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 June 30, 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
June 30, 2008 there were 30,180,241 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– June 30, 2008  (unaudited) and December 31,
      2007
            3Statements
      of Operations – Three and Six Months Ended June 30, 2008 and 2007
      (unaudited)
            4Condensed
      Statements of Cash Flows – Six Months Ended June 30, 2008 and 2007
      (unaudited)
            5Notes
      to Financial Statements
      (unaudited)
            6ITEM
      2.
            Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
            10ITEM
      3.
            Quantitative
      and Qualitative Disclosures About Market Risk.
            18ITEM
      4.
            Controls
      and
      Procedures
            22PART
      II:
            OTHER
      INFORMATIONITEM
      1.
            Legal
      Proceedings
            22ITEM
      2.
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            22ITEM
      3.
            Defaults
      Upon Senior
      Securities
            25ITEM
      4.
            Submission
      of Matters to a Vote of Security Holders
            25ITEM
      5.
            Other
      Information
            25ITEM
      6.
            Exhibits
            25Signatures
            
            26





2


PART
I - FINANCIAL INFORMATION





ITEM
      1.
            Financial
      Statements





Amarillo
Biosciences, Inc.


Balance
Sheets





June
      30
              2008
            
            
            December
      31,
              2007Assets
            
            (unaudited)Current
      assets:Cash
      and cash equivalents
            
            $
            6,283
            
            
            $
            47,184Other
      current assets
            
            
            42,874
            
            
            
            31,688Total
      current assets
            
            
            49,157
            
            
            
            78,872Property,
      equipment, and software, net
            
            
            12,367
            
            
            
            14,098Patents,
      net
            
            
            126,115
            
            
            
            120,925Total
      assets
            
            $
            187,639
            
            
            $
            213,895Liabilities
      and Stockholders' DeficitCurrent
      liabilities:Accounts
      payable and accrued expenses
            
            $
            285,522
            
            
            $
            98,203Accrued
      interest - related party
            
            
            527,527
            
            
            
            682,773Notes
      payable - related party
            
            
            2,000,000
            
            
            
            2,000,000Total
      current liabilities
            
            
            2,813,049
            
            
            
            2,780,976Total
      liabilities
            
            
            2,813,049
            
            
            
            2,780,976Commitments
      and contingenciesStockholders'
      deficitPreferred
      stock, $0.01 par value:Authorized
      shares - 10,000,000Issued
      and outstanding shares – 1,000 at June  30, 2008 and 0 at
      December 31, 2007, respectively
            
            
            10
            
            
            
            -Common
      stock, $0.01par value:Authorized
      shares - 100,000,000Issued
      and outstanding shares – 30,180,241 at June 30, 2008 and 29,465,261 at
      December 31, 2007, respectively
            
            
            301,802
            
            
            
            294,653Additional
      paid-in capital
            
            
            27,319,630
            
            
            
            25,598,217Accumulated
      deficit
            
            
            (30,246,852
            )
            
            
            (28,459,951
            )Total
      stockholders' deficit
            
            
            (2,625,410
            )
            
            
            (2,567,081
            )Total
      liabilities and stockholders’ deficit
            
            $
            187,639
            
            
            $
            213,895


See
accompanying notes to financial statements.


3


Amarillo
Biosciences, Inc.


Statements
of Operations - Unaudited





Three
      months ended June 30,
            
            
            Six
      months ended June 30,2008
            
            
            2007
            
            
            2008
            
            
            2007Revenues:Dietary
      supplement sales
            
            $
            396
            
            
            $
            614
            
            
            $
            1,284
            
            
            $
            1,148Sublicense
      fee revenue
            
            
            30,000
            
            
            
            -
            
            
            
            30,000
            
            
            
            40,000Total
      revenues
            
            
            30,396
            
            
            
            614
            
            
            
            31,284
            
            
            
            41,148Operating
      expenses:Cost
      of sales
            
            
            136
            
            
            
            186
            
            
            
            437
            
            
            
            354Research
      and development expenses
            
            
            129,724
            
            
            
            112,231
            
            
            
            345,616
            
            
            
            243,243Selling,
      general and administrative expenses
            
            
            415,291
            
            
            
            478,348
            
            
            
            818,975
            
            
            
            1,111,924Total
      operating expenses
            
            
            545,151
            
            
            
            590,765
            
            
            
            1,165,028
            
            
            
            1,355,521Operating
      loss
            
            
            (514,755
            )
            
            
            (590,151
            )
            
            
            (1,133,744
            )
            
            
            (1,314,373
            )Other
      income (expense)Interest
      expense
            
            
            (22,482
            )
            
            
            (22,436
            )
            
            
            (44,956
            )
            
            
            (44,673
            )Interest
      income
            
            
            1,325
            
            
            
            978
            
            
            
            2,696
            
            
            
            2,230Net
      loss
            
            
            (535,912
            )
            
            
            (611,609
            )
            
            
            (1,176,004
            )
            
            
            (1,356,816
            )Deemed
      dividend for beneficial conversion feature
            
            
            -
            
            
            
            -
            
            
            
            (562,841
            )
            
            
            -Dividend
      on preferred stock
            
            
            (25,000
            )
            
            
            -
            
            
            
            (48,056
            )
            
            
            -Net
      loss applicable to common shareholders
            
            $
            (560,912
            )
            
            $
            (611,609
            )
            
            $
            (1,786,901
            )
            
            $
            (1,356,816
            )Basic
      and diluted net loss per share
            
            
            (0.02
            )
            
            
            (0.02
            )
            
            
            (0.06
            )
            
            
            (0.05
            )Weighted
      average shares outstanding
            
            
            29,817,431
            
            
            
            25,444,815
            
            
            
            29,662,750
            
            
            
            25,953,645





See
accompanying notes to financial statements.


4


Amarillo
Biosciences, Inc.


Condensed
Statements of Cash Flows - Unaudited





Six
      months ended June 30,2008
            
            
            2007Net
      cash used in operating activities
            
            $
            (846,389
            )
            
            $
            (804,894
            )Cash
      from investing activitiesPurchases
      of equipment and software
            
            
            (980
            )
            
            
            (1,265
            )Patent
      expenditures
            
            
            (12,325
            )
            
            
            (3,942
            )Net
      cash used in investing activities:
            
            
            (13,305
            )
            
            
            (5,207
            )Cash
      from financing activities:Proceeds
      from exercise of options
            
            
            -
            
            
            
            45,889Proceeds
      from sales of convertible preferred stock
            
            
            793,793
            
            
            
            -Proceeds
      from sale of common stock
            
            
            25,000
            
            
            
            600,506Net
      cash provided by financing activities
            
            
            818,793
            
            
            
            646,395Net
      decrease in cash
            
            
            (40,901
            )
            
            
            (163,706
            )Cash
      and cash equivalents at beginning of period
            
            
            47,184
            
            
            
            213,844Cash
      and cash equivalents at end of period
            
            $
            6,283
            
            
            $
            50,138Supplemental
      disclosure of cash flow informationCash
      paid for interest
            
            $
            200,202
            
            
            $
            165Cash
      paid for income taxes
            
            $
            -
            
            
            $
            -Non
      cash transactionsStock
      dividend to preferred shareholders
            
            $
            48,056
            
            
            $
            -




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 six months ended June 30, 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 quarter 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.  In the second quarter of 2007, the Company completed
      private equity financing by selling 349,100 restricted shares of common
      stock at a discount to eight investors, generating $151,405 in
      cash.  Cash generated from selling restricted shares during the
      first six months of 2007 totaled $600,505.  During the first six
      months of, 2007, finder’s fees paid related to private placements of stock
      totaled $7,750, and are included as general and administrative expenses in
      the Company’s statement of
operations.





During
the first quarter of 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 first quarter of 2008, no private placement of restricted shares of common
stock occurred.  During the second quarter of 2008, the Company
completed private equity financing by selling 100,000 restricted shares of
common stock at a discount with 100,000 three year warrants exercisable at $0.30
per share to two investors, generating $25,000 in cash.  No finder’s
fees were paid.


6





During
the first quarter of 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 was issued in 25,000 share
portions on March 31, June 30, and is to be issued in 25,000 share portions on
September 30 and December 31 during fiscal 2008.  Expense of $12,750
was recognized in the six months ending June 30, 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 terminated the agreement for the remaining nine
months of services.  The Company paid the Consultant $30,000 plus the
above common stock grant of 90,000 shares for the first three
months.





In the
first quarter of 2008, the Board of Directors awarded Dr. 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 second
quarter of 2008, an attorney agreed to accept payment of 166,667 shares of stock
to cover $30,000 of fees to file the amendments to the Registration
Statement.  The Board of Directors approved payment of 166,667 shares
of stock on May 20, 2008 ($55,000 fair value).  On June 25, 2008, the
Executive Committee approved to pay a consultant $20,000 in fees for public
relations and investor relations services in stock and warrants under the same
terms and conditions as a private placement approved by the Executive Committee
on April 24, 2008 ($0.25 per share of unregistered common stock with 100%
warrant coverage, three year term and exercisable at $0.30 per
share).  Expense was recognized on June 15, 2008 for payment of 40,000
shares of common stock ($9,200 fair value) and 80,000 warrants ($11,522 fair
value) in payment of $10,000 due on June 15, 2008.  The remaining
$10,000 will be paid in stock on July 15, 2008 and August 15,
2008.  Dr. Peter Mueller was paid 54,627 shares of stock on June 2,
2008 ($16,652 fair value) in salary.





On April
1, 2008 and July 7, 2008, Firebird Global Master Fund, Ltd.  was
issued 84,198 shares and 121,913 shares of common stock respectively, as a
dividends on the Series A Preferred Stock.  These dividends were
valued at $23,056 and $25,000 and recorded on March 31, 2008 and June 30, 2008,
respectively.  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).





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
      $55,304 during the second quarter of
2007.





During
the second quarter of 2007, the Company issued 500,000 stock options for
services.  The Company recognized an $187,383 expense related to the
options during the first six months of 2007.





During
the second quarter of 2007, 249,486 options were exercised at $0.06 to $0.44 per
share generating $45,889 in cash.  A Director exercised 6,000 cashless
options at $0.44 per share and received 1,672 shares of Common Stock valued at
$0.61 per share.


7





The
Company recognized $55,661 of employee options expense during the first quarter
of 2008 and $97,575 during the second quarter of 2008.  The remaining
cost expected to be recognized if these options vest is
$478,873.  During the second quarter of 2008 the amount of employee
options expense increased when Dr. Peter Mueller joined the Company as COO. On
April 15, 2008 the Company issued 700,000 options to Dr. Mueller pursuant to an
employment agreement dated April 15, 2008.  On April 15, 2008, 100,000
of these options vested ($25,516 fair value recognized for the second quarter of
2008).  The remaining options vest evenly over the three years
following grant.  $11,311 fair value of these options was recognized
during the second quarter of 2008.  The remaining cost expected to be
recognized if these options vest is $155,168.





During
the first six months of 2008, the Company also recognized $10,121 expense for
100,000 options granted to two consultants.  25,000 options vested on
March 31; 25,000 options vested on June 30, and 25,000 options each vest
September 30 and December 31, 2008.





No
options were exercised during the first six months of 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 109.6 - 138.31%,
risk-free interest rate of 1.5 – 4.617% and expected life of 0.25 - 5
years.





5.
            Preferred
      Stock Financing.  During the first quarter 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
      $848,793, net of commissions, 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.  During the second quarter $55,000 of additional
      registration costs were incurred to file two amendments to the S-1
      registration statement.  Net proceeds were reduced to
      $793,793.





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.


8





The
Company filed a registration statement with the SEC on April 24, 2008 for the
common stock reserved for the preferred stock and warrants.  The SEC
issued a comment letters on May, 7, 2008 and June 2, 2008.  The
Company filed amended registration statements on May 21, 2008 and June 6,
2008.  The second amendment to the registration statement for
3,288,000 of 4,000,000 shares reserved for the preferred stock, all 4,000,000
shares reserved for warrants and 84,198 shares paid as a dividend payment on
April 1, 2008 was declared effective on June 12, 2008.  The 712,000
unregistered shares reserved for conversion of the preferred stock and future
unregistered stock for dividend payments are eligible to have the restricted
stock legends removed under rule 144 since the preferred stock has been held
more than six months.





6.
            Notes
      Payable.  The Company has unsecured loan agreements with
      Hayashibara Biochemical Laboratories (HBL), a related
      party.  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 June 3, 2008.  The other $1,000,000 was payable on or
      before August 28, 2008.  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.  During the second quarter of 2008 the
      Company received a $30,000 sublicense fee.  A $14,990 sublicense
      fee payable to HBL was included in accounts payable based on sublicense
      fee income earned by the Company during the second quarter of
      2008.





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 six months ended June
      30, 2008 the Company incurred approximately $31,000 and of legal fees from
      Sanders Baker P.C.





9.
            Employment
      Contract.  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.


9


10.
            Subsequent
      Events.  The Company received a $30,000 sublicense fee in July
      2008.  A $14,990 sublicense fee is payable to HBL based on
      sublicense fee income earned by the Company.  On July 10, 2008
      management was paid 99,438 shares of stock in salary ($18,893 fair
      value).  On July 15, 2008 a consultant was paid 20,000 shares of
      restricted stock valued at $0.18 per share for $3,600 of
      services.








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.




Peter
Mueller, PhD, formerly an executive from big pharma, joined the Company as Chief
Operating Office and Director of Research and Development on April 15, 2008 to
help transform Amarillo Biosciences from a research and development Company into
a specialty pharmaceutical Company extending global reach through selective
partnerships for development and commercialization.  The Company will
focus more on large indications with large market potential.





The
Company has changed to focus more on the development of low-dose oral interferon
treatment of chronic cough in COPD patients, an indication with large market
potential.  COPD affects approximately 10% of the world population
over 40, is a growing problem and is the 5th leading
cause of death in the world.  A successful Phase 2 proof-of-concept
study is anticipated to generate interest from potential big pharma
partners.  The Company plans to complete a low-dose oral interferon
Phase 2 proof-of-concept study to treat chronic cough in COPD patients, start a
Phase 2 dose-ranging study and seek a big pharma partner for upfront payments,
milestone payments and royalties.  The chronic cough proof-of-concept
study is a 4-week study with a 4-week follow up period.





Data from
a Phase 2 clinical study at Texas Tech University shows that treatment with
low-dose oral interferon leads to a rapid and significant reduction in the cough
associated with idiopathic pulmonary fibrosis (IPF), resulting in improved
quality of life.  Blinded, controlled studies in the US and Canada
showed that low-dose oral interferon relieves chronic coughing in horses with
COPD-like disease.  A blinded, placebo-controlled Phase 2 study of
low-dose oral interferon treatment of chronic cough in COPD and IPF patients is
ongoing at Texas Tech University.





AMAR has
completed pre-clinical (70 animal clinical trials) and human safety studies (34
human clinical trials) for the low-dose oral interferon mucosal route of
administration using a lozenge that is stable for 1-2 years at room
temperature.  Orally delivered interferon binds to mucosal cells in
the mouth and throat resulting in stimulation of immune mechanisms and has been
shown to activate hundreds of immune system genes in the peripheral
blood.  Oral interferon is given in doses 10,000 times less than
injectable interferon, so side effects are reduced or eliminated.  The
company has 9 patents and 3 patents pending including a patent pending for oral
interferon treatment of chronic cough.


10







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 half of 2008, with results expected by the end
of the second quarter in 2009.





Dr.
Lorenz Lutherer of Texas Tech University has obtained university funding for a
proof-of-concept study to evaluateorally administered IFNα
in the treatment chronic cough in COPD and IPF patients. This
experimental clinical study is a Phase 2 randomized, double-blind,
placebo-controlled, parallel trial in which 40 eligible volunteers with IPF or
COPD-associated chronic cough are to be randomly assigned to one
of two groups in equal numbers to receive either IFNα or placebo. Treatmentis given three times daily for 4 weeks, and patients are followed for 4
weeks post-treatment to assess durability of response. The study evaluatesthe ability of IFNα to
reduce the frequency and severity of chronic cough in COPD patients.Patient enrollment has started.





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 third 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, 46 oral warts patients have been enrolled
at 12 active clinical sites.  Enrollment of a further 34 patients at a
cost of approximately $102,000 is anticipated by the end of 2009.





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.


11





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.





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 naturaloutbreak
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.


12





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.





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.





Dr.
Manafred Beilharz at The University of Western Australia has received a grant
from the Department of Health, Government of Western Australia for a Phase 2
clinical study for oral interferon treatment of influenza patients in
Australia.  AMAR is providing oral interferon lozenges and other
support for the study.  The study is to be completed by September 24,
2009.





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


13


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.





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 third 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.


14





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.  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.




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.  Net proceeds after commissions,
registration costs and closing were $793,793.





During
the second quarter of 2008, the Company completed private equity financing by
selling 100,000 restricted shares of common stock at a discount with 100,000
three year warrants exercisable at $0.30 per share to two investors, generating
$25,000 in cash.  No finder’s fees were paid.


15


Results
of Operations for Quarter Ended June 30, 2008:




Revenues.  During
the quarter ended June 30, 2008, $396 from dietary supplement sales was
generated compared to $614 for the quarter ended June 30, 2007, a decrease of
$218 or 36%.  During the quarter ended June 30, 2008, $30,000
sublicense fee was generated compared to no sublicense fee the quarter ended
June 30, 2007, an increase of $30,000.




Research
and Development Expenses. Research and development expenses of $129,724 were
incurred for the quarter ended June 30, 2008, compared to $112,231 for the
quarter ended June 30, 2007, an increase of $17,493 (16%).  The
increase was mostly from increased R&D personnel costs in the second quarter
of 2008.




Selling,
General and Administrative Expenses. Selling, general and administrative
expenses of $415,291 were incurred for the second quarter in 2008, compared to
$478,348 for the second quarter of 2007, a decrease of $63,057
(13%).  Most of this decrease was from lower professional fees in the
second quarter of 2008




Non-cash
Consulting Activities.  During the second quarter of 2008, the Board
of Directors authorized 25,000 shares to be issued to David Stewart ($5,500 fair
value) and 40,000 shares plus 80,000 warrants to be issued to a consultant
($9,200 fair value for 40,000 shares of common stock issued and $11,522 fair
value for 80,000 of warrants recognized).  The consultant is to be
issued 20,000 shares of common portions on July 15, 2008 and August 15,
2008.  David Stewart is to be issued 25,000 share portions on
September 30 and December 31 during fiscal 2008.  The accumulated
value of the above mentioned stock recognized for the second quarter of 2008 is
$14,700 plus $11,522 recognized for warrants for non-cash consulting
compensation.  The Board of Directors also authorized the issuance of
12,500 options each to two consultants ($5061 fair value) in the second quarter
of 2008.  Portions of 12,500 options will vest on September 30 and
December 31 during fiscal 2008.  Non-cash consulting activities
totaled $31,283 during the second quarter of 2008.  In the second
quarter of 2007, 25,000 shares were issued to David Stewart ($20,500 fair value)
and 500,000 options to consultants for services (fair value
$187,382).  Non cash consulting compensation in the second quarter of
2007 was $207,882.




Other
Income.  During the second quarter of 2008, $1,325 from interest and
investment income was generated compared to $978 from interest income for the
second quarter of 2007, an increase of $347 or approximately 35%.




Net
Loss.  The Company's net loss for the second quarter of 2008 was
$535,912 compared to a net loss of $611,609 for the second quarter of
2007.  A $25,000 preferred stock dividend was recognized during the
second quarter of 2008 which increased the net loss applicable to common
shareholders to $560,912 compared to $611,609 for the second quarter of 2007, a
decrease of $50,697 or 8%.




Results
of Operations for the Six Months Ended June 30, 2008:




Revenues.  During
the six month period ended June 30, 2008, $1,284 from dietary supplement sales
was generated compared to dietary supplement sales for the six-month period
ended June 30, 2007, of $1,148, an increase of $100 or approximately
9%.  During the six-month period ended June 30, 2008 a $30,0000
sublicense fee was generated compared to a $40,000 sublicense fee for the six
month period ended June 30, 2007, a $10,000 decrease or approximately
25%.




16


Research
and Development Expenses. Research and development expenses of $345,616 were
incurred for the six month period ended June 30, 2008, compared to $243,243 for
the six month period ended June 30, 2007, an increase of $102,373
(42%).  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 $818,975 were incurred for the six-month period ended June 30, 2008,
compared to $1,111,924 for the six-month period ended June 30, 2007, a decrease
of $292,949 (26%).  Most of this decrease  was from public
relations and investor relations expenses ($75,544) and professional fees
excluding legal and accounting fees($258,351).




Non-cash
Consulting Activities.  During the first six months of, the Board of
Directors authorized the issuance of 230,000 shares of common stock to
consultants: 90,000 shares to CEOcast on February 26, 2008 ($27,900 fair value),
100,000 shares to David Stewart on March 31, 2008 ($12,750 fair value for 50,000
shares issued) and 80,000 shares plus 80,000 warrants to a consultant ($9,200
fair value for 40,000 shares of common stock issued and $11,522 fair value for
80,000 of warrants recognized) on June 25, 2008.  The consultant is to
be issued 20,000 shares of common portions on July 15, 2008 and August 15,
2008.  The shares to David Stewart were issued in a 25,000 share
portions on March 31 and June 30 and are to be issued September 30 and December
31 during fiscal 2008.  The accumulated value of the above mentioned
stock recognized for the first six months of 2008 is $49,850 plus $11,522
recognized for warrants for non-cash consulting compensation.  The
Board of Directors also authorized the issuance of 50,000 options each to two
consultants, Dr. Kimball Austin Miller and Dr. Elaine King Miller. Portions of
12,500 Options each vested on March 31, 2008, June 30, 2008 and will vest on
September 30 and December 31 during fiscal 2008.  As of June 30, 2008,
$10,121 of expense has been recognized from the Miller
options.   Non-cash consulting activities totaled $71,493 during
the first six months of 2008.  In the first six months of 2007,
non-cash consulting compensation was $353,382.




Other
Income.  During the six-month period ended June 30, 2008, $2,696 from
interest and investment income was generated compared to $2,230 from interest
income for the six-month period ended June 30, 2007, an increase of $466 or
approximately 21%.




Net
Loss.  As a result of the above, in the six-month period ended June
30, 2008, the Company's net loss was $1,176,004 compared to a net loss for the
six-month period ended June 30, 2007 of $1,356,816.  A $562,841 deemed
dividend for the conversion feature of preferred stock and $48,056 of preferred
dividends were recognized during the first six months of 2008 which increased
the net loss applicable to common shareholders to$1,786,901 compared to
$1,356,816 for the six months ended June 30, 2007.




Liquidity
Needs:  On June 30, 2008, the Company had available $6,283 cash and
had a working capital deficit (current assets less current liabilities) of
approximately $2,764,000.  Current liabilities include two $1 million
notes plus $527,527 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 including payment of $200,000 of
accrued interest to HBL (burn rate) is approximately $143,000 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.




17




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, 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.


18





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.





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 by
$2,763,892.  Most of the difference between current assets and current
liabilities is the amount owed to HBL for two $1 million notes plus $527,527 of
accrued interest on June 30, 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 Dr. Joseph M. Cummins, our President and Chief Executive
Officer, Dr. Peter R. Mueller, our Chief Operating Officer and Director of
Research, Dr. 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.


19


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 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 $1,314,373 for the six months ended
June 30, 2007 and $1,133,744 for the six months ended June 30,
2008.  In addition, as of December 31, 2007 we had an accumulated
deficit of $28,459,951 and $30,246,852 as of June 30, 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 June 30,
2008, we had 30,180,241 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 and two
amendments on May 21, 2008 and June 6, 2008.  The Registration
Statement went effective on June 12, 2008 for 8,312,198 shares of common stock,
including 3,288,000 of 4,000,000 shares underlying the Series A Preferred Stock,
4,640,000 shares underlying Series A Warrants, 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.  In Addition 166,667 shares of stock were registered
via S-8 registration in payment of services to file the two registration
statement amendments above.  The sale of these shares may adversely
affect the market price of our common stock.


20




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.





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.


21


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 June 30, 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 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 six months ended June 30, 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 and $5,500 in the quarter ended June 30,
2008.  Subsequently a S-8 registration statement was filed on April
21, 2008 for the 2008 Consultants Stock Grant Plan to register the
shares.  In January 2008, the Board of Directors awarded Dr. 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.





On May
20, 2008 the Board of Directors approved payment of 166,667 shares of common
stock to an attorney for services related to the preparation of amendments to
the registration statement on form S-1 ($55,000 fair value
recognized).  An attorney agreed to accept payment of 166,667 shares of
stock to cover $30,000 of fees to file the amendments to the Registration
statement.  The Board of Directors approved payment of 166,667 shares
of stock on May 20, 2008 ($55,000 fair value).


22





On June
25, 2008, the Executive Committee approved to pay a consultant $20,000 in fees
for public relations and investor relations services in stock and warrants under
the same terms and conditions as a private placement approved by the Executive
Committee on April 24, 2008 ($0.25 per share of unregistered common stock with
100% warrant coverage, three year term and exercisable at $0.30 per
share).  Expense was recognized on June 15, 2008 for payment of 40,000
($9,200 fair value) shares of common stock and 80,000 warrants ($11,522 fair
value) for payment of $10,000 due on June 15, 2008.  The remaining
$10,000 will be paid in stock on July 15, 2008 and August 15,
2008.  Dr. Peter Mueller was paid 54,627 shares of stock on June 2,
2008 ($16,652 fair value) in salary.





During
the first six 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 five 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 five 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%.  The Company filed amended registration statements on May 21,
2008 and June 6, 2008 to respond to SEC comment letters dated May 7, 2008 and
June 2, 2008.  The second amendment to the registration statement was
declare effective on June 12, 2008 for 3,288,000 of 4,000,000 shares reserved
for the preferred stock, all 4,000,000 warrants, and 84,198 shares paid as a
dividend payment on April 1, 2008.  The 712,000 unregistered shares
for conversion of the preferred stock and future unregistered stock for dividend
payments are eligible to have the restricted stock legends removed under rule
144 since the preferred stock has been held six months or
more.  During the second quarter $55,000 of additional registration
costs were incurred to file two amendments to the S-1 registration
statement.  Net proceeds were reduced to $793,793.





On April
1, 2008 and July 7, 2008, Firebird Global Master Fund, Ltd.  was
issued 84,198 shares and 121,913 shares of common stock respectively, as a
dividends on the Series A Preferred Stock.  These dividends were
valued at $23,056 and $25,000 and recorded on March 31, 2008 and June 30, 2008,
respectively.  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




23




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
            Dr.
      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
            2,5686
            May
      16**
            .1358
            20,000
            David
      Metz
            .1742
            3,4847
            May
      19**
            .1358
            80,000
            Griffin
      Family Trust
            .1742
            13,9368
            May
      23***
            .18
            166,667
            Darrin
      Ocasio
            .15
            25,0009
            June
      2
            .3048
            54,627
            Dr.
      Peter Mueller
            .00
            010
            June
      15**
            .1537
            40,000
            RJ
      Falkner
            .0763
            305211
            June
      30
            .22
            25,000
            David
      Stewart
            .00
            012
            July
      7
            .2051
            121,913
            Firebird
      Global Master Fund
            .0228
            2,780





*Discounts
were calculated based on the closing price of the last transaction on each date
except (1) dividend payment was calculated on the average of the 2 lowest VWAP
during the 5 trading days prior to the payment due date; (2) Dr. Peter Mueller’s
payroll payment was calculated on the average closing price during the pay
period.





**The
price was $0.25 for each share of common stock and one warrant with three year
term and exercisable at $0.30 per share.  The stock closing prices for
the Metz, Griffin and Falkner transactions are $0.31, $0.31 and $0.23
respectively.  Relative fair value of common stock and warrants were
determined:  The relative fair value of the stock was utilized to
determine the relative discounts above.  The relative fair values for
the Metz, Griffin and Falkner common stock are $2,717, $10,868 and $6,149
respectively.  The discounts reported above are based on the stock
fair values based on the closing stock price of the transaction minus the stock
relative fair values.  The relative fair values for the Metz, Griffin
and Falkner warrants are $2,283, $9,132 and $3,851.  The Black-Scholes
fair values for the Metz, Griffin and Falkner warrants are $4,202, $16,806 and
$5,761.  The discounts for the Metz Griffin and Falkner warrants are
$1,919, $7,674 and $1,910 respectively.





***Darrin
Ocasio of SRFF received 166,667 shares of common stock in payment of $30,000 of
legal services for two amendments to a registration statement filed with the
SEC.  The closing price of the stock was $0.33 on the transaction
date.


24





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.




25







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:
      August 14, 2008
            By:/s/
      Joseph M. Cummins


Joseph
      M. Cummins


President
      and Chief Executive Officer













Date:
      August 14, 2008
            By:/s/
      Gary W. Coy


Gary
      W. Coy


Vice
      President and Chief Financial
Officer








26