##### Table of Contents

---



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549



FORM 10-Q



|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934.
|- | -----------------------------------------------------------------------------------------



For the quarterly period ended July 31, 2005



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------



For the transition period from
 to



Commission File Number: 002-31909



SYNTHETIC BLOOD INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|New Jersey                                                     |  | 33-0112644                          
|(State or Other Jurisdiction of Incorporation or Organization) |  | (I.R.S. Employer Identification No.)



3189 Airway Avenue,
Building C, Costa Mesa, California 92626

(Address of Principal Executive Office)



714-427-6363

(Registrants telephone number, including area code)



Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 (the
Exchange Act) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.



YES  x    NO ̈



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).



YES ̈NO  x



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.):



YES ̈NO  x



Indicate the number of shares outstanding of each of the issuers classes of common stock as of September 10, 2005: 129,659,918 shares of common stock, par value
$0.01.



---



---

##### Table of Contents

FORM 10-Q

SYNTHETIC BLOOD INTERNATIONAL, INC.



INDEX



|         |  |                       |  |                                                                                                                                                           |  |     
|-------- |  | --------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|         |  |                       |  |                                                                                                                                                           |  | Page
|PART I.  |  | FINANCIAL INFORMATION |  |                                                                                                                                                          
|         |  |                       | 
|         |  | Item 1.               |  | Financial Statements                                                                                                                                      |  |     
|         |  |                       | 
|         |  |                       |  | Balance Sheets as of July 31, 2005 (unaudited) and April 30, 2005                                                                                         |  | 3   
|         |  |                       | 
|         |  |                       |  | Statements of Operations for the Three Months Ended July 31, 2005 and 2004, and for the Period From May 26, 1967 (inception) to July 31, 2005 (unaudited) |  | 4   
|         |  |                       | 
|         |  |                       |  | Statements of Cash Flows for the Three Months Ended July 31, 2005 and 2004, and for the Period From May 26, 1967 (inception) to July 31, 2005 (unaudited) |  | 5   
|         |  |                       | 
|         |  |                       |  | Condensed Notes to Financial Statements                                                                                                                   |  | 6   
|         |  |                       | 
|         |  | Item 2.               |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                                     |  | 9   
|         |  |                       | 
|         |  | Item 3.               |  | Quantitative and Qualitative Disclosure About Market Risk                                                                                                 |  | 13  
|         |  |                       | 
|         |  | Item 4.               |  | Controls and Procedures                                                                                                                                   |  | 13  
|         |  |                      
|PART II. |  | OTHER INFORMATION     |  |                                                                                                                                                          
|         |  |                       | 
|         |  | Item 6.               |  | Exhibits                                                                                                                                                  |  | 14  
|         |  |                      
|         |  | Signatures            |  | 14                                                                                                                                                       



2



---

##### Table of Contents



Part I-Financial
Information



|ITEM 1. | FINANCIAL STATEMENTS.
|------- | ---------------------



SYNTHETIC BLOOD INTERNATIONAL, INC.

(A Development Stage Company)

BALANCE SHEETS



|                                                                                                                                 |  |               |             |   |                |   |             |  
|-------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ----------- | - | -------------- | - | ----------- | -
|                                                                                                                                 |  | July 31, 2005 |             |   | April 30, 2005 |  
|                                                                                                                                 |  | (Unaudited)   |             |   |                |  
|ASSETS                                                                                                                           |  |               |             |   |                |   |             |  
|Current Assets:                                                                                                                  |  |               |             |   |                |   |             |  
|Cash and cash equivalents                                                                                                        |  | $             | 1,281,423   |   |                | $ | 588,763     |  
|Prepaid expenses                                                                                                                 |  |               | 52,156      |   |                |   | 77,686      |  
|                                                                                                                                 |  |               |             |   |                |   |             |  
|Total Current Assets                                                                                                             |  |               | 1,333,579   |   |                |   | 666,449     |  
|Property and Equipment, net                                                                                                      |  |               | 365,438     |   |                |   | 384,278     |  
|Patents, net                                                                                                                     |  |               | 212,424     |   |                |   | 211,618     |  
|Unamortized Bond Issuance Cost                                                                                                   |  |               | 169,350     |   |                |   |            |  
|                                                                                                                                 |  |               |             |   |                |   |             |  
|                                                                                                                                 |  | $             | 2,080,791   |   |                | $ | 1,262,345   |  
|                                                                                                                                 |  |               |             |   |                |   |             |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                             |  |               |             |   |                |   |             |  
|Current Liabilities:                                                                                                             |  |               |             |   |                |   |             |  
|Accounts payable                                                                                                                 |  | $             | 49,604      |   |                | $ | 269,975     |  
|Accrued liabilities                                                                                                              |  |               | 45,491      |   |                |   | 43,969      |  
|                                                                                                                                 |  |               |             |   |                |   |             |  
|Total Current Liabilities                                                                                                        |  |               | 95,095      |   |                |   | 313,944     |  
|                                                                                                                                 |  |               |             |   |                |   |             |  
|Convertible Debentures, net of bond discount of $1,850,000                                                                       |  |               |            |   |                |   |            |  
|                                                                                                                                 |  |               |             |   |                |   |             |  
|Stockholders Equity:                                                                                                            |  |               |             |   |                |   |             |  
|Preferred Stock, undesignated, authorized 10,000,000 shares, none issued or outstanding                                          |  |               |            |   |                |   |            |  
|Common Stock, par value $.01 per share; authorized 200,000,000 shares; issued and outstanding 128,159,918 and 125,659,918
shares |  |               | 1,281,599   |   |                |   | 1,256,599   |  
|Additional paid-in capital                                                                                                       |  |               | 25,020,862  |   |                |   | 23,283,449  |  
|Deposits on common stock                                                                                                         |  |               |            |   |                |   | 140,833     |  
|Deferred compensation                                                                                                            |  |               | (81,686     | ) |                |   | (109,749    | )
|Deficit accumulated during the development stage                                                                                 |  |               | (24,235,079 | ) |                |   | (23,622,731 | )
|                                                                                                                                 |  |               |             |   |                |   |             |  
|Total Stockholders Equity                                                                                                       |  |               | 1,985,696   |   |                |   | 948,401     |  
|                                                                                                                                 |  |               |             |   |                |   |             |  
|                                                                                                                                 |  | $             | 2,080,791   |   |                | $ | 1,262,345   |  
|                                                                                                                                 |  |               |             |   |                |   |             |  



See accompanying
condensed notes to financial statements.



3



---

##### Table of Contents



SYNTHETIC BLOOD INTERNATIONAL, INC.

(A Development Stage Company)

STATEMENTS OF OPERATIONS



|                                                                 |  |                                                     |             |   |                             |   |             |   |  |   |             |  
|---------------------------------------------------------------- |  | --------------------------------------------------- | ----------- | - | --------------------------- | - | ----------- | - |  | - | ----------- | -
|                                                                 |  | Period FromMay 26, 1967(inception) to July 31, 2005 |             |   | Three Months Ended July 31, |  
|                                                                 |  | 2005                                                |             |   | 2004                        |  
|                                                                 |  | (Unaudited)                                         |             |   | (Unaudited)                 |  
|Expenses:                                                        |  |                                                     |             |   |                             |   |             |   |  |   |             |  
|Research and development                                         |  | $                                                   | 9,800,429   |   |                             | $ | 340,173     |   |  | $ | 219,466     |  
|General and administrative                                       |  |                                                     | 14,886,685  |   |                             |   | 275,667     |   |  |   | 255,614     |  
|Interest                                                         |  |                                                     | 182,643     |   |                             |   |            |   |  |   |            |  
|                                                                 |  |                                                     |             |   |                             |   |             |   |  |   |             |  
|Total Expenses                                                   |  |                                                     | 24,869,757  |   |                             |   | 615,840     |   |  |   | 475,080     |  
|Other Income                                                     |  |                                                     | (634,678    | ) |                             |   | (3,492      | ) |  |   | (1,658      | )
|                                                                 |  |                                                     |             |   |                             |   |             |   |  |   |             |  
|NET LOSS                                                         |  | $                                                   | (24,235,079 | ) |                             | $ | (612,348    | ) |  | $ | (473,422    | )
|                                                                 |  |                                                     |             |   |                             |   |             |   |  |   |             |  
|NET LOSS PER SHARE BASIC AND DILUTED                             |  |                                                     |             |   |                             | $ | (0.005      | ) |  | $ | (0.004      | )
|                                                                 |  |                                                     |             |   |                             |   |             |   |  |   |             |  
|WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING, BASIC AND DILUTED |  |                                                     |             |   |                             |   | 126,312,092 |   |  |   | 113,808,876 |  
|                                                                 |  |                                                     |             |   |                             |   |             |   |  |   |             |  



See accompanying
condensed notes to financial statements.



4



---

##### Table of Contents



SYNTHETIC BLOOD INTERNATIONAL, INC.

(A Development Stage Company)

STATEMENTS OF CASH FLOWS



|                                                                                                              |  |                                                    |             |   |                             |   |           |   |  |   |          |  
|------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------- | ----------- | - | --------------------------- | - | --------- | - |  | - | -------- | -
|                                                                                                              |  | Period FromMay 26, 1967(inception) toJuly 31, 2005 |             |   | Three Months Ended July 31, |  
|                                                                                                              |  | 2005                                               |             |   | 2004                        |  
|                                                                                                              |  | (Unaudited)                                        |             |   | (Unaudited)                 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                                         |  |                                                    |             |   |                             |   |           |   |  |   |          |  
|Net loss                                                                                                      |  |                                                    | (24,235,079 | ) |                             |   | (612,348  | ) |  | $ | (473,422 | )
|Adjustments to reconcile net loss to net cash used in operating activities:                                   |  |                                                    |             |   |                             |   |           |   |  |   |          |  
|Depreciation and amortization                                                                                 |  |                                                    | 1,048,854   |   |                             |   | 34,936    |   |  |   | 26,636   |  
|Amortization of deferred compensation                                                                         |  |                                                    | 253,064     |   |                             |   | 28,063    |   |  |   | 20,148   |  
|Settlement of vendor dispute                                                                                  |  |                                                    | (39,000     | ) |                             |   | (39,000   | ) |  |   |         |  
|Loss on disposal and write-down of property and equipment and other assets                                    |  |                                                    | 150,409     |   |                             |   |          |   |  |   |         |  
|Compensatory stock options/warrants issued                                                                    |  |                                                    | 2,229,263   |   |                             |   |          |   |  |   |         |  
|Issuance of stock below market value                                                                          |  |                                                    | 695,248     |   |                             |   |          |   |  |   |         |  
|Contribution of capital through services rendered by stockholders                                             |  |                                                    | 216,851     |   |                             |   |          |   |  |   |         |  
|Issuance of stock for services rendered                                                                       |  |                                                    | 1,265,279   |   |                             |   |          |   |  |   |         |  
|Changes in operating assets and liabilities:                                                                  |  |                                                    |             |   |                             |   |           |   |  |   |          |  
|Prepaid expenses and other assets                                                                             |  |                                                    | (52,156     | ) |                             |   | 25,530    |   |  |   | 77,760   |  
|Accounts payable and accrued liabilities                                                                      |  |                                                    | 310,687     |   |                             |   | (179,849  | ) |  |   | 46,313   |  
|                                                                                                              |  |                                                    |             |   |                             |   |           |   |  |   |          |  
|Net cash used in operating activities                                                                         |  |                                                    | (18,156,580 | ) |                             |   | (742,668  | ) |  |   | (302,565 | )
|                                                                                                              |  |                                                    |             |   |                             |   |           |   |  |   |          |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                                         |  |                                                    |             |   |                             |   |           |   |  |   |          |  
|Purchase of property and equipment                                                                            |  |                                                    | (1,082,697  | ) |                             |   | (5,124    | ) |  |   | (64,227  | )
|Purchase of other assets                                                                                      |  |                                                    | (642,085    | ) |                             |   | (11,778   | ) |  |   | (10,897  | )
|                                                                                                              |  |                                                    |             |   |                             |   |           |   |  |   |          |  
|Net cash used in investing activities                                                                         |  |                                                    | (1,724,782  | ) |                             |   | (16,902   | ) |  |   | (75,124  | )
|                                                                                                              |  |                                                    |             |   |                             |   |           |   |  |   |          |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                                         |  |                                                    |             |   |                             |   |           |   |  |   |          |  
|Proceeds from sale of common stock and exercise of common stock options and warrants, net of related expenses |  |                                                    | 18,617,345  |   |                             |   | 321,730   |   |  |   | 612,000  |  
|Repayments of amounts due stockholders                                                                        |  |                                                    | (121,517    | ) |                             |   |          |   |  |   |         |  
|Proceeds from stockholder notes payable                                                                       |  |                                                    | 977,692     |   |                             |   |          |   |  |   |         |  
|Proceeds from notes, debentures and lease obligations                                                         |  |                                                    | 2,571,065   |   |                             |   | 1,295,000 |   |  |   |         |  
|Payments on notes and capital lease obligations                                                               |  |                                                    | (717,300    | ) |                             |   |          |   |  |   |         |  
|Bond issue costs                                                                                              |  |                                                    | (164,500    | ) |                             |   | (164,500  | ) |  |   |         |  
|                                                                                                              |  |                                                    |             |   |                             |   |           |   |  |   |          |  
|Net cash provided by financing activities                                                                     |  |                                                    | 21,162,785  |   |                             |   | 1,452,230 |   |  |   | 612,000  |  
|                                                                                                              |  |                                                    |             |   |                             |   |           |   |  |   |          |  
|Net change in cash and cash equivalents                                                                       |  |                                                    | 1,050,854   |   |                             |   | 692,660   |   |  |   | 234,311  |  
|Cash and cash equivalents, beginning of period                                                                |  |                                                    |            |   |                             |   | 588,763   |   |  |   | 302,310  |  
|                                                                                                              |  |                                                    |             |   |                             |   |           |   |  |   |          |  
|Cash and cash equivalents, end of period                                                                      |  | $                                                  | 1,281,423   |   |                             | $ | 1,281,423 |   |  | $ | 536,621  |  
|                                                                                                              |  |                                                    |             |   |                             |   |           |   |  |   |          |  
|Cash paid for: Interest                                                                                       |  | $                                                  | 143,129     |   |                             | $ |          |   |  | $ |         |  
|                                                                                                              |  |                                                    |             |   |                             |   |           |   |  |   |          |  
|Taxes                                                                                                         |  | $                                                  | 17,000      |   |                             | $ |          |   |  | $ | 1,550    |  
|                                                                                                              |  |                                                    |             |   |                             |   |           |   |  |   |          |  



Non-cash financing activities during
the three months ended July 31, 2005:



As further disclosed in
Note 3 to the condensed financial statements, in connection with the sale of convertible debentures, the Company recorded original issue discount of $555,000, discount of $525,000 related to the value of warrants issued in the transaction, and
additional discount of $770,000 related to the value of the beneficial conversion feature.



See accompanying condensed notes to financial statements



5



---

##### Table of Contents

SYNTHETIC BLOOD INTERNATIONAL, INC.

(A Development Stage Company)

CONDENSED NOTES TO FINANCIAL STATEMENTS



|1. | BASIS OF PRESENTATION
|-- | ---------------------



The accompanying unaudited financial statements contain all adjustments (consisting only of normal recurring adjustments) which, in the opinion of
management, are necessary to present fairly the financial position of the Company as of July 31, 2005, and the results of its operations for the three months ended July 31, 2005 and 2004, and for the period from May 26, 1967 (inception) to July 31,
2005, and its cash flows for the three months ended July 31, 2005 and 2004, and for the period from May 26, 1967 (inception) to July 31, 2005. Certain information and footnote disclosures normally included in financial statements have been condensed
or omitted pursuant to rules and regulations of the U.S. Securities and Exchange Commission (the Commission). The Company believes that the disclosures in the financial statements are adequate to make the information presented not
misleading. However, the financial statements included herein should be read in conjunction with the financial statements and notes thereto included in the Companys Annual Report on Form 10-K for the year ended April 30, 2005 filed with the
Commission on August 15, 2005.



The accompanying financial
statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying financial statements, the Company is in the
development stage and, at July 31, 2005, has an accumulated deficit of $24,235,079, continues to sustain operating losses on a monthly basis, and expects to incur operating losses for the foreseeable future. Since the Company is in the pre-clinical
and clinical trial stages of its products, these products must undergo considerable development and testing prior to submission to the FDA for approval to market the products. The Companys continuation as a going concern is dependent on its
ability to obtain additional financing sufficient to fund the required additional development and testing and to meet its obligations on a timely basis. These factors, among others, raise substantial doubt about the Companys ability to
continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern for a reasonable period of time.



|2. | STOCK-BASED COMPENSATION
|-- | ------------------------



The Company accounts for stock-based employee compensation as prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees
(APB 25), and has adopted Statement of Financial Accounting Standards 148, Accounting for Stock-Based Compensation-Transition and Disclosure (SFAS 148), that amends certain aspects of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123). APB 25 provides that compensation expense relative to the Companys employee stock options is measured based on the intrinsic value of stock options
granted. SFAS 123 and 148 require pro forma disclosures of net income (loss) and net income (loss) per share as if the fair value based method of accounting for stock-based awards had been applied for employee grants. They also require disclosure of
option status on a more prominent and frequent basis. The Company accounts for stock options and warrants



6



---

##### Table of Contents

issued to non-employees based on the fair value method, but has not elected this treatment for grants to employees and board members. Under the fair value
based method, compensation cost is recorded based on the value of the award at the grant date and is recognized over the service period.



The fair value of each option grant was estimated at the grant date using the Black-Scholes option-pricing model. The BlackScholes option-pricing
valuation model was developed for use in estimating the fair value of traded options and warrants that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions,
including the expected stock price volatility. Because the Companys stock options and warrants have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in managements opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options and warrants.



The Companys calculations are based on a single option valuation
approach and forfeitures are recognized as they occur. The following table illustrates the effect on net income and earnings per share if the fair value based method had been applied to all outstanding and unvested employee awards:



|                                                        |  |               |          |   |               |   |          |  
|------------------------------------------------------- |  | ------------- | -------- | - | ------------- | - | -------- | -
|                                                        |  | July 31, 2005 |          |   | July 31, 2004 |  
|Net loss, as reported                                   |  | $             | (612,348 | ) |               | $ | (473,422 | )
|Add: stock-based employee compensation expenses         |  |               | 28,063   |   |               |   | 20,148   |  
|Deduct: fair value based employee compensation expenses |  |               | (64,091  | ) |               |   | (58,121  | )
|                                                        |  |               |          |   |               |   |          |  
|Pro forma net loss                                      |  | $             | (648,376 | ) |               | $ | (511,395 | )
|                                                        |  |               |          |   |               |   |          |  
|Loss per share:                                         |  |               |          |   |               |   |          |  
|As reported                                             |  | $             | (0.005   | ) |               | $ | (0.004   | )
|                                                        |  |               |          |   |               |   |          |  
|Pro forma                                               |  | $             | (0.005   | ) |               | $ | (0.004   | )
|                                                        |  |               |          |   |               |   |          |  



In December 2004, the
FASB issued SFAS No. 123 (Revised), Share-Based Payment. This standard revises SFAS No. 123, APB Opinion No. 25 and related accounting interpretations, and eliminates the use of the intrinsic value method for employee stock-based
compensation. SFAS No. 123(R) requires compensation costs related to share-based payment transactions to be recognized in the financial statements over the period that an employee provides service in exchange for the award. Currently, the Company
uses the intrinsic value method of APB Opinion No. 25 to value share-based options granted to employees and board members. The new standard requires the expensing of all share-based compensation, including options, using the fair value-based method.
The effective date of this standard for the Company will be May 1, 2006. Management is currently assessing the impact that this new standard will have on the Companys financial statements and expects that non-cash stock-based compensation
charges will increase upon adoption of this standard.



7



---

##### Table of Contents

|3. | STOCKHOLDERS EQUITY
|-- | --------------------



On July 7, 2005, the Company received final payment of $321,667 under a purchase agreement signed in October 2004 and extended in November 2004 for the
purchase of 2,500,000 shares of common stock at $0.185 per share plus a warrant to purchase 6,000,000 shares of common stock at $0.20 per share that expires in September 2007.



On July 13, 2005 the Company closed on a financing transaction with three private investors. In the transaction the Company
issued to the investors unsecured convertible debentures in the principal amount of approximately $1.85 million payable over a term of three years beginning 120 days following the closing of the financing discounted on the date of issue at 10
percent per annum. Proceeds to the Company after commissions, investors professional fees, and original issue discount of $555,000, were approximately $1,130,500.



The principal amount of the debentures is convertible to common stock at any time at the election of the holder at a rate of
one common share for each $0.22 of principal. The Company may, at its option and subject to certain conditions, make monthly payments on the debentures in common stock priced at the lower of $0.22 or 80 percent of the volume weighted average price
for the common stock over the five trading days prior to the payment date. The Company also issued to the investors warrants to purchase up to 8,409,083 of shares of common stock exercisable during a term of three years at an exercise price of
$0.242 per share. Based on the Black-Scholes valuation model, the warrants had an estimated value of $880,000.



In accordance with the provisions of Accounting Principles Board Opinion No. 14, the Company allocated the net proceeds received in this transaction to
each of the convertible debentures and common stock purchase warrants based on their relative estimated fair values. As a result, the Company allocated $770,000 to the convertible debentures and $525,000 to the common stock purchase warrants, which
was recorded in additional paid-in-capital. In accordance with the consensus of EITF issues 98-5 and 00-27, management determined that the convertible debentures contained a beneficial conversion feature based on the effective conversion price after
allocating proceeds of the convertible debentures to the common stock purchase warrants. Because the calculated beneficial conversion amount exceeded the remaining net carrying value of the convertible debentures, the beneficial conversion was
recorded in an amount equal to the remaining net carrying value of the convertible debentures of $770,000 with a corresponding amount recorded as additional paid-in-capital. The amounts recorded for the common stock purchase warrants and the
beneficial conversion feature will be amortized as interest expense over the terms of the convertible debentures.



|4. | RELATED PARTY TRANSACTIONS
|-- | --------------------------



During the three months ended July 31, 2005 and 2004, the Company paid $32,100 and $8,100, respectively, to a specialty contract manufacturer of
pharmaceutical products to manufacture Oxycyte, the Companys perfluorocarbon-based blood substitute and therapuetic oxygen carrier, for upcoming clinical trials. An officer of the Company is a minority shareholder and director of this
specialty manufacturer. At July 31, 2005, the Company had no outstanding purchase orders with this specialty manufacturer.



8



---

##### Table of Contents

|5. | SUBSEQUENT EVENT
|-- | ----------------



Through September 7, 2005, 1,500,000 shares of common stock were issued upon the conversion of $330,000 face value of debentures at $0.22 per share.



|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
|------- | --------------------------------------------------------------------------------------



Synthetic Blood International, Inc., is a New Jersey corporation that, since 1990, has pursued the development of medical
products based on perfluorocarbon technology. Since 1993, Synthetic Blood has also pursued development of a glucose biosensor implant.



Perfluorocarbons are biologically inert compounds containing carbon and fluorine. The chemical composition of perfluorocarbons allows them to readily
absorb and give up oxygen and carbon dioxide. This property creates opportunities for developing blood substitutes that act as oxygen carriers for human tissue and fluids that carry oxygen to the lungs for remedial uses.



Synthetic Blood developed Oxycyte as a synthetic blood substitute and
therapeutic oxygen carrier. We received approval of our Investigational New Drug application filed with the U.S. Food and Drug Administration (FDA) in 2003 and completed a Phase I safety study in normal volunteers in the fourth of 2003. The results
of the Phase I study were in line with our expectations for the performance of Oxycyte.



Enrollment started earlier this year in a Phase II orthopedic surgery trial, and five study sites have been qualified and approved to participate in this study. In this first Phase II trial we are evaluating both
efficacy and safety in the prevention of tissue hypoxia (the effects of reduced oxygen levels) in hip surgery patients who experience mild to moderate blood loss during surgery. While blood transfusions are typically not given during such
procedures, blood loss may result in postoperative complications caused by tissue hypoxia. We are now actively screening and enrolling patients for this trial, and plan to enroll 60 patients in up to six U.S. clinical sites. One-half of these
patients will be treated with Oxycyte and the others will serve as a control group. If enrollment proceeds as planned, we expect to complete this study and report our findings later this year.



An 8 patient proof of concept Phase II Oxycyte study in patients with brain
ischemia due to severe head injury has been approved and enrollment is expected to start in September, 2005. A 20 patient proof of concept Phase II Oxycyte trial in patients in sickle cell crisis, and treatment of acute myocardial ischemia (heart
attack) in an animal model with Oxycyte will be started in September or October, 2005. The results of these studies are expected to be available by the end of 2005. In addition to these studies, our future clinical development plans include testing
Oxycyte in high blood loss surgery, coronary bypass surgery, stroke, myocardial infarction, malignant tumors and decompression sickness.



We expect to commit a substantial portion of our financial and business resources over the next 3 years to testing Oxycyte and advancing this product to
licensing and commercial distribution.



Fluorovent is an
oxygen exchange fluid and surfactant for facilitating the treatment of lung



9



---

##### Table of Contents

conditions, which is currently under development. We have not filed any applications on this product with the FDA and do not expect we will do so while we
are focusing on Oxcyte clinical trials.



Our biosensor product
uses an enzyme process for measuring the glucose level in the blood stream. It is a subcutaneous implant programmed to measure the glucose level and transmit the results to a wearable receiver. This product is also under development and we do not
expect we will file any applications with the FDA for at least the next 2 years.



RESULTS OF OPERATIONS



Three months ended July 31, 2005 and 2004



Research and Development expenses for the three months ended July 31, 2005 were $340,173, compared to $219,466 for the same period in the prior year. During the quarter ended July 31, 2005, we continued to concentrate our research
activities on our Oxycyte product that included the beginning of Phase II clinical trials during the first quarter of calendar 2005. Phase II expenses totaled $110,856 for the quarter ended July 31, 2005. Because of the nature of our ongoing
research and development activities, accounting periods may reflect significant changes in expenses resulting from the timing of research related to our developmental products.



General and Administrative expenses for the three months ended July 31, 2005 were $275,667, compared to $255,614 for the
same period in the prior year. General office and operating expenses have remained relatively constant for the quarters ended July 31, 2004 and 2005, with the exception of increased investor relations expenses of $34,000 during the three months
ended July 31, 2005.



The net loss for the three months ended
July 31, 2005 was $612,348, compared to a net loss of $473,422 for the same period in the prior year. Total expenses increased $140,760 during the three months ended July 31, 2005 over the comparable period in 2004, as discussed above. In addition,
other income, consisting principally of interest income, increased $1,834, resulting from an increase in invested balances over the previous quarter.



LIQUIDITY AND CAPITAL RESOURCES



Synthetic Blood has financed its operations since September 1990 through the issuance of debt and equity securities and loans from stockholders. As of
July 31, 2005, we had $1,333,579 of total current assets and working capital of $1,238,484. Our practice is to invest excess cash in short-term money market investment instruments.



We have had and continue to have difficulty raising additional capital for research and development activities.



On July 7, 2005 the Company received final payment of $321,667 under a
purchase agreement signed in October 2004 and extended in November 2004 for the purchase of 2,500,000 shares of common stock at $0.185 per share plus a warrant to purchase 6,000,000 shares of common stock at $0.20 per share that expires in September
2007.



10



---

##### Table of Contents

Also, on July 13, 2005 the Company closed on a financing transaction with three private investors. In the
transaction, the Company issued to the investors unsecured convertible debentures in the principal amount of approximately $1.85 million payable over a term of three years beginning 120 days following the closing of the financing, discounted on the
date of issue at 10 percent per annum. Proceeds to the Company after the original issue discount, commissions, and the investors professional fees were approximately $1,145,500.



Management believes that this new funding together with the Companys cash and cash equivalents at July 31, 2005, will
be sufficient to fund the Companys clinical studies and general and administrative expenses for at least the next 6 months.



We are in the pre-clinical and clinical trial stages in the development of our products. Under an Investigational New Drug application filed with the FDA,
we completed Phase I clinical studies on Oxycyte in December 2003. The results of the Phase I study were in line with our expectations for the performance of Oxycyte. We are now enrolling patients in our first Phase II clinical trial and are in the
planning or start up stages for two additional trials we hope to conduct during 2005. We estimate the cost of pursuing our Phase II clinical trials in 2005 and 2006 at $8,000,000. Even if we are successful with our Phase II studies, we must then
conduct Phase III clinical studies and, if they are successful, file with the FDA and obtain approval of a Biologics License Application to begin commercial distribution, all of which will take more time and funding to complete. Our other products,
Fluorovent and the glucose biosensor, must undergo further development and testing prior to submission to the FDA for approval to initiate clinical trials, which also requires additional funding. Management is actively pursuing private and
institutional financing, as well as strategic alliances and/or joint venture agreements to obtain the necessary additional financing and reduce the cost burden related to the development and commercialization of our products. We expect our primary
focus will be on funding the continued testing of Oxycyte, since this product is the furthest along in the regulatory review process. Our ability to continue to pursue testing and development of our products beyond the end of calendar year 2005
depends on obtaining outside financial resources, and there is no assurance we will succeed in obtaining the necessary resources.



Cash used in operating activities during the three months ended July 31, 2005 was $742,668, compared to $302,565 for the comparable period of the prior
year. Operating activities consisted primarily of product research and development and the general operation of our corporate office. Cash used in operating activities is primarily dependent on the timing and extent of our research and development
activities.



Cash used in investing activities during the
three months ended July 31, 2005 was $16,902, compared to $75,124 for the comparable period of the prior year. Investing activities consisted primarily of the purchase of laboratory equipment and expenditures related to the Companys patent
rights. Synthetic Blood does not anticipate significant future capital expenditures in the near term.



Cash provided by financing activities during the three months ended July 31, 2005 was $1,452,230 compared to cash provided by financing activities of
$612,000 for the comparable period of the prior year. Cash provided by financing activities consists primarily of the sale of our common stock to outside investors and proceeds from the sale



11



---

##### Table of Contents

of convertible debentures. As discussed earlier in this quarterly report, Synthetic Blood is attempting to raise additional funds that may take the form of
equity or debt securities.



CRITICAL ACCOUNTING POLICIES



We believe the following critical accounting policies
affect our more significant judgments and estimates used in the preparation of our financial statements:



Stock-Based Compensation - We account for stock-based employee compensation as prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees,
and, effective April 30, 2003, we adopted Statement of Financial Accounting Standards (SFAS) 148, Accounting for Stock-Based Compensation-Transition and Disclosure (SFAS 148) that supercedes Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation (SFAS 123). SFAS 148 requires pro forma disclosures of net income and net income per share as if the fair value based method of accounting for stock-based awards had been applied for both
employee and non-employee grants. It also requires disclosure of option status on a more prominent and frequent basis. We account for stock options and warrants issued to non-employees based on the fair value method, but have not elected this
treatment for grants to employees and board members. Under the fair value based method, compensation cost is recorded based on the value of the award at the grant date and is recognized over the service period.



The fair value of each option grant was estimated at the grant date using
the Black-Scholes option-pricing model. The BlackScholes option valuation model was developed for use in estimating the fair value of traded options and warrants that have no vesting restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because our employee stock options and warrants have characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the fair value estimate, in managements opinion, the existing models do not necessarily provide a reliable single measure of the fair value of our employee stock
options.



In December 2004, the FASB issued SFAS No. 123
(Revised), Share-Based Payment. This standard revises SFAS No. 123, APB Opinion No. 25 and related accounting interpretations, and eliminates the use of the intrinsic value method for employee stock-based compensation. SFAS No. 123(R)
requires compensation costs related to share-based payment transactions to be recognized in the financial statements over the period that an employee provides service in exchange for the award. Currently, the Company uses the intrinsic value method
of APB Opinion No. 25 to value share-based options granted to employees and board members. The new standard requires the expensing of all share-based compensation, including options, using the fair value-based method. The effective date of this
standard for the Company will be August 1, 2005. Management is currently assessing the impact that this new standard will have on the Companys financial statements.



Long-Lived Assets - Our intangible assets consist of patents related to our various technologies. These assets are amortized
on a straight-line method over their estimated useful life, which ranges from eight to ten years. We review these intangible assets for impairment on a quarterly basis in accordance with SFAS No. 144, Accounting for the



12



---

##### Table of Contents

Impairment or Disposal of Long-Lived Assets (SFAS 144). At July 31, 2005, management believes no indications of impairment existed.



FORWARD LOOKING STATEMENTS



Except for the historical information contained herein, the discussion and
information presented in this report contain forward-looking statements that involve risks and uncertainties. The Companys actual results could differ materially from those presented in the forward-looking statements. Factors that could cause
or contribute to such differences include, but are not limited to, those discussed in this section and those discussed in the Companys Annual Report on Form 10-K for the year ended April 30, 2005 and subsequent filings made with the Securities
and Exchange Commission.



Although the Company believes that
the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of performance or achievements. Moreover, neither the Company nor any other person assumes responsibility for the
accuracy and completeness of the forward-looking statements. The Company is under no obligation to update any of the forward-looking statements after the filing of this report to conform such statements to actual results or changes in expectations.



|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
|------- | ----------------------------------------------------------



The Company has no derivative financial instruments and no exposure to foreign currency exchange rates or interest rate risk.



|ITEM 4. | CONTROLS AND PROCEDURES.
|------- | ------------------------



We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is
recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms, and that such information is accumulated and communicated to our management, including our Principal
Executive Officer and our Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Our management, including our Principal Executive Officer and our Principal Financial Officer, does not expect that our
disclosure controls or procedures will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute assurance that the objectives of the control system are met. Further, the
benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation or controls can provide absolute assurance that all control issues and instances of fraud, if any, within the
Company have been detected.



We carried out an evaluation,
under the supervision and with the participation of our management, including our Principal Executive Officer and our Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the
end of the quarterly period covered by this report. Based on the foregoing, our



13



---

##### Table of Contents

Principal Executive Officer and our Principal Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable
assurance level.



There has been no change in the
Companys internal controls over financial reporting during the Companys most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect the Companys internal controls over financial reporting.



Part II-Other Information



|ITEM 6. | EXHIBITS.
|------- | ---------



| | (a) | Exhibits:
| | --- | ---------



|     |  |                                                                                                                         
|---- |  | ------------------------------------------------------------------------------------------------------------------------
|31.1 |  | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                     
|     | 
|31.2 |  | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                     
|     | 
|32.1 |  | Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes- Oxley Act of 2002.



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



|                   |  |  |  |                                     |  |                      |  |                                                   
|------------------ |  |  |  | ----------------------------------- |  | -------------------- |  | --------------------------------------------------
|                   |  |  |  | SYNTHETIC BLOOD INTERNATIONAL, INC.
|                   |  |  | 
|September 14, 2005 |  |  |  |                                     |  | /s/ Robert W. Nicora
|                   |  |  |  |                                     |  |                      |  | President and Chief Executive Officer             
|                   |  |  | 
|September 14, 2005 |  |  |  |                                     |  | /s/ David H. Johnson
|                   |  |  |  |                                     |  |                      |  | Chief Financial Officer (Chief Accounting Officer)



14