              13PART
                  II:
              OTHER
                  INFORMATIONITEM
                  2.
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              14ITEM
                  4.
              Submission
                  of Matters to a Vote of Security Holder
              15ITEM
                  6.
              Exhibits
              16Signatures
              
              17
 
  2
  **PART
        I - FINANCIAL INFORMATION**
 
 **Item
                  1.**
              **Financial
                  Statements**
 
 Amarillo
        Biosciences, Inc. and Subsidiaries
 Consolidated
        Balance Sheet - Unaudited
 September
        30, 2006
 
  **Assets**Current
                    assets:Cash
                    and cash equivalents
                
                $
                496,166Other
                    current assets
                
                
                45,896Total
                    current assets
                
                
                542,062Property,
                    equipment, & software, net of accumulated depreciation of
                    $45,651
                
                
                11,492Patents,
                    net of accumulated amortization of $201,074
                
                
                123,527Total
                    assets
                
                $
                677,082**Liabilities
                    and Stockholders' Deficit**Current
                    liabilities:Accounts
                    payable
                
                $
                93,731Accrued
                    interest expense - related parties
                
                
                577,832Notes
                    payable - related parties
                
                
                2,000,000Total
                    current liabilities
                
                
                2,671,563Total
                    liabilities
                
                
                2,671,563Commitments
                    and contingenciesStockholders'
                    deficitPreferred
                    stock, $.01 par value:Authorized
                    shares - 10,000,000Issued
                    shares - none
                
                
                -Common
                    stock, $.01 par value:Authorized
                    shares - 50,000,000Issued
                    shares - 24,326,767
                
                
                243,268Additional
                    paid-in capital
                
                
                23,218,664Accumulated
                    deficit
                
                
                (25,456,413
                )Total
                    stockholders' deficit
                
                
                (1,994,481
                )Total
                    liabilities and stockholders' deficit
                
                $
                677,082
 *See
        accompanying notes to financial statements.*
  3
  Amarillo
        Biosciences, Inc. and Subsidiaries
 Consolidated
        Statements of Operations - Unaudited
 
  Three
                    months ended
                
                Nine
                    months endedSeptember
                    30,
                
                September
                    30,2006
                
                2005
                
                2006
                
                2005Revenues:Sales
                    - Nutraceutical
                
                $
                609
                
                $
                1,428
                
                $
                2,854
                
                $
                42,202Sublicense
                    fee revenue
                
                
                -
                
                
                25,352
                
                
                30,000
                
                
                67,486Federal
                    research grants
                
                
                -
                
                
                27,228
                
                
                60,023
                
                
                40,841Total
                    Revenue
                
                
                609
                
                
                54,008
                
                
                92,877
                
                
                150,529Operating
                    Expenses:Cost
                    of sales
                
                
                -
                
                
                (9,641
                )
                
                -
                
                
                (17,456
                )Research
                    and development expenses
                
                
                (174,371
                )
                
                (38,924
                )
                
                (430,306
                )
                
                (122,688
                )Selling,
                    general and administrative expense
                
                
                (589,174
                )
                
                (127,270
                )
                
                (1,873,868
                )
                
                (358,100
                )Total
                    Operating Expenses
                
                
                (763,545
                )
                
                (175,835
                )
                
                (2,304,174
                )
                
                (498,244
                )Operating
                    loss
                
                
                (762,936
                )
                
                (121,827
                )
                
                (2,211,297
                )
                
                (347,715
                )Other
                    income (expense):Interest
                    expense
                
                
                (23,062
                )
                
                (25,351
                )
                
                (70,193
                )
                
                (73,922
                )Interest
                    income
                
                
                1,295
                
                
                -
                
                
                1,295
                
                
                -Net
                    loss
                
                $
                (784,703
                )
                $
                (147,178
                )
                $
                (2,280,195
                )
                $
                (421,637
                )Basic
                    and diluted net loss per share
                
                $
                (0.03
                )
                $
                (0.01
                )
                $
                (0.10
                )
                $
                (0.03
                )Weighted
                    average shares outstanding
                
                
                23,270,391
                
                
                16,684,292
                
                
                21,819,372
                
                
                15,952,171
 
 *See
        accompanying notes to financial statements.*
  4
  Amarillo
        Biosciences, Inc. and Subsidiaries
 Condensed
        Consolidated Statements of Cash Flows - Unaudited
 
 Nine
                    months ended September 30,2006
                
                2005Net
                    cash used in operating activities
                
                $
                (1,144,162
                )
                $
                (274,598
                )Cash
                    from investing activities:Purchases
                    of equipment
                
                
                (10,987
                )
                
                -Purchases
                    of software
                
                
                (1,579
                )
                
                -Patents
                
                
                (13,905
                )
                
                -Net
                    cash used in investing activities
                
                
                (26,471
                )
                
                -Cash
                    from financing activities:Proceeds
                    from exercise of options
                
                
                30,400
                
                
                12,500Proceeds
                    from issuance of common stock
                
                
                1,536,585
                
                
                266,500Principal
                    payments on notes payable
                
                
                (93,500
                )
                
                -Line
                    of credit, net
                
                
                -
                
                
                4,660Net
                    cash provided by financing activities
                
                
                1,473,485
                
                
                283,660Net
                    increase in cash
                
                
                302,852
                
                
                9,062Cash
                    at beginning of period
                
                
                193,315
                
                
                6,283Cash
                    at end of period
                
                $
                496,167
                
                $
                15,345Supplemental
                    Disclosure of Cash Flow InformationCash
                    paid for interest
                
                $
                3,062
                
                $
                33,234
  *See
        accompanying notes to financial statements.*
  5
  **Amarillo
        Biosciences, Inc. and Subsidiaries**
 
 **Notes
        To Consolidated Financial Statements - Unaudited**
 
 1.
              Basis
                  of presentation. The accompanying consolidated financial statements,
                  which
                  should be read in conjunction with the consolidated financial statements
                  and footnotes included in the Company's Form 10-KSB for the year
                  ended
                  December 31, 2005 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 nine months ended September 30, 2006 are not necessarily
        indicative of the results that may be expected for the full year ending December
        31, 2006.
 
 2.
              Stock
                  based compensation. Effective January 1,
                  2006, the Company adopted SFAS No.
                  123 (revised), "Share-Based Payment" (SFAS 123(R)) utilizing the
                  modified prospective approach. Prior to the adoption of SFAS 123(R)
                  we accounted for stock option grant in accordance with
                  APB Opinion No. 25,”Accounting for Stock Issued to Employees," and
                  accordingly, recognized compensation expense for stock option
                  grants using the intrinsic value
                  method.
 
 Under
        the
        modified prospective approach, SFAS 123(R) applies to new awards and
        to awards that were outstanding on January 1, 2006 that
        are subsequently modified, repurchased or cancelled.  Under the
        modified prospective approach, compensation cost recognized in
        the first quarter of fiscal 2006 includes compensation cost for all
        share-based payments granted prior to, but not yet vested as of January 1,
        2006,
        based on the grant-date fair value estimated in accordance with the
        original  provisions of SFAS 123, and compensation cost for all
        share-based payments granted subsequent  to January 1, 2006 based
        on the grant-date fair value estimated in accordance with the
        provisions of SFAS 123(R).  For all quarters after the first quarter of
        fiscal 2006, compensation costs recognized will include compensation costs
        for
        all share-based payments granted based on the grant date fair value estimated
        in
        accordance with the provisions of SFAS 123(R).
 
 The
        following table illustrates the effect on net loss and net loss per share
        if
        Amarillo had applied the fair value provisions of FASB Statement No. 123,
        Accounting for Stock-Based Compensation, to stock-based employee compensation
        prior to January 1, 2006.
  6
 Nine
                      months ended September 30, 2005Net
                      loss, as reported
                  
                  $
                  (421,637
                  )Less:
                      stock based compensation determinedunder
                      fair value based method
                  
                  
                  (181,105
                  )Pro
                      forma net loss
                  
                  $
                  (602,742
                  )Basic
                      and diluted net loss per shareAs
                      reported
                  
                  $
                  (0.03
                  )Pro
                      forma
                  
                  $
                  (0.04
                  )
 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 of 0.0%, expected volatility of 134.0%, risk-free
        interest rate of 1.5% and expected life of 60 months.
 
 3.
              Loss
                  per share. Loss per share is computed based on the weighted average
                  number
                  of common shares outstanding.
 
 4.
              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.
 
 5.
              Line
                  of Credit. The Company has aline
                  of credit with Wells Fargo for $16,000, with interest at the prime
                  rate
                  plus 6.75 percent. There was an outstanding balance at September
                  30, 2006
                  of $428, which is included in accounts
                  payable.
 
 6.
              Equity.
                  During the quarter ended March 31, 2006, the Board of Directors
                  authorized
                  the issuance of 9,033 shares of restricted common stock to consultants
                  in
                  lieu of cash payments. Based upon the common stock trading price
                  at the
                  time of issuance, a non-cash consulting expense of $5,200 was recorded
                  for
                  the issuance of these shares during the first quarter of 2006.
 
 During
        the quarter ended June 30, 2006, the Board of Directors authorized the issuance
        of 70,415 shares of restricted common stock to consultants in lieu of cash
        payments. Based upon the
        common stock trading price at the time of issuance, a non-cash consulting
        expense of $36,400 was recorded for the issuance of these shares during the
        second quarter of 2006.
  7
  During
        the quarter ended September 30, 2006, the Board of Directors authorized the
        issuance of 7,861 shares of restricted common stock to consultants in lieu
        of
        cash payments. Based upon the common stock trading price at the time of
        issuance, a non-cash consulting expense of $8,235 was recorded for the issuance
        of these shares during the third quarter of 2006.
 
 During
        the nine months ended September 30, 2006, the Board of Directors also authorized
        the issuance of 874,000 options to purchase restricted common stock at a
        discounted price to consultants for service, in lieu of cash payments. These
        options have not been exercised. In the first quarter of 2006, the Company
        issued 24,000 options to a consultant, vesting over a twelve month period.
        The
        value of these options will be recognized evenly over the vesting period,
        beginning with the first quarter of 2006 at $8,951 per quarter. In the first
        quarter of 2006, the Company also issued 250,000 options, vesting immediately
        valued at $249,448. In the second quarter of 2006, the Company issued 400,000
        options, vesting immediately valued at $299,914. In the third quarter of
        2006,
        the Company issued 200,000 options, vesting immediately valued at $117,408.
 
 The
        accumulated value of the above mentioned stock and stock options for the
        nine
        months ended September 30, 2006 is $743,458 for non-cash consulting
        compensation.
 
 During
        the nine months ended September 30, 2006, the Company recognized $216,000
        (fair
        value) of expense in connection with the February 2006 grant of 300,000 shares
        of stock to an employee of the Company.  The certificate was issued in May
        2006. The Company also recognized $75,614 of expense in connection with options
        to purchase restricted common stock at a discounted price issued to employees
        of
        the Company.
 
 During
        the quarter ended September 30, 2006, the Company applied the balance of
        its
        $25,000 note payable towards the purchase of 45,455 shares of restricted
        common
        stock at a discounted price. These shares were issued in July 2006.
 
 In
        the
        first nine months of 2006, the Company completed private equity financing
        by
        selling 3,274,917 restricted shares of common stock at a discount to 16
        investors. The net proceeds to the Company were approximately
        $1,511,500.
  
 7.
              License
                  Fee. License 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 2006, the Company entered into a License and Supply Agreement
                  whereby
                  the Company received and earned $30,000 as an initial license
                  fee.
  8
  8.
              Dissolution
                  of Subsidiaries. Effective October 1, 2006, the following subsidiaries
                  of
                  the Company were dissolved with the State of Texas: ABI Taiwan
                  Inc,
                  Amarillo Cell of Canada Inc, Vanguard Biosciences Inc, Veldona
                  Africa Inc,
                  and Veldona Poland Inc. All the above subsidiaries have been inactive
                  for
                  the past several years with no revenues, expenses, assets or liabilities
                  represented in the consolidated financial statements. The capital
                  accounts
                  of the above subsidiaries and the investment in subsidiaries by
                  the
                  Company were eliminated during the third quarter of 2006. No gain
                  or loss
                  was recognized on the dissolution of the above subsidiaries during
                  the
                  third quarter of 2006. Effective October 1, 2006, Amarillo Biosciences,
                  Inc will present its financial statements and filings as an unconsolidated
                  entity.
 
 9.
              Inventory.
                  Inventories are stated at the lower of cost or market. Cost is
                  determined
                  on a first-in, first-out basis. The Company continually assesses
                  the
                  appropriateness of inventory valuations giving consideration to
                  slow-moving, non-saleable, out-of-date or close-dated inventory.
                  As of
                  September 30, 2006 the Company has $4,321 of inventory included
                  in other
                  current assets.
 
 10.
              Cash
                  and Cash Equivalents. Cash and cash equivalents include treasury
                  bills with original maturities of three months or less at the time
                  of
                  purchase.
 
 
 
 **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.*
 
 *Hance,
        Scarborough, Wright, Woodward & Weisbart.* The
        company retained Hance, Scarborough, Wright, Woodward & Weisbart (HSWWW) an
        Austin, Texas based law firm to represent ABI regarding federal and state
        governmental relations matters. HSWWW will work with ABI toward the goal
        of
        achieving regulatory approval for ABI’s low-dose interferon-alpha for oral
        delivery to humans and animals. HSWWW efforts will initially focus on obtaining
        sufficient government or private funding to conduct human influenza studies
        at a
        major research facility.
  *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
        is
        negotiating with an entrepreneur who seeks a supply agreement to sell ACM
        for
        dry mouth.
   9
  *Partner/License
        Discussions.* The
        Company is presently negotiating with human health commercial development
        partners in various regions of the world including South America, India,
        the
        United States and China. These agreements could generally include provisions
        for
        the commercial partner to pay the Company a technology access fee, could
        include
        payments for a portion of the clinical trial expenses, could include payment
        obligations to the Company upon the accomplishment of certain defined tasks
        and/or could provide for payments relating to the future sales of commercial
        product. These agreements could be an important source of funds for the Company.
        However, there can be no assurance that the Company will be successful in
        obtaining additional funding from either human health and animal health
        commercial development partners or private investors. If the Company is not
        successful in raising additional funds, it will need to significantly curtail
        clinical trial expenditures and to reduce staff and administrative expenses
        and
        may be forced to cease operations.
  *Human
        Clinical Studies* . *Houston.* The
        Company has launched a myeloproliferative diseases study at a major cancer
        center in Texas. The myeloproliferative diseases being studied are polycythemia
        vera and essential thrombocythemia. An investigational new drug (IND)
        application was filed with the US Food and Drug Administration (FDA) in the
        second quarter of 2005. Fourteen of twenty patients planned for the first
        phase
        of the study have been enrolled to date.
  *Istanbul.* Nobel
        Ilac Sanayii Ve Ticaret A.S., a leading Turkish pharmaceutical company, is
        co-sponsoring a Behçet’s Disease study with the Company in Turkey. To date, 42
        of 90 planned patients have been enrolled into this double-blinded Phase
        II
        study that is testing the efficacy of interferon lozenges versus placebo
        in the
        treatment and prevention of mouth ulcers. The treatment duration is 12 weeks,
        with completion of the study expected within a year. Other products used
        to
        treat mouth ulcers in Behçet’s Disease, such as corticosteroids, have
        significant side effects. ABI’s non-toxic oral interferon product potentially
        represents a substantial improvement in the treatment of the mouth ulcers
        suffered by virtually all Behçet’s Disease patients.
  *Multiple
        US sites.* A
        protocol has been filed with the FDA and six clinical sites have been engaged
        to
        cooperate in a study of 80 HIV+ patients suffering from oral warts. This
        placebo-controlled Phase II Study is a follow-up to two successful studies
        that
        have already been completed. In the most recent study, 57% of HIV patients
        given
        the optimal dose of oral interferon experienced a complete or nearly complete
        clearance of their oral warts. No products are currently approved by the
        FDA for
        this condition, so treatment of oral warts represents a unique market for
        the
        Company. Patient enrollment is expected to begin within 30 days. The study
        will
        take approximately one year to complete.
  *Lubbock.* Enrollment
        has been completed in an ongoing study of the use of interferon lozenges
        in the
        treatment of idiopathic pulmonary fibrosis (IPF) at Texas Tech University Health
        Sciences Center in Lubbock, Texas (TTUHSC). The principal investigator, Lorenz
        Lutherer, MD, PhD, presented current findings from the study at the Company’s
        annual shareholders’ meeting on June 22, 2006. Dr. Lutherer reported that more
        than half of his patients treated for at least one year showed no signs of
        disease progression as assessed by pulmonary-functions testing and
        high-resolution cat scans of their lungs. IPF is normally rapidly progressive,
        so the fact that half of the
   10
  patients
        have shown no progression of the disease during interferon lozenge treatment
        is
        very encouraging.
  *Multiple
        US sites.* ABI
        has
        noted that low-dose oral interferon relieves chronic coughing in patients
        with
        Sjogren’s syndrome and idiopathic pulmonary fibrosis (IPF). Moreover, ABI has
        published that horses with chronic obstructive pulmonary disease or COPD,
        also
        called inflammatory airway disease, are significantly improved with low doses
        of
        oral interferon. ABI is seeking funding to treat chronic coughing in human
        COPD
        or IPF patients with oral interferon. COPD is reported to affect 10% of humans
        over the age of 40. Because COPD affects many millions of people and is not
        an
        Orphan Disease (a disease that affects fewer than 200,000 people in the U.S.),
        the study of COPD will require a large study population and is therefore
        too
        expensive for ABI to study beyond Phase II without a pharmaceutical partner.
        If
        the clinical data from Phase II are as positive as expected, these Phase
        II data
        will be shared with potential Big Pharma partners.
  *Animal
        Studies.* Manfred
        Beilharz, PhD, Head of Microbiology and Immunology at the School of Biomedical,
        Biomolecular and Chemical Sciences, The University of Western Australia,
        reported on an influenza study in mice sponsored by the Company at the Company’s
        annual shareholders’ meeting on June 22, 2006. An oral dose of interferon alpha
        given once daily protected mice against the weight loss and changes in core
        body
        temperature normally associated with influenza infections. Mice given placebo
        or
        the wrong dose of oral interferon lost weight and suffered declining core
        temperature and had to be euthanized due to their deteriorating condition,
        as
        required by Australian regulations. Dr. Beilharz is preparing to announce
        the
        details of his findings in a major scientific journal. Dr. Beilharz is past
        President of the Australian Interferon Society and an internationally recognized
        authority on interferon. He and members of his research department have 10
        publications and three dissertations on the subject of orally administered
        interferon.
 
 Dr.
        Troy
        Randall of the Trudeau Institute has been conducting influenza studies for
        the
        Company using oral interferon in mice. Data provided to date indicate a positive
        response from oral interferon, similar to the positive results reported from
        Australia. A final report from Dr. Randall is expected soon.
  A
        study
        in poultry was conducted in Nebraska in which chickens were given interferon
        in
        their drinking water before a challenge with low pathogenic avian influenza
        virus. The study is complete, and the Company awaits the final
        report.
  An
        SBIR
        grant was obtained to study *Helicobacter
        pylori* in
        gnotobiotic piglets. The piglets were given interferon orally to determine
        the
        effect on vaccination and reinfection. A full report from The Ohio State
        University, our collaborating university, is expected by the end of
        2006.
   11
  Results
        of Operations:
  Revenues.
        During the nine month period ended September 30, 2006, $2,854 from product
        sales
        was generated compared to revenues from product sales for the nine month
        period
        ended September 30, 2005 of $42,202, a decrease of $39,348. This decline
        in
        revenue is largely due to the fact that there have been no sales of interferon
        products in 2006. ABI entered into a License and Supply Agreement in the
        first
        quarter of 2006 whereby the Company received and earned $30,000 as an initial
        license fee. ABI also received an SBIR grant of $60,023 for use with The
        Ohio
        State University.
  Research
        and Development Expenses. Research and development expenses of $430,306 were
        incurred for the nine month period ended September 30, 2006, compared to
        $122,688 for the nine month period ended September 30, 2005, an increase
        of
        $307,618. This increase is mainly a result of several studies that the Company
        has begun in order to further its business objectives.
  Selling,
        General and Administrative Expenses. Selling, general and administrative
        expenses of $1,873,868 were incurred for the nine month period ended September
        30, 2006, compared to $358,100 for the nine month period ended September
        30,
        2005, an increase of $1,515,768. This included $734,507 in non-cash expenses
        in
        recognition of restricted stock issued to cover services provided by consultants
        in lieu of cash, and options to purchase restricted stock in lieu of cash.
        Also
        included in this amount is $216,000 for a stock bonus awarded on February
        20,
        2006 and $75,416 of expense recognized for options to purchase restricted
        stock
        issued to employees of the Company. Salary expense increased by approximately
        $138,400 for the nine month period ended September 30, 2006 compared to the
        nine
        month period ended September 30, 2005. This is a result of salary increases
        and
        the addition of two employees.
  Non-Cash
        Consulting Activities. During the nine month period ended September 30, 2006,
        the Board of Directors authorized the issuance of shares of restricted common
        stock to consultants in lieu of cash payments. Based upon the common stock
        trading price at the times of issuance a non-cash consulting expense of $49,835,
        the fair value, was recorded for the issuance of these shares during the
        nine
        month period ended September 30, 2006. Additionally, the Board authorized
        the
        issuance of 874,000 options to purchase restricted common stock at a discounted
        price to consultants for service, in lieu of cash payments.
 
 Net
        Income (Loss). As a result of the above, in the nine month period ended
        September 30, 2006, the Company's Net Loss was ($2,280,195) compared to a
        Net
        Loss for the nine month period ended September 30, 2005 of ($421,637). This
        increased loss is primarily due to a substantial increase in research activity,
        addition of two employees, change to fair value method for expensing stock
        options, and non-cash compensation of officers and consultants.
 
 Liquidity
        Needs:
 At
        September 30, 2006, the Company had available cash and cash equivalents of
        approximately $496,167, leaving a working capital deficit of approximately
        ($2,099,500). Assuming there is no decrease in current accounts payable,
        the
        Company’s negative cash flow is approximately $127,000 per month. The Company's
        continued losses and lack of liquidity indicate that the
   12
  Company
        may not be 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 2007 objectives.
  Forward-Looking
        Statements: Certain statements made 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-QSB 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,
        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.**
              **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 September 30, 2006. This
   13
  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 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
        2. Unregistered Sales of Equity Securities and Use of
        Proceeds**
  During
        the quarter ended September 30, 2006, the Board of Directors authorized the
        issuance of 7,861 shares of restricted common stock to consultants in lieu
        of
        cash payments. Based upon the common stock trading price at the time of
        issuance, a non-cash consulting expense of $8,235 was recorded for the issuance
        of these shares during the third quarter of 2006. All issuances were exempt
        from
        registration under Rule 504 of Regulation D promulgated pursuant to the
        Securities Act of 1933. Financial consulting services were provided as
        consideration for the shares.
 
 The
        first
        issuance occurred on July 19, 2006, in the amount of 1,579 shares, and was
        valued at $1,200 at a per share price of $.76, representing an increase of
        $.07
        per share, as shares of the Company closed at $.69 on that date.
 
 The
        second issuance occurred on July 19, 2006, in the amount of 1,232 shares,
        and
        was valued at $2,000 at a per share price of $1.62, representing an increase
        of
        $.93 per share, as shares of the Company closed at $.69 on that date.
 
 The
        third
        issuance occurred on July 19, 2006, in the amount of 1,562 shares, and was
        valued at $2,000 at a per share price of $1.28 representing an increase of
        $.59
        per share, as shares of the Company closed at $.69 on that date.
 
 The
        fourth issuance occurred on July 19, in the amount of 2,344 shares, and was
        valued at $2,039 at a per share price of $.87, representing an increase of
        $.18
        per share, as shares of the Company closed at $.69 on that date.
  14
  The
        fifth
        issuance occurred on September 29, in the amount of 1,144 shares, and was
        valued
        at $995 at a per share price of $.87, representing an increase of $.20 per
        share, as shares of the Company closed at $.67 on that date.
 
 In
        the
        quarter ended September 30, 2006, the Company completed private equity financing
        by selling 1,370,000 restricted shares of common stock at a discount to four
        investors. The shares are restricted and are transferable pursuant to Rule
        144
        promulgated under the Securities Act of 1933. The net proceeds to the Company
        were approximately $753,500. All shares sold were exempt from registration
        pursuant to Rule 506 of Regulation D, promulgated pursuant to the Securities
        Act
        of 1933. No underwriters were involved in any of the unregistered share sales
        and no commissions were paid.
  
 **Date
                  (2006)**
              **Shares**
              **Purchaser**
              **Discount*****Issue
                  Price**
              **Number**
              **Per
                  Share**
              **Total**1
              July
                  6
              .55
              100,000
              Clarence
                  McDaniel
              .32
              32,0002
              July
                  6
              .55
              10,000
              Earl
                  McDaniel
              .32
              3,2003
              August
                  9
              .55
              1,200,000
              Bumiller
                  Art Found.
              .15
              180,0004
              Sept
                  25
              .55
              60,000
              Rajan
                  Vaz
              .21
              12,600
 *Discounts
        were calculated based on the last transaction on each date.
 
 **Item
        4. Submission of Matters to a Vote of Security Holders.**
 The
        annual meeting of shareholders was noticed and convened on June 22, 2006,
        to
        consider the election of directors, the authorization to vote proxies on
        other
        business to properly come before the meeting, and to adjourn the meeting
        to
        solicit additional votes. There were fewer than 50% of the outstanding shares
        of
        the Company represented at the meeting so the meeting was adjourned until
        July
        7, 2006, in order to solicit additional votes and obtain a quorum.
  The
        following persons were directors of the Company before the meeting and continued
        to serve as directors of the Company until the meeting was reconvened on
        July 7,
        2006: Joseph M. Cummins, Stephen Chen, James Page, Dennis Moore, and Katsuaki
        Hayashibara.
  The
        meeting reconvened on July 7, 2006, with 11,181,724 shares of the voting
        common
        stock of the Company represented, being 51.8% of the issued and outstanding
        voting common shares of the Company, and constituting a quorum.
  **Proposition
        1 - Election of Directors.**
  The
        following directors were elected at the meeting to serve until the next annual
        meeting of shareholders or until their successor shall have been duly elected
        and qualified:
  Director
        No. 1 - Joseph M. Cummins - 11,126,872 shares voted in favor and 54,852 share
        withheld;
  Director
        No. 2 - Stephen Chen - 11,163,449 shares voted in favor and 18,275 withheld;
   15
  Director
        No. 3 - James Page - 11,159,449 shares voted in favor and 22,275 withheld;
  Director
        No. 4 - Dennis Moore - 11,109,001 shares voted in favor and 72,723 withheld;
  Director
        No. 5 - Thomas D’Alonzo - 11,159,449 shares voted in favor and 22,275 withheld;
        and
  Director
        No. 6 - Thomas Ulie - 11,109,301 shares voted in favor and 72,423 withheld.
  **Proposition
        2 - Authorization to vote Proxies on Other Business to Properly Come Before
        the
        Meeting.**
  Proposition
        2 passed by a vote of 11,091,549 shares voted in favor, 80,900 voted against,
        and 9,275 shares not voted due to broker abstentions.
  **Proposition
        3 - Adjournment of Meeting to Solicit Additional Votes.**
  Proposition
        3 passed by a vote of 11,110,072 shares voted in favor, 63,677 shares voted
        against, and 7,975 shares not voted due to broker abstentions.
  No
        other
        business was transacted at the meeting.
  
  **Item
                  6.**
              **Exhibits.**
 None.
   16
  
  **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: 
                        November 14, 2006
                    By:/s/ Joseph M. CumminsJoseph
                        M. CumminsPresident
                        and Chief Executive
                        Officer
 
  
 Date: 
                    November 14, 2006
                By:/s/ Gary CoyGary
                    CoyVice
                    President and Chief Financial
                    Officer
  
  17