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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549



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FORM 10-Q



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



For the quarterly period ended January 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: 2-31909



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SYNTHETIC BLOOD INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|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)



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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 the number of shares outstanding of each of the issuers classes of common stock as of February 28, 2005. 125,534,918 shares of common stock, par value $0.01.



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FORM 10-Q

SYNTHETIC BLOOD INTERNATIONAL, INC.



INDEX



|         |  |                       |  |                                                                                                                                                                      |  |     
|-------- |  | --------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|         |  |                       |  |                                                                                                                                                                      |  | Page
|PART I.  |  | FINANCIAL INFORMATION |  |                                                                                                                                                                     
|         |  |                       | 
|         |  | Item 1.               |  | Financial Statements                                                                                                                                                 |  |     
|         |  |                       | 
|         |  |                       |  | Balance Sheets as of January 31, 2005 (unaudited) and April 30, 2004                                                                                                 |  | 3   
|         |  |                       | 
|         |  |                       |  | Statements of Operations for the Three Months and Nine Months Ended January 31, 2005 and 2004, and During the Development Stage Through January 31, 2005 (unaudited) |  | 4   
|         |  |                       | 
|         |  |                       |  | Statements of Cash Flows for the Nine Months Ended January 31, 2005 and 2004, and During the Development Stage Through January 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                                                                                                            |  | 14  
|         |  |                       | 
|         |  | Item 4.               |  | Controls and Procedures                                                                                                                                              |  | 14  
|         |  |                      
|PART II. |  | OTHER INFORMATION     |  |                                                                                                                                                                     
|         |  |                       | 
|         |  | Item 6.               |  | Exhibits                                                                                                                                                             |  | 14  
|         |  |                      
|         |  | Signatures            |  | 14                                                                                                                                                                  



2



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Part I-Financial Information



ITEM 1. FINANCIAL STATEMENTS.



SYNTHETIC BLOOD INTERNATIONAL, INC.

(A Development Stage Company)

BALANCE SHEETS



|                                                                                                                                 |  |                 |             |   |                |   |             |  
|-------------------------------------------------------------------------------------------------------------------------------- |  | --------------- | ----------- | - | -------------- | - | ----------- | -
|                                                                                                                                 |  | January 31,2005 |             |   | April 30, 2004 |  
|                                                                                                                                 |  | (Unaudited)     |             |   |                |  
|ASSETS                                                                                                                           |  |                 |             |   |                |   |             |  
|Current Assets:                                                                                                                  |  |                 |             |   |                |   |             |  
|Cash and cash equivalents                                                                                                        |  | $               | 1,050,854   |   |                | $ | 302,310     |  
|Prepaid expenses                                                                                                                 |  |                 | 106,898     |   |                |   | 118,980     |  
|                                                                                                                                 |  |                 |             |   |                |   |             |  
|Total Current Assets                                                                                                             |  |                 | 1,157,752   |   |                |   | 421,290     |  
|Property and Equipment, net                                                                                                      |  |                 | 430,904     |   |                |   | 407,194     |  
|Patents, net                                                                                                                     |  |                 | 220,787     |   |                |   | 219,495     |  
|                                                                                                                                 |  |                 |             |   |                |   |             |  
|                                                                                                                                 |  | $               | 1,809,443   |   |                | $ | 1,047,979   |  
|                                                                                                                                 |  |                 |             |   |                |   |             |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                             |  |                 |             |   |                |   |             |  
|Current Liabilities:                                                                                                             |  |                 |             |   |                |   |             |  
|Accounts payable                                                                                                                 |  | $               | 319,381     |   |                | $ | 237,249     |  
|Accrued liabilities                                                                                                              |  |                 | 42,133      |   |                |   | 56,449      |  
|                                                                                                                                 |  |                 |             |   |                |   |             |  
|Total Current Liabilities                                                                                                        |  |                 | 361,514     |   |                |   | 293,698     |  
|                                                                                                                                 |  |                 |             |   |                |   |             |  
|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 125,534,918 and 113,808,876
shares |  |                 | 1,255,349   |   |                |   | 1,138,089   |  
|Additional paid-in capital                                                                                                       |  |                 | 23,242,199  |   |                |   | 20,708,959  |  
|Deferred compensation                                                                                                            |  |                 | (137,812    | ) |                |   | (142,834    | )
|Deficit accumulated during the development stage                                                                                 |  |                 | (22,911,807 | ) |                |   | (20,949,933 | )
|                                                                                                                                 |  |                 |             |   |                |   |             |  
|Total Stockholders Equity                                                                                                       |  |                 | 1,447,929   |   |                |   | 754,281     |  
|                                                                                                                                 |  |                 |             |   |                |   |             |  
|                                                                                                                                 |  | $               | 1,809,443   |   |                | $ | 1,047,979   |  
|                                                                                                                                 |  |                 |             |   |                |   |             |  



See accompanying
condensed notes to financial statements.



3



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SYNTHETIC BLOOD INTERNATIONAL, INC.

(A Development Stage Company)

STATEMENTS OF OPERATIONS



|                                                                 |  |                                                                      |             |   |                                |      |             |                               |      |   |            |      |  |   |             |   |  |   |            |  
|---------------------------------------------------------------- |  | -------------------------------------------------------------------- | ----------- | - | ------------------------------ | ---- | ----------- | ----------------------------- | ---- | - | ---------- | ---- |  | - | ----------- | - |  | - | ---------- | -
|                                                                 |  | DeficitAccumulatedDuring theDevelopmentStage ThroughJanuary
31, 2005 |             |   | Three Months Ended January 31, |      |             | Nine Months Ended January 31, |     
|                                                                 |  |                                                                      | 2005        |   |                                | 2004 |             |                               | 2005 |   |            | 2004 | 
|                                                                 |  | (Unaudited)                                                          |             |   | (Unaudited)                    |      |             | (Unaudited)                   |     
|Expenses:                                                        |  |                                                                      |             |   |                                |      |             |                               |      |   |            |      |  |   |             |   |  |   |            |  
|Research and development                                         |  | $                                                                    | 9,026,998   |   |                                | $    | 304,987     |                               |      | $ | 501,488    |      |  | $ | 834,068     |   |  | $ | 1,000,198  |  
|General and administrative                                       |  |                                                                      | 14,328,939  |   |                                |      | 588,308     |                               |      |   | 314,035    |      |  |   | 1,135,210   |   |  |   | 742,336    |  
|Interest                                                         |  |                                                                      | 182,643     |   |                                |      |            |                               |      |   |           |      |  |   |            |   |  |   |           |  
|                                                                 |  |                                                                      |             |   |                                |      |             |                               |      |   |            |      |  |   |             |   |  |   |            |  
|Total Expense                                                    |  |                                                                      | 23,538,580  |   |                                |      | 893,295     |                               |      |   | 815,523    |      |  |   | 1,969,278   |   |  |   | 1,742,534  |  
|Other Income                                                     |  |                                                                      | (626,773    | ) |                                |      | (4,799      | )                             |      |   | (2,192     | )    |  |   | (7,401      | ) |  |   | (16,867    | )
|                                                                 |  |                                                                      |             |   |                                |      |             |                               |      |   |            |      |  |   |             |   |  |   |            |  
|NET LOSS                                                         |  | $                                                                    | (22,911,807 | ) |                                | $    | (888,496    | )                             |      | $ | (813,331   | )    |  | $ | (1,961,877  | ) |  | $ | (1,725,667 | )
|                                                                 |  |                                                                      |             |   |                                |      |             |                               |      |   |            |      |  |   |             |   |  |   |            |  
|NET LOSS PER SHARE, BASIC AND DILUTED                            |  |                                                                      |             |   |                                | $    | (0.007      | )                             |      | $ | (0.008     | )    |  | $ | (0.017      | ) |  | $ | (0.019     | )
|                                                                 |  |                                                                      |             |   |                                |      |             |                               |      |   |            |      |  |   |             |   |  |   |            |  
|WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING, BASIC AND DILUTED |  |                                                                      |             |   |                                |      | 120,908,287 |                               |      |   | 98,469,019 |      |  |   | 116,659,887 |   |  |   | 92,253,415 |  
|                                                                 |  |                                                                      |             |   |                                |      |             |                               |      |   |            |      |  |   |             |   |  |   |            |  



See accompanying
condensed notes to financial statements.



4



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SYNTHETIC BLOOD INTERNATIONAL, INC.

(A Development Stage Company)

STATEMENTS OF CASH FLOWS



|                                                                                                              |  |                                                       |             |   |                               |      |            |   |  |   |            |  
|------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------- | ----------- | - | ----------------------------- | ---- | ---------- | - |  | - | ---------- | -
|                                                                                                              |  | Period FromMay 26, 1967(inception) toJanuary 31, 2005 |             |   | Nine Months Ended January 31, |     
|                                                                                                              |  |                                                       | 2005        |   |                               | 2004 |           
|                                                                                                              |  | (Unaudited)                                           |             |   | (Unaudited)                   |     
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                                         |  |                                                       |             |   |                               |      |            |   |  |   |            |  
|Net loss                                                                                                      |  |                                                       | (22,911,807 | ) |                               |      | (1,961,877 | ) |  | $ | (1,725,667 | )
|Adjustments to reconcile net loss to net cash used in operating activities:                                   |  |                                                       |             |   |                               |      |            |   |  |   |            |  
|Depreciation and amortization                                                                                 |  |                                                       | 957,483     |   |                               |      | 81,282     |   |  |   | 106,411    |  
|Amortization of deferred compensation                                                                         |  |                                                       | 100,025     |   |                               |      | 100,025    |   |  |   |           |  
|Loss on disposal and write-down of property and equipment and other assets                                    |  |                                                       | 150,409     |   |                               |      |           |   |  |   |           |  
|Compensatory stock options/warrants issued                                                                    |  |                                                       | 2,326,179   |   |                               |      | 311,000    |   |  |   | 73,333     |  
|Issuance of stock below market value                                                                          |  |                                                       | 695,248     |   |                               |      |           |   |  |   |           |  
|Contribution of capital through services rendered by stockholders                                             |  |                                                       | 216,851     |   |                               |      |           |   |  |   |           |  
|Issuance of stock for services rendered                                                                       |  |                                                       | 1,222,779   |   |                               |      |           |   |  |   | 1,971      |  
|Changes in operating assets and liabilities:                                                                  |  |                                                       |             |   |                               |      |            |   |  |   |            |  
|Prepaid expenses and other assets                                                                             |  |                                                       | (106,898    | ) |                               |      | 12,082     |   |  |   | (34,275    | )
|Accounts payable and accrued liabilities                                                                      |  |                                                       | 538,104     |   |                               |      | 67,817     |   |  |   | 319,222    |  
|                                                                                                              |  |                                                       |             |   |                               |      |            |   |  |   |            |  
|Net cash used in operating activities                                                                         |  |                                                       | (16,811,627 | ) |                               |      | (1,389,671 | ) |  |   | (1,259,005 | )
|                                                                                                              |  |                                                       |             |   |                               |      |            |   |  |   |            |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                                         |  |                                                       |             |   |                               |      |            |   |  |   |            |  
|Purchase of property and equipment                                                                            |  |                                                       | (1,063,671  | ) |                               |      | (71,231    | ) |  |   | (85,522    | )
|Purchase of other assets                                                                                      |  |                                                       | (643,570    | ) |                               |      | (35,054    | ) |  |   | (13,599    | )
|                                                                                                              |  |                                                       |             |   |                               |      |            |   |  |   |            |  
|Net cash used in investing activities                                                                         |  |                                                       | (1,707,241  | ) |                               |      | (106,285   | ) |  |   | (99,121    | )
|                                                                                                              |  |                                                       |             |   |                               |      |            |   |  |   |            |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                                         |  |                                                       |             |   |                               |      |            |   |  |   |            |  
|Proceeds from sale of common stock and exercise of common stock options and warrants, net of related expenses |  |                                                       | 18,154,782  |   |                               |      | 2,244,500  |   |  |   | 1,902,225  |  
|Repayments of amounts due stockholders                                                                        |  |                                                       | (121,517    | ) |                               |      |           |   |  |   |           |  
|Proceeds from stockholder notes payable                                                                       |  |                                                       | 977,692     |   |                               |      |           |   |  |   |           |  
|Proceeds from notes, debentures and lease obligations                                                         |  |                                                       | 1,276,065   |   |                               |      |           |   |  |   |           |  
|Payments on notes and capital lease obligations                                                               |  |                                                       | (717,300    | ) |                               |      |           |   |  |   |           |  
|                                                                                                              |  |                                                       |             |   |                               |      |            |   |  |   |            |  
|Net cash provided by financing activities                                                                     |  |                                                       | 19,569,722  |   |                               |      | 2,244,500  |   |  |   | 1,902,225  |  
|                                                                                                              |  |                                                       |             |   |                               |      |            |   |  |   |            |  
|Net change in cash and cash equivalents                                                                       |  |                                                       | 1,050,854   |   |                               |      | 748,544    |   |  |   | 544,099    |  
|Cash and cash equivalents, beginning of period                                                                |  |                                                       |            |   |                               |      | 302,310    |   |  |   | 178,442    |  
|                                                                                                              |  |                                                       |             |   |                               |      |            |   |  |   |            |  
|Cash and cash equivalents, end of period                                                                      |  | $                                                     | 1,050,854   |   |                               | $    | 1,050,854  |   |  | $ | 722,541    |  
|                                                                                                              |  |                                                       |             |   |                               |      |            |   |  |   |            |  
|Cash paid for: Interest                                                                                       |  | $                                                     | 143,129     |   |                               | $    |           |   |  | $ |           |  
|                                                                                                              |  |                                                       |             |   |                               |      |            |   |  |   |            |  
|Taxes                                                                                                         |  | $                                                     | 16,000      |   |                               | $    | 1,550      |   |  | $ | 1,340      |  
|                                                                                                              |  |                                                       |             |   |                               |      |            |   |  |   |            |  



Non-cash investing and financing
activities during the nine months ended January 31, 2005:



The
Company issued 500,000 incentive stock options to a Director of the Company. Deferred compensation of $95,000 has been recorded for the difference between the market value of the shares at the date of grant of $.34 per share over the strike price of
$.15 per share and will be amortized to compensation expense over the 2 year vesting period.



See accompanying condensed notes to financial statements



5



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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 January 31, 2005, and the results of its operations for the three months and nine months ended January 31, 2005 and 2004, and for the period from May 26, 1967
(inception) to January 31, 2005, and its cash flows for the nine months ended January 31, 2005 and 2004, and for the period from May 26, 1967 (inception) to January 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, 2004 filed with the Commission on August 13, 2004.



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 January 31, 2005, has an accumulated deficit of $22,911,807, 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



6



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prominent and frequent basis. The Company accounts for stock options and warrants 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:



|                                                        |  |                                   |            |   |                                   |   |            |  
|------------------------------------------------------- |  | --------------------------------- | ---------- | - | --------------------------------- | - | ---------- | -
|                                                        |  | Nine Months EndedJanuary 31, 2005 |            |   | Nine Months EndedJanuary 31, 2004 |  
|Net loss, as reported                                   |  | $                                 | (1,961,877 | ) |                                   | $ | (1,725,667 | )
|Add: stock-based employee compensation expenses         |  |                                   | 100,025    |   |                                   |   | 73,333     |  
|Deduct: fair value based employee compensation expenses |  |                                   | (217,972   | ) |                                   |   | (181,065   | )
|                                                        |  |                                   |            |   |                                   |   |            |  
|Pro forma net loss                                      |  | $                                 | (2,079,824 | ) |                                   | $ | (1,833,399 | )
|                                                        |  |                                   |            |   |                                   |   |            |  
|Loss per share:                                         |  |                                   |            |   |                                   |   |            |  
|As reported                                             |  | $                                 | (0.017     | ) |                                   | $ | (0.019     | )
|                                                        |  |                                   |            |   |                                   |   |            |  
|Pro forma                                               |  | $                                 | (0.018     | ) |                                   | $ | (0.020     | )
|                                                        |  |                                   |            |   |                                   |   |            |  



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.



7



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



In May 2004, the Company accepted a subscription agreement covering the sale of 7,733,334 shares of common stock, 7,733,334 Series A Warrants, 3,400,000
Series B Warrants, and 3,400,000 Series C Warrants for $2,350,000. To date, the Company has not received payment for the shares and warrants. The Company intends to continue discussions with the subscriber in an effort to collect the subscription
price, but due to the lack of performance the Company is not relying on this subscription as a potential source of capital and is proceeding with its fund raising and product development efforts assuming no funds will ever be collected under the
subscription. Should the Company receive the full purchase price for the shares, it will pay a total of $235,000 to a foreign financial consultant as compensation for his assistance with the offering, in addition to three percent of the funds
derived from exercise of the warrants issued.



During December
2004, the Company received $1,800,000 and issued 9,000,000 shares of common stock to six investors at $0.20 per share. Each investor also received three-year warrants for the purchase of 9,000,000 shares of common stock at $0.275, callable by the
Company at $.55 per share. The shares were issued in reliance on the exemption afforded by Regulation S adopted under the Securities Act of 1933. Synthetic Blood paid a total of $255,000 to a foreign financial consultant as compensation for his
assistance with this placement.



Also in December 2004, the
Company received $87,500 and issued 437,500 shares of common stock to seven investors at $.20 per share. Each investor also received three-year warrants for the purchase of 437,500 shares of common stock at $.275, callable by the Company at $.55 per
share. The shares were issued in reliance on the exemption afforded by Regulation D adopted under the Securities Act of 1933. In addition, Synthetic Blood issued 21,875 shares of common stock as compensation for assistance with this placement. The
fair value of the common stock issued of $4,813 has been determined using the market price of the stock on the issue date and has been offset against Additional Paid-In Capital as a reduction of the proceeds from the private placement.



In December 2004, the Company approved the issuance of two-year warrants
to six investors to purchase 5,500,000 shares of common stock at a price of $.40 per share in consideration of the delayed registration of their stock. The estimated fair value of the warrants of $311,000 has been recorded as an expense in the
accompanying statement of operations with a corresponding credit recorded to Additional Paid-in Capital.



In October 2004, the Company entered into a stock purchase agreement with a foreign investor for the purchase of 2,500,000 shares of common stock at $.185
per share, plus 6,000,000 shares of common stock at $.20 per share. The agreement expired on November 30, 2004; however, in consideration for this investors efforts in assisting the Company in raising additional capital, the agreement has been
extended to February 2005. The Company has accounted for the substance of this transaction as a stock option, and therefore, the estimated fair value of the option of $922,000 has been offset against Additional Paid-In Capital as a reduction of the
proceeds to be received from the private placement. During February 2005, the Company was notified of the investors intent to exercise this option.



8



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



During the three months ended January 31, 2005 and 2004, the Company paid $24,075 and $38,900, respectively, and during the nine months ended January 31,
2005 and 2004, the Company paid $77,235 and $126,000, 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 January 31, 2005, the Company has $16,050 in outstanding purchase orders with this specialty manufacturer.



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. We
received approval of our Investigational New Drug application filed with the U.S. Food and Drug Administration (FDA) and began Phase I clinical studies in October 2003, which were completed in December 2003. The results of the Phase I study were in
line with our expectations for the performance of Oxycyte.



A
New York State University Medical Center clinical site has received local Institutional Review Board (IRB) approval to participate in the first Phase II trial with Oxycyte. 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. We expect to complete this study and report our findings later this year.



We are making plans to conduct two additional Phase II studies this year in which Oxycyte will be used in coronary bypass and/or heart valve replacement
surgery patients, and in surgical patients who require blood transfusions. We are currently developing protocols for these trials with plans to initiate both this year. In addition to surgery and trauma, our future plans include testing Oxycyte in
stroke, myocardial infarction, malignant tumors and decompression sickness.



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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 commercial distribution.



Fluorovent is an oxygen exchange fluid and surfactant for facilitating the treatment of lung 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 for at least one year.



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 January 31, 2005 and 2004



Research and Development expenses for the three months ended January 31, 2005 were $304,987, compared to $501,488 for the same period in the prior year. During the quarter ended January 31, 2005, we continued to concentrate our research
activities on our Oxycyte product in an effort to begin Phase II clinical trials during calendar 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 January 31, 2005 were $588,308, compared to $314,035 for the same period in the prior year. Administrative fees increased $282,000 during the current quarter primarily resulting
from an expense of $311,000 related to the granting of stock warrants in consideration for a delayed registration of stock. Additionally, a decrease in administrative wages and salaries of $38,000 in the current quarter has been offset by increases
in insurance expense of $5,000 and office expenses of $18,000 over the previous year.



The net loss for the three months ended January 31, 2005 was $888,496, compared to a net loss of $813,331 for the same period in the prior year. Total expenses increased $77,772 during the three months ended January
31, 2005 over the comparable period in 2004, as discussed above. In addition, other income, consisting principally of interest income, increased $2,607, resulting from an increase in invested balances over the previous quarter.



Nine months ended January 31, 2005 and 2004



Research and Development expenses for the nine months ended January 31, 2005
were $834,068, compared to $1,000,198 for the same period in the prior year. During the nine months ended January 31, 2005, we continued to concentrate our research activities on our Oxycyte product in an effort to begin Phase II clinical trials
during calendar 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.



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General and Administrative expenses for the nine months ended January 31, 2005 were $1,135,210, compared
to $742,336 for the same period in the prior year. Consulting fees increased $52,000 from the previous year as a result of the retention of an investor relations firm in the current period. Administrative fees increased $348,000 during the current
period primarily resulting from an expense of $311,000 related to the granting of stock warrants in consideration for a delayed registration of stock.



The net loss for the nine months ended January 31, 2005 was $1,961,877, compared to a net loss of $1,725,667 for the same period in the prior year. Total
expenses increased $226,714 during the nine months ended January 31, 2005 over the comparable period in 2004, as discussed above. In addition, other income, consisting principally of interest income, decreased $9,466, resulting from a decline in
average invested balances over the previous period.



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 January 31, 2005, we had $1,157,752 of total current assets and working capital of $796,238. 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.



Nevertheless, during December 2004, Synthetic Blood received $1,800,000 and issued 9,000,000 shares of common stock to six investors at $.20 per share.
Each investor also received warrants for the purchase of 9,000,000 shares of common stock at $.275, callable by the Company at $.55 per share. The shares were issued in reliance on the exemption afforded by Regulation S adopted under the Securities
Act of 1933. Synthetic Blood paid a total of $255,000 to a foreign financial consultant as compensation for his assistance with this placement.



Also in December 2004, Synthetic Blood received $87,500 and issued 437,500 shares of common stock to seven investors at $.20 per share. Each investor also
received warrants for the purchase of 437,500 shares of common stock at $.275, callable by the Company at $.55 per share. The shares were issued in reliance on the exemption afforded by Regulation D adopted under the Securities Act of 1933.
Synthetic Blood issued a total of 21,875 shares of common stock as compensation for assistance with this placement.



Management believes that this new funding together with the Companys cash and cash equivalents at January 31, 2005, will be sufficient to fund the
Companys clinical studies and general and administrative expenses for at least the next 5 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



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with our expectations for the performance of Oxycyte. We are now enrolling patients for our first Phase
II clinical trial and are in the planning stages for two additional trials we hope to conduct in 2005. We estimate the cost of pursuing our Phase II clinical trials in 2005 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 nine months ended January 31, 2005 was $1,389,671, compared to $1,259,005 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 nine months ended January 31, 2005 was $106,285, compared to $99,121 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 nine months ended January 31, 2005 was $2,244,500, compared to cash provided by financing activities of
$1,902,225 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. 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



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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 Impairment or Disposal of Long-Lived Assets (SFAS
144). At January 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, 2004 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



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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.



Management is responsible for maintaining effective disclosure controls and procedures. As of the end of the period covered by this report, we evaluated the effectiveness and operation of our disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective and provide for timely collection and
evaluation of information that may need to be disclosed to investors. There have been no significant changes in internal controls or other factors that could significantly affect internal controls subsequent to the date of our evaluation.
Accordingly, no corrective actions with regard to significant deficiencies and material weaknesses were required or undertaken.



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.

|               |  |  |  |                                      
|-------------- |  |  |  | -------------------------------------
|               |  | 
|March 16, 2005 |  |  |  | /s/ Robert W. Nicora                 
|               |  |  |  | President and Chief Executive Officer
|               |  | 
|March 16, 2005 |  |  |  | /s/ David H. Johnson                 
|               |  |  |  | Chief Financial Officer              
|               |  |  |  | (Chief Accounting Officer)           



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