AMARILLO BIOSCIENCES INC, SB-2/A, 1996-07-31

AMARILLO BIOSCIENCES INC
SB-2/A, 1996-07-31
PHARMACEUTICAL PREPARATIONS

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 31, 1996

REGISTRATION NO. 333-04413

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------

AMENDMENT NO. 2

TO
FORM SB-2
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
------
AMARILLO BIOSCIENCES, INC.
(Name of Small Business Issuer in its Charter)
<TABLE>

<S> <C> <C>
Texas 8731 75-1974352
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
</TABLE>

800 West 9th Avenue
Amarillo, Texas 79101
(806) 376-1741
(Address and Telephone Number of Principal Executive Offices and Principal
Place of Business)
Dr. Joseph M. Cummins, DVM, PhD
Amarillo Biosciences, Inc.
800 West 9th Avenue
Amarillo, Texas 79101
(806) 376-1741
(Name, Address and Telephone Number of Agent for Service)
------
Copies to:
ROBERT E. FISCHER, ESQ. ROBERT J. MITTMAN, ESQ.
Lowenthal, Landau, Fischer & Bring, P.C. Tenzer Greenblatt LLP
250 Park Avenue 405 Lexington Avenue
New York, New York 10177 New York, New York 10174
(212) 986-1116 (212) 885-5000
Facsimile No. (212) 986-0604 Facsimile No. (212) 885-5001

Approximate Date of Proposed Sale to the Public: As soon as practicable
after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities
Act of 1933, check the following box. /X/

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /_____________

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /_____________

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /

------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.

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AMARILLO BIOSCIENCES, INC.
------
CROSS REFERENCE SHEET
------

<TABLE>
<CAPTION>
Form SB-2 Item Nos. and Caption Prospectus Caption
----------------------------------------------------------- -------------------------------------------------
<S> <C>
1. Front of Registration Statement and Outside Front Cover
of Prospectus ........................................ Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus ............................................ Inside Front and Outside Back Cover Pages
3. Summary Information and Risk Factors .................. Prospectus Summary; Risk Factors
4. Use of Proceeds ....................................... Use of Proceeds
5. Determination of Offering Price ....................... Underwriting
6. Dilution .............................................. Dilution
7. Selling Security-Holders .............................. *
8. Plan of Distribution .................................. Outside Front Cover Page; Underwriting
9. Legal Proceedings ..................................... *
10. Directors, Executive Officers, Promoters and Control
Persons ............................................... Management

11. Security Ownership of Certain Beneficial Owners and
Management ............................................ Principal Shareholders
Description of Common Stock; Shares Eligible For Future

12. Description of Securities ............................. Sale
13. Interest of Named Experts and Counsel ................. Legal Matters; Experts
14. Disclosure of Commission Position on Indemnification for
Securities Act Liabilities ............................ *
15. Organization Within Last Five Years ................... *
16. Description of Business ............................... Prospectus Summary; Business

17. Management's Discussion and Analysis or Plan of
Operation .............................................. Management's Discussion and Analysis of Financial
Condition and Results of Operations
18. Description of Property ............................... Business
19. Certain Relationships and Related Transactions ........ Certain Transactions
20. Market for Common Equity and Related Stockholder Matters
*
21. Executive Compensation ................................ Management
22. Financial Statements .................................. Consolidated Financial Statements
23. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure .................. *

</TABLE>

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* Not applicable.

<PAGE>

Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any state in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
any such state.

PRELIMINARY PROSPECTUS DATED JULY 31, 1996

SUBJECT TO COMPLETION

[LOGO]
2,000,000 SHARES
AMARILLO BIOSCIENCES, INC.
COMMON STOCK

Prior to this offering, there has been no public market for the Common
Stock and there can be no assurance that any such market will develop. It is
anticipated that the Common Stock will be quoted on the NASDAQ Small Cap
Market ("NASDAQ") under the symbol "AMAR." For a discussion of the factors
considered in determining the initial public offering price, see
"Underwriting."

Hayashibara Biochemical Laboratories, Inc. ("HBL"), a principal shareholder
and supplier of the Company, and Mochida Pharmaceutical Co., Ltd. have
indicated their interest in purchasing at the initial offering price up to
200,000 and 300,000 shares, respectively, of the Common Stock being sold in this
offering. Certain employees of HBL have also indicated their interest in
purchasing at the initial offering price up to an aggregate of 240,000 shares
of the Common Stock being sold in this offering. In addition, the Company has
agreed to use $1,000,000 of the proceeds of this offering to pay a portion of
the indebtedness owed by the Company to HBL. See "Use of Proceeds," "Principal
Shareholders" and "Certain Transactions."
------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION AND SHOULD NOT BE PURCHASED BY INVESTORS WHO CANNOT
AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS"
COMMENCING ON PAGE 6 AND "DILUTION" ON PAGE 17.

------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
===============================================================================
Price Underwriting Proceeds
to Discounts and to
Public Commissions(1) Company(2)
- -------------------------------------------------------------------------------
Per Share .......................... $5.00 $.50 $4.50
- -------------------------------------------------------------------------------
Total(3) ........................... $10,000,000 $1,000,000 $9,000,000
===============================================================================
(1) In addition, the Company has agreed to pay to the Underwriter a 3%
nonaccountable expense allowance, to sell to the Underwriter warrants
(the "Underwriter's Warrants") to purchase up to 200,000 shares of Common
Stock and to retain the Underwriter as a financial consultant. The
Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses, including the nonaccountable expense allowance
in the amount of $300,000 ($345,000 if the Underwriter's over-allotment
option is exercised in full), estimated at $825,000, payable by the
Company.
(3) The Company has granted the Underwriter an option, exercisable within 45
days from the date of this Prospectus, to purchase up to 300,000
additional shares of Common Stock, on the same terms as set forth above,
solely for the purpose of covering over-allotments, if any. If the
Underwriter's over-allotment option is exercised in full, the total price
to public, underwriting discounts and commissions and proceeds to Company
will be $11,500,000, $1,150,000 and $10,350,000 respectively. See
"Underwriting."

The shares of Common Stock are being offered, subject to prior sale, when,
as and if delivered to and accepted by the Underwriter and subject to
approval of certain legal matters by counsel and to certain other conditions.
The Underwriter reserves the right to withdraw, cancel or modify the offering
and to reject any order in whole or in part. It is expected that delivery of
certificates representing the shares of Common Stock offered hereby will be
made at the offices of the Underwriter, 650 Fifth Avenue, New York, New York
10019, on or about , 1996.
------

WHALE SECURITIES CO., L.P.
The date of this Prospectus is , 1996

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A graphic image of a man appears here showing the path of IFN|ga taken
orally. Four circles surrounding the image display drawings of (i) a profile
of the head of a person suffering from Sjogren's syndrome, (ii) the mouth of
an individual with oral mucositis, (iii) an IFN|ga molecule and (iv) a
microscopic view of a portion of a liver infected with the hepatitis virus.
In addition to the graphic images, the following text appears: "The Company
is currently focusing its research on human health indications for the use of
low dose oral natural interferon alpha ("IFN|ga"). Based upon initial results,
the Company intends to focus its development activities on the applications
discussed below: Sjogren's Syndrome. Sjogren's syndrome is a chronic
autoimmune disorder characterized by severe dryness of the eyes and mouth.
The Company believes oral IFN|ga therapy helps to relieve the dryness
associated with Sjogren's syndrome and may effectively supplement or be used
in lieu of existing treatments. Oral Mucositis. Oral mucositis is a condition
characterized by inflammation and sometimes ulcerations of the mucosal lining
of the mouth. It is often associated with the use of chemotherapy or
radiation therapy on cancer patients. The Company has filed and there is now
in effect an Investigational New Drug Application for the use of IFN|ga to
treat oral mucositis. Hepatitis B and Hepatitis C. Hepatitis is a family of
diseases in which inflammation of the liver occurs. Hepatitis B and hepatitis
C are two of the most common viruses which cause hepatitis. The Company
believes that low dose oral IFN|ga therapy for chronic active hepatitis B
disease might be as beneficial a treatment for the disease as parenteral IFN|ga
and will be more economical. The Company believes that, by pretreating
hepatitis C patients with low dose oral IFN|ga, the response rate of those
patients to parenteral IFN|ga treatment may increase."

AVAILABLE INFORMATION

As of the date of this Prospectus, the Company will become subject to the
reporting requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and, in accordance therewith, will file reports, proxy
statements and other information with the Securities and Exchange Commission
(the "Commission"). The Company intends to furnish its shareholders with
annual reports containing audited financial statements and such other reports
as the Company deems appropriate or as may be required by law.

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

2
<PAGE>

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements, including the notes
thereto, appearing elsewhere in this Prospectus. Each prospective investor is
urged to read this Prospectus in its entirety. Unless otherwise indicated,
all share and per share information in this Prospectus (i) gives retroactive
effect to a 10-for-1 stock split effected in May 1993 and a 20% stock
dividend effected in May 1996, and (ii) assumes that the Underwriter's
over-allotment option is not exercised. See "Underwriting" and Notes 1 and 13
of Notes to Consolidated Financial Statements. For definitions of certain
terms used in this Prospectus see the Glossary beginning on page 46.

THE COMPANY

Amarillo Biosciences, Inc., a development-stage company (the "Company"),
is engaged in developing biologics for the treatment of human and animal
diseases. The Company is currently focusing its research on human health
indications for the use of low dose oral natural interferon alpha ("IFN|ga"),
particularly for the treatment of Sjogren's syndrome, oral mucositis in
cancer patients and hepatitis B and C ("Primary Development Projects"). The
Company believes that significant worldwide opportunities exist for the
development of low dose oral natural IFN|ga as an inexpensive, non-toxic,
efficacious alternative to the treatment of disease by injection of high
doses of IFN|ga. In addition, the Company believes that low dose oral natural
IFN|ga can be an effective treatment for diseases or conditions for which
current therapies are inadequate.

The Company owns or licenses eleven United States patents relating to low
dose oral natural IFN|ga. Since 1992, the Company has filed, and there now are
in effect, seven Investigational New Drug Applications covering indicated
uses for low dose oral IFN|ga, including treatment of Sjogren's syndrome and
oral mucositis. The Company is seeking regulatory approvals in certain
foreign countries to test and/or market low dose oral IFN|ga for the treatment
of hepatitis B and C.

The Company is also testing oral IFN|ga in cats with herpesvirus-1
infection, dogs with keratoconjunctivitis sicca and cattle with shipping
fever or mastitis and has filed, and there are now in effect, Investigational
New Animal Drug Notices for these and other indications for the product in
animals. The Company is also testing a topical IFN|ga as a treatment for
genital warts in humans.

The Company has formed a strategic alliance with Hayashibara Biochemical
Laboratories, Inc. ("HBL") of Okayama, Japan, a subsidiary of Hayashibara
Company, Ltd., a privately-owned Japanese holding corporation with
diversified subsidiaries. To date, the Company has received from HBL research
funding in the amount of $9,000,000. HBL has also purchased from the Company
an aggregate of 461,520 shares of Common Stock for a total purchase price of
$1,443,800 and has made loans to the Company aggregating $3,000,000, of which
$1,000,000 borrowed after March 31, 1996 will be repaid simultaneously with
the consummation of this offering. Pursuant to a Joint Development and
Manufacturing/Supply Agreement between HBL and the Company (the "Development
Agreement"), HBL manufactures and supplies exclusively to the Company IFN|ga
for oral use in the development of human applications under the Company's
patents for worldwide markets outside of Japan and for animal applications
worldwide. The Company also has a non-exclusive license from HBL to use HBL's
patented technology to produce IFN|ga lozenges with anhydrous maltose. This
formulation significantly prolongs the stability of IFN|ga activity at room
temperature. In addition, HBL has agreed to supply its IFN|ga exclusively to
the Company in North America for non-oral (topical and parenteral) use.

The Company has also entered into manufacturing and supply and license
agreements with Interferon Sciences, Inc. ("ISI") of New Brunswick, New
Jersey, a subsidiary of National Patent Development, Inc., under which ISI,
among other things, supplies exclusively to the Company, IFN|ga for oral use in
animals.

3
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which in the opinion of the Company have the greatest commercial potential
and are most likely to be approved by the United States Food and Drug
Administration (the "FDA"). To the extent possible, the Company will attempt
to minimize the cost to the Company of obtaining FDA approval by utilizing
forms of IFN|ga already approved (in other dosage forms and for different
indications) by the Japanese Ministry of Health and Welfare for human use or
by the FDA for animal use. The Company believes that such minimized costs
will be the result of more information available for use in preparing
applications for approval. The Company will attempt to gain market share for
approved products by forming alliances with strong marketing partners.

The Company is in the development stage and currently has no products
approved for commercial use other than in Kenya. The Company's long-term
viability, profitability and growth will depend upon successful
commercialization of products resulting from its research and product
development activities. To date, although the Company has recorded contract
revenue relating to research and development pursuant to the Development
Agreement, the Company has generated only limited revenues from product sales
and licensing. Moreover, the Company has incurred significant losses,
including losses of $129,239 and $311,579 for the years ended December 31,
1994 and 1995, respectively, and $4,943,168 for the period from June 25, 1984
(inception) through March 31, 1996. For the years ended December 31, 1994 and
1995 and the three months ended March 31, 1996, the Company recorded contract
revenues of $2,480,093, $1,361,395 and $402,574, respectively, as research
and development and administrative costs were incurred. As of March 31, 1996,
all but $14,566 of the $9,000,000 in research funding provided by HBL from
1992 to 1994 pursuant to the Development Agreement had been recognized as
contract revenue. HBL has no obligation to provide additional research
funding to the Company nor does the Company currently have such a commitment
from any other person. Inasmuch as the Company will continue to have a high
level of research and development and general and administrative expenses
(including compensation expense in 1996 of $515,156 relating to the issuance
of restricted stock to three officers of the Company simultaneously with the
sale of the Common Stock offered hereby) and will not have matching contract
revenues as such expenditures are incurred, the Company anticipates that,
commencing in the second quarter of 1996, losses will increase significantly
and losses will continue until such time, if ever, as the Company is able to
generate sufficient revenues to support its operations. The Company believes
that its ability to generate sufficient revenues primarily depends on the
success of the Company in completing development and obtaining regulatory
approvals for the commercial sale of products, including approval of any
manufacturing facilities established or maintained by the Company or its
suppliers that produce such products. There can be no assurance that any of
such events will occur, that the Company will attain revenues from
commercialization of its products or that the Company will ever achieve
profitable operations. See "Risk Factors."

The Company was incorporated in June 1984 in the State of Texas under the
name of Amarillo Cell Culture Company, Incorporated. In May 1996, the Company
changed its name to Amarillo Biosciences, Inc. The executive offices of the
Company are located at 800 West 9th Avenue, Amarillo, Texas 79101 and its
telephone number is (806) 376-1741. Unless the context otherwise requires,
all references in this Prospectus to the Company include its wholly-owned
subsidiaries, Vanguard Biosciences Inc., Veldona USA Inc., Veldona Inc.,
Veldona Africa Inc., Veldona Poland Inc. and Amarillo Cell of Canada Inc.

THE OFFERING

Common Stock offered........... 2,000,000 shares

Common Stock to be outstanding
after the offering (1)....... 5,114,232 shares

Use of Proceeds................ The Company intends to use approximately
$6,350,000 of the net proceeds of this
offering for research and development,
$1,000,000 for repayment of certain
short-term indebtedness to HBL and the
balance for working capital and general
corporate purposes. See "Use of Proceeds."

4
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Risk Factors................... The securities offered hereby are
speculative and involve a high degree of
risk and immediate substantial dilution and
should not be purchased by investors who
cannot afford the loss of their entire
investment. See "Risk Factors" and
"Dilution."

Proposed NASDAQ symbol......... AMAR

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(1) Includes 79,000 shares of Common Stock to be issued to three officers of
the Company simultaneously with the sale of the Common Stock offered
hereby pursuant to their employment agreements. Does not include (i)
200,000 shares of Common Stock reserved for issuance upon exercise of the
Underwriter's Warrants; (ii) an aggregate of 115,500 shares of Common
Stock reserved for issuance upon the exercise of stock options to be
outstanding under the Company's 1996 Employee Stock Option Plan and the
Company's Outside Director and Advisor Stock Option Plan (collectively,
the "Plans"), none of which options are currently exercisable; or (iii)
an aggregate of 134,500 shares of Common Stock reserved for issuance upon
exercise of stock options which are available for future grant under the
Plans. See "Management -- Employment Agreements," "-- Stock Option
Plans," "Principal Shareholders," "Certain Transactions" and
"Underwriting."

SUMMARY CONSOLIDATED FINANCIAL INFORMATION

The summary consolidated financial information set forth below is derived
from the consolidated financial statements appearing elsewhere in this
Prospectus. Such information should be read in conjunction with such
financial statements, including the notes thereto.

CONSOLIDATED STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
Cumulative From
June 25, 1984
(Inception)
Three Months Ended March Through
Year Ended December 31, 31, March 31,
---------------------------- -------------------------- ---------------
1994 1995 1995 1996 1996
------------ ------------ ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Total revenues ........ $2,653,331 $2,006,262 $ 647,069 $ 415,728 $10,570,886
Total expenses ........ 2,782,570 2,317,841 722,003 402,921 15,514,054
Net income (loss) ..... (129,239) (311,579) (74,934) 12,807 (4,943,168)
Net loss per share .... (.04) (.10) (.02) --
Weighted average shares
outstanding .......... 3,005,592 3,034,339 3,031,609 3,035,232

</TABLE>

CONSOLIDATED BALANCE SHEET DATA:
<TABLE>
<CAPTION>
March 31, 1996
-------------------------------
December 31, 1995 Actual As Adjusted(1)
----------------- ------------- --------------
<S> <C> <C> <C>
Cash and cash equivalents ....................... $ 1,108,527 $ 724,280 $ 8,664,280
Working capital (deficiency) .................... (18,035) (2,585) 8,062,102
Total assets .................................... 1,791,060 1,424,004 9,364,004
Total liabilities ............................... 3,152,957 2,743,094 2,618,407
Deficit accumulated during the development stage . (4,955,975) (4,943,168) (5,448,481)
Shareholders' equity (deficit) .................. (1,361,897) (1,319,090) 6,745,597
</TABLE>
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(1) Gives effect to the sale of 2,000,000 shares of Common Stock offered
hereby and the anticipated application of the estimated net proceeds
therefrom, including the payment of $235,000 to satisfy withholding tax
obligations of the Company arising in a transaction required under the
employment agreements of three officers in which the Company shall also
issue 79,000 shares of Common Stock to such officers. Subsequent to March
31, 1996, the Company borrowed $1,000,000 from HBL, which amount will be
repaid from the proceeds of this offering. See "Use of Proceeds" and
"Certain Transactions."

Notice to Washington Investors. Each purchaser of shares of Common Stock in
Washington must be an "accredited investor," as that term is defined in Rule
501(a) of Regulation D promulgated under the Securities Act.

5
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RISK FACTORS

The shares of Common Stock offered hereby are speculative and involve a
high degree of risk, including, but not necessarily limited to, the risk
factors described below. Each prospective investor should carefully consider
the following risk factors inherent in and affecting the business of the
Company and this offering before making an investment decision.

Except for the historical information contained herein, the discussion in
this Prospectus contains forward- looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from
those discussed here. Factors that could cause or contribute to such
difference include, but are not limited to, those discussed in "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business" as well as those discussed elsewhere in
this Prospectus.

Development Stage Company; Uncertainty of Product Development; Limited
Relevant Operating History. The Company is in the development stage and
currently has no products approved for commercial use other than in Kenya.
The Company's long-term viability, profitability and growth will depend upon
successful commercialization of products resulting from its research and
product development activities. The Company will not be able to sell
significant quantities of any product until such time, if ever, as it
receives regulatory approval to commercially market the product. All of the
Company's products will require significant additional development,
laboratory and clinical testing and investment prior to obtaining such
approvals for any product and prior to commercialization. The Company does
not expect to receive regulatory approvals in the United States for any
product for at least three years. Moreover, adverse or inconclusive results
in clinical trials could significantly delay or ultimately preclude any such
approvals and, even if obtained, there can be no assurance that any product
approval will lead to the successful commercialization of such product.
Further, as a development stage company, the Company has a limited relevant
operating history upon which an evaluation of its prospects can be made. Such
prospects must be considered in light of the risks, expenses and difficulties
frequently encountered in establishing a new business in the evolving,
heavily regulated pharmaceutical industry, which is characterized by an
increasing number of market entrants, intense competition and a high failure
rate. In addition, significant challenges are often encountered in shifting
from development to commercialization of new products. See "Business."

History of Significant Losses; Anticipated Future Losses; Limited Product
Revenues. To date, although the Company has recorded contract revenues
relating to research and development pursuant to the Development Agreement,
the Company has generated only limited revenues from product sales and
licensing. Moreover, the Company has incurred significant losses, including
losses of $129,239 and $311,579 for the years ended December 31, 1994 and
1995, respectively, and $4,943,168 for the period from June 25, 1984
(inception) through March 31, 1996. For the years ended December 31, 1994 and
1995 and the three months ended March 31, 1996, the Company recorded contract
revenues of $2,480,093, $1,361,395 and $402,574, respectively, as research
and development and administrative costs were incurred. As of March 31, 1996,
all but $14,566 of the $9,000,000 in research funding provided by HBL from
1992 to 1994 pursuant to the Development Agreement had been recognized as
contract revenue. HBL has no obligation to provide additional research
funding to the Company nor does the Company currently have such a commitment
from any other person. Inasmuch as the Company will continue to have a high
level of research and development and general and administrative expenses
(including compensation expense in 1996 of $515,156 relating to the issuance
of restricted stock to three officers of the Company simultaneously with the
sale of the Common Stock offered hereby) and will not have matching contract
revenues as such expenditures are incurred, the Company anticipates that,
commencing in the second quarter of 1996, losses will increase significantly
and losses will continue until such time, if ever, as the Company is able to
generate sufficient revenues to support its operations. The Company believes
that its ability to generate sufficient revenues primarily depends on the
success of the Company in completing development and obtaining regulatory
approvals for the commercial sale of products, including approval of any
manufacturing facilities established or maintained by the Company or its
suppliers that produce such products. There can be no assurance that any of
such events will occur, that the Company will attain revenues from
commercialization of its products or that the Company will ever achieve
profitable operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business" and Consolidated Financial
Statements.

Significant Capital Requirements; Dependence on Proceeds of this Offering;
Need for Additional Capital. The Company's capital requirements have been and
will continue to be significant. To fund its capital

6
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requirements to date, the Company has been dependent primarily on (i) an
aggregate of $9,000,000 in funding received from HBL under the Development
Agreement, (ii) the net cash proceeds of private placements of the Company's
Common Stock, aggregating approximately $3,500,000 and (iii) loans from HBL
aggregating $3,000,000, of which $1,000,000 borrowed after March 31, 1996
will be repaid with a portion of the proceeds of this offering. The Company
is dependent upon the proceeds of this offering to fund its research and
development as well as other working capital requirements. The Company
anticipates, based on its currently proposed plans and assumptions relating
to its operations (including assumptions regarding the progress of its
research and development and the timing and costs associated with the Primary
Development Projects), that the net proceeds of this offering, together with
the Company's existing capital resources, will be sufficient to satisfy the
Company's estimated cash requirements for at least 12 months following the
consummation of this offering. The Company estimates that an aggregate of
$11,100,000 will be needed over approximately the next three years to
complete its Primary Development Projects. Such amount is in excess of the
net proceeds of this offering and the existing capital of the Company.
Therefore, unless the Company generates significant revenues during such
period, which the Company believes is unlikely, the Company will need
additional financing to fully fund such development. The Company has no
current arrangements with respect to, or sources of, additional financing and
it is not anticipated that any of the officers, directors or shareholders of
the Company (including HBL) will provide any portion of the Company's future
financing requirements. There can be no assurance that, when needed,
additional financing will be available to the Company on commercially
reasonable terms, or at all. In the event that the Company's plans change,
its assumptions change or prove inaccurate, or if the net proceeds of this
offering, together with other capital resources, otherwise prove to be
insufficient to fund operations, the Company could be required to seek
additional financing sooner than currently anticipated. Any inability to
obtain additional financing when needed would have a material adverse effect
on the Company, including possibly requiring the Company to significantly
curtail or possibly cease its operations. In addition, any additional equity
financing may involve substantial dilution to the Company's then existing
shareholders. See "Use of Proceeds," "Dilution," "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Business" and
"Certain Transactions."

Patent Claims Made By Roche. Hoffmann La-Roche, Inc. ("Roche") has
asserted to both HBL and ISI that the manufacture, sale and use of their
respective forms of IFN|ga infringe United States Patent 4,503,035 and foreign
counterparts thereof owned by Roche relating to IFN|ga (collectively, the
"Roche Patent"). The Roche Patent expires in March 2002 in the United States
and at various times in other jurisdictions. HBL has informed the Company
that it believes that the claims of the Roche Patent are not applicable to
the manufacture and sale of HBL IFN|ga . HBL has prevailed at the trial level
in litigation initiated by Roche in Japan concerning the dispute and Roche
has appealed the decision. The Company is not a party to the litigation
between Roche and HBL in Japan.

The Company believes that it is likely that Roche would commence suit
against the Company if the Company were to sell or attempt to sell HBL IFN|ga
for commercial use in the United States or any other country where the Roche
Patent has issued with IFN|ga composition claims and is still in effect.
However, under applicable United States patent law, the use of a patented
product solely for uses reasonably related to the development and submission
of information for seeking FDA approval of a biologic for indicated uses in
humans is not an act of infringement. Thus, the Company believes that it is
unlikely that it would be sued by Roche prior to commercialization of the
Company's IFN|ga products. Roche would also not assert infringement claims with
respect to the Company's sale of ISI IFN|ga , because in March 1995 ISI entered
into a license agreement with Roche pursuant to which ISI was granted a
license to use the Roche Patent in exchange for specified royalties.

The Company believes that its oral IFN|ga dosage forms do not infringe any
claims of the Roche Patent. However, there can be no assurance that, if the
Company sells or attempts to sell HBL IFN|ga for commercial use in one or more
countries in which the Roche Patent has issued, such sale or attempted sale
would not be determined to be an infringement of the Roche Patent under
applicable law. HBL has agreed to indemnify the Company for litigation
expenses incurred in defending suits brought by Roche against the Company for
infringement of the Roche Patent and for any damages the Company may be
required to pay to Roche in the event that Roche is successful in any such
suit. Nevertheless, a determination of infringement could have a material
adverse effect on the business and operations of the Company. See
"Business-Patents and Proprietary Rights" and Certain Transactions."

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<PAGE>

Government Regulation. The development, manufacture, testing and marketing
of all of the Company's products are subject to extensive regulation by
numerous authorities in the United States and other countries. In the United
States, before new pharmaceutical products (including biologics) are
permitted to be marketed commercially, they must undergo extensive
preclinical and clinical testing to satisfy the FDA that they are safe and
efficacious in each clinical indication (the specific condition intended to
be treated) for which approval is sought. Additionally, approval by analogous
regulatory authorities in other countries must be obtained prior to
commencing marketing of pharmaceutical products in those countries. The
approval process varies from country to country and approval of a drug for
sale in one country does not ensure approval in other countries. Delays in
obtaining regulatory approvals may adversely affect the development, testing
or marketing of the Company's products and the ability of the Company to
generate revenues from the sale or licensing of such products. There can be
no assurance that the Company will obtain regulatory approvals for its
products in a timely manner, or at all.

Since 1992 the Company has filed and there are now in effect, seven INDs
covering indicated uses for low dose oral IFN|ga. The Company intends to use a
portion of the proceeds of this offering to do clinical testing of the use of
low dose oral IFN|ga in treating Sjogren's syndrome and oral mucositis, two of
the indications covered by the INDs granted to the Company. There can be no
assurance that regulatory approvals will be obtained by the Company in the
United States or any other country to sell IFN|ga for such purposes. In
addition, INADs have been filed and are now in effect for testing of low dose
oral IFN|ga in cats, dogs, swine, horses and cattle.

Manufacturers of therapeutic products sold in the United States are
required to satisfy the FDA that their manufacturing facilities and processes
adhere to the agency's good manufacturing practices ("GMP") regulations and
to engage in extensive record keeping and reporting. Even if regulatory
approval for a product is granted, the facilities in which the product is
manufactured will be subject to periodic review and inspections by the FDA or
the analogous regulatory authorities of other countries for compliance with
GMP or similar foreign regulatory standards. Compliance with such regulations
requires substantial time and attention, and is costly. In addition, each
domestic manufacturing establishment must be registered with and approved by
the FDA. For biologics, except certain well-characterized ones, this requires
the filing of an establishment license application for the facilities at
which the product will be produced. Failure to comply with the applicable
regulatory requirements by either the Company or its strategic partners
could, among other things, result in criminal prosecution and fines, product
recalls, product seizures and operating restrictions.

The Company has not yet sought FDA approval for the commercial sale of any
of its products or for the manufacturing processes or facilities of any of
its strategic partners. The Company has obtained approval in Kenya for the
use of oral IFN|ga for the treatment of certain symptoms of AIDS and has made
application in Poland for the use of oral IFN|ga as a treatment for hepatitis B
and AIDS, but has not yet received approval for commercial sales in Poland.
The approval process applicable to products of the type being developed by
the Company usually takes many years and typically requires substantial
expenditures. Moreover, even if approval is granted, such approval may impose
limitations on the indicated uses for which a product may be marketed.

Inasmuch as the Company may manufacture products in the United States and
seek to market or license other domestic manufacturers to market products
throughout the world, the Company may become subject to United States laws
and regulations applicable to exporting drugs, including biologics. The
Federal Food, Drug, and Cosmetic Act stipulates that, prior to FDA approval
for commercial sale, a drug manufactured in the United States may be
exported to any country in the world, without prior FDA authorization,
only if it has received marketing authorization in at least one of the 25
countries listed in Section 802 of that act. Other requirements include that
(i) the product is manufactured in substantial compliance with the FDA's GMP
regulations, (ii) the FDA is notified of the exportation, and (iii) the FDA has
not determined that the probability of reimportation presents an imminent
hazard to the public health and safety of the United States. Drugs for
investigational use in any of the 25 countries may be exported without
notification to the FDA. Drugs for investigational use in other countries
may not be exported without FDA authorization. Thus, the ability of
the Company or its licensees to export products manufactured in the United
States prior to receiving commercial approval in the United States will be
subject to certain restrictions. Therefore, there can be no assurance that the
Company or its licensees would be able to export for investigational use or
commercial sale in any countries products manufactured in the United States
which have not received FDA approval.

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<PAGE>

The Company is also subject to the regulations of the United States
Environmental Protection Agency as well as other federal, state and local
laws and regulations governing the use and disposal of hazardous materials.
Compliance with these laws and regulations is time-consuming and expensive
and failure to comply could have a material adverse effect on the Company.

The adoption by federal, state or local governments of significant new
laws or regulations or a change in the interpretation of existing laws or
regulations relating to environmental or other regulatory matters could
increase the cost of producing the products manufactured by the Company or
its strategic partners or otherwise adversely affect the demand for the
Company's products. Adverse governmental regulation which might arise from
future legislative or administrative action cannot be predicted. See
"Business-Government Regulation."

Dependence on HBL; Possible Conflict of Interest. The success of the
Company's business will depend upon many factors beyond the Company's
control, including its contractual and working relationship with HBL. The
Company relies and will rely on HBL to supply HBL IFN|ga to the Company in
sufficient quantities to support development and regulatory approval of
products for oral and topical use in humans and animals. The ability of the
Company to commercialize its oral IFN|ga products in Japan will be dependent
upon the efforts of HBL, to which it has granted exclusive marketing rights
in such country. To date HBL has provided to the Company an aggregate of
$9,000,000 of funding pursuant to the Development Agreement. HBL has also
purchased from the Company an aggregate of 461,520 shares of Common Stock for
a total purchase price of $1,443,800 and has made loans to the Company
aggregating $3,000,000. Of such loans, $1,000,000 principal amount bearing
interest at 6% per annum is due in September 1996 and $1,000,000 principal
amount bearing interest at 6% per annum is due in September 1997, provided in
each case that principal and accrued interest thereon are required to be paid
only out of 10% of the Company's gross revenues from its sale of IFN. The
remaining $1,000,000 principal amount of the loans bears interest at the rate
of 4% per annum and is required to be, and will be, repaid with a portion of
the proceeds of this offering. Of the shares of Common Stock to be sold in
this offering, up to 200,000 shares may be sold to HBL. Giving effect to the
sale of 2,000,000 shares of the Company's Common Stock pursuant to this
offering, including 200,000 shares to HBL, and the issuance of 79,000 shares to
three officers of the Company simultaneously with the sale of the Common Stock
offered hereby, HBL will own approximately 24.1% of the Company's Common Stock.
Despite its substantial investment in the Company, HBL is not obligated to
provide any additional funding to the Company. The initial term of the
Development Agreement expires in March 1999, but the agreement is automatically
renewable for successive three year terms, subject to the prior written
agreement of the parties. Commencing in March 2002, HBL may also terminate the
Development Agreement if sales by the Company or its sublicensees of oral
products containing HBL IFN|ga shall not have exceeded $100,000 during the
calendar year prior to the termination. If such agreement is terminated, the
Company would lose its only current source of supply of IFN|ga for use in humans
and there can be no assurance that alternate sources of supply would be
available on satisfactory terms, or at all. Such loss could severely limit the
Company's ability to conduct clinical trials for the development of applications
for its products or to sell its products. The termination of the Company's
relationship with HBL could also adversely affect the Company's ability to
develop and maintain business relationships with other companies. HBL is a
principal shareholder of the Company and one of the directors of the Company is
an employee of HBL. The Development Agreement and other agreements and
arrangements with HBL may from time to time require further negotiation with the
Company and there can be no assurance that conflicts of interest will not arise
with respect to the foregoing agreements or arrangements or that conflicts will
be resolved in a manner favorable to the Company. See "Business -- Strategic
Alliance with HBL" and "Certain Transactions."

Limited Manufacturing Capability and Experience. To be successfully
commercialized, the Company's products must be manufactured in large
quantities in compliance with regulatory requirements and at an acceptable
cost. The Company does not intend to build manufacturing facilities for such
purpose. Rather, it currently intends to obtain all of its requirements of
bulk IFN|ga for oral use in humans from HBL and all of its requirements of bulk
IFN|ga for animal use from either ISI or HBL. HBL manufactures IFN|ga at its
plant in Okayama, Japan, which the Company believes will have sufficient
capacity to produce all of the Company's requirements of the product for the
foreseeable future. HBL will be required to obtain FDA approval for
commercial-scale manufacturing of products sold in the United States which
contain HBL IFN|ga , which approval has not yet been sought or obtained. ISI
manufactures IFN|ga at its plant in New Brunswick, New Jersey. The FDA has
approved an establishment license application for such facility. The Company
has entered into a supply agreement with ISI pursuant to which ISI is
obligated to use its best efforts to supply the Company's requirements of
IFN|ga for

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<PAGE>

animal use. However, such agreement may be terminated by ISI under certain
circumstances. If for any reason HBL and ISI were unwilling or unable to
supply to the Company IFN|ga, the Company would be required to seek alternate
sources of such product. The availability of such alternate sources of
supply, on terms satisfactory to the Company, or at all, is not assured. The
Company's failure to obtain adequate supplies of IFN|ga at a competitive cost
or in a timely manner could have a material adverse effect on the Company.
See "Business."

Risks Related to Obtaining, Maintaining and Defending Patents and
Proprietary Technology. The Company's success will depend in part on its
ability to obtain or license patents, protect trade secrets for its
technology and operate without infringing on the proprietary rights of
others. The Company owns two United States patents which expire in 2008 and
2010 and licenses from HBL and two universities or their affiliates a total
of nine United States patents which expire on various dates between 2001 and
2014. The Company also owns or licenses numerous foreign counterparts of such
patents. The Company's licensors also have eight United States patent
applications pending. While all claims in seven of such pending applications
have been initially rejected by the patent examiner, the Company's licensors
are continuing prosecution of all of such applications to counter the
rejections with the goal of patent grants. The issued patents are primarily
"use" patents (which cover the use of IFN|ga for particular purposes). However,
the patents licensed by the Company from HBL cover certain forms of maltose
and their use in the manufacture of pharmaceutical dosage forms. The Company
and its licensors have filed patent applications in certain other areas of
the world and expect to make additional patent applications in the United
States and other countries with respect to the use of low doses of IFN|ga for
oral mucosal administration. There can be no assurance, however, that either
the Company's or its licensors' existing patent applications will mature into
issued patents or, if issued, that such patents will be adequate to protect
the Company's products or processes. In addition, there can be no assurance
that the Company will be able to obtain any necessary or desired additional
licenses to patents or technologies of others or that the Company will be
able to develop its own additional patentable technologies.

The Company believes that the patent position of pharmaceutical companies
generally involves complex legal and factual questions. There can be no
assurance that any future patent applications or any patents issued to the
Company will provide it with competitive advantages or that the Company's use
of its technology will not be challenged as infringing upon the patents or
proprietary rights of others, or that the patents or proprietary rights of
others will not have an adverse effect on the ability of the Company to do
business. Furthermore, there can be no assurance that others will not
independently develop similar technology or that others will not design
technology to circumvent the Company's existing or future patents or
proprietary rights. In the event that the Company's technology were deemed to
be infringing upon the rights of others, the Company could be subject to
damages or enjoined from using such technology or the Company could be
required to obtain licenses to utilize such technology. No assurance can be
given that any such licenses would be made available on terms acceptable to
the Company, or at all. If the Company were unable to obtain such licenses,
it could encounter significant delays in introducing products to the market
while it attempts to design around the patents or rights infringed upon, or
the Company's development, manufacture and sale of products requiring such
licenses could be foreclosed. In addition, the Company could experience a
loss of revenues and may incur substantial costs in defending itself and
indemnifying its strategic partners in patent infringement or other actions
based on proprietary rights violations brought against it or its strategic
partners. The Company could also incur substantial costs in the event it
finds it necessary to assert claims against third parties to prevent the
infringement of its patents and proprietary rights by others.

The Company relies on proprietary know-how and confidential information
and employs various methods, such as entering into confidentiality and
noncompete agreements with its current employees and with third parties to
whom it has divulged proprietary information, to protect the processes,
concepts, ideas and documentation associated with its technologies. Such
methods may afford incomplete protection and there can be no assurance that
the Company will be able to protect adequately its trade secrets or that
other companies will not acquire information which the Company considers to
be proprietary. The Company will be materially adversely affected if it
cannot maintain its proprietary technologies. See "Business--Patents and
Proprietary Rights."

Competition. The pharmaceutical industry is an expanding and rapidly
changing industry characterized by intense competition. The Company believes
that its ability to compete will be dependent in large part upon its ability
to continually enhance and improve its products and technologies. In order to
do so, the Company must effectively utilize and expand its research and
development capabilities and, once developed, expeditiously convert new
technology into products and processes which can be commercialized.
Competition is based primarily

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<PAGE>

on scientific and technological superiority, technical support, availability
of patent protection, access to adequate capital, the ability to develop,
acquire and market products and processes successfully, the ability to obtain
governmental approvals and the ability to serve the particular needs of
commercial customers. Corporations and institutions with greater resources
than the Company may, therefore, have a significant competitive advantage.
The Company's potential competitors include entities that develop and produce
therapeutic agents for treatment of human and animal diseases. These include
numerous public and private academic and research organizations and
pharmaceutical and biotechnology companies pursuing production of, among
other things, biologics from cell cultures, genetically engineered drugs and
natural and chemically synthesized drugs. Almost all of these potential
competitors have substantially greater capital resources, research and
development capabilities, manufacturing and marketing resources and
experience than the Company. The Company's competitors may succeed in
developing products or processes that are more effective or less costly than
any that may be developed by the Company, or that gain regulatory approval
prior to the Company's products. The Company also expects that the number of
its competitors and potential competitors will increase as more IFN|ga products
receive commercial marketing approvals from the FDA or analogous foreign
regulatory agencies. Any of these competitors may be more successful than the
Company in manufacturing, marketing and distributing its products. There can
be no assurance that the Company will be able to compete successfully. See
"Business-Competition."

Technological Change. The pharmaceutical industry is subject to rapid and
significant technological change, and the ability of the Company to compete
is dependent in large part on its ability continually to enhance and improve
its products and technologies. In order to do so, the Company must
effectively utilize and expand its research and development capabilities,
and, once developed, expeditiously convert new technology into products and
processes which can be commercialized. The Company's competitors may succeed
in developing technologies, products and processes that render the Company's
processes and products obsolete. Certain companies, such as Roche, have filed
applications for or have been issued patents and may obtain additional
patents and proprietary rights relating to products or processes competitive
with or otherwise related to those of the Company. The scope and viability of
these patents, the extent to which the Company may be required to obtain
licenses under these patents or under other proprietary rights and the cost
and availability of licenses are unknown, but these factors may limit the
Company's ability to market its products. See "Business-- Competition."

Product Liability Exposure; Uncertainty of Availability of Insurance. The
Company's business exposes it to potential product liability risks which are
inherent in the testing, manufacturing, marketing and sale of therapeutic
products. While the Company will take precautions it deems appropriate, there
can be no assurance that it will be able to avoid significant product
liability exposure. Product liability insurance for the pharmaceutical
industry generally is expensive, to the extent it is available at all.
Although the Company is currently making limited sales of IFN|ga in Kenya and
is using IFN|ga in clinical trials, it has not yet sought to obtain product
liability coverage. The Company intends to obtain product liability insurance
coverage at such time, if any, that the volume of sales of its products in
its opinion warrants such coverage. There can be no assurance that it will be
able to obtain coverage on acceptable terms or that any insurance policy will
provide adequate protection against potential claims. A successful claim
brought against the Company in excess of any insurance coverage could have a
material adverse effect upon the Company.

Uncertainty of Healthcare Reimbursement and Reform. The healthcare
industry is subject to changing political, economic and regulatory influences
that may affect the procurement practices and operations of healthcare
industry participants. During the past several years, state and federal
government regulation of reimbursement rates and capital expenditures in the
United States has increased. Lawmakers continue to propose programs to reform
the United States healthcare system, which may contain programs to increase
governmental involvement in healthcare, lower Medicare and Medicaid
reimbursement rates or otherwise change the operating environment in the
healthcare industry. Healthcare industry participants may react to these
proposals by curtailing or deferring use of new treatments for disease,
including treatments utilizing the biologics that the Company is developing.

Dependence on Management. The success of the Company will be largely
dependent on the abilities and continued personal efforts of Dr. Joseph
Cummins, the Company's founder, Chairman of the Board, President and Chief
Executive Officer, as well as, to a lesser extent, Dr. Alan Richards, its
Director of Clinical and Regu

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<PAGE>

latory Affairs, and Charles Hughes, its Vice President-Finance and
Administration and Chief Financial Officer. Dr. Cummins is employed by the
Company under an employment agreement expiring December 31, 1999. Dr.
Richards and Mr. Hughes each have an employment agreement with the Company
which is terminable by either the individual or the Company on six months
prior written notice to the other. The loss of the services of Dr. Cummins
would have a material adverse effect on the Company. The Company is the
beneficiary of a key man life insurance policy on Dr. Cummins in the amount
of $2,000,000. It does not own policies covering any other officer or
employee. The Company is seeking the services of an additional experienced
senior executive. There can be no assurance that the Company will be able to
attract such a person. See "Management."

Continuing Control by Existing Shareholders. Upon the consummation of this
offering, HBL and Dr. Joseph Cummins, the Chairman of the Board, President and
Chief Executive Officer of the Company, will beneficially own approximately
24.1% and 13.6%, respectively, of the shares of Common Stock outstanding.
Katsuaki Hayashibara, the Director of the Research and Development Center of
HBL, is a director of the Company. In the event that HBL and Dr. Cummins were to
act in concert, they may be in a position generally to control the affairs of
the Company. These two shareholders may be able to control the outcome of
shareholder votes, including votes concerning the election of directors, the
adoption of amendments to the Company's Restated Certificate of Incorporation or
By-laws and the approval of certain mergers and other significant corporate
transactions, including a sale of substantially all of the Company's assets.
Such control by existing shareholders could also have the effect of delaying,
deferring or preventing a change in control of the Company. Moreover, purchasers
of the shares offered hereby (other than HBL) will be minority shareholders and,
although entitled to vote on matters submitted to a vote of shareholders, they
will not control the outcome of such a vote. See "Principal Shareholders" and
"Description of Common Stock."

Indemnification of Directors and Officers. The Company's By-laws provide
for the Company to indemnify each director and officer of the Company against
liabilities imposed upon him (including reasonable amounts paid in
settlement) and expenses incurred by him in connection with any claim made
against him or any action, suit or proceeding to which he may be a party by
reason of his being or having been a director or officer of the Company. The
Company has also entered into Indemnification Agreements with each officer
and director pursuant to which the Company will, in general, indemnify such
persons to the maximum extent permitted by the Company's By-laws and the laws
of the State of Texas against any expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement incurred in connection with
any actual or threatened action or proceeding to which such director or
officer is made or threatened to be made a party by reason of the fact that
such person is or was a director or officer of the Company. The foregoing
provisions may reduce the likelihood of derivative litigation against
directors and may discourage or deter shareholders or management from suing
directors for breaches of their duty of care, even though such an action, if
successful, might otherwise benefit the Company and its shareholders. See
"Management -- Indemnification of Directors and Officers."

Broad Discretion by Management in Application of Proceeds. Although the
Company currently intends to use approximately $6,350,000 (77.7%) of the net
proceeds of this offering to fund the Primary Development Projects, it will
have broad discretion in the use of such funds as circumstances warrant. In
addition, approximately $825,000 (10.1%) of the estimated net proceeds from
this offering has been allocated to working capital and general corporate
purposes. Accordingly, the Company's management will have broad discretion as
to the application of such proceeds. See "Use of Proceeds."

No Assurance of Public Market; Arbitrary Determination of Offering Price;
Possible Volatility of Market Price of Common Stock. Prior to this offering,
there has been no public trading market for the Common Stock. Consequently,
the initial public offering price has been determined by negotiation between
the Company and the Underwriter and is not necessarily related to the
Company's asset value, net worth or other criteria of value. Among the
factors considered in determining the offering price were the Company's
financial condition and prospects, management, market prices of similar
securities of comparable publicly-traded companies, certain financial and
operating information of companies engaged in activities similar to those of
the Company and the general condition of the securities market. There can be
no assurance that a regular trading market will develop after this offering
or that, if developed, it will be sustained. The market prices for securities
of biotechnology companies have been volatile. Announcements of technological
innovations or new products by the Company or

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<PAGE>

its competitors, developments concerning proprietary rights (including
patents and litigation matters), publicity regarding actual or potential
clinical testing relating to products under development by the Company or
others, regulatory developments in both the United States and foreign
countries, public concern as to the safety of biotechnology products and
economic and other external factors, as well as period-to-period fluctuations
in financial results, may have a significant impact on the market price of
the Common Stock. Additionally, in recent years, the stock market has
experienced a high level of price and volume volatility and market prices for
the stock of many companies, particularly the common stock of small and
emerging growth companies that trade in the over-the-counter market, have
experienced wide price fluctuations not necessarily related to the operating
performance of such companies. See "Underwriting."

Benefits of Offering to Existing Shareholders. Upon the consummation of
this offering, the existing shareholders of the Company will receive
substantial benefits, including the creation of a public trading market for
their securities and the corresponding facilitation of sales by such
shareholders of their shares of Common Stock in the secondary market, as well
as an immediate increase in net tangible book value of $1.77 per share to
such shareholders based upon the pro forma net tangible book value per share
after this offering and the initial public offering price per share of the
Common Stock offered hereby. The existing shareholders of the Company have
acquired their respective equity interests at costs substantially below the
offering price. Accordingly, to the extent that the Company incurs losses,
the investors purchasing shares in this offering will bear a disproportionate
risk of such losses. If, at the time the existing shareholders are able to
sell their shares of Common Stock in the public market, the market price per
share remains at the $5.00 initial public offering price (of which there can
be no assurance) such shareholders would realize an aggregate gain of
$11,951,082 ($3.84 per share) on the sale of all of their existing shares.
Additionally, $1,000,000 of the proceeds of this offering will be used to
repay indebtedness owing by the Company to HBL, which is an existing
shareholder. See "Use of Proceeds," "Dilution" and "Shares Eligible for
Future Sale."

Shares Eligible for Future Sale. Upon the consummation of this offering,
the Company will have 5,114,232 shares of Common Stock outstanding. Up to
200,000 of the 2,000,000 shares offered hereby may be purchased by HBL and,
if purchased, will be subject to certain restrictions on sale imposed under
the federal securities laws. The remaining shares of Common Stock offered
hereby will be freely tradeable without restriction or further registration
under the Securities Act of 1933, as amended (the "Securities Act"). All of
the 3,035,232 shares of Common Stock outstanding as of the date of this
Prospectus are, and all of the 79,000 shares to be issued to three officers
of the Company simultaneously with the consummation of the sale of the Common
Stock offered hereby, including 30,000 shares to each of Dr. Cummins and Dr.
Richards and 19,000 shares to Mr. Hughes, will be, "restricted securities" as
that term is defined under Rule 144 promulgated under the Securities Act.
Such shares may only be sold pursuant to a registration statement under the
Securities Act, in compliance with the exemptive provisions of Rule 144 or
pursuant to another exemption under the Securities Act. Of such 3,114,232
restricted shares of Common Stock, an aggregate of 1,040,976 shares are
immediately eligible for sale, without registration, under Rule 144 (subject
to the contractual restrictions described below). An additional 1,964,616
shares will become eligible for sale (subject to the volume limitations
prescribed in Rule 144 and such contractural restrictions) commencing 90 days
after the date of this Prospectus. The balance of such shares will become
eligible for sale at various times commencing in January 1997. In general,
under Rule 144 as currently in effect, subject to the satisfaction of certain
other conditions, a person (or persons whose shares are aggregated for this
purpose), including an affiliate of the Company, who has owned restricted
shares of Common Stock beneficially for at least two years is permitted to
sell in the open market within any three- month period a number of shares
that does not exceed the greater of 1% of the outstanding shares of the same
class or, if the Common Stock is quoted on NASDAQ, the average weekly trading
volume during the four calendar weeks preceding the filing of the required
notice of sale. A person who has not been an affiliate of the Company for at
least the three months immediately preceding the sale and who has
beneficially owned shares of Common Stock as described above for at least
three years is entitled to sell such shares under Rule 144 without regard to
any of the limitations described above. The Company and its officers and
directors and shareholders owning of record more than 99% of the Common Stock
outstanding as of the date of this Prospectus, have agreed with the
Underwriter not to sell or otherwise dispose of any shares of Common Stock
for a period of 12 months after the date of this Prospectus, without the
Underwriter's prior written consent. No predictions can be made of the
effect, if any, that sales of Common Stock in the market or the availability
of shares of Common Stock for sale under Rule 144 will have on the market
price of Common Stock prevailing from time to time.

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<PAGE>

Nevertheless, the possibility that substantial amounts of Common Stock may be
sold in the public market may adversely affect prevailing market prices for
the Common Stock and could impair the Company's ability to raise capital
through the sale of its equity securities. See "Shares Eligible for Future
Sale" and "Underwriting."

Outstanding Options. Upon the consummation of this offering, there will be
40,500 shares of Common Stock reserved for issuance upon the exercise of
stock options outstanding under the Company's 1996 Employee Stock Option Plan
(the "Employee Plan") and 75,000 shares of Common Stock reserved for issuance
upon exercise of stock options outstanding under the Company's Outside
Director and Advisor Stock Option Plan (the "Director Plan" and together with
the Employee Plan, the "Plans"). None of the foregoing options is currently
exercisable. An additional 134,500 shares are reserved for issuance upon
exercise of options available for future grant under the Plans. All of the
options outstanding upon consummation of this offering will be exercisable at
a price of $5.00 per share. To the extent the market price of Common Stock at
the time of exercise exceeds the exercise price, the exercise of the
foregoing options will have a dilutive effect on the Company's shareholders.
Moreover, the terms upon which the Company may be able to obtain additional
equity may be adversely affected, since the holders of the options can be
expected to exercise them at a time when the Company would, in all
likelihood, be able to obtain any needed capital on terms more favorable to
the Company than those provided in the options. See "Management - Stock
Option Plans" and "Shares Eligible for Future Sale."

Immediate and Substantial Dilution. This offering involves an immediate
and substantial dilution of $3.69 (73.8%) between the pro forma net tangible
book value per share of Common Stock after the offering and the initial
public offering price of $5.00 per share. See "Dilution."

No Dividends. To date, the Company has not paid any cash dividends on its
Common Stock and it does not expect to declare or pay dividends on the Common
Stock in the foreseeable future. In addition, future agreements or credit
facilities may restrict dividend payments. See "Dividend Policy" and
"Description of Common Stock."

Possible Delisting of Securities from NASDAQ System; Risks of Low-Priced
Stocks. It is anticipated that the Company's Common Stock will be quoted on
NASDAQ on the date of this Prospectus. However, in order to continue to be
listed on NASDAQ, a company must maintain $2,000,000 in total assets, a
$200,000 market value of the public float and $1,000,000 in total capital and
surplus. In addition, continued inclusion requires two market makers and a
minimum bid price of $1.00 per share; provided, however, that if a company
falls below such minimum bid price, it will remain eligible for continued
inclusion on NASDAQ if the market value of the public float is at least
$1,000,000 and the company has $2,000,000 in capital and surplus. The failure
to meet these maintenance criteria in the future may result in the delisting
of the Company's Common Stock from NASDAQ and trading, if any, in the
Company's Common Stock would thereafter be conducted in the non- NASDAQ
over-the-counter market. As a result of such delisting, an investor may find
it more difficult to dispose of, or to obtain accurate quotations as to the
market value of, the Company's Common Stock.

In addition, if the Common Stock were to become delisted from trading on
NASDAQ and the trading price of the Common Stock were to fall below $5.00 per
share, trading in the Common Stock would also be subject to the requirements
of certain rules promulgated under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), which require additional disclosure by
broker-dealers in connection with any trades involving a stock defined as a
"penny stock" (generally, any non-NASDAQ equity security that has a market
price of less than $5.00 per share, subject to certain exceptions). Such
rules require the delivery, prior to any penny stock transaction, of a
disclosure schedule explaining the penny stock market and the risks
associated therewith, and impose various sales practice requirements on
broker-dealers who sell penny stocks to persons other than established
customers and accredited investors (generally defined as an investor with a
net worth in excess of $1,000,000 or annual income exceeding $200,000,
$300,000 together with a spouse). For these types of transactions, the
broker-dealer must make a special suitability determination for the purchaser
and have received the purchaser's written consent to the transaction prior to
sale. The broker-dealer also must disclose the commissions payable to the
broker-dealer, current bid and offer quotations for the penny stock and, if
the broker-dealer is the sole market-maker, the broker-dealer must disclose
this fact and the broker-dealer's presumed control over the market. Such
information must be provided to the customer orally or in writing prior to
effecting the transaction and in writing before or with the customer
confirmation. Monthly statements must be sent disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stocks. The additional burdens imposed upon
broker-dealers by such requirements may discourage them from effecting
transactions in the Common Stock, which could severely limit the liquidity of
the Common Stock and the ability of purchasers in this offering to sell the
Common Stock in the secondary market.

14
<PAGE>

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 2,000,000 shares of
Common Stock offered hereby, after deducting underwriting discounts and
commissions and other expenses of the offering are estimated to be
approximately $8,175,000 ($9,480,000 if the Underwriter's over-allotment
option is exercised in full). The Company expects to use such net proceeds
approximately as follows:

<TABLE>
<CAPTION>
Approximate Approximate
Dollar Percentage of
Application of Proceeds Amount Net Proceeds
------------------------------------------------- ------------- ---------------
<S> <C> <C>
Research and development(1) ..................... $6,350,000 77.7%
Repayment of indebtedness to HBL (2) ............ 1,000,000 12.2
Working capital and general corporate purposes(3) . 825,000 10.1
------------- ---------------
Total ....................................... $8,175,000 100.0%
============= ===============

</TABLE>

- ------
(1) Represents a portion of the costs associated with the Primary Development
Projects, including the cost of conducting clinical trials to determine
the safety, efficacy and optimal dosages of low dose oral IFN|ga for
indicated uses as well as other direct and indirect costs. The Company
estimates that the amounts required to complete the Primary Development
Projects will be substantially in excess of the portion of the proceeds
allocated to research and development. See "Business--Research and
Development."

(2) The Company has borrowed $3,000,000 from HBL, of which $1,000,000
borrowed after March 31, 1996, bearing interest at the rate of 4% per
annum, is required to be repaid upon the consummation of the sale of
Common Stock offered hereby. The Company has used the proceeds of loans
made to it by HBL for research and development and general corporate
purposes.

(3) Pursuant to agreements between the Company and three of its officers,
simultaneously with the consummation of this offering the Company was to
have issued an aggregate of 126,000 shares to such officers. In
satisfaction of such obligation, the Company will issue 79,000 shares
and use $235,000 of the proceeds of this offering to satisfy required
tax withholding relating to such transaction. In addition, a portion of
the proceeds allocated to working capital is expected to be utilized to
pay the salaries of the Company's three executive officers, which
salaries are anticipated to aggregate approximately $281,500 for the 12
months following the consummation of this offering. See "Management" and
"Certain Transactions."

If the Underwriter exercises its over-allotment option in full, the
Company will receive additional net proceeds of approximately $1,305,000,
which amount will be utilized for research and development.

The allocation of the net proceeds of this offering set forth above
represents the Company's best estimates based upon its current plans and
certain assumptions regarding the Company's future revenues and expenditures.
If any of these factors change, the Company may find it necessary or
advisable to reallocate some of the proceeds within the above-described
categories or to use portions thereof for other purposes.

The Company estimates that, over approximately the next three years,
approximately $4,500,000 and $3,800,000 will be needed for regulatory
compliance and clinical trials with respect to low dose oral IFN|ga therapy for
the treatment of Sjogren's syndrome and oral mucositis, respectively,
approximately $2,000,000 will be needed for HCV testing in Mexico and Canada
and approximately $800,000 will be needed for HBV testing in Mexico, subject
to obtaining regulatory approvals in such countries. The amounts actually
expended by the Company for these activities may vary significantly from the
foregoing estimates as a result of a variety of factors, including the timing
of regulatory approvals (if such approvals are given at all), the status of
competitive products, technological advances made by the Company or others,
the progress of the Company's research and development efforts, the
availability of funding from institutions or corporate sponsors and
determinations regarding the commercial potential of the Company's products,
including other products the Company is currently developing and new products
the Company may identify. The Company may abandon, deemphasize or expand its
activities with respect to one or more of the Primary Development Projects
and may use a portion of the proceeds of this offering for other projects as
circumstances warrant.

15
<PAGE>

The Company anticipates, based on its currently proposed plans and
assumptions relating to its operations (including assumptions regarding the
progress of its research and development and the timing and costs associated
with the Primary Development Projects), that the net proceeds of this
offering, together with the Company's existing capital resources, will be
sufficient to satisfy the Company's estimated cash requirements for at least
12 months following the consummation of this offering. As set forth above,
the Company estimates that an aggregate of $11,100,000 will be needed over
approximately the next three years to complete the Primary Development
Projects. Such amount is in excess of the net proceeds of this offering and
the existing capital of the Company. Therefore, unless the Company generates
significant revenues during such period, which the Company believes is
unlikely, the Company will need additional financing to fully fund such
development. The Company has no current arrangements with respect to, or
sources of, additional financing and it is not anticipated that any of the
officers, directors or shareholders of the Company (including HBL) will
provide any portion of the Company's financing requirements. There can be no
assurance that, when needed, any additional financing will be available to
the Company on commercially reasonable terms, or at all. In the event the
Company's plans change, its assumptions change or prove to be inaccurate, or
if the net proceeds of this offering, together with other capital resources,
otherwise prove to be insufficient to fund operations, the Company could be
required to seek additional financing sooner than currently anticipated.

Proceeds not immediately required for the purposes described above will be
invested principally in United States Government securities, bank
certificates of deposit, money market funds or other short-term interest-
bearing investments.

DIVIDEND POLICY

To date, the Company has not declared or paid any cash dividends on its
Common Stock and does not expect to declare or pay any dividends in the
foreseeable future. Instead, the Company intends to retain all earnings, if
any, for use in the Company's business operations.

16
<PAGE>

DILUTION

The difference between the public offering price per share of the Common
Stock and the pro forma net tangible book value per share of the Common Stock
after completion of this offering constitutes the dilution to investors in
this offering. Net tangible book value per share on any given date is
determined by dividing the Company's net tangible book value (total tangible
assets less total liabilities) on such date by the number of outstanding
shares of Common Stock.

At March 31, 1996, the negative net tangible book value of the Company was
$(1,383,475) or approximately $(.46) per share of Common Stock. After giving
effect to the sale by the Company of 2,000,000 shares of Common Stock offered
hereby (less underwriting discounts and commissions and estimated expenses of
this offering and assuming no exercise of the Underwriter's over-allotment
option or the Underwriter's Warrants) and the issuance of 79,000 shares and
the use of $235,000 of the proceeds of this offering simultaneously with such
sale to satisfy withholding tax obligations relating to such transaction, the
pro forma net tangible book value of the Company at March 31, 1996 would have
been $6,681,212, or approximately $1.31 per share of Common Stock. This
represents an immediate increase in net tangible book value of $1.77 per
share to the existing shareholders and an immediate dilution of $3.69 per
share (73.8%) to new investors. The following table illustrates this dilution
to new investors on a per share basis:

<TABLE>
<CAPTION>
<S> <C> <C>
Public offering price .......................... $5.00
Negative net tangible book value before offering $(.46)
Increase attributable to new investors .... 1.77
--------
Pro forma net tangible book value after offering . 1.31
-------
Dilution to new investors ...................... $3.69

</TABLE>

The following table sets forth, with respect to the Company's existing
shareholders (including three employees of the Company who will be issued an
aggregate of 79,000 shares simultaneously with the consummation of the sale
of the Common Stock offered hereby) and new investors in this offering a
comparison of the number of shares of Common Stock purchased from the
Company, the percentage ownership of such shares, the total consideration
paid, the percentage of total consideration paid and the average price per
share:

<TABLE>
<CAPTION>
Average
Price Per
Shares Purchased Total Consideration Share
------------------------ -------------------------- -----------
Number Percent Amount Percent
----------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders . 3,114,232 60.9% $ 3,620,078 26.6% $1.16
New investors ....... 2,000,000 39.1 10,000,000 73.4 5.00
----------- --------- ------------- --------- -----------
Total ............. 5,114,232 100.0% $13,620,078 100.0%
=========== ========= ============= =========

</TABLE>

The above table assumes no exercise of the Underwriter's over-allotment
option. If the Underwriter's over- allotment option is exercised in full, the
new investors will have paid $11,500,000 or 76.1% of the total consideration,
for 2,300,000 shares, or approximately 42.5% of the total number of shares of
Common Stock outstanding. See "Underwriting."

17
<PAGE>

CAPITALIZATION

The following table sets forth the capitalization of the Company as of
March 31, 1996 on a historical basis and as adjusted to give effect to the
Company's sale of 2,000,000 shares of Common Stock offered hereby and the
application of the estimated net proceeds therefrom.

<TABLE>
<CAPTION>
March 31, 1996
-------------------------------
Actual As Adjusted(1)
------------- --------------
<S> <C> <C>
Notes payable to related party(2) ................. $ 2,000,000 $ 2,000,000
------------- --------------
Shareholders' equity (deficit)
Common Stock, $.01 par value, 10,000,000 shares
authorized, 3,048,672 shares issued,
5,114,232 shares as adjusted(3) ......... 30,487 51,142
Additional paid-in capital ................. 3,589,591 12,112,936
Deficit accumulated during the development
stage. .................................. (4,943,168) (5,448,481)
Unrealized gain on marketable securities ... 30,000 30,000
Treasury stock -- 13,440 shares(4) ......... (26,000) --
------------- --------------
Total shareholders' equity (deficit) ..... (1,319,090) 6,745,597
------------- --------------
Total capitalization ................... $ 680,910 $ 8,745,597
============= ==============

</TABLE>

- ------
(1) Gives effect to the issuance of 79,000 shares of Common Stock to three
officers of the Company and the use of $235,000 of the proceeds of this
offering simultaneously with the sale of the Common Stock offered hereby
to satisfy withholding tax obligations relating to such transaction. See
"Management-Employment Agreements."

(2) Represents the outstanding principal amounts of two $1,000,000 promissory
notes issued to HBL in September 1991 and September 1992, respectively.
Accrued interest on such notes was $483,699 as of March 31, 1996. The
notes are due on September 16, 1996 and September 25, 1997, respectively,
provided that principal and accrued interest thereon are required to be
paid only out of 10% of the Company's gross revenues from its sales of
IFN. The notes bear interest at the rate of 6% per annum. Since repayment
of the notes is dependent on future sales of IFN by the Company, material
amounts of which are not expected within the next year, they are
classified as non-current liabilities.

(3) Does not include (i) 200,000 shares of Common Stock reserved for issuance
upon exercise of the Underwriter's Warrants; (ii) an aggregate of 115,500
shares of Common Stock reserved for issuance upon the exercise of stock
options to be outstanding under the Plans, none of which options are
currently exercisable; or (iii) an aggregate of 134,500 shares of Common
Stock reserved for issuance upon exercise of stock options which are
available for future grant under the Plans. See "Management-Stock Option
Plans," "Principal Shareholders," "Certain Transactions" and
"Underwriting."

(4) On May 14, 1996, the Board of Directors of the Company approved the
cancellation of all treasury shares.

18
<PAGE>

SELECTED FINANCIAL DATA

The selected financial data presented below under the captions
"Consolidated Statement of Operations Data" and "Consolidated Balance Sheet
Data" for the two years ended December 31, 1995 and as of December 31, 1995
are derived from the consolidated financial statements of the Company and its
subsidiaries (companies in the development stage) included elsewhere in this
Prospectus, which financial statements have been audited by Ernst & Young
LLP, independent auditors. Financial data for the three months ended March
31, 1995 and March 31, 1996 and the period from June 25, 1984 (inception)
through March 31, 1996 and as of March 31, 1996 are unaudited and, in the
opinion of the Company's management, contain all adjustments (consisting only
of normal recurring adjustments) necessary for a fair presentation thereof.
Results for the three months ended March 31, 1996 are not indicative of the
results that may be expected for the full 1996 fiscal year. The selected
financial data should be read in conjunction with the consolidated financial
statements, the related notes and the independent auditors' report, appearing
elsewhere in this Prospectus.

CONSOLIDATED STATEMENT OF OPERATIONS DATA:

Cumulative From
June 25, 1984
Three Months Ended March (Inception)
Year Ended December 31, 31, Through
---------------------------- -------------------------- March 31,
1994 1995 1995 1996 1996
------------ ------------ ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Total revenues ................ $2,653,331 $2,006,262 $ 647,069 $ 415,728 $10,570,886
Total expenses ................ 2,782,570 2,317,841 722,003 402,921 15,514,054
Net income (loss) ............. (129,239) (311,579) (74,934) 12,807 (4,943,168)
Net loss per share ............ (.04) (.10) (.02) --
Weighted average shares
outstanding .................. 3,005,592 3,034,339 3,031,609 3,035,232

</TABLE>

CONSOLIDATED BALANCE SHEET DATA:

<TABLE>
<CAPTION>
March 31, 1996
-------------------------------
December 31, 1995 Actual As Adjusted(1)
----------------- ------------- --------------
<S> <C> <C> <C>
Cash and cash equivalents ....................... $ 1,108,527 $ 724,280 $ 8,664,280
Working capital (deficiency) .................... (18,035) (2,585) 8,062,102
Total assets .................................... 1,791,060 1,424,004 9,364,004
Total liabilities ............................... 3,152,957 2,743,094 2,618,407
Deficit accumulated during the development stage . (4,955,975) (4,943,168) (5,448,481)
Shareholders' equity (deficit) .................. (1,361,897) (1,319,090) 6,745,597

</TABLE>

- ------
(1) Gives effect to the sale of 2,000,000 shares of Common Stock offered
hereby and the anticipated application of the estimated net proceeds
therefrom, including the payment of $235,000 to satisfy withholding tax
obligations of the Company arising in a transaction required under the
employment agreements of three officers in which the Company shall also
issue 79,000 shares of Common Stock to such officers. Subsequent to March
31, 1996, the Company borrowed $1,000,000 from HBL, which amount will be
repaid from the proceeds of this offering. See "Use of Proceeds" and
"Certain Transactions."

19
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

Since June 1984, the Company, a development stage company, has been
engaged almost exclusively in research and development activities focused on
developing biologics for the treatment of human and animal diseases. Other
than limited sales of natural IFN|ga in Kenya, the Company has not yet
commenced any significant product commercialization and, until such time as
it does, will not generate significant product revenues. The Company has
incurred significant operating losses since its inception resulting in an
accumulated deficit of $4,943,168 at March 31, 1996. Beginning in April 1996,
the rate of loss increased and such losses are expected to continue for the
foreseeable future and until such time, if ever, as the Company is able to
attain sales levels sufficient to support its operations.

RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31,
1995

During the three months ended March 31, 1996 (the "1996 Quarter") and the
three months ended March 31, 1995 (the "1995 Quarter") the Company recorded
total revenues of $415,728 and $647,069, respectively. $402,574 of the 1996
revenues and $618,266 of the 1995 revenues were contract revenues recognized
during the respective periods. Other revenues consisted primarily of interest
income of $11,154 and $28,803 for the 1996 and 1995 quarters, respectively.
Of the $9 million contract revenues received from HBL from 1992 through 1994,
all but $14,566 has been recognized as income as of the end of the 1996
Quarter. Beginning in April 1996, the Company will no longer have contract
revenues to offset expenditures as they are incurred. Accordingly, the
Company anticipates a significant increase in net losses.

During the 1996 Quarter, research and development expenses were $134,209
as compared to $247,978 for the 1995 Quarter. The decrease of $113,769 was
the result of fewer clinical studies conducted and completed in the 1996
Quarter.

General and administrative expenses were $238,712 during the 1996 Quarter
as compared to $444,025 during the 1995 Quarter. The primary reason for the
decrease was fewer employees in the 1996 Quarter (eight compared to eleven)
and litigation expense in the 1995 Quarter of $103,737 compared to none in
the 1996 Quarter.

YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994

During the year ended December 31, 1995, the Company had total revenues of
$2,006,262 compared to total revenues of $2,653,331 during the year ended
December 31, 1994. $550,000 of the revenues for 1995 were received in
connection with the settlement of a patent infringement action brought by the
Company in New Zealand. Of the total settlement amount, $50,000 was in
exchange for the grant by the Company of a sublicense of the technology that
was the subject of the lawsuit and $500,000 was a reimbursement of research
and development cost incurred by the Company. Other revenues for 1995
consisted of interest income of $94,867 and deferred contract revenues
recognized in the amount of $1,361,395. Had the Company not received the
$500,000 payment toward research and development costs from the settlement,
the remaining balance of deferred contract revenue ($417,140) would have been
recognized as contract revenue in 1995. During 1994, deferred contract
revenues of $2,480,093 were recorded as earned based on research and
development and administrative costs incurred. Other 1994 revenues consisted
of interest income of $132,713 and interferon sales of $40,525.

During 1995, research and development expenses were $875,093 as compared
to $1,364,042 during 1994. The decrease of $488,949 in 1995 was the result of
certain clinical studies being completed in 1994 and the continuation of
certain other studies into 1996. It is anticipated that approximately $76,000
will be paid by the Company in 1996 for 1995 studies which will be completed
in 1996.

During 1995 and 1994, the Company incurred general and administrative
expenses of $1,322,748 and $1,298,528, respectively. Over all, general and
administrative expenses for 1995 were lower than 1994. However, the Company
recorded a $150,000 discount on its investment in ISI common stock due to
certain restric-

20
<PAGE>

tions placed on the sale of such stock. The Company acquired 312,500 shares
of ISI common stock for $625,000, or $2.00 per share, representing the quoted
market price of ISI stock at that time. The stock was acquired as a result of
an agreement with ISI to allow the sublicense by the Company to others of
certain products previously exclusively licensed to ISI.

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 1996, the Company had cash of $724,280 with accounts payable
of $100,175 and other funding commitments for clinical studies of
approximately $36,000. Deferred contract revenues of $14,566 at March 31,
1996 represents contract revenues received from HBL in advance of services to
be performed for research and development activities.

The Company has borrowed $2 million from HBL and the notes accrue interest
at the rate of 6% per annum with accrued interest of $483,699 at March 31,
1996. The accrued interest and principal are to be paid only from 10% of the
Company's gross revenues from sales of IFN. The Company has borrowed from HBL
an additional $500,000 in May 1996 and $500,000 in June 1996. Such additional
loans bear interest at the rate of 4% per annum and will be paid in full
simultaneously with the consummation of this offering.

At the present time, the Company's only sales of IFN|ga are to Kenya and
such sales are insignificant. Accordingly, the Company believes that losses
from operations will continue until such time, if ever, as the Company
receives approval from the FDA, so that commercial marketing of the Company's
products can begin in the United States. Also, approval is being sought in
certain foreign countries for product sales. However, there can be no
assurance that such approvals will occur.

The Company anticipates, based on its currently proposed plans and
assumptions relating to its operations (including assumptions regarding the
progress of its research and development and the timing and costs associated
with the Primary Development Projects), that the net proceeds of this
offering, together with the Company's existing capital resources, will be
sufficient to satisfy the Company's estimated cash requirements for at least
12 months following the consummation of this offering. The Company estimates
that an aggregate of $11,100,000 will be needed over approximately the next
three years to complete its Primary Development Projects. Such amount is in
excess of the net proceeds of this offering and the existing capital of the
Company. Therefore, unless the Company generates significant revenues during
such period, which the Company believes is unlikely, the Company will need
additional financing to fully fund such development. The Company has no
current arrangements with respect to, or sources of, additional financing and
it is not anticipated that any of the officers, directors or shareholders of
the Company (including HBL) will provide any portion of the Company's future
financing requirements. There can be no assurance that, when needed,
additional financing will be available to the Company on commercially
reasonable terms, or at all. In the event that the Company's plans change,
its assumptions change or prove inaccurate, or if the net proceeds of this
offering, together with other capital resources, otherwise prove to be
insufficient to fund operations, the Company could be required to seek
additional financing sooner than currently anticipated. Any inability to
obtain additional financing when needed would have a material adverse effect
on the Company, including requiring the Company to significantly curtail or
possibly cease its operations.

21
<PAGE>

BUSINESS

GENERAL

The Company, a development-stage company, is engaged in developing
biologics for the treatment of human and animal diseases. The Company is
currently focusing its research on human health indications for the use of
low dose oral natural IFN|ga, particularly for the treatment of Sjogren's
syndrome, oral mucositis in cancer patients and hepatitis B and C. The
Company believes that significant worldwide opportunities exist for the
development of low dose oral natural IFN|ga as an inexpensive, non-toxic,
efficacious alternative to the treatment of disease by injection of high
doses of IFN|ga. In addition, the Company believes that low dose oral natural
IFN|ga can be an effective treatment for diseases or conditions for which
current therapies are inadequate.

The Company is also testing oral IFN|ga in cats with herpesvirus-1
infection, dogs with keratoconjunctivitis sicca and cattle with shipping
fever or mastitis and has filed and there are now in effect Investigational
New Animal Drug Applications for these and other indications for the product
in animals. The Company is also testing a topical IFN|ga as a treatment for
genital warts in humans.

The Company's objective is to exploit its proprietary technology to become
a leader in the field of low dose oral IFN|ga applications. The Company's
business strategy is to pursue those indications for low dose oral IFN|ga
treatment for which initial clinical research has indicated the treatment is
efficacious and which in the opinion of the Company have the greatest
commercial potential and are most likely to be approved by the FDA. To the
extent possible, the Company will attempt to minimize the cost to the Company
of obtaining FDA approval by utilizing forms of IFN|ga already approved (in
other dosage forms and for different indications) by the Japanese Ministry of
Health and Welfare for human use or by the FDA for animal use. The Company
believes such minimized costs will be the result of more information
available for use in preparing applications for such approvals. The Company
will attempt to gain market share for approved products by forming alliances
with strong marketing partners.

IFN|ga

The bodies of humans and animals maintain delicately balanced immune
systems that fight disease and injury. Substances such as IFN|ga, which are
produced by the body in small quantities, play important roles in the
maintenance of these systems. The Company believes that IFN|ga and other
biologics show great promise as weapons against disease and for use in
therapy.

IFN|ga has antiviral, antiproliferative and immunomodulatory properties and
is used therapeutically in humans with various chronic disorders. IFN|ga may
reduce inflammation by eliminating persistent viral infection, modulating the
allergic response or attenuating factors which cause inflammation.

In recent years IFN|ga has been used as a biologic and various techniques
have been discovered for the mass production of IFN|ga and other biologics. The
prevailing view is that for IFN|ga to be effective, sufficient concentrations
of the substance must reach the disease site, by means of either local or
distal administration of the IFN|ga. If IFN|ga is disseminated in the
bloodstream, high doses of IFN|ga would be required to assure that sufficient
amounts of IFN|ga reach the diseased tissue. Such approaches have proven
effective in many instances, but high-dose systemic IFN|ga therapy has the
disadvantage of significant side effects in many cases as well as expense.

The Company has focused its efforts on the use of IFN|ga in low doses since
such use mimics the way the body naturally produces and utilizes the
substance. It has accumulated data that indicate that oral administration

22
<PAGE>

of IFN|ga , at very low doses, can trigger systemic alterations which augment
the body's disease-fighting mechanisms. Such oral application of low dose
IFN|ga is without the adverse side effects of high-dose IFN|ga administration.
Moreover, low dose treatment which is administered orally or topically is
more economical than treatment by injection of high dose IFN|ga.

The Company has conducted preliminary research on various human and animal
indications for the use of low dose oral IFN|ga therapy and, based upon initial
results, intends to focus its development activities on the applications
discussed below.

HUMAN HEALTH APPLICATIONS

Sjogren's Syndrome. Sjogren's syndrome is a chronic autoimmune disorder
characterized by severe dryness of the eyes and mouth. It can exist as a
primary disorder or in association with other autoimmune diseases such as
rheumatoid arthritis, systemic lupus erythematosus and progressive systemic
sclerosis. Patients with primary Sjogren's syndrome may have clinical signs
such as rash, arthritis, pneumonitis and nephritis. Typical symptoms include
burning eyes, dry mouth, stinging tongue, painful throat, swollen glands and
dry vagina. Oral candidiasis (a fungus infection of the mouth) may also arise
as a result of the absence of naturally occurring anti-yeast substances which
are contained in saliva. Although Sjogren's syndrome is not life threatening,
it can cause extreme discomfort.

The National Institutes of Health ("NIH") estimates that there are
approximately two to four million people in the United States who suffer from
Sjogren's syndrome. The Company believes that the incidence of Sjogren's
syndrome worldwide is similar to its incidence in the United States.

Topical use of artificial tears is the prevailing treatment for the dry
eye symptom of the disease. Artificial tears must be used on a regular basis.
Intensive oral hygiene is prescribed to prevent progressive periodontal
problems that may develop as a result of the disease.

The Company believes that oral IFN|ga therapy helps to relieve the dryness
associated with Sjogren's syndrome and may effectively supplement or be used
in lieu of existing treatments. In a study conducted by the Company from
October 1994 to January 1996 at two universities, the Company found that oral
IFN|ga therapy administered to Sjogren's syndrome patients led to increased
saliva production in six of 14 patients.

The Company has filed and there is now in effect an IND for the use of
oral IFN|ga to treat Sjogren's syndrome. The Company intends to spend
approximately $4.5 million to conduct and evaluate additional clinical trials
of the treatment during the next three years.

Oral Mucositis. Oral mucositis is a condition characterized by
inflammation and sometimes ulcerations of the mucosal lining of the mouth. It
is often associated with the use of chemotherapy or radiation therapy on
cancer patients, and in many cases is a dose limiting factor for the
chemotherapy treatment cancer patients receive. Current treatments for oral
mucositis, including oral hygiene, topical agents and oral rinses, are
generally ineffective.

The Company has filed and there is now in effect an IND for the use of
oral IFN|ga to treat oral mucositis. The Company sponsored a Phase 1/Phase 2
clinical trial at three oncology research centers. Seven out of ten patients
experienced a clinically significant reduction in their oral mucositis when
IFN|ga was given with particular chemotherapy compared to a previous cycle of
chemotherapy without IFN|ga given to the same patients. The Company believes
that in the United States approximately 400,000 patients per year will suffer
from oral mucositis. The Company intends to spend approximately $3.8 million
to conduct and evaluate additional clinical trials during the next three
years.

Hepatitis. Hepatitis is a family of diseases in which inflammation of the
liver occurs. The most common cause of hepatitis is viral infection by one of
six distinct viruses. Two of the most common of such viruses are HBV and HCV.

Symptoms of acute hepatitis, regardless of which viral agent causes the
illness, are similar and include fever, nausea, vomiting and jaundice. While
acute viral hepatitis can be debilitating, it is seldom fatal or permanently
disabling. However, HBV and HCV can result in a lifelong chronic state. This
chronic condition is usu-

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ally found in two forms. One form is a "chronic carrier" state in which the
individual does not have the clinical signs of the disease but is infectious.
A chronic carrier can spread the disease for years without being aware of it.
The second chronic state is termed "chronic active hepatitis." In this
condition, the person is both infectious and has mild to severe hepatitis
symptoms. According to the World Health Organization ("WHO"), HBV chronically
infects (including both carrier and active states) 300-400 million people
worldwide. WHO lists HBV as the ninth leading cause of death, responsible for
up to 2 million deaths each year.

Hepatitis B

HBV is transmitted through blood, blood products and sexual contact. About
6-10% of patients infected with HBV become carriers and 5-8% of all HBV
patients develop chronic disease.

Currently, the only effective and widely approved treatment for chronic
HBV is IFN|ga administered parenterally in high doses three times per week for
16 to 24 weeks. However, new parenteral IFN|ga treatment regimens last for up
to 48 weeks. Fewer than 40% of HBV patients respond favorably to parenteral
IFN|ga treatment. The therapy has been shown to be almost totally ineffective
in carrier cases.

High dose parenteral IFN|ga therapy often results in adverse reactions,
including fever, headache, muscular pain, anorexia, fatigue, chills,
weakness, nausea, hair loss, depression and personality changes. Parenteral
high- dose IFN|ga treatment is also costly. Moreover, its use requires the
additional expense of syringes and needles, and necessitates close medical
supervision. Some of the additional required medical expense is in the form
of doctor visits and treatment for the adverse effects associated with the
parenteral IFN|ga. While no specific cost estimates are available, the costs
are substantial, especially in countries where the health system is already
overburdened.

The Company believes that low dose oral IFN|ga therapy for chronic HBV might
be as beneficial a treatment for the disease as, and will be more economical
than, parenteral IFN. Up to 105 million chronic HBV patients may qualify for
low dose oral IFN|ga therapy worldwide.

Since 1990, the Company has been involved in an open-labelled (non-placebo
controlled) safety and efficacy study of oral IFN|ga therapy for chronic HBV
patients conducted at two clinical centers in Poland. The therapy appears to
have had as beneficial an effect in this patient population as parenteral
IFN|ga and to have produced fewer adverse side effects. Care needs to be taken
in the interpretation of the results of the study since it was not
placebo-controlled. However, the data generated to date indicate that the low
dose oral IFN|ga therapy would represent significant improvement over
parenteral therapy because it is less toxic and less expensive.

The Company intends to spend approximately $800,000 to conduct and
evaluate clinical trials of oral IFN|ga treatment in Mexico with the goal of
obtaining regulatory approval for marketing in Mexico. The Company has
designed a study to be conducted at a hepatitis treatment center in Mexico
City, which the Company believes will require approximately two years to
complete. The Company is seeking temporary approval to market IFN|ga for
treatment of HBV in China while clinical testing is being conducted. The
Company intends to seek permanent marketing approval in China for such
treatment after clinical testing has been completed.

Hepatitis C

HCV is transmitted primarily through blood and blood products and, to a
lesser extent, by sexual contact. However, in up to 40% of HCV cases, no
source of infection can be identified. Symptoms of the acute phase of the
disease are similar to HBV, though usually less severe, with fatigue being
the most common complaint. Of individuals infected with HCV, 20-30% will
resolve their infection, 20-30% will become chronic carriers and the
remaining 40-60% will develop chronic active hepatitis. The latter group is
at great risk of developing cirrhosis and/or liver cancer. It is estimated
that the number of chronic infections (including carriers) is 60 million
worldwide, and the number is increasing rapidly. While infection via blood,
blood products and sexual contact can be controlled to a certain extent, the
20 to 40% of cases with an unknown method of transmission have resulted in
great concern in the international health care community. Because HCV was not
identified until 1989, the full extent of the epidemic is still unknown.

As with HBV, parenterally administered IFN|ga is the only widely approved
therapy for HCV infection. Current therapy consists of high dosages of IFN|ga
that are administered by injection three times per week for 24

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<PAGE>

weeks. Relapse after parenteral IFN|ga administration is common in HCV
patients. Of the 30-50% of patients who initially respond to treatment, about
half will revert to active disease, leaving only 15-25% of treated patients
who experience a lasting benefit from therapy. Parenteral IFN|ga treatment of
HCV is associated with the same high cost and adverse side effects attendant
to such therapy for HBV. Costs can be even greater in treating HCV since
patients who fail to respond to parenteral IFN|ga therapy or who relapse after
therapy often receive multiple treatment courses, sometimes consisting of
even greater doses and/or duration, in an attempt to forestall the frequently
life-threatening consequences of long-term chronic HCV.

Recent clinical pilot work completed by the Company in association with a
university in Canada indicates that chronic HCV patients treated with
low-dose oral IFN|ga followed by a standard course of parenteral IFN|ga had an
initial response rate twice that recorded in patients given parenteral IFN|ga
alone. HBL has provided the Company with data that demonstrates that HCV
patients in Japan who were treated with injectable IFN|ga preceded by low-dose
oral IFN|ga experienced a greater than expected sustained rate of response. It
should be noted that these data were generated from open-label treatment and
should be interpreted accordingly. The Company has licensed such technology
from the Canadian university and intends to use approximately $2,000,000, to
prepare an Investigational New Drug submission in Canada and a similar
application in Mexico, and, if such applications are approved, to conduct
clinical trials in such countries to evaluate, and thereafter develop, oral
IFN|ga pre-treatment as a means of increasing the effectiveness of parenteral
IFN|ga therapy. An estimated 40 million worldwide chronic cases of HCV are
believed to be candidates for this treatment.

Other Applications and Products. The Company has also filed and there are
currently in effect INDs for the use of oral IFN|ga to treat aphthous
stomatitis, fibromyalgia, the common cold and chronic fatigue syndrome in
humans. However, the Company does not currently have, nor does it believe
that in the foreseeable future it will have, the financial or human resources
to actively pursue research and development activities with respect to these
or other diseases or conditions. Any such additional activities would require
arrangements to be made with strategic partners. There can be no assurance
that any such development would occur.

In April 1996, the NIH announced that it will be conducting a clinical
trial of the use of low dose oral IFN|ga therapy for the treatment of
AIDS-related symptoms. The study will enroll 560 AIDS patients and test three
different forms of IFN|ga , including the form produced by HBL as well as forms
produced by two licensees of the Company. While the Company has filed an IND
for the use of oral IFN|ga to treat AIDS, and assisted the NIH in the
finalization of the study protocol as well as the coordination of the
packaging of clinical supplies for the study, the Company currently plans
only limited further development work for this indication until the NIH study
has been completed. The extent of further development work undertaken by the
Company may depend upon the results of the NIH study.

The Company is currently testing IFN|ga in ointment form for the treatment
of genital warts. A pilot study has been conducted in Mexico on eight
volunteers. The Company is also conducting laboratory tests on the product at
an American university.

ANIMAL HEALTH

The 1996 American Veterinary Medical Association Membership Directory and
Resource Manual reports that there are approximately 52 million dogs in 34
million households and 57 million cats in 29 million households in the United
States. The United States Department of Agriculture estimates that the total
number of cattle in the United States at the end of last year was 103
million.

While the Company does not currently intend to devote significant
financial or human resources to animal health, it is testing oral IFN|ga as a
treatment for keratoconjunctivitis sicca ("KCS") in dogs, feline
herpesvirus-1 infection ("FVR") in cats and shipping fever and mastitis in
cattle.

KCS. KCS occurs whenever there is decreased production of tears or
increased evaporation or break-up of the tear film. The disease is most
common in dogs but occasionally occurs in cats and horses. Current treatment
for the condition involves stimulation of tear production by a topical
administration of cyclosporine formulation, topical applications or oral
administration of antibiotics and use of artificial tear solutions. The
Company has conducted a pilot study in which low dose oral IFN|ga resulted in
significantly increased tear production in dogs.

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FVR. Veterinarians can trace 80 to 90% of all feline upper-respiratory
tract infections to two known viruses. Although both viruses cause similar
clinical effects, FVR (also known as feline viral rhinotracheitis) usually
causes a more severe illness. A cat suffering from infection by the virus may
sneeze frequently, become lethargic, salivate excessively and lose its
appetite. Some cats also develop conjunctivitis and in some cases, pneumonia.
In a pilot study on the use of oral IFN|ga in the treatment of FVR conducted by
the Company at an American university in 1995, cats given IFN|ga for only two
days had a significant benefit over cats given a placebo in terms of reduced
nasal discharges, reduced fever and other clinical variables.

Shipping Fever. The term "shipping fever" is used to describe the bovine
respiratory disease complex observed in cattle after shipment either into
feedlots or onto pasture. Affected cattle experience fever, loss of appetite,
cough, nasal discharge and irregular breathing. In studies conducted by Dr.
Cummins at an American university from 1982 to 1988, human IFN|ga given orally
to calves was found to provide significant reduction in fever, improvement in
feed intake, and a decrease in mortality. The Company has filed an INAD and
intends to conduct clinical trials with respect to use of oral IFN|ga as a
treatment for shipping fever when a development partner is found.

Mastitis. The inflammation of the mammary gland in dairy cows is the most
important and costly disease in the dairy industry. Ajinomoto Co., Inc. of
Tokyo, Japan has agreed to conduct a pilot study, at its sole expense, on the
use of low dose oral IFN|ga as a treatment for mastitis.

Development Agreement for Animal Health Products. In May 1996, the Company
entered into an agreement with Virbac S.A., a manufacturer and distributor of
pharmaceuticals and biologics for animals ("Virbac"), pursuant to which it
granted to Virbac an exclusive worldwide license, except in Japan, to use the
Company's patents and technology for development and sale of oral IFN|ga for
dog and cat applications. Under the agreement the Company will work with
Virbac, at Virbac's expense, to achieve regulatory approvals for such
applications. The Company will also supply bulk IFN|ga to Virbac for the
manufacture, formulation, testing and marketing of oral dosage forms of
licensed products by Virbac and Virbac will pay the Company for such IFN|ga at
specified rates. Virbac will also pay to the Company certain additional fees
and reimbursements.

STRATEGIC ALLIANCE WITH HBL

HBL was established in 1970 to engage in biotechnical research and
development. It is a subsidiary of Hayashibara Company Ltd., a
privately-owned Japanese holding corporation with diversified subsidiaries.
For more than 100 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 IFN|ga and other biologics. HBL also has developed and obtained patents
for technology relating to the production of IFN|ga - containing lozenges by
which the stability of the IFN|ga activity can be maintained for up to 18
months at room temperature and up to three 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.

In 1989, the Company and HBL entered into a manufacturing and supply
agreement pursuant to which HBL granted the Company a license to use and
distribute HBL IFN|ga and committed to supply to the Company its requirements
of HBL IFN|ga and the Company agreed to pay HBL perpetual royalties on net
sales of products containing IFN|ga (whether supplied by HBL or others) along
with certain fees for the sublicensing of the Company's rights. In March
1992, HBL and the Company terminated the 1989 agreement and entered into a
Joint Development and Manufacturing/Supply Agreement (the "Development
Agreement") pursuant to which HBL agreed to supply to the Company HBL IFN|ga
and granted to the Company an exclusive license to market (with the right to
sublicense such rights to others, subject to HBL's approval of the
sublicensees) HBL IFN|ga for low dosage oral use in humans worldwide, except in
Japan (where HBL has retained exclusive marketing rights), and

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for low dosage oral use in animals worldwide.

Subject to certain conditions, HBL also agreed to provide to the Company
$9,000,000 in research funding. All of such funding was provided to the
Company during the three years ended December 31, 1994 and has been expended.
The Company also increased HBL's perpetual royalties on net sales by the
Company of IFN|ga- containing products for oral use.

Under the Development Agreement, the Company has granted to HBL an
exclusive license to use the Company's technology and certain of its patents
for the marketing of HBL IFN|ga for oral use in humans in Japan and HBL agreed
to pay to the Company perpetual royalties on net sales of HBL IFN|ga for oral
use by humans in Japan by HBL, its affiliates and licensees. The initial term
of the Development Agreement expires in March 1999, but the agreement is
automatically renewable for successive three year terms subject to the prior
written agreement of the parties.

In January 1993, the Company entered into a license agreement with HBL
pursuant to which it granted a license to HBL for the marketing by HBL of HBL
IFN|ga for oral use in animals in Japan in exchange for HBL's agreement to pay
royalties on net sales of the product for such use in Japan by HBL, its
affiliates and licensees. Such agreement terminates in January 2000 but is
automatically renewable for successive three year terms subject to the prior
written agreement of the parties.

In June 1994, the Company and HBL entered into a Manufacturing/Supply
Agreement under which HBL granted to the Company an exclusive license to use,
formulate, test and market HBL IFN|ga for non-oral (topical or parenteral) use
in both humans and animals in North America and HBL agreed to supply to the
Company its IFN|ga for such purposes. Under the agreement the Company agreed to
pay to HBL a specified price for the HBL IFN|ga it purchases for non-oral use.

AGREEMENTS WITH ISI AND OTHERS

In October 1989, the Company entered into a Manufacturing and Supply
Agreement with ISI, under which ISI granted to the Company an exclusive
worldwide license to market ISI IFN|ga for oral use in animals and agreed to
supply ISI IFN|ga for such use exclusively to the Company. Pursuant to the
agreement, ISI receives a specified price for ISI IFN|ga sold to the Company.
ISI is also entitled to receive royalties on net sales as well as a
percentage of any license fee, option fee or other payment, except royalty or
specific research or patent expense reimbursements, which the Company
receives for the assignment or sublicense of the Company's rights under the
license agreement.

Since 1994, the Company has been required to expend a minimum of $50,000
per year toward development of products under the Manufacturing and Supply
Agreement in order to keep it in force. The Company has done so, and
currently intends to continue to make such expenditures. The Manufacturing
and Supply Agreement will continue for seven years after the Company's first
purchase order for Manufactured Products under the Agreement, and will be
automatically renewed for successive three-year terms thereafter, subject to
termination by the Company, with or without cause, and subject to termination
by ISI at any time after the first renewal term, if net sales for a calendar
year do not exceed $100,000. The seven-year term has not yet commenced, since
the Company has not yet placed an order with ISI for Manufactured Products.
"Manufactured Products" is defined in the agreement as ISI IFN|ga, packaged in
accordance with FDA approved dosage forms. The FDA has not yet approved any
dosage form within the meaning of the agreement.

In October 1989, the Company and ISI entered into a license agreement
pursuant to which the Company granted to ISI a license (co-exclusive with the
Company) of the Company's patented technology for the use and sale of IFN|ga -
containing products for use in humans worldwide, except for Japan (where the
Company has granted to HBL an exclusive license), for a royalty on net sales
of licensed products made during the term of the agreement. The original term
of the license agreement was to expire on October 20, 1994, but ISI extended
its term as therein permitted. As amended in April 1995, the agreement will
continue in force for the life of the licensed patents, subject only to ISI's
right to terminate the agreement with or without cause (in which case ISI
must cease any use or sale of the licensed products), and the Company's right
to terminate for breach of the agreement by ISI, or upon certain other
events.

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In April 1995, in connection with the settlement of certain patent and
infringement litigation brought by the Company in New Zealand against Fernz
Corporation Limited, Pharma Pacific Management Pty. Ltd. ("PPM") and certain
other companies and certain opposition proceedings brought by PPM against the
Company and certain of the Company's licensors in Australia and Europe, the
Company entered into a non-exclusive license agreement with PPM. Pursuant to
such agreement, the Company licenses to PPM worldwide, except in Japan, the
right to use the Company's patented technology for the use and sale of IFN|ga -
containing products in humans and PPM is obligated to pay the Company a
royalty based on sales of the product in countries where any of the licensed
patents has issued. To the Company's knowledge, PPM is not selling products
covered by the license in any such country. PPM also paid to the Company
$500,000 as a reimbursement of a portion of the Company's research and
expenses related to the licensed technology and a $50,000 license fee to be
credited against future royalties. In connection with the settlement, ISI and
the Company agreed to an amendment of ISI's license from the Company to
prohibit any sublicensing by ISI of the licensed technology (except that ISI
retained the right to sublicense such technology in connection with the use
and sale of ISI IFN|ga products) and the Company purchased, for $625,000,
312,500 shares of the Common Stock of ISI, a public company.

MANUFACTURING

The Company depends on HBL and ISI for the production and purification of
IFN|ga for use in clinical trials and intends to rely on them to supply it with
IFN|ga in bulk for formulation in products commercially sold by the Company. HBL
produces all of its IFN|ga (including injectable IFN|ga and IFN|ga formulated in
lozenges) at its Kibi Pharmaceutical Plant outside Okayama, Japan. The plant has
not yet been approved by the FDA for production of IFN|ga . ISI produces all of
its IFN|ga at an FDA-approved plant in New Brunswick, New Jersey. The Company
uses ISI IFN|ga for oral administration in animal testing.

MARKETING AND SALES

The Company anticipates that its products eventually will be marketed in
all countries where approval to sell such products is obtained. The Company
expects to sell products for human use to pharmaceutical distributors who
will undertake the marketing of human products. It hopes to sell the products
for animal use to animal health distributors who will undertake the marketing
of the products. However, the Company does not expect that it will have
significant sales for at least three years.

In November 1990, the Company entered into an agreement (the "Marketing
Agreement") with Mitsubishi Corporation ("Mitsubishi") under which it has
appointed Mitsubishi its marketing representative for the Company's low-dose
oral IFN|ga products for human use. The agreement is exclusive worldwide,
except for the United States, Japan, Thailand and certain countries in
Africa. Pursuant to the Marketing Agreement, Mitsubishi is assisting the
Company in developing a global marketing strategy. Mitsubishi will also
identify and negotiate with potential licensees where the Company determines
that licensing is the most effective method of commercializing a product;
establish distribution channels for such products, if any, that may be
produced under the Company's own auspices; arrange for shipment and delivery
of products to licensees, distributors and customers; and assist the Company
in obtaining regulatory approval for the Company's products. For its
services, Mitsubishi will receive stated percentages of all license or option
fees and stated percentages of any royalties paid to the Company under any
license agreements entered into by the Company in Mitsubishi's exclusive
market area during the term of the Marketing Agreement or any license
agreement entered into within two years after the term with licensees
contacted by Mitsubishi or introduced to the Company by Mitsubishi prior to
the expiration of the Marketing Agreement. In addition, Mitsubishi is
entitled to a percentage commission on the net sales value (as defined in the
agreement) of products shipped to any person in Mitsubishi's exclusive
marketing area during the same periods discussed above with respect to
licenses. The initial term of the Marketing Agreement expires in November
2000, but the term shall automatically be extended for successive three year
periods unless either party elects not to extend the agreement by written
notice to the other not less than 12 months prior to the end of the term or
renewal term.

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PATENTS AND PROPRIETARY RIGHTS

The Company seeks patent protection for its technology and products. It
typically files United States patent applications and related foreign patent
applications as soon as such technology and products are developed. The
Company files foreign patent applications on some of its technology and
products in countries where, in the Company's opinion, business
considerations warrant such filings. The foreign countries in which the
Company files patent applications usually include Japan, Canada, Australia,
and countries of the European Economic Community.

The Company owns two United States patents which expire in 2008 and 2010
and licenses from HBL and two universities or their affiliates, a total of
nine United States patents which expire on various dates between 2001 and
2014. The Company's licensors have eight United States patent applications
pending relating to oral IFN|ga. Numerous foreign patent applications which
correspond to certain of these United States patent applications have also
been filed and are pending. Although the patent examiner has initially
rejected all claims in seven of the pending United States patent
applications, the Company's licensors are prosecuting the applications to
counter the rejections, with the goal of patent grants. There can be no
assurance, however, that the Company's licensors' existing patent
applications will mature into issued patents, or, if issued, that such
patents will be adequate to protect the Company's products or processes. In
addition, there can be no assurance that the Company will be able to obtain
any necessary or desired additional licenses to patents or technologies of
others or that the Company will be able to develop its own additional
patentable technologies.

The Company's license agreements with its licensors provide for the
payment to licensors of various license issue fees, percentage royalties on
net sales of licensed products by the Company (including certain minimum
annual royalties) and stated percentages of license, option or other front-
end payments and royalty payments received by the Company from sublicensees.
The Company's licenses extend for the life of the licensed patents, subject
to earlier termination without cause by the Company or with cause by
licensors.

The Company believes that the patent position of pharmaceutical companies
involves complex legal and factual questions. There can be no assurance that
any future patent applications or any patents issued to the Company will
provide it with competitive advantages or that the Company's use of its
technology will not be challenged as infringing upon the patents or
proprietary rights of others, or that the patents or proprietary rights of
others will not have an adverse effect on the ability of the Company to do
business. Furthermore, there can be no assurance that others will not
independently develop similar technology or that others will not design
technology to circumvent the Company's existing or future patents or
proprietary rights. In the event that the Company's technology were deemed to
be infringing upon the rights of others, the Company could be subject to
damages or enjoined from using such technology or the Company could be
required to obtain licenses to utilize such technology. No assurance can be
given that any such licenses would be made available on terms acceptable to
the Company, or at all. If the Company were to be unable to obtain such
licenses, it could encounter significant delays in introducing products to
the market while it attempts to design around the patents or rights infringed
upon, or the Company's development, manufacture and sale of products
requiring such licenses could be foreclosed. In addition, the Company could
experience a loss of revenues and may incur substantial costs in defending
itself and indemnifying its strategic partners in patent infringement or
other actions based on proprietary rights violations brought against it or
its strategic partners. The Company could also incur substantial costs in the
event it finds it necessary to assert claims against third parties to prevent
the infringement of its patents and proprietary rights by others.

Roche has asserted to both HBL and ISI that the manufacture, sale and use
of their respective forms of IFN|ga infringe United States Patent 4,503,035 and
foreign counterparts thereof owned by Roche relating to IFN|ga (collectively,
the "Roche Patent"). The Roche Patent expires in March 2002 in the United
States and at various times in other jurisdictions. HBL has informed the
Company that it believes that the claims of the Roche Patent are not
applicable to the manufacture and sale of HBL IFN|ga. HBL has prevailed at the
trial level in litigation initiated by Roche in Japan concerning the dispute
and Roche has appealed the decision. The Company is not a party to the
litigation between Roche and HBL in Japan.

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The Company believes that it is likely that Roche would commence suit
against the Company if the Company were to sell or attempt to sell HBL IFN|ga
for commercial use in the United States or any other country where the Roche
Patent has issued with IFN|ga composition claims and is still in effect.
However, under applicable United States patent law, the use of a patented
product solely for uses reasonably related to the development and submission
of information for seeking FDA approval of a biologic for indicated uses in
humans is not an act of infringement. Thus, the Company believes that it is
unlikely that it would be sued by Roche prior to commercialization of the
Company's IFN|ga products. Roche would also not assert infringement claims with
respect to the Company's sale of ISI IFN|ga, because in March 1995 ISI entered
into a license agreement with Roche pursuant to which ISI was granted a
license to use the Roche Patent in exchange for specified royalties.

In response to patent infringement claims made by the Company against PPM
and certain other persons, PPM contested the validity of granted claims of
certain Company-licensed patents in Australia, New Zealand and Europe. In
addition, a former employee of the Company contested the validity of one of
the United States patents licensed by the Company. All of the disputes were
settled or dismissed without final resolution of the patent validity issues.
However, in connection with the settlement of the litigation with PPM, the
Company granted to PPM a non-exclusive royalty-bearing license to use the
patented technology worldwide, except in Japan. See "-- Agreements with ISI
and Others."

COMPETITION

The pharmaceutical industry is an expanding and rapidly changing industry
characterized by intense competition. The Company believes that its ability
to compete will be dependent in large part upon its ability to continually
enhance and improve its products and technologies. In order to do so, the
Company must effectively utilize and expand its research and development
capabilities and, once developed, expeditiously convert new technology into
products and processes which can be commercialized. Competition is based
primarily on scientific and technological superiority, technical support,
availability of patent protection, access to adequate capital, the ability to
develop, acquire and market products and processes successfully, the ability
to obtain governmental approvals and the ability to serve the particular
needs of commercial customers. Corporations and institutions with greater
resources than the Company may, therefore, have a significant competitive
advantage. The Company's potential competitors include entities that develop
and produce therapeutic agents for treatment of human and animal disease.
These include numerous public and private academic and research organizations
and pharmaceutical and biotechnology companies pursuing production of, among
other things, biologics from cell cultures, genetically engineered drugs and
natural and chemically synthesized drugs. Almost all of these potential
competitors have substantially greater capital resources, research and
development capabilities, manufacturing and marketing resources and
experience than the Company. The Company's competitors may succeed in
developing products or processes that are more effective or less costly than
any that may be developed by the Company, or that gain regulatory approval
prior to the Company's products. The Company also expects that the number of
its competitors and potential competitors will increase as more IFN|ga products
receive commercial

30
<PAGE>

marketing approvals from the FDA or analogous foreign regulatory agencies.
Any of these competitors may be more successful than the Company in
manufacturing, marketing and distributing its products. There can be no
assurance that the Company will be able to compete successfully.

GOVERNMENT REGULATION

The Company's research and development activities are subject to
comprehensive regulation by numerous governmental authorities in the United
States and other countries. If the Company is able to produce and market
products, such production and marketing will place the Company under
continued regulation. Among the applicable regulations in the United States,
pharmaceutical products are subject to the Federal Food, Drug and Cosmetic
Act, the Public Health Service Act, other federal statutes and regulations,
and certain state and local regulations. These statutes and regulations
govern the development, testing, formulation, manufacture, labeling, storage,
record keeping, quality control, advertising, promotion, sale, distribution
and approval of pharmaceutical products. Failure to comply with applicable
requirements can result in fines, recall or seizure of products, total or
partial suspension of production, refusal by the government to approve
marketing of the product and criminal prosecution.

A new drug may not be legally marketed for commercial use in the United
States without FDA approval. In addition, upon approval, a drug may only be
marketed for the indications, in the formulations and at the dosage levels
approved by the FDA. The FDA also has the authority to withdraw approval of
drugs in accordance with applicable statutes and regulations. Analogous
foreign regulators impose similar approval requirements relating to
commercial marketing of a drug in their respective countries and may impose
similar restrictions and limitations after approval.

In order to obtain FDA approval of a new product, the Company and its
strategic partners, if any, must submit proof of safety, efficacy, purity,
and stability, and the Company must demonstrate validation of its
manufacturing process. The testing and application process is expensive and
time consuming, often taking years to complete. There is no assurance that
the FDA will act favorably or quickly in reviewing applications. With respect
to patented products, processes or technologies, delays imposed or caused by
the governmental approval process may materially reduce the period during
which the Company will have the exclusive right to exploit them. Delays could
also affect the commercial advantages derived from proprietary processes.
There is no assurance that the regulatory agencies will find present or
future submissions of the Company to be adequate.

The FDA approval process for a pharmaceutical product such as oral IFN|ga
includes review of (i) preclinical laboratory and animal studies to enable
FDA review of an Investigational New Drug Application ("IND") or
Investigational New Animal Drug Notice ("INAD"), (ii) initial clinical
studies to define safety and dose parameters and (iii) well-controlled
clinical trials to demonstrate product efficacy and safety, followed by
submission and FDA approval of a Product License Application ("PLA")
concerning biologics and a New Drug Application ("NDA") with respect to
drugs. FDA approval of the NDA and/or PLA is required prior to any commercial
sale or shipment of the product, except as to certain exports.

Preclinical studies involve laboratory evaluation of product
characteristics and animal studies to assess the safety of the product. The
results of the preclinical tests are submitted to the FDA as part of the IND
or INAD application and are reviewed by the FDA. Unless the FDA objects to an
IND, the application will become effective 30 days following its receipt by
the FDA. INADs need only be filed prior to the shipment of the drug or
biologic for testing. There can be no certainty that the FDA will not object
to the commencement of clinical studies concerning any drug or biologic.

Human clinical trials are typically conducted in three sequential phases
with some amount of overlap allowed. Phase 1 trials normally consist of
testing the product in a small number of patient volunteers for establishing
safety (adverse effects), dosage tolerance, metabolism, distribution,
excretion and clinical pharmacology. In Phase 2, the continued safety and
initial efficacy of the product are evaluated in a somewhat larger patient
population, and appropriate dosage amounts and treatment intervals are
determined. Phase 3 trials typically involve more definitive testing of the
appropriate dose for safety and clinical efficacy in an expanded patient
population at multiple clinical testing centers. A clinical plan, or
"protocol," accompanied by the approval of the institution participating in
the trials, must be submitted to the FDA prior to commencement of each
clinical trial.

31
<PAGE>

Each clinical study must be conducted under the auspices of an Institutional
Review Board ("IRB") at the institution performing the clinical study. An IRB
may require changes in a protocol, and there can be no assurance that an IRB
will permit any given study to be initiated or completed. In addition, the
FDA may order the temporary or permanent discontinuation of clinical trials
at any time. In light of this process, the Company must necessarily rely on
other persons and institutions to conduct studies. The Company cannot
guarantee that such persons and institutions will conduct studies properly.
There also can be no assurance that Phase 1, Phase 2 and Phase 3 testing of
the Company's products will be completed successfully within any specified
time period, if at all.

All the results of the preclinical and clinical studies on a
pharmaceutical product are submitted to the FDA in the form of a PLA or NDA,
for approval to commence commercial distribution. Submission of a PLA or NDA
does not assure FDA approval for marketing. The application review process
takes more than two years on average to complete. However, the process may
take substantially longer if the FDA has questions or concerns about a
product or studies regarding the product. In general, the FDA requires at
least two adequate and well-controlled clinical studies demonstrating
efficacy with sufficient levels of statistical assurance. However, additional
support may be required. The FDA also may request additional information
relating to safety or efficacy, such as long- term toxicity studies. In
responding to a PLA or NDA, the FDA may grant marketing approval, require
additional testing and/or information or deny the application. Accordingly,
there can be no assurance about any specific time frame for approval, if any,
of products by the FDA. The FDA also may require post-marketing testing and
surveillance to monitor the safety record of a product and its continued
compliance with regulatory requirements.

The facilities of each pharmaceutical manufacturer must be registered with
and approved by the FDA as compliant with the agency's good manufacturing
practice regulations ("GMP"). For biologics, except certain
well-characterized ones, this requires the filing of an establishment license
application ("ELA") that must be approved by the FDA for the facility in
which the product is maintained. While the ELA and PLA are separate
documents, they must be submitted at the same time and both documents must be
approved before the sale of the biologic. Continued registration also
requires compliance with the FDA's GMP regulations. Products must be
formulated in accordance with the FDA's GMP requirements and preclinical
tests must be conducted by laboratories that comply with FDA regulations
governing the testing of drugs in humans and animals. In order to comply with
GMP, manufacturers must continue to expend time, money and effort in
production, record keeping and quality control. In addition, manufacturers
must comply with regulations promulgated by the United States Drug
Enforcement Administration and similar state and local regulatory authorities
if they handle controlled substances, and they must be registered with the
United States Environmental Protection Agency and similar state and local
regulatory authorities if they generate toxic or dangerous waste streams.
Other regulatory agencies, such as the Occupational Safety and Health
Administration, also monitor manufacturing facilities for compliance with
workplace safety regulations. Each of these organizations conducts periodic
establishment inspections to confirm continued compliance with its
regulations. Failure to comply with any of these regulations could mean
fines, interruption of production and even criminal prosecution.

For foreign markets, a pharmaceutical company is subject to regulatory
requirements, review procedures and product approvals which, generally, may
be as extensive, if not more extensive, as those in the United States.
Although the technical descriptions of the clinical trials are different, the
trials themselves are often substantially the same as those in the United
States. Approval of a product by regulatory authorities of foreign countries
must be obtained prior to commencing commercial product marketing in those
countries, regardless of whether FDA approval has been obtained. The time and
cost required to obtain market approvals in foreign countries may be greater
than required for FDA approval and may be subject to delay. There can be no
assurance that regulatory authorities of foreign countries will grant
approval.

RESEARCH AND DEVELOPMENT

During the years ended December 31, 1994 and 1995 and the three months
ended March 31, 1996, the Company incurred expenses of $1,364,042, $875,093
and $134,209, respectively, resulting from Company- sponsored research and
development activities. Research and development is expected to remain a
significant component of the Company's business. In the short term, the
Company expects to concentrate on the Primary

32
<PAGE>

Development Projects and intends to use approximately $6,350,000 of the
estimated net proceeds of this offering and other funds, to the extent they
are, or may become, available, for such projects. However, the Company may
abandon or deemphasize its research and development activities with respect
to the Primary Development Projects and expand research and development of
other products as circumstances warrant. The Company has contracted out
substantially all of its clinical research and intends to continue to do so
while utilizing its staff for monitoring such research.

PROPERTY

The Company's executive and administrative offices are located at 800 West
9th Avenue, Amarillo, Texas in a 5,200 square foot facility owned by the
Company. The building contains offices, meeting rooms and a biologic storage
area. The Company believes that the facility is adequate for its present and
anticipated uses.

EMPLOYEES

The Company currently has eight full-time employees, three of whom are
executive officers, three of whom assist in the design and monitoring of
clinical trials and the conduct of regulatory affairs for such trials, and
two of whom are clerical staff. The Company believes that its relations with
its employees are good. None are covered by a collective bargaining agreement
with the Company.

33
<PAGE>

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The current directors and executive officers of the Company are as
follows:

<TABLE>
<CAPTION>
Name Age Position
----------------------------- ----- -------------------------------------------
<S> <C> <C>
Joseph Cummins, DVM, PhD ..... 53 Chairman of the Board, President,
Chief Executive Officer and Director
Vice President--Finance and
Charles Hughes .............. 56 Administration, Chief Financial Officer
Alan Richards, PhD .......... 46 and Treasurer
Edward L. Morris ............ 51 Director of Clinical and Regulatory Affairs
Stephen Chen, PhD (1) ....... 47 Secretary
James Cook (2)(3) ........... 61 Director
Katsuaki Hayashibara (1)(2)... 52 Director
Dennis Moore, DVM (2)(3) .... 49 Director
James Page, MD (1) .......... 69 Director
Director
</TABLE>

- ------
(1) Member of the Compensation Committee.
(2) Member of the Finance Committee.
(3) Member of the Audit Committee.

Joseph Cummins has been the Chairman of the Board of the Company since he
founded it in June 1984. Dr. Cummins has also served as President of the
Company since December 1994 and from June 1984 to September 1992. He received
a PhD degree in veterinary microbiology from the University of Missouri in
1978 and a doctor of veterinary medicine degree from Ohio State University in
1966. Dr. Cummins has been conducting research concerning IFN since 1969.

Charles Hughes has been Vice President -- Finance and Administration,
Chief Financial Officer and Treasurer of the Company since April 1993. From
August 1991 to March 1993 he was a Vice President of First National Bank of
Amarillo, and from July 1989 to July 1991 he was Vice President of Finance
and Administration of the Cattlemen's Beef Promotion and Research Board, an
industry organization. From September 1985 to July 1989, he was a financial
consultant and from May 1979 to September 1985 he was the Chief Financial
Officer of Friona Industries, Inc., a public company engaged in agribusiness.
Mr. Hughes is a certified public accountant.

Alan Richards has served the Company in various capacities since June
1990, most recently as Director of Clinical and Regulatory Affairs. From 1986
to 1990, Dr. Richards was a member of the faculty of Campbell University
teaching microbiology, immunology, genetics and biotechnology. He received a
PhD degree in veterinary microbiology and immunology from Texas A&M
University in 1984.

Edward Morris has served as Secretary of the Company since 1986. Since
1983, Mr. Morris has been a partner in the law firm of Morris, Moore, Moss &
Douglass, P.C., which firm provides legal services to the Company.

Stephen Chen has been a director of the Company since February 1996. He
has been President and Chief Executive Officer of STC International, Inc., a
healthcare investment firm, since May 1992. From August 1989 to May 1992 he
was Director of Pharmaceutical Research and Development for the Ciba Consumer
Pharmaceuticals Division of Ciba-Geigy.

James Cook has been a director of the Company since 1988. He has been the
President and Chief Executive Officer of the First National Bank of Arvada
since January 1992 and from April 1987 to December 1991 he was Executive Vice
President of First National Bank of Amarillo.

Katsuaki Hayashibara has been a director of the Company since 1994. Since
1988, Mr. Hayashibara has been the Director of Research and Development for
HBL.

34
<PAGE>

Dennis Moore has been a director of the Company since 1986. Dr. Moore has
been a doctor of veterinary medicine since 1972 and was in private practice
from 1972 to 1995.

James Page has been a director of the Company since February 1996. Prior
to retiring in 1991 as a Vice President with Adria Laboratories, Inc., a
pharmaceutical company specializing in therapy given to cancer and AIDS
patients, Dr. Page held various upper management level positions with Carter
Wallace, Inc., Merck Sharpe & Dohme Research Laboratories and Wyeth
Laboratories.

The Company's directors are elected at the annual meeting of shareholders
to hold office until the annual meeting of shareholders for the ensuing year
or until their successors have been duly elected and qualified. The Company
pays directors who are not employees of the Company a fee of $1,000 per
regularly scheduled Board meeting attended (or $250 for participation in a
regularly scheduled Board meeting by conference telephone). The Company
reimburses all directors for their expenses in connection with their
attendance at such meetings.

Officers are elected annually by the Board of Directors and serve at the
discretion of the Board.

The Company has agreed, for a period of five years from the date of this
Prospectus, if so requested by the Underwriter, to nominate and use its best
efforts to elect a designee of the Underwriter as a director of the Company
or, at the Underwriter's option, as a non-voting advisor to the Company's
Board of Directors. The Company's officers and directors and substantially
all of its existing shareholders have agreed to vote their shares of Common
Stock in favor of such designee. The Underwriter has not yet exercised its
right to designate such a person.

The Company is the owner and beneficiary of a $2,000,000 insurance policy
on the life of Dr. Joseph Cummins.

EXECUTIVE COMPENSATION

The following table sets forth for the three years ended December 31, 1995
compensation paid by the Company to its Chairman of the Board, President and
Chief Executive Officer. None of the Company's other executive officers had
annual compensation in excess of $100,000 for services rendered during any of
the three years ended December 31, 1995.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
Annual Compensation
---------------------------------------
Other Annual
Compensation
Name and Principal Position Year Salary($) Bonus($) ($)
---------------------------- ------ ---------- -------- --------------
<S> <C> <C> <C> <C>
Dr. Joseph Cummins, Chairman
of the Board, President and
Chief Executive Officer ... 1995 $120,000 $ 500 $ --
1994 120,000 -- --
1993 120,000 27,308 30,000(1)
</TABLE>

- ------
(1) Represents the amount allocated to Mr. Cummins of contributions made by
the Company to employees under the Company's Profit Sharing Plan which
was discontinued in 1995.

EMPLOYMENT AGREEMENTS

Joseph Cummins, the Chairman of the Board, President and Chief Executive
Officer of the Company, is employed under an employment agreement entered
into by the parties in March 1994, as amended in May 1996. As amended, the
agreement provides for a term expiring on December 31, 1999. Pursuant to the
agreement Dr. Cummins is required to devote his full time to the affairs of
the Company and receives an annual salary of $120,000. The agreement also
contains provisions (i) prohibiting disclosure of confidential information,
(ii) granting to the Company rights to intellectual property developed by Dr.
Cummins that relate to the Company's business and are developed in the course
of his employment by the Company, and (iii) prohibiting competition with the
Company during, and for a period of three years after, Dr. Cummins'
employment by the Company. The employment agreement also sets forth the
amended terms of a restricted stock grant awarded to Dr. Cum-

35
<PAGE>

mins by the Company. In accordance with and in full satisfaction of such
terms, simultaneously with the sale of the Common Stock offered hereby, the
Company will issue to Dr. Cummins 30,000 shares of Common Stock and use
$90,000 to satisfy withholding tax obligations arising as a result of such
issuance. See "Certain Transactions."

Alan Richards, the Company's Director of Clinical and Regulatory Affairs,
and Charles Hughes, its Vice President - Finance and Administration and Chief
Financial Officer, respectively, are employed pursuant to employment
agreements entered into in March 1994 and June 1994, respectively. Pursuant
to the agreements, Dr. Richards and Mr. Hughes each is required to devote his
full time to the affairs of the Company and receive annual salaries of
$87,500 and $74,000, respectively. The employment agreements contain the same
provisions regarding confidentiality, non-competition and ownership of
intellectual property rights as contained in Dr. Cummins' employment
agreement. The employment agreements were amended in May 1996 to modify the
terms of certain restricted stock grants previously awarded to the employees.
In accordance with and in full satisfaction of the amended terms of the
restricted stock grants, simultaneously with the sale of the Common Stock
offered hereby, the Company will issue 30,000 and 19,000 shares of Common
Stock, respectively, to Dr. Richards and Mr. Hughes and use an aggregate of
$145,000 to satisfy withholding tax obligations relating to such issuances.
Each employment agreement is for an indefinite term, but is terminable by
either party upon six months prior written notice to the other. See "Certain
Transactions."

For a period of three years after the date of this Prospectus, the Company
may not, without the prior written consent of the Underwriter, increase the
compensation of Messrs. Cummins, Richards or Hughes. Such approval shall be
predicated upon, among other things, the performance of the Company, the
performance of the employee, inflationary trends and other economic
conditions.

SCIENTIFIC ADVISORY BOARD

The Company's Scientific Advisory Board (the "Advisory Board") was
organized to review and evaluate the Company's research and development
programs and to advise the Company generally in addressing various scientific
issues. The Company generally selects for membership persons who are experts
in infectious diseases. Members of the Advisory Board ("Advisors") may meet
as a group or individually with management of the Company. They are not
employed by the Company and may have commitments to, or consulting or
advisory agreements with, other entities that may limit their availability to
the Company. These entities may also be competitors of the Company. The
Company is not aware of any conflict of interest between work performed by
Advisors on behalf of the Company and work performed by them on behalf of
other parties. The Company requires each Advisor to execute a confidentiality
agreement upon the commencement of his or her relationship with the Company.
The agreements generally provide that all confidential information made known
to the individual during the term of the relationship is the exclusive
property of the Company and shall be kept confidential and not disclosed to
third parties. The current members of the Advisory Board are as follows:

<TABLE>
<S> <C>
Steven L. Berk, M.D. Michael Lange, M.D.
Chairman of the Scientific Advisory Board Associate Chief of Infectious Diseases
Professor and Chairman of Medicine St. Luke's-Roosevelt Hospital Center
East Tennessee State University New York, New York

Masashi Kurimoto Jun Minowada, M.D., DMS
Member of Executive Retired
Board of HBL, Director of Former Executive Director of HBL and Director of
Fujisaki Institute Fujisaki Cell Center

Wayne A. Tompkins, Ph.D. James Page, M.D.
Professor of Immunology and Director Director of the Company
of Graduate Programs, North Carolina
State University
</TABLE>

The Company has entered into consulting agreements with each Advisor. Each
agreement is for a one year term. Under each agreement the Company is
required to pay the Advisor $1,200 per day for consultation services
requested by the Company and performed by such person. Advisors also receive
reimbursement of travel

36
<PAGE>

expenses connected with Company business and stock options and related stock
appreciation rights under the Director Plan. Consultation services include
assisting the Company in the development of a research plan to elucidate the
biological effects, safety and efficacy of the Company's products and
assisting the Company in analyzing data from research trials and other
studies concerning the Company's products. The Company anticipates that each
Advisor will devote approximately six days per year to the affairs of the
Company in his capacity as an Advisor, consisting of three one-day meetings
of the Scientific Advisory Board to be held each year and preparation for
such meetings.

INDEMNIFICATION OF DIRECTORS AND OFFICERS

The Company's By-laws provide for the Company to indemnify each director
and officer of the Company against liabilities imposed upon him (including
reasonable amounts paid in settlement) and expenses incurred by him in
connection with any claim made against him or any action, suit or proceeding
to which he may be a party by reason of his being or having been a director
or officer of the Company. The Company has also entered into Indemnification
Agreements with each officer and director pursuant to which the Company will,
in general, indemnify such persons to the maximum extent permitted by the
Company's By-Laws and the laws of the State of Texas against any expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
incurred in connection with any actual or threatened action or proceeding to
which such director or officer is made or threatened to be made a party by
reason of the fact that such person is or was a director or officer of the
Company. The foregoing provisions may reduce the likelihood of derivative
litigation against directors and may discourage or deter shareholders or
management from suing directors for breaches of their duty of care, even
though such an action, if successful, might otherwise benefit the Company and
its shareholders.

STOCK OPTION PLANS

In May 1996, the Board of Directors adopted and the shareholders of the
Company approved both the 1996 Employee Stock Option Plan (the "Employee
Plan") and the Outside Director and Advisor Stock Option Plan (the "Director
Plan" and together with the Employee Plan, the "Plans").

EMPLOYEE PLAN

The purpose of the Employee Plan is to serve as an incentive to employees
for continuous employment with the Company, to maintain competitive
compensation levels for employees and to more closely align the interests of
shareholders and employees of the Company.

Awards under the Employee Plan shall be in the form of incentive stock
options ("ISOs"), as defined in Section 422 of the Internal Revenue Code of
1986, as amended. Limited stock appreciation rights ("Limited Rights")
relating to such ISOs may also be granted. An aggregate of 150,000 shares of
Common Stock are reserved for issuance upon the exercise of ISOs granted
under the Employee Plan.

The Employee Plan is administered by a committee of at least two directors
of the Company (the "Committee") which has the authority, in its sole
discretion, to grant ISOs and Limited Rights to eligible employees, to
determine the timing and amount of such awards, to impose limitations,
restrictions and conditions upon such awards and to interpret the Employee
Plan and related rules and agreements.

All ISOs granted to employees who do not possess more than 10% of the
total combined voting power of all classes of stock of the Company will be
exercisable at a price equal to 100% of the fair market value of a share of
Common Stock on the date of grant and will vest at the rate of 20% per year,
commencing on the first anniversary of the date of grant. All ISOs granted to
10% shareholders will be exercisable at a price equal to 110% of the fair
market value of a share of Common Stock on the date of grant and will vest at
the rate 25% per year, commencing on the first anniversary of the date of
grant. The aggregate fair market value of the shares covered by ISOs granted
under the Employee Plan that become exercisable by a holder for the first
time in any calendar year is subject to a $100,000 limit. The maximum number
of shares of Common Stock with respect to which ISOs may be granted in any
one year to any employee shall not exceed 50,000.

ISOs granted to employees who are not 10% shareholders must be exercised
prior to the expiration of ten years from the date of grant and ISOs granted
to 10% shareholders must be exercised prior to the expiration of

37
<PAGE>

five years from the date of grant. ISOs are exercisable only during the
holder's employment, and, in the case of an involuntary termination of the
employee, for a period of up to 90 days after the termination of such
holder's employment to the extent the ISOs were exercisable at the date of
termination or become exercisable within the 90 days after termination of
employment. However, in the case of the termination of an optionee's
employment by reason of his disability or retirement, the ISOs held by him
may be exercised for a period of 36 months after such termination to the
extent the ISOs were exercisable at the date of termination. In the case of
the death of an optionee, any ISO exercisable on the date of the employee's
death may be exercised by the employee's estate or beneficiaries if such
exercise occurs within the remaining term of the option but in no event after
one year after the employee's death. ISOs may not be transferred other than
by will or the laws of descent and distribution, or pursuant to certain
qualified domestic relations orders.

Concurrently with or subsequent to the award of any ISO, the Committee may
award a Limited Right with respect to each ISO permitting the optionee to be
paid the appreciation on the Common Stock in lieu of (but not in addition to)
exercising the ISO. A Limited Right is fully exercisable and must be
exercised immediately preceding or simultaneously with a Change in Control
(as defined in the Employee Plan), except that if a Change of Control occurs
without notice to the holder of the Limited Right or an opportunity by the
holder of the Limited Right to exercise it, the Limited Right must be
exercised as soon as practicable after the Change of Control occurs.

Any shares of Common Stock subject to an option which has been terminated
unexercised or expires shall again be available for issuance under the
Employee Plan, except that shares subject to an option which are not issued
because the optionee has elected to be paid upon the exercise of a related
Limited Right shall not again be available for issuance under the Employee
Plan.

In May 1996, the Company granted ISOs to purchase 7,500 shares of Common
Stock at an exercise price of $5.00 per share to each of Joseph Cummins,
Charles Hughes and Alan Richards.

DIRECTOR PLAN

The purpose of the Director Plan is to provide an incentive to outside
directors and members of the Company's Scientific Advisory Board ("Advisors")
for continuous association with the Company and to reinforce the relationship
between participants' rewards and shareholder gains.

Awards under the Director Plan are in the form of so-called non-qualified
stock options and Limited Rights relating to such options. An aggregate of
100,000 shares of Common Stock are reserved for issuance upon exercise of
options granted under the Director Plan. Options under the Director Plan may
be granted only to directors or Advisors who are not officers or employees of
the Company.

The Director Plan is administered by a committee of at least two directors
of the Company which has the authority, in its sole discretion, to interpret
the Plan, to adopt, amend and rescind rules and regulations relating to the
Plan and to otherwise administer the Plan. However, all options and Limited
Rights granted under the Plan are automatic and non-discretionary.

The Director Plan provides that on the day following the date of this
Prospectus or, if later, the date a person first becomes an outside director
of or Advisor to the Company, each outside director or Advisor shall be
awarded options to purchase an aggregate of 10,000 and 5,000 shares,
respectively, of Common Stock, except any outside director who is an Advisor
shall be granted options to purchase 10,000 shares of Common Stock as a
director and shall not be granted any options as an Advisor. Concurrently
with the award of options, each director and Advisor shall also be awarded an
equal number of Limited Rights.

All options granted under the Director Plan will be exercisable at a price
equal to 100% of the fair market value of a share of Common Stock on the date
of grant and will vest at the rate of 20% per year, commencing on the first
anniversary of the date of grant. Options must be exercised prior to the
expiration of ten years from the date of grant.

The provisions of the Director Plan relating to exercisability of
outstanding options after the optionee's termination of association with the
Company by virtue of his death, disability or the involuntary termination of
the optionee's employment and the exercise of Limited Rights are the same as
the provisions of the Employee Plan relating thereto. Options under the
Director Plan may not be transferred other than by will or the laws of
descent and distribution.

38
<PAGE>

On the day after the date of this Prospectus, options to purchase an
aggregate of 10,000 shares of Common Stock at an exercise price of $5.00 per
share will be granted to each of Stephen Chen, James Cook, Katsuaki
Hayashibara, Dennis Moore and James Page, each of whom is a director of the
Company, and options to purchase an aggregate of 5,000 shares of Common Stock
at an exercise price of $5.00 per share will be granted to each of Steven
Berk, Masashi Kurimoto, Wayne Tompkins, Michael Lange and Jun Minowada, each
of whom is an Advisor.

39
<PAGE>

PRINCIPAL SHAREHOLDERS

The following table sets forth information as of the date of this
Prospectus and as adjusted to reflect the sale of 2,000,000 shares offered
hereby, based upon information obtained from the persons named below,
relating to the beneficial ownership of shares of Common Stock by (i) each
person known to the Company to own five percent or more of the outstanding
Common Stock, (ii) each director of the Company and (iii) all officers and
directors of the Company as a group.

<TABLE>
<CAPTION>
Amount and Nature
of Beneficial Percentage of Shares Owned
Ownership -------------------------
Name and Address Before Offering Before After
of Beneficial Owner (1) Offering Offering (2)
- --------------------------------------------------- ----------------- ---------- ------------
<S> <C> <C> <C>
Hayashibara Biochemical
Laboratories, Inc.
2-3, Shimoishii 1-chome
Okayama 700, Japan ................................ 1,032,756 34.0% 24.1%(3)
Dr. Joseph Cummins
800 West 9th Avenue
Amarillo, Texas 79101 ............................. 666,804(4) 22.0% 13.6%
Mesa, Inc.
P.O. Box 2009
Amarillo, Texas 79189-2009 ........................ 315,120 10.4% 6.2%
Dr. Dennis Moore
P.O. Box 1553
Hamilton, Montana 59840 ........................... 149,616 4.9% 2.9%
Katsuaki Hayashibara
Hayashibara Biochemical
Laboratories, Inc.
1-2-3, Shimoishii
Okayama 700, Japan ................................ 48,240(5) 1.6% *
Dr. Stephen Chen
6 Persimmon Court
East Brunswick, New Jersey 08816 .................. -- -- --
James Cook
13711 Basalt Court
Broomfield, Colorado 80020 ........................ 66,600(6) 2.2% 1.3%
Dr. James Page
103 Clubhouse Lane
Naples, Florida 33942 ............................. -- -- --
All officers and directors as a group (nine persons) 1,033,824(7) 34.1% 21.8%
</TABLE>
- ------
* Less than 1%

<PAGE>

(1) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from the date of this Prospectus
upon the exercise of options or warrants. Each beneficial owner's
percentage ownership is determined by assuming that options that are held
by such person (but not those held by any other person) and that are
exercisable within 60 days from the date of this Prospectus have been
exercised. Except as otherwise indicated, the Company believes that each
of the persons named has sole voting and investment power with respect to
the shares shown as beneficially owned by him.

(2) Gives effect to the issuance of 30,000 shares of Common Stock to Joseph
Cummins and an aggregate of 49,000 shares of Common Stock to two officers
simultaneously with the consummation of the sale of the Common Stock
offered hereby - See "Management-Employment Agreements" and "Certain
Transactions."

(3) Gives effect to the purchase by HBL of 200,000 of the 2,000,000 shares
offered hereby.

(4) Includes an aggregate of 337,666 shares of Common Stock held by Joseph
Cummins as trustee under certain trusts for the benefit of his children
and 360 shares owned by Dr. Cummins wife.

(5) Does not include 1,032,756 shares owned by HBL.

(6) All of such shares are owned jointly with Mr. Cook's wife.

(7) Includes an aggregate of 22,344 shares of Common Stock held by one
officer as trustee of a trust, an aggregate of 28,000 shares of Common
Stock held by such officer as the executor of an estate, an aggregate of
960 shares of Common Stock held by such officer as the trustee of a
profit sharing plan and an aggregate of 17,616 shares of Common Stock
owned by a law firm of which such officer is a member.

Joseph Cummins and HBL may be deemed "parents" of the Company and Joseph
Cummins may be deemed a "promoter" of the Company, as such terms are defined
under the federal securities laws.

40
<PAGE>

CERTAIN TRANSACTIONS

The Company has relied significantly on HBL, the principal shareholder of the
Company, for a substantial portion of its capital requirements. From 1989 to the
date of this Prospectus, HBL has provided an aggregate of $9,000,000 of funding
pursuant to the Development Agreement, purchased from the Company an aggregate
of 461,520 shares of Common Stock for a total purchase price of $1,443,800 and
made loans to the Company aggregating $3,000,000, of which $1,000,000 loaned
after March 31, 1996 will be repayable simultaneously with the consummation of
this offering. As of March 31, 1996, the outstanding amount of the Company's
indebtedness to HBL (including accrued interest) was $2,483,699. Of the shares
of Common Stock to be sold in this offering, up to 200,000 shares may be sold at
the initial public offering price, to HBL. Giving effect to the sale of
2,000,000 shares of the Company's Common Stock pursuant to this offering,
including 200,000 shares to HBL, HBL will own approximately 24.1% of the
Company's Common Stock. In addition to the Development Agreement, HBL and the
Company are parties to various license and manufacturing and supply agreements
pursuant to which the Company licenses certain technology to or from HBL and HBL
supplies formulations of its IFN|ga to the Company.

In May 1996, the Company amended the employment agreements of three
officers to provide that in lieu of issuing an aggregate of 126,000 shares of
Common Stock that were originally to be issued to such persons as a result of
their satisfying certain criteria under which the Common Stock becomes
issuable, the Company will issue an aggregate of 79,000 shares and use
$235,000 of the proceeds of this offering to satisfy withholding tax
obligations relating to such issuances. The amended employment agreement
between the Company and Dr. Cummins provides for the term of Dr. Cummins'
employment agreement to be extended to December 31, 1999. See "Management --
Employment Agreements."

Pursuant to a Contract Termination and Severance Agreement with Edward
Sherwood, a former President of the Company, in January 1995 the Company
issued to Mr. Sherwood an aggregate of 29,640 shares of Common Stock and
satisfied the withholding tax obligations relating to such issuance.

Pursuant to a Stock Purchase Agreement entered into in September 1987
between the Company and Mesa, Inc. ("Mesa"), which owns 315,120 shares of
Common Stock as of the date of this Prospectus, the Company has agreed that
for as long as Mesa is a shareholder of the Company, the Company shall not
without the prior written approval of Mesa engage in any repurchase or
redemption of its issued and outstanding shares of Common Stock, unless such
repurchase or redemption is offered, pro rata, to all then existing
shareholders.

During the year ended December 31, 1995, the Company accrued an aggregate
of $68,700 for legal services rendered by Morris, Moore, Moss and Douglas,
P.C. Edward Morris, the Secretary of the Company, is a member of such firm.

Effective upon the consummation of the sale of Common Stock offered
hereby, HBL has agreed to indemnify the Company and its officers, directors,
employees and agents for litigation expenses, losses, damages and amounts
paid in settlement arising out of litigation which may be brought by Roche or
its affiliates relating to the Roche Patent.

Although the Company believes that the foregoing transactions were on
terms no less favorable to the Company than would have been available from
unaffiliated third parties in arm's length transactions, there can be no
assurance that this is the case. All future transactions and loans between
the Company and its officers, directors and 5% shareholders will be on terms
no less favorable to the Company than could be obtained from independent,
third parties. There can be no assurance, however, that future transactions
or arrangements between the Company and its affiliates will be advantageous,
that conflicts of interest will not arise with respect thereto or that if
conflicts do arise, that they will be resolved in favor of the Company.

41
<PAGE>

DESCRIPTION OF COMMON STOCK

The Company is authorized to issue 10,000,000 shares of Common Stock, par
value $.01 per share. As of the date of this Prospectus, there are 3,035,232
shares outstanding (not including an aggregate of 79,000 shares to be issued
to three officers simultaneously with the sale of the Common Stock offered
hereby) which are held by 135 holders of record.

The holders of Common Stock are entitled to one vote for each share held
of record on all matters to be voted on by shareholders. There is no
cumulative voting with respect to the election of directors, with the result
that the holders of more than 50% of the shares voting for the election of
directors can elect all of the directors. The holders of Common Stock are
entitled to receive dividends when, as and if declared by the Board of
Directors in its discretion, out of funds legally available therefor. In the
event of liquidation, dissolution or winding up of the Company, the holders
of Common Stock are entitled to share ratably in the assets of the Company,
if any, legally available for distribution to them after payment of debts and
liabilities of the Company and after provision has been made for each class
of stock, if any, having liquidation preference over the Common Stock.
Holders of shares of Common Stock have no conversion, preemptive or other
subscription rights, and there are no redemption or sinking fund provisions
applicable to the Common Stock.

The Company has agreed that for so long as Mesa is a shareholder of the
Company, the Company shall not without the prior written approval of Mesa
engage in any repurchase or redemption of its issued and outstanding shares
of Common Stock, unless such repurchase or redemption is offered, pro rata,
to all the existing shareholders.

All of the outstanding shares of Common Stock are, and the shares of
Common Stock offered hereby will be, when issued upon payment of the
consideration set forth in this Prospectus, fully paid and non-assessable.

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar for the Common Stock is American Stock
Transfer & Trust Company, 40 Wall Street, New York, New York 10005.

REPORTS TO SHAREHOLDERS

The Company intends to furnish its shareholders annual reports containing
audited financial statements and such other periodic reports as the Company
may determine to be appropriate or as may be required by law.

The Company has agreed, subject to the sale of the shares offered hereby,
that on or before the date of this Prospectus, it will register its Common
Stock under the provisions of Section 12(g) of the Exchange Act and has
agreed with the Underwriter that it will use its best efforts to maintain
such registration for five years. Such registration will require the Company
to comply with periodic reporting, proxy solicitation and certain other
requirements of the Exchange Act.

SHARES ELIGIBLE FOR FUTURE SALE

Upon the consummation of this offering, the Company will have 5,114,232
shares of Common Stock outstanding (assuming no exercise of the Underwriter's
over-allotment option or other outstanding options). Up to 200,000 of the
2,000,000 shares offered hereby may be purchased by HBL and, if purchased,
will be subject to certain restrictions on sale imposed under the federal
securities laws. The remaining shares of Common Stock being offered hereby
will be immediately tradeable without restriction or further registration
under the Securities Act. All of the 3,035,232 shares of Common Stock
outstanding as of the date of this Prospectus are, and all of the 79,000
shares to be issued to three officers of the Company simultaneously with the
consummation of the sale of the Common Stock offered hereby will be, deemed
to be "restricted securities," as that term is defined under Rule 144
promulgated under the Securities Act, in that such shares were acquired by
the shareholders of the Company in transactions not involving a public
offering, and, as such, may only be sold pursuant to a registration statement
under the Securities Act, in compliance with the exemption provisions of Rule
144, or pursuant to another exemption under the Securities Act. Of such
3,114,232 restricted shares of Common Stock, an aggregate of 1,040,976 shares
are immediately eligible for sale, without registration, under Rule 144
(subject to

42
<PAGE>

the contractual restrictions described below). An additional 1,964,616 shares
will become eligible for sale (subject to the volume limitations prescribed
in Rule 144 and such contractual restrictions) commencing 90 days after the
date of this Prospectus. The balance of such shares will become so eligible
at various times commencing in January 1997. Notwithstanding the foregoing,
stockholders of the Company owning of record more than 99% of the Common
Stock outstanding as of the date of this Prospectus, have agreed not to sell
or otherwise dispose of any shares of Common Stock beneficially owned by them
for a period of 12 months from the date of this Prospectus without the
Underwriter's prior written consent.

In general, under Rule 144 as currently in effect, any person (or persons
whose shares are aggregated) who has beneficially owned restricted shares for
at least two years is entitled to sell, within any three-month period, a
number of shares that does not exceed the greater of 1% of the then
outstanding shares of the issuer's common stock or the average weekly trading
volume during the four calendar weeks preceding such sale, provided that
certain public information about the issuer as required by Rule 144 is then
available and the seller complies with certain other requirements. Affiliates
will be subject to the provisions of Rule 144, except that the holding period
requirement does not apply to sales by affiliates of shares which are not
restricted securities. A person who is not an affiliate, has not been an
affiliate within three months prior to sale, and has beneficially owned the
restricted shares for at least three years is entitled to sell such shares
under Rule 144 without regard to any of the limitations described above.

Prior to this offering, there has been no market for the Common Stock and
no prediction can be made as to the effect, if any, that market sales of
Common Stock or the availability of such shares for sale will have on the
market price prevailing from time to time. Nevertheless, the possibility that
substantial amounts of Common Stock may be sold in the public market may
adversely affect prevailing market prices for the Common Stock and could
impair the Company's ability to raise capital through the sale of its equity
securities.

UNDERWRITING

Whale Securities Co., L.P. (the "Underwriter") has agreed, subject to the
terms and conditions contained in the Underwriting Agreement, to purchase
2,000,000 shares of Common Stock from the Company. The Underwriter is
committed to purchase and pay for all of the Common Stock offered hereby if
any of such securities are purchased. The shares of Common Stock are being
offered by the Underwriter, subject to prior sale, when, as and if delivered
to and accepted by the Underwriter and subject to approval of certain legal
matters by counsel and to certain other conditions.

The Underwriter has advised the Company that it proposes to offer the
Common Stock to the public at the public offering price set forth on the
cover page of this Prospectus. The Underwriter may allow to certain dealers
who are members of the National Association of Securities Dealers, Inc. (the
"NASD") concessions, not in excess of $ per share of Common Stock, of which
not in excess of $ per share of Common Stock may be reallowed to other
dealers who are members of the NASD.

The Company has granted to the Underwriter an option, exercisable for 45
days from the date of this Prospectus, to purchase up to 300,000 additional
shares of Common Stock at the public offering price set forth on the cover
page of this Prospectus, less the underwriting discounts and commissions. The
Underwriter may exercise this option in whole or, from time to time, in part,
solely for the purpose of covering over-allotments, if any, made in
connection with the sale of the shares of Common Stock offered hereby.

The Company has agreed to pay to the Underwriter a non-accountable expense
allowance of 3% of the gross proceeds of this offering (including gross
proceeds received as a result of the exercise of the Underwriter's
over-allotment option), of which $50,000 has been paid as of the date of this
Prospectus. The Company has also agreed to pay all expenses in connection
with qualifying the shares of Common Stock offered hereby for sale under the
laws of such states as the Underwriter may designate, including expenses of
counsel retained for such purpose by the Underwriter.

The Company has agreed to sell to the Underwriter and its designees for an
aggregate of $200, warrants (the "Underwriter's Warrants") to purchase up to
200,000 shares of Common Stock at a purchase price of $8.10 per share. The
Underwriter's Warrants may not be sold, transferred, assigned or hypothecated
for one year from the date of this Prospectus, except to the officers and
partners of the Underwriter and members of the selling

43
<PAGE>

group, and are exercisable during the four-year period commencing one year
after the date of this Prospectus (the "Warrant Exercise Term"). During the
Warrant Exercise Term, the holders of the Underwriter's Warrants are given,
at nominal cost, the opportunity to profit from a rise in the market price of
the Company's Common Stock. To the extent that the Underwriter's Warrants are
exercised, dilution to the interests of the Company's stockholders will
occur. Further, the terms upon which the Company will be able to obtain
additional equity capital may be adversely affected since the holders of the
Underwriter's Warrants can be expected to exercise them at a time when the
Company would, in all likelihood, be able to obtain any needed capital on
terms more favorable to the Company than those provided in the Underwriter's
Warrants. Any profit realized by the Underwriter on the sale of the
Underwriter's Warrants or the underlying shares of Common Stock may be deemed
additional underwriting compensation. Subject to certain limitations and
exclusions, the Company has agreed, at the request of the holders of a
majority of the Underwriter's Warrants, at the Company's expense, to register
the Underwriter's Warrants and the shares of Common Stock issuable upon
exercise of the Underwriter's Warrants under the Securities Act on one
occasion during the Warrant Exercise Term and to include the Underwriter's
Warrants and all such underlying securities in any appropriate Registration
Statement which is filed by the Company during the seven years following the
date of this Prospectus.

The Company has agreed for a period of five years from the date of this
Prospectus, if so requested by the Underwriter, to nominate and use its best
efforts to elect a designee of the Underwriter as a director of the Company,
or, at the Underwriter's option, as a non-voting advisor to the Company's
Board of Directors. The Underwriter has not yet exercised its right to
designate such a person.

In addition, the Company has agreed to retain the Underwriter as a
financial consultant for a period of two years from the consummation of this
offering at an annual fee of $30,000, the entire $60,000 payable in full, in
advance, upon the consummation of this offering. The consulting agreement
will not require the consultant to devote a specific amount of time to the
performance of its duties thereunder. It is anticipated that these consulting
services will be provided by principals of the Underwriter and/or members of
the Underwriter's corporate finance department who, however, have not been
designated as of the date hereof. In the event that the Underwriter
originates a financing or a merger, acquisition, joint venture or other
transaction to which the Company is a party, the Underwriter will be entitled
to receive a finder's fee in consideration for origination of such
transaction.

The Underwriter has informed the Company that it does not expect sales
made to discretionary accounts to exceed 1% of the securities offered hereby.

The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act.

All of the officers and directors and shareholders of the Company owning
of record more than 99% of the Common Stock outstanding as of the date of
this Prospectus, have agreed that they will not sell any shares of Common
Stock of the Company for a period of 12 months after the date of this
Prospectus without the prior written consent of the Underwriter.

Prior to this offering, there has been no public trading market for the
Common Stock. Consequently, the initial public offering price of the Common
Stock has been determined by negotiation between the Company and the
Underwriter and is not necessarily related to the Company's asset value, net
worth or other established criteria of value. Among the factors considered in
determining the offering price were the Company's financial condition and
prospects, management, market prices of similar securities of comparable
publicly-traded companies, certain financial and operating information of
companies engaged in activities similar to those of the Company and the
general condition of the securities market.

LEGAL MATTERS

The legality of the Common Stock offered hereby will be passed upon for
the Company by Lowenthal, Landau, Fischer & Bring, P.C., New York, New York.
Certain legal matters have been passed upon for the Underwriter by Tenzer
Greenblatt LLP, New York, New York.

44
<PAGE>

EXPERTS

The consolidated financial statements of the Company and its subsidiaries
(companies in the development stage) at December 31, 1995 and for each of the
two years in the period ended December 31, 1995, appearing in this Prospectus
and Registration Statement have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report given upon
the authority of such firm as experts in accounting and auditing.

ADDITIONAL INFORMATION

The Company has filed with the Commission a Registration Statement under
the Securities Act with respect to the Common Stock offered by this
Prospectus. This Prospectus, filed as a part of such Registration Statement,
does not contain all of the information set forth in, or annexed as exhibits
to, the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. For further
information with respect to the Company and this offering, reference is made
to the Registration Statement, including the exhibits filed therewith, which
may be inspected without charge at the Commission's principal office at
Judiciary Plaza, 450 Fifth Street, N.W., Washington D.C. 20549, at the
Chicago Regional Office, 500 West Madison Street, Chicago, Illinois
60601-2511, and at the New York Regional Office, 7 World Trade Center, New
York, New York 10048. Copies of the Registration Statement may be obtained
from the Commission's Public Reference Section upon payment of prescribed
fees. Electronic registration statements made through the Electronic Data
Gathering, Analysis, and Retrieval system are publicly available through the
Commission's Web site at http://www.sec.gov. Statements contained in this
Prospectus as to the contents of any contract or other document are not
necessarily complete and, where the contract or other document has been filed as
an exhibit to the Registration Statement, each statement is qualified in all
respects by reference to the applicable document filed with the Commission.

<PAGE>

GLOSSARY

<TABLE>
<CAPTION>
<S> <C>
AIDS ............................. Acquired Immunodeficiency Syndrome
ANTIPROLIFERATIVE ................ Slowing or stopping the multiplication of cells.
APHTHOUS STOMATITIS .............. Painful ulcers occurring in the mucosal lining of the mouth.
BIOLOGIC ......................... A product derived from living cells which is used to treat
or diagnose disease.
CIRRHOSIS ........................ Fibrosis of the liver with hardening caused by excessive
formation of connective tissue followed by contraction.
CLINICAL TRIALS .................. The investigational use of a product in humans or animals.
Phase I trials test the product for general safety and
metabolism. Phase II trials test various dosages for efficacy
and Phase III trials test the chosen dosage in many patients.
DISTAL ........................... Far from the point of origin.
FELINE HERPESVIRUS-1 INFECTION ... Feline viral rhinotracheitis - a viral disease of the upper
respiratory tract of cats.
FIBROMYALGIA ..................... A debilitating disease characterized by pain at specific
"trigger points", fatigue, sleeplessness, headaches and
stiffness.
HEPATITIS B (HBV) ................ Disease of the liver caused by a DNA virus.
HEPATITIS C (HCV) ................ Disease of the liver caused by an RNA virus.
IMMUNOMODULATORY ................. That which modulates (augments or diminishes) immune responses.
INDICATION ....................... A specific condition intended to be treated by a drug or biologic.
INTERFERON (IFN) ................. A natural protein produced by all species of animals in response
to infection by viruses and other intracellular microorganisms.
IFN|ga ........................... Interferon alpha, a distinct class of IFN.
INTERNATIONAL UNIT (IU) .......... An internationally accepted measure of IFN|ga anti- viral
activity.
INAD ............................. Notice of Claimed Investigational Exemption for a New Animal
Drug. A document that must be submitted to the FDA before
animal clinical trials can be conducted using a new drug or
biologic.
IND .............................. Investigational New Drug Application. A document that must
be submitted to the FDA before human clinical trials can be
conducted using a new drug or biologic.
KERATOCONJUNCTIVITIS SICCA ....... Inflammation of the cornea and conjunctiva of the eye resulting
in a decrease in tear production.
LOZENGE .......................... A solid dosage formulation designed to dissolve in the mouth
and deliver a drug, biologic or active ingredient to the oral
cavity.
MASTITIS ......................... Inflammation of the mammary gland.
ORAL MUCOSITIS ................... Inflammation and ulcers of the mucosal lining of the mouth,
often associated with the use of chemotherapy and/or radiation
therapy in cancer patients.
PARENTERAL ....................... By injection, not by the digestive tract.

46
<PAGE>

SHIPPING FEVER ................... A bovine respiratory disease complex observed in cattle after
shipment. Usually shipping fever is a combination of viral
and bacterial infections.
SJOGREN'S SYNDROME ............... A symptom complex of unknown cause marked by
keratoconjunctivitis sicca (dry eye) and xerostomia (dry
mouth).
</TABLE>

47
<PAGE>

AMARILLO BIOSCIENCES, INC. AND SUBSIDIARIES
(COMPANIES IN THE DEVELOPMENT STAGE)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
Page
--------
<S> <C>
Report of Independent Auditors ...................................................................... F-2
Consolidated Balance Sheets as of December 31, 1995 and March 31, 1996 (Unaudited) .................. F-3
Consolidated Statements of Operations for the years ended December 31, 1994 and 1995 and the unaudited
three months ended March 31, 1995 and 1996 and cumulative from June 25, 1984 (inception) through
March 31, 1996 (unaudited) ......................................................................... F-4
Consolidated Statements of Shareholders' Deficit for the years ended December 31, 1994 and 1995
and the three months ended March 31, 1996 (unaudited) and cumulative from June 25, 1984 (inception)
through March 31, 1996 (unaudited) ................................................................. F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1994 and 1995 and the unaudited
three months ended March 31, 1995 and 1996 and cumulative from June 25, 1984 (inception) through
March 31, 1996 (unaudited) .......................................................................... F-6
Notes to Consolidated Financial Statements .......................................................... F-7
</TABLE>

F-1
<PAGE>

REPORT OF INDEPENDENT AUDITORS

The Board of Directors
Amarillo Biosciences, Inc.
We have audited the accompanying consolidated balance sheet of Amarillo
Biosciences, Inc. and subsidiaries (companies in the development stage) as of
December 31, 1995, and the related consolidated statements of operations,
shareholders' deficit and cash flows for each of the two years in the period
ended December 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Amarillo Biosciences, Inc. and subsidiaries at December 31, 1995, and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Dallas, Texas
February 1, 1996,
except for Note 13, as to which the date is
May 14, 1996

F-2
<PAGE>

AMARILLO BIOSCIENCES, INC. AND SUBSIDIARIES
(COMPANIES IN THE DEVELOPMENT STAGE)
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
December 31, March 31,
1995 1996
-------------- -------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents ......................................... $ 1,108,527 $ 724,280
Prepaid expenses .................................................. 26,395 16,229
-------------- -------------
Total current assets ...................................... 1,134,922 740,509
Property and equipment, net (Note 2) ................................ 114,593 114,110
Patent license, net of accumulated amortization of $59,118 and $60,946
at December 31, 1995 and March 31, 1996 (unaudited), respectively (Note
5) ................................................................ 65,882 64,054
Organizational costs, net of accumulated amortization of $6,335 and $6,667
at December 31, 1995 and March 31, 1996 (unaudited), respectively . 663 331
Investment in ISI common stock (Note 12) ............................ 475,000 505,000
-------------- -------------
Total assets ........................................................ $ 1,791,060 $ 1,424,004
============== =============
Liabilities and Shareholders' Deficit
Current liabilities:
Deferred contract revenues (Note 4) ............................... $ 417,140 $ 14,566
Accounts payable .................................................. 148,274 100,175
Accrued interest expense .......................................... 453,699 483,699
Accrued restricted stock grants ................................... 114,844 124,687
Other accrued expenses ............................................ 19,000 19,967
-------------- -------------
Total current liabilities ................................. 1,152,957 743,094
Notes payable to related party (Note 3) ............................. 2,000,000 2,000,000
-------------- -------------
Total liabilities ................................................... 3,152,957 2,743,094
-------------- -------------
Commitments and contingencies (Notes 4, 5, 6, and 10)

Shareholders' deficit (Notes 7 and 13):
Common stock, $.01 par value:
Authorized shares - 10,000,000
Issued shares - 3,048,672 ......................................... 30,487 30,487
Additional paid-in capital ........................................ 3,589,591 3,589,591
Deficit accumulated during the development stage .................. (4,955,975) (4,943,168)
Unrealized gain on marketable securities .......................... -- 30,000
Treasury stock - 13,440 shares, at cost ........................... (26,000) (26,000)
-------------- -------------
Total shareholders' deficit ......................................... (1,361,897) (1,319,090)
-------------- -------------
Total liabilities and shareholders' deficit ......................... $ 1,791,060 $ 1,424,004
============== =============

</TABLE>

See accompanying notes.

F-3
<PAGE>

AMARILLO BIOSCIENCES, INC. AND SUBSIDIARIES
(COMPANIES IN THE DEVELOPMENT STAGE)
CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
Cumulative
from
June 25,
1984
(Inception)
Year ended Three months ended through
December 31, December 31, March 31, March 31, March 31,
1994 1995 1995 1996 1996
-------------- -------------- ------------ ----------- ---------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Contract revenues (Note 4) ....... $2,480,093 $1,361,395 $ 618,266 $ 402,574 $ 8,985,434
Interferon sales ................. 40,525 -- -- 2,000 415,773
Interest income .................. 132,713 94,867 28,803 11,154 520,430
Sublicense fees (Note 12) ........ -- 50,000 -- -- 108,334
Royalty income ................... -- -- -- -- 31,544
Other (Note 12) .................. -- 500,000 -- -- 509,371
-------------- -------------- ------------ ----------- ---------------
2,653,331 2,006,262 647,069 415,728 10,570,886

Expenses:
Research and development expenses. . 1,364,042 875,093 247,978 134,209 6,585,071
Selling, general, and administrative
expenses ...................... 1,298,528 1,322,748 444,025 238,712 8,408,162
Interest expense ................. 120,000 120,000 30,000 30,000 485,821
-------------- -------------- ------------ ----------- ---------------
2,782,570 2,317,841 722,003 402,921 15,479,054
-------------- -------------- ------------ ----------- ---------------

Income (loss) before income taxes .. (129,239 ) (311,579 ) (74,934 ) 12,807 (4,908,168)
Income tax expense (Note 9) ........ -- -- -- -- 35,000
-------------- -------------- ------------ ----------- ---------------
Net income (loss) .................. $ (129,239 ) $ (311,579 ) $ (74,934 ) $ 12,807 $ (4,943,168)
============== ============== ============ =========== ===============
Income (loss) per share ............ $ (.04) $ (.10) $ (.02) $ --
============== ============== ============ ===========
Weighted average shares outstanding . 3,005,592 3,034,339 3,031,609 3,035,232
============== ============== ============ ===========

</TABLE>

See accompanying notes.

F-4
<PAGE>

AMARILLO BIOSCIENCES, INC. AND SUBSIDIARIES
(COMPANIES IN THE DEVELOPMENT STAGE)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
CUMULATIVE FROM JUNE 25, 1984 (INCEPTION) THROUGH DECEMBER 31, 1996

<TABLE>
<CAPTION>
Issuance Common Stock
-------------------------
Price Shares Issued Amount
----------- ------------- --------
<S> <C> <C> <C>
1984:
Initial issuance for cash .................... $.29 84,000 $ 840
Initial issuance in exchange for legal fees .. .29 30,000 300
Initial issuance in exchange for services and
research and development costs .............. .01 1,086,000 10,860
1985:
Issuance for cash ............................ .83 102,000 1,020
Issuance in exchange for professional fees,
salaries, and research services ............. .83 10,800 108
1986:
Issuance in exchange for professional fees,
salaries, and services ...................... .83 22,800 228
Treasury stock purchase, 11,040 shares at cost -- --
Issuance for cash ............................ .83 -1.25 182,352 1,824
Issuance in exchange for professional fees,
salaries, and research services ............. .83 19,020 190
1987:
Issuance for cash ............................ 1.25 - 2.08 309,648 3,096
Treasury stock purchase, 2,400 shares at cost -- --
1988:
Issuance for cash ............................ 1.88 120,972 1,210
1989:
Issuance for cash ............................ 2.08 2,568 26
Issuance for cash ............................ 2.50 227,748 2,277
1990:
Issuance for cash ............................ 1.72 - 2.50 592,584 5,926
Issuance for cash ............................ 4.17 174,000 1,740
Issuance in exchange for note receivable from
shareholder ................................. 2.50 54,540 545
1991:
Repayment of note receivable from shareholder -- --
Net loss cumulative from June 25, 1984
(inception) through December 31, 1991 ....... -- --
1992:
Net loss for year ended December 31, 1992 .... -- --
----------- ------------- --------
Balance at December 31, 1992 ................. 3,019,032 30,190
1993:
Net loss for year ended December 31, 1993 .... -- --
----------- ------------- --------
Balance at December 31, 1993 ................. 3,019,032 30,190
1994:
Net loss for year ended December 31, 1994 .... -- --
Adjustment to unrealized losses on marketable
securities .................................. -- --
----------- ------------- --------
Balance at December 31, 1994 ................. 3,019,032 30,190
1995:
Issuance for stock grant ..................... 2.50 29,640 297
Net loss for year ended December 31, 1995 .... -- --
Adjustment to unrealized losses on marketable
securities .................................. -- --
----------- ------------- --------
Balance at December 31, 1995 ................. 3,048,672 30,487
1996:
Net income for three months ended March 31,
1996 (unaudited) ............................ -- --
Adjustment to unrealized gain on marketable
securities (unaudited) ...................... -- --
----------- ------------- --------
Balance at March 31, 1996 (unaudited) ........ 3,048,672 $30,487
=========== ============= ========

</TABLE>

<PAGE>

<TABLE>
<CAPTION>
Deficit
Accumulated Unrealized Note
During the Gain (Loss) on Receivable Total
Additional Development Marketable From Treasury Shareholders'
Paid-in Capital Stage Securities Shareholder Stock Deficit
--------------- ------------ ------------ ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
1984:
Initial issuance for cash .................... $ 23,660 $ -- $ -- $ -- $ -- $ 24,500
Initial issuance in exchange for legal fees .. 8,450 -- -- -- -- 8,750
Initial issuance in exchange for services and
research and development costs .............. (9,955) -- -- -- -- 905
1985:
Issuance for cash ............................ 83,980 -- -- -- -- 85,000
Issuance in exchange for professional fees,
salaries, and research services ............. 8,892 -- -- -- -- 9,000
1986:
Issuance in exchange for professional fees,
salaries, and services ...................... 18,772 -- -- -- -- 19,000
Treasury stock purchase, 11,040 shares at cost -- -- -- -- (22,500) (22,500)
Issuance for cash ............................ 154,626 -- -- -- -- 156,450
Issuance in exchange for professional fees,
salaries, and research services ............. 15,660 -- -- -- -- 15,850
1987:
Issuance for cash ............................ 445,974 -- -- -- -- 449,070
Treasury stock purchase, 2,400 shares at cost -- -- -- -- (3,500) (3,500)
1988:
Issuance for cash ............................ 225,613 -- -- -- -- 226,823
1989:
Issuance for cash ............................ 5,324 -- -- -- -- 5,350
Issuance for cash ............................ 567,093 -- -- -- -- 569,370
1990:
Issuance for cash ............................ 1,108,634 -- -- -- -- 1,114,560
Issuance for cash ............................ 723,260 -- -- -- -- 725,000
Issuance in exchange for note receivable from
shareholder ................................. 135,805 -- -- (136,350) -- --
1991:
Repayment of note receivable from shareholder -- -- -- 136,350 -- 136,350
Net loss cumulative from June 25, 1984
(inception) through December 31, 1991 ....... -- (3,901,236) -- -- -- (3,901,236)
1992:
Net loss for year ended December 31, 1992 .... -- (505,558) -- -- -- (505,558)
-------------- ------------ ----------- ----------- --------- -----------
Balance at December 31, 1992 ................. 3,515,788 (4,406,794) -- -- (26,000) (886,816)
1993:
Net loss for year ended December 31, 1993 .... -- (108,363) -- -- -- (108,363)
-------------- ------------ ----------- ----------- --------- -----------
Balance at December 31, 1993 ................. 3,515,788 (4,515,157) -- -- (26,000) (995,179)
1994:
Net loss for year ended December 31, 1994 .... -- (129,239) -- -- -- (129,239)
Adjustment to unrealized losses on marketable
securities .................................. -- -- (57,316) -- -- (57,316)
-------------- ------------ ----------- ----------- --------- ------------
Balance at December 31, 1994 ................. 3,515,788 (4,644,396) (57,316) -- (26,000) (1,181,734)
1995:
Issuance for stock grant ..................... 73,803 -- -- -- -- 74,100
Net loss for year ended December 31, 1995 .... -- (311,579) -- -- -- (311,579)
Adjustment to unrealized losses on marketable
securities .................................. -- -- 57,316 -- -- 57,316
-------------- ------------ ----------- ----------- --------- ------------
Balance at December 31, 1995 ................. 3,589,591 (4,955,975) -- -- (26,000) (1,361,897)
1996:
Net income for three months ended March 31,
1996 (unaudited) ............................ -- 12,807 -- -- -- 12,807
Adjustment to unrealized gain on marketable
securities (unaudited) ...................... -- -- 30,000 -- -- 30,000
-------------- ------------ ----------- ----------- --------- ------------
Balance at March 31, 1996 (unaudited) ........ $3,589,591 $(4,943,168) $ 30,000 $ -- $(26,000) $(1,319,090)
============== ============ =========== =========== ========= ============

</TABLE>

See accompanying notes.

F-5
<PAGE>

AMARILLO BIOSCIENCES, INC. AND SUBSIDIARIES
(COMPANIES IN THE DEVELOPMENT STAGE)
CONSOLIDATED STATEMENTS OF CASH FLOWS

<S> <C> <C> <C> <C> <C>
Operating Activities
Net income (loss) ............................... $ (129,239) $ (311,579) $ (74,934) $ 12,807 $(4,943,168)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization .............. 29,282 23,652 6,387 5,110 204,830

Discount on investment in ISI .............. -- 150,000 -- -- 150,000

Recognition of deferred sublicense fees .... -- -- -- -- (32,844)
Organization costs ......................... -- -- -- -- (9,953)
Gain on sale of equipment, net ............. -- -- -- -- (8,375)
Common stock issued for stock grant ........ -- 74,100 74,100 -- 74,100

Common stock issued for services ........... -- -- -- -- 53,505

Changes in operating assets and liabilities:
Other current assets .................. (26,323) 5,000 (12,983) 10,166 (16,229)
Accounts payable ...................... 25,692 7,282 (82,643) (48,099) 100,175

Accrued expenses ...................... 246,926 98,126 (20,634) 40,810 628,353

Deferred contract revenue ............. (980,092) (1,361,395) (618,266) (402,574) 14,566

-------------- -------------- ------------ ----------- --------------
Net cash used in operating activities ........... (833,754) (1,314,814) (728,973) (381,780) (3,785,040)
Investing Activities
Sale (purchase) of marketable securities ........ (1,999,336) 1,999,336 -- -- --

Capital expenditures ............................ (2,468) -- -- (2,467) (253,442)
Proceeds from the sale of equipment ............. -- -- -- -- 13,445

Purchase of patent license ...................... -- -- -- -- (125,000)
Investment in ISI ............................... -- (625,000) -- -- (625,000)
Deposits ........................................ (85,000) 85,000 -- -- --
-------------- -------------- ------------ ----------- --------------
Net cash provided by (used in) investing
activities .................................... (2,086,804) 1,459,336 -- (2,467) (989,997)
Financing Activities
Receipt of sublicense fees ...................... $ -- $ -- $ -- $ -- $ 32,844

Proceeds from notes payable ..................... -- -- -- -- 2,000,000

Repayment of note receivable from shareholder for
purchase of common stock ...................... -- -- -- -- 136,350

Issuance of common stock ........................ -- -- -- -- 3,356,123

Acquisition of treasury stock ................... -- -- -- -- (26,000)
-------------- -------------- ------------ ----------- -------------
Net cash provided by financing activities ....... -- -- -- -- 5,499,317

-------------- -------------- ------------ ----------- --------------
Net increase (decrease) in cash and cash
equivalents ................................... (2,920,558) 144,522 (728,973) (384,247) 724,280

Cash and cash equivalents at beginning of period . 3,884,563 964,005 964,005 1,108,527 --
-------------- -------------- ------------ ----------- -------------
Cash and cash equivalents at end of period ...... $ 964,005 $ 1,108,527 $ 235,032 $ 724,280 $ 724,280
============== ============== ============ =========== ==============
Supplemental Disclosure of Cash Flow
Information
Cash paid for income taxes ...................... $ 7,084 $ -- $ -- $ -- $ 37,084
============== ============== ============ =========== ==============

</TABLE>

See accompanying notes.

F-6
<PAGE>

AMARILLO BIOSCIENCES, INC. AND SUBSIDIARIES
(COMPANIES IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

Amarillo Biosciences, Inc. (the Company), formerly Amarillo Cell Culture
Company, Inc. (Note 13), is a development stage company incorporated on June
25, 1984, for the purpose of developing and marketing, within the United
States and internationally, eleven patents and eight pending applications
relating to low dosage oral and non-oral natural interferon alpha used in the
treatment of human and animal diseases. The Company has obtained certain
patent rights through licensing agreements (see Note 5) and is currently
conducting clinical studies as part of the process of obtaining regulatory
approval from the United States Food and Drug Administration (FDA), so that
commercial marketing can begin in the United States.

The Company's viability is dependent upon successful commercialization of
products resulting from its research and product development activities. All
of the Company's 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, the Company will continue to incur research and development
and general and administrative expenses and likely will not generate
sufficient revenues from product sales to support its operations.

The Company has been dependent upon financing from its shareholders. The
Company's development- stage-through-1991 activities were financed primarily
through the issuance of common stock. Since 1991, such activities have been
financed under agreements (described in Note 4) with a major shareholder. The
Company anticipates, based on its currently proposed plans and expectations
relating to its operations (including expectations regarding the progress of
its research and development and the timing and costs associated therewith),
that its existing capital resources together with the proceeds from a
$1,000,000 loan expected from a major shareholder, will be sufficient to
satisfy the Company's estimated cash requirements through December 31, 1996.
However, the Company estimates that an aggregate of $11,100,000 will be
needed over the next three years to complete its primary research and
development projects.

The Company has no current arrangements with respect to further sources of
financing and there can be no assurance that any of its officers, directors
or shareholders (including the major shareholder) will provide any portion of
the Company's future financing requirements. The possible inability to obtain
further financing would have a material adverse effect on the Company,
including possibly requiring the Company to cease operations.

Principles of Consolidation

The accompanying consolidated financial statements include the financial
statements of the Company and its wholly-owned subsidiaries, Amarillo Cell of
Canada, Inc. (a Texas corporation), Veldona Africa, Inc. (a Texas
corporation), Veldona, Inc. (A Canada corporation), Veldona Poland, Inc.,
Veldona USA, Inc. and Vanguard Biosciences, Inc. (Texas corporations). All
significant intercompany balances and transactions have been eliminated in
consolidation. The effect of translation of foreign currencies is not
material.

Marketable Securities

Marketable securities are classified as available-for-sale.
Available-for-sale securities are carried at fair value, with any unrealized
gain or loss reported as a separate component of shareholders' equity.

Cash and Cash Equivalents

The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.

F-7
<PAGE>

Amarillo Biosciences, Inc. and Subsidiaries
(companies in the development stage)
Notes to Consolidated Financial Statements - (Continued)

1. Organization and Summary of Significant Accounting Policies - (Continued)

Property and Equipment

Property and equipment are stated at cost. Depreciation is calculated
using methods that approximate the declining balance method over the
estimated useful lives of the assets.

Patent License

The patent license represents payments made under one of the license
agreements described in Note 5. The agreement remains in effect over the life
of the underlying patents. Accordingly, the patent license fee is being
amortized over 17 years using the straight-line method.

Organizational Costs

Organizational costs are amortized using the straight-line method over
five years.

Income Taxes

The Company files a consolidated income tax return with its domestic
subsidiaries, Amarillo Cell of Canada, Inc., Veldona Africa, Inc., Veldona
Poland, Inc., Veldona USA, Inc., and Vanguard Biosciences, Inc. Veldona, Inc.
files a separate income tax return in Canada.

On January 1, 1993, the Company changed its method of accounting for
income taxes from the deferred method to the liability method required by
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (Statement No. 109). As permitted by the new rules, prior years'
financial statements have not been restated. The effect of adopting Statement
No. 109 was not material.

Revenue Recognition

Contract revenue for research and development performed under the
manufacturing and supply agreement with Hayashibara Biochemical Laboratories,
Inc. (HBL) (see Note 4) is recorded as earned based on research and
administrative costs incurred. Amounts received in advance of services to be
performed are recorded as deferred revenue until expenses are incurred.

Research and Development

Research and development costs are expensed as incurred.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Stock Split

In May 1993, the Company approved a ten-for-one stock split for all issued
and outstanding shares. As described in Note 13, during 1996 a six-for-five
stock split was effected. All references to common stock and per share data
have been restated to give effect to these splits.

F-8
<PAGE>

Amarillo Biosciences, Inc. and Subsidiaries
(companies in the development stage)
Notes to Consolidated Financial Statements -- (Continued)

2. PROPERTY AND EQUIPMENT

Property and equipment are stated at cost and consist of the following:

<TABLE>
<CAPTION>
December 31,
1995
--------------
<S> <C>
Land .................................................... $ 8,000
Building ................................................ 94,532
Furniture and equipment ................................. 114,354
--------------
216,886
Less accumulated depreciation ............................ 102,293
--------------
$114,593
==============
</TABLE>

3. NOTES PAYABLE

In September 1991, the Company borrowed $1,000,000 under a note payable
agreement with HBL. In September 1992, the Company borrowed an additional
$1,000,000 under a similar note agreement with HBL. The unsecured notes
accrue interest at a rate of 6%, and the entire principal and interest is due
on September 16, 1996 and September 25, 1997, respectively, provided that the
principal and accrued interest be paid only from 10% of the Company's gross
revenues from sales of interferon. All payments are to be applied first to
accrued interest. As repayment of the notes is dependent on future sales,
management is unable to estimate the fair value of the notes at December 31,
1995. Because material amounts of sales are not expected in the next twelve
months, the notes continue to be classified as non-current liabilities.

4. MANUFACTURING AND SUPPLY AGREEMENTS

The Company was a party to the following manufacturing and supply
agreements at December 31, 1995:

On March 13, 1992, the Company entered into a Joint Development and
Manufacturing/ Supply Agreement with HBL (the "Development Agreement"), a
major shareholder (see Note 7), under which HBL will formulate, manufacture,
and supply HBL interferon for the Company or any sublicensee. In exchange,
HBL is entitled to receive a transfer fee, specified royalties and a portion
of any payment received by the Company for sublicense of rights under this
agreement. The agreement further provides that the Company sublicense to HBL
the right to market HBL interferon for oral use in humans and in nonhuman,
warm-blooded species in Japan, in exchange for the Company receiving a
royalty fee based on net sales. On June 1, 1994, HBL entered into an
additional agreement with HBL to make the Company HBL's exclusive agent for
the development of HBL interferon for non-oral use in humans and in nonhuman,
warm-blooded species in North America. In exchange, HBL is entitled to
receive a transfer fee based on units of interferon supplied.

Under the Development Agreement, HBL has provided $9,000,000 in research
funding to the Company as follows: $3,500,000 in 1992, $4,000,000 in 1993,
and $1,500,000 in 1994. Costs incurred under the Development Agreement
amounted to $2,480,093 and $1,361,395 in the years ended December 31, 1994
and 1995, respectively, $618,266 and $402,574 in the three months ended March
31, 1995 and 1996 (unaudited), respectively, and $8,985,434 cumulative from
June 25, 1984 (inception) through March 31, 1996 (unaudited). The agreement
also provides that a royalty fee be paid to HBL. The initial term of the
agreement is for seven years, but will be renewed automatically for
successive three-year terms subject to prior written agreement. HBL can
terminate the agreement at any time after the end of the first renewal term
if certain conditions are not met.

On October 20, 1989, the Company entered into a manufacturing and supply
agreement with Interferon Sciences, Inc. (ISI), a 2% shareholder of the
Company, under which ISI will manufacture and utilize ISI interferon to
formulate and supply interferon-containing compositions to the Company for
use in nonhuman species. Under the Agreement, ISI is entitled to receive
certain transfer fees, manufacturing and supply fees, and a portion of any
payments received by the Company related to the use of ISI interferon. The
initial five-year term of the agreement has been extended to October 20,
1996, and may be terminated or further extended if certain conditions are
met.

F-9
<PAGE>

Amarillo Biosciences, Inc. and Subsidiaries
(companies in the development stage)
Notes to Consolidated Financial Statements - (Continued)

4. Manufacturing and Supply Agreements - (Continued)

On October 1, 1991, Veldona, Inc. entered into an agreement with a
Canadian pharmaceutical firm which is to manufacture interferon tablets. As
of December 31, 1995, minimum purchase requirements have not been established
pending completion of validation trials. If the agreement is terminated,
Veldona, Inc. is required to purchase any finished product, raw materials, or
packaging components in possession of the manufacturer. The agreement is
effective until December 31, 1996, with one year renewal options beyond that
date.

5. LICENSE AND SUBLICENSE AGREEMENTS

The Company holds patent rights for which the Company has paid certain
license fees under three license agreements. Under these agreements, the
Company will pay the licensor a portion of any sublicense fee received by the
Company with respect to the manufacturing, use or sale of a licensed product,
as well as a royalty fee based on the net selling price of licensed products,
subject to a minimum annual royalty.

The Company has also entered into various sublicense agreements under
which the Company is entitled to receive royalties based on the net sales
value of licensed products.

6. RESEARCH AGREEMENTS

The Company contracts with third parties throughout the world to conduct
research, including studies and clinical trials. These agreements are
generally less than one year in duration. At December 31, 1995, the Company
had commitments to provide additional funding of approximately $76,000 under
these agreements.

7. COMMON STOCK

In May 1993, the shareholders of the Company approved an amendment to the
Articles of Incorporation to increase the total number of authorized shares
of common stock of the Company from one million shares to ten million shares.
The shareholders also approved a ten-for-one stock split for the currently
issued and outstanding shares of the Company.

Since 1984, the Company has issued common stock in exchange for various
professional, research, and consulting services. The stock issued for noncash
consideration was assigned a value based on the fair value of the services
received.

In December 1989, the Company issued 218,400 shares of stock to HBL for
$2.50 per share. In February 1990, an additional 174,000 shares were issued
to HBL for $4.17 per share, and in November 1990, an additional 69,120 shares
were issued to HBL for $2.50 per share. These shares, combined with purchases
from various other shareholders, give HBL control of 34% of the outstanding
common stock, or 1,032,756 shares at December 31, 1995.

In July 1992, the Board of Directors approved restricted stock grants to
three employees which would allow the Company to issue, under certain
conditions, up to 180,000 shares of its authorized but unissued shares of
common stock. In May 1994, the Board of Directors approved restricted stock
grants to an additional employee which would allow the Company to issue,
under certain conditions, up to 30,000 shares of its authorized but unissued
shares of common stock. In January 1995, 29,640 shares of common stock (net
of required federal withholdings of 12,360 shares) were issued to a former
employee under a Contract Termination and Severance Agreement. The issuance
and withholding were in full satisfaction of the employee's original 84,000
shares in stock grants.

Under a stock purchase agreement with a shareholder, Mesa, Inc. (Mesa),
the Company is prohibited from repurchasing or redeeming any of its issued
and outstanding shares without the prior written approval of Mesa unless such
redemption or repurchase is offered pro rata to all shareholders.

F-10
<PAGE>

Amarillo Biosciences, Inc. and Subsidiaries
(companies in the development stage)
Notes to Consolidated Financial Statements - (Continued)

8. EMPLOYEE BENEFIT PLAN

The Company discontinued a defined contribution retirement plan for
eligible employees in August 1995. Profit sharing expense for the years ended
December 31, 1994 and 1995, and cumulative from June 25, 1984 (inception)
through March 31, 1996 was approximately $0, $0, and $154,500, respectively.

9. INCOME TAXES

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax reporting purposes.
Significant components of the Company's deferred tax liabilities and assets
are as follows at December 31, 1995:

<TABLE>
<CAPTION>
<S> <C>
Deferred tax liabilities:
Prepaid expenses ................................... $ 8,975
-------------
Total deferred tax liabilities ....................... 8,975
Deferred tax assets:
Net operating loss and AMT carryforwards ........ 1,277,286
Accrued interest ................................ 154,258
Depreciation and amortization ................... 59,192
Deferred revenue ................................ 141,828
Accrued stock grants ............................ 39,047
Other ........................................... 56,873
-------------
1,728,484
Valuation allowance for deferred tax assets .......... (1,719,509)
-------------
Total deferred tax assets, net of valuation allowance . 8,975
-------------
Net deferred taxes ................................... $ --
=============

</TABLE>

At December 31, 1995, the Company has net operating loss carryforwards of
approximately $3,292,000 for federal income tax purposes expiring in 2006
through 2010. The ability of the Company to utilize these carryforwards may
be limited should changes in shareholder ownership occur in the future.

At December 31, 1995, the Company had approximately $36,000 of alternative
minimum tax credits which may be carried forward indefinitely.

The difference between the reported income tax provision and the benefit
normally expected by applying the statutory rate to the loss before income
taxes results primarily from the inability of the Company to recognize its
tax losses.

10. CONTINGENCIES

Hoffmann La-Roche, Inc. ("Roche") has asserted to HBL that the
manufacture, sale and use of its form of IFN|ga infringes United States Patent
4,503,035 and foreign counterparts thereof owned by Roche relating to IFN|ga
(collectively, the "Roche Patent"). The Roche Patent expires in March 2002 in
the United States and at various times in other jurisdictions. HBL has
informed the Company that it believes that the claims of the Roche Patent are
not applicable to the manufacture and sale of HBL IFN|ga . HBL has prevailed at
the trial level in litigation initiated by Roche in Japan concerning the
dispute and Roche has appealed the decision. The Company is not a party to
the litigation between Roche and HBL in Japan.

The Company is not a party to any litigation related to these issues;
however, there is a possibility of litigation against the Company regarding
these matters at some point in the future. Management of the Company believes
that litigation which might result from these disputes will not have an
adverse effect on current opera

F-11
<PAGE>

Amarillo Biosciences, Inc. and Subsidiaries
(companies in the development stage)
Notes to Consolidated Financial Statements - (Continued)

10. Contingencies - (Continued)

tions, as the Company is not currently selling or attempting to sell HBL
interferon in any country where Roche has a patent. However, since the
Company currently has no interferons under license except ISI interferon and
HBL interferon, an ultimate determination adverse to the Company could impact
future expansion of the Company's sales.

11. RELATED PARTY TRANSACTIONS

In the ordinary course of business, the Company has and expects to have
transactions with related parties, including shareholders. In addition to the
transactions disclosed elsewhere in these financial statements, such related
party transactions included legal fees of approximately $50,400 and $68,700
paid to Morris, Moore, Moss and Douglass, P.C., a member of which is an
officer and shareholder of the Company, in 1994 and 1995, respectively. The
Company also employs various shareholders as researchers and consultants and
pays fees based on contractual agreements.

12. SETTLEMENT OF LITIGATION

Commencing in 1993, the Company was the plaintiff in litigation involving
a patent infringement action in New Zealand. In May 1995, a settlement was
reached whereby the Company: (1) amended its manufacturing and supply
agreement with ISI to allow the sublicense of certain products previously
exclusively licensed to ISI and purchased 312,500 shares of ISI common stock
for $625,000, or $2 per share, representing the quoted market price of ISI
stock at that time; and (2) received $550,000 cash from the defendant in the
lawsuit, comprising $50,000 in exchange for a sublicense of the technology
that was the subject of the lawsuit and $500,000 as a payment toward research
and development costs incurred by the Company.

As a result of restrictions on the sale by the Company of its ISI stock
until May 1997, the Company has discounted the ISI stock (quoted price of
$1.875 per share at December 31, 1995) to a carrying value of $475,000 at
December 31, 1995, and as a result charged $150,000 to selling, general, and
administrative expenses. The ISI stock is classified as available-for-sale.
The $500,000 contribution toward research and development costs has been
recorded as other revenue in 1995.

13. SUBSEQUENT EVENTS

On May 14, 1996, the shareholders of the Company approved a name change
from Amarillo Cell Culture Company, Inc. to Amarillo Biosciences, Inc. and
approved a six-for-five stock split to be effected through a 20% stock
dividend on the issued and outstanding shares of the Company at the record
date of April 16, 1996. All references to common stock and per share data
have been restated to give effect to the split.

During May 1996, the Company executed two notes with HBL under which it
expects to borrow $500,000 on May 31, 1996 and $500,000 on June 28, 1996. The
notes bear interest at 4% per annum and mature one year after the borrowing
date. If the Company successfully consummates an initial public offering, the
notes are payable in full from the proceeds of such offering.

14. UNAUDITED INFORMATION

The unaudited interim financial statements have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission. Certain
information and note disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to those rules and
regulations, although the Company believes that the disclosures made are
adequate to make the information presented not misleading. The unaudited
interim financial statements reflect, in the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary to
fairly present the financial position, results of operations, and cash flows
as of and for the periods presented. The unaudited interim financial
information should be read in conjunction with the audited financial
statements and related notes thereto. The results for the interim periods
presented are not necessarily indicative of results to be expected for the
full year.

F-12
<PAGE>
==============================================================================

No dealer, salesperson or any other individual has been authorized to give
any information or to make any representation not contained in this
Prospectus in connection with the offer made by this Prospectus and, if given
or made, such information or representation must not be relied upon as having
been authorized by the Company or the Underwriter. This Prospectus does not
constitute an offer to sell, or a solicitation of an offer to buy, any
securities other than the securities offered by this Prospectus, or an offer
to sell or a solicitation of an offer to buy any security by any person in
any jurisdiction in which such offer or solicitation is unlawful. Neither the
delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, imply that the information in this Prospectus is correct as of
any time subsequent to the date of this Prospectus.

------

TABLE OF CONTENTS
Page
--------
Prospectus Summary ........................ 3
Risk Factors .............................. 6
Use of Proceeds ........................... 15
Dividend Policy ........................... 16
Dilution .................................. 17
Capitalization ............................ 18
Selected Financial Data ................... 19
Management's Discussion and Analysis of
Financial Condition and Results of Operations 20
Business .................................. 22
Management ................................ 34
Principal Shareholders .................... 40
Certain Transactions ...................... 41
Description of Common Stock ................ 42
Shares Eligible for Future Sale ........... 42
Underwriting .............................. 43
Legal Matters ............................. 44
Experts ................................... 45
Additional Information .................... 45
Glossary .................................. 46
Index to Financial Statements ............. F-1

Until , 1996 (25 days after the date of this Prospectus), all
dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.

==============================================================================

<PAGE>
==============================================================================

2,000,000 SHARES

AMARILLO BIOSCIENCES, INC

[LOGO]

COMMON STOCK

------------
PROSPECTUS
------------

WHALE SECURITIES CO., L.P.

, 1996

==============================================================================
<PAGE>
PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Article 2.02-1 of the Texas Business Corporation Act (the "Texas
Corporation Law") empowers a Texas corporation to indemnify any person who
was, is or is threatened to be made a named defendant or respondent in any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative, arbitrative or investigative, any appeal in any
such action, suit or proceeding and any inquiry or investigation that could
lead to such an action, suit or proceeding (individually, a "Proceeding") by
reason of the fact that he is or was a director, officer, employee or agent
of the corporation, or is or was serving at the request of the corporation as
a director, officer, partner, venturer, proprietor, trustee, employee, agent
or similar functionary of another foreign or domestic corporation,
partnership, joint venture, sole proprietorship, trust or other enterprise,
against reasonable expenses (including court costs and attorneys' fees),
judgments, penalties (including excise and similar taxes), fines and amounts
paid in settlement actually incurred by him in connection with such
Proceeding if he conducted himself in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and with respect to any criminal action or proceeding had no
reasonable cause to believe his conduct was unlawful. The termination of any
Proceeding by judgment, order, settlement, conviction, or upon plea of nolo
contendere, or its equivalent, is not, of itself, determinative that the
person did not act in good faith and in a manner which he reasonably believed
to be in or not opposed to the best interests of the corporation, and, with
respect to any criminal action or proceeding, had reasonable cause to believe
that his conduct was lawful.

A person may be indemnified in respect of a Proceeding (a) in which the
person is found liable on the basis that personal benefit was improperly
received by him whether or not the benefit resulted from an action taken in
the person's official capacity or (b) in which the person is found liable to
the corporation. However, indemnification in the foregoing circumstances is
limited to reasonable expenses actually incurred by the person in connection
with the Proceeding. In no event shall any indemnification be made in respect
of a Proceeding in which the person shall have been liable for willful or
intentional misconduct in the performance of his duty to the corporation. A
person shall be deemed to have been found liable in respect of any claim,
issue or matter only after the person shall have been so adjudged by a court
of competent jurisdiction after exhaustion of all appeals therefrom.

Reasonable expenses incurred by a director, officer, employee or agent of
a Texas corporation who was, is, or is threatened to be made a named
defendant or respondent in a Proceeding may be paid or reimbursed by the
corporation, in advance of the final disposition of the Proceeding, after the
corporation receives a written affirmation by the director of his good faith
belief that he has met the standard of conduct necessary for indemnification
under the Texas Corporation Law and a written undertaking by or on behalf of
the person to repay the amount paid or reimbursed if it is ultimately
determined that he has not met that standard or if it is ultimately
determined that indemnification of the person against expenses incurred by
him in connection with that Proceeding is prohibited by the Texas Corporation
Law.

If, upon application of a person, a court of competent jurisdiction
determines, after giving any notice the court considers necessary, that the
person is fairly and reasonably entitled to indemnification in view of all
the relevant circumstances, the court may order the indemnification that the
court determines is proper and equitable.

Article 2.02-1 of the Texas Corporation Law further provides that, subject
to restrictions on the circumstances in which indemnification is required
which may be set forth in the corporation's articles of incorporation, a
Texas corporation is required to indemnify a director or officer against
reasonable expenses incurred by him in connection with any Proceeding in
which he is a named defendant or respondent because he is or was a director
or officer, if he has been successful on the merits or otherwise in the
defense of the Proceeding; that a corporation may also, consistent with law,
indemnify and advance expenses to persons as may be provided in the
corporation's articles of incorporation, bylaws or by general or specific
action of the corporation's board of directors, or contract or as permitted
or required under common law; and empowers the corporation to purchase and
maintain insurance or another arrangement on behalf of any person who is or
was a director, officer,

II-1
<PAGE>

employee or agent of the corporation or who is or was serving at the request
of the corporation as a director, officer, partner, venturer, proprietor,
trustee, employee, agent, or similar functionary of another domestic or
foreign corporation, partnership, joint venture, sole proprietorship, trust,
employee benefit plan, or any other enterprise against any such liability
asserted against him and incurred by him in any such capacity or arising out
of his status as such whether or not the corporation would have the power to
indemnify him against liability under Article 2.02-1. A Texas corporation may
provide indemnification only as authorized in the specific case upon a
determination that person has met the applicable standard of conduct. Such
determination is to be made (i) by the members of the board of directors by a
majority vote of a quorum consisting of directors who were not named
defendants or respondents in the Proceeding, or (ii) if such a quorum is not
obtainable, by a majority vote of a committee of the board of directors
designated to act in the matter by a majority vote of all directors,
consisting solely of two or more directors who are not named defendants or
respondents in the Proceeding or (iii) by special legal counsel selected by
the board of directors or a committee thereof.

Article IV of the By-Laws of the Company also provides for indemnification
of current or former directors and officers of the Company and any person who
has served at the request of the Company as a director or officer of another
corporation in which the Company owns shares of capital stock or of which it
is a creditor against liabilities imposed upon him and expenses reasonably
incurred by him in connection with any claim made against him, or any action,
suit or proceeding to which he may be a party by reason of his being or
having been such director or officer; provided that no director or officer
shall be indemnified with respect to matters as to which he shall be adjudged
liable for negligence or misconduct in performance of his duty or with
respect to matters for which such indemnification could be against public
policy. Indemnification of such a person is also authorized against such sums
as independent legal counsel selected by the board of directors shall deem
reasonable payment in settlement of claims primarily with a view of avoiding
expenses of litigation.

The Company has entered into indemnification agreements with each of its
directors and executive officers whereby the Company will, in general,
indemnify such directors and executive officers, to the extent permitted by
the Company's Certificate of Incorporation or the laws of the State of Texas,
against any expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement incurred in connection with any actual or
threatened action or proceeding to which such director or officer is made or
threatened to be made a party by reason of the fact that such person is or
was a director or officer of the Company.

The Company has obtained liability insurance for each director and officer
for certain losses arising from claims or charges made against them while
acting in their capacities as directors or officers of the Company.

The Underwriting Agreement, which is filed as Exhibit 1.1, provides for
indemnification of the directors and certain officers of the Company by the
Underwriter against certain civil liabilities, including liabilities under
the Securities Act of 1933.

Effective upon the consummation of the offering made pursuant to this
Registration Statement, HBL has agreed to indemnify the Company and its
officers and directors for litigation expenses, losses, damages and amounts
paid in settlement arising out of litigation which may be brought by Roche or
its affiliates relating to the Roche Patent.

II-2
<PAGE>

ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth an itemized statement of all expenses in
connection with the issuance and distribution of the securities being
registered (all of which are estimated other than the filing fees of the
Securities and Exchange Commission, NASDAQ and the National Association of
Securities Dealers, Inc. and the consulting fee to the Underwriter), other
than underwriting discounts and commissions and the Underwriter's
non-accountable expense allowance:

Securities and Exchange Commission filing fee ............ $ 4,524
NASDAQ fee ............................................... $ 10,415
National Association of Securities Dealers, Inc. filing fee $ 1,813
Printing and engraving expenses .......................... $ 100,000
Legal Fees and expenses .................................. $ 210,000
Registrar and transfer agent fees ........................ $ 5,000
Accounting fees and expenses ............................. $ 75,000
Blue sky fees and expenses ............................... $ 45,000
Consulting fee to Underwriter ............................ $ 60,000
Miscellaneous ............................................ $ 13,248
----------
Total ............................................... $525,000
==========

</TABLE>

ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.

On May 24, 1993 the Company issued 2,264,274 shares of Common Stock to
effect a 10 for 1 stock split. The shares issued in the stock split did not
require registration under the Securities Act in that the stock split was not
a "sale," "offer for sale" or "offer" as such terms are defined in the
Securities Act.

On January 12, 1995 the Company issued to a former employee 29,640 shares
of Common Stock pursuant a Contract Termination and Severance Agreement
between the Company and such person. The issuance was in consideration of the
settlement of certain obligations of the Company to the employee. The
employee did not pay any cash to the Company for the shares. All of the
shares were issued pursuant to an exemption from the registration
requirements of the Securities Act afforded by Section 4(2) of the Securities
Act.

On May 6, 1996 the Company made a 20% stock dividend to all holders of
record of its Common Stock as of April 16, 1996. The Company issued 505,872
shares in connection with the stock dividend. The shares issued in the stock
dividend did not require registration under the Securities Act in that the
stock dividend was not a "sale," "offer for sale" or "offer" as such terms
are defined in the Securities Act.

On the date this Registration Statement is declared effective by the
Securities Exchange Commission the Company shall issue to Joseph Cummins,
Alan Richards and Charles Hughes 30,000, 30,000 and 19,000 shares,
respectively, of the Company's Common Stock in accordance with the terms of
conditional stock grants awarded by the Company to Messrs. Cummins and
Richards in July 1992 and Mr. Hughes in June 1994. All of the shares were
issued pursuant to an exemption from the registration requirements of the
Securities Act afforded by Section 4(2) of the Securities Act.

II-3
<PAGE>

ITEM 27. EXHIBITS

<TABLE>
<CAPTION>
Number Description
------- -----------------------------------------------------------------------------------------------
<S> <C>
*1.1 Form of Underwriting Agreement.
*3.1 Restated Articles of Incorporation of the Company.
*3.2 Articles of Amendment of Restated Articles of Incorporation of the Company.
*3.3 Bylaws of the Company.
*4.1 Specimen Common Stock Certificate.
*4.2 Form of Underwriter's Warrant.
*5.1 Opinion of Lowenthal, Landau, Fischer & Bring, P.C.
*10.1 Agreement dated as of April 1, 1984 between University Patents, Inc. and the Company.
*10.2 License Agreement dated as of March 22, 1988 between the Company and The Texas A&M University System.
*10.3 License Agreement dated October 20, 1989 between the Company and ISI.***
*10.4 Manufacturing and Supply Agreement dated October 20, 1989 between the Company and ISI.***
*10.5 Joint Development and Manufacturing/Supply Agreement dated March 13, 1992 between the Company and
HBL, as amended.***
*10.6 Amended and Restated Agreement dated as of November 24, 1992 between Mitsubishi and the Company.
*10.7 Japan Animal Health License Agreement dated January 20, 1993 between the Company and HBL.***
*10.8 Employment Agreement dated as of March 4, 1994 between the Company and Dr. Alan B. Richards, as amended.
*10.9 Employment Agreement dated as of March 4, 1994 between the Company and Dr. Joseph M. Cummins, as
amended.
*10.10 Employment Agreement dated as of June 1, 1994 between the Company and Charles Hughes, as amended.
*10.11 Manufacturing/Supply Agreement dated June 1, 1994 between the Company and HBL.
*10.12 Settlement Agreement dated April 27, 1995 among the Company, ISI, Pharma Pacific Management Pty.
Ltd. ("PPM"), Pharma Pacific Pty. Ltd., Pharma Pacific Ltd., and Fernz Corporation Limited.
*10.13 Amendment of ACC/ISI License Agreement dated April 27, 1995 between the Company and ISI.
*10.14 PPM/ACC Sub-license Agreement dated April 27, 1995 between PPM and the Company.***
*10.15 License and Supply Agreement dated July 10, 1995 between Veldona Africa, Inc. ("VAF") and Innovative
Therapeutics, Ltd. ("ITL").***
*10.16 Pricing Amendment, dated December 5, 1995 between VAF and ITL.***
*10.17 License Agreement dated September 25, 1995 between McGill University and the Company.
*10.18 Form of Consulting Agreement between the Company and the Underwriter.
*10.19 Research Agreement dated March 25, 1996 between the Company and Ajinomoto Co., Inc.
*10.20 1996 Employee Stock Option Plan
*10.21 1996 Outside Director and Advisor Stock Option Plan
*10.22 Form of Indemnification Agreement between the Company and officers and directors of the Company.
*10.23 Indemnification Agreement between HBL and the Company.
</TABLE>

II-4
<PAGE>

<TABLE>
<CAPTION>
Number Description
- ------- ------------
<S> <C>
*10.24 Stock Purchase Agreement dated as of September 21, 1987 between Mesa Operating Limited Partnership
and the Company.
*10.25 Research License and Supply Agreement dated May 20, 1996 between the Company and Virbac S.A.
21.1 Subsidiaries of the Company. The following sets forth the name and jurisdiction of incorporation
of each subsidiary of the Company. All of such subsidiaries are wholly-owned by the Company.

Name Jurisdiction of Incorporation
----------------------------------------- -----------------------------
Vanguard Biosciences, Inc. Texas
Veldona USA Inc. Texas
Veldona Africa Inc. Texas
Veldona Poland Inc. Texas
Amarillo Cell of Canada Inc. Texas

*23.1 Consent of Lowenthal, Landau, Fischer & Bring, P.C. (included in Exhibit 5.1).
**23.2 Consent of Ernst & Young LLP
*24.1 Powers of Attorney (contained on signature page of Registration Statement).
</TABLE>

- ------
* Previously filed.
** Filed herewith.
*** Confidential treatment has been requested with respect to portions of
this document. Omitted portions have been filed separately with the
Securities and Exchange Commisssion.

ITEM 28. UNDERTAKINGS.

The Company hereby undertakes that: it will file, during any period in
which it offers or sells securities, a post-effective amendment to this
Registration Statement to:

(a) Include any prospectus required under Section 10(a) of the
Securities Act;
(b) Reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in this
Registration Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement; and
(c) Include any additional or changed material information on the plan
of distribution.

(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial
bona fide offering.

(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.

Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the provisions described under Item 24 above, or
otherwise, the Company has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Company of expenses incurred or paid by a director,
officer or controlling person of the Company in the successful defense of any
action, suit or proceeding) is asserted against the Company by such director,
officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.

The Company hereby undertakes that (i) for purposes of determining
liability under the Securities Act, the information omitted from the form of
Prospectus filed as part of this Registration Statement in reliance upon Rule
430A and contained in a form of Prospectus filed by the Company pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be a part of this Registration Statement as of the time it was

II-5
<PAGE>

declared effective; and (ii) for purposes of determining any liability under
the Securities Act, each post-effective amendment that contains a form of
Prospectus shall be deemed to be a new Registration Statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.

The Company will provide to the Underwriter at the closing specified in
the Underwriting Agreement certificates in such denominations and registered
in such names as required by the Underwriter to permit prompt delivery to
each purchaser.

II-6

<PAGE>

SIGNATURES

In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form SB-2 and authorized this amendment
to the registration statement to be signed on its behalf by the undersigned,
thereto duly authorized, in the City of Amarillo, State of Texas, on July 31,
1996.

AMARILLO BIOSCIENCES, INC.
By: /s/ Joseph M. Cummins

-------------------------------
Joseph M. Cummins,
Chairman of the Board

In accordance with the requirements of the Securities Act of 1933, this
amendment to the registration statement has been signed by the following
persons in the capacities and on the dates stated.

<TABLE>
<CAPTION>
Signature Title Date
------------------------- ---------------------------------------------- --------------
<S> <C> <C>
/s/ Joseph M. Cummins Chairman of the Board and President July 31, 1996
------------------------ (Chief Executive Officer) and Director
Joseph M. Cummins
* Vice President-Finance and Administration July 31, 1996
------------------------ and Treasurer (Chief Financial Officer and
Charles H. Hughes Chief Accounting Officer)
* Secretary July 31, 1996
------------------------
Edward L. Morris
* Director July 31, 1996
------------------------
Stephen Chen
* Director July 31, 1996
------------------------
Katsuaki Hayashibara
* Director July 31, 1996
------------------------
Dennis Moore
* Director July 31, 1996
------------------------
James Page
* Director July 31, 1996
------------------------
James Cook
/s/ Joseph M. Cummins
------------------------
*Joseph M. Cummins
Attorney-in-fact
</TABLE>

II-7

<PAGE>
EXHIBIT INDEX

<TABLE>
<CAPTION>
Number Description
------- ------------
<S> <C>
*1.1 Form of Underwriting Agreement.
*3.1 Restated Articles of Incorporation of the Company.
*3.2 Articles of Amendment of Restated Articles of Incorporation of the Company.
*3.3 Bylaws of the Company.
*4.1 Specimen Common Stock Certificate.
*4.2 Form of Underwriter's Warrant.
*5.1 Opinion of Lowenthal, Landau, Fischer & Bring, P.C.
*10.1 Agreement dated as of April 1, 1984 between University Patents, Inc. and the Company.
*10.2 License Agreement dated as of March 22, 1988 between the Company and The Texas A&M University System.
*10.3 License Agreement dated October 20, 1989 between the Company and ISI.***
*10.4 Manufacturing and Supply Agreement dated October 20, 1989 between the Company and ISI.***
*10.5 Joint Development and Manufacturing/Supply Agreement dated March 13, 1992 between the Company and
HBL, as amended.***
*10.6 Amended and Restated Agreement dated as of November 24, 1992 between Mitsubishi and the Company.
*10.7 Japan Animal Health License Agreement dated January 20, 1993 between the Company and HBL.***
*10.8 Employment Agreement dated as of March 4, 1994 between the Company and Dr. Alan B. Richards, as amended.
*10.9 Employment Agreement dated as of March 4, 1994 between the Company and Dr. Joseph M. Cummins, as
amended.
*10.10 Employment Agreement dated as of June 1, 1994 between the Company and Charles Hughes, as amended.
*10.11 Manufacturing/Supply Agreement dated June 1, 1994 between the Company and HBL.
*10.12 Settlement Agreement dated April 27, 1995 among the Company, ISI, Pharma Pacific Management Pty.
Ltd. ("PPM"), Pharma Pacific Pty. Ltd., Pharma Pacific Ltd., and Fernz Corporation Limited.
*10.13 Amendment of ACC/ISI License Agreement dated April 27, 1995 between the Company and ISI.
*10.14 PPM/ACC Sub-license Agreement dated April 27, 1995 between PPM and the Company.***
*10.15 License and Supply Agreement dated July 10, 1995 between Veldona Africa, Inc. ("VAF") and Innovative
Therapeutics, Ltd. ("ITL").***
*10.16 Pricing Amendment, dated December 5, 1995 between VAF and ITL.***
*10.17 License Agreement dated September 25, 1995 between McGill University and the Company.
*10.18 Form of Consulting Agreement between the Company and the Underwriter.
*10.19 Research Agreement dated March 25, 1996 between the Company and Ajinomoto Co., Inc.
*10.20 1996 Employee Stock Option Plan
*10.21 1996 Outside Director and Advisor Stock Option Plan
*10.22 Form of Indemnification Agreement between the Company and officers and directors of the Company.
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
Number Description
----------- -----------------------------------------------------------------------------------------------
<S> <C>
*10.23 Indemnification Agreement between HBL and the Company.
*10.24 Stock Purchase Agreement dated as of September 21, 1987 between Mesa Operating Limited Partnership
and the Company.
*10.25 Research License and Supply Agreement dated May 20, 1996 between the Company and Virbac S.A.
21.1 Subsidiaries of the Company. The following sets forth the name and jurisdiction of incorporation
of each subsidiary of the Company. All of such subsidiaries are wholly-owned by the Company.

<PAGE>

EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS

We consent to the reference to our firm under the captions "Experts" and
"Selected Financial Data" and to the use of our report dated February 1,
1996, except for Note 13, as to which the date is May 14, 1996, in Amendment
No. 2 to the Registration Statement (Form SB-2 No. 333-04413) and related
Prospectus of Amarillo Biosciences, Inc. for the registration of 2,000,000
shares of its common stock.

ERNST & YOUNG LLP

Dallas, Texas
July 30, 1996