SHAMAN PHARMACEUTICALS INC, S-2/A, 1998-07-31

SHAMAN PHARMACEUTICALS INC
S-2/A, 1998-07-31
PHARMACEUTICAL PREPARATIONS

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 31, 1998

REGISTRATION NO. 333-59053
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

AMENDMENT NO. 3

FORM S-2
------------------------
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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SHAMAN PHARMACEUTICALS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S> <C>
DELAWARE 94-3095806
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>

213 EAST GRAND AVENUE
SOUTH SAN FRANCISCO, CALIFORNIA 94080-4812
(650) 952-7070
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF THE
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

LISA A. CONTE
PRESIDENT AND CHIEF EXECUTIVE OFFICER
SHAMAN PHARMACEUTICALS, INC.
213 EAST GRAND AVENUE
SOUTH SAN FRANCISCO, CALIFORNIA 94080-4812
(650) 952-7070
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE OF PROCESS)

COPIES TO:

<TABLE>
<S> <C>
J. STEPHAN DOLEZALEK, ESQ. A. JOHN MURPHY, ESQ.
BROBECK, PHLEGER & HARRISON LLP SHEPPARD, MULLIN, RICHTER & HAMPTON LLP
TWO EMBARCADERO PLACE, 2200 GENG ROAD SEVENTEENTH FLOOR, FOUR EMBARCADERO CENTER
PALO ALTO, CALIFORNIA 94301-0913 SAN FRANCISCO, CALIFORNIA 94111-4106
(650) 424-0160 (415) 434-9100
</TABLE>

APPROXIMATE DATE OF COMMENCEMENT 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, other than Securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If the registrant elects to deliver its latest annual report to security
holders or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of this form, 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. [ ]

CALCULATION OF REGISTRATION FEE

<TABLE>
<S> <C> <C> <C> <C>
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PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED (1) PER SHARE OFFERING PRICE (1) FEE(3)
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Series C Convertible Preferred Stock, $.001
par value................................. 200,000 $100 $20,000,000 $5,900
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Common Stock, $.001 par value............... 6,201,551(2) -- -- --
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</TABLE>

(1) Represents (i) the maximum number of shares of Series C Convertible
Preferred Stock being sold pursuant to this offering, and (ii) a number of
additional shares of Common Stock as may from time to time become issuable
upon conversion of such preferred stock or by reason of stock splits, stock
dividends and other similar transactions and is set forth solely for the
purpose of calculating the registration fee in accordance with Rule 457(c)
of the Securities Act of 1933, as amended.
(2) The number of shares of Common Stock to be registered is estimated using the
price of $3.225 per share, which was 85% of the average closing prices of
the Common Stock reported by The Nasdaq Stock Market for the 10 trading days
from July 10, 1998 to July 23, 1998.

(3) Previously paid.

------------------------

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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<PAGE> 2

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.

SUBJECT TO COMPLETION, DATED JULY 31, 1998

MINIMUM OFFERING 150,000 SHARES
MAXIMUM OFFERING 200,000 SHARES

SERIES C CONVERTIBLE PREFERRED STOCK

This Prospectus relates to the offer and sale by Shaman Pharmaceuticals,
Inc. (the "Company") of (i) a minimum of 150,000 (the "Minimum") and a maximum
of 200,000 (the "Maximum") shares (the "Shares") of Series C Convertible
Preferred Stock, par value $0.001 per share (the "Series C Preferred Stock");
and (ii) in accordance with Rule 416 under the Securities Act of 1933, as
amended (the "Securities Act"), an indeterminate number of shares of the
Company's Common Stock, par value $0.001 per share (the "Common Stock"), as may
be issuable upon conversion of the Series C Preferred Stock or as a result of
stock splits, stock dividends and other similar transactions. Investor funds
will be placed in an escrow account, and no funds will be released to the
Company until the Company receives and accepts subscriptions for a minimum of
150,000 Shares.

Each share of Series C Preferred Stock shall be entitled to receive
cumulative dividends paid semi-annually on May 31 and November 30 of each year
to the holders of record of such shares on March 31 and September 30 of such
year (the "Dividends") as follows: (i) a stock-on-stock dividend of $10.00 per
annum, paid in arrears, in shares of Common Stock (valued at 85% of the average
closing price of the Common Stock for the 10 trading day period ending three
trading days prior to the date on which the dividend is paid); plus (ii) a cash
amount equaling 0.00005% of the Company's United States net sales, if any, for
the preceding two calendar quarters of its SP-303/Provir(TM) product for the
treatment of diarrhea (equivalent to a 7.5% royalty for the Minimum and a 10%
royalty for the Maximum of the aggregate shares of Series C Preferred Stock)
less $5.00 (the value of the semi-annual stock dividend). If, under Delaware
law, the Company is unable to pay the cash amount of the Dividends, then the
cash portion of the Dividends shall be payable in shares of Common Stock (valued
at 85% of the average closing price of the Common Stock for the 10 day trading
period ending three days prior to the date on which the dividend is paid). Each
Share shall be convertible, at any time at least 12 months after the original
issuance date thereof at the election of each holder, and automatically on the
fourth anniversary of the date on which any shares of Series C Preferred Stock
were first issued, into the greater of (i) 16.6667 shares of Common Stock or
(ii) such number of shares of Common Stock as equals $100 divided by 85% of the
average closing price of the Common Stock reported by the Nasdaq Stock Market
for the 10 trading day period ending three trading days prior to the date of
conversion.

The Common Stock of the Company is traded on The Nasdaq National Market tier
of The Nasdaq Stock Market under the symbol "SHMN." On July 27, 1998, the last
sale price for the Common Stock as quoted on The Nasdaq National Market was
$3.4375 per share.

Prior to this offering, there has been no public market for the Series C
Preferred Stock. The public offering price is expected to be $100 per share. See
"Plan of Distribution" for a discussion of the factors in determining the
initial public offering price. The Company initially filed an application to
list the Shares on The Nasdaq SmallCap Market. The application, however, was
denied by the Nasdaq staff. The placement agent, Dakin Securities Corporation,
has applied for inclusion of the Series C Preferred Stock on the NASD OTC
Bulletin Board under the symbol "SHMNX." The OTC Bulletin Board System is an
unorganized, inter-dealer, over-the-counter market which provides significantly
less liquidity than The Nasdaq Stock Market, and quotes for stocks included on
the OTC Bulletin Board are not listed in the financial sections of newspapers as
are those for The Nasdaq Stock Market. In the event the Shares are not included
on the OTC Bulletin Board, quotes for the Shares may be included in the "pink
sheets" for the over-the-counter market. See "Risk Factors -- No Assurance of
Public Trading Market for Preferred Stock."
------------------------

AN INVESTMENT IN THE SHARES OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE
"RISK FACTORS" BEGINNING ON PAGE 7.
------------------------

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.

<TABLE>
<CAPTION>
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UNDERWRITING
PRICE TO DISCOUNT AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- ------------------------------ ---------------------------- ---------------------------- ----------------------------
<S> <C> <C> <C>
Per Share..................... $ 100.00 $ 6.00 $ 94.00
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Total Minimum................. $ 15,000,000 $ 900,000 $ 14,100,000
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Total Maximum................. $ 20,000,000 $ 1,200,000 $ 18,800,000
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</TABLE>

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(1) The Company has granted Dakin Securities Corporation (the "Placement Agent")
the exclusive right to sell the Series C Preferred Stock on a "best efforts"
basis. The commissions set forth in the table above assume that the
Placement Agent will receive a commission equal to six percent of the
aggregate sales price of all the Series C Preferred Stock sold in the
offering. The Placement Agent is entitled to a commission of three percent,
rather than six percent, in certain circumstances. The Company has also
agreed to reimburse the Placement Agent for certain expenses incurred in
connection with the offering and to indemnify the Placement Agent against
certain liabilities, including liabilities under the Securities Act. See
"Plan of Distribution."

(2) Before deducting expenses estimated at $275,000, which are payable by the
Company.
------------------------

It is expected that delivery of the Series C Preferred Stock will be made
in San Francisco, California on or about , 1998.
DAKIN SECURITIES CORPORATION
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THE DATE OF THIS PROSPECTUS IS JULY , 1998
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[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 4

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and Financial Statements incorporated by reference herein. An
investment in the shares of Series C Preferred Stock offered hereby involves a
high degree of risk. Prospective investors should consider carefully the factors
identified under "Risk Factors." Except as otherwise specified, the information
in this Prospectus gives effect to the Company's agreement, upon the
consummation of this offering, not to issue shares of its Series B Preferred
Stock pursuant to certain Series B Preferred Stock Purchase Agreements, dated
June 10, 1998, by and among the Company and certain investors.

THE COMPANY

Shaman discovers and develops novel pharmaceutical products for the
treatment of human diseases and their symptoms through the isolation and
optimization of active compounds found in tropical plants. The Company believes
that by focusing on drugs extracted from plants with a history of medicinal use,
its drug discovery efforts may be quicker and more likely to lead to safe and
effective pharmaceuticals. Shaman has three product candidates in clinical
development -- SP-303/Provir, nikkomycin Z and SP-134101. These product
candidates target five indications. Of these product candidates, the most
advanced, SP-303/Provir, entered into a Phase III human clinical trial in March
1998 for the treatment of diarrhea in people with AIDS. In May 1998, the U.S.
Food and Drug Administration ("FDA") formally notified the Company that
SP-303/Provir had been granted "fast track product" designation. Earlier in
1998, the FDA also advised the Company that upon its completion, data from
Shaman's single Phase III study along with corroborative information from a
previously completed Phase II trial may serve as the basis for the submission of
a New Drug Application ("NDA"). In the Phase II trial, SP-303/Provir was shown
to provide a significant treatment effect for diarrhea in people with AIDS. If
the results of the current trial, which is currently over 75% enrolled, are
positive, the Company expects to file an NDA for commercial approval of
SP-303/Provir in early 1999. With a fast track designation from the FDA for the
indication of diarrhea in people with AIDS, the Company is preparing for
potential product launch in the second half of 1999 and intends to retain U.S.
marketing rights to this product. The Company intends to out-license marketing
rights for Europe and other parts of the world.

SP-303/Provir has shown an ability to inhibit a primary mechanism in watery
diarrhea, and is also being evaluated in human clinical trials for watery
diarrhea indications other than diarrhea in people with AIDS. In July 1998, the
Company completed two separate Phase II dose optimization studies of
SP-303/Provir in acute watery diarrhea from two different populations. Both
studies were double-blind, randomized, placebo-controlled. Positive,
statistically significant results in the reduction of time to last unformed
stool ("TLUS") over 48 hours, the key efficacy end point, were achieved in each
study. These studies also showed SP-303/ Provir to be well tolerated. The
Company also intends to advance SP-303/Provir in clinical development for a
third indication, pediatric diarrhea. Shaman is currently engaged in formulation
development and in planning the ongoing clinical development program for this
indication. SP-303/Provir has now been tested in over 700 patients, including
over 170 people with AIDS, with no significant drug-related effects.

Nikkomycin Z is an orally-active anti-fungal compound. The Company believes
that nikkomycin Z has the potential to treat endemic mycoses and other systemic
fungal infections. In 1997 Shaman completed a Phase I trial in the United
Kingdom, with results showing that the drug appeared to be safe when orally
administered. The Company filed an Investigational New Drug application ("IND")
in the United States in December 1997.

Shaman's third compound in clinical development, SP-134101, is an oral
product for the treatment of Type II (adult onset or non-insulin dependent)
diabetes. In animal models, the compound has demonstrated the ability to lower
glucose and triglycerides and have a beneficial effect on blood pressure. The
compound appears to work by increasing glucose uptake in the peripheral tissues
and decreasing triglyceride output from the liver. From a discovery research
effort that led to the identification of 26 chemically distinct, orally-active
compounds that demonstrated glucose lowering effects in preclinical animal
testing, SP-134101 was Shaman's first proprietary product candidate from its
diabetes program to enter clinical trials in January 1998. Significant funding
for the Company's diabetes discovery research program has been and is being
provided through a collaboration with Lipha, s.a., a wholly-owned subsidiary of
Merck KGaA, Darmstadt, Germany

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("Lipha/Merck"), and has been previously provided through a collaboration with
Ono Pharmaceutical Co., Ltd. ("Ono"). Both Lipha/Merck and Ono will make
milestone payments to Shaman on any product candidates resulting from their
respective collaborations. Lipha/Merck and Ono have no commercialization rights
to SP-134101 and no milestone payments are due to the Company on the development
and commercialization of this compound.

Shaman Pharmaceuticals, Inc. was incorporated in California in May 1989,
began operations in March 1990 and reincorporated in Delaware in January 1993.
The Company's principal executive offices are located at 213 East Grand Avenue,
South San Francisco, California, 94080-4812, and its telephone number is (650)
952-7070.

SP-303/Provir(TM) and the Company's stylized logo are trademarks of the
Company. Shaman Pharmaceuticals(R) and Virend(R) are registered U.S. trademarks
of the Company.

4
<PAGE> 6

THE OFFERING

SERIES C CONVERTIBLE PREFERRED
STOCK OFFERED(1).............. Minimum: 150,000 shares at $100 per share
Maximum: 200,000 shares at $100 per share

PREFERRED STOCK OUTSTANDING
AFTER THE OFFERING............ Minimum: 550,000 shares
Maximum: 600,000 shares

COMMON STOCK OUTSTANDING AFTER
THE OFFERING(2)............. 18,980,862 shares

USE OF PROCEEDS............... Research, development, clinical testing,
regulatory activities and pre-commercialization
activities for SP-303/Provir

NASDAQ NATIONAL MARKET
SYMBOL........................ SHMN
- ---------------
(1) Investor funds will be deposited into an interest bearing escrow account
maintained with U.S. Bank Trust N.A. The escrow provides that funds may be
released from escrow only upon the satisfaction of certain conditions,
including the deposit of $15,000,000 in the escrow account by August ,
1998; provided, however the Company may extend such date for up to an
additional 30 days. Interest on deposited funds will accrue at a rate of 10%
per annum from the date such funds are placed into the escrow account.

(2) Based on shares outstanding as of July 24, 1998. Excludes (i) 2,952,629
shares of Common Stock issuable upon the exercise of options outstanding
under the Company's stock option plan; (ii) 1,261,024 shares issuable upon
exercise of outstanding warrants; (iii) 400,000 shares issuable upon the
conversion of Series A Preferred Stock; (iv) an estimate of 4,651,163 to
6,201,551 shares issuable upon the conversion of reserved but unissued
Series C Preferred Stock; and (v) approximately 2,234,953 shares issuable
upon conversion of senior convertible notes.

5
<PAGE> 7

SUMMARY FINANCIAL DATA
(in thousands, except per share data)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
-------------------------------- ------------------
1997 1996 1995 1998 1997
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<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue from collaborative
agreements.......................... $ 3,500 $ 3,406 $ 2,210 $ 875 $ 875
Operating expenses:
Research and development............ 24,140 19,138 17,635 7,513 6,015
General and administrative.......... 4,833 3,537 3,705 1,276 991
-------- -------- -------- ------- -------
Total operating expenses.... 28,973 22,675 21,340 8,789 7,006
-------- -------- -------- ------- -------
Loss from operations.................. (25,473) (19,269) (19,130) (7,914) (6,131)
Interest income....................... 1,218 1,082 1,695 232 251
Interest expense (cash)............... (1,341) (603) (569) (807) (101)
Interest expense (non-cash)........... (3,692) -- -- -- --
-------- -------- -------- ------- -------
Net loss.............................. $(29,288) $(18,790) $(18,004) $(8,489) $(5,981)
======== ======== ======== ======= =======
Net loss per share(1)................. $ (1.72) $ (1.39) $ (1.37) $ (0.48) $ (0.39)
======== ======== ======== ======= =======
Shares used in calculation of net loss
per share(1)........................ 17,010 13,496 13,161 17,836 15,455
======== ======== ======== ======= =======
Ratio of earnings to combined fixed
charges and preferred stock
dividends(2)........................ -- -- -- -- --
======== ======== ======== ======= =======
</TABLE>

<TABLE>
<CAPTION>
MARCH 31, 1998
-------------------------------------
DECEMBER 31, 1997 ACTUAL AS ADJUSTED
----------------- --------- ------------------------
MINIMUM(3) MAXIMUM(4)
---------- ----------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents, and short
term investments................... $ 21,421 $ 14,199 $ 28,024 $ 32,724
Working capital...................... 14,547 6,814 20,639 25,339
Total assets......................... 26,753 19,277 33,102 37,802
Long-term obligations, including
current installments............... 6,802 6,423 6,423 6,423
Senior convertible notes............. 9,967 10,179 10,179 10,179
Accumulated deficit.................. (111,910) (120,399) (120,399) (120,399)
Total stockholders' equity (net
capital deficiency)................ 5,148 (3,012) 10,813 15,513
</TABLE>

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(1) Net loss per share is based on the weighted average number of common shares
outstanding during the period.

(2) For purposes of calculating the ratio of earnings to combined fixed charges
and preferred stock dividends (i) earnings consist of operating loss plus
fixed charges and preferred stock dividends and (ii) fixed charges consist
of interest expense incurred, plus the portion of rent expense under
operating leases deemed by the Company to be representative of the interest
factor. For the years ended December 31, 1997, 1996 and 1995 and for the
three-month periods ended March 31, 1998 and 1997, the Company's historical
earnings were insufficient to cover fixed charges by $29.3 million, $18.8
million, $18.0 million, $8.5 million and $6.0 million, respectively.

(3) Adjusted to reflect the sale by the Company of 150,000 shares of Series C
Preferred Stock at the public offering price of $100 per share and the
application of the net proceeds therefrom of approximately $13.8 million.
See "Use of Proceeds" and "Capitalization."

(4) Adjusted to reflect the sale by the Company of 200,000 shares of Series C
Preferred Stock at the public offering price of $100 per share and the
application of the net proceeds therefrom of approximately $18.5 million.
See "Use of Proceeds" and "Capitalization."

6
<PAGE> 8

RISK FACTORS

The shares offered hereby involve a high degree of risk. The following risk
factors should be considered carefully in addition to the other information
contained or incorporated by reference in this Prospectus before purchasing the
shares of Series C Preferred Stock offered hereby. In addition to the historical
information contained herein, the discussion in this Prospectus may contain
certain forward-looking statements that involve risks and uncertainties, such as
statements of the Company's plans, objectives, expectations and intentions. The
cautionary statements made in this Prospectus should be read as being applicable
to all related forward-looking statements wherever they appear in this
Prospectus. The Company's actual results could differ materially from those
discussed in this Prospectus. Factors that could cause or contribute to such
differences include those discussed below as well as those cautionary statements
and other factors set forth elsewhere herein.

Risk Regarding Failure to Meet Continued Listing Requirements. On June 10,
1998 the Company received correspondence from The Nasdaq National Market
("Nasdaq") stating that they had found that the Company no longer met the
$4,000,000 net tangible asset requirement for continued listing on The Nasdaq
National Market. As of March 31, 1998, the Company had a net capital deficiency
of ($3,011,702). On July 15, 1998 the Company requested a formal hearing to
determine the Company's compliance with the Nasdaq listing requirements. The
hearing date has been scheduled for September 3, 1998. The Company believes it
is in compliance with all other listing requirements. However, absent additional
financing, the receipt of license fees or milestone payments from corporate
partnerships or the conversion of outstanding convertible notes, there can be no
assurance that the Company will satisfy the Nasdaq National Market listing
requirements at or after the time of such hearing. If the Company fails to
satisfy The Nasdaq National Market that it meets such requirements, the Common
Stock will no longer be traded on The Nasdaq National Market, and the Company
would need to seek listing on the American Stock Exchange. If traded on the
American Stock Exchange, the Company's Common Stock may be subject to reduced
liquidity and reduced analyst coverage, the Company's ability to raise capital
in the future may be inhibited and the Company's business, financial condition
and results of operations could be materially adversely affected.

Early Stage of Development; Technological Uncertainty. Shaman has not yet
completed the development of any products. Many of the Company's products will
require significant additional clinical testing and investment of capital prior
to commercialization. Products for therapeutic use in human health care must be
evaluated in extensive human clinical trials to determine their safety and
efficacy as part of a lengthy process to obtain government approval. The
Company's SP-303/Provir, nikkomycin Z and SP-134101 products are each in
clinical development. Positive results for any of these products in a clinical
trial do not necessarily assure that positive results will be obtained in future
clinical trials or that government approval to commercialize the products will
be obtained.

Clinical trials may be terminated at any time for many reasons, including
toxicity or adverse event reporting. There can be no assurance that any of the
Company's products will be successfully developed, enter into human clinical
trials, prove to be safe and efficacious in clinical trials, meet applicable
regulatory standards, obtain required regulatory approvals, be capable of being
produced in commercial quantities at reasonable costs or be successfully
marketed or that the Company will not encounter problems in clinical trials that
will cause the Company to delay or suspend product development. Failure of any
of the Company's products to be commercialized could have a material adverse
effect on the Company's business, financial condition and results of operations.

History of Operating Losses; Products Still in Development; Future
Profitability Uncertain. Shaman was incorporated in 1989 and has experienced
significant operating losses in each of its fiscal years since operations began.
The Company incurred an operating loss of approximately $8.5 million for the
three months ended March 31, 1998 and additional losses of $3.0 million in April
1998 and $2.7 million in May 1998. The loss in April was a result of the
Company's incurring research and development expenses of approximately $2.8
million, general and administrative expenses of approximately $364,000 and
interest expense net of interest income of approximately $151,000. These
expenses were partially offset by revenues of approximately $292,000 for the
month. The loss in May was a result of the Company's incurring research and
development expenses of approximately $2.4 million, general and administrative
expenses of approximately $525,000 and interest expense net of interest income
of approximately $142,000. These expenses were partially offset by revenues of
approximately $433,000 for the month. As of May 31, 1998, the Company's
accumulated deficit

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<PAGE> 9

was approximately $126.1 million. The Company has not generated any product
revenues to date. All of Shaman's products and compounds are still in the
research and development stage, which requires substantial expenditures of
funds. In order to generate revenues or profits, the Company, alone or with
others, must successfully develop, test, obtain regulatory approval for and
market its potential products. No assurance can be given that Shaman's product
development efforts will be successful, that required regulatory approvals will
be obtained, or that the products, if developed and introduced, will be
successfully marketed or will achieve market acceptance.

Future Capital Needs; Uncertainty of Additional Funding. As of June 30,
1998, the Company had cash, cash equivalents and investment balances of
approximately $5.2 million. The Company will require substantial additional
funds to conduct the development and testing of its potential products and to
manufacture and market any products that may be developed. The Company's future
capital requirements will depend on numerous factors, including the progress of
its research and development programs, the progress of preclinical and clinical
testing, the time and costs involved in obtaining regulatory approvals, the cost
of filing, prosecuting, defending and enforcing patent claims and other
intellectual property rights, competing technological and market developments,
changes in the Company's existing collaborative and licensing relationships, the
ability of the Company to establish additional collaborative relationships for
the manufacture and marketing of its potential products, and the purchase of
additional capital equipment. In addition, senior convertible note purchase
agreements entered into by the Company in connection with a private placement
completed in 1997, provide that under certain circumstances the Company would be
required to redeem all or some portion of the principal balance remaining ($6.5
million at July 24, 1998), which redemption could significantly accelerate the
Company's cash expenditures and capital requirements beyond the levels currently
anticipated, and would materially and adversely affect the Company's ability to
conduct its business.

The Company will need to seek additional funding through public or private
equity or debt financings, collaborative arrangements or from other sources. If
additional funds are raised by issuing equity securities, significant dilution
to existing stockholders may result. In the event that additional funds are
obtained through collaborative agreements, such agreements may require the
Company to relinquish rights to certain of its technologies, product candidates,
products or marketing territories that the Company would otherwise seek to
develop or commercialize itself. There can be no assurance that additional
financing sources will be available on acceptable terms or at all. If adequate
funds are not available, the Company will need to delay, scale back or eliminate
one or more of its research, discovery or development programs, which could have
a material adverse effect on the Company's business, financial condition and
results of operations.

No Assurance of Successful Product Development. The Company's research and
development programs are at various stages of development, ranging from the
research stage to clinical trials. Substantial additional research and
development will be necessary in order for the Company to move additional
product candidates into clinical testing or to complete clinical testing of
current product candidates, and there can be no assurance that any of the
Company's research and development efforts on these or other potential products,
including SP-303/Provir, nikkomycin Z and SP-134101, will lead to development of
products that are shown to be safe and effective in clinical trials.

In addition, there can be no assurance that any such products will meet
applicable regulatory standards, be capable of being produced in commercial
quantities at acceptable costs, be eligible for third party reimbursement from
governmental or private insurers, be successfully marketed or achieve market
acceptance. Further, the Company's products may prove to have undesirable or
unintended side effects that may prevent or limit their commercial use. The
Company may find, at any stage of this complex product development process, that
products that appeared promising in preclinical studies or Phase I and Phase II
clinical trials do not demonstrate efficacy in larger-scale, Phase III clinical
trials and do not receive regulatory approvals. Accordingly, any product
development program undertaken by the Company may be curtailed, redirected,
suspended or eliminated at any time.

Uncertainties Associated with Clinical Trials. Shaman has conducted, and
plans to continue conducting, extensive and costly clinical trials to assess the
safety and efficacy of its potential products. The rate of completion of the
Company's clinical trials is dependent upon, among other factors, the rate of
completion and approval of trial protocols, the availability of funds for trials
and the rate of patient enrollment. Patient enrollment is a function of many
factors, including the nature of the Company's clinical trial protocols,

8
<PAGE> 10

existence of competing protocols, size of patient population, proximity of
patients to clinical sites and eligibility criteria for the study. Any delay in
patient enrollment will result in increased costs and delays, which could have a
material adverse effect on the Company's ability to complete clinical trials in
a timely fashion.

In addition, there can be no assurance that the Company's testing and
development schedules will be met. Any failure to meet such schedules could have
a material adverse effect on the Company's business, financial condition and
results of operations. The Company's clinical trials may be delayed by many
factors, including, but not limited to: slower than anticipated patient
enrollment, difficulty in finding a sufficient number of patients fitting the
appropriate trial profile, difficulties in the acquisition of sufficient
supplies of clinical trial materials, or failure to show efficacy in clinical
trials or adverse events occurring during the clinical trials. Completion of
testing, studies and trials may take several years, and the length of time
varies substantially with the type, complexity, novelty and intended use of the
product. In addition, data obtained from preclinical and clinical activities are
susceptible to varying interpretations, which could delay, limit or prevent
regulatory approval. Delays or rejections may be encountered based upon many
factors, including changes in regulatory policy during the period of product
development and could have a material adverse effect on the Company's business,
financial condition and results of operations.

The Company cannot assure that patients enrolled in its clinical trials
will respond to the Company's product candidates. Setbacks are to be expected in
conducting human clinical trials. Failure to comply with the FDA regulations
applicable to such testing can result in delay, suspension or cancellation of
such testing, and/or refusal by the FDA to accept the results of such testing.
In addition, the FDA or the Company may suspend clinical trials at any time if
either of them concludes that any patients participating in any such trial are
being exposed to unacceptable health risks. Further, there can be no assurance
that human clinical testing will demonstrate that any current or future product
candidate is safe or effective or that data derived from any such study will be
suitable for submission to the FDA or other regulatory authorities. Failure of
the Company's clinical trials to demonstrate safety or efficacy in humans could
cause the delay, suspension or termination of any product program, including
SP-303/Provir, nikkomycin Z and SP-134101, and could have a material adverse
effect on the Company's business, financial condition and results of operations.

Dependence on Collaborative Relationships. The Company's research and
development efforts in its diabetes program and, to a lesser extent, in its
other programs, have been dependent upon its arrangements with Lipha/Merck and
Ono and their funding for research and development efforts thereunder. Because
research and development funding from Ono has ended, the Company must in the
future rely on continued funding from Lipha/Merck or milestone payments from
products developed by either Ono or Lipha/Merck, if any, or must seek new
collaborations to provide further funding for its diabetes program. There can be
no assurance that such further funding will be obtained or that any significant
revenues will ultimately be derived from any of the Company's collaborations.

The Company expects to seek additional collaborative agreements to
commercialize its other product candidates and will, in particular, need to rely
on such third party arrangements to commercialize its products, including
SP-303/Provir, outside the United States. No assurance can be given that the
Company will be successful in negotiating or entering into such agreements on
terms favorable to the Company or at all, or that any such agreement, if entered
into by the Company, will be successful. A failure to successfully enter into
such agreements and sell products thereunder would have a material adverse
effect on the Company's business, financial condition and results of operations.

Rapid Technological Change and Substantial Competition. The pharmaceutical
industry is subject to rapid and substantial technological change. Technological
competition from pharmaceutical and biotechnology companies and universities is
intense. Many of these entities have significantly greater research and
development capabilities, as well as substantial marketing, manufacturing,
financial and managerial resources, and represent significant competition for
the Company. There can be no assurance that developments by others will not
render the Company's products or technologies noncompetitive or that the Company
will be able to keep pace with technological developments. Competitors have
developed or are in the process of developing technologies that are, or in the
future may be, the basis for competitive products. Some of these products may
have an entirely different approach or means of accomplishing the desired
therapeutic effect than products developed by the Company. These competing
products may be more effective and less costly than the products developed by
the Company. In addition, other forms of medical treatment may offer

9
<PAGE> 11

competition to the Company's products. The development of competing compounds
could have a material adverse effect on the Company's business, financial
condition and results of operations.

Government Regulation; No Assurance of Regulatory Approvals. All new drugs,
including the Company's products under development, are subject to extensive and
rigorous regulation by the federal government, principally the FDA, as well as
comparable agencies in state and local jurisdictions and in foreign countries.
These authorities, in particular the FDA, impose substantial requirements upon
the preclinical and clinical testing, manufacturing and marketing of
pharmaceutical products. The steps required before a drug may be approved for
marketing in the United States generally include (i) preclinical laboratory and
animal tests, (ii) the submission to the FDA of an IND for human clinical
testing, (iii) adequate and well controlled human clinical trials to establish
the safety and efficacy of the drug, (iv) submission to the FDA of an NDA, and
(v) satisfactory completion of an FDA inspection of the manufacturing facility
or facilities at which the drug is made to assess compliance with Good
Manufacturing Practices ("GMP").

Lengthy and detailed preclinical and clinical testing, validation of
manufacturing and quality control processes, and other costly and time-consuming
procedures are required for approval of a new drug. Satisfaction of these
requirements typically takes several years and the time needed to satisfy them
may vary substantially, based on the type, complexity and novelty of the
pharmaceutical product. The effect of government regulation may be to delay or
to prevent marketing of potential products for a considerable period of time and
to impose costly procedures upon the Company's activities. There can be no
assurance that the FDA or any other regulatory agency will grant approval for
any products developed by the Company on a timely basis, or at all. Success in
preclinical or early stage clinical trials does not assure success in later
stage clinical trials.

Data obtained from preclinical and clinical activities are susceptible to
varying interpretations which could delay, limit or prevent regulatory approval.
If regulatory approval of a product is granted, such approval may impose
limitations on the indicated uses for which a product may be marketed. Further,
even if regulatory approval is obtained, later discovery of previously unknown
problems with a product may result in restrictions on the product, including
withdrawal of the product from the market. Any delay or failure in obtaining
regulatory approvals would have a material adverse effect on the Company's
business, financial condition and results of operations.

Among the conditions for FDA approval of a pharmaceutical product is the
requirement that the manufacturer's (either the Company itself or any
third-party manufacturer) quality controls and manufacturing procedures conform
to GMP, which must be followed at all times. The FDA strictly enforces GMP
requirements through periodic unannounced inspections. There can be no assurance
that the FDA will determine that the facilities and manufacturing procedures of
the Company or any third-party manufacturer of the Company's planned products
conform to GMP requirements. Additionally, the Company or its third-party
manufacturers must pass a pre-approval inspection of their manufacturing
facilities by the FDA before the Company can obtain marketing approval. Failure
to comply with applicable regulatory requirements may result in penalties such
as restrictions on a product's marketing or withdrawal of a product from the
market.

The FDA's policies may change and additional government regulations may be
promulgated which could prevent or delay regulatory approval of the Company's
potential products. Moreover, increased attention to the containment of health
care costs in the United States could result in new government regulations that
could have a material adverse effect on the Company's business. The Company is
unable to predict the likelihood of adverse governmental regulation that might
arise from future legislative or administrative action, either in the United
States or abroad.

The Company will also be subject to a variety of foreign regulations
governing clinical trials, registration and sales of its products. Regardless of
whether FDA approval is obtained, approval of a product by comparable regulatory
authorities of foreign countries must be obtained prior to marketing the product
in those countries. The approval process varies from country to country and the
time needed to secure approval may be longer or shorter than that required for
FDA approval. Delays in the approval process or the failure to obtain such
foreign approvals would have a material adverse effect on the Company's
business, financial condition and results of operations.

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<PAGE> 12

Dependence on Sources of Supply. The Company currently imports all of the
plant materials from which its products are derived from countries in Latin and
South America, Africa and Southeast Asia. To the extent that its products cannot
be economically synthesized or otherwise produced, the Company will continue to
be dependent upon a supply of raw plant material. The Company does not have
formal agreements in place with all of its suppliers. In addition, a continued
source of plant supply is subject to the risks inherent in international trade.
These risks include unexpected changes in regulatory requirements, exchange
rates, tariffs and barriers, difficulties in coordinating and managing foreign
operations, political instability and potentially adverse tax consequences.
Interruptions in supply or material increases in the cost of supply could have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, tropical rain forests, and certain
irreplaceable plant resources therein, are currently threatened with
destruction. In the event portions of the rain forests are destroyed which
contain the source material from which Shaman's current or future products are
derived, such destruction could have a material adverse effect on the Company's
business, financial condition and results of operations.

Limited Manufacturing and Marketing Experience and Capacity. The Company
currently produces products only in quantities necessary for clinical trials and
does not have the staff or facilities necessary to manufacture products in
commercial quantities. As a result, the Company must rely on collaborative
partners or third-party manufacturing facilities. If the Company or its third
party manufacturers should encounter delays or difficulties in producing,
packaging and distributing the Company's finished products, clinical trials,
regulatory filings, market introduction and subsequent sales of such products
could be adversely affected.

Contract manufacturers must conform to GMP regulations strictly enforced by
the FDA on an ongoing basis through its facilities inspection program. Contract
manufacturing facilities must pass a pre-approval inspection of their
manufacturing facilities before the FDA will approve an NDA. Certain material
manufacturing changes that occur after approval are also subject to FDA review
and clearance or approval. There can be no assurance that the FDA or other
regulatory agencies will approve the process or the facilities by which any of
the Company's products may be manufactured. The Company's dependence on third
parties for the manufacture of products may adversely affect the Company's
ability to develop and deliver products on a timely and competitive basis.
Should the Company be required to manufacture products itself, the Company will
be required to build or purchase a manufacturing facility, will be subject to
the regulatory requirements described above, to similar risks regarding delays
or difficulties encountered in manufacturing any such products and will require
substantial additional capital. There can be no assurance that the Company will
be able to manufacture any such products successfully or in a cost-effective
manner.

The Company currently has no sales staff. There can be no assurance that
the Company will be able to successfully establish a marketing and sales force.
To the extent that the Company does not or is unable to successfully establish a
complete marketing and sales force, there can be no assurance that the Company
will achieve a successful product entry into the marketplace. Such failure would
have a material adverse effect on the Company's business, financial condition
and results of operations.

Uncertainty Regarding Patents and Proprietary Rights; Current Legal
Proceedings Regarding Patents and Proprietary Rights. The Company's success will
depend in large part on its ability to obtain and maintain patents, protect
trade secrets and operate without infringing upon the proprietary rights of
others. Moreover, others may have filed patent applications, may have been
issued patents or may obtain additional patents and proprietary rights relating
to products or processes competitive with those of the Company. There can be no
assurance that the Company's patent applications will be approved, that the
Company will develop additional proprietary products that are patentable, that
any issued patents will provide the Company with adequate protection for its
inventions or will not be challenged by others, or that the patents of others
will not impair the ability of the Company to commercialize its products. The
patent position of companies in the pharmaceutical industry generally is highly
uncertain, involves complex legal and factual questions, and has recently been
the subject of much litigation. No consistent policy has emerged from the U.S.
Patent and Trademark Office ("PTO") or the courts regarding the breadth of
claims allowed or the degree of protection afforded under pharmaceutical
patents. There is considerable variation between countries as to the level of
protection afforded under patents and other proprietary rights. Such differences
may expose the Company to differing risks of commercialization in each foreign
country in which it may sell products. There can be no assurance that

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<PAGE> 13

others will not independently develop similar products, duplicate any of the
Company's products or design around any patents of the Company.

A number of pharmaceutical companies and research and academic institutions
have developed technologies, filed patent applications or received patents on
various technologies that may be related to the Company's business. Some of
these technologies, applications or patents may conflict with the Company's
technologies or patent applications. The European Patent Office, the French
Patent Office, the German Patent Office and the Australian Patent Office, have
each granted a patent containing broad claims to proanthocyanidin polymer
compositions (and methods of use of such compositions), which are similar to the
Company's specific proanthocyanidin polymer composition (which covers the active
pharmaceutical ingredient in SP-303/Provir), to Leon Cariel and the Institut des
Substances Vegetales. The effective filing date of these patents is prior to the
effective filing date of the Company's foreign pending patent application in
Europe. Certain of the foreign patents have been granted in jurisdictions where
examination is not rigorous. The Company has instituted an Opposition in the
European Patent Office against granted European Patent No. 472531 owned by Leon
Cariel and Institut des Substances Vegetales. The Company believes that the
granted claims are invalid and intends to vigorously prosecute the Opposition.

There can be no assurance that the Company will be successful in having the
granted European patent revoked or the claims sufficiently narrowed so as not to
potentially cover the Company's proanthocyanidin polymer composition and methods
of use. There can be no assurance that Daniel Jean, Leon Cariel and the Institut
des Substances Vegetales will not assert claims relating to this patent against
the Company. There can be no assurance that the Company would be able to obtain
a license to this patent at all, or at reasonable cost, or be able to develop or
obtain alternative technology to use in Europe or elsewhere. The earlier
effective filing date of this patent could limit the scope of the patents, if
any, that the Company may be able to obtain or result in the denial of the
Company's patent applications in Europe or elsewhere.

In the United States, the PTO has rendered judgment in an interference (the
"Interference") declared between the Company's issued patent covering its
specific proanthocyanidin polymer composition and certain claims of a U.S.
application corresponding to the granted European patent of Leon Cariel and the
Institut des Substances Vegetales by Daniel Jean and Leon Cariel. Judgment was
awarded to the Company on July 14, 1997. Since the period for appeal has passed,
this judgment is now final.

Additionally, in connection with the Interference proceeding, the Company
has had an opportunity to review the claims and file history of the Daniel Jean
and Leon Cariel patent application which, under U.S. patent law, are kept
confidential. One broad claim, in particular, of the Daniel Jean and Leon Cariel
patent application, which was not involved in the Interference proceeding and
which has been indicated to be allowable, covers a large variety of
proanthocyanidin polymers. The Company believes that this broad claim is subject
to attack as invalid in view of prior art. Based on knowledge of the Company's
specific proanthocyanidin polymer composition, the Company believes that the
manufacture, use or sale of its specific proanthocyanidin polymer composition
would not constitute infringement of this broad claim, once it issues. There can
be no assurances however, that the Company would prevail should an action for
infringement of such claim be commenced. In addition, if patents that cover the
Company's activities have been or are issued to other companies, there can be no
assurance that the Company would be able to obtain licenses to these patents at
a reasonable cost, or at all, or be able to develop or obtain alternative
technology.

If the Company does not obtain such licenses, it could encounter delays or
be precluded from introducing products to the market. Litigation may be
necessary to defend against or assert claims of infringement, to enforce patents
issued to the Company or to protect trade secrets or know-how owned by the
Company. Additional interference proceedings may be declared or become necessary
to determine issues of invention; such litigation and/or interference
proceedings could result in substantial cost to and diversion of effort by the
Company and may have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, there can be no
assurance that such efforts by the Company will be successful.

The Company's competitive position is also dependent upon unpatented trade
secrets. All employees of the Company have entered into confidentiality
agreements. However, there can be no assurance that others will not
independently develop substantially equivalent information and techniques or
otherwise gain access to the Company's trade secrets, that such trade secrets
will not be disclosed or that the Company can effectively protect its rights to
unpatented trade secrets. To the extent that the Company or its consultants or
research
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<PAGE> 14

collaborators use intellectual property owned by others in their work for the
Company, disputes also may arise as to the rights in related or resulting
know-how and inventions.

Patent applications in the United States are generally maintained in
secrecy until patents are issued. Since publication of discoveries in the
scientific or patent literature tends to lag behind actual discoveries by
several months, Shaman cannot be certain that it was the first to discover
compositions covered by its pending patent applications or the first to file
patent applications on such compositions. There can be no assurance that the
Company's patent applications will result in issued patents or that any of its
issued patents will afford comprehensive protection against potential
infringement.

The Company is presently prosecuting 13 patent applications with the PTO,
but the Company does not know whether any of these applications will result in
the issuance of any patents or, if any patents are issued, whether any issued
patent will provide significant proprietary protection or will be circumvented
or invalidated. During the course of patent prosecution, patent applications are
evaluated, inter alia, for utility, novelty, non-obviousness and enablement. The
PTO may require that the claims of an initially filed patent application be
amended if it is determined that the scope of the claims includes subject matter
that is not useful, novel, non-obvious or enabled.

Furthermore, in certain instances, the practice of a patentable invention
may require a license from the holder of dominant patent rights. In cases where
one party believes that it has a claim to an invention covered by a patent
application or patent of a second party, the first party may provoke an
interference proceeding in the PTO or such a proceeding may be declared by the
PTO. In general, in an interference proceeding, the PTO would review the
competing patents and/or patent applications to determine the validity of the
competing claims, including but not limited to determining priority of
invention. Any such determination would be subject to appeal in the appropriate
U.S. federal courts.

There can be no assurance that additional patents will be obtained by the
Company or that the 16 U.S. patents issued to date will provide substantial
protection or be of commercial benefit to the Company. The issuance of a patent
is not conclusive as to its validity or enforceability, nor does it provide the
patent holder with freedom to operate without infringing the patent rights of
others. A patent could be challenged by litigation and, if the outcome of such
litigation were adverse to the patent holder, competitors could be free to use
the subject matter covered by the patent, or the patent holder may license the
technology to others in settlement of such litigation. The invalidation of
patents owned by or licensed to the Company or non-approval of pending patent
applications could create increased competition, with potential adverse effects
on the Company and its business prospects. In addition, there can be no
assurance that any applications of the Company's technology will not infringe on
patents or proprietary rights of others or that licenses that might be required
as a result of such infringement for the Company's processes or products would
be available on commercially reasonable terms, if at all.

The Company cannot predict whether its or its competitors' patent
applications will result in valid patents being issued. Litigation, which could
result in substantial cost to the Company, may also be necessary to enforce the
Company's patent and proprietary rights and/or to determine the scope and
validity of others' proprietary rights. The Company may, on a voluntary or
involuntary basis, participate in interference proceedings that may in the
future be declared by the PTO, which could result in substantial costs to the
Company. There can be no assurance that the outcome of any such litigation or
interference proceedings will be favorable to the Company or that the Company
will be able to obtain licenses to technology that it may require or that, if
obtainable, such technology can be licensed at a reasonable cost.

Year 2000 Compliance. Many currently installed computer systems and
software products are coded to accept only two digit entries in the date code
field and cannot distinguish 21st century dates from 20th century dates. These
date code fields will need to distinguish 21st century dates from 20th century
dates and, as a result, many companies' software and computer systems may need
to be upgraded or replaced in order to comply with such "Year 2000"
requirements.

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<PAGE> 15

materially affected by the year 2000. The Company does not yet know the extent,
if any, of the impact of the year 2000 on its other systems and equipment or
those of third parties with which the Company does business. There can be no
assurance that third parties, such as suppliers, clinical research organizations
and collaborative parties, are using systems that are year 2000 compliant or
will address any year 2000 issues in a timely fashion, or at all. Any year 2000
compliance problems experienced by the Company, its suppliers, its clinical
research organizations, or its collaborative partners could have a material
adverse effect on the Company's business, financial condition and results of
operations.

Uncertainty of Product Pricing, Reimbursement and Related Matters. The
Company's business may be materially adversely affected by the continuing
efforts of governmental and third party payers to contain or reduce the costs of
health care through various means. For example, in certain foreign markets, the
pricing or profitability of health care products is subject to government
control. In the United States, there have been, and the Company expects there
will continue to be, a number of federal and state proposals to implement
similar government control. While the Company cannot predict whether any such
legislative or regulatory proposals or reforms will be adopted, the announcement
of such proposals or reforms could have a material adverse effect on the
Company's ability to raise capital or form collaborations, and the adoption of
such proposals or reforms could have a material adverse effect on the Company's
business, financial condition and results of operations.

In addition, in both the United States and elsewhere, sales of health care
products are dependent in part on the availability of reimbursement from third
party payers, such as government and private insurance plans. Significant
uncertainty exists as to the reimbursement status of newly approved health care
products, and third party payers are increasingly challenging the prices charged
for medical products and services. If the Company succeeds in bringing one or
more products to the market, there can be no assurance that reimbursement from
third party payers will be available or will be sufficient to allow the Company
to sell its products on a competitive or profitable basis.

No Prior Public Market for Series C Preferred Stock; Possible Volatility of
Stock Price. Before this offering, there has been no public market for the
Series C Preferred Stock, and there can be no assurance that an active trading
market will develop as a result of the offering or, if a trading market does
develop, that it will be sustained or that the shares of Series C Preferred
Stock can be resold at or above the assumed public offering price. The market
price of the Common Stock and Series C Preferred Stock, like the stock prices of
many publicly traded biotechnology and smaller pharmaceutical companies, may be
highly volatile. Announcements of technological innovations, regulatory matters
or new commercial products by the Company or its competitors, developments or
disputes concerning patent or proprietary rights, publicity regarding actual or
potential medical results relating to products under development by the Company
or its competitors, regulatory developments in both the United States and
foreign countries, public concern as to the safety of pharmaceutical 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 or Series C Preferred Stock.

No Assurance of Public Trading Market for Preferred Stock. An application
for inclusion on the OTC Bulletin Board has been filed by the Placement Agent.
The OTC Bulletin Board is an unorganized, inter-dealer, over-the-counter market
which provides significantly less liquidity than The Nasdaq Stock Market, and
quotes for stocks included on the OTC Bulletin Board are not typically listed in
the financial sections of newspapers as are those for The Nasdaq Stock Market.
Therefore, prices for securities traded solely on the OTC Bulletin Board may be
difficult to obtain and purchasers of the Series C Preferred Stock may be unable
to resell the Series C Preferred Stock at or near the original offering price or
at any price. In the event the Series C Preferred Stock is not included on the
OTC Bulletin Board, quotes for the Series C Preferred Stock may be included in
the "pink sheets" for the over-the-counter market. There can be no assurance
that a regular trading market for the Series C Preferred Stock will develop
after this offering or that, if developed, it will be sustained.

Environmental Regulation. In connection with its research and development
activities and manufacturing of clinical trial materials, the Company is subject
to federal, state and local laws, rules, regulations and policies governing the
use, generation, manufacture, storage, air emission, effluent discharge,
handling and disposal of certain materials and wastes. Although the Company
believes that it has complied

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<PAGE> 16

with these laws and regulations in all material respects and has not been
required to take any action to correct any noncompliance, there can be no
assurance that the Company will not be required to incur significant costs to
comply with environmental and health and safety regulations in the future. The
Company's research and development activities involve the controlled use of
hazardous materials, chemicals, viruses and various radioactive compounds.
Although the Company believes that its safety procedures for handling and
disposing of such materials comply with the standards prescribed by state and
federal regulations, the risk of accidental contamination or injury from these
materials cannot be completely eliminated. In the event of such an accident, the
Company could be held liable for any damages that result. The Company has
secured insurance to mitigate such expense, however, any such liability could
exceed the insurance coverage and resources of the Company. Such liability could
have a material adverse effect on the Company's business, financial condition
and results of operations.

Anti-Takeover Effect of Delaware Law and Certain Charter and Bylaws
Provisions. Certain provisions of the Company's Certificate of Incorporation and
Bylaws may have the effect of making it more difficult for a third party to
acquire, or discouraging a third party from attempting to acquire, control of
the Company. Such provisions could limit the price that certain investors might
be willing to pay in the future for shares of the Common Stock or Series C
Preferred Stock. At June 30, 1998 the Company's Board of Directors had the
authority to issue up to 400,000 additional shares of Preferred Stock (after
giving effect to the issuance of 200,000 shares of Series C Preferred Stock) and
to determine the price, rights, preferences, privileges and restrictions of
those shares without any further vote or action by the stockholders.

The rights of the holders of Common Stock and Series C Preferred Stock will
be subject to, and may be adversely affected by, the rights of the holders of
any Preferred Stock that may be issued in the future. The issuance of Preferred
Stock with voting rights, while providing desirable flexibility in connection
with possible acquisitions and other corporate purposes, could have the effect
of making it more difficult for a third party to acquire a majority of the
outstanding voting stock of the Company. Other than the Series C Preferred
Stock, the Company has no present plans to issue shares of Preferred Stock with
voting rights. Certain provisions of Delaware law applicable to the Company
could also delay or make more difficult a merger, tender offer or proxy contest
involving the Company, including Section 203 of the Delaware General Corporation
Law, which prohibits a Delaware corporation from engaging in any business
combination with any interested stockholder for a period of three years unless
certain conditions are met.

Product Liability Exposure; Limited Insurance Coverage. The Company's
business exposes it to potential product liability risks which are inherent in
the development, testing, manufacture, marketing and sale of pharmaceutical
products. Product liability insurance for the pharmaceutical industry generally
is expensive. There can be no assurance that the Company's present product
liability insurance coverage, which includes coverage for acts by third parties,
including manufacturers of the Company's product candidates, is adequate. Such
existing coverage will not be adequate as the Company further develops its
products, and no assurance can be given that adequate insurance coverage against
all potential claims will be available in sufficient amounts or at a reasonable
cost. Certain of the Company's development and manufacturing agreements contain
insurance and indemnification provisions pursuant to which the Company could be
held accountable for certain occurrences. Such liability could have a material
adverse effect on the Company's business, financial condition and results of
operations.

Limitation of Liability and Indemnification. The Company's Certificate of
Incorporation limits, to the maximum extent permitted by Delaware Law, the
personal liability of directors for monetary damages for breach of their
fiduciary duties as a director. The Company's Bylaws provide that the Company
shall indemnify its officers, directors, employees and agents to the full extent
permitted by the general corporation law of Delaware. The Company has entered
into indemnification agreements with its officers and directors containing
provisions which are in some respects broader than the specific indemnification
provisions contained in Delaware Law. The indemnification agreements may require
the Company, among other things, to indemnify such officers and directors
against certain liabilities that may arise by reason of their status or service
as directors or officers (other than liabilities arising from willful misconduct
of a culpable nature), to advance their expenses incurred as a result of any
proceeding against them as to which they could be indemnified, and to obtain
directors' and officers' insurance, if available on reasonable terms. The
Company currently maintains directors' and officers' insurance.

15
<PAGE> 17

Section 145 of the Delaware Law provides that a corporation may indemnify a
director, officer, employee or agent made or threatened to be made a party to an
action by reason of the fact that he was a director, officer, employee or agent
of the corporation or was serving at the request of the corporation against
expenses actually and reasonably incurred in connection with such action if he
acted 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. Delaware Law does not permit a corporation to eliminate a
director's duty of care, and the provisions of the Company's Certificate of
Incorporation have no effect on the availability of equitable remedies, such as
injunction or rescission, for a director's breach of the duty of care.

Dilution. The biopharmaceutical industry is capital intensive. In this
regard the Company has entered into a number of financings, many of which have
included securities that are convertible into shares of Common Stock. Dilution
may occur upon the exercise of outstanding options and warrants and upon
conversion of senior convertible notes, the Series A Preferred Stock, the Series
C Preferred Stock and, if issued, the Series B Preferred Stock. Stockholders may
also suffer additional dilution if the Company exercises its right to put
additional shares of its Common Stock to Fletcher International Limited,
pursuant to its agreements with such investor, as more fully set forth in
Exhibit 10.47 to the Registration Statement, of which this Prospectus forms a
part. See "Description of Capital Stock."

Dependence on Key Personnel. The Company's ability to maintain its
competitive position depends in part upon the continued contributions of its key
senior management. The Company's future performance also depends on its ability
to attract and retain qualified management and scientific personnel. Competition
for such personnel is intense, and there can be no assurance that the Company
will be able to continue to attract, assimilate or retain other highly qualified
technical and management personnel in the future. The loss of key personnel or
the failure to recruit additional personnel or to develop needed expertise could
have a material adverse effect on the Company's business, financial condition
and results of operations.

16
<PAGE> 18

USE OF PROCEEDS

The net proceeds to the Company from the sale of a minimum of 150,000
shares and a maximum of 200,000 shares of Series C Preferred Stock offered
hereby are estimated to be $13.8 million and $18.5 million, respectively, after
deducting the placement agent discount and commissions and estimated offering
expenses.

The Company anticipates that the proceeds of this offering, together with
the Company's current working capital and committed revenue from corporate
collaborations will be adequate to fund the clinical development of
SP-303/Provir for diarrhea in people with AIDS through an NDA filing, diabetes
research and compound development, clinical testing and related regulatory
activities for other indications for SP-303/ Provir, nikkomycin Z and SP-134101
and pre-commercialization activities for SP-303/Provir through at least March
31, 1999. In addition, the Company has acquired certain rights to sell
additional shares of Common Stock at specified intervals and subject to certain
conditions. See "Description of Capital Stock." Because the exercise of such
rights would be dilutive, the Company intends to utilize the proceeds of this
offering prior to seeking to access this source of capital.

The amounts and timing of the Company's expenditures may vary significantly
depending upon numerous factors, including the progress of Shaman's research and
development programs, the results of clinical studies, the timing of regulatory
approvals, the status of competitive products and the availability of
alternative financing, including agreements with other companies relating to the
development and marketing of the Company's products.

Pending application of the proceeds as described above, the Company plans
to invest the net proceeds of the offering in United States government
securities, other investment grade debt securities and other short-term
investments. Based on its current operating plan, the Company anticipates that
its existing capital resources and committed funding, along with the proceeds of
this offering and the interest thereon, will be adequate to satisfy its capital
needs through at least the first quarter of 1999. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."

17
<PAGE> 19

PRICE RANGE OF COMMON STOCK

Prior to this offering, there has been no public market for the Series C
Preferred Stock. The public offering price is expected to be $100 per share.

The Company's Common Stock trades on The Nasdaq National Market tier of The
Nasdaq Stock Market under the symbol SHMN. The Company's Common Stock began
trading on January 26, 1993.

Set forth below is the range of high and low bid prices for the Company's
Common Stock for each quarter in the two most recent fiscal years, and for the
first three quarters of 1998 (through July 27, 1998) as regularly quoted in The
Nasdaq National Market.

<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
Q1 FY 96............................................. $7.32 $5.13
Q2 FY 96............................................. 9.00 6.13
Q3 FY 96............................................. 8.63 5.75
Q4 FY 96............................................. 7.38 5.38
Q1 FY 97............................................. 6.25 3.88
Q2 FY 97............................................. 6.19 4.69
Q3 FY 97............................................. 7.00 5.12
Q4 FY 97............................................. 7.06 4.25
Q1 FY 98............................................. 5.63 4.00
Q2 FY 98............................................. 5.38 3.00
Q3 FY 98 (through July 27, 1998)..................... 4.13 3.25
</TABLE>

The Company has received correspondence from The Nasdaq National Market
regarding the Company's failure to comply with The Nasdaq National Market's
continued listing requirements. See "Risk Factors -- Nasdaq National Market
Listing Requirements."

DIVIDEND POLICY

No dividends have been paid on the Common Stock since the Company's
inception, and the Company does not anticipate paying any dividends in the
foreseeable future. The terms of the Company's loan agreement with MMC/GATX
Partnership No. 1 restrict the payment of dividends on any equity security so
long as any amount remains outstanding under such loan agreement. However,
MMC/GATX has waived such requirements with respect to the payment of dividends
on the Series C Preferred Stock. In addition, the Certificate of Designation of
Preferences of Series A Preferred Stock and the Certificate of Designation of
Preferences of Series C Preferred Stock require that the Company pay equivalent
per share dividends to the holders of the Company's Series A Preferred Stock and
Series C Preferred Stock, respectively, prior to the payment of dividends to the
holders of the Company's Common Stock.

18
<PAGE> 20

CAPITALIZATION

The following table sets forth the actual capitalization of the Company as
of March 31, 1998 and as adjusted to reflect the sale of a minimum of 150,000
and a maximum of 200,000 shares of Series C Preferred Stock offered hereby at
the public offering price of $100 per share and after deducting the placement
agent discount and commissions and estimated offering expenses.

<TABLE>
<CAPTION>
MARCH 31, 1998
------------------------------------
AS ADJUSTED
------------------------
ACTUAL MINIMUM(1) MAXIMUM(2)
--------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt and capital lease obligations, including
current portion.......................................... $ 16,602 $ 16,602 $ 16,602
Stockholders' equity
Preferred Stock, $.001 par value per share, 1,000,000
shares authorized(3);
Series A Preferred Stock, 400,000 shares designated;
400,000 shares issued and outstanding, actual and as
adjusted............................................ -- -- --
Series C Preferred Stock, 200,000 shares authorized
for designation; 150,000 shares (minimum) and
200,000 shares (maximum) issued and outstanding, as
adjusted............................................ -- -- --
Common Stock, $.001 par value per share, 40,000,000
shares authorized; 17,861,143 shares issued and
outstanding, actual and as adjusted................... 18 18 18
Additional paid-in capital............................... 117,452 131,277 135,977
Deferred compensation and other adjustments.............. (83) (83) (83)
Accumulated deficit...................................... (120,399) (120,399) (120,399)
--------- --------- ---------
Total stockholders' equity....................... (3,012) 10,813 15,513
--------- --------- ---------
Total capitalization............................. $ 13,590 $ 27,415 $ 32,115
========= ========= =========
</TABLE>

- ---------------
(1) Adjusted to reflect the sale of 150,000 shares of Series C Preferred Stock
at the public offering price of $100 per share and the application of the
net proceeds therefrom of approximately $13.8 million. See "Use of
Proceeds."

(2) Adjusted to reflect the sale of 200,000 shares of Series C Preferred Stock
at the public offering price of $100 per share and the application of the
net proceeds therefrom of approximately $18.5 million. See "Use of
Proceeds."

(3) See "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Liquidity and Capital Resources."

19
<PAGE> 21

SELECTED FINANCIAL DATA

(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------- -----------------
1997 1996 1995 1994 1993 1998 1997
-------- -------- -------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue from collaborative agreements......... $ 3,500 $ 3,406 $ 2,210 $ 1,360 $ 2,050 $ 875 $ 875
Operating expenses (1):
Research and development.................... 24,140 19,138 17,635 18,643 13,646 7,513 6,015
General and administrative.................. 4,833 3,537 3,705 3,545 2,659 1,276 991
-------- -------- -------- -------- -------- ------- -------
Total operating expenses........................ 28,973 22,675 21,340 22,188 16,305 8,789 7,006
-------- -------- -------- -------- -------- ------- -------
Loss from operations............................ (25,473) (19,269) (19,130) (20,828) (14,255) (7,914) (6,131)
Interest income................................. 1,218 1,082 1,695 2,045 1,543 232 251
Interest expense (cash)......................... (1,341) (603) (569) (698) (315) (807) (101)
Interest expense (non-cash)..................... (3,692) - - - - - -
-------- -------- -------- -------- -------- ------- -------
Net loss........................................ $(29,288) $(18,790) $(18,004) $(19,481) $(13,027) $(8,489) $(5,981)
======== ======== ======== ======== ======== ======= =======
Net loss per share (2).......................... $ (1.72) $ (1.39) $ (1.37) $ (1.50) $ (1.30) $ (0.48) $ (0.39)
======== ======== ======== ======== ======== ======= =======
Shares used in calculation of net loss per share
(2)........................................... 17,010 13,496 13,161 12,986 10,036 17,836 15,455
======== ======== ======== ======== ======== ======= =======
Ratio of earnings to combined fixed charges and
preferred stock dividends(3).................. -- -- -- -- -- -- --
======== ======== ======== ======== ======== ======= =======
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, 1998
----------------------------------------------------- -----------------------------------
1997 1996 1995 1994 1993 ACTUAL AS ADJUSTED
--------- -------- -------- -------- -------- --------- -----------------------
MINIMUM(4) MAXIMUM(5)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents, and
short-term investments....... $ 21,421 $ 16,533 $ 26,665 $ 39,843 $ 57,333 $ 14,199 $ 28,024 $ 32,724
Working capital................ 14,547 9,641 22,850 33,422 36,711 6,814 20,639 25,339
Total assets................... 26,753 22,377 33,810 49,673 67,229 19,277 33,102 37,802
Long-term obligations,
including current
installments................. 6,802 4,816 6,041 5,017 4,221 6,423 6,423 6,423
Senior Convertible Notes....... 9,967 -- -- -- -- 10,179 10,179 10,179
Accumulated deficit............ (111,910) (82,622) (63,832) (45,828) (26,348) (120,399) (120,399) (120,399)
Total stockholders' equity (net
capital deficiency).......... $ 5,148 $ 11,977 $ 24,205 $ 41,300 $ 60,436 $ (3,012) $ 10,813 $ 15,513
</TABLE>

- ---------------
(1) Certain expenses in 1994 have been reclassified to conform to 1997
presentation.

(2) Net loss per share is based on the weighted average number of common shares
outstanding during the period and, for periods prior to the Company's
initial public offering in January 1993, certain common equivalent shares.
The Company has not paid any dividends on its capital stock since its
inception.

(3) For purposes of calculating the ratio of earnings to combined fixed charges
and preferred stock dividends (i) earnings consist of operating loss plus
fixed charges and preferred stock dividends and (ii) fixed charges consist
of interest expense incurred, plus the portion of rent expense under
operating leases deemed by the Company to be representative of the interest
factor. For the years ended December 31, 1997, 1996, 1995, 1994 and 1993 and
for the three-month periods ended March 31, 1998 and 1997, the Company's
historical earnings were insufficient to cover fixed charges by $29.3
million, $18.8 million, $18.0 million, $19.5 million, $13.0 million, $8.5
million and $6.0 million, respectively.

(4) Adjusted to reflect the sale of 150,000 shares of Series C Preferred Stock
at the public offering price of $100 per share and the application of the
net proceeds therefrom of approximately $13.8 million. See "Use of Proceeds"
and "Capitalization".

(5) Adjusted to reflect the sale of 200,000 shares of Series C Preferred Stock
at the public offering price of $100 per share and the application of the
net proceeds therefrom of approximately $18.5 million. See "Use of Proceeds"
and "Capitalization."

20
<PAGE> 22

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

OVERVIEW

Shaman discovers and develops novel pharmaceutical products for major human
diseases and their symptoms through the isolation and optimization of active
compounds found in tropical plants with a history of medicinal use. The Company
has human clinical trials underway for its three leading product candidates --
SP-303/Provir, an oral product for the treatment of diarrhea in people with AIDS
and watery diarrhea; nikkomycin Z, an oral antifungal for the treatment of
systemic fungal infections; and SP-134101, an oral product for the treatment of
Type II diabetes. Shaman maintains an active Type II diabetes research program
which serves as the basis for its collaboration with Lipha/Merck.

The Company began operations in March 1990. To date, Shaman has not sold
any products. Assuming favorable completion of the Phase III clinical trial
(which is over 75% enrolled) and a fast track approval from the FDA, the Company
expects to achieve its first commercial product launch in the second half of
1999. The Company's accumulated deficit at March 31, 1998, was approximately
$120.4 million. Since its inception, Shaman has financed its research,
development and administrative activities through various private and public
equity financings, loans and debt financings, and collaborative agreements with
pharmaceutical companies and, to a lesser extent, through equipment and
leasehold improvement lease financings.

RESULTS OF OPERATIONS FOR THE QUARTERS ENDED MARCH 31, 1998 AND 1997

The Company recorded collaborative revenues of $875,000 for each of the
quarters ended March 31, 1998 and 1997. Revenues for these three-month periods
resulted from research funding from Ono and from Shaman's ongoing collaboration
with Lipha/Merck. The Company expects that revenues from collaborative
agreements will continue to fluctuate in the future as development of its
various compounds proceeds and new product candidates are partnered for
development and commercialization. In May 1998, the Company's collaborative
agreement with Ono, and the ongoing research and development funding received
pursuant thereto, expired under the original terms of the agreement and was not
renewed. Under the original terms of the agreement, Ono will continue to provide
milestone payments and royalties to Shaman on any resulting products they
develop from compounds identified during the three-year term of the agreement.

The Company incurred research and development expenses of $7.5 million and
$6.0 million for the quarters ended March 31, 1998 and 1997, respectively. This
increase was primarily attributable to the Company's increased clinical
development activities with respect to SP-303/Provir. Research and development
expenses are expected to increase in 1998 as the Company continues its clinical
development activities with respect to SP-303/Provir, other products continue
through development, and the Company maintains its diabetes research program.

General and administrative expenses were $1.3 million and $991,000 for the
quarters ended March 31, 1998 and 1997, respectively. This increase was
primarily attributable to increases in compensation and marketing research
related to late stage clinical products, as well as additional legal dispute
costs. The Company's expanded research and clinical activities are not expected
to require commensurate increases in general and administrative support and
expense.

Interest income was $232,000 and $251,000 for the quarters ended March 31,
1998 and 1997, respectively. Interest income decreased for the period ended
March 31, 1998, compared with the period ended March 31, 1997, due to lower
average cash and investment balances as the Company continues to fund its
operations. Interest expense was $807,000 and $101,000 for the quarters ended
March 31, 1998 and 1997, respectively. Interest expense increased for the period
ended March 31, 1998, compared with the period ended March 31, 1997 due to
higher average debt balance and amortization of the non-cash interest expense of
$266,000 in connection with certain debt financing.

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

The Company recorded collaborative revenues of $3.5 million, $3.4 million,
and $2.2 million for 1997, 1996, and 1995, respectively. Revenues for 1997
resulted from the Company's research funding from Ono and research funding from
Shaman's on-going collaboration with Lipha/Merck. Revenues for 1996 resulted
from

21
<PAGE> 23

the Company's research funding from Ono, an additional $1.0 million payment from
Ono for enhanced rights to Shaman's antidiabetic compounds, and research
payments and access fees from Shaman's collaboration with Lipha/Merck. Revenues
in 1995 resulted solely from the Company's relationship with Ono, and included a
one-time access fee associated with the May 1995 commencement of the
collaboration. The Company expects that revenues from collaborative agreements
will continue to fluctuate in the future as development of its various compounds
proceeds and new products are partnered for development and commercialization.

The Company incurred research and development expenses of $24.1 million,
$19.1 million, and $17.6 million for 1997, 1996, and 1995, respectively. These
expenses include salaries for scientific personnel, clinical development costs,
laboratory supplies, patent protection and consulting fees, travel, plant
collections, facilities expenses and other expenditures relating to research and
product development. Research and development expenses increased $5.0 million in
1997 compared with 1996, and increased $1.5 million in 1996 compared with 1995.
The increase in 1997 was primarily attributable to costs of $3.8 million
associated with the Company's increased clinical development activities with
respect to SP-303/Provir, partially offset by reduced expenses of $1.1 million
for clinical development activities for nikkomycin Z, and to increased
scientific salaries of $1.2 million. The increase in 1996 was primarily
attributable to the Company's clinical development activities for SP-303/Provir,
as well as additional research and development activities with respect to
nikkomycin Z, partially offset by reduced expenses for clinical development
activities for Virend. Research and development expenses are expected to
increase in 1998 as SP-303/Provir enters and proceeds with Phase III clinical
development for diarrhea in people with AIDS, other products continue through
development and the Company actively maintains its diabetes research program.

General and administrative expenses were $4.8 million, $3.5 million and
$3.7 million for 1997, 1996 and 1995, respectively. These expenses include
administrative salaries, consulting, legal, travel and other operating expenses.
General and administrative expenses increased $1.3 million in 1997 compared to
1996, and decreased $0.2 million in 1996 compared to 1995. The increase in 1997
was primarily attributable to an increase in compensation and marketing research
of $388,000 related to late stage clinical products, as well as an increase in
legal expenses of $631,000 over 1996 primarily related to certain disputes
related to the Company's intellectual property rights. The Company's expanded
research and clinical activities in 1998 are not expected to require
commensurate increases in general and administrative support.

Interest income was $1.2 million, $1.1 million and $1.7 million for 1997,
1996 and 1995, respectively. Interest income increased $100,000 in 1997 compared
with 1996 and decreased $600,000 in 1996 compared with 1995. Interest income
fluctuations have been consistent with changes in average cash and investment
balances with which the Company substantially funded its operations in 1997,
1996 and 1995. The balances of cash, cash equivalents and investments were $21.4
million, $16.5 million and $26.7 million at December 31, 1997, 1996 and 1995,
respectively.

Interest expense was $5.0 million, $603,000 and $569,000 for 1997, 1996 and
1995, respectively. Interest expense increased in 1997 compared with 1996
principally due to a $3.7 million non-cash interest charge related to the
issuance of senior convertible notes in June 1997, as well as the interest
expense related to the Company's secured debt financing in May 1997. Interest
expense increased in 1996 compared with 1995 as the Company absorbed a full
year's expense on its unsecured term loan. The Company's general policy is to
finance capital equipment and tenant improvements on a long-term basis, and
interest expense in the future will be dependent in part on the Company's
capacity to finance its future equipment needs.

At December 31, 1997, the Company had federal net operating loss carry
forwards of approximately $102 million. The federal net operating loss carry
forwards will expire at various dates beginning in 2004 through 2012, if not
sooner utilized. Utilization of the net operating losses and credits is subject
to a substantial annual limitation due to the "change in ownership" provisions
of the Internal Revenue Code of 1986, as amended. The annual limitation may
result in the expiration of net operating losses and credits before utilization.

LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 1998, the Company's cash, cash equivalents, and investments
totaled approximately $5.2 million, compared with $21.4 million at December 31,
1997. The Company invests excess cash according to

22
<PAGE> 24

its investment policy that provides guidelines with regard to liquidity, type of
investment, credit ratings and concentration limits.

In June 1998, the Company entered into Stock Purchase Agreements (the
"Stock Agreements") with certain of its stockholders (the "Buyers") pursuant to
which the Company acquired the right to sell to the Buyers, subject to certain
conditions and in one or two tranches closing no later than February 28, 1999,
up to an aggregate of 7,000 shares of the Company's Series B Custom Convertible
Preferred Stock (the "Series B Preferred Stock") for an aggregate purchase price
of $7,000,000. The Stock Agreements became effective on June 22, 1998 (the
"Effective Date") but will be terminated upon the closing of this offering. See
"Description of Capital Stock."

As consideration for entering into the Stock Agreements, the Company issued
to the Buyers on the Effective Date warrants (the "June Warrants") to purchase
an aggregate of 350,000 shares of Common Stock. The June Warrants are
exercisable for a period of five years after the Effective Date at an exercise
price per share equal to 115% of the average trading price of the Common Stock
during specified measurement periods. The June Warrants provide for adjustment
of the number of shares of Common Stock issuable upon exercise thereof,
including upon the distribution of certain dividends or upon the division or
combination of the Company's Common Stock. The Company filed a registration
statement with the Securities and Exchange Commission (the "SEC") for the resale
of shares issued upon exercise of the June Warrants, which registration
statement was declared effective on July 10, 1998.

In June 1997, the Company privately issued $10.4 million of senior
convertible notes (the "1997 Private Placement"). The notes mature in August
2000 and bear interest at a rate of 5.5% per annum. Interest on the notes may be
paid in Common Stock or cash at the Company's option. The notes are convertible
into Common Stock of the Company at a 10% discount from the low trading price
during a designated time period prior to the conversion. The Company filed a
registration statement with the SEC for the resale of shares issued upon
conversion of these notes, which registration statement was declared effective
on August 29, 1997. As of July 24, 1998, a total principal amount of $3.9
million of the notes had been converted into an aggregate of 1,138,540 shares of
Common Stock.

In March 1998, the Company and the purchasers of the notes entered into an
Amendment Agreement (the "Amendment Agreement") in order to avoid conversion of
the notes at a price that would be unduly dilutive to the Company's existing
stockholders. As consideration for entering into the Amendment Agreement, the
Company issued to the purchasers of the notes warrants (the "March Warrants") to
purchase an aggregate of 137,500 shares of Common Stock. The March Warrants are
exercisable through March 18, 2001 at an exercise price of $7.50 per share. The
Company filed a registration statement with the SEC for the resale of shares
issued upon exercise of the March Warrants, which registration statement was
declared effective on July 10, 1998.

In May 1997, the Company obtained a $5.0 million loan, which amortizes over
36 months to pay off pre-existing debt, finance capital asset acquisitions and
finance continued research and clinical development of the Company's existing
product candidates. The loan carries an annual interest rate of 14.58% and is
payable in equal monthly installments over the term of the loan. The lender was
granted 10-year warrants to purchase 200,000 shares of the Company's Common
Stock at an exercise price of $6.25 per share. The Company has attributed a
value of $648,000 to these warrants. This amount has been recorded as a discount
on the related debt and is being amortized as interest expense over the term of
the loan.

In September 1996, the Company entered into a five-year collaborative
agreement with Lipha/Merck to jointly develop Shaman's antihyperglycemic drugs.
Upon signing the collaboration, the Company received an annual research fee of
$1.5 million which was amortized to revenue over 12 months, as work was
performed. The Company also received approximately $3.0 million for 388,918
shares of Common Stock priced at $7.71 per share, representing a 20% premium to
the weighted average price of the Company's Common Stock at the time of
purchase. In exchange for development and marketing rights in all countries
except Japan, South Korea, and Taiwan (which are covered under an earlier
agreement between Shaman and Ono), Lipha/Merck will provide up to $9.0 million
in research payments and up to $10.5 million in equity investments priced at a
20% premium to a multi-day volume weighted average price of the Company's Common
Stock at the time of purchase. The agreement also provides for additional
preclinical and clinical milestone payments to the Company in excess of
23
<PAGE> 25

$10.0 million per compound for each antihyperglycemic drug developed and
commercialized. Lipha/Merck will bear all pre-clinical, clinical, regulatory and
other development expenses associated with the compounds selected under the
agreement. In addition, as products are commercialized, Shaman will receive
royalties on all product sales outside the United States and up to 50% of the
profits (if the Company exercises its co-promotion rights) or royalties on all
product sales in the United States. Certain of the milestone payments will be
credited against future royalty payments, if any, due to the Company from sales
of products developed pursuant to the agreement. As of July 10, 1998, the
Company has received an aggregate of $7.5 million under the agreement. A balance
of $12 million in committed capital remains under the agreement.

In July 1996, the Company closed a private placement (the "1996 Private
Placement") pursuant to Regulation S under the Securities Act of 1933, as
amended, with one investor in which it received gross proceeds of $3.3 million
for the sale of 400,000 shares of Series A Preferred Stock and for the issuance
of a six-year warrant to purchase 550,000 shares of the Company's Common Stock
at an exercise price of $10.18 per share. The Series A Preferred Stock does not
carry a dividend obligation and will convert into Common Stock no later than
July 23, 1999 at a price per share between $6.00 and $8.15, depending on the
market value of the Company's Common Stock during the period prior to
conversion. Holders of Series A Preferred Stock are entitled to a liquidation
preference of $8.15 per share. In addition to the sale of Series A Preferred
Stock and the warrant, the Company has the right, from time to time during the
period beginning January 1997 and ending July 2000, subject to certain
conditions, including continued listing of the Common Stock on any national
exchange to sell up to 1,200,000 additional shares of Common Stock to the
investor at a formula price of 100% or 101% of a multi-day average of the
Company's Common Stock price at the time of sale. If the Company exercises this
right, the investor has the option to increase the number of shares it purchases
by up to an aggregate of 527,500 shares.

Over the next year and potentially longer depending on clinical results and
regulatory reviews, the Company expects to incur substantial additional costs
relating to the continued preclinical and clinical testing of its products,
regulatory activities and research and development programs. The Company
anticipates that its cash, cash equivalents and investment balances, the
collaborative revenue committed by Lipha/Merck, Lipha/Merck's commitment to
purchase additional equity and either (i) the proceeds of this offering or (ii)
Shaman's additional rights to sell Common Stock under the 1996 Private
Placement, will be adequate to fund operations through the filing of an NDA on
SP-303/Provir for the fast track indication of diarrhea in people with AIDS, at
least through the first quarter of 1999. Milestone payments which may be
received by the Company from Ono and Lipha/Merck would extend the Company's
capacity to finance its operations beyond that time. However, there can be no
assurance that these milestones will be achieved, nor that additional funding,
if needed, will be available on reasonable terms, or at all.

YEAR 2000 COMPLIANCE

Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field and cannot distinguish
21st century dates from 20th century dates. These date code fields will need to
distinguish 21st century dates from 20th century dates and, as a result, many
companies' software and computer systems may need to be upgraded or replaced in
order to comply with such "Year 2000" requirements.

The Company is in the process of assessing the impact of year 2000 on its
operations and systems, including those of its suppliers and collaborators and
other third parties. Management is in the process of formalizing its assessment
procedures and developing a plan to address identified issues, if any. To date,
the Company has evaluated its financial and accounting systems and concluded
that they are not and will not be materially affected by the year 2000. The
Company does not yet know the extent, if any, of the impact of the year 2000 on
its other systems and equipment or those of third parties with which the Company
does business. There can be no assurance that third parties, such as suppliers,
clinical research organizations and collaborative parties, are using systems
that are year 2000 compliant or will address any year 2000 issues in a timely
fashion, or at all. Any year 2000 compliance problems of either the Company, its
suppliers, its clinical research organizations, or its collaborative partners
could have a material adverse effect on the Company's business, operating
results and financial conditions.

24
<PAGE> 26

BUSINESS

Shaman discovers and develops novel pharmaceutical products for the
treatment of human diseases and their symptoms through the isolation and
optimization of active compounds found in tropical plants. The Company believes
that by focusing on drugs extracted from plants with a long history of medicinal
use, its drug discovery efforts may be quicker and more likely to lead to safe
and effective pharmaceuticals. Shaman has three product candidates in clinical
development -- SP-303/Provir, nikkomycin Z, and SP-134101. These products target
five indications. Of these product candidates, the most advanced, SP-303/Provir,
entered into a Phase III human clinical trial in March 1998 for the treatment of
diarrhea in people with AIDS. In May 1998, the FDA formally notified the Company
that SP303/Provir had been granted "fast track product" designation by the FDA.
Earlier in 1998, the FDA also advised the Company that upon completion, data
from Shaman's single Phase III study along with corroborative information from a
previously completed Phase II trial may serve as the basis for the submission of
an NDA. In the Phase II trial, SP-303/Provir was shown to provide a significant
treatment effect for diarrhea in people with AIDS. If the results of the current
trial (which is currently over 75% enrolled) are positive, the Company expects
to file an NDA for commercial approval of SP303/Provir in early 1999. With a
fast track designation from the FDA for the indication of diarrhea in people
with AIDS the Company is preparing for potential product launch in the second
half of 1999 and intends to retain U.S. marketing rights to this product. In
addition, in July 1998 the Company announced positive results from two
confirming Phase II studies for SP-303/Provir in acute watery diarrhea. The
Company intends to out-license marketing rights for Europe and other parts of
the world.

BACKGROUND

Shaman builds on the knowledge and expertise of ethnobotanist and physician
teams who work with traditional healers to identify effective treatments in the
therapeutic areas targeted by the Company. These teams gather comparative data
on traditional medicinal uses of plants from geographically diverse tropical
areas and prioritize plant drug candidates based on common use among cultures
and other factors. The prioritization process includes cross-checking
field-derived information against the results of literature searches as to
chemical constituents, previously discovered biological activity and other
reported medicinal uses. Shaman isolates and identifies the active compounds
from plant extracts by testing for activity in whole animal models at each step
of its purification process. The Company's natural product chemists use
chromatography, spectroscopy, nuclear magnetic resonance ("NMR") and other
proven technologies to identify and isolate compounds and structures. Because
these compounds reflect the previously untapped plant diversity of the rain
forests, they have, to date, also exhibited significant diversity of chemical
structure. In addition, the Company's whole animal screening approach provides
the opportunity to discover novel methods of treatment for diseases in which the
underlying mechanism of action of a disease is complicated and not well
understood.

THE SHAMAN BUSINESS STRATEGY

Shaman's current operational priority is to complete the Phase III trial
(which is over 75% enrolled) and prepare for the continued clinical development
and preparation for commercialization of its first potential product,
SP-303/Provir, for the fast track indication of diarrhea in people with AIDS.
Assuming favorable completion of the Phase III clinical trial and a fast track
approval from the FDA, the Company expects to file an NDA for commercial
approval of SP-303/Provir in early 1999 and is preparing for potential product
launch in the second half of 1999. The Company intends to retain U.S. marketing
rights to this product.

25
<PAGE> 27

CLINICAL AND RESEARCH PROGRAMS

Shaman has established and is continuing to build a portfolio of product
candidates. The following table describes the major therapeutic areas in which
the Company is conducting its product development and research:

<TABLE>
<CAPTION>
PRODUCT CANDIDATE INDICATION STATUS COMMERCIAL RIGHTS
----------------- ---------- ------ -----------------
<S> <C> <C> <C>
SP-303/Provir AIDS-associated diarrhea in Ongoing Phase III study Shaman
people with AIDS initiated Q1, 1998.
Completed a Phase II
efficacy study in Q4,
1997.
SP-303/Provir Watery diarrhea Completed two Phase II Shaman
dosing trials in Q3,
1998. Completed Phase II
efficacy studies in 1996
and 1997.
SP-303/Provir Pediatric diarrhea Formulation under Shaman
development.
Nikkomycin Z Endemic mycoses Completed Phase I study Shaman
in Q2, 1997.
Nikkomycin Z and Azoles Azole-resistant Candida Initiation pending pre- Shaman
clinical development by
Pfizer.
SP-134101 Type II Diabetes Initiated Phase I study Shaman
in Q1, 1998.
Oral antihyperglycemic Type II Diabetes Preclinical. Ono; Lipha/Merck; and
compounds Shaman. Shaman to receive
royalties on sales outside
the U.S. and profit sharing
in the U.S.
</TABLE>

SP-303/Provir

The Shaman-patented compound SP-303 is the active ingredient in
SP-303/Provir. SP-303 is extracted from the latex of the Croton tree, which
grows abundantly in Latin America. Latex extractions are used orally by many
native cultures throughout Latin America for a variety of medicinal purposes,
including gastrointestinal problems as well as respiratory infections.

SP-303/Provir is an oral drug that acts as a specific inhibitor of fluid
loss via an antisecretory mechanism to treat diarrhea. In clinical trials, the
Company determined that SP-303/Provir is not detectable in plasma, a critical
advantage in that it reduces the potential for interactions with other drugs and
minimizes side effects.

SP-303/Provir demonstrated a significant treatment effect for diarrhea in
people with AIDS in results from a Phase II study released in October 1997. A
Phase III study in this population was initiated in March 1998. The FDA has
advised Shaman that, if successful, the Company may submit data from this single
Phase III study, along with the corroborative data from Phase II, as the basis
for an NDA submission expected in early 1999.

In July 1998, SP-303/Provir also demonstrated a significant treatment
effect in two separate Phase II studies in acute watery diarrhea.

Diarrhea in People with AIDS/HIV

Diarrhea in people with HIV and AIDS is a devastating syndrome which
afflicts between 20% and 80% of patients. In the developed world, there are
currently estimated to be 728,000 people with AIDS, 223,000 of whom are in the
United States alone. Between 650,000 and 900,000 individuals in the United
States are believed to be infected with HIV. Sources indicate that, of the
combined groups in the United States, approximately 50% suffer with diarrhea at
any given time. Although protease inhibitors and highly active antiretroviral
therapy ("HAART") have improved the patient prognosis for AIDS, the problem of
diarrhea persists, and in many cases is drug-related, representing a serious
unmet medical need.

26
<PAGE> 28

ANTI-HIV THERAPIES

REPORT OF DIARRHEA SIDE-EFFECT INCIDENCE

<TABLE>
<CAPTION>
PRODUCT MANUFACTURER PACKAGE INSERT
------- ------------ --------------
<S> <C> <C>
Crixivan (Indinavir) Merck 4.6%
Viracept (Nelfinavir) Agouron 14% - 32%
Norvir (Ritinovir) Abbott Laboratories 12.8%
Invirase (Saquinavir) Roche 3% - 4.9%
Epivir (3TC)
(Lamivudine) Glaxo Wellcome 18%
Zerit (D4T) (Stavudine) Bristol Meyers-Squibb 50%
</TABLE>

In fact, diarrhea in people with AIDS not only compromises the health and
quality of life of individuals attempting to live a normal lifestyle; diarrhea
has been shown to dramatically increase the cost of their medical care.
Furthermore, patients with chronic diarrhea are forced to restrict their daily
activities to accommodate the disruptions caused by this condition because
current symptomatic therapies provide either poor relief or undesirable
side-effects.

The Company believes that a treatment which reduces the frequency and
volume of diarrhea in people with AIDS and at the same time creates positive new
impacts on their health and quality of life as well as the cost of their care
represents a large, focused market opportunity. Shaman believes that with an
in-house sales force, it has the potential to create a larger market opportunity
in the United States than would be available if SP-303/Provir were outlicensed
to a pharmaceutical partner. In addition, a decision to retain U.S. marketing
rights represents an opportunity to generate larger profit margins on the
commercialized product to the extent the product can be sold by the Company's
own dedicated sales force as opposed to royalties collected from that of a
pharmaceutical partner. For both of these reasons, Shaman has decided to develop
an internal sales force to detail those physicians who specialize in AIDS in the
United States. The Company intends, however, to out-license marketing rights for
SP-303/Provir in Europe and other parts of the world. See "Risk
Factors -- Limited Manufacturing and Marketing Experience and Capacity."

Shaman believes that the competitive promotional response will be limited
in this discrete market because current oral anti-diarrheals have no indication
in this patient population and because, for the most part, they are older,
generic products. Furthermore, since SP-303/Provir is a natural product, with
the potential to dramatically improve the everyday lifestyle activities of
chronic diarrhea sufferers in the AIDS population, the Company believes that
physicians and patients alike will be in a position to decide to use the
medication without having to consider the potential of compromising other
therapies or treatment regimens already in place. See "Risk Factors -- Rapid
Technological Change and Substantial Competition."

SP-303/Provir is currently being evaluated for the treatment of diarrhea in
people with AIDS in a Phase III human clinical trial (which is over 75%
enrolled) that began in late March 1998. This double-blind, placebo-controlled
study is planned to include approximately 320 patients at more than 20 sites
throughout the United States. The study includes both an in-patient and an
out-patient phase for a total of four weeks of treatment. The primary endpoint
for this study is a reduction in stool weight, data for which is collected
during the in-patient phase of the study.

A Phase II study, which was completed in October 1997, and the data
therefrom was presented at the 12th World AIDS Conference in Geneva, Switzerland
in July 1998, demonstrated a significant treatment effect for chronic diarrhea
in people with AIDS. The results of the study suggested that SP-303/Provir is
effective in reducing stool weight and abnormal stool frequency in people with
AIDS and chronic or sub-acute diarrhea. In addition, treatment with
SP-303/Provir was well tolerated with no imbalance between treated and placebo
groups in the occurrence of adverse events.

Assuming favorable Phase III clinical results, the Company is preparing to
file an NDA for this indication of SP-303/Provir in early 1999, and, with fast
track designation from the FDA, is preparing for potential product launch in the
second half of 1999.

27
<PAGE> 29

Watery Diarrhea

Shaman has completed Phase II trials showing preliminary efficacy for
SP-303/Provir for the treatment of watery diarrhea. Two additional confirming
Phase II studies were completed in the third quarter of 1998.

Watery diarrhea is often caused by infectious agents such as V. cholerae
and E. coli. These agents secrete toxins that adhere to the intestinal wall and
cause increased secretion of chloride ions from intestinal cells, and in fluid
accumulation in the small intestine. This, in turn, leads to severe and, in some
cases, life-threatening diarrhea. According to 1995 data from IMS America, Ltd.
("IMS"), the leading pharmaceutical marketing data firm, over 26 million
prescriptions are written annually for watery diarrhea. Moreover, approximately
67 million over-the-counter product units are sold in the United States alone.

Current primary treatments for watery diarrhea do not address the
dehydration or fluid loss caused by the illness. Watery diarrhea is typically
treated with one of two treatment regimens: antibiotics or antimotility agents.
Antibiotics kill bacteria, while antimotility agents reduce diarrhea frequency
by inhibiting peristaltic action (natural muscular contraction of the intestinal
tract). For mild to moderate cases of watery diarrhea, the use of antibiotics is
discouraged by the World Health Organization ("WHO") and the Centers for Disease
Control ("CDC"). Bacteria can, in many cases, build up a resistance to
antibiotics, and antibiotics can reduce the body's ability to build natural
immunities to disease and, therefore, increase the likelihood of reinfection.

While antimotility agents are effective in reducing the severity of watery
diarrhea, they often cause severe constipation. In addition, because of reduced
motility in the intestine, the bacteria are often not eliminated and remain in
the gut. When the treatment is stopped, the patient often experiences rebound
diarrhea. Moreover, these agents are not recommended in children and the elderly
because of the risk of prolonging the illness.

Preclinical studies indicate that SP-303/Provir inhibits the secretion of
chloride ions from intestinal cells, specifically countering fluid loss, a
fundamental mechanism causing diarrhea. Based on its mechanism of action and
results of initial clinical testing, it appears that SP-303/Provir does not
affect the normal motility of the intestine. Furthermore, the lack of detection
of SP-303/Provir in plasma contributes to its safety, its reduced potential for
drug interactions, and its specificity of action.

The Company believes that the market opportunity for a treatment of
traveler's diarrhea, one of several watery diarrhea indications, is significant.
More than 35 million individuals travel annually to countries that present the
risk of traveler's diarrhea. While several therapies are popularly prescribed to
minimize the effects of a diarrheal episode, market research indicates that
sufferers are seeking greater relief.

In July 1998, the Company completed two separate Phase II dose optimization
studies of SP-303/Provir in acute watery diarrhea patients from two different
populations. Both studies were double-blind, randomized, placebo-controlled.

The first study further validated SP-303/Provir's ability to treat
traveler's diarrhea in Americans travelling in Jamaica and Mexico. The study
involved 184 patients treated for two days on an outpatient basis with either
placebo or one of three SP-303/Provir doses given four times per day: 125mg,
250mg or 500mg. In the key efficacy endpoint, time to last unformed stool
("TLUS") over 48 hours (the standard for measurement in acute watery diarrhea
studies), all doses reached a highly statistically significant (p#0.01) result
versus placebo. The study showed SP-303/Provir to be well tolerated. More than
35 million individuals travel annually to countries that present the risk of
traveler's diarrhea.

The second study evaluated SP-303/Provir in Venezuelan nationals who
locally contracted acute watery diarrhea. A total of 140 patients were enrolled
in the trial, which took place in a hospital setting. SP-303/ Provir treatment
with 125mg four times per day for two days resulted in statistically significant
earlier resolution of diarrhea as compared to placebo, as measured by TLUS over
48 hours. Results for patients treated with 250mg and 500mg doses did not
achieve statistical significance. This study also showed SP-303/ Provir to be
well tolerated.

The effectiveness of SP-303/Provir in mild non-specific diarrhea was the
subject of an out-patient study also in 1997. After an analysis of interim
results, the study was discontinued. The Company has suspended its out-patient
study design of mild, non-specific diarrhea and is now focusing on
moderate-to-severe diarrhea.
28
<PAGE> 30

In November 1996, the Company completed a Phase II pilot trial in 75
patients to determine the efficacy of SP-303/Provir in the treatment of
traveler's and non-specific diarrhea. This open-label Phase II study was
conducted by Dr. Herbert DuPont, a world recognized expert in travel medicine,
of the University of Texas at Houston and Baylor College of Medicine. It
included American subjects who suffered from diarrhea upon traveling to Mexico
as well as Mexican nationals suffering from diarrhea of unknown cause, or
non-specific diarrhea.

In the pilot study, 89% of the 75 patients treated with SP-303/Provir
responded favorably (returned to normal bowel function) after 48 hours of
treatment, with over 60% of those patients returning to normal after just 24
hours. These preliminary data were especially encouraging in light of the fact
that traveler's diarrhea left untreated usually lasts five to seven days.
Non-specific diarrhea usually lasts three to four days. Of the 71 patients
available for follow up, none of the patients experienced worsening of the
diarrhea illness once resolution of the disease began. In addition, no
significant adverse reactions were reported.

Shaman conducted Phase I clinical trials for SP-303/Provir in more than 150
adults, children and infants as young as three months of age, in both single and
multiple doses. These trials demonstrated that SP-303/Provir is safe and
indicated no significant adverse side effects of the drug.

The FDA now allows dissemination of information on unapproved and new uses
for currently marketed drugs. Information can now be distributed to physicians
and other healthcare professionals as long as the information has been
pre-cleared by the FDA, is not false and misleading, and has been designated an
unapproved use.

Nosocomial Diarrhea

Nosocomial diarrhea, which is acquired during a patient's hospital stay, is
another prevalent form of acute diarrhea. Approximately five percent to ten
percent of overall patients admitted to hospitals acquire nosocomial diarrhea.
Approximately 40% of adults in the intensive care unit ("ICU") of a hospital
procure nosocomial diarrhea, and 50% of children procure nosocomial diarrhea in
the ICU. Pending the results of the two Phase II acute watery diarrheal studies,
Shaman intends to evaluate SP-303/Provir for the indication of nosocomial
diarrhea.

Diarrhea as a Result of Pharmaceutical Side-Effects

According to the 1998 Physicians Desk Reference, 82% of the top 100 selling
pharmaceuticals indicate diarrhea as a common side effect. Sixteen percent of
such pharmaceutical package inserts identify diarrhea as one of the top three
side effects, and 10% of such pharmaceuticals list diarrhea as the number one
side effect associated with that product.

Pediatric Diarrhea

According to the Journal of Pediatrics, in the United States alone, over 30
million episodes of diarrhea occur annually in children under five years of age.
Of these, approximately 35% seek medical care. In addition, there are over one
billion episodes of pediatric diarrhea worldwide annually and in developing
countries, more than four million deaths associated with pediatric diarrhea per
year among children less than five years old. In the United States, the average
episode for children under the age of five is 1.8 per year, per child. Current
recommended therapies for pediatric diarrhea are designed to replace water and
electrolytes. Antimotility agents are contraindicated in children less than two
years of age and not recommended for treatment of diarrhea in children of any
age. In the vast majority of diarrheal illnesses in the United States,
particularly those in children, the use of antibiotics is not recommended.
Currently, there is no FDA-approved product for this indication available on the
market for children under the age of five.

Shaman is currently engaged in formulation development of SP-303/Provir as
a potential treatment for pediatric diarrhea in preparation for initiating a
clinical development program.

29
<PAGE> 31

Nikkomycin Z

Nikkomycin Z was licensed in 1995 from Bayer AG. See
"Business -- Collaborative Relationships and License Agreements." Nikkomycin Z
is an orally administered product designed for the treatment of endemic mycoses
and other systemic fungal infections. Nikkomycin Z is novel in its mechanism of
action against fungal infections. Preclinical studies of nikkomycin Z indicate
that it is fungicidal and could prove superior to current treatments. By
inhibiting chitin synthetase, which is found in the cell walls of most fungi,
but not in mammalian cells, nikkomycin Z inhibits cell wall synthesis,
ultimately causing fungal cells to expand and burst. The lack of chitin in
mammalian cells should prevent similar damage to normal cells in tissues
affected by these fungal infections. A single-dose Phase I trial in the United
Kingdom was completed in 1997.

Endemic mycoses are systemic fungal infections concentrated in the
southwest, central and northeast regions of the United States. There are three
basic forms of endemic mycoses: coccidiomycosis (valley fever), histoplasmosis
and blastomycosis ("cocci," "histo" and "blasto," respectively). The infecting
organisms are found in soil. When the soil is disturbed (such as during crop
planting or harvesting), the fungi become airborne and may be inhaled into the
lungs. Once infected, otherwise healthy individuals will experience mild
flu-like symptoms but may never be diagnosed with the disease. In more severe
cases, however, the fungus spreads systemically and results in disseminated
fungal infections. It is estimated that approximately 240,000 persons per year
in the United States show clinical symptoms of endemic mycoses. The Company
believes that the annual market for treatment of endemic mycoses in the United
States is approximately $150 million.

Currently, two classes of drugs are commonly prescribed for the treatment
of endemic mycoses: azoles, which are fungistatic (inhibit the growth of the
fungus, but do not kill it) and polyenes (including amphotericin B), which are
fungicidal (kill the fungus). However, often these drugs cannot be tolerated in
high enough doses to kill the fungi.

Candidiasis is a fungal infection that can result in serious systemic
disease. Approximately 265,000 patients worldwide are treated annually for
systemic candidiasis. Nikkomycin Z has also been shown to be capable of
interacting in a synergistic fashion with a number of known antifungal
compounds, including fluconazole (Diflucan) and itraconazole (Sporonox), the two
largest selling antifungals in the world. Based on this synergistic activity,
the Company plans to supply nikkomycin Z to Pfizer Corporation for a combination
study that tests nikkomycin Z in combination with fluconazole in treating
azole-resistant esophageal candidiasis. The estimated annual total market of
antifungal agent sales for systemic fungal infections is approximately $2.0
billion.

SP-134101

SP-134101 is a Shaman oral product candidate for the treatment of Type II
diabetes. It is covered by an allowed patent application for methods of use. In
January 1998, Shaman initiated a Phase I human clinical trial for SP-134101, the
first product to emerge from the Company's diabetes discovery effort. In
preclinical studies SP-134101 has been shown to lower blood glucose,
triglycerides, and blood pressure, in vivo. SP-134101 appears to work by
increasing glucose uptake in the peripheral tissues and decreasing triglyceride
output from the liver.

DRUG DISCOVERY RESEARCH

Research Strategy

Shaman's research strategy is to employ a drug discovery process focused on
diseases that:

- appear to result from multiple and, in many cases, unknown causes and
therefore, may not be amenable to a targeted in vitro drug discovery
process;

- occur in the rain forests and are readily recognized and treated by
traditional healers (e.g., foot ulcers, sweet urine, poor eyesight and
fungal infections are often predictive of Type II diabetes); and

- allow the plant extract treatment to be confirmed in a whole animal
model and then purified to isolate the active compound.

30
<PAGE> 32

Shaman believes this drug discovery process provides it with the
opportunity to:

- identify novel methods of treating diseases with therapeutic
relevance;

- discover new chemical entities or new classes of compounds to treat
disease; and

- provide early confirmation of efficacy and safety.

Shaman intends to commercialize the majority of its products through
licensing arrangements when safety and efficacy have been demonstrated in
humans. Shaman intends to out-license broad applications of its products
worldwide while retaining the opportunity to directly access specific market
opportunities.

Diabetes

Type II diabetes is a chronic disease in which the tissues of the body are
resistant to the actions of insulin (a hormone produced by the pancreas), and
the pancreas cannot secrete enough insulin to overcome this resistance. When
this happens, the ability of insulin to carry out its normal action on the
liver, muscle and adipose tissues is lost, the result is increased blood glucose
and associated symptoms. This disease is the result of multiple causes, many of
which are undefined at the molecular level.

Shaman has focused on the development of oral antihyperglycemic (blood
glucose lowering) agents for the treatment of Type II diabetes. The program
involves in vivo screening of plants by oral administration in animal models,
followed by the fractionation of active extracts, the isolation and
identification of active compounds, and the capability to profile and prioritize
promising candidates for clinical development. In just over 24 months of this
program, the Company has identified 26 orally-active compounds for which, to
date, 17 original U.S. patent applications have been filed (eight of which have
been issued) and 11 international patent applications have been filed. These
compounds represent new classes and, potentially, new methods for treating Type
II diabetes.

In the United States alone, approximately 625,000 new cases of Type II
diabetes are diagnosed each year, and it is estimated that there will be over 18
million cases by the year 2002 (over five percent of the population). Worldwide,
diabetes is estimated to affect approximately 135 million people; by the year
2025, growth in the diabetic population is expected to rise to 300 million,
according to The World Health Report, 1997. In developed countries, the number
of diabetic patients is projected to grow by at least 40%. By contrast, in
developing countries, the growth will be far more dramatic, approaching 170%.
This so-called "epidemic" is thought to be the result of longer life
expectancies coupled with unhealthy diets, sedentary lifestyles and tendencies
to be overweight.

Chronic diabetes sufferers, those who have Type II disease, represent 90%
to 95% of the total diabetic population. Tied closely to their condition are
serious health complications such as heart disease, stroke, hypertension,
blindness and kidney failure. Despite the magnitude of the population and the
extent of its healthcare impacts, there is widespread agreement that better
drugs are needed.

By selecting plants with a history of use in traditional cultures, Shaman
is tapping a highly focused yet diverse source of materials to screen for
antidiabetic activity. From these materials, extracts are evaluated for activity
in animal models, a process by which active compounds can be identified to serve
as leads for development or for synthetic modifications that will result in new
leads.

The diabetes research and development program serves as the basis for
Shaman's collaboration with Lipha/Merck. Significant funding, as well as
milestone payments for this program, result from this collaboration as well as
potential royalty and milestone payments from previous collaboration with Ono.
See "Business -- Collaborative Relationships and License Agreements."

31
<PAGE> 33

COLLABORATIVE RELATIONSHIPS AND LICENSE AGREEMENTS

In September 1996, the Company entered into a five-year collaborative
agreement with Lipha/Merck to develop jointly Shaman's antihyperglycemic drugs.
In exchange for development and marketing rights in all countries except Japan,
South Korea and Taiwan (which are covered under an earlier agreement between
Shaman and Ono), Lipha/Merck will provide up to $9.0 million in research
payments and up to $10.5 million in equity investments priced at a 20% premium
to a multi-day volume weighted average price of the Company's Common Stock at
the time of purchase. Of the $4.5 million received on signing the agreement,
$1.5 million was an up-front research payment and $3.0 million was structured as
an equity investment. The agreement also provides for additional preclinical and
clinical milestone payments (certain of which clinical milestones are creditable
against future royalty payments) to the Company in excess of $10.0 million per
compound for each antihyperglycemic drug developed and commercialized. As of
July 24, 1998, the Company has received an aggregate of $7.5 million under the
agreement. A balance of $12.0 million in committed capital remains under the
agreement.

Lipha/Merck will bear all pre-clinical, clinical, regulatory and other
development expenses associated with the compounds selected by Lipha/Merck under
the agreement. In addition, as products are commercialized by Lipha/Merck,
Shaman will receive royalties on all product sales outside the United States and
up to 50% of the profits (if the Company exercises its co-promotion rights,
which does not require any clinical development cost reimbursement) or royalties
on all product sales in the United States. Certain of the milestone payments
will be credited against future royalty payments, if any, due to the Company
from sales of products developed pursuant to the agreement. To date, Shaman has
identified 26 proprietary, orally-active compounds which show preclinical
activity as treatments for Type II diabetes.

In May 1995, the Company entered into a collaborative agreement with Ono
providing for, among other things, three years of funding for the research and
development of compounds for the treatment of Type II diabetes. Under the terms
of the agreement, Shaman screened 100 diabetes-specific plants per year in vivo,
isolated and identified active compounds, and participate in any medicinal
chemistry modification. In turn, Ono provided Shaman with access to Ono's
preclinical and clinical development capabilities through proprietary in vitro
assays and medicinal chemistry efforts. Ono's development and commercialization
rights were for the countries of Japan, South Korea and Taiwan. Under the terms
of the agreement, Ono provided $7.0 million in collaborative research funding
and agreed to pay preclinical and clinical milestone payments of $4.0 million
per compound for each antidiabetic drug that may be selected and commercialized.
Of the $3.0 million received on signing the agreement, $1.0 million was an
up-front research payment. Shaman received an additional $1.0 million payment
(beyond the $7.0 million commitment) in December 1996 for enhanced access rights
to these compounds. In May 1998, the Company's collaborative agreement with Ono
expired under the original terms of the agreement and was not renewed. Although
the on-going research funding period under such agreement has expired, Ono
continues to have contractual obligations to the Company for the potential
payment of milestones and royalties. There can be no assurance that such
milestones will be attained or that the Company will receive any future
milestone payments or royalties from Ono.

In June 1995, the Company licensed several patents from Bayer AG relating
to the use of nikkomycin Z and the composition and use of nikkomycin Z in
combination with other antifungal compounds for the development of antifungal
agents. Under the terms of the agreement, the Company has paid Bayer AG an
initial milestone payment and may be required, upon the occurrence of certain
events, to make additional milestone payments and to pay royalties on any
commercialized products derived from the agreement.

In February 1990, the Company entered into a license agreement with Dr.
Michael Tempesta. There currently exists a dispute with Dr. Tempesta over the
scope and coverage, if any, of the license. The maximum royalty claimed by Dr.
Tempesta is two percent on net sales of a certain antiviral agent. In November
1996, a demand for arbitration was filed by the Company to address a claim made
by Dr. Tempesta that the royalty will be payable with respect to SP-303/Provir.
See "Legal Proceedings."

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<PAGE> 34

As the Company continues its product development and commercialization, it
intends to enter into additional corporate alliances which may include licenses
and/or marketing rights to selected products and markets.

MANUFACTURING

Shaman intends to conduct both pilot-scale and commercial manufacturing of
its future products either in-house, with collaborative partners, or through
contract manufacturing facilities. In April 1998, Shaman hired a senior
executive to direct manufacturing activities for the Company's products. The
Company has created an in-house facility that operates under GMP and has
conducted pilot-scale manufacturing of SP-303/Provir. The Company has a
sufficient quantity of raw material for SP-303/Provir and SP-303/Provir
manufacturing capacity to complete currently planned clinical trials and prepare
for the commercial launch of SP-303/Provir. In addition, Shaman has established
a second source manufacturing facility to produce registration and early
commercial lots.

In January 1996, the Company entered into an agreement with Abbott
Laboratories ("Abbott") for the production of nikkomycin Z. Abbott has developed
processes and manufactured nikkomycin Z in compliance with GMP guidelines for
the Company's clinical trial programs. The Company is currently seeking other
sources and methodologies to produce nikkomycin Z. Separately, SP-134101 is
being manufactured by a contract manufacturer in compliance with GMP guidelines
for the Company's clinical trial programs. See "Risk Factors -- Limited
Manufacturing and Marketing Experience and Capacity."

MARKETING

The Company intends to retain U.S. marketing rights to its SP-303/Provir
product for diarrhea in people with AIDS. In July 1997, Shaman hired a senior
executive to direct commercial development, including sales and marketing. The
Company's general strategy is to develop corporate alliances with larger
pharmaceutical companies for certain of its programs in order to take advantage
of such companies' abilities to reach broad-based markets. At the present time,
Shaman has no sales staff. However, assuming a successful conclusion of the
ongoing Phase III study of SP-303/Provir, the Company intends to begin planning
for commercialization of the product by hiring an internal U.S. detail force.
See "Business -- Collaborative Relationships and License Agreements" and "Risk
Factors -- Limited Manufacturing and Marketing Experience and Capacity."

PATENTS AND PROPRIETARY TECHNOLOGY

Proprietary protection for the Company's product candidates, processes and
know-how is important to the Company's business. The Company's policy is to file
patent applications to protect technology, inventions and improvements that are
considered commercially important to the development of its business. The
Company also relies upon trade secrets, know-how and continuing technological
innovation to develop and maintain its competitive position. The Company
aggressively prosecutes and defend its patents and proprietary technology.

The Company has been issued a U.S. patent related to its specific
proanthocyanidin polymer compositions designated SP-303/Provir; specifically,
the patent contains composition of matter claims related to SP-303/Provir
contained in the Company's SP-303/Provir product.

The Company has also filed foreign applications corresponding to its issued
U.S. patents relating to its proanthocyanidin polymer composition. The Company
has been granted patents in Australia, Mexico and New Zealand and has patent
applications pending in Canada, Europe, Japan, the Republic of Korea and
Singapore.

The Company has also recently filed a U.S. patent application directed to
new formulations and methods of using its specific proanthocyanidin polymer
composition for treatment of watery diarrhea. These formulations are contained
in the Company's SP-303/Provir product.

The Company has eight issued U.S. patents relating to compositions and
methods for treating Type II diabetes, as well as reducing hyperglycemia
associated with other etiologies. The Company also has nine
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<PAGE> 35

additional U.S. patent applications still pending which relate to compositions
and methods for treating Type II diabetes, as well as reducing hyperglycemia
associated with other etiologies. The Company has filed 11 foreign applications,
i.e., international applications under the Patent Cooperation Treaty designating
a number of foreign countries, as well as applications in Taiwan, corresponding
to a number of the U.S. applications and plans to file additional corresponding
foreign applications within the relevant convention periods.

The Company also has one pending U.S. patent application and a
corresponding international patent application designating a number of foreign
countries relating to methods for administering and sustained release
formulations for anti-fungal agents like nikkomycin Z. The methods and
compositions are useful for treatment of fungal infections, particularly
candidiasis, the most frequently encountered life-threatening mycoses. The
Company has licensed several patents from Bayer AG relating to the use of
nikkomycin Z and the composition and use of nikkomycin Z in combination with
other antifungal compounds for the development of antifungal agents.

There can be no assurance that the Company's pending patent applications
will result in patents being issued or that, if issued, patents will afford
protection against competitors with similar technology; nor can there be any
assurance that others will not obtain patents that the Company would need to
license or circumvent. See "Risk Factors -- Uncertainty Regarding Patents and
Proprietary Rights; Current Legal Proceedings Regarding Patents and Proprietary
Rights"

RAW MATERIALS SUPPLY

The Company imports all of the plant material it screens from foreign
countries, particularly from countries in Latin and South America, Southeast
Asia and Africa. Shaman's relationships with botanical organizations in tropical
regions have enabled the Company to set up large-scale supply arrangements for
the raw material from which some of its lead products are derived. For example,
the plant material required for SP-303/Provir is found in at least seven Latin
and South American countries and can be harvested in a sustainable manner where
work forces already exist. Presently, Shaman is harvesting approximately 200,000
kilograms of the SP-303/Provir source plant per year from Latin and South
America, pursuant to supply agreements with corporations working in that region.
The SP-303/Provir source plant occurs naturally in these areas and, after
harvesting, can be regenerated to maturity in seven years. Shaman is currently
engaged in setting up market-scale, long-term acquisition of quantities of
material adequate to meet projected commercial demands for the launch and sale
of SP-303/Provir. See "Risk Factors -- Dependence on Sources of Supply."

Shaman requires that all large-scale plant collections be conducted in a
sustainable manner, which could include replanting in areas of intensive wild
harvesting. In the case of SP-303/Provir, the source plant can be sustainably
harvested because it grows spontaneously with minimal management. Shaman works
with communities and cooperatives in Latin and South America to harvest the
SP-303/Provir source plant and other source plants in a regenerable manner.
These communities and cooperatives, many of which receive support from national
and international government agencies, are experienced in the sustainable
harvest of other tropical forest products, including natural rubber, nuts and
fruits. Company policy also requires that each source plant targeted for
large-scale compound isolation must have multi-country sources of supply or be
economically synthesizable. This policy reduces the risks associated with using
foreign suppliers, such as political or economic instability.

Shaman has entered into supply agreements with companies working in Central
and South America pursuant to which they will supply certain quantities of
Shaman's commercial requirements of the raw material used to produce
SP-303/Provir from their countries. These companies work with cooperatives of
indigenous peoples to supply source plants to Shaman, to transfer material
information to Shaman relating to improvements in the collection and harvesting
of the raw material, and to improve sustainable harvesting techniques in order
to create a model of sustainable production in tropical forests. Although the
Company has developed multi-country sources of supply for its key plant
materials and has entered into long-term supply agreements for the source
material for SP-303/Provir, there can be no assurance of a continual source of
supply of these materials. See "Risk Factors -- Dependence on Sources of
Supply."

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<PAGE> 36

Shaman continues to expand its supply agreements with the private sector
and indigenous groups in multiple countries. This represents the culmination of
long term relationship building with indigenous federations, communities,
regional and governmental organizations. New supply business partners are also
being identified and contracted to meet our projected material requirements. As
part of its commitment to sustainable harvesting, Shaman has supplied financial
and educational support for long-term large scale reforestation, undertaken with
government, community and private sector involvement in Colombia, Peru and
Ecuador. More than 200,000 trees have been reforested in three countries to date
and 400,000 additional trees are in the process of reforestation through a
program run by the governments of these countries in conjunction with Shaman's
collaborators.

When it is economically advantageous and technically feasible to synthesize
a compound rather than extract it from raw plant material, the Company will
utilize large-scale chemical synthesis to obtain a sufficient supply of such
compound in order to satisfy its commercial requirements. However, there can be
no assurance that the Company will be successful in synthesizing any such
products.

COMPETITION

Competition in the pharmaceutical industry is extremely intense. The
principal factors upon which such competition is based include therapeutic
efficacy, side-effect profile, ease of use, safety, physician acceptance,
patient compliance, marketing, distribution and price. Many treatments for
infectious and metabolic diseases exist and additional therapeutics are under
development, including other naturally-sourced pharmaceuticals. To the extent
these therapeutics address the disease indications on which the Company has
focused, they may represent significant competition. Many pharmaceutical
companies have significantly greater research and development capabilities, as
well as substantially greater marketing, financial and human resources than the
Company. In addition, many of these competitors have significantly greater
experience than the Company in undertaking preclinical testing and human
clinical trials of new pharmaceutical products and obtaining regulatory
approvals of such products. These companies may represent significant long-term
competition for the Company.

There can be no assurance that developments by other pharmaceutical
companies will not render Shaman's products or technologies obsolete or
noncompetitive, or that the Company will be able to keep pace with technological
developments of its competitors. Many of the Company's competitors have
developed, or are in the process of developing, technologies that are, or in the
future may be, the basis for competitive products. Some of these products may
have an entirely different approach or means of accomplishing the desired
therapeutic effect than products being developed by the Company. These competing
products may be more effective and less costly than the products developed by
Shaman.

Nonetheless, with respect to SP-303/Provir, Shaman believes that the
competitive promotional response will be limited in this discrete market because
current oral anti-diarrheals have no indication in this patient population and
because, for the most part, they are older, generic products. Furthermore, since
SP-303/Provir is a natural product, with the potential to dramatically improve
the everyday lifestyle activities of chronic diarrhea sufferers in the AIDS
population, the Company believes that physicians and patients alike will be in a
position to decide to use the medication without having to consider the
potential of compromising other therapies or treatment regimens already in
place. See "Risk Factors -- Rapid Technological Change and Substantial
Competition."

GOVERNMENT REGULATION

The research and development, manufacture and marketing of Shaman's
products are subject to substantial regulation by the FDA in the United States
and by comparable authorities in other countries. These national agencies and
other federal, state and local entities regulate, among other things, research
and development activities and the testing, manufacture, safety, effectiveness,
labeling, storage, record keeping, approval, advertising and promotion of the
Company's products.

The process required by the FDA before the Company's products may be
marketed in the United States generally involves the following: (i) preclinical
laboratory and animal tests; (ii) submission to the FDA of an
35
<PAGE> 37

IND, which must become effective before human clinical testing may commence;
(iii) adequate and well-controlled human clinical trials to establish the safety
and efficacy of the proposed drug for its intended indications; (iv) the
submission to the FDA of an NDA; (v) satisfactory completion of an FDA
inspection of the manufacturing facilities at which the product is made to
assess compliance with GMP. The testing and approval process requires
substantial time, effort and financial resources.

Preclinical tests include laboratory evaluation of the product as well as
animal studies to assess the potential safety and efficacy of the product. The
results of the preclinical tests, together with manufacturing information and
analytical data, are submitted to the FDA as part of the IND, which must become
effective before human clinical trials may commence. The IND will automatically
become effective 30 days after receipt by the FDA, unless the FDA before that
time raises concerns or questions about the conduct of the trials as outlined in
the IND. In such cases the IND sponsor and the FDA must resolve any outstanding
concerns before clinical trials can proceed. There can be no assurance that
submission of an IND will result in FDA authorization to commence clinical
trials.

Clinical trials involve the administration of the investigational products
to healthy volunteers or patients under the supervision of a qualified principal
investigator. Further, each clinical study must be reviewed and approved by an
independent Institutional Review Board ("IRB") at each institution at which the
study will be conducted. The IRB will consider, among other things, ethical
factors, the safety of human subjects and the possible liability of the
institution.

Clinical trials are typically conducted in three sequential phases which
may overlap. Phase I usually involves the initial introduction of the drug into
healthy human subjects where the product is tested for safety, dosage tolerance,
absorption, metabolism, distribution and excretion. Phase II involves studies in
a limited patient population to (i) determine the efficacy of the product for
specific targeted indications, (ii) determine dose tolerance and optimal dose
and (iii) identify possible adverse effects and safety risks. When Phase II
evaluations demonstrate that the product is effective and has an acceptable
safety profile, Phase III trials are undertaken to further evaluate clinical
efficacy and to further test for safety in an expanded patient population at
geographically-dispersed clinical study sites. The FDA or the sponsor may
suspend clinical trials at any point in this process for a variety of reasons,
including either party's belief that clinical subjects are being exposed to an
unacceptable health risk.

Occasionally, the FDA will require Phase IV "Post-Marketing Trials" which
are conducted after FDA clearance to gain additional experience from the
treatment of patients in the intended therapeutic area. Other Phase IV
commitments might be additional toxicology or pharmacology studies.

After completion of the required testing, generally an NDA is submitted.
FDA approval of the NDA is required before marketing may begin in the United
States. The NDA must include the results of extensive clinical and other testing
and the compilation of data relating to the product's chemistry, pharmacology
and manufacture, the cost of all of which is substantial. The FDA reviews all
NDAs submitted before it accepts them for filing and may request additional
information rather than accept an NDA for filing. In such an event, the NDA must
be resubmitted with the additional information and, again, is subject to review
before filing. Once the submission is accepted for filing, the FDA begins an
in-depth review of the NDA. Under the Federal Food, Drug and Cosmetic Act, the
FDA has 180 days in which to review the NDA and respond to the applicant. The
review is often extended by mutual agreements of the sponsor and the FDA, or a
major amendment to the submission.

As part of the Modernization Act of 1997, the FDA has created a fast track
designation. For products that receive this designation, the FDA is expected to
take such actions as are appropriate to expedite the development and review of
an application for marketing approval of the product. SP-303/Provir has received
a fact track designation for the indication of diarrhea in people with AIDS.

The FDA may refer the application to the appropriate advisory committee for
review, evaluation and a recommendation as to whether the application should be
approved. The FDA is not bound by the recommendation of an advisory committee,
but generally follows the committee's recommendation. If evaluations of the NDA
and the manufacturing facilities are favorable, the FDA may issue either an
approval

36
<PAGE> 38

letter or an approvable letter, which usually contains a number of conditions
that must be met in order to secure final approval of an NDA. When and if those
conditions have been met to the FDA's satisfaction, the FDA will issue an
approval letter, authorizing commercial marketing of the drug for certain
indications. If the FDA's evaluation of the NDA submission or manufacturing
facilities is not favorable, the FDA may refuse to approve the NDA or issue a
not approvable letter.

Each drug product manufacturing establishment that supplies drugs to the
U.S. market must be registered with, and be approved by, the FDA prior to
commencing commercial production, and is subject to biennial inspections by the
FDA for GMP compliance after an NDA has been approved. In addition, drug product
manufacturing establishments located in California also must be licensed by the
State of California. See "Risk Factors -- Government Regulations; No Assurance
of Regulatory Approvals."

The Company will also be subject to a variety of foreign regulations
governing clinical trials, registrations and sales of its products. Whether or
not FDA approval has been obtained, approval of a product by comparable
regulatory authorities of foreign countries must be obtained prior to marketing
the product in those countries. The approval process varies from country to
country and the time needed to secure approval may be longer or shorter than
that required for FDA approval.

THE HEALING FOREST CONSERVANCY

In January 1990, Shaman formed The Healing Forest Conservancy, a California
not-for-profit public benefit corporation (the "Conservancy"), which is
dedicated to maintaining global biocultural diversity. The Conservancy focuses
on conserving plants that have been used traditionally for medicinal purposes
and conserving the knowledge of cultures that utilize them. Shaman has donated
13,333 shares of Common Stock to the Conservancy's endowment fund. The Company
also plans to donate additional funds when it has achieved profits from product
sales, if any, to provide benefits to indigenous peoples in the countries where
Shaman's source plants are obtained.

LEGAL PROCEEDINGS

The Company has initiated arbitration against Dr. Michael Tempesta with
respect to a February 1990 license agreement. See "Business -- Collaborative
Relationships and License Agreements."

Ms. Jacqueline Cossmon, the Company's former Vice President of investor and
public relations filed a complaint against the Company with the Superior Court
of the State of California, County of San Mateo on December 31, 1997 for
wrongful termination and seeking monetary damages. The complaint alleges in
substance that Cossmon was wrongfully terminated for a disagreement with
management. The Company denies any wrongdoing with respect to Ms. Cossmon and
intends to vigorously defend this action.

With the exception of the patent opposition proceeding in Europe,
arbitration against Dr. Tempesta and Ms. Cossmon's action, the Company is not
party to any other material legal proceedings. See "Risk Factors -- Uncertainty
Regarding Patents and Proprietary Rights; Current Legal Proceedings Regarding
Patents and Proprietary Rights."

EMPLOYEES

As of July 24, 1998, the Company had 110 employees. Of these employees, 88
are dedicated to research, development, quality assurance and quality control,
regulatory affairs and preclinical testing. Thirty-four of the Company's
full-time employees hold a Ph.D. or M.D. In addition, the Company currently
fills 17 positions through the use of temporary staff and consultants.

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<PAGE> 39

MANAGEMENT

EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES

The following table sets forth certain information with respect to the
executive officers, directors and key employees of the Company as of July 24,
1998:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Lisa A. Conte 39 Director, President and Chief Executive Officer
Atul S. Khandwala, Ph.D. 55 Senior Vice President, Development and Chief Regulatory
Officer
Steven R. King, Ph.D. 40 Senior Vice President, Ethnobotany and Conservation
James E. Pennington, M.D. 55 Senior Vice President, Clinical Research and Chief Medical
Officer
Gerald M. Reaven, M.D. 69 Senior Vice President, Research
John Chow 46 Vice President, Product Development and Manufacturing
Stephanie C. Diaz 33 Vice President, Chief Financial Officer
J.D. Haldeman 33 Vice President, Commercial Development
Laurie Peltier 46 Vice President, Project Coordination
G. Kirk Raab 62 Chairman of the Board
Adrian D.P. Bellamy 56 Director
Jeffrey Berg 50 Director
Herbert H. McDade, Jr. 71 Director
M. David Titus 41 Director
</TABLE>

Lisa A. Conte founded the Company in May 1989 and currently serves as the
Company's President and Chief Executive Officer and as Director. From 1987 to
1989, Ms. Conte was Vice President at Technology Funding, Inc., a venture
capital firm, where she was responsible for the analysis and management of
healthcare industry investments. From 1985 to 1987, she conducted risk and
strategy audits for venture capital portfolio companies at Strategic Decisions
Group, a management consulting firm. Ms. Conte received an A.B. in Biochemistry
from Dartmouth College, an M.S. in Physiology/Pharmacology from the University
of California, San Diego and an M.B.A. from The Amos Tuck School, Dartmouth
College.

Atul S. Khandwala, Ph.D. joined Shaman in March 1996 and currently serves
as Senior Vice President, Development and Chief Regulatory Officer. From August
1995 to February 1996, Dr. Khandwala served as Vice President for Ethical
Product Development at Block Drug Company. Prior to joining Block Drug Company,
from 1986 to August 1995, Dr. Khandwala held various positions, the last being
Executive Vice President, with Chemex Pharmaceuticals, Inc. From 1976 to 1986,
Dr. Khandwala held various positions with Revlon Health Care Group Research and
Development Division. Dr. Khandwala received a B.Sc. in Chemistry from Gujarat
University in India and a Ph.D. in Pharmaceutical Chemistry from the University
of Wisconsin.

Steven R. King, Ph.D. joined Shaman in March 1990. He currently serves as
Senior Vice President, Ethnobotany and Conservation and is responsible for
coordinating the Company's Scientific Strategy Team. From 1989 to 1990, Dr. King
was the chief botanist for Latin America at Arlington, Virginia's Nature
Conservancy. He worked in 1988 as Research Associate for the Committee on
Managing Global Genetic Resources at the National Academy of Sciences, and was a
Doctoral Fellow from 1983 to 1988 at The New York Botanical Garden's Institute
of Economic Botany. Dr. King received a B.A. in Human Ecology from the College
of the Atlantic and M.S. and Ph.D. degrees in Biology from City University of
New York.

James E. Pennington, M.D. joined Shaman in September 1997 as Senior Vice
President, Clinical Research and Chief Medical Officer. Prior to joining the
Company, from September 1986 to September 1997, Dr. Pennington worked at Bayer
Corp., where he served as Vice President, Clinical Research from February 1994
to September 1997 and as Director, Clinical Research from September 1986 to
February 1994. Prior to joining Bayer Corp., Dr. Pennington served on the
medical faculty of Harvard Medical School, from July 1975 to August 1986, with
the academic title of Associate Professor of Medicine. Dr. Pennington has
published

38
<PAGE> 40

over 100 articles and was the editor of a textbook on respiratory infections.
Dr. Pennington received his B.A. and M.D. from the University of Oregon.

Gerald M. Reaven, M.D. joined Shaman as a consultant in February 1995 and
became an employee in July 1995. He currently serves as Senior Vice President,
Research. Dr. Reaven came to Shaman from the Stanford University School of
Medicine where he served as a faculty member since 1960 and a Professor of
Medicine since 1970. Over the last 20 years, Dr. Reaven served as head of the
Division of Endocrinology and Metabolic Diseases, Division of Gerontology and
director of the General Clinical Research Center. Dr. Reaven also served as head
of the Division of Endocrinology, Gerontology and Metabolism at Stanford
University School of Medicine, and Director of the Geriatric Research, Education
and Clinical Center, at the Palo Alto Veterans Affairs Medical Center. Dr.
Reaven received his A.B., B.S. and M.D. from the University of Chicago.

John Chow joined Shaman in April 1998 as Vice President of Product
Development and Manufacturing. Prior to joining the Company, from December 1997
to April 1998, Dr. Chow served as Director, Product and Technology Evaluation at
Bristol-Myers Squibb Company, where he performed technical due diligence toward
the acquisition and licensing of various dosage forms and technologies and
reviewed and approved new product specifications. Prior to holding this
position, from July 1980 to December 1997, Dr. Chow held other positions, also
with Bristol-Myers Squibb Company, where he was responsible for developing
strategies for manufacturing consolidation, facilitating technology transfers of
new and existing products, and directing technical operations of an
international plant. Dr. Chow received a B.S. in Pharmacy from Washington State
University, a Ph.D. in Pharmaceutical Chemistry from Ohio State University and
an M.B.A. in Pharmaceutical/Chemical Studies from Fairleigh Dickinson
University.

Stephanie C. Diaz joined Shaman in June 1998 as Vice President, Chief
Financial Officer. Prior to joining the Company, from December 1997 to June
1998, Ms. Diaz held the position of Director of Finance with Hyseq, Inc., a
genomics company. From January 1993 to December 1997, Ms. Diaz was the
Controller and later the Director of Finance for Martek Biosciences Corporation
("Martek"), where she managed the financial and investor relations functions of
the Company, actively participated in public and private financing activities,
managed certain business development efforts and worked closely with Martek's
manufacturing and marketing teams to initiate production and commercialization
of a new product. Ms. Diaz holds a B.A. in international relations from Stanford
University and an M.B.A. from Georgetown University.

J.D. Haldeman joined Shaman in July 1997 as Vice President, Commercial
Development. Prior to joining the Company, from April 1988 to June 1997, Ms.
Haldeman served in various positions at Warner-Lambert/Parke-Davis
Pharmaceuticals ("Warner-Lambert"), most recently as Senior Director,
Cardiovascular Marketing from October 1995 to June 1997. Prior to that, she
served as Director, Customer Marketing -- West Business Unit; Product Manager,
Epilepsy Team; Associate Product Manager, Global Cardiovascular Product
Planning; and Sales Specialist for Warner-Lambert. Ms. Haldeman received her
B.A. from Brigham Young University and her Masters of Management from the J.L.
Kellogg Graduate School of Management, Northwestern University.

Laurie Peltier joined Shaman in June 1997 as Vice President, Project
Coordination. Prior to joining the Company, from June 1992 to May 1997, Ms.
Peltier served as Senior Director, Project Management at Amylin Pharmaceuticals,
Inc. Prior to that, she served as Director, Development at Quintiles Inc., a
contract research organization, from May 1990 to May 1992. Ms. Peltier served in
various positions in biostatics clinical operations at Syntex Corporation from
May 1979 through April 1990. Ms. Peltier received a B.S. in Psychology from the
University of Michigan, Flint, an M.A. in Psychology and an M.S. in Statistics
from Northern Illinois University and an M.B.A. from Golden Gate University.

G. Kirk Raab became a director of the Company in January 1992 and Chairman
of the Board in September 1995. Mr. Raab was President, Chief Executive Officer
and director of Genentech, Inc. ("Genentech") from February 1990 to July 1995
and President, Chief Operating Officer and director from February 1985 to
January 1990. Before joining Genentech, Mr. Raab was associated with Abbott
Laboratories, serving as President, Chief Operating Officer and director. Mr.
Raab holds a B.A. in Political Science from Colgate University, where he
currently serves as a trustee. Mr. Raab is also Chairman of the
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<PAGE> 41

Board of Connectics, Inc. and Oxford GlycoSciences (UK) Ltd. and a director of
LXR Biotechnology, Inc., Bridge Medical, Inc., Accumetrics, Inc. and Applied
Imaging Corporation,

Adrian D.P. Bellamy became a director of the Company in October 1997. Since
April 1995, Mr. Bellamy has served as Chairman and a director of each of Airport
Group International Holdings LLC and Gucci Group N.V. From September 1983 to
April 1995, Mr. Bellamy served as Chairman of the Board of Directors and Chief
Executive Officer of DFS Group Limited, a specialty retailer. He received a B.A.
in Communications and an M.B.A. from the University of South Africa. Mr. Bellamy
is a director of The Body Shop, Inc., The Body Shop International PLC, The Gap,
Inc., Paragon Trade Brands, Inc. and Williams-Sonoma, Inc.

Jeffrey Berg became a director of the Company in June 1998. Mr. Berg has
been the Chairman and Chief Executive Officer of International Creative
Management, Inc. since 1985. Mr. Berg, one of the leading agents in the
entertainment industry, has been in the entertainment industry for over 25
years. Mr. Berg received a B.A. from the University of California at Berkeley
and a Master of Liberal Arts from the University of Southern California. He
served as Co-Chair of the California Information Technology Council and is a
director of each of Oracle Corporation and Excite, Inc.

Herbert H. McDade, Jr. became a director of the Company in October 1991. He
has served as Chairman of the Board and Chief Executive Officer of Chemex,
Pharmaceuticals, Inc. ("Chemex") since February 1989 and as Chief Executive
Officer from February 1989 through January 1996, when Chemex merged with Access
Pharmaceutical Corporation ("Access") and the combined entity changed its name
to Access. From October 1986 to January 1988, Mr. McDade was Chairman, President
and Chief Executive Officer of Armour Pharmaceuticals, Inc., after previously
serving as President, International Health Care Division of the Revlon Health
Care Group. Mr. McDade holds a B.S. in Biology from the University of Notre Dame
and a B.P.H. in Theology and Philosophy from Laval University. He is Chairman of
the Board of Access and a director of Cytrx, Inc., Discovery Ltd. and several
privately held companies.

Mr. David Titus became a director of the Company in April 1990. Mr. Titus
is currently a General Partner of Windward Ventures Management, L.P., a venture
capital firm, which he founded in November 1997. Prior to founding Windward
Ventures Management, L.P., Mr. Titus was Managing Director of Windward Ventures,
a venture capital consulting and investment firm, which he founded in 1993. From
May 1986 to December 1992, he served in various capacities at Technology
Funding, Inc., a venture capital firm, including Group Vice President,
Technology Funding, Inc., and General Partner of Technology Funding Limited.
Prior to joining Technology Funding, Inc. in May 1986, Mr. Titus was a founder
and Senior Vice President of the Technology Division of Silicon Valley Bank. Mr.
Titus earned a B.A. in Economics from the University of California, Santa
Barbara. He is a director of several privately held companies.

SCIENTIFIC STRATEGY TEAM

Shaman's Scientific Strategy Team ("SST") consists of an interdisciplinary
group of ethnobotanists, scientists, pharmacologists, physicians, pharmacists
and Company personnel. Several members of the SST who are actively working in
the field have agreed to exclusively advise the Company in connection with
medical and ethnobotanical matters and to refrain from consulting with other
pharmaceutical companies on all ethnobotanical matters. Some members may have
collaborative relationships with other pharmaceutical firms for random
collection of plants on a contract basis.

The principal criteria used in selecting members of the SST are breadth of
the scientific discipline, recognized scientific excellence in their fields, and
ability to contribute to the team evaluation process. The Company relies on the
SST to assist in the identification of plant candidates for Shaman's botanical
screening process and to evaluate the information obtained about these
candidates, both in the field and in literature. SST members who are not
employees of the Company are compensated with stock options for their general
contributions throughout the year, and are paid $1,000 per day for participation
at the SST meetings, which occur approximately every 12 months. Shaman also pays
SST members for any additional consulting services and field expeditions
conducted on behalf of the Company.

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<PAGE> 42

The SST includes the following members:

Edward F. Anderson, Ph.D. is a Senior Research Botanist at the Desert
Botanical Gardens in Phoenix, Arizona. Formerly, he was a Professor of Biology
at the Whitman College in Walla Walla, Washington. Dr. Anderson received a B.A.
in Biology from Pomona College in California and an M.A. and a Ph.D. in Botany
from Claremont Graduate School and Rancho Santa Ana Botanic Garden,
respectively.

Paul S. Auerbach, M.D. is Chief Operating Officer of MedAmerica in Oakland,
California. Dr. Auerbach was formerly Chief, Division of Emergency Medicine at
Stanford University Hospital in Stanford, California. Dr. Auerbach earned an
A.B. in Religion from Duke University, an M.D. from Duke University School of
Medicine, and was a Sloan fellow, M.S.M. at Stanford University Graduate School
of Business.

Michael J. Balick, Ph.D. is Director of the Institute of Economic Botany at
The New York Botanical Garden. Dr. Balick holds a B.S. in Agriculture and Plant
Science from the University of Delaware and both an A.M. and a Ph.D. in Biology
from Harvard University.

Baruch S. Blumberg, M.D., Ph.D. is Associate Director of Clinical Research
at the Fox Chase Cancer Center in Philadelphia and the first American dean of a
college at Oxford University. Dr. Blumberg became a Nobel laureate in 1976 for
his discovery of the hepatitis B antigen. He received a B.S. from Union College
in New York, an M.D. from the College of Physicians and Surgeons at Columbia
University and a Ph.D. in Biochemistry from Oxford University.

Anthony Conte is a retired pharmacist and former proprietor of the Gilliar
Drug Company, Inc. Mr. Conte has 30 years of experience in commercializing
pharmaceuticals. He received a B.S. in Pharmacy from Long Island University,
Brooklyn College of Pharmacy and an M.S. in Pharmaceutical Chemistry from
Columbia University. Mr. Conte is the father of Ms. Conte, President, Chief
Executive Officer and a director of Shaman.

James A. Duke, Ph.D. is a recently retired research scientist at the
Agricultural Research Service of the United States Department of Agriculture.
Dr. Duke earned his A.B., B.S. and Ph.D. in Botany from the University of North
Carolina.

Elaine Elisabetsky, Ph.D. is a research fellow of the Brazilian Research
Council, Associate Professor at the Universidade Federal do Rio Grande do Sul
and a board member of the International Society of Ethnopharmacology. Dr.
Elisabetsky holds a B.S. in Biomedical Sciences from the Escola de Medicina in
Sao Paulo, Brazil, a Ph.D. in Pharmacology from the Departmento de Farmacologia
e Bioquimica, Escola Paulista de Medicina in Brazil, and has received
post-doctorate training in ethnobotany and ethnopharmacology from The New York
Botanical Garden.

Norman R. Farnsworth, Ph.D. is Research Professor of Pharmacognosy and
Director of the Program for Collaborative Research in the Pharmaceutical
Sciences at the College of Pharmacy, University of Illinois at Chicago. Dr.
Farnsworth received a B.S. and an M.S. in Pharmacy from the Massachusetts
College of Pharmacy and a Ph.D. in Pharmacognosy from the University of
Pittsburgh.

Maurice M. Iwu, Ph.D. is founder and director of BioResources Development
Conservation Programme and Professor of Pharmacognosy and Medicinal Chemistry at
the University of Nigeria, Nsukka. Dr. Iwu earned a Ph.D. in Pharmacognosy from
the University of Bradford, England.

Charles F. Limbach, M.D. is a practitioner of family medicine in Salinas,
California. Dr. Limbach earned a B.A. in Biology from the University of Michigan
and an M.D. from Michigan State University.

Koji Nakanishi, Ph.D. is Centennial Professor of Chemistry at Columbia
University and formerly Director of the Suntory Institute for Bioorganic
Research in Osaka, Japan. Dr. Nakanishi was the recipient of the 1990 Japan
Academy Prize and the Imperial Prize, the highest Japanese honor a scholar can
receive. He received a B.S. and a Ph.D. in Chemistry from Nagoya University in
Japan.

Mark J. Plotkin, Ph.D. is Executive Director of Ethnobiology and
Conservation Team and previously served as Director of Plant Conservation at the
World Wildlife Fund. He also serves as a Research Associate of Ethnobotanical
Conservation at the Botanical Museum at Harvard University and Secretary of the
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<PAGE> 43

Ethnobotany Specialist Group, Species Survival for the International Union for
the Conservation of Nature. Dr. Plotkin received an A.B. from Harvard University
Extension, an M.F.S. in Wildlife Ecology from Yale School of Forestry and
Environmental Studies, and a Ph.D. in Biological Conservation from Tufts
University.

Nathaniel Quansah, Ph.D. is an independent ethnobotanical researcher. Dr.
Quansah obtained a B.S. from the University of Cape Coast, Ghana and a Ph.D. in
Botany from Goldsmith's College, University of London.

Robert F. Raffauf, Ph.D. is Professor Emeritus at Northeastern University's
College of Pharmacy. He holds a B.S. in Chemistry/Biology from the College of
the City of New York, an M.A. in Chemistry from Columbia University and a Ph.D.
in Organic/Analytical Chemistry from the University of Minnesota.

Richard E. Schultes, Ph.D. is Professor Emeritus at Harvard University. Dr.
Schultes has spent 40 years studying the traditional uses of the higher plants
and fungi of the Colombian Amazon. He has been the recipient of numerous awards,
including the Gold Medal of the World Wildlife Fund. Dr. Schultes holds an A.B.,
an A.M. and a Ph.D. from Harvard University.

Charles G. Smith, Ph.D. has been a consultant to start-up businesses, major
pharmaceutical companies and venture capital firms since 1986. Most recently, he
served as Vice President of Research and Development at Revlon Healthcare Group.
Dr. Smith received a B.S. in Chemistry from Illinois Institute of Technology, an
M.S. in Biochemistry from Purdue University, and a Ph.D. in Biochemistry from
the University of Wisconsin.

D. Doel Soejarto, Ph.D. is Professor of Pharmacognosy for the Department of
Medicinal Chemistry and Pharmacognosy and for the Program for Collaborative
Research in the Pharmaceutical Sciences at the University of Illinois at
Chicago. Dr. Soejarto holds a B.S. in Biology from the College of Tjiawi, Java,
an A.M. in Biology/Botany from Harvard University and a Ph.D. in Biology from
Harvard University.

Hildebert K.M. Wagner, Ph.D. is Professor of Pharmacognosy in the Institut
Fur Pharmazeutische Biologie at the Ludwig Maximilians University in Munich,
Germany. Dr. Wagner also serves as co-director of the Institute of
Pharmaceutical Biology at the University of Munich. He earned his Ph.D. in
Pharmacognosy at the University of Munich.

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<PAGE> 44

DESCRIPTION OF CAPITAL STOCK

Upon the closing of this offering, the authorized capital stock of the
Company will consist of 40,000,000 shares of Common Stock, par value $0.001 per
share, and 1,000,000 shares of Preferred Stock, par value $0.001 per share.

COMMON STOCK

As of July 24, 1998, there were 18,980,862 shares of Common Stock
outstanding held of record by approximately 868 stockholders. The holders of
Common Stock are entitled to one vote for each share held of record on all
matters submitted to a vote of the stockholders. Subject to preferential rights
with respect to any outstanding Preferred Stock, holders of Common Stock are
entitled to receive ratably such dividends as may be declared by the Board of
Directors out of funds legally available therefor. In the event of a
liquidation, dissolution, sale or winding up of the Company, holders of Common
Stock are entitled to share ratably in all assets remaining after payment of
liabilities and satisfaction of preferential rights and have no rights to
convert their Common Stock into any other securities. Holders of Common Stock
have no preemptive or subscription rights and there are no redemption or
conversion rights with respect to such shares. The outstanding shares of Common
Stock are, and the Common Stock to be outstanding upon completion of the
offering will be, fully paid and nonassessible.

PREFERRED STOCK

The Board of Directors has the authority to cause the Company to issue
without any further vote or action by the stockholders, up to the authorized
number of shares of Preferred Stock in one or more series, to designate the
number of shares constituting any series, and to fix the rights, preferences,
privileges and restrictions thereof, including dividend rights, conversion
rights, voting rights, rights and terms of redemption, redemption price or
prices and liquidation preferences of such series. The issuance of Preferred
Stock may have the effect of delaying, deferring, or preventing a change in
control of the Company without further action by the stockholders. The issuance
of Preferred Stock with voting and conversion rights may adversely affect the
voting power of the holders of Common Stock, including the loss of voting
control. As of July 24, 1998 there were 400,000 shares of authorized Series A
Preferred Stock, all of which shares were issued and outstanding. Shares of
Series B Preferred Stock were proposed to be authorized and issued but will not
be so authorized or issued if this offering is completed. Upon the completion of
this offering, there will be a minimum of 150,000 and a maximum of 200,000
shares of authorized Series C Preferred Stock, all of which will be issued and
outstanding.

Series A Preferred Stock

As of July 24, 1998, there were 400,000 shares of Series A Preferred Stock
(the "Series A Preferred Stock") outstanding held of record by one stockholder.

Voting. Each holder of Series A Preferred Stock is entitled to a number of
votes equal to the number of shares of Common Stock into which the shares of
Series A Preferred Stock held by such stockholder are convertible and has voting
rights and powers equal to those of the Common Stock, except as otherwise
expressly provided or as required by law.

Dividends. Subject to preferential rights with respect to any series of
preferred stock which may from time to time come into existence, holders of
Series A Preferred Stock are entitled to receive such dividends as may be
declared by the Board of Directors out of funds legally available therefor. Any
dividends declared on the Series A Preferred Stock are not cumulative.

Liquidation Preference. In the event of a liquidation, dissolution, sale or
winding up of the Company, holders of Series A Preferred Stock are entitled to
receive $8.15 per share (as adjusted for any stock dividends, combinations or
splits with respect to such shares) plus all accrued or declared but unpaid
dividends. If the assets and funds of the Company legally available for
distribution to the holders of the Series A Preferred Stock are insufficient to
permit payment of the full preferential amount, then holders of the Series A
Preferred

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<PAGE> 45

Stock are entitled to share ratably the entire amount of such assets or funds
legally available for distribution. After payment of the liquidation preference,
the remaining assets and funds of the Company legally available for distribution
shall be divided ratably among the holders of Common Stock.

Conversion. Each share of Series A Preferred Stock is convertible into one
share of Common Stock, as adjusted for any stock dividends, combinations or
splits with respect to such shares, at any time at the option of the holder;
provided, however, that the minimum number of shares which may be converted at
any one time is 75,000 shares, or such lesser number of shares as are then
outstanding. Each share of Series A Preferred Stock shall automatically convert
into Common Stock on the earlier to occur of: (i) immediately in the event that
at any time prior to July 23, 1999, the closing sale price of the Company's
Common Stock (as listed on The Nasdaq National Market) has for a period of 60
consecutive trading days exceeded $8.15 per share, at which time each share of
Series A Preferred Stock will automatically convert into one share of Common
Stock, as appropriately adjusted for any stock dividends, combinations or
splits; or (ii) July 23, 1999, at which time each share of Series A Preferred
Stock will automatically convert into such number of shares of Common Stock as
equals $8.15 divided by the weighted-average closing sale price for the 60
consecutive trading days ending two days prior to July 23, 1999, but in no event
shall a share of Series A Preferred Stock be convertible into more than 1.3578
shares of Common Stock, in each case as appropriately adjusted for any stock
dividends, combinations or splits with respect to such shares of Common Stock.

Redemption. The Series A Preferred Stock is not redeemable.

Priority. The Series A Preferred Stock ranks senior to the Common Stock and
junior to the Series C Preferred Stock, if issued, as to dividends,
distributions and distribution of assets upon liquidation, dissolution or
winding up of the Company.

Series C Preferred Stock

As of the completion of this offering, there will be between 150,000 and
200,000 shares of Series C Preferred Stock outstanding.

Voting. The holders of the Series C Preferred Stock are entitled (i) during
the first year after the issuance thereof to one vote for each six shares held;
and (ii) thereafter, to one vote for each share of Common Stock into which such
share of Series C Preferred Stock is convertible on the record date for the
matter to be voted on.

Dividends. Each share of Series C Preferred Stock shall be entitled to
receive cumulative dividends paid semi-annually on May 31 and November 30 of
each year to the holders of record of such shares on March 31 and September 30
of such year as follows: (i) a stock-on-stock dividend of $10.00 per annum, paid
in arrears, in shares of Common Stock (valued at 85% of the average closing
price of the Common Stock for the 10 trading day period ending three trading
days prior to the date on which the dividend is paid); plus (ii) a cash amount
equaling 0.00005% of the Company's United States net sales, if any, for the
preceding two calendar quarters of its SP-303/Provir product for the treatment
of diarrhea (equivalent to a 7.5% royalty for the Minimum and a 10% royalty for
the Maximum of the aggregate shares of Series C Preferred Stock) less $5.00 (the
value of the semi-annual stock dividend). If under Delaware law, the Company is
unable to pay the cash amount of the above described dividend, then the cash
portion shall be payable in shares of Common Stock (valued at 85% of the average
closing price of the Common Stock for the 10 day trading period ending three
days prior to the date on which the dividend is paid).

Liquidation Preference. In the event of a liquidation, dissolution, sale or
winding up of the Company, holders of the Series C Preferred Stock shall be
entitled to receive, prior and in preference to the holders of the Common Stock
and the Series A Preferred Stock, but subordinate to the holders of the Series B
Preferred Stock, an amount equal to $100 per share, plus any accrued and unpaid
dividends.

Conversion. Each share of Series C Convertible Preferred Stock shall be
convertible, at any time at least 12 months after the original issuance date
thereof at the election of each holder, and automatically on the fourth
anniversary of the date on which any shares of Series C Preferred Stock were
first issued, into the greater of (i) 16.6667 shares of Common Stock or (ii)
such number of shares of Common Stock as equals

44
<PAGE> 46

$100 divided by 85% of the average closing price of the Common Stock for the 10
trading day period ending three trading days prior to the date of conversion.

Redemption. The Series C Preferred Stock is not redeemable.

Priority. The Series C Preferred Stock ranks senior to the Common Stock and
Series A Preferred Stock, but junior to the Series B Preferred Stock, as to
dividends, distributions and distribution of assets upon liquidation,
dissolution or winding up of the Company.

WARRANTS

As of July 24, 1998, there were outstanding warrants to purchase an
aggregate of 1,261,024 shares of Common Stock at a weighted average exercise
price of $7.79 per share.

In September 1993, the Company issued, in connection with equipment lease
financings, warrants to purchase 23,524 shares of Common Stock at prices ranging
from $10.50 to $10.83 per share. These warrants expire September 1998.

In March 1998, the Company issued to certain investors the March Warrants
to purchase an aggregate of 137,500 shares of Common Stock. The March Warrants
are exercisable through March 18, 2001 at an exercise price of $7.50 per share.
The Company has filed a registration statement with the SEC for the resale of
shares issued upon exercise of the March Warrants, which registration statement
was declared effective on July 10, 1998.

In June 1998, the Company issued to certain investors the June Warrants to
purchase an aggregate of 350,000 shares of Common Stock. The June Warrants are
exercisable through June 22, 2003 at an exercise price per share equal to 115%
of the average trading price of the Common Stock during specified measurement
periods. The June Warrants provide for adjustment of the number of shares of
Common Stock issuable upon exercise thereof, including upon the distribution of
certain dividends, upon the Company's reorganization, reclassification or
merger, or upon the division or combination of the Company's Common Stock. The
Company has filed a registration statement with the SEC for the resale of shares
issued upon exercise of the June Warrants, which registration statement was
declared effective on July 10, 1998.

As long as any of the foregoing warrants remain unexercised and
outstanding, the holders thereof will have the opportunity to profit from an
increase in the market price of the Common Stock, if any, without assuming the
risk of ownership.

REGISTRATION RIGHTS

The Company has granted to one investor certain demand and "piggyback"
rights to register shares of Common Stock currently owned or in the future
acquired by such investor pursuant to a stock purchase agreement between the
Company and such investor.

PLAN OF DISTRIBUTION

GENERAL

The Company is offering for sale on a "best efforts" basis a minimum of
150,000 (the "Minimum Offering Amount"), and a maximum of 200,000 (the "Maximum
Offering Amount") shares of Series C Preferred Stock. There is no minimum number
of shares that investors must purchase.

ESCROW

All funds received from investors and accepted by the Company will be
deposited into an escrow account with U.S. Bank Trust N.A. The escrow will
provide that funds may be released from escrow only upon the satisfaction of
certain conditions, including the deposit of the Minimum Offering Amount in the
escrow account on or before August , 1998; provided, however, that the Company
may extend such date for up to

45
<PAGE> 47

an additional 30 days (the release of the escrowed funds under such conditions
being the "Initial Closing"). In the event that additional funds are raised
subsequent to the Initial Closing, one or more later closings may be held until
the Maximum Offering Amount is sold or until the termination of the offering as
provided below.

The offering will terminate upon the first to occur of: (a) the failure of
the Company to meet the conditions of the Initial Closing; (b) the sale of the
Maximum Offering Amount of Shares; or (c) the expiration of 30 days after the
Initial Closing; provided, however, that the Company may extend such 30-day
period for up to an additional 30 days.

If the offering does not achieve the Minimum Offering Amount within the
time period specified above, any subscription funds received in connection with
the offering will be promptly returned with interest thereon at the rate of 10%
per annum from the date such funds were deposited into escrow. If an investor's
subscription is rejected by the Company, such investor's funds will be promptly
returned without interest.

PLACEMENT AGENT

The Company and the Placement Agent have entered into an agreement (the
"Placement Agent Agreement") pursuant to which the Placement Agent has agreed to
use its best efforts to sell for the Company a minimum of $15 million, and a
maximum of $20 million, aggregate principal amount of Shares.

The Placement Agent Agreement provides that the Placement Agent and the
Company will promptly remit the purchase price of the Shares upon receipt
thereof and acceptance by the Company (not later than noon of the next business
day following receipt) to a segregated bank escrow account, at U.S. Bank Trust
N.A., in trust for the respective purchasers of the Shares pending closing under
the Placement Agent Agreement. The Placement Agent and the Company will provide
wire transfer instructions, as necessary. See " -- Subscription Procedures"
below.

The Company has agreed to pay the Placement Agent a commission equal to six
percent of the proceeds received from investors in the offering; provided,
however, that the Company will only pay a commission in an amount equal to three
percent of the proceeds received from investors introduced to the Placement
Agent by the Company. The Company has also agreed to reimburse the Placement
Agent for expenses incurred in connection with such offering, including up to an
aggregate of $50,000 for legal counsel to the Placement Agent.

The Company has agreed to indemnify the Placement Agent against certain
liabilities, including liabilities under the Securities Act, to contribute to
payments that the Placement Agent may be required to make in respect thereof.

SUBSCRIPTION PROCEDURES

Any person interested in purchasing the Shares should complete and execute
a Subscription Agreement and send the Subscription Agreement, together with a
money order, bank draft or check made payable to "U.S. Bank Trust N.A. as Escrow
Agent for Escrow No. " for the amount of its subscription to Dakin
Securities Corporation, Attn: Syndicate Desk, Dakin Securities Corporation, 505
Sansome Street, San Francisco, California 94111. The Placement Agent and the
Company will provide wire transfer instructions, as necessary. No Subscription
Agreement will be effective until accepted by the Company.

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<PAGE> 48

LEGAL MATTERS

The validity of the Shares offered hereby will be passed upon for the
Company by Brobeck, Phleger & Harrison LLP, Palo Alto, California. Sheppard,
Mullin, Richter & Hampton LLP, San Francisco, California, is acting as counsel
for the Placement Agent in connection with certain legal matters relating to the
shares of Series C Preferred Stock offered hereby.

EXPERTS

The financial statements of the Company appearing in the Company's Annual
Report on Form 10-K/A for the year ended December 31, 1997 have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
included therein and incorporated herein by reference. Such financial statements
are incorporated herein by reference in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.

AVAILABLE INFORMATION

This Prospectus, which constitutes a part of a Registration Statement on
Form S-2 (the "Registration Statement") filed by the Company with the SEC under
the Securities Act omits certain of the information set forth in the
Registration Statement. For further information with respect to the Company and
the Series C Preferred Stock offered hereby, reference is hereby made to such
Registration Statement, exhibits and schedules. Statements contained in this
Prospectus regarding the contents of any contract or other document are not
necessarily complete; with respect to each such contract or document filed as an
exhibit to the Registration Statement, reference is made to the exhibit for a
more complete description of the matter involved, and each such statement shall
be deemed qualified in its entirety by such reference. A copy of the
Registration Statement, including the exhibits and schedules thereto, may be
inspected without charge at the public reference facilities of the SEC described
below, and copies of such material may be obtained from such office upon payment
of the fees prescribed by the SEC.

The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the SEC.
Such reports, proxy statements and other information filed by the Company with
the SEC can be inspected and copied at the public reference facilities
maintained by the SEC at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, and the following regional offices of the Commission:
New York Regional Office, Seven World Trade Center, 13th Floor, New York, New
York 10048; and Chicago Regional Office, Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can also be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, upon payment of prescribed rates.
Furthermore, the SEC maintains a Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. Such Web site is located at
http://www.sec.gov. In addition, reports, proxy statements and other information
concerning the Company can be inspected at the offices of the National
Association of Securities Dealers, Inc. at 1735 K Street, N.W., Washington, D.C.
20006.

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The following documents or portions of documents filed by the Company (File
No. 0-21022) with the Commission are hereby incorporated herein by reference:
(a) the Company's Annual Report on Form 10-K for the year ended December 31,
1997, as amended on Form 10K/A on each of May 4, May 11 and May 28, 1998; (b)
the Company's quarterly report on Form 10-Q for the quarter ended March 31,
1998, as amended on Form 10-Q/A on each of May 28 and July 9, 1998; (c) the
Company's Definitive Proxy Statement dated April 15, 1998, filed in connection
with the Company's 1998 Annual Meeting of Stockholders; and (d) the description
of the Company's Common Stock contained in its Registration Statement on Form
8-A, as

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amended, filed with the SEC on December 18, 1992, including any amendments or
reports filed for the purpose of updating such description.

All reports and other documents subsequently filed by the Company pursuant
to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act, prior to the filing
of a post-effective amendment that indicates that all securities offered hereby
have been sold or that deregisters all securities remaining unsold, shall be
deemed to be incorporated by reference herein and to be a part hereof from the
date of filing of such reports and documents. Any statement contained in a
document incorporated by reference herein shall be deemed modified or superseded
for purposes of this Prospectus to the extent that a statement contained or
incorporated by reference herein modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.

The Company will provide without charge to each person to whom this
Prospectus is delivered, upon written or oral request of such person, a copy of
any and all of the information that has been or may be incorporated by reference
in this Prospectus, other than exhibits to such documents (unless such exhibits
are specifically incorporated by reference into such documents). Such requests
should be directed to Shaman Pharmaceuticals, Inc., 213 East Grand Avenue, South
San Francisco, California 94080-4812, telephone (650) 952-7070, facsimile (650)
873-8367, Attn: Corporate Communications.

This Prospectus is accompanied by a copy of the Company's 1997 Annual
Report on Form 10-K/A, together with any amendments thereto, filed with the SEC
for each subsequent fiscal year of the Company during the duration of this
Offering and by a copy of the Company's Proxy Statement used for the
solicitation of stockholders for each subsequent annual meeting of stockholders
held during the duration of this offering.

The Company shall deliver without charge to each person to whom this
Prospectus is delivered a copy of the Company's latest Form 10-Q filed with the
SEC with respect to the most recent fiscal quarter which ends after the end of
the latest fiscal year of the Company for which the Company has delivered the
1997 Annual Report as described above. The Company shall also provide without
charge a copy of each Form 8-K, if any, filed with the SEC since the end of the
latest fiscal year of the Company for which the audited financial statements
were included in the latest Form 10-K/A filed with the SEC.

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<PAGE> 50

- ------------------------------------------------------
- ------------------------------------------------------

NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY OTHER PERSON.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES OTHER THAN THE SHARES OF SERIES C PREFERRED STOCK
OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY OF THE SHARES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION
IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE
ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE
SUBSEQUENT TO THE DATE HEREOF.

------------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 7
Use of Proceeds....................... 17
Price Range of Common Stock........... 18
Dividend Policy....................... 18
Capitalization........................ 19
Selected Financial Data............... 20
Management's Discussion and
Analysis of Financial Condition
and Results of Operations........... 21
Business.............................. 25
Management............................ 38
Description of Capital Stock.......... 43
Plan of Distribution.................. 45
Legal Matters......................... 47
Experts............................... 47
Available Information................. 47
Incorporation of Certain Documents by
Reference........................... 47
</TABLE>

- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
MINIMUM OFFERING 150,000 SHARES
MAXIMUM OFFERING 200,000 SHARES

[LOGO]
SERIES C CONVERTIBLE
PREFERRED STOCK
---------------------

PROSPECTUS
---------------------
JULY , 1998
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 51

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth the various expenses expected to be incurred
by the Registrant in connection with the sale and distribution of the securities
being registered hereby. All amounts are estimated except the Securities and
Exchange Commission registration fee and the Nasdaq listing fee.

<TABLE>
<S> <C>
SEC registration fee........................................ $ 5,900
Nasdaq listing fee.......................................... 6,000
Accounting fees and expenses................................ 50,000
Legal fees and expenses..................................... 125,000
Printing and engraving fees................................. 50,000
Miscellaneous fees and expenses............................. 38,100
--------
Total............................................. $275,000
========
</TABLE>

ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Section 145 of the Delaware General Corporation Law, as amended (the
"DGCL"), provides that a corporation may indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal or investigative
(other than an action by or in the right of the corporation) 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, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding, if he acted
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.
Section 145 further provides that a corporation similarly may indemnify any such
person serving in any such capacity who was or is a party or is threatened to be
made a party to any threatened, pending or completed action or suit by or in the
right of the corporation to procure a judgment in its favor, against expenses
actually and reasonably incurred in connection with the defense or settlement of
such action or suit if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the corporation and
except that no indemnification shall be made in respect of any claim, issue or
matter as to which such person shall have been adjudged to be liable to the
corporation unless and only to the extent that the Delaware Court of Chancery or
such other court in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.

Section 102(b)(7) of the DGCL permits a corporation to include in its
certificate of incorporation a provision eliminating or limiting the personal
liability of a director to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, provided that such provision
shall not eliminate or limit the liability of a director (i) for any breach of
the director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the DGCL (relating to
unlawful payment of dividends and unlawful stock purchase and redemption) or
(iv) for any transaction from which the director derived an improper personal
benefit.

The Registrant's Restated Certificate of Incorporation provides that the
Registrant's directors shall not be liable to the Registrant or its stockholders
for monetary damages for breach of fiduciary duty as a director, except to the
extent that exculpation from liabilities is not permitted under the DGCL as in
effect at the time

II-1
<PAGE> 52

such liability is determined. The Registrant has entered into indemnification
agreements with all of its officers and directors, as permitted by the DGCL.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

The exhibits listed in the Exhibit Index are filed as part of this
Registration Statement.

(a) EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
1.1* Form of Placement Agent Agreement by and between the
Registrant and Dakin Securities Corporation.
1.2* Form of Escrow Agreement by and between the Registrant and
Silicon Valley Bank.
3.1(12) Restated Certificate of Incorporation, as filed with the
Delaware Secretary of State on June 3, 1997.
3.2(9) Amended and Restated By-Laws, as amended March 29, 1996.
3.3(14) Form of Certificate of Designations of Series B Custom
Convertible Preferred Stock.
3.4* Certificate of Designation of Preferences of Series C
Preferred Stock.
4.1(9) Certificate of Designation of Preferences of Series A
Preferred Stock of the Registrant, as filed with the
Delaware Secretary of State on July 27, 1996.
5.1* Opinion of Brobeck, Phleger & Harrison LLP.
10.1(1)(16) 1990 Stock Option Plan, as amended.
10.2(1)(16) 401(k) Plan.
10.3(1)(16) Form of Stock Purchase Agreement.
10.6(1) Form of Indemnification Agreement.
10.8(1) Form of Agreement with Scientific Strategy Team Members.
10.9(1) Form of Proprietary Information and Inventions
Agreement-Employees.
10.10(1) Form of Proprietary Information and Inventions
Agreement-Consultants.
10.12(1)(15) License Agreement dated February 8, 1990, between Shaman and
Dr. Michael Tempesta.
10.13(1)(15) Stock Purchase Agreement dated June 15, 1990, between Shaman
and Lisa A. Conte.
10.17(1) Master Equipment Lease Agreement dated December 26, 1990,
between Shaman and Lease Management Services, Inc.
10.24(1)(15) Supply Agreement dated June 1, 1992.
10.29(1) Registration Rights Agreement dated October 22, 1992, as
amended December 14, 1992, between Shaman and certain
holders of preferred stock of Shaman.
10.30(1) Industrial Lease Agreement dated January 1, 1993, between
Shaman and Grand/ Roebling Investment Company.
10.31(1) Three Party Agreement dated as of January 1, 1993, by and
among Berlex Laboratories, Inc., Shaman and Grand/Roebling
Investment Company.
10.37(4) Loan and Security Agreement dated September 27, 1993,
between Shaman and Household Commercial of California.
10.39(4) Common Stock Warrant dated September 30, 1993, issued to
MMC/GATX Partnership No. I.
10.40(4) Common Stock Warrant dated October 5, 1993, issued to Meier
Mitchell & Co.
10.41(6)(15) Joint Research and Product Development Agreement, dated May
24, 1995, by and between Ono Pharmaceutical Co., Ltd. and
Registrant.
</TABLE>

II-2
<PAGE> 53

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.41(a)(10) Amendment Agreement, dated December 4, 1996, to the Joint
Research and Product Development Agreement by and between
Ono Pharmaceutical Co., Ltd. and Registrant.
10.42(6)(15) License Agreement, dated June 8, 1995, by and between Bayer
AG and Registrant.
10.43(7)(15) Development Agreement, dated January 11, 1996, by and
between Abbott Laboratories and Registrant.
10.47(9)(15) Subscription Agreement dated July 25, 1996 by and between
the Registrant and Fletcher International Limited.
10.48(10)(15) Joint Research and Product Development and Commercialization
Agreement dated September 23, 1996, by and between Lipha,
Lyonnaise Industrielle Pharmaceutique s.a. and the
Registrant.
10.49(10)(15) Stock Purchase Agreement dated September 23, 1996, by and
between Lipha, Lyonnaise Industrielle Pharmaceutique s.a.
and the Registrant.
10.50(11)(16) Shaman Pharmaceuticals, Inc. 1992 Stock Option Plan (as
Amended and Restated on February 14, 1997).
10.51(3)(16) Form of Notice of Grant with Stock Option Agreement.
10.52(3)(16) Form of Addendum to Stock Option Agreement (Special Tax
Elections).
10.53(3)(16) Form of Addendum to Stock Option Agreement (Limited Stock
Appreciation Rights).
10.54(11)(16) Form of Non-Employee Director Automatic Stock Option
Agreement.
10.55(12) Masopracol License Agreement, dated as of March 19, 1997, by
and between Access Pharmaceuticals, Inc. and the Registrant.
10.56(12)(15) Amended and Restated Masopracol License Agreement, dated as
of April 1997, by and between Access Pharmaceuticals, Inc.
and the Registrant.
10.57(12) Loan and Security Agreement, dated as of May 7, 1997,
between MMC/GATX Partnership I and Registrant.
10.57A(12) Amendment No. 1 to Loan and Security Agreement, dated as of
June 30, 1997, by and between Registrant and MMC/GATX
Partnership No. I.
10.57B* Waiver letter dated July 16, 1998, executed by Shaman
Pharmaceuticals, Inc. and approved by MMC/GATX Partnership
No. I as to the payment of dividends on the Series C
Preferred Stock.
10.58(12) Secured Promissory Note, dated May 16, 1997, issued in favor
of MMC/GATX Partnership No. I.
10.59(12) Warrant, granted May 7, 1997, in favor of MMC/GATX
Partnership No. I.
10.60(12) Amendment to Warrants, dated May 7, 1997, MMC/GATX
Partnership No. I and Registrant.
10.61(12) Engagement Agreement, dated April 7, 1997, by and between
Registrant and Diaz & Altschul Capital, LLC.
10.62(12) Amended Engagement Agreement, dated June 30, 1997, by and
between Registrant and Diaz & Altschul Capital, LLC.
10.63(12) Form of Note Purchase Agreement, dated as of June 30, 1997,
by and between Registrant and certain investors.
10.64(13) Master Lease Agreement, dated September 15, 1997, between
Registrant and Transamerica Business Credit Corporation.
10.65(13) Amendment to Note Purchase Agreement, dated as of June 30,
1997, by and between Registrant and Certain investors.
</TABLE>

II-3
<PAGE> 54

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.66(14) Amendment Agreement, dated as of March 18, 1998, by and
between the Registrant and certain investors.
10.67(14) Form of Common Stock Purchase Warrant, dated as of March 18,
1998, issued to certain investors.
10.69(14) Second Amendment Agreement, dated as of June 10, 1998, by
and between the Registrant and certain investors.
12.1* Statement Regarding Computation of Ratios.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2* Consent of Brobeck, Phleger & Harrison LLP (included in the
opinion filed as Exhibit 5.1).
24.1* Power of Attorney (included under the caption "Signatures").
</TABLE>

- ---------------
* Previously filed.

** To be filed by amendment.

(1) Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-1, File No. 33-55892 which was declared
effective January 26, 1993.

(2) Intentionally omitted.

(3) Incorporated by reference to exhibits filed on July 23, 1993 with
Registrant's Registration Statement on Form S-8, File No. 33-66450.

(4) Incorporated by reference to exhibits filed on November 10, 1993 with
Registrant's Registration Statement on Form S-1, File No. 33-71506.

(5) Intentionally omitted.

(6) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1995, as amended.

(7) Incorporated by reference to exhibits filed with Registrant's Annual Report
on Form 10-K for the year ended December 31, 1995.

(8) Intentionally omitted.

(9) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1996, as amended.

(10) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1996, as amended.

(11) Incorporated by reference to exhibits filed on June 30, 1997 with
Registrant's Registration Statement on Form S-8, File No. 333-30365.

(12) Incorporated by reference to exhibits filed with Registrant's Registration
Statement on Form S-3, File No. 333-31843.

(13) Incorporated by reference to exhibits filed with Registrant's Annual Report
on Form 10-K for the year ended December 31, 1997.

(14) Incorporated by reference to exhibits filed with Registrant's Registration
Statement on Form S-3, File No. 333-49025.

(15) Confidential treatment has been granted with respect to certain portions of
these agreements.

(16) Management contract or compensation plan.

(b) FINANCIAL STATEMENT SCHEDULES

None.

II-4
<PAGE> 55

ITEM 17. UNDERTAKINGS.

The undersigned Registrant hereby undertakes:

(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement: (i) to
include any prospectus required by Section 10(a)(3) of the Securities Act;
(ii) to reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement; and (iii) to include any material information with
respect to the plan of distribution not previously disclosed in the
Registration Statement or any material change to such information in the
Registration Statement; provided, however, that (i) and (ii) do not apply
if the Registration Statement is on Form S-3 or Form S-8, and the
information required to be included in a post-effective amendment by (i)
and (ii) is contained in periodic reports filed with or furnished to the
Commission by the Registrant pursuant to Section 13 or Section 15(d) of the
Exchange Act that are incorporated by reference in the Registration
Statement.

(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment 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.

(3) To remove from registration by means of a post-effective amendment
any of the securities being registered that remain unsold at the
termination of the offering.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
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 Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant 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 undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Exchange Act (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to Section 15(d) of the Exchange Act) that is
incorporated by reference in the Registration Statement 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 undersigned Registrant hereby undertakes that:

(1) For purposes of determining any 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 Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.

(2) 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.

II-5
<PAGE> 56

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Company
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-2 and has duly caused this Amendment No. 3 to
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of South San Francisco, State of California, on the
30th day of July, 1998.

SHAMAN PHARMACEUTICALS, INC.

By: /s/ LISA A. CONTE
------------------------------------
Lisa A. Conte
President and Chief Executive
Officer

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the persons whose signatures
appear below, which persons have signed such Registration Statement in the
capacities and on the dates indicated:

<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>

/s/ LISA A. CONTE Director, President, and Chief July 30, 1998
- -------------------------------------------------------- Executive Officer (Principal
Lisa A. Conte Executive Officer)

* Chief Financial Officer (Chief July 30, 1998
- -------------------------------------------------------- Financial and Accounting
Stephanie C. Diaz Officer)

* Chairman of the Board July 30, 1998
- --------------------------------------------------------
G. Kirk Raab

Director July , 1998
- --------------------------------------------------------
Adrian D.P. Bellamy

Director July , 1998
- --------------------------------------------------------
Jeffrey Berg

* Director July 30, 1998
- --------------------------------------------------------
Herbert H. McDade, Jr.

* Director July 30, 1998
- --------------------------------------------------------
M. David Titus

*By: /s/ LISA A. CONTE
---------------------------------------------------
Lisa A. Conte
(Attorney-in-Fact)
</TABLE>

II-6
<PAGE> 57

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------- ----------- ------
<S> <C> <C>
1.1* Form of Placement Agent Agreement by and between the
Registrant and Dakin Securities Corporation.
1.2* Form of Escrow Agreement by and between the Registrant and
Silicon Valley Bank.
3.1(12) Restated Certificate of Incorporation, as filed with the
Delaware Secretary of State on June 3, 1997.
3.2(9) Amended and Restated By-Laws, as amended March 29, 1996.
3.3(14) Form of Certificate of Designations of Series B Custom
Convertible Preferred Stock.
3.4* Certificate of Designation of Preferences of Series C
Preferred Stock.
4.1(9) Certificate of Designation of Preferences of Series A
Preferred Stock of the Registrant, as filed with the
Delaware Secretary of State on July 27, 1996.
5.1* Opinion of Brobeck, Phleger & Harrison LLP.
10.1(1)(16) 1990 Stock Option Plan, as amended.
10.2(1)(16) 401(k) Plan.
10.3(1)(16) Form of Stock Purchase Agreement.
10.6(1) Form of Indemnification Agreement.
10.8(1) Form of Agreement with Scientific Strategy Team Members.
10.9(1) Form of Proprietary Information and Inventions
Agreement-Employees.
10.10(1) Form of Proprietary Information and Inventions
Agreement-Consultants.
10.12(1)(15) License Agreement dated February 8, 1990, between Shaman and
Dr. Michael Tempesta.
10.13(1)(15) Stock Purchase Agreement dated June 15, 1990, between Shaman
and Lisa A. Conte.
10.17(1) Master Equipment Lease Agreement dated December 26, 1990,
between Shaman and Lease Management Services, Inc.
10.24(1)(15) Supply Agreement dated June 1, 1992.
10.29(1) Registration Rights Agreement dated October 22, 1992, as
amended December 14, 1992, between Shaman and certain
holders of preferred stock of Shaman.
10.30(1) Industrial Lease Agreement dated January 1, 1993, between
Shaman and Grand/Roebling Investment Company.
10.31(1) Three Party Agreement dated as of January 1, 1993, by and
among Berlex Laboratories, Inc., Shaman and Grand/Roebling
Investment Company.
10.37(4) Loan and Security Agreement dated September 27, 1993,
between Shaman and Household Commercial of California.
10.39(4) Common Stock Warrant dated September 30, 1993, issued to
MMC/GATX Partnership No. I.
10.40(4) Common Stock Warrant dated October 5, 1993, issued to Meier
Mitchell & Co.
10.41(6)(15) Joint Research and Product Development Agreement, dated May
24, 1995, by and between Ono Pharmaceutical Co., Ltd. and
Registrant.
</TABLE>

<PAGE> 58

<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------- ----------- ------
<S> <C> <C>
10.41(a)(10) Amendment Agreement, dated December 4, 1996, to the Joint
Research and Product Development Agreement by and between
Ono Pharmaceutical Co., Ltd. and Registrant.
10.42(6)(15) License Agreement, dated June 8, 1995, by and between Bayer
AG and Registrant.
10.43(7)(15) Development Agreement, dated January 11, 1996, by and
between Abbott Laboratories and Registrant.
10.47(9)(15) Subscription Agreement dated July 25, 1996 by and between
the Registrant and Fletcher International Limited.
10.48(10)(15) Joint Research and Product Development and Commercialization
Agreement dated September 23, 1996, by and between Lipha,
Lyonnaise Industrielle Pharmaceutique s.a. and the
Registrant.
10.49(10)(15) Stock Purchase Agreement dated September 23, 1996, by and
between Lipha, Lyonnaise Industrielle Pharmaceutique s.a.
and the Registrant.
10.50(11)(16) Shaman Pharmaceuticals, Inc. 1992 Stock Option Plan (as
Amended and Restated on February 14, 1997).
10.51(3)(16) Form of Notice of Grant with Stock Option Agreement.
10.52(3)(16) Form of Addendum to Stock Option Agreement (Special Tax
Elections).
10.53(3)(16) Form of Addendum to Stock Option Agreement (Limited Stock
Appreciation Rights).
10.54(11)(16) Form of Non-Employee Director Automatic Stock Option
Agreement.
10.55(12) Masopracol License Agreement, dated as of March 19, 1997, by
and between Access Pharmaceuticals, Inc. and the Registrant.
10.56(12)(15) Amended and Restated Masopracol License Agreement, dated as
of April , 1997, by and between Access Pharmaceuticals,
Inc. and the Registrant.
10.57(12) Loan and Security Agreement, dated as of May 7, 1997,
between MMC/GATX Partnership I and Registrant.
10.57A(12) Amendment No. 1 to Loan and Security Agreement, dated as of
June 30, 1997, by and between Registrant and MMC/GATX
Partnership No. I.
10.57B* Waiver letter executed by Shaman Pharmaceuticals, Inc. and
approved by MMC/GATX Partnership No. I as to the payment of
dividends on the Series C Preferred Stock.
10.58(12) Secured Promissory Note, dated May 16, 1997, issued in favor
of MMC/GATX Partnership No. I.
10.59(12) Warrant, granted May 7, 1997, in favor of MMC/GATX
Partnership No. I.
10.60(12) Amendment to Warrants, dated May 7, 1997, MMC/GATX
Partnership No. I and Registrant.
10.61(12) Engagement Agreement, dated April 7, 1997, by and between
Registrant and Diaz & Altschul Capital, LLC.
10.62(12) Amended Engagement Agreement, dated June 30, 1997, by and
between Registrant and Diaz & Altschul Capital, LLC.
10.63(12) Form of Note Purchase Agreement, dated as of June 30, 1997,
by and between Registrant and certain investors.
10.64(13) Master Lease Agreement, dated September 15, 1997, between
Registrant and Transamerica Business Credit Corporation.
</TABLE>

<PAGE> 59

<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------- ----------- ------
<S> <C> <C>
10.65(13) Amendment to Note Purchase Agreement, dated as of June 30,
1997, by and between Registrant and Certain investors.
10.66(14) Amendment Agreement, dated as of March 18, 1998, by and
between the Registrant and certain investors.
10.67(14) Form of Common Stock Purchase Warrant, dated as of March 18,
1998, issued to certain investors.
10.69(14) Second Amendment Agreement, dated as of June 10, 1998, by
and between the Registrant and certain investors.
12.1* Statement Regarding Computation of Ratios.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2* Consent of Brobeck, Phleger & Harrison LLP (included in the
opinion filed as Exhibit 5.1).
24.1* Power of Attorney (included under the caption "Signatures").
</TABLE>

- ---------------
* Previously filed.

** To be filed by amendment.

(1) Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-1, File No. 33-55892 which was declared
effective January 26, 1993.

(2) Intentionally omitted.

(3) Incorporated by reference to exhibits filed on July 23, 1993 with
Registrant's Registration Statement on Form S-8, File No. 33-66450.

(4) Incorporated by reference to exhibits filed on November 10, 1993 with
Registrant's Registration Statement on Form S-1, File No. 33-71506.

(5) Intentionally omitted.

(6) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1995, as amended.

(7) Incorporated by reference to exhibits filed with Registrant's Annual Report
on Form 10-K for the year ended December 31, 1995.

(8) Intentionally omitted.

(9) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1996, as amended.

(10) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1996, as amended.

(11) Incorporated by reference to exhibits filed on June 30, 1997 with
Registrant's Registration Statement on Form S-8, File No. 333-30365.

(12) Incorporated by reference to exhibits filed with Registrant's Registration
Statement on Form S-3, File No. 333-31843.

(13) Incorporated by reference to exhibits filed with Registrant's Annual Report
on Form 10-K for the year ended December 31, 1997.

(14) Incorporated by reference to exhibits filed with Registrant's Registration
Statement on Form S-3, File No. 333-49025.

(15) Confidential treatment has been granted with respect to certain portions of
these agreements.

(16) Management contract or compensation plan.

<PAGE> 1

EXHIBIT 23.1

CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-2) and related prospectus of Shaman
Pharmaceuticals, Inc. for the registration of 150,000 shares to 200,000 shares
of its Series C Preferred Stock and to the incorporation by reference therein of
our report dated January 29, 1998, with respect to the financial statements of
Shaman Pharmaceuticals, Inc. included in its Annual Report (Form 10-K/A) for the
year ended December 31, 1997, filed with the Securities and Exchange Commission.

ERNST & YOUNG LLP

July 27, 1998

Palo Alto, California