THE STEWART REPORT HOTLINE SUMMARY

Special Report: Amarillo Biosciences, Inc.
Wednesday, June 1, 2005
(Next HotLine Scheduled for Wednesday, June 29, 2005)

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Instead of “Amarillo Biosciences, Inc.,” the headline for this Special Report could just as easily read: “Good Company, Inc.”

After all, that’s what we own – shares in one very Good Company, which is itself in very “Good Company” judging by the distinguished professionals and scientists both on the stockholder list and in attendance at the shareholder meeting.

At the top of this list, of course, is Hayashibara Biochemical Laboratories. This giant Japanese pharmaceutical company has invested more than $16.5 million in our tiny Texas biotech over the years, and now owns 20.5 percent of all Amarillo shares outstanding. Several score of Amarillo’s roughly 1,400 stockholders of record are also scientific professionals employed by Hayashibara - including Mr. Hayashibara himself.

On the geographic flip-side, many more of those 1,400 or so Amarillo Biosciences shareholders are themselves Amarillo area scientists - to wit, Texas doctors or researchers practicing either human or veterinary medicine. Indeed, at least eight of those medical pros were in the audience on Friday, May 27, when Amarillo Biosciences, Inc. (Nasdaq/BB: AMAR – $0.35), hosted its annual shareholder meeting.

As I promised in the last HotLine, The Stewart Report’s proxy at that meeting – by virtue of actually living in Amarillo – was our Editor-in-Chief, Larry D. Spears. Larry’s observations from that morning’s event have been incorporated throughout this evening’s document, while some of his same-day notes have been quoted directly, as follows:

“AMAR President, CEO and CFO Dr. Joseph Cummins opened the meeting by introducing each of the nine non-corporate officers in attendance, all but one of whom he knew personally by virtue of their long-term tenure as shareholders. Worth noting, seven of those nine were doctors of either human or veterinary medicine – again strong and vested testimony to the health profession’s belief in the value of Amarillo’s low-dose oral interferon in both treating and preventing various human ailments and animal maladies.

“Later, while ballots and proxies were being tallied for the election of the corporate board of directors and other official items of business, attendees received briefings on two new studies the company is preparing to undertake, as well as three studies or clinical trials currently underway. The two new projects are:
• A program in conjunction with Ohio State University funded under a $104,372 grant from the National Institutes of Health (NIH) to treat gnotobiotic piglets for h. pylori bacteria, a leading cause of gastric ailments in humans. If the pig trials prove effective, it could lead to future studies of interferon alpha efficacy against gastritis and gastroduodenal ulcers in humans.
• A journey by AMAR representatives to Cambodia in July to assist in setting up a study to evaluate whether oral interferon regimens can be used in treating or preventing the growing outbreak of Avian flu in Southeast Asia. World health officials have expressed extreme fears about the potential threat of a pandemic arising from the so-called “bird flu.” Amarillo is hopeful oral interferon may prove to be both a practical and cost-effective treatment option, based on results of Russian tests of interferon in the1960s to treat Hong Kong flu.

“As for projects currently in progress:
• A joint 12-week study with Nobel ILAC in Turkey to evaluate interferon treatment of 90 patients suffering from Behçet’s disease. Behçet’s is relatively rare in the U.S., with under 15,000 cases, but is much more prevalent in the Middle East. Thus the focus on Turkey, which has an estimated 260,000 Behçet’s sufferers.
A study in conjunction with M.D. Anderson Cancer Center in Houston to test the efficacy of oral interferon in treating two different myeloproliferative diseases – polycythemia vera and essential thrombocythemia.
These diseases impact the body’s ability to fight blood clots and, in the case of the latter, may lead to development of leukemia. Current treatments are only marginally effective and involve significant harmful side effects. Each study group will consist of 20 patients, and positive results could lead to further trials, as well as application for orphan-drug designation for interferon treatments. (The two diseases affect 7,000 to 8,000 new patients per year.)
• A study being conducted by Dr. Lorenz Lutherer of Texas Tech (who presented his results at the meeting) to treat sufferers of idiopathic pulmonary fibrosis, a degenerative lung disease that is nearly always fatal within three to five years of diagnosis.
The study has been underway for more than three years and has shown positive results in arresting the progression of the disease, though no evidence has been shown that it can either cure or reverse its effects. Additional test patients are still being sought for this study, and AMAR hopes to do more work on the disease in conjunction with the national Pulmonary Fibrosis Association, as well as applying for orphan-drug status. (There are roughly 80,000 patients in the United States.)

“While none of these studies has yet reached a stage where they generate revenues for the company, Amarillo benefits because other entities are bearing the bulk of the study costs. Using a cost assumption of $10,000 per patient, the four studies cited thus represent roughly $1.6 million in “free” research evaluating Amarillo’s intellectual properties and patents. Worth noting, the company currently owns or licenses 16 separate U.S. patents on the medical and veterinary use of oral interferon alpha. This additional funding could very easily add to these already considerable assets – and, again, we’re using other people’s money.

“Dr. Cummins also announced receipt of some new revenues as an outgrowth of the company’s Hayashibara relationship. AMAR received its first royalty check from BioVet, Inc., a Tokyo-based veterinary medicine company that has obtained regulatory approval to use Amarillo’s interferon formula to treat calves for rotavirus. The check, which totaled $40,000, covered just six months of sales in Japan. Cummins said BioVet now has plans to significantly expand distribution of interferon for animal use, and hopes to go public based on its increased sales, both of which should boost future Amarillo royalties.

“More importantly, the regulatory approval in Japan could lead to similar authorization for animal treatment in other Asian nations, opening the door for Amarillo to enter into additional licensing and/or royalty agreements since it currently retains rights to its technology outside Japan. (Note: Though the exact fiscal impact of this deal wasn’t detailed at the meeting, it is estimated that revenues from the BioVet royalty alone could cover more than 10 percent of Amarillo’s annual operating budget.)

“Two subjects that weren’t addressed in the meeting itself but that came up in private conversations afterward were Amarillo’s possible move to another location outside Texas and the use of interferon to treat livestock against a possible terrorist attack using foot and mouth (FMD) or other animal diseases.

“Dr. Cummins said he’d had discussions with business, educational and/or political officials in West Virginia, Michigan and New Mexico about relocating the company, but that there had been no firm offers of financial or other incentives as yet. He also said there was a strong possibility that, should an out-of-state proposal be received, matching offers might come in from the Amarillo (City) Economic Development Commission or the State of Texas, either of which could induce the company to stay put.

“In other words, Dr. Cummins is now in a very enviable position. He has four states, several cities and at least one U.S. Senator (West Virginia’s Jay Rockefeller) competing for Amarillo’s presence – and he may be able to play them off against one another in an effort to lock in highly favorable financial and tax incentives for future company operations.

“With respect to the terrorist issue and possible FMD treatment, Dr. Cummins said talks were still on-going with various government agencies and livestock industry organizations. The goal is development of a program to utilize interferon as a cost-effective preventative measure rather than waiting until after an attack and having to destroy any afflicted herds.”

So, Larry’s report left off where mine shall resume – with a mention of terrorism and the obvious appreciation for Amarillo as a pure biotech company.

Sure, it’s a biotech in a dusty, friendly, mid-sized town – but now, suddenly, it’s the politicians who are dusting off the welcome mats for AMAR, not the other way around. Educational giants with big budgets (such as West Virginia’s Marshall University and its $12 million grant for biotech development within that state) now lie at AMAR’s feet. And big-name Senators like Rockefeller are rolling out the red carpet. And don’t forget Hayashibara, which never once pulled the rug out from under Amarillo, but faithfully stayed the course – the very long-term course – and is now beginning to realize benefits from that investment.

This brings me to Larry’s earlier reference to Amarillo’s new royalties – actually its first-ever royalties – resulting from the BioVet-Hayashibara relationship in Japan. As he reported, the first check was for $40,000. That isn’t big – but the relationship is. That’s why the checks are likely to get much, much larger – and arrive quite often. That, in turn, is why I’d like to expand on what was said.

The Hayashibara pact to provide AMAR’s interferon to BioVet is a very new deal and applies only to Japan – which may be famous for its Kobe beef, but not for having very many of the cattle that produces it. (In other words – and each of them with a Southern drawl – all I mean to say is, “When it comes to cattle, Japan ain’t no Texas!”) Yet, despite the deal being young, BioVet being small and the Japanese cattle population being even smaller, the potential for revenue growth – in the opinion of the Asian equity markets – is so large and so obvious that BioVet is now worth taking public. The offering is good to go; the prospectuses have been printed.

I have not seen one, but a colleague familiar with the offering says BioVet’s first-year revenues are expected to come in between $10 million and $12 million. (Which only makes sense. After all, if the company couldn’t do that, there wouldn’t be much point in taking it public, would there?!) Aside from the overwhelming “out-of-the-gate” sales response to AMAR’s product in BioVet’s hands, the reason the sales are expected to expand rapidly is because BioVet’s market is expected to expand rapidly, too, growing to include numerous nations besides Japan.

Bottom line here? BioVet is going public almost solely on the basis of our patents – and the fact that Hayashibara is right in the middle. We’re in bed with Hayashibara – and have been for over two decades, drawing more than $16 million in investment. That really says a lot – as will the size and frequency of future royalties. You see, the first $40,000 was based on Amarillo’s 8 percent share of Hayashibara’s first $500,000 sale to BioVet. But, if BioVet meets the analysts’ expectations of $10 million to $12 million, then our 8 percent suddenly grows from $40,000 to something more like $1 million!

Other earlier projections will come true, too. For example, Avian influenza now has every major world health organization worried all the way to the top – a truth that is 100 percent verifiable by hundreds of published papers and journals around the world, and now, even in books. Much of this information is easily accessed at Amarillo’s website – www.amarbio.com. (Similar information can also be found at the website of Emergency Filtration Products, Inc. – www.emergencyfiltration.com – because of the obvious applications for EMFP’s nano-mask technology).

It’s easy to appreciate why interferon could be a key in preventing the “bird flu’s” growth into a pandemic. Just look at how interferon was originally discovered: As a result of a 1950’s outbreak of influenza. In fact, it was even given its name because it was found to “interfere” with one particular strain of the flu virus. It’s a natural fit.

Likewise, agro-terrorism is as real today as when I said to buy the stock more than a year ago, then again in the fall and again in January when departing Bush Cabinet member Tommy Thompson made a farewell statement almost daring fanatics to attack America’s food supply. And my BUY recommendation, based on the terrorist aspect alone, remains as real as the threat.

But the importance of this BUY recommendation and this particular document is to remind you that there are dozens and dozens of ways that Amarillo’s technologies could affect both human science and animal science – and its own share price. That’s the basis for my profound recent interest in this stock – “recent” being defined as the point at which I recognized the company as being a potential shaker and mover in a world that is itself being shaken and moved by unprecedented events.

This much potential, prestigious business and research partners, $37 million willingly invested so far – and lots more en route, principally in the form of research grants and university-funded studies. You know … scientists looking for the next big thing. Why? Because it makes great sense – at least to those in the know. What does not make sense is how Wall Street has missed this tiny gem.

Seriously, how can this company have a market cap of just $5.93 million? I used to blame the anomaly on geography – but Japan has found it. State governments from Michigan to New Mexico have found it. Senators on the opposite coast have found it. Look at the half a million shares that traded last month alone. Then try to tell me that someone else hasn’t also found it – and is aggressively accumulating shares.

Do I sound angry? Well, I’m not. I’m just another incredulous investor who’s not afraid to wait to be right. How hard can that be?

We’re talking of a potentially world-class biotech in the making – that is actually being made, as we speak, on many fronts, with many partners, a score of patents, more than 1,350 shareholders and …

… A total current market capitalization of just $5.93 million?

$5.93 million is not a typo – but, yes, it is unbelievable. This whole Good Company for the price of a good O.C. beach house.

To me, there is a large disconnect. It was there when I recommended the stock at 8 cents, and at 10 cents, and at 12 cents – and today, at 35 cents, where AMAR still holds its official title: The Stewart Report’s “Favorite Speculation.”

P.S. – I am The Stewart Report, and I own a quarter-million shares – and have for over one year. – JDS.

FINAL QUOTES (BUT NO NOTES):

International Card Establishment, Inc.
Nasdaq/BB: ICRD -- $0.41 – Up $0.08 since the last HotLine
Strong BUY to $0.50

Emergency Filtration Products, Inc.
Nasdaq/BB: EMFP – $0.40 – Down $0.03 since the last HotLine
Good BUY at Current Levels

As always, thank you for listening – and for subscribing.

J. David Stewart
Analyst and Publisher, The Stewart Report

Note: David’s HotLines are also available 24/7 by dialing (949) 583-6057, and
entering your subscriber-protected, 2-digit Pass Code at the prompt.

Information contained herein has been obtained from sources believed to be reliable, but there is no guarantee as to completeness or accuracy. Any opinions expressed herein are statements of our judgment on this date and are subject to change without notice. Acting as an investor, and also as a consultant to the Company, David Stewart purchased 250,000 shares of Amarillo Biosciences, restricted under Rule 144. J. David Stewart currently owns 100,000 shares of ICRD common stock. Affiliates of The Stewart Report may also have additional long or short positions in these and other securities discussed herein, including warrants and/or options, and may buy or sell same at their own discretion. This report contains or may contain forward-looking statements within the meaning of the "safe-harbor" provisions of the U.S. Private Securities Litigation Reform Act of 1995. This report is intended for informational purposes only and does not have regard for or take into consideration the reader's investment objective, financial situation or suitability for this security. Consult with your financial advisor and perform your own due diligence. Copyright © The Stewart Report, 2005.