---

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, 2006



| ̈ | 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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.

Large accelerated filer ̈an accelerated filer ̈or a non-accelerated filer  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 12, 2006: 137,836,026 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 July 31, 2006 (unaudited) and April 30, 2006                                                                                         |  | 3   
|         |  |                                                                                                                                                          
|         |  | Statements of Operations for the Three Months Ended July 31, 2006 and 2005, and for the Period From May 26, 1967 (inception) to July 31, 2006 (unaudited) |  | 4   
|         |  |                                                                                                                                                          
|         |  | Statements of Cash Flows for the Three Months Ended July 31, 2006 and 2005, and for the Period From May 26, 1967 (inception) to July 31, 2006 (unaudited) |  | 5   
|         |  |                                                                                                                                                          
|         |  | Condensed Notes to Financial Statements                                                                                                                   |  | 7   
|         |  |                                                                                                                                                          
|         |  | 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 1A. Risk Factors                                                                                                                                     |  | 14  
|         |  |                                                                                                                                                          
|         |  | 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



|                                                                                                                                 |  |              |             |   |               |   |             |  
|-------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ----------- | - | ------------- | - | ----------- | -
|                                                                                                                                 |  | July 31,2006 |             |   | April 30,2006 |  
|                                                                                                                                 |  | (Unaudited)  |             |   |               |  
|ASSETS                                                                                                                           |  |              |             |   |               |   |             |  
|Current Assets:                                                                                                                  |  |              |             |   |               |   |             |  
|Cash and cash equivalents                                                                                                        |  | $            | 7,699       |   |               | $ | 382         |  
|Debt issuance cost, net of accumulated amortization of $174,187 and $112,338, respectively                                       |  |              | 180,198     |   |               |   | 78,012      |  
|Prepaid expenses                                                                                                                 |  |              | 43,794      |   |               |   | 76,213      |  
|                                                                                                                                 |  |              |             |   |               |   |             |  
|Total Current Assets                                                                                                             |  |              | 231,691     |   |               |   | 154,607     |  
|Property and Equipment, net                                                                                                      |  |              | 272,331     |   |               |   | 298,370     |  
|Patents, net                                                                                                                     |  |              | 155,555     |   |               |   | 157,811     |  
|                                                                                                                                 |  |              |             |   |               |   |             |  
|                                                                                                                                 |  | $            | 659,577     |   |               | $ | 610,788     |  
|                                                                                                                                 |  |              |             |   |               |   |             |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                             |  |              |             |   |               |   |             |  
|Current Liabilities:                                                                                                             |  |              |             |   |               |   |             |  
|Accounts payable                                                                                                                 |  | $            | 288,927     |   |               | $ | 151,670     |  
|Accrued liabilities                                                                                                              |  |              | 137,443     |   |               |   | 81,813      |  
|Notes payable, net of unamortized discount of $189,456 and $149,662, respectively                                                |  |              | 225,314     |   |               |   | 14,794      |  
|Convertible Debentures, net of unamortized discount of $185,407 and $288,291, respectively                                       |  |              | 193,449     |   |               |   | 176,295     |  
|                                                                                                                                 |  |              |             |   |               |   |             |  
|Total Current Liabilities                                                                                                        |  |              | 845,133     |   |               |   | 424,572     |  
|                                                                                                                                 |  |              |             |   |               |   |             |  
|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 137,379,463 and 136,589,119
shares |  |              | 1,373,795   |   |               |   | 1,365,891   |  
|Additional paid-in capital                                                                                                       |  |              | 26,848,946  |   |               |   | 26,525,469  |  
|Deferred compensation                                                                                                            |  |              | (7,914      | ) |               |   | (15,831     | )
|Deficit accumulated during the development stage                                                                                 |  |              | (28,400,383 | ) |               |   | (27,689,313 | )
|                                                                                                                                 |  |              |             |   |               |   |             |  
|Total Stockholders Equity                                                                                                       |  |              | (185,556    | ) |               |   | 186,216     |  
|                                                                                                                                 |  |              |             |   |               |   |             |  
|                                                                                                                                 |  | $            | 659,577     |   |               | $ | 610,788     |  
|                                                                                                                                 |  |              |             |   |               |   |             |  

See accompanying condensed notes to financial statements.



3



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SYNTHETIC BLOOD INTERNATIONAL, INC.

(A Development Stage Company)

STATEMENTS OF OPERATIONS



|                                                                 |  |                                                    |                             |   |             |      |             |   |  |   |             |  
|---------------------------------------------------------------- |  | -------------------------------------------------- | --------------------------- | - | ----------- | ---- | ----------- | - |  | - | ----------- | -
|                                                                 |  | Period FromMay 26, 1967(inception) toJuly 31, 2006 |                             |   |             |      |             |   | 
|                                                                 |  |                                                    | Three Months Ended July 31, |  
|                                                                 |  |                                                    | 2006                        |   |             | 2005 |            
|                                                                 |  | (Unaudited)                                        |                             |   | (Unaudited) |     
|Expenses:                                                        |  |                                                    |                             |   |             |      |             |   |  |   |             |  
|Research and development                                         |  | $                                                  | 10,895,013                  |   |             | $    | 230,180     |   |  | $ | 340,173     |  
|General and administrative                                       |  |                                                    | 16,169,533                  |   |             |      | 284,510     |   |  |   | 275,667     |  
|Interest                                                         |  |                                                    | 2,058,520                   |   |             |      | 220,003     |   |  |   |            |  
|                                                                 |  |                                                    |                             |   |             |      |             |   |  |   |             |  
|Total Expenses                                                   |  |                                                    | 29,123,066                  |   |             |      | 734,693     |   |  |   | 615,840     |  
|Other Income                                                     |  |                                                    | (722,683                    | ) |             |      | (23,623     | ) |  |   | (3,492      | )
|                                                                 |  |                                                    |                             |   |             |      |             |   |  |   |             |  
|NET LOSS                                                         |  | $                                                  | (28,400,383                 | ) |             | $    | (711,070    | ) |  | $ | (612,348    | )
|                                                                 |  |                                                    |                             |   |             |      |             |   |  |   |             |  
|NET LOSS PER SHARE BASIC AND DILUTED                             |  |                                                    |                             |   |             | $    | (0.005      | ) |  | $ | (0.005      | )
|                                                                 |  |                                                    |                             |   |             |      |             |   |  |   |             |  
|WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING, BASIC AND DILUTED |  |                                                    |                             |   |             |      | 136,936,598 |   |  |   | 126,312,092 |  
|                                                                 |  |                                                    |                             |   |             |      |             |   |  |   |             |  

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) toJuly 31, 2006 |                             |   |             |      |          |   | 
|                                                                                                       |  |                                                    | Three Months Ended July 31, |  
|                                                                                                       |  |                                                    | 2006                        |   |             | 2005 |         
|                                                                                                       |  | (Unaudited)                                        |                             |   | (Unaudited) |     
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                                  |  |                                                    |                             |   |             |      |          |   |  |   |           |  
|Net loss                                                                                               |  | $                                                  | (28,400,393                 | ) |             | $    | (711,070 | ) |  | $ | (612,348  | )
|Adjustments to reconcile net loss to net cash used in operating activities:                            |  |                                                    |                             |   |             |      |          |   |  |   |           |  
|Depreciation and amortization                                                                          |  |                                                    | 1,217,155                   |   |             |      | 33,902   |   |  |   | 34,936    |  
|Amortization of deferred compensation                                                                  |  |                                                    | 328,836                     |   |             |      | 7,917    |   |  |   | 28,063    |  
|Amortization of discounts on notes payable                                                             |  |                                                    | 1,850,653                   |   |             |      | 194,779  |   |  |   |          |  
|Loss on disposal and write-down of property and equipment and other assets                             |  |                                                    | 219,305                     |   |             |      |         |   |  |   |          |  
|Compensatory stock options/warrants issued                                                             |  |                                                    | 2,252,463                   |   |             |      | 14,000   |   |  |   |          |  
|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                                                                      |  |                                                    | (43,795                     | ) |             |      | 32,419   |   |  |   | 25,530    |  
|Accounts payable and accrued liabilities                                                               |  |                                                    | 602,963                     |   |             |      | 192,887  |   |  |   | (179,849  | )
|                                                                                                       |  |                                                    |                             |   |             |      |          |   |  |   |           |  
|Net cash used in operating activities                                                                  |  |                                                    | (19,795,435                 | ) |             |      | (235,166 | ) |  |   | (742,668  | )
|                                                                                                       |  |                                                    |                             |   |             |      |          |   |  |   |           |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                                  |  |                                                    |                             |   |             |      |          |   |  |   |           |  
|Purchase of property and equipment                                                                     |  |                                                    | (1,083,902                  | ) |             |      |         |   |  |   | (5,124    | )
|Purchase of other assets                                                                               |  |                                                    | (685,763                    | ) |             |      | (5,607   | ) |  |   | (11,778   | )
|                                                                                                       |  |                                                    |                             |   |             |      |          |   |  |   |           |  
|Net cash used in investing activities                                                                  |  |                                                    | (1,769,665                  | ) |             |      | (5,607   | ) |  |   | (16,902   | )
|                                                                                                       |  |                                                    |                             |   |             |      |          |   |  |   |           |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                                  |  |                                                    |                             |   |             |      |          |   |  |   |           |  
|Proceeds from sale of common stock and exercise of stock options and warrants, net of related expenses |  |                                                    | 18,615,519                  |   |             |      |         |   |  |   | 321,730   |  
|Repayments of amounts due stockholders                                                                 |  |                                                    | (121,517                    | ) |             |      |         |   |  |   |          |  
|Proceeds from stockholder notes payable                                                                |  |                                                    | 977,692                     |   |             |      |         |   |  |   |          |  
|Proceeds from issuance of notes payable                                                                |  |                                                    | 876,905                     |   |             |      | 248,090  |   |  |   |           |  
|Proceeds from notes, debentures and other obligations, net of issue costs                              |  |                                                    | 1,941,500                   |   |             |      |         |   |  |   | 1,130,500 |  
|Payments on notes and capital lease obligations                                                        |  |                                                    | (717,300                    | ) |             |      |         |   |  |   |          |  
|                                                                                                       |  |                                                    |                             |   |             |      |          |   |  |   |           |  
|Net cash provided by financing activities                                                              |  |                                                    | 21,572,799                  |   |             |      | 248,090  |   |  |   | 1,452,230 |  
|                                                                                                       |  |                                                    |                             |   |             |      |          |   |  |   |           |  
|Net change in cash and cash equivalents                                                                |  |                                                    | 7,699                       |   |             |      | 7,317    |   |  |   | 692,660   |  
|Cash and cash equivalents, beginning of period                                                         |  |                                                    |                            |   |             |      | 382      |   |  |   | 588,763   |  
|                                                                                                       |  |                                                    |                             |   |             |      |          |   |  |   |           |  
|Cash and cash equivalents, end of period                                                               |  | $                                                  | 7,699                       |   |             | $    | 7,699    |   |  | $ | 1,281,423 |  
|                                                                                                       |  |                                                    |                             |   |             |      |          |   |  |   |           |  
|Cash paid for: Interest                                                                                |  | $                                                  | 144,189                     |   |             | $    | 1,060    |   |  | $ |          |  
|                                                                                                       |  |                                                    |                             |   |             |      |          |   |  |   |           |  
|Taxes                                                                                                  |  | $                                                  | 18,825                      |   |             | $    |         |   |  | $ |          |  
|                                                                                                       |  |                                                    |                             |   |             |      |          |   |  |   |           |  

See accompanying condensed notes to financial statements.



5



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SYNTHETIC BLOOD INTERNATIONAL, INC.

(A Development Stage Company)

STATEMENTS OF CASH FLOWS - CONTINUED

Non-cash financing activities during the three months ended July 31, 2006:



| | (1) | As further disclosed in Note 3 to the condensed financial statements, in connection with the issuance of $259,890 of one-year notes payable, the Company recorded discounts on notes
payable of $114,967 related to the original issue discount and 4,656,703 warrants issued in the transaction.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | The Company made principal payments on its convertible notes payable of $89,360 through the issuance of 790,344 shares of common stock.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------



| | (3) | The Company recorded debt issue costs of $141,046 through the issuance of 1,647,235 warrants for capital raising services.
| | --- | --------------------------------------------------------------------------------------------------------------------------

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

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.



6



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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 July 31, 2006, and the results of
its operations for the three months ended July 31, 2006 and 2005, and for the period from May 26, 1967 (inception) to July 31, 2006, and its cash flows for the three months ended July 31, 2006 and 2005, and for the period from
May 26, 1967 (inception) to July 31, 2006. 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, 2006 filed with the Commission on July 28, 2006.

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, 2006, has an accumulated deficit of $28,400,383, 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
|-- | ------------------------

In September 1999, the
Companys Board of Directors approved the 1999 Stock Plan (the 1999 Plan) which provides for the granting of incentive and nonstatutory stock options to employees, directors and consultants to purchase up to 4,000,000 shares of the
Companys common stock. The 1999 Plan was approved by stockholders on October 10, 2000. Options granted under the 1999 Plan are exercisable at various dates up to four years and have expiration periods of generally ten years. As of
April 30, 2006, the Company had 2,895,000 qualified stock options outstanding under the 1999 Plan. In addition, the Company has 3,040,000 non-qualified stock options outstanding as of April 30, 2006.

Effective May 1, 2006, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123(R), Share Based
Payment, using a modified prospective application.



7



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Earlier periods were not restated. SFAS No. 123(R) is a revision of SFAS No. 123, Accounting for Stock-Based Compensation and
supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options,
to be recognized in the financial statements based on their fair values.

Prior to adopting SFAS No. 123(R), as permitted, the Company
elected to follow APB 25 in accounting for its employee stock options. According to APB 25, no compensation expense is recognized since the exercise price of the Companys stock options generally equals the market price of the underlying stock
on the date of grant. The Company transitioned to SFAS No. 123 by utilizing SFAS No. 148, Accounting for Stock-Based Compensation  Transition and Disclosure (SFAS No. 148). In accordance with SFAS
No. 148, the Company disclosed the effects of stock-based employee compensation on reported net income or loss and earnings or loss per share in the footnotes to its annual and interim financial statements.

Given that the Company previously followed APB 25 and SFAS No. 148 in accounting for its employee stock options, the impact of adopting the expense
recognition requirements of SFAS 123(R) was significant to the Companys results of operations, but not its financial position. The Companys net loss for the three months ended July 31, 2006 includes approximately $14,000 of non-cash
stock-based employee compensation costs. As of July 31, 2006, there was approximately $66,000 of total unrecognized compensation cost related to non-vested share-based compensation arrangements.

For the three months ended July 31, 2005, the following pro forma information regarding net loss and net loss per share has been determined as if the
Company had accounted for its employee stock plans under the fair value method.

For purposes of pro forma disclosures, the estimated fair
value of the options is amortized as expense over the vesting period of the options, resulting in the following pro forma information for the three-month period ended July 31, 2005:



|                                                        |  |                                 |          |  
|------------------------------------------------------- |  | ------------------------------- | -------- | -
|                                                        |  | Three Months EndedJuly 31, 2005 |         
|Net loss, as reported                                   |  | $                               | (612,348 | )
|Add: stock-based employee compensation expenses         |  |                                 | 28,063   |  
|Deduct: fair value based employee compensation expenses |  |                                 | (64,091  | )
|                                                        |  |                                 |          |  
|Pro forma net loss                                      |  | $                               | (648,376 | )
|                                                        |  |                                 |          |  
|Net loss per share:                                     |  |                                 |          |  
|As reported                                             |  | $                               | (0.005   | )
|                                                        |  |                                 |          |  
|Pro forma                                               |  | $                               | (0.005   | )
|                                                        |  |                                 |          |  



8



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

During the three months
ended July 31, 2006:



| | (1) | the Company received a net amount of $118,200 from the issuance of one-year notes payable. The notes are unsecured and were issued with a 9% original issue discount totaling $11,690
and pay interest at 9% per year. In addition, the Company issued 5-year warrants to purchase 3,896,703 shares of common stock at $0.245 per share. Additional discount of $71,510 was recorded for the relative fair value of the warrants. The
Company issued five-year warrants to purchase 1,647,235 shares of common stock at $0.245 per share in connection with placing the 9% notes payable.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | the Company received a net amount of $70,000 from the issuance of one-year notes payable. The notes are unsecured and pay interest at 18% per year. In addition, the Company
issued one-year warrants to purchase 760,000 shares of common stock at $0.245 per share. Additional discount of $31,767 was recorded for the relative fair value of the warrants.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (3) | For the three months ended July 31, 2006, the Company made principal payments on its debentures of $89,360 through the issuance of 790,344 shares of common stock.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



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

During the three months
ended July 31, 2006 and 2005, the Company paid $17,334 and $32,100, respectively, to a specialty contract manufacturer of pharmaceutical products to manufacture Oxycyte, the Companys perfluorocarbon-based blood substitute and therapeutic
oxygen carrier, for upcoming clinical trials. An officer of the Company is a minority shareholder and director of this specialty manufacturer. At July 31, 2006, the Company had no outstanding purchase orders with this specialty manufacturer.
During June 2006 the Company borrowed $60,000 from this officer.



|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 on a limited basis.

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 December 2003. The results of the Phase I study were in line with our expectations for the performance of Oxycyte.



9



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Enrollment started last 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. Three study sites have enrolled 12 patients in this study.
This is less than expected, so enrollment has been temporarily put on hold so resources can be refocused on shorter term Phase II trials. Additional financing will be required to restart enrollment, and a completion date cannot be projected at this
time.

An eight patient proof of concept Phase II Oxycyte study in patients with brain ischemia due to severe head injury has been
completed. A 20 patient proof of concept Phase II Oxycyte trial in patients with sickle cell anemia was put on clinical hold by the FDA for requested protocol changes before enrollment could begin. It is not known at this time if or when enrollment
in this study might begin. In addition to these studies, our future clinical development plans include testing Oxycyte in acute myocardial ischemia, 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 conditions, which the Company has been developing. 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 of a diabetic patient. It is a subcutaneous implant
programmed to measure the glucose level and transmit the results to a wearable receiver. 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, 2006 and 2005

Research and Development expenses for the three months ended July 31, 2006 were $230,180,
compared to $340,173 for the same period in the prior year. During the quarter ended July 31, 2006, we continued to concentrate our research activities on our Oxycyte product that included Phase II clinical trials. Phase II expenses totaled
$18,030 for the quarter ended July 31, 2006, compared to $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 .



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General and Administrative expenses for the three months ended July 31, 2006 were $284,510, compared
to $275,667 for the same period in the prior year. General office and operating expenses have remained relatively constant for the quarters ended July 31, 2006 and 2005, with the exception of increased consulting expenses of $33,600 during the
current period and a reduction in legal fees of $20,300 during the three months ended July 31, 2006 over the same period in 2005.

The
net loss for the three months ended July 31, 2006 was $711,070 compared to a net loss of $612,348 for the same period in the prior year. Total expenses increased $118,853 during the three months ended July 31, 2006 over the comparable
period in 2005. In addition to the items noted above, interest expense increased $220,003 due to the interest cost associated with the notes and debentures payable and the related amortization of associated debt discounts. Additionally, other
income, consisting principally of sub-rental income of $23,575, increased $20,131 from the quarter ended July 31, 2005.

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, 2006, we had $231,691 of total current assets and negative working capital of $613,442. Our practice is to invest excess cash, where available, in short-term money market investment
instruments.

We do not have the working capital necessary to fund our current operations in fiscal year 2007. We need financing immediately
to cover administrative expenses and on-going expenses of testing Oxycyte. Management is actively seeking additional sources of equity and/or debt financing; however there is no assurance that any additional funding will be available. Should we be
unable to obtain additional financing to meet our short-term needs, we may be forced to cease operations. These factors raise substantial doubt about our ability to continue as a going concern.

As a result of the foregoing circumstances our independent registered public accounting firm has, and is likely in the future to, include an explanatory
paragraph in their audit opinions based on uncertainty regarding our ability to continue as a going concern.

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 a Phase I clinical study on Oxycyte in December 2003. The results of the Phase I study were in line with our
expectations for the performance of Oxycyte. Phase II clinical testing started in 2005. We estimate the additional cost of pursuing our Phase II clinical trials in 2006 and 2007 to approximate $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



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ability to continue to pursue testing and development of our products beyond the end of the first quarter of the 2006/2007 fiscal year 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, 2006 was $235,166, compared to $742,668 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 and our available liquidity.

Cash used in investing activities during the three months ended July 31, 2006 was $5,607, compared to $16,902 for the comparable period of the prior year. Investing activities consisted primarily of expenditures
related to our 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, 2006 was $248,090, compared to cash provided by financing activities of $1,452,230 for the comparable period of the prior year. Cash provided by financing activities consists
primarily of the proceeds from the sale of short-term notes payable. 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:

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. The new standard requires the expensing of all share-based compensation, including options, using the fair value-based method. We adopted the new standard effective May 1, 2006.

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 July 31, 2006, 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. Synthetic Bloods actual results could differ materially from those presented



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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 Synthetic Bloods Annual Report on Form 10-K for the year ended April 30, 2006 and subsequent filings made with the Securities and Exchange Commission.

Although Synthetic Blood believes that the expectations reflected in the forward-looking statements are reasonable, Synthetic Blood cannot guarantee
future results, levels of performance or achievements. Moreover, neither Synthetic Blood nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. Synthetic Blood 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.
|------- | ----------------------------------------------------------

We have no derivative financial instruments and no exposure to foreign currency exchange rates or interest rate risk. Our convertible debentures and notes payable that are described elsewhere in this report bear a fixed interest rate, and
therefore, are not subject to 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 reports filed under the Securities Exchange Act of 1934 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 Synthetic Blood 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 Principal Executive Officer and our
Principal Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.



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

Part
II-Other Information



|ITEM 1A. | RISK FACTORS
|-------- | ------------

Under Item 1A. Risk
Factors in our Annual Report on Form 10-K for the fiscal year ended April 30, 2006, we describe a number of risks associated with our business and our financial condition. Those factors continue to be meaningful for your evaluation of
Synthetic Blood and we urge you to review and consider the risk factors presented in the Annual Report.

One risk we identified was the lack
of working capital. This risk continues to be significant. We do not have the working capital necessary to fund our operations in fiscal year 2007. We need financing immediately to cover administrative expenses and on-going expenses of testing
Oxycyte. Management is actively seeking additional sources of equity and/or debt financing; however there is no assurance that any additional funding will be available. Should we be unable to obtain additional financing to meet our short-term needs,
we may be forced to cease operations. These factors raise substantial doubt about our ability to continue as a going concern.



|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 Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.



|                   |  |  |  |                                      
|------------------ |  |  |  | -------------------------------------
|                   |  |  |  | SYNTHETIC BLOOD INTERNATIONAL, INC.  
|                   |  | 
|September 19, 2006 |  |  |  | /s/ Robert W. Nicora                 
|                   |  |  |  | Robert W. Nicora                     
|                   |  |  |  | President and Chief Executive Officer
|                   |  | 
|September 19, 2006 |  |  |  | /s/ David H. Johnson                 
|                   |  |  |  | David H. Johnson                     
|                   |  |  |  | Chief Financial Officer              
|                   |  |  |  | (Chief Accounting Officer)           



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