Summary of AMARILLO BIOSCIENCES INC

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.

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 evaluate orally administered IFN? 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 IFN? or placebo. Treatment is given three times daily for 4 weeks, and patients are followed for 4 weeks post-treatment to assess durability of response. The study evaluates the ability of IFN? 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.

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 natural outbreak or challenge studies indicate that low doses of IFN? given orally and/or intranasally are safe and effective at treating human flu. IFN? administered intranasally coats the oropharynx and comes in contact with the same receptors as IFN? 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.

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

In 1981, HBL established the Fujisaki Institute to accelerate development of industrial methods for the production of biologics and to sponsor clinical trials for such products. In 1985, HBL built the Fujisaki Cell Center to support basic research. In 1987, HBL successfully accomplished the mass production of human cells in an animal host by producing human cells in hamsters. This made it possible to economically produce a natural form of human interferon alpha and other biologics. HBL also has developed and obtained patents for technology

relating to the production of interferon alpha-containing lozenges by which the stability of the interferon alpha activity can be maintained for up to 24 months at room temperature and up to five years if the product is refrigerated. The Company believes that the use of such lozenges gives it advantages over competitive technologies in terms of cost, taste and ease of handling. On March 13, 1992, the Company entered into a Joint Development and Manufacturing/Supply Agreement with HBL (the "Development Agreement"). Such Development Agreement was subsequently amended on January 17, 1996; May 10, 1996; and September 7, 2001. The current expiration date of the Development Agreement is March 12, 2011, at which time it will automatically renew for an additional three (3) years, unless the parties agree otherwise. Among other things, the Development Agreement provides the Company with a source of natural human interferon alpha for use in the Company's interferon alpha-containing products.

Strategic Alliance with Nobel. We signed a licensing and supply agreement in September 2004 with a Turkish pharmaceutical company, NOBEL ILAC SANAYII VE TICARET A.S., providing the rights to oral low-dose interferon-alpha for the treatment of Behcet's disease in Turkey and in Azerbaijan, Bosnia & Herzegovina, Bulgaria, Croatia, Georgia, Kazakhstan, Kyrghyzstan, Macedonia, Romania, Russia, Saudi Arabia, Slovenia, Tajikistan, Turkmenistan, Uzbekistan, and Federal Republic of Yugoslavia.

The license agreement covers a territory whose population is approximately 365 million. In Turkey, where the disease is more than 600 times more prevalent than in the United States, there are from 56,000 to 259,000 people who are afflicted with the disease, according to a review published in the New England Journal of Medicine. The U.S. Food and Drug Administration (FDA) has granted Orphan Drug Designation for this product for the clinical indication of Behcet's Disease to us. The Orphan Drug Designation is designed to promote the development of treatments for diseases rare in the United States and provides certain marketing exclusivity incentives outlined under the Orphan Drug Act.

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.

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.

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%.

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.

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