United
States


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q








QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR
15(d)


OF
      THE SECURITIES EXCHANGE ACT OF 1934





For the
Quarterly Period Ended March 31, 2009





Commission
File Number 0-20791





AMARILLO
BIOSCIENCES,
INC.


(Exact name of registrant as
specified in its charter)





TEXAS
            
            75-1974352(State
      or other jurisdiction of incorporation or organization)
            
            (IRS
      Employer Identification No.)4134
      Business Park Drive, Amarillo, Texas 79110(Address
      of principal executive offices) (Zip Code)(806)
      376-1741(Issuer’s
      telephone number, including area
code)







Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. [√ ] Yes   [ ] No




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.





Large
      accelerated filer [ ]
            
            Accelerated
      filer [ ]Non-accelerated
      filer [ ] (do not check if smaller reporting company)
            
            Smaller
      reporting company [√]







Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act)[ ] Yes   [√] No




As
of  March 31, 2009 there were 41,610,146 shares of the issuer's common
stock and no shares of the issuer’s preferred stock outstanding.





1


AMARILLO
BIOSCIENCES, INC.





INDEX


PAGE NO.PART
      I:
            FINANCIAL
      INFORMATIONITEM
      1.
            Financial
      StatementsBalance
      Sheets– March 31, 2009  (unaudited) and December 31,
      2008
            3Statements
      of Operations – Three Months Ended March 31, 2009 and 2008
      (unaudited)
            4Condensed
      Statements of Cash Flows – Three Months Ended March 31, 2009 and 2008
      (unaudited)
            5Notes
      to Financial Statements
      (unaudited)
            6ITEM
      2.
            Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
            8ITEM
      3.
            Quantitative
      and Qualitative Disclosures About Market Risk.
            16ITEM
      4.
            Controls
      and
      Procedures
            19PART
      II:
            OTHER
      INFORMATIONITEM
      1.
            Legal
      Proceedings
            20ITEM
      2.
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            20ITEM
      3.
            Defaults
      Upon Senior
      Securities
            21ITEM
      4.
            Submission
      of Matters to a Vote of Security Holders
            21ITEM
      5.
            Other
      Information
            21ITEM
      6.
            Exhibits
            21Signatures
            
            22





2


PART
I - FINANCIAL INFORMATION





ITEM
      1.
            Financial
      Statements





Amarillo
Biosciences, Inc.


March
      31, 2009
            
            
            December
      31, 2008Assets
            
            (unaudited)Current
      assets:Cash
      and cash equivalents
            
            $
            25,313
            
            
            $
            10,853Other
      current assets
            
            
            11,662
            
            
            
            12,813Total
      current assets
            
            
            38,975
            
            
            
            23,666Property,
      equipment, and software, net
            
            
            7,470
            
            
            
            9,575Patents,
      net
            
            
            122,614
            
            
            
            126,828Total
      assets
            
            $
            167,059
            
            
            $
            160,069Liabilities
      and Stockholders' DeficitCurrent
      liabilities:Accounts
      payable and accrued expenses
            
            $
            394,683
            
            
            $
            511,236Accrued
      interest - related party
            
            
            594,904
            
            
            
            572,773Accrued
      expenses – related party
            
            
            54,362
            
            
            
            53,971Derivative
      liabilities
            
            
            782,804
            
            
            
            -Notes
      payable - related party
            
            
            2,000,000
            
            
            
            2,000,000Total
      current liabilities
            
            
            3,826,753
            
            
            
            3,137,980Total
      liabilities
            
            
            3,826,753
            
            
            
            3,137,980Commitments
      and contingenciesStockholders'
      deficitPreferred
      stock, $0.01 par value:Authorized
      shares - 10,000,000Issued
      and outstanding shares – 0 at March 31, 2009 and 0 at December 31,
      2008,
            
            
            -
            
            
            
            -Common
      stock, $0.01par value:Authorized
      shares - 100,000,000Issued
      and outstanding shares – 41,610,146 at March 31, 2009 and 35,953,377 at
      December 31, 2008
            
            
            416,101
            
            
            
            359,534Additional
      paid-in capital
            
            
            28,805,890
            
            
            
            28,322,564Accumulated
      deficit
            
            
            (32,881,685
            )
            
            
            (31,660,009
            )Total
      stockholders' deficit
            
            
            (3,659,694
            )
            
            
            (2,997,911
            )Total
      liabilities and stockholders’ deficit
            
            $
            167,059
            
            
            $
            160,069





See
accompanying notes to financial statements.


3


Amarillo
Biosciences, Inc.


Statements
of Operations - Unaudited





Three
      months ended
              March
      31,2009
            
            
            2008Revenues:Dietary
      supplement sales
            
            $
            132
            
            
            $
            888Sublicense
      fee revenue
            
            
            782
            
            
            
            -Total
      revenues
            
            
            914
            
            
            
            888Cost
      of revenues:Product
      sales
            
            
            25
            
            
            
            301Sublicense
      fee revenues
            
            
            391
            
            
            
            -Total
      cost of revenues
            
            
            416
            
            
            
            301Gross
      margin
            
            
            498
            
            
            
            587Operating
      expenses:Research
      and development expenses
            
            
            170,951
            
            
            
            215,892Selling,
      general and administrative expenses
            
            
            247,524
            
            
            
            403,684Total
      operating expenses
            
            
            418,475
            
            
            
            619,576Operating
      loss
            
            
            (417,977
            )
            
            
            (618,989
            )Other
      income (expense)Change
      in fair value of derivative instruments
            
            
            (124,724
            )
            
            
            -Interest
      expense
            
            
            (22,855
            )
            
            
            (22,474
            )Interest
      and other income
            
            
            1,960
            
            
            
            1,371Net
      loss
            
            
            (563,596
            )
            
            
            (640,092
            )Deemed
      dividend for beneficial conversion feature
            
            
            -
            
            
            
            (562,841
            )Dividend
      on preferred stock
            
            
            -
            
            
            
            (23,056
            )Net
      loss applicable to common shareholders
            
            $
            (563,596
            )
            
            $
            (1,225,989
            )Basic
      and diluted net loss per share
            
            $
            (0.01
            )
            
            $
            (0.04
            )Weighted
      average shares outstanding
            
            
            38,343,377
            
            
            
            29,508,069





See
accompanying notes to financial statements.


4


Amarillo
Biosciences, Inc.


Condensed
Statements of Cash Flows - Unaudited





Three
      months ended March 31,2009
            
            
            2008Net
      cash used in operating activities:
            
            $
            (310,178
            )
            
            $
            (637,375
            )Cash
      from investing activitiesPurchases
      of equipment and software
            
            
            -
            
            
            
            (980
            )Patent
      expenditures
            
            
            (362
            )
            
            
            (1,987
            )Net
      cash used in investing activities
            
            
            (362
            )
            
            
            (2,967
            )Cash
      from financing activities:Proceeds
      from sale of convertible preferred stock
            
            
            -
            
            
            
            848,793Proceeds
      from sale of common stock
            
            
            325,000
            
            
            
            -Net
      cash provided by financing activities
            
            
            325,000
            
            
            
            848,793Net
      increase in cash and cash equivalents
            
            
            14,460
            
            
            
            208,451Cash
      and cash equivalents at beginning of period
            
            
            10,853
            
            
            
            47,184Cash
      and cash equivalents at end of period
            
            $
            25,313
            
            
            $
            255,635Supplemental
      disclosure of cash flow informationCash
      paid for interest
            
            $
            724
            
            
            $
            200,096Cash
      paid for income taxes
            
            $
            -
            
            
            $
            -Non
      cash transactionsDeemed
      dividend for beneficial conversion feature of preferred
    stock
            
            $
            -
            
            
            $
            562,841Stock
      dividend to preferred shareholders
            
            $
            -
            
            
            $
            23,056





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-K for the year ended December 31, 2008 filed with
      the Securities and Exchange Commission, are unaudited, but have been
      prepared in accordance with accounting principles generally accepted in
      the United States for interim financial information. Accordingly, they do
      not include all of the information and footnotes required by accounting
      principles generally accepted in the United States for complete financial
      statements. In the opinion of management, all adjustments (consisting only
      of normal recurring adjustments) considered necessary for a fair
      presentation have been included.




Operating
results for the three months ended March 31, 2009 are not necessarily indicative
of the results that may be expected for the full year ending December 31,
2009.




2.
            Financial
      Condition. Our viability as a company is dependent upon successful
      commercialization of products resulting from its research and product
      development activities. We plan 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.  Our products will require significant
      additional development, laboratory and clinical testing and investment
      prior to obtaining regulatory approval to commercially market its
      product(s). Accordingly, for at least the next few years, we 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.  The shareholders have authorized 100,000,000 shares of
      voting common shares for issuance.  On March 31, 2009, a total
      of 69,402,558 shares of common stock were and outstanding (41,610,146) and
      reserved (27,792,412) for issuance upon exercise of options and
      warrants.  Common stock issuances in the first quarter of 2009
      are as follows:




Common
      Stock Issued in Q1 2009
            
            Shares
            
            
            Issue
      Price
            
            
            Net
      PricePrivate
      placements – cash
            
            
            3, 3,550,000
            
            
            $
            0.10
            
            
            $
            320,000Directors,
      officers, consultants plan – cash
            
            
            62,500
            
            
            
            0.08
            
            
            
            5,000Directors,
      officers, consultants plan – salaries
            
            
            1,407,905
            
            
            
            0.05-0.08
            
            
            
            105,846Directors,
      officers, consultants plan – services
            
            
            636,364
            
            
            
            0.06
            
            
            
            35,000Total
      Common Stock Issued in Q1 2009
            
            
            5,656,769
            
            
            $
            0.05-0.10
            
            
            $
            465,846





Finders’
fees totaled $35,000 during the first quarter of 2009.  Net price
above reflects net proceeds after finders’ fees are deducted.  Private
placement stock issued during the first quarter of 2009 included 100% warrant
coverage (3,550,000 warrants) with $0.10 – $0.20 exercise price and 3-year
term.




4.
            Common
      Stock Options.  We recognized $74,048 of employee options
      expense, related to previously issued options, during the first quarter of
      2009.  The remaining cost expected to be recognized if these
      options vest is $436,558.




No
options were exercised during the first three months of 2009.









6







5.
            Common
      Stock Warrants.   We are at risk of triggering the warrant
      anti-dilution provisions of previously issued warrants if we sell stock
      below $0.10 per share to any non-exempt parties.  Options and
      warrants issued prior to January 8, 2008 plus officers, directors and
      consultants under stock plans approved by outside board of director
      members are exempt from the anti-dilution provisions.  During
      the first quarter of 2009, 3,550,000 warrants were issued in connection
      with private placement sales of 3,550,000 shares of stock.  The
      3-year warrants are exercisable from $0.10 to $0.20 per
    share.




Warrants
issued in connection with a preferred stock financing in the first quarter of
2008 (“Firebird warrants”) have an embedded derivative feature (full-ratchet
anti-dilution provision).   GAAP accounting regulation EITF 07-5
requires reclassification of the warrants to liabilities at fair value on
January 1, 2009 and subsequent reporting of the change in fair
value.  The binomial Black-Scholes pricing model was used to calculate
the value of the warrants.  In the binomial model, the most likely
price which will trigger the anti-dilution ratchet and the most likely price
that will not trigger the anti-dilution ratchet are given estimated
probabilities for occurrence.  The probability of private placement
issuances triggering a reset at the closing stock price on January 1
and  March 31, 2009 was estimated as 50% on each date.  The
probability of not triggering the reset at $0.10 per share was also estimated as
50%.  Valuation consists of 50% of the Black-Scholes value for each
probable occurrence. The Black-Scholes option-pricing model was utilized with
the following  assumptions: dividend yield 0.0%, expected volatility
of 138% - 164%, risk-free interest rate of 0.76% – 0.81% and expected life of 2
years.   The valuation for the 13.2 million warrants with
embedded features was $658,080 on January 1, 2009 and $782,804 on March 31,
2009.   $658,080 was reclassified from the retained earnings
account to the derivative liabilities account on January 1, 2009 as the
cumulative effect of the change in accounting principle.  For the
quarter ended March 31, 2009, the change in fair value of derivative instruments
was recorded as an expense and the derivative liabilities account increased to
$782,804.




6.
            Notes
      Payable.  Two $1,000,000 notes are payable under an unsecured
      loan agreement with HBL dated July 22, 1999.  Although we are
      currently in default of the notes, HBL has not demanded
      payment.




7.
            Line
      of Credit.   We have a line of credit with Wells Fargo for
      $20,000, with an interest rate of prime rate plus 6.75
      percent.  There was an outstanding balance on March 31, 2009 of
      $4,776 which is included in accounts
payable.




8.
            License
      and Sublicense Agreements.  During the first quarter of 2009, a
      $782 license fees was received.  A $391 sublicense fee payable
      to HBL was recorded in the first quarter of 2009.  A $7,500
      minimum cash royalty fee payable to Texas A&M University System was
      recorded in the first quarter of
2009.




On
February 6, 2009, we entered into a 15-year License and Supply agreement with
Cyto Biotech, Inc. a Taipei, Taiwan animal health company.   Cyto
Biotech purchased common stock, included in the above issuances in Amarillo
Biosciences; paid an initial license fee; and will pay a royalty on low dose
oral interferon sales.




9.
            Related
      Party Transactions.  The Company engaged the law firm of
      Underwood, Wilson, Berry, Stein and Johnson  P.C. of which Mr.
      Morris is a shareholder.  Mr. Morris is also the Secretary of
      the Company. During the first quarter, 2009 the Company incurred
      approximately $6,785 of legal fees from the Underwood Law
      Firm.  Dr. Steve Chen, Director, referred the Company to Cyto
      Biotech and collected a $30,000 finder’s fee for the $300,000 stock
      purchase by Cyto Biotech.




7







10.
            Subsequent
      Events.  Since March 31, 2009, the Company sold 2,170,000
      unregistered shares of common stock for $0.10 per share together with
      2,170,000 warrants with 3-year term and exercisable at $0.10 per
      share.  In addition, 40,290 unregistered shares of common stock
      were sold for $0.10 per share plus 419,367 unregistered shares were paid
      to an officer in lieu of salary for $0.10 per share.  Net
      proceeds totaled $216,029 cash plus $41,937 of salaries.  A
      broker was paid a $5,000
commission.




The 2009A
Officers, Directors, Employees and Consultants Non-Qualified Stock Option Plan
was adopted on April 28, 2009 by the Board of Directors.   The
Plan Committee approved the grant of 1,600,000 stock options exercisable at
$0.125 to officers, directors and employees on April 30, 2009.




A former
director was hired subsequent to March 31, 2009 as a consultant in the areas of
financing, merger & acquisition and management compensation and
retention.







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.




Amarillo
Biosciences, Inc. (OTCBB: AMAR), is the world leader in the development of
low-dose interferon for oral delivery and is conducting Phase 2 clinical studies
testing oral interferon in animal and human diseases. We have changed our focus
from Orphan Diseases (small markets) to treatment of diseases with large markets
to attract large pharma partners.  Our funding strategy is to seek
private placement funding to complete Phase 2 clinical studies for chronic cough
in COPD patients, hepatitis C and influenza; then seek large pharma partners to
fund and help with the regulatory approval process in the US and
Europe.  We believe that our technology and the large billion dollar
markets for these disease indications will attract global pharma partners later
this year or sometime next year.




Intellectual
Property




Our
portfolio consists of patents with claims that encompass method of use or
treatment with interferon and composition of matter and
manufacturing.  We currently own or license nine patents and four
pending patents related to low-dose orally delivered interferon, and one issued
patent on our dietary supplement.  We have completed more than 100
pre-clinical (animal) and human studies of the safety and efficacy of low-dose
orally delivered interferon.




Technology
- Non-toxic Interferon




Injectable
interferon is FDA-approved to treat some neoplastic, viral and autoimmune
diseases.  Many patients experience moderate to severe side effects
that result in discontinuance of  injectable interferon therapy. Our
product is a natural human interferon alpha delivered into the oral cavity as a
lozenge in low (nanogram) doses. The lozenge dissolves in the mouth




8


where
interferon binds to surface (mucosal) cells in the mouth and throat resulting in
stimulation of immune mechanisms.  Orally delivered interferon has
been shown to activate hundreds of immune system genes in the peripheral
blood.  Human studies have shown that oral interferon is effective
against viral and autoimmune diseases. Oral interferon is given in
concentrations 10,000 times less than that given by injection resulting in
almost no side effects.




Influenza




Influenza
(the flu) is a contagious respiratory illness caused by influenza
viruses.  It can cause mild to severe illness, and at times can lead
to death.  Influenza usually starts suddenly and may include the
following symptoms: 1) fever (usually high), 2) headache, 3) tiredness (can be
extreme), 4) cough, 5) sore throat, 6) runny or stuffy nose, 7) body aches, and
8) digestive problems such as diarrhea, nausea and
vomiting.  Complications of flu can include bacterial pneumonia, ear
infections, sinus infections, dehydration, and worsening of chronic medical
conditions, such as congestive heart failure, asthma, or diabetes.




Flu
viruses spread mainly from person to person through coughing or
sneezing.   Sometimes people may become infected by touching
something with flu viruses on it and then touching their mouth or
nose.  Most healthy adults may be able to infect others beginning 1
day before symptoms develop and up to 5 days after becoming
sick.  That means that a person may be able to pass on the flu to
someone else before they know they are sick, as well as while they are
sick.




Influenza
A viruses are divided into subtypes based on 2 proteins on the surface of the
virus: the hemagglutinin (H) and the neuraminidase (N).  There are 16
different H subtypes and 9 different N subtypes, all of which have been found
among influenza A viruses in wild birds.  Wild birds are the primary
natural reservoir for all subtypes of influenza A viruses and are thought to be
the source of influenza A viruses in all other animals.  Most
influenza viruses cause asymptomatic or mild infection in birds; however, the
range of symptoms in birds varies greatly depending on the strain of
virus.  Infection with certain avian influenza A viruses (for example,
some strains of H5 and H7 viruses) can cause widespread disease and death among
some species of wild and especially domestic birds such as chickens and
turkeys.




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.




9


Influenza
A viruses are found in many different animals, including ducks, chickens, pigs,
whales, horses and seals.  Influenza B viruses circulate widely only
among humans. While it is unusual for people to get influenza infections
directly from animals, sporadic human infections and outbreaks caused by certain
avian influenza A viruses have been reported.




A number
of natural outbreak or challenge studies indicate that low doses of IFNα given
orally and/or intranasally are safe and effective at treating human
flu.  IFNα administered intranasally coats the oropharynx and comes in
contact with the same receptors as IFNα administered
orally.  Leukocyte interferon was given in low doses intranasally for
3 consecutive days to 374 subjects “at the height” of an influenza
outbreak.  Interferon-treated subjects had less severe illness than
382 subjects given
placebo.  When interferon was given to 320 subjects “before” the
influenza outbreak, these subjects had less illness than the 317 subjects given
placebo.  It was reported that the interferon treatment was free of
adverse events.




In 1969,
approximately 14,000 people in Moscow participated in controlled studies of
placebo versus interferon treatment during a natural outbreak of Hong Kong
influenza.  Interferon (about 128 units) or placebo was dripped into
the nose daily for 5 days starting about the time of the first reported
influenza cases.  Interferon treatment significantly (P<0.01)
reduced the number of influenza cases. Intranasal drops of human interferon
alpha (5,000 units daily) given for 4 months reduced the frequency and severity
of diseases due to influenza A(H3N2
and H1N1) and parainfluenza virus.  Data was collected on 83
volunteers in the study.  Fever occurred in 6 of 40 volunteers given
interferon and in 15 of 43 volunteers given placebo
(P<0.01).  Subjective symptoms such as headache, cough, fatigue,
anorexia, myalgia, etc. occurred in 34% of volunteers given interferon and in
67% of volunteers given placebo (P<0.01).




In 1982,
it was reported that human leukocyte interferon (10,000 units/day) or placebo
was dripped into the nostrils of 27 children daily for 60 days.  The
children lived in an orphanage where natural outbreaks of influenza A and
influenza B occurred during the treatment period.  Interferon did not
prevent illness but significantly reduced the duration of fever and reduced the
main peak fever.  Clinical manifestations of influenza were milder in
children given interferon compared to placebo.  Adverse events due to
interferon therapy were not observed.




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.




Influenza/Cold
FDA Phase 2 Study (mostly funded by Australian government)




The
University of Western Australia has started a Phase 2 clinical study of oral
interferon as prevention/treatment of respiratory illnesses, including
influenza.   We provided the study drug, electronic data
collection service, and US regulatory support for the study.  Up to
200 healthy volunteers with high levels of anticipated occupational exposure to
respiratory viruses will take oral interferon or placebo lozenges once daily for
16 weeks, with an additional 4 weeks of untreated observation. Once per week,
the study volunteers will submit a




10


report
detailing the severity of any cold/flu symptoms experienced, any medications
taken, number of days of work missed, etc.  The aim of the study is to
determine whether the volunteers who take oral interferon experience fewer
respiratory illnesses and/or less severe symptoms during the winter cold/flu
season in Australia (June-August).  Final results of the study are
expected soon after the study ends in  October 2009.




Two
publications in the April issue of the Journal of Virology report that
interferon placed in the nose of guinea pigs or ferrets suppresses replication
of influenza virus.  These publications reinforce our view that
low-dose interferon, in the nose or in the mouth, is protective against
influenza in humans.




In the
March 20, 2009 issue of Science (page 1560-1561), flu experts stated “Our
ability to anticipate pandemic events is poor, and our anti-pandemic
armamentarium is weak.  In an ever-shifting landscape of influenza
evolution, we need to be farsighted and forceful in optimizing pandemic response
capacity.”




We
believe low-dose oral interferon alpha will help people overcome pandemic
influenza.  The present swine flu epidemic threatens to endanger
millions of people.  The WHO predicted (May 7, 2009) that 2 billion
people could be infected by this new swine flu.




Chronic
Cough – COPD – FDA Phase 2 ongoing, funding sought for a second
study




COPD
affects approximately 10% of the world population over 40, is a growing problem,
and is the 4th leading
cause of death in the world.  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.




Data from
a Phase 2 clinical study at Texas Tech University shows that treatment with 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
oral interferon relieves chronic coughing in horses with COPD-like disease. We
have 9 patents and 4 patents pending, including a patent pending for oral
interferon treatment of chronic cough. Oral interferon treatment of cough is
expected to improve quality of life of COPD patients.




A
proof-of-concept study of low-dose oral interferon as treatment of chronic cough
is ongoing at Texas Tech University. 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 will be randomly
assigned to one of two groups in equal numbers to receive either oral interferon
or placebo lozenges. Treatment will be given three times daily for 4 weeks, and
patients will be followed for 4 weeks post-treatment to assess durability of
response. The study will evaluate the ability of oral interferon to reduce the
frequency and severity of chronic cough, compared to placebo.




We are
seeking funding to complete an expanded proof-of-concept study of low-dose oral
interferon for treatment of chronic cough. A successful Phase 2 proof-of-concept
study in COPD patients is anticipated to generate interest from potential big
pharma partners, which should result in milestone payments and royalties for the
Company.




11





Hepatitis
C FDA Phase 2 (funded by Cytopharm)




CytoPharm,
Inc., our licensee for Taiwan and China, will be launching a Phase 2,
placebo-controlled, dose-ranging study of 165 hepatitis C virus-infected
patients in Taiwan in the second quarter of 2009.  The study is
designed to test the ability of oral interferon to reduce the virologic relapse
rate of patients who have completed standard therapy with pegylated interferon
plus ribavirin.  Results are expected by the end of 2010.





Behcet’s
Disease - FDA Phase 2 completed




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.




NOBEL
ILAC SANAYII VE TICARET A.S. (“Nobel”), our licensee, completed a double-blind,
placebo-controlled Phase 2 trial in Turkey in 2008 with 84 Behcet’s disease
patients randomized out of an initial target of 90.  While safety was
confirmed, no significant differences were found between the treatment groups
with respect to the primary or secondary study endpoints.




Oral
Warts in HIV+ Patients – FDA Phase 2 ongoing, funded by AMAR




Oral
warts are lesions in the mouth caused by the human papillomavirus. The FDA has
granted Orphan Drug Designation to us 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), efficacy of oral interferon was observed when some subjects achieved a
complete or nearly complete regression of their warts.




We have
concluded enrollment of  a placebo-controlled, Phase
2  24-weekstudy. A total of 59 oral warts patients were enrolled at 10
active clinical sites.  Treatment of ongoing patients and collection
of data will be completed  by the end of 2009. If the results of the
current study are positive, a partner will be sought to fund further clinical
development, which would include a Phase 3 trial to confirm safety and
efficacy.




Strategic Alliancewith HBL.Hayashibara
Biochemical Laboratories, Inc. (“HBL”) was established in 1970 to engage in
research and development. It is a subsidiary of Hayashibara Company, Ltd., a
privately-owned Japanese holding corporation with diversified subsidiaries. For
more than 130 years the Hayashibara Company, Ltd. and its predecessors have been
applying microbiological technology in the starch industry for the production of
maltose and other sugars.




In 1981,
HBL established the Fujisaki Institute to accelerate development of industrial
methods for the production of biologics and to sponsor clinical trials for such
products. In 1985, HBL built the Fujisaki Cell Center to support basic research.
In 1987, HBL successfully accomplished the mass production of human cells in an
animal host by producing human cells in hamsters. This made it possible to
economically produce a natural form of human interferon alpha and other
biologics. HBL also has developed and obtained patents for technology relating
to the production of interferon  alpha-containing lozenges by which
the stability of the interferon alpha activity can be maintained for up to 24
months at room temperature and




12


up to
five years if the product is refrigerated. We believe 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, we 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 us 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.




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.




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 our natural human IFN and commence marketing the product after
approval. The terms of the agreement call for Bumimedic to manufacture lozenges
from our bulk natural human IFN (which is supplied by Hayashibara Biochemical
Laboratories); package the lozenges and distribute them to local hospitals,
pharmacies and clinics in Malaysia. Pursuant to the agreement, we will receive a
series of payments, in three stages: upon formal execution of the distribution
agreement, upon regulatory approval, and upon production. We will also receive a
royalty on the sale of the natural human IFN.




Strategic Alliance with
CytoPharm.In November 2006, we entered into a License and
Supply Agreement with CytoPharm, Inc., a Taipei, Taiwan-based biopharmaceutical
company whose parent company is Vita Genomics, Inc., the largest biotech company
in Taiwan specializing in pharmacogenomics and specialty Clinical Research
Organization. Under the terms of the Agreement, CytoPharm and its subsidiary
will conduct all clinical trials, and seek to obtain regulatory approvals in
both China and Taiwan (the “Territory”) to launch our low dose oral interferon
in the Territory for influenza and hepatitis B (“HBV”) and hepatitis C (“HCV”)
indications.  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.




In March
2008, we entered into a Supply Agreement for Animal Health with CytoPharm,
Inc.  Under the terms of the Agreement, CytoPharm will conduct all
clinical trials, and seek to obtain regulatory approvals in China and Taiwan
(the “Territory”) to launch our low dose oral interferon in the Territory for
treatment of diseases and other healthcare applications of swine, cattle and
poultry.  CytoPharm will make payments to us upon reaching certain
milestones and will also pay royalties on low dose oral interferon sales
in the Territory.




13


Strategic Alliance with Cyto
Biotech.On February 6, 2009, we entered into a 15-year
License and Supply agreement with Cyto Biotech, Inc. a Taipei, Taiwan animal
health company.  Under the terms of the agreement, Cyto Biotech, will,
at its sole expense and cost, conduct all clinical trials and studies and seek
to obtain regulatory approvals in China, Taiwan, Thailand, the Philippines,
Cambodia, Vietnam and Malaysia (“the Territory”), subject to the existing
license and supply agreements with CytoPharm, Inc. and Bumimedic SDN. BHD.,
required for the commercial launch of our low dose oral interferon in the
Territory for any animal and human health indications.




Cyto
Biotech purchased common stock, included in the above issuances in Amarillo
Biosciences stock; paid an initial license fee to us; and will pay a net royalty
on low dose oral interferon sales.  In addition, the agreement calls for
certain minimum royalty payments to be made.




Nutraceutical
Product.   We sell anhydrous crystalline maltose (ACM) as
Maxisal® to individuals and to pharmacies in the USA and to licensed
distributors overseas. We seek to out-license Maxisal®.




Equity Funding.In
the first quarter of 2009, the Company sold 3,050,000 unregistered shares of
common stock for $0.10 per share plus 3,050,000 3-year warrants with $0.20
exercise price and 500,000 unregistered shares of common stock for $0.10 per
share plus 500,000 3-year warrants with $0.10 exercise price.  Net
proceeds from the private placement stock sales totaled $320,000 after payment
of $35,000 in commissions and finder’s fees.   A consultant
purchased 62,500 shares at $0.08 per share for $5,000 cash.  Equity
funding net of commissions and finder’s fees totaled
$325,000.




Results
of Operations for Quarter Ended March 31, 2009 and 2008:




Revenues.  During
the quarter ended March 31, 2009, $132 from dietary supplement sales was
generated compared to $888 for the quarter ended March 31, 2008, a decrease of
$756 (85%).  During the quarter ended March 31, 2009, $782 sublicense
fee was generated compared to no sublicense fee the quarter ended March 31,
2008.




Research
and Development Expenses. Research and development expenses of $170,951 were
incurred for the quarter ended March 31, 2009, compared to $215,892 for the
quarter ended March 31, 2008, a decrease of $44,941 (21%).  The
decrease was mostly from lower costs for oral warts in HIV+ patients Phase 2
clinical studies.




Selling,
General and Administrative Expenses. Selling, general and administrative
expenses of $247,524 were incurred for the first quarter in 2009, compared to
$403,684 for the first quarter of 2008, a decrease of $156,160
(39%).  Most of this decrease was from  $155,003 in lower
public relations and investor relations costs.




Change in
Fair Value of Derivative Instruments.  Change in fair value of
derivative instruments was realized as a $124,724 operating expense in the first
quarter of 2009 compared to zero in the first quarter of
2008.  Reclassification of the fair value for warrants with embedded
features was not required by EITF 07-5 in 2008.




Non-cash
Consulting Activities.  During the first quarter of 2009, no stock or
stock options were issued to consultants. The Company recognized $74,048 of
employee option expense in the first quarter of 2009.  During the
first quarter of 2008, the Board of Directors authorized the issuance of 190,000
shares of common stock to consultants: 90,000 shares to CEOcast on February 26,
2008 ($27,900 fair value) and 100,000 shares to David Stewart on March 31, 2008
($29,000 fair value).




14


The
shares to David Stewart were issued in a 25,000 share portions on March 31 and
are to be issued on June 30, September 30 and December 31 during fiscal
2008.  The Board of Directors also authorized the issuance of 50,000
options (fair value of $10,121) each to two consultants during the first quarter
of 2008.  Non-cash consulting activities totaled $40,210 during the
first three months of 2008.




Other
Income.  During the three-month period ended March 31, 2009, $1,960
of  interest and other income was generated compared to $1,371 from
interest and other income for the three-month period ended March 31, 2008, an
increase of $589 (43%).




Net
Loss.  As a result of the above, in the three-month period ended March
31, 2009, the Company's net loss was $563,596 compared to a net loss for the
three-month period ended March 31, 2008 of $640,092.




Liquidity
Needs:  On March 31, 2009, the Company had available $25,313 cash and
had a working capital deficit (current assets less current liabilities) of
approximately $3,790,000.  Current liabilities include two $1 million
notes plus $594,904 of accrued interest owed to Hayashibara Biochemical
Laboratories, Inc. (HBL), the Company’s largest
shareholder.   Accrued payroll and vacation expenses owed mostly
to officers is $251,611.  Reclassification of warrants with imbedded
features into $782,804 of liabilities is also included in the working capital
deficit.  That leaves approximately $160,000 of accounts payables and
accrued expenses in the working capital deficit.




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 and patent filings, the Company’s cash burn rate is
approximately $104,000 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 license and milestone
fees, 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 2009 Plan.  The Company is currently pursuing
potential investors for funding.  In addition, the Company is also
pursuing potential pharmaceutical partners to provide upfront license fee
payments and funding for clinical studies.  There can be no assurance
that private placement funding or pharmaceutical partner funding will become
available.




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-K
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




15


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 three patents and license
seven  patents.  No assurance can be given that such
licenses or rights used by us will not be challenged, infringed or circumvented
or that the rights granted thereunder will provide competitive advantages to us.
Furthermore, there can be no assurance that we will be able to remain in
compliance with our existing or future licensing arrangements. Consequently,
there may be a risk that licensing arrangements are withdrawn with no penalties
to the licensee or compensation to us.




We rely on third parties for the
supply, manufacture and distribution of our products.  Third
parties manufacture and distribute all of our products. We do not currently have
manufacturing facilities or personnel to independently manufacture our products.
Currently, Marlyn Nutraceutical manufactures our nutraceutical products. Our
licensed distributors, located in the United States and internationally,
distribute the products.  Except for any contractual rights and
remedies that we may have with our manufacturer and our distributors, we have no
control over the availability of our products, their quality or cost or the
actual distribution of our products. If for any reason we are unable to obtain
or retain third-party manufacturers and distributors on commercially acceptable
terms, we may not be able to produce and distribute our products as
planned.  If we encounter delays or difficulties with our contract
manufacturer in producing or packaging our products or with our distributor in
distributing our products, the production, distribution, marketing and
subsequent sales of these




16


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 negligible 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 approximately $3,790,000.  Most of the difference between
current assets and current liabilities is the amount owed to HBL for two $1
million notes plus $594,904 of accrued interest; $251,611 of accrued payroll and
vacation expenses owed mostly to officers; and $782,804 from the
reclassification of warrants with imbedded features into
liabilities.  See a detailed discussion of the HBL notes in Note 6
(“Notes Payable”) to Financial Statements under Part I, Item 1,
above.




The
Company is currently pursuing potential investors for funding.  In
addition the Company is also pursuing potential pharmaceutical partners to
provide upfront license fee payments and funding for clinical
studies.  There can be no assurance that private placement funding or
pharmaceutical partner funding will become available.




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. Gary W. Coy, our Chief Financial Officer, and Martin J. Cummins,
our Vice President of Clinical and Regulatory Affairs. The loss of the services
of one or more of our key employees could have a material adverse effect on our
operations. We do currently have employment agreements with our executive
officers. We do not currently maintain key man life insurance on any of our key
employees.  In addition, as our business plan is implemented, we will
need to recruit and retain additional management and key employees in virtually
all phases of our operations. We cannot assure that we will be able to
successfully attract and retain key personnel.




If we do not successfully develop,
acquire or license new drugs our business may not grow.We
must invest substantial time, resources and capital in identifying and
developing new drugs, dosage and delivery systems, either on our own or by
acquiring and licensing such products from third parties. Our growth depends, in
part, on our success in such process.  If we are unable to either
develop new products on our own or acquire licenses for new products from third
parties, our ability to grow revenues and market share may be adversely
affected. In addition, we may not be able to recover our investment in the
development of new drugs, given that projects may be interrupted, unsuccessful,
not as profitable as initially contemplated or we may not be able to obtain
necessary financing for such development if we are unable to fund such
development from our future revenues. Similarly, there is no assurance that we
can successfully secure such rights from third parties on an economically
feasible basis.




Our competitors are much larger and
more experienced than we are and, even if we complete the development of our
drugs, we may not be able to successfully compete with
them.The pharmaceutical industry is highly competitive. 
Our biologics and low-dose oral interferon alpha applications compete with high
dose injectable interferon manufactured by Roche, Schering, InterMune, Serono,
Biogen, Berlex and Hemispherx. High dose injectable interferon has been widely
accepted by the medical community for many years.  Companies who
manufacture injectable interferon alpha applications are more established than
we are and have far greater financial, technical, research and development,
sales and marketing, administrative and other 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.


17




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 of $1,225,989 for the three months ended March 31, 2008
and $563,596 for the three months ended March 31, 2009.  In addition,
as of December 31, 2008 we had an accumulated deficit of $32,881,685. These
factors, among others, raise substantial doubt about our ability to continue as
a going concern. Our 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. We have
already significantly curtailed operations, and if we are unable to generate
profits and if we to continue to be unable to obtain financing to meet our
working capital requirements, we will have to 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.




Risk Relating to Our January 2008
Financing Arrangement.There
are 13,320,000 shares underlying our warrants related to our January 2008
financing arrangement that may be available for future sale and the sale of
these shares may depress the market price of our common stock.  In
addition the warrants have an anti-dilution ratchet feature that could cause the
number of warrants to increase and the exercise price to decrease if we should
have any non exempt stock, option or warrant issuances less the $0.10 per
share.As of
March 31, 2009, we had 41,610,146 shares of common stock issued and outstanding
plus 27,792,412 shares reserved for options and warrants which includes the
above January 2008 warrants.






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.




18







The
Securities Enforcement and Penny Stock Reform Act of 1990 requires additional
disclosure relating to the market for penny stocks in connection with trades in
any stock defined as a penny stock. Securities and Exchange Commission
regulations generally define a penny stock to be an equity security that has a
market price of less than $5.00 per share, subject to certain exceptions. Such
exceptions include any equity security listed on NASDAQ or a national securities
exchange and any equity security issued by an issuer that has:




·
            net
      tangible assets in excess of $2,000,000, if such issuer has been in
      continuous operation for three
years;


·
            net
      tangible assets in excess of $5,000,000, if such issuer has been in
      continuous operation for less than three years;
  or


·
            average
      revenue of at least $6,000,000, for the last three
  years.





Unless an
exception is available, the regulations require, prior to any transaction
involving a penny stock, that a disclosure schedule explaining the penny stock
market and the risks associated therewith is delivered to a prospective
purchaser of the penny stock.  We currently do not qualify for an
exception, and, therefore, our common stock is considered to be penny stock and
is subject to these requirements.  The penny stock regulations adversely
affect the market liquidity of our common shares by limiting the ability of
broker/dealers to trade the shares and the ability of purchasers of our common
shares to sell in the secondary market.  In addition, certain institutions
and investors will not invest in penny stocks.




Future
sales of a significant number of shares of our common stock by existing
stockholders may lower the price of our common stock, which could result in
losses to our stockholders.  We estimate there that are approximately
22,000,000 restricted shares outstanding which, upon becoming freely tradable
under Rule 144 or 144(k) of the Securities Exchange Act of 1934, may lower the
price of our common stock.







ITEM
4.                      Controls
and Procedures




As
required by Rule 13a-15 under the Exchange Act, we have carried out an
evaluation of the effectiveness of the design and operation of our company’s
disclosure controls and procedures as of the end of the period covered by this
quarterly report, being March 31, 2009. 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.




19


There
were no significant changes in internal controls over financial reporting during
the first quarter of 2009.






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 first quarter of 2009, we sold 3,550,000 restricted shares of common stock
at $0.10 per share with 3,550,000 three year warrants exercisable at $0.10 -
$0.20 per share (private placements) to four investors, generating net proceeds
of $320,000 in cash after $35,000 of commissions and finder fees were
paid.  Also, a consultant purchased 62,500 shares of common stock at
$0.08 per share (Directors, Officers, Consultants Plan), generating $5,000 in
cash.




During
the first quarter of 2009, officers were paid 1,407,905 shares of common stock
at $0.05 - $0.08 per share in lieu of salaries (Directors, Officers, Consultants
Plan).  Also, consultants were paid 636,364 shares of common stock at
$0.055 per share in lieu of services (Directors, Officers, Consultants
Plan).   Salaries and services paid in stock totaled
$140,846.




Date
      (2009)
              Shares
      of Common Stock
              Purchaser
              Discount*Issue
      Price
              Number
              Per
      Share
              Total1
              January
      9 **
              $
              .10
              5,000
              JoLynn
      Carney
              $
              0
              $
              02
              February
      5
              
              .08
              62,500
              Katsuaki
      Hayashibara
              
              0
              
              03
              February
      13 ***
              
              .10
              3,000,000
              Cyto
      Biotech
              
              0
              
              04
              February
      20
              
              .08
              134,984
              Dr.
      Joseph Cummins
              
              0
              
              05
              February
      20
              
              .08
              100,510
              Dr.
      Gary Coy
              
              0
              
              06
              February
      20
              
              .08
              969,835
              Dr.
      Peter Mueller
              
              0
              
              07
              March
      1 ****
              
              .10
              250,000
              Paul
      Tibbits
              
              0
              
              08
              March
      1 ****
              
              .10
              250,000
              Marian
      Tibbits
              
              0
              
              09
              March
      12
              
              .0465
              116,116
              Dr.
      Joseph Cummins
              
              0
              
              010
              March
      12
              
              .0465
              86,460
              Dr.
      Gary Coy
              
              0
              
              011
              March
      25
              
              .055
              318,182
              Alicia
      Browner
              
              0
              
              012
              March
      25
              
              .055
              318,182
              Richard
      Tieken
              
              0
              
              0





*Discounts
were calculated based on the closing price of the last transaction on each
date.




20


** The
price was $0.10 for each share of common stock and one warrant with three year
term and exercisable at $0.20 per share.  The stock closing price on
January 9, 2009 was $0.07 per share.




*** The
price was $0.10 for each share of common stock and one warrant with three year
term and exercisable at $0.20 per share.  The stock closing price on
February 13, 2009 was $0.065 per share.




**** The
price was $0.10 for each share of common stock and one warrant with three year
term and exercisable at $0.10 per share.  The stock closing price on
March 1, 2009 was $0.07 per share.









ITEM
      3.
            Defaults
      Upon Senior Securities.




None,
      other than set forth in Note 6 to Financial Statements, “Notes Payable”,
      under Part I, Item 1, above, regarding non-payment of the HBL
      Notes.









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




None.









ITEM.5.
            Other
      Information




None









ITEM
      6.
            Exhibits.




10.67(12)
            License
      and Supply Agreement Between Cyto Biotech, Inc. and Amarillo Biosciences,
      Inc.  (12)The
      Exhibit is incorporated byreference
      to theCompany’s
      Report on Form 8-K filed with the SEC on February 26,
      2009.




10.68
            Addendum
      dated February 20, 2009 to the License and Supply Agreement dated February
      6, 2009, between Cyto Biotech, Inc. and the Company







21







SIGNATURES




Pursuant
to the requirements of Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.




AMARILLO
BIOSCIENCES, INC.









Date:
      May 15, 2009
            By:/s/
      Joseph M. Cummins


Joseph
      M. Cummins


President
      and Chief Executive Officer








Date:
      May 15, 2009
            By:/s/
      Gary W. Coy


Gary
      W. Coy


Vice
      President and Chief Financial
Officer








22