U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-QSB

þ

Quarterly report under Section 13 or 15(d) of the SecuritiesExchange Act of 1934

For the quarterly period ended June 30, 2007



 ̈

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934



Commission file no. 0-28413

HUMAN BIOSYSTEMS

(Exact name of small business issuer as specified in its charter)



California
    (State or other jurisdiction of
    incorporation or organization)77-0481056
    (I.R.S. Employer Identification Number)


1127 Harker Avenue

Palo Alto, California 94301

(Address of principal executive offices)



650-323-0943

(Issuers telephone number)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days.  Yes þ   No  ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12(b)-2 of the Exchange Act) Yes  ̈   No þ

At June 30, 2007 the registrant had outstanding 102,745,000 shares of common stock, no par value.

Transitional Small Business disclosure format:   Yes  ̈   No þ



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HUMAN BIOSYSTEMS

FORM 10-QSB

TABLE OF CONTENTS



PAGE

PART I - FINANCIAL INFORMATION



Item 1.  Financial Statements



Condensed Balance Sheet (Unaudited) -- as of June 30, 2007................................................F- 1



Condensed Statements of Operations (Unaudited)

For the Three Months and Six Months Ended June 30, 2007 and 2006,

and the Period from February 26, 1998 (Inception) through June 30, 2007...........................F- 2



Condensed Statement of Stockholders' Deficit (Unaudited)

For the Six Months Ended June 30, 2007...........................................................................F- 3



Condensed Statements of Cash Flows (Unaudited)

For the Six Months Ended June 30, 2007 and 2006,

and the Period from February 26, 1998 (Inception) through June 30, 2007............................. F- 4



Notes To Condensed Financial Statements (Unaudited)...........................................................F5-14



Item 2.  Management's Discussion and Analysis

or Plan of Operation........................................................................................................ 15



Item 3.  Controls and Procedures.................................................................................................. 28



PART II - OTHER INFORMATION............................................................................................. 28



Item 1.  Legal Proceedings............................................................................................................. 28



Item 1a.   Risk Factors.................................................................................................................... 28



Item 2.  Unregistered Sales of Equity Securities

and Use of Proceeds...................................................................................................... 39



Item 3.  Defaults Upon Senior Securities.................................................................................... 40



Item 4.  Submission of Matters to a Vote of Security Holders................................................ 40



Item 5.  Other Information............................................................................................................. 40



Item 6.  Exhibits ............................................................................................................................. 40



Signatures ...................................................................................................................................... 40

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2







ITEM 1.  FINANCIAL STATEMENTS.



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F-4







HUMAN BIOSYSTEMS

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)



1. Basis of Presentation

Human BioSystems (hereinafter referred to as the "Company") is a development stage company incorporated on February 26, 1998 under the laws of the State of California under the name "HyperBaric Systems."  In November of 2002, we changed our name to Human BioSystems. The business purpose of the Company is to develop the technology for preservation of certain biologic material, including platelets (a blood component), red blood cells, heart valves, tissue and organs. The Company is in the tenth year of its research and development activities. The Company's goal is to develop the technology to extend and maintain functionality of these materials for much longer periods of time than is currently possible.



In August 2006, we also entered the renewable energy market through the formation of our wholly-owned subsidiary, HBS BioEnergy (HBS Bio).  HBS Bio intends to identify, secure and develop suitable sites for the production of ethanol and biodiesel fuel for the U.S. market using innovative methods to improve the efficiency and cost of producing biofuels.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with Securities and Exchange Commission requirements for interim financial statements. Therefore, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. The financial statements should be read in conjunction with the Company's Form 10-KSB for the year ended December 31, 2006.

The interim consolidated financial statements present the condensed balance sheet, statements of operations, stockholders' deficit and cash flows of Human BioSystems and its wholly owned subsidiary HBS Bio. All significant intercompany transactions and balances have been eliminated in consolidation.

The interim financial information is unaudited. In the opinion of management, all adjustments necessary to present fairly the financial position of the Company as of June 30, 2007 and the results of operations and cash flows presented herein have been included in the financial statements. Interim results are not necessarily indicative of results of operations for the full year.

The financial statements have been prepared in accordance with accounting principles generally accepted in the United States.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.



2. Stock Compensation



On January 1, 2006 the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment, requiring the Company to recognize expense related to the fair value of its employee stock option awards. The Company recognizes the cost of all share-based awards on a graded vesting basis over the vesting period of the award. Total stock compensation expense recognized by the Company during the six months ended June 30, 2007 and 2006 was $21,100 and $52,600, respectively.





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The Company has estimated the fair value of its option awards granted after January 1, 2006 using a modified Black-Scholes option valuation model that uses the assumptions noted in the following table. Expected volatilities are based on the historical volatility of the Companys stock. The Company uses historical data to estimate option exercise and employee termination within the valuation model. The expected term of options granted is derived from the output of the option valuation model and represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.



|                                                          |          |        
|--------------------------------------------------------- | -------- | -------
|                                                          |          |        
|                                                          |          |        
|                                                          |          |        
|Modified Black-Scholes-Based Option Valuation Assumptions | 2007     | 2006   
|Fair value of options granted during the period           | $  -     | $26,000
|Expected term (in years)                                  | -        | 3.2    
|Expected volatility                                       | 0.0%   - | 226%   
|Weighted average volatility                               | 0.0%     | 226%   
|Expected dividend yield                                   | 0.0%     | 0.0%   
|Risk-free rate                                            | 0.0%     | 4.64%  



The following table summarizes the stock option transactions for the six months ended June 30, 2007:



|                               |           |                        |                          
|------------------------------ | --------- | ---------------------- | -------------------------
|                               |           |                        |                          
|                               |           |                        |                          
|Stock Options                  | Shares    | Weighted
Average
Price | Aggregate
Intrinsic Value
|Outstanding at January 1, 2007 | 1,484,000 | $0.33                  | $6,200                   
|Granted                        | -         | -                      | -                        
|Exercised                      | -         | -                      | -                        
|Expired                        | 218,000   | $0.54                  | -                        
|                               |           |                        |                          
|Outstanding at June 30, 2007   | 1,266,000 | $0.29                  | $6,200                   
|                               |           |                        |                          
|Exercisable at June 30, 2007   | 996,500   | $0.29                  | $6,200                   
|                               |           |                        |                          

The aggregate intrinsic value of options exercised during the six months ended June 30, 2007 and 2006 was zero and zero, respectively.



3. Investment in Marketable Securities



On July 29, 2004, the Company entered into a Stock Purchase Agreement (the "Purchase Agreement") with Langley Park Investments, PLC ("Langley"), a London Investment Company, to issue 7,000,000 shares of the Company's common stock to Langley in return for 512,665 shares of Langley. The Company issued the 7,000,000 shares during August 2004. Fifty percent of Langley shares issued to the Company under this agreement will be held in escrow for two years as a downside price protection against 7,000,000 shares issued to Langley. In the event of a decline in the market price of the Company's common stock at the end of two years, the Company will be required to sell to Langley the amount of Langley shares held in escrow equal to (i) the original number of Langley shares issued as consideration under the Purchase Agreement multiplied by (ii) the percentage decrease in the market price of the Company's common stock. The Company's shares are to be held by Langley for a period of at least two years. The Purchase Agreement became effective during October 2004 when Langley was approved for trading by the UK Listing Authority and Langley shares began trading.  The holding period expired in October 2006 and Langley transferred the shares from escrow. A finders fee of 25,600 shares, valued at approximately $6,600 was paid for this transfer. As of December 31, 2006 the Company had a balance of 487,000 Langley shares, which were sold January 30, 2007 for $140,700 for a net loss on investment of $7,600.

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4. Fixed Assets



A summary of fixed assets as of June 30, 2007 is as follows:



|                               |   |        
|------------------------------ | - | -------
|                               |   |        
|Equipment                      | $ | 130,900
|Less: accumulated depreciation |   | 14,900 
|Fixed  assets, net             | $ | 116,000
|                               |   | =======







5. Due to Stockholders



Stockholder payables consist of the following as of June 30, 2007:



|                                                                                                                                        |   |        
|--------------------------------------------------------------------------------------------------------------------------------------- | - | -------
|                                                                                                                                        |   |        
|Wages payable to stockholder employees                                                                                                  | $ | 106,600
|                                                                                                                                        |   |        
|Accrued interest on notes payable                                                                                                       |   | 1,900  
|                                                                                                                                        |   |        
|Employee advances                                                                                                                       |   | (9,000)
|                                                                                                                                        |   |        
|Promissory note payable to stockholder  and director of the Company, unsecured, bearing interest at 9.25% per annum, due March 21, 2009 |   | 500,000
|Total                                                                                                                                   | $ | 599,500
|                                                                                                                                        |   | ====== 

In March 2007, the Company entered into a loan agreement with a director. The director agreed to loan the Company $500,000 for a term of two years from March 21, 2007, with a closing cost of $1,717.95 to be added into the first months interest payment. The loan is interest only for the term at 9.25%, with a balloon payment at the end of the term for the principle amount. The Company issued 100,000 shares of restricted common stock and 900,000 warrants valued at $30,000, to the lender, for loan fees. The $30,000 loan discount is being accreted; $3,700 of this discount was accreted during the six months ended June 30, 2007.



6. Notes Payable



In March 2006, the Company entered into a loan agreement with an independent lender.  The lender agreed to loan the Company an amount based on 50% of the value of a portfolio of 500,000 shares of the Companys common stock (approximately $75,000).  These shares are held as collateral only. The lender will receive a loan fee equal to five percent of the gross loan proceeds (approximately $3,700). The conversion feature related to the note payable was recorded as a discount of $75,000; $19,800 of this discount was accreted during the year ended December 31, 2006 and $12,500 was accreted during the six months ended June 30, 2007. The agreement calls for interest payment of 4.99% annual rate of the loan amount payable quarterly for period three years. At maturity, the Company has the option to pay off the loan balance and receive the same number of shares pledged, sell the pledged shares under certain conditions or renew the loan under certain conditions, or forfeit the shares and not repay the loan. On January 23, 2007 an additional 166,666 shares of stock were issued for collateral.



The Loan Agreement called for the Lender to loan an aggregate of $462,000 to the Company (the "Loan") with interest at the rate of zero percent per annum. Repayment of the Loan was to be secured by 23,000,000 shares of the Company's common stock issuable under Regulation S under the Securities Act of 1933, as amended (the "Shares"). Pursuant to the Loan Agreement and an Escrow Agreement between the Lender and the Company, the 23,000,000 Shares were issued during October 2004 and were delivered to the Lender to hold until funds for repayment of the Loan have been delivered to the escrow agent. The Loan Agreement was declared in default, with the Shares to be immediately returned to the Company, as the Loan funds were not delivered by the 15th calendar day following the date of the Loan Agreement (November 13, 2004). The shares were cancelled during February and March 2005. Accordingly, the Company has not recorded the shares as outstanding.



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In November 2006, the Company entered into a finance agreement for payment of its D&O insurance.  The total amount financed was $53,700 at an annual percentage rate of 9.29%. The agreement calls for monthly payments of approximately $6,200 per month through July 2007. The balance payable as of June 30, 2007 was $6,000. Prepaid expenses as of June 30, 2007 include $20,900 pertaining to the D&O insurance.



In November 2006, the Company entered into a loan transaction with Dutchess Private Equities, LP (Dutchess), and issued to Dutchess a Promissory Note (Note) with a face value of $1,200,000, with net proceeds to the Company from the transaction of $1,000,000 and an imputed annual rate of interest of 43.278%. The Note matures on August 31, 2007. Repayment of the face value will be made monthly in the amount of $120,000, plus 50% of any proceeds raised over $120,000 per month from Puts, issued by the Company as collateral. Thirty such Puts were issued and are to be used only in the case of a default under the terms of the loan agreement. If the Notes face value is not paid off by maturity, the Company will be required to pay an additional 10% on the face value of the Note, plus 2.5% per month, compounded daily, until the Note is paid off. The Company may be required to pay penalties if certain obligations under the Note are not met.  If the Company raises financing of more than $2,000,000, Dutchess may require that the Company use the balance of any amount over $2,000,000 to pay any amounts due on the Note. The Company issued 500,000 Holder Shares, which will carry piggyback registration rights in the next registration statement. An additional 500,000 shares will be required each time an eligible registration statement is filed and the shares are not included. The $200,000 loan discount is being accreted: $40,000 of this discount was accreted during the year ended December 31, 2006 and $120,000 was accreted during the six months ended June 30, 2007.



In May 2007, the Company entered into a loan transaction with Dutchess Private Equities, LP (Dutchess), and issued to Dutchess a Promissory Note (Note) with a face value of $462,000, with net proceeds to the Company from the transaction of $350,000 and an imputed annual rate of interest of 63.108%.  The Note matures on April 15, 2008. Repayment of the face value will be made monthly in an amount of the greater of 1) 100% of the proceeds raised from Puts given to Dutchess (as the Investor see note 8) by the Company, exceeding $120,000 per month (Threshold Amount) or 2) $51,333 per month. The lender received a loan fee of $25,000, payable in restricted stock. The $112,000 loan discount is being accreted; $15,300 of this discount was accreted during the six months ended June 30, 2007.





7. Common Stock



In January 2007, the Company issued 25,800 shares of restricted common stock and 25,800 shares of free trading common stock valued at $5,700 for services related to public relations.

In January 2007, the Company issued 500,000 shares of free trading common stock valued at $35,000 for services related to investor awareness.



In February 2007, the Company entered into an addendum to a consulting agreement with a consultant for the sale of common stock in Europe pursuant to a trustee arrangement.  The Company agreed to pay the consultant a commission equal to three percent of the proceeds from the sale of such shares. The Company issued 280,000 shares of free trading stock during the first quarter, which were valued at $30,900 and included in offering costs totaling $494,400.



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In February 2007 the Company entered into an extension of an agreement signed in 2003 with the above-referenced consultant for services including the coordination of investor relations in Europe.  In consideration for such extension, the Company issued to the consultant an aggregate of 250,000 free trading shares of common stock valued at $30,000.



In February 2007, the Company issued 43,200 shares of restricted common stock and 43,100 shares of free trading common stock valued at $11,500 for services related to public relations.



In February 2007, the Company issued 9,600 shares of restricted common stock in satisfaction of accounts payable, valued at $1,200.



In March 2007, the Company issued 27,300 shares of restricted common stock and 27,400 shares of free trading common stock valued at $5,400 for services related to public relations.



In March 2007, the Company issued 50,000 shares of restricted common stock for $5,400 cash.



In the first quarter of 2007, the Company issued 5,396,300 shares of free trading common stock in Europe for $119,800 cash (net of offering costs totaling $494,400).



In April 2007, the Company issued 100,000 shares of restricted common stock and 900,000 warrants valued at $30,000 for loan fees (see note 5).





In April 2007, the Company issued 1,025,000 shares of free trading common stock valued at $85,500 for services related to investor awareness.



In April 2007, the Company issued 11,000 shares of restricted common stock in satisfaction of accounts payable, valued at $1,100.



In April 2007, the Company issued 50,000 shares of restricted common stock valued at $4,000 and 50,000 warrants valued at $4,000 for services related to a HBS Bio project.



In April 2007, the Company issued 23,200 shares of restricted common stock and 23,300 shares of free trading common stock valued at $4,000 for services related to public relations.



In May 2007, the Company issued 7,500 shares of restricted common stock in satisfaction of accounts payable, valued at $700.



In May 2007, the Company issued 250,000 shares of restricted common stock valued at $25,000 for loan fees.



In May 2007, the Company issued 40,900 shares of restricted common stock and 40,800 shares of free trading common stock valued at $8,400 for services related to public relations.



In May 2007, the Company issued 72,000 shares of free trading common stock valued at $7,900 for consultant services including the coordination of investor relations in Europe.



In June 2007, the Company issued 12,700 shares of restricted common stock in satisfaction of accounts payable, valued at $1,300.



In June 2007, the Company issued 200,000 shares of restricted common stock to a director for services, valued at $10,000.



In June 2007, the Company issued 50,000 shares of restricted common stock for $2,300 cash.



F-9





In June 2007, the Company issued 23,200 shares of restricted common stock and 23,200 shares of free trading common stock valued at $3,500 for services related to public relations.



In June 2007, the Company issued 91,700 warrants in satisfaction of accounts payable, valued at $9,100.



In the second quarter of 2007, the Company issued 5,057,000 shares of free trading common stock in Europe for $390,600 cash (net of offering costs totaling $128,100).



8. Investment Agreement



In June 2004, the Company entered into an Investment Agreement (the "Investment Agreement") with Dutchess Private Equities Fund II, LP ("Dutchess") effective June 28, 2004. Pursuant to the terms of the Investment Agreement, the Company may offer, through a series of puts, and Dutchess must purchase, up to 38,000,000 shares of the Company's common stock with an aggregate purchase price up to $5,000,000. The purchase price of the shares is equal to 95% of the lowest closing "best bid" price (the highest posted bid price) during the five trading days immediately following the date of put. The value that the Company will be permitted to put pursuant to the Investment Agreement will be either: (A) 200% of the average daily volume in the US market of the common stock for the ten trading days prior to the notice of put multiplied by the average of the three daily closing bid prices immediately preceding the date of the put, or (B) $10,000. No single put can exceed $1,000,000.  Pursuant to the Investment Agreement, Dutchess acquired a total of 434,615 shares of the Company's common stock for approximately $297,500 during the year ended December 31, 2005, 3,880,000 shares for approximately $643,700 during the year ended December 31, 2006 and 1,041,100 shares of the Company's common stock in exchange for approximately $71,400 during January 2007, 292,000 shares for approximately $29,500 during February 2007, 190,700 shares for approximately $16,500 during March 2007, 2,408,300 shares for approximately $179,600 during April 2007, 1,178,300 shares for approximately $123,400 during May 2007 and 1,436,300 shares for approximately $80,400 during June 2007.



In June 2007, the Company entered into a representation and finders agreement to raise investment capital from potential Korean investment sources, including institutions and individual investors. The Finders fee is set at 5% of capital raised and up to $10 million of capital raised. In addition, a warrant to purchase 1,000,000 shares of common stock of the Company is granted such that for each $100,000 raised, 10,000 shares shall vest up to the maximum amount of 1,000,000 shares if the full $10 million of capital is raised.



In June 2007, the Company entered into a consulting and finders agreement to coordinate and support potential Korean investment opportunities. The Company will pay a cash fee of 5% of the capital raised up to $10 million.



9. Ethanol Agreements



In September 2006, the Company and its wholly owned subsidiary, HBS BioEnergy (HBS Bio), entered into an Asset Purchase Agreement with EXL III Group Corporation (EXL).  EXL agreed to sell certain assets, including options to purchase certain property in Lumberton County, North Carolina, to HBS Bio.



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In consideration for the options, HBS Bio will issue fifty thousand (50,000) shares of the Companys common stock to EXL, which were placed in escrow in October 2006, and reimburse EXL $40,000 for expenses incurred with respect to the options and related proposed ethanol projects.



The Company and HBS Bio also entered into a Consulting Services Agreement with EXL.  That agreement provides that EXL will supervise, manage, and coordinate the development, construction, and operation of up to three ethanol facilities.  The term of the agreement is two years from the effective date, with an option to extend the term for two additional years by mutual written agreement.



In consideration for its consulting services, EXL will receive an annual consulting fee of $199,000.  Upon the funding of the first ethanol facility, the annual consulting fee will increase to $224,000.  The consulting fee will increase again to $324,000 upon the funding of the second ethanol facility, and to $424,000 in the event a third ethanol facility is funded.



EXL will also be entitled to 3,450,000 shares of the Companys common stock, which was placed in escrow in October 2006.  The Escrow Agreement provides that 1,000,000 shares of HBS common stock will be released to EXL upon the execution of certain agreements necessary for the development of the first ethanol facility, the submission of preliminary environmental and land use permits for the first ethanol facility, and the assignment and conveyance of the option to purchase the second facility.  An additional 1,000,000 shares will be released to EXL upon the acquisition of certain permits for the first facility and the execution of certain agreements necessary for development of the first facility, as well as the submission of preliminary environmental and land use permits for the second facility.  The 1,450,000 remaining shares will be released to EXL when a funding commitment for the first facility is obtained.  In the event funding for the first facility is not obtained within four months from the date on which the funding commitment is received, any shares still in escrow will be dispersed to HBS Bio and any shares previously released to EXL will be returned to HBS Bio.



Under the Consulting Services Agreement, the facilities will be funded by the Company according to a schedule, with $300,000 due upon closing of the Asset Purchase Agreement and additional amounts upon completion of certain milestones thereafter.  The Company will contribute $150,000 upon completing the following milestones: (1) raw product supply agreement for the first plant; (2) environmental services agreement for the first plant; (3) risk management agreement for the first plant; and (4) distilled grain marketing agreement for the first plant.  The Company will contribute an additional $150,000 upon completing the following milestones: (1) ethanol off take agreement for the first plant; (2) preliminary engineering study for the first plant; (3) land use permit submittal for the first plant; (4) environmental permits submittal for the first plant; (5) financial advisory services agreement or letter of interest from financial entity; (6) land option agreement for the second plant; and (7) fuel supply agreement for the first plant.  The Company will contribute an additional $400,000 upon reaching the following milestones: (1) utility services agreement for the first plant; (2) Phase I engineering and environmental for the first plant; (3) raw product supply agreement for the second plant; (4) environmental services agreement for the second plant; (5) risk management agreement for the second plant; and (6) distilled grain marketing agreement for the second plant.  The Company will contribute an additional $450,000 upon reaching the following milestones: (1) EPC Agreement and Phase II engineering for the first plant; (2) fuel supply agreement for the second plant; (3) utility services agreement for the second plant; (4) ethanol off take agreement for the second plant; (5) environmental permits submittal for the second plant; (6) preliminary engineering study for the second plant; (7) land use permit submittal for the second plant; (8) Phase I engineering and environmental studies for the second plant; (9) long term equity commitment for first plant (10) long term debt commitment for the first plant; (11) issuance of authority to construct permits for the first plant; and (12) final funding documentation for the first plant.  Finally, the Company will contribute $400,000 upon completing the following milestones: (1) EPC Agreement and Phase II engineering for the second plant; (2) long term equity commitment for the second plant; (3) long term debt commitment for the second plant; (4) final environmental permits for the second plant; (5) authority to construct permits for the second plant; and (6) final funding documentation for the second plant.



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In February 2007, HBS Bio formed a joint venture with Visalia-based Dairy Development Group and Agrimass Enviro-Energy to build an energy park in the San Joaquin Valley of California.   Pursuant to this joint venture, the parties have formed HBS BioEnergy DDG Corcoran, LLC (HBS Corcoran), a California limited liability company. HBS Bio will provide all development capital for the energy park pursuant to an agreed-upon budget, while the other parties will provide all management and other services as well as technology required for the energy park.



During April 2007, HBS Bio entered into a lease for approximately 90 acres of property in Morrow County, Oregon for a period of 20 years, with the option to renew the lease for 10 consecutive terms of five years each. HBS Bio paid $15,000 upon execution of the lease for a three month review period. HBS Bio may extend the review period for an additional three months upon payment of an additional $15,000, and may terminate the lease at any time during the review periods. During the original 20 year term of the lease after the review periods the base rent will be $27,000 per month.



During April 2007, HBS Corcoran entered into an agreement for the purchase of approximately 922 acres of property in Tulare County, California for an aggregate purchase price of approximately $12 million. HBS Corcoran is required to make deposits of up to $690,000 in escrow within 18 months from April 17, 2007. The deposits are nonrefundable except under certain conditions, are to be applied to the purchase price, and will constitute liquidated damages in the event of HBS Corcorans default under the purchase agreement. HBS Corcoran will have 18 months to review the suitability of the property for its planned uses. The balance of the purchase price must be deposited in escrow within 30 days after completion of the feasibility review or the end of the feasibility period, whichever occurs first. An aggregate of $239,700 was deposited into escrow during the six month period ended June 30, 2007.



During April 2007, HBS Bio entered into an agreement for consulting services relating to raising capital for HBS Bio. Under the agreement HBS Bio will pay the consultant a consulting/finders fee of 4% of the units of the venture funded as a result of the consultants efforts and $500,000 with regard to the first $20 million or pro-rata amount thereof invested or loaned by a party introduced by the consultant and the lesser of 2.5% or $100,000 with regard to each subsequent $10 million invested or loaned by a party introduced by the consultant.



During May 2007, HBS Bio entered into ethanol merchandising, corn procurement and consulting services, and distillers grains marketing and consulting services agreements for the proposed California and Oregon ethanol facilities.



During May 2007, HBS Bio entered into a letter of intent to set out the remaining terms and move toward a formal process technology and equipment agreement to facilitate the production of a 100 million gallon facility for the proposed Oregon ethanol facility. A deposit payment of $250,000 was to be placed into escrow within seven days of the execution of the letter of intent. As of June 30, 2007, the deposit has not been paid pursuant to further discussions to finalize the agreement.



In April 2007, the Company entered into an agreement to render consultant services, including the providing of financial and business contacts in Korea. The Company granted 50,000 shares of restricted common stock, valued at $4,000, as compensation under this agreement. The agreement was amended in June 2007 to include additional services for which a warrant to purchase 1,000,000 shares of common stock of the Company was granted.  The warrant vests as to 250,000 shares upon achieving a certain milestone and the balance of 750,000 vests upon the Company signing a definitive agreement with a certain Korean company. A consulting fee of $1,000 per day will be paid to the consultant for Company approved non-incidental projects.





F-12







10. Public Relations Agreement



During April 2007, the Company entered into an agreement for investor relations and awareness services under which the Company will make cash payments equal to 35% of the buy volume of the Companys common stock attributable to the agreement during the six months commencing April 13, 2007. The public relations and promotion services company will promote the Company to the investment community and the general public through press releases and other communications, all of which must be approved in advance by the Company. The Company has paid $167,100 pursuant to this agreement.



During April 2007, the Company entered into agreements for investor relations services for $18,500 in cash.



11. Going Concern



Going concern - 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. The Company is in the development stage, has no operating revenue and incurred a net loss of approximately $2,121,800 for the six months ended June 30, 2007. The Company is in the tenth year of research and development, with an accumulated loss during the development stage of approximately $25,449,600. As of June 30, 2007, management is uncertain as to the completion date of its preservation products or if the products will be completed at all.



These conditions give rise to substantial doubt about the Company's ability to continue as a going concern. These financial statements do not include adjustments relating to the recoverability and classification of reported asset amounts or the amount and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company's continuation as a going concern is dependent upon its ability to obtain additional financing or sale of its common stock as may be required and ultimately to attain profitability.



Management's plan, in this regard, is to raise financing of approximately $4,000,000 through a combination of equity and debt financing. Management believes this amount will be sufficient to finance the continuing research for the next twelve months. However, there is no assurance that the Company will be successful in raising such financing.  In 2005, in furtherance of its capital raising goals, the Company entered into an agreement with a financial advisor and placement agent for assistance with structuring, issuance and sale of the Companys securities.



F-13







12. Segment Information



The Company operates in two reportable segments, the development of technology for preservation of certain biologic material and the development of a renewable energy market, as defined by Statement of Financial Accounting Standards (SFAS) No. 131. Prior to 2007, the Company operated in only one segment, and therefore did not report segment information for the period ended December 31, 2006.



Six month period ended June 30, 2007 (unaudited)





|                                          |   |             |   |           |   |            
|----------------------------------------- | - | ----------- | - | --------- | - | -----------
|                                          |   |             |   |           |   |            
|                                          |   | BioMedical  |   | BioEnergy |   | Total      
|Revenue                                   | $ | -           | $ | -         | $ | -          
|                                          |   |             |   |           |   |            
|Operating expenses                        |   |             |   |           |   |            
|Stock based comp                          |   | 21,100      |   | -         |   | 21,100     
|Public relations                          |   | 405,500     |   | -         |   | 405,500    
|Other general and administrative expenses |   | 637,000     |   | -         |   | 637,000    
|Total general and administrative          |   | 1,063,600   |   | -         |   | 1,063,600  
|Research and development                  |   | 141,200     |   | 771,700   |   | 912,900    
|Sales and marketing                       |   | -           |   | -         |   | -          
|Total operating expenses                  |   | 1,204,800   |   | 771,700   |   | 1,976,500  
|                                          |   |             |   |           |   |            
|Loss from operations                      | $ | (1,204,800) | $ | (771,700) | $ | (1,976,500)
|                                          |   | ========    |   | ========  |   | ========   



13. Subsequent Events



In July 2007, the Company issued 22,000 shares of restricted common stock and 22,000 shares of free trading common stock valued at $3,100 for services related to public relations.



In July 2007, the Company issued 4,300 shares of restricted common stock in satisfaction of accounts payable, valued at $300.



F-14







ITEM 2.  Management's Discussion And Analysis Or Plan Of Operation.



THIS QUARTERLY REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, INCLUDING, WITHOUT LIMITATION, STATEMENTS REGARDING OUR EXPECTATIONS, BELIEFS, INTENTIONS OR FUTURE STRATEGIES THAT ARE SIGNIFIED BY THE WORDS "EXPECTS," "ANTICIPATES," "INTENDS," "BELIEVES," OR SIMILAR LANGUAGE.  THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS, UNCERTAINTIES AND OTHER FACTORS.  ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS DOCUMENT ARE BASED ON INFORMATION AVAILABLE TO US ON THE DATE HEREOF AND SPEAK ONLY AS OF THE DATE HEREOF.  THE FACTORS DISCUSSED BELOW UNDER "RISK FACTORS" AND ELSEWHERE IN THIS QUARTERLY REPORT ON FORM 10-QSB ARE AMONG THOSE FACTORS THAT IN SOME CASES HAVE AFFECTED OUR RESULTS AND COULD CAUSE THE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS.



The following discussion should be read in conjunction with the Condensed Financial Statements and Notes thereto.



Overview/ Recent Developments



We are a developmental stage company, and have a very limited operating history and no revenue to date.  Our prospects must be considered in light of the risks and uncertainties encountered by companies in an early stage of development involving new technologies and overcoming regulatory approval process requirements before any revenue is possible.



We have experienced operating losses since our inception.  These losses have resulted from the significant costs incurred in the development of our technology and the establishment of our research and development facility. Expenditures will increase in all areas in order to execute our business plan, particularly in research and development and in gaining regulatory approval to market our products in the U.S. and abroad.



From time to time since 2003, we have experienced increased difficulty in raising outside capital.  Although research continued in organ preservation, we were forced to suspend animal testing and human infusion testing in late 2003 due to a lack of funds.  Our employees accepted a temporary 50% salary reduction in January 2004 to conserve cash, and several of these employees as well as certain of our outside consultants elected to convert a portion of their deferred compensation to shares of our common stock.  On September 1, 2004, we restored all employee salaries; however, employees received 50% of their salaries in cash and 50% in shares of restricted common stock.  In February 2005, we changed our overall compensation structure to reduce recurring payroll expenses in non-critical areas in order to provide additional resources for the completion of our scientific objectives.   In March 2005, we made the decision to pay all of the accrued salaries in cash rather than in stock.



During the year ended December 31, 2005, we pursued various alternatives for raising capital, including but not limited to transactions with Dutchess Private Equities Fund II, L.P. (Dutchess), Langley Park Investments PLC (Langley) and Pini Ben David (Ben David).  In October 2005, we entered into an agreement with Ascendiant Capital to assist in the capital-raising process, and in March 2006, we entered into a loan transaction and received approximately $71,000 in net proceeds.  In November 2006, we received a $1,000,000 loan from Dutchess to provide capital for the development of several ethanol production facilities (see "Liquidity and Capital Resources" below for detailed descriptions of all of the above transactions).  We also raised funds through the sales of our capital stock through Regulation S under the Securities Act.  To date, we continue to seek alternative sources for capital.



We are a developer of preservation platforms for organs and other biomaterials, specializing in the development of proprietary above zero (HBS-AZ) and below zero (HBS-BZ) organ and tissue preservation systems and methods for preserving blood platelets.  We have been successful in preserving blood platelets for ten days under refrigeration while maintaining cell structure and morphology, which has never been done before to our knowledge.  We had originally contemplated submitting our findings to the United States Food and Drug Administration (FDA) in the first half of 2003; however, additional pre-human infusion tests were necessary to address certain aspects of our findings. We believe that we have now satisfactorily resolved all issues raised by these findings, and resumed our human infusion tests in February 2005.  Some delays have been encountered at the centers conducting the tests, as it was necessary for the centers to repeat our in-vitro (test tube) tests prior to proceeding to the actual human tests. Internal approval for starting the pre-human infusion studies had to be secured, which is now in place.  We have completed in-vitro tests at two independent laboratories that specialize in platelet testing with results that we believe justify proceeding to human infusion (in-vivo) tests.  Additional approvals to commence human in-vivo studies will be required from the test centers internal review board and from the FDA.  We are now in the process of obtaining such approvals and have submitted data to the FDA.  The FDA may require animal studies as a prerequisite to human testing, although we believe that previous studies by others show that there is no correlation between animals and humans in the case of platelet preservation.  We currently anticipate that the human infusion tests will be completed within four to six months after receiving a license from the FDA allowing us to proceed.



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We began research on kidney preservation in 2002 and have developed what we believe is a solution that will operate under refrigerated temperature storage conditions for over 30 hours, allowing organ preservation beyond current capabilities.  We successfully transplanted a rat kidney that had been frozen at a temperature of negative 80 degrees Centigrade for three months in our patent-pending HBS sub-zero solution. In October 2005, we successfully completed the initial phase of our survival studies of animals with transplanted kidneys preserved using our HBS organ preservation solution, and were able to preserve a rat's kidney at negative 196 degrees Centigrade for up to five days while maintaining some functionality when transplanted back into the animal, evidenced by urine production. We previously preserved rats' kidneys at negative 20 and negative 80 degrees Centigrade. We will continue to conduct further tests on a larger animal sample size, and conduct histology and survival studies as well. Our goal is to extend the kidney shelf life for up to 72 to 96 hours at above freezing temperatures and even longer at sub-zero temperatures.  We believe that the extended shelf life should enable better matching of donor kidneys to recipients. In the third quarter of 2005, we also purchased a special freezer and equipment used to conduct experiments at negative 80 degrees Centigrade.  Recent survival studies on animals with kidneys stored in the HBS-AZ solution for 14 days showed an 83% survival rate versus 42% and 10% for the respective UW and HTK (European) solutions. Further recent studies using biochemical test markers have corroborated these studies.  In 2007, we intend to seek opportunities to license our organ preservation technology for storage at temperatures above zero degrees Centigrade.



In July 2002, we received our first patent on our technology and methodology for preserving blood platelets.  We filed a provisional patent application in June 2001 to cover our improved platelet preservation methods.   In August 2003, we filed another patent application covering improved platelet preservation methods. In May 2006, the U.S. Patent Office approved our patent for organ preservation entitled Methods and Solutions for Storing Donor Organs, U.S. Patent No. 7,029,839.  We will seek strategic alliances with companies that have the capability to provide technical and clinical expertise as well as financial and marketing expertise to leverage our current expertise in these areas.



We also entered the alternative energy market through our wholly-owned subsidiary, HBS Bio.  HBS Bio intends to identify, secure and develop suitable sites for the production of ethanol and biodiesel fuel for the U.S. market using innovative methods to improve the efficiency and cost of producing biofuels.  We believe the ethanol industry has substantial potential for growth, and as such entered into agreements with EXL to develop several ethanol production facilities.



We entered into an Asset Purchase Agreement with EXL effective September 1, 2006.  Pursuant to the Asset Purchase Agreement, EXL agreed to sell certain options to purchase certain property in Lumberton County, North Carolina, to HBS Bio; the stock is being held in escrow pursuant to the Escrow Agreement referenced below.  In consideration for the options, HBS Bio issued 50,000 shares of our common stock to EXL and reimbursed EXL $40,000 for expenses incurred with respect to the options and related proposed ethanol projects, discussed further below.



16

Also effective September 1, 2006, we entered into a Consulting Services Agreement with EXL.  That Agreement provides that EXL will supervise, manage and coordinate the development, construction and operation of up to three ethanol facilities.  The Consulting Services Agreement also provides that EXLs President, Claude Luster, III, will have the title of President of HBS Bio during the term of the Agreement, and will report to HBS Bios Chief Executive Officer.  The term of the Agreement is two years from the effective date, with an option to extend the term for two additional years by mutual written agreement.  In consideration for its consulting services, EXL will receive an annual consulting fee of $199,000.  Upon the funding of the first ethanol facility, the annual consulting fee will increase to $224,000.  The consulting fee will increase again to $324,000 upon the funding of the second ethanol facility, and to $424,000 in the event a third ethanol facility is funded.



EXL will also be entitled to receive up to 3,450,000 shares of HBS common stock.  The stock will be placed in escrow, and to that end, HBS Bio, EXL, and Silicon Valley Law Group as escrow agent entered into an Escrow Agreement.  The Escrow Agreement provides that 1,000,000 shares of the Companys common stock will be released to EXL upon the execution of certain agreements necessary for the development of the first ethanol facility, the submission of preliminary environmental and land use permits for the first ethanol facility, and the assignment and conveyance of the option to purchase the second facility.  An additional 1,000,000 shares will be released to EXL upon the acquisition of certain permits for the first facility and the execution of certain agreements necessary for development of the first facility, as well as the submission of preliminary environmental and land use permits for the second facility.  The 1,450,000 remaining shares will be released to EXL when a funding commitment for the first facility is obtained.  In the event funding for the first facility is not obtained within four months from the date on which the funding commitment is received, any shares still in escrow will be dispersed to HBS Bio and any shares previously released to EXL will be returned to HBS Bio.



Under the Consulting Services Agreement, the facilities will be funded by us according to a schedule, with $300,000 due upon closing of the Asset Purchase Agreement and additional amounts upon completion of certain milestones thereafter.  We will contribute $150,000 upon completing the following milestones: (1) raw product supply agreement for the first plant; (2) environmental services agreement for the first plant; (3) risk management agreement for the first plant; and (4) distilled grain marketing agreement for the first plant.  We will contribute an additional $150,000 upon completing the following milestones: (1) ethanol off take agreement for the first plant; (2) preliminary engineering study for the first plant; (3) land use permit submittal for the first plant; (4) environmental permits submittal for the first plant; (5) financial advisory services agreement or letter of interest from financial entity; (6) land option agreement for the second plant; and (7) fuel supply agreement for the first plant.  We will contribute an additional $400,000 upon reaching the following milestones: (1) utility services agreement for the first plant; (2) Phase I engineering and environmental for the first plant; (3) raw product supply agreement for the second plant; (4) environmental services agreement for the second plant; (5) risk management agreement for the second plant; and (6) distilled grain marketing agreement for the second plant.  We will contribute an additional $450,000 upon reaching the following milestones: (1) EPC Agreement and Phase II engineering for the first plant; (2) fuel supply agreement for the second plant; (3) utility services agreement for the second plant; (4) ethanol off take agreement for the second plant; (5) environmental permits submittal for the second plant; (6) preliminary engineering study for the second plant; (7) land use permit submittal for the second plant; (8) Phase I engineering and environmental studies for the second plant; (9) long term equity commitment for first plant (10) long term debt commitment for the first plant; (11) issuance of authority to construct permits for the first plant; and (12) final funding documentation for the first plant.  Finally, we will contribute $400,000 upon completing the following milestones: (1) EPC Agreement and Phase II engineering for the second plant; (2) long term equity commitment for the second plant; (3) long term debt commitment for the second plant; (4) final environmental permits for the second plant; (5) authority to construct permits for the second plant; and (6) final funding documentation for the second plant.



During April 2007, HBS Bio entered into a lease for approximately 90 acres of property in Morrow County, Oregon for a period of 20 years, with the option to renew the lease for 10 consecutive terms of five years each. HBS Bio paid $15,000 upon execution of the lease for a three month review period. HBS Bio may extend the review period for an additional three months upon payment of an additional $15,000, and may terminate the lease at any time during the review periods. During the original 20 year term of the lease after the review periods, the base rent will be $27,000 per month.



17



During April 2007, HBS BioEnergy DDG Corcoran, LLC (HBS Corcoran), a joint venture in which HBS Bio owns an interest, entered into an agreement for the purchase of approximately 922 acres of property in Tulare County, California for an aggregate purchase price of approximately $12 million. HBS Corcoran is required to make deposits of up to $690,000 in escrow within 18 months from April 17, 2007. During the six months ended June 30, 2007, HBS Bio deposited an aggregate of $239,700 into escrow.  The deposits are nonrefundable except under certain conditions, are to be applied to the purchase price, and will constitute liquidated damages in the event of HBS Corcorans default under the purchase agreement. HBS Corcoran will have 18 months to review the suitability of the property for its planned uses. The balance of the purchase price must be deposited in escrow within 30 days after completion of the feasibility review or the end of the feasibility period, whichever occurs first.



There is no guarantee that we will be able to complete the purchase of any real property or the development of any of the proposed ethanol facilities.  The acquisition of real property and the development of the ethanol facilities will require significant additional capital.  If we are able to complete one or more of the proposed facilities, there is no guarantee that the facility will be able to generate sufficient revenue to fund our research and development activities, or any revenue at all.  At this time, we do not have an estimate of the time or the amount of funds that will be required to complete the ethanol facilities, but we believe it will cost at least $1,890,000, including our funding obligation under the Consulting Services Agreement and reimbursement to EXL under the Asset Purchase Agreement.  There will be additional costs, including but not limited to EXLs consulting fee, which will differ depending on when certain facilities are funded and how long the project takes.   Some projects may exceed the original budget and will be considered on a case by case basis.



Results of Operations



THREE MONTHS ENDED JUNE 30, 2007 COMPARED WITH THREE MONTHS ENDED JUNE 30, 2006



Revenues.  We did not generate any revenue in either of the three-month periods ended June 30, 2007 or 2006, and we have not generated revenues since our inception in February 1998, as our focus to date has been on the research and development of products.  We are a development stage company in the tenth year of research and development activities, and do not anticipate receiving revenue until we complete product development and clinical testing.



General and Administrative Expenses.   Total general and administrative expenses in the three months ended June 30, 2007 were $648,800, a slight increase from $635,500 for the three months ended June 30, 2006.  The increase was comprised in part by a small increase in public relations expenses to $279,900 for the three months ended June 30, 2007, from $270,000 for the three months ended June 30, 2006.  Our public relations expenses stem from the renewal in April 2007 of our public relations agreement with Abernathy Mendelson & Associates (Abernathy) pursuant to which we provided shares of restricted and free trading common stock as payment for advertising and promotional services (see below for additional information).



Our increase in total general and administrative expenses was also due to an increase in other general and administrative expenses to $359,400 for the three months ended June 30, 2007 from $334,800 for the comparable period in 2006.  This increase was due to additional legal and professional fees and other expenses related to the filing of a registration statement and our ongoing public company reporting requirements.



18







Due to the recent initiation and planned development of our alternative energy and ethanol business, we anticipate that general and administrative expenses will experience a significant increase in fiscal 2007.  The increase will be incurred in several categories of general and administrative expenses, as we expect to hire additional personnel, retain specialized counsel and other consultants and utilize stock-based compensation to a greater extent than in fiscal 2006.

We experienced a decrease in stock-based compensation in the three months ended June 30, 2007 to $9,500, from $30,700 for the three months ended June 30, 2006.  From time to time, our staff has worked for under market rate compensation or has had to accrue pay for extended periods of time when financing was not available.  We have granted stock options to certain employees in partial consideration for salary reductions, and certain employees have elected to receive stock in lieu of compensation.

Research and Development.  Our research and development expenses were $70,600 for the three months ended June 30, 2007, an increase from $32,500 for the comparable period in 2006.    This increase was primarily due to our decision to ramp up our research and development spending in platelet and organ preservation.

Sales and Marketing Expenses.  We had no sales and marketing expenses for either of the three months ended June 30, 2007 or 2006.  We eliminated payroll in sales and marketing in order to give priority to the completion of our scientific objectives  to complete human infusion studies for platelets and move closer to human testing utilizing our organ preservation technology  as well as to devote resources to the establishment of our alternative energy and ethanol business.



Ethanol Development.  We expended $331,600 for the development of our ethanol business in the three months ended June 30, 2007.  No such expenditures were made during the three months ended June 30, 2006, as we commenced our alternative energy operations in the third quarter of 2006.  We anticipate significant additional expenditures for ethanol development in fiscal 2007.



Other Income and Expense.  We incurred interest expense of $141,700 during the three months ended June 30, 2007, due primarily to interest on certain debt.  We incurred interest expense of $9,900 during the three months ended June 30, 2006.  We had interest income of $800 in the three months ended June 30, 2007; no interest income was realized in the comparable period in 2006.



Net Loss.  As a result of the foregoing factors, our net loss increased to $1,191,900 for the three months ended June 30, 2007, from a net loss of $677,900 for the three months ended June 30, 2006.  Our net loss per share was $0.01 for each of the respective three months ended June 30, 2007 and 2006.



SIX MONTHS ENDED JUNE 30, 2007 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2006



Revenues.  We did not generate any revenue in either of the six-month periods ended June 30, 2007 or 2006, and we have not generated revenues since our inception in February 1998, as our focus to date has been on the research and development of products.  We are a development stage company in the tenth year of research and development activities, and do not anticipate receiving revenue until we complete product development and clinical testing.



General and Administrative Expenses.   Total general and administrative expenses in the six months ended June 30, 2007 were $1,063,600, a decrease from $1,275,600 for the six months ended June 30, 2006.  A significant portion of the decrease was due to a decline in public relations expenses to $405,500 for the six months ended June 30, 2007, from $597,100 for the six months ended June 30, 2006.  Our public relations expenses stem from our public relations agreement (as amended) with Abernathy Mendelson & Associates (Abernathy) pursuant to which we provided shares of restricted and free trading common stock as payment for advertising and promotional services (see below for additional information).  The agreement lapsed in the fourth quarter of 2006, but was renewed in April 2007.  We anticipate that our public relations expenses may increase pursuant to this renewal.



19





Our decrease in total general and administrative expenses was offset by a slight increase in other general and administrative expenses to $637,000 for the six months ended June 30, 2007 from $625,900 for the comparable period in 2006.  This increase was due to additional legal and professional fees and other expenses related to the filing of a registration statement and our ongoing public company reporting requirements.



Due to the recent initiation and planned development of our alternative energy and ethanol business, we anticipate that general and administrative expenses will experience a significant increase in fiscal 2007.  The increase will be incurred in several categories of general and administrative expenses, as we expect to hire additional personnel, retain specialized counsel and other consultants and utilize stock-based compensation to a greater extent than in fiscal 2006.



We also experienced a decrease in stock-based compensation in the six months ended June 30, 2007 to $21,100, from $52,600 for the six months ended June 30, 2006.  From time to time, our staff has worked for under market rate compensation or has had to accrue pay for extended periods of time when financing was not available.  We have granted stock options to certain employees in partial consideration for salary reductions, and certain employees have elected to receive stock in lieu of compensation.



Research and Development.  Our research and development expenses were $141,200 for the six months ended June 30, 2007, an increase from $74,500 for the comparable period in 2006.    This increase was primarily due to our decision to ramp up our research and development spending in platelet and organ preservation.



Sales and Marketing Expenses.  We had no sales and marketing expenses for either of the six months ended June 30, 2007 or 2006.  We eliminated payroll in sales and marketing in order to give priority to the completion of our scientific objectives  to complete human infusion studies for platelets and move closer to human testing utilizing our organ preservation technology  as well as to devote resources to the establishment of our alternative energy and ethanol business.



Ethanol Development.  We expended $771,700 for the development of our ethanol business in the six months ended June 30, 2007.  No such expenditures were made during the six months ended June 30, 2006, as we commenced our alternative energy operations in the third quarter of 2006.  We anticipate significant additional expenditures for ethanol development in fiscal 2007.



Other Income and Expense.  We incurred interest expense of $252,900 during the six months ended June 30, 2007, due primarily to interest on certain debt.  We incurred significantly lower interest expense of $12,000 during the six months ended June 30, 2006.  We also recognized $100 in the six months ended June 30, 2007 from the forgiveness of debt on an account payable converted to stock, as compared to $6,600 from the forgiveness of debt for the same period in 2006.  During the six months ended June 30, 2007, we had a loss on investment in marketable securities of $7,600 from the sale of the remaining Langley securities (see below).  We had interest income of $5,100 in the six months ended June 30, 2007; no interest income was realized in the comparable period in 2006



Net Loss.  As a result of the foregoing factors, our net loss increased to $2,231,800 for the six months ended June 30, 2007, from a net loss of $1,355,500 for the six months ended June 30, 2006. We had an unrealized loss of $3,200 on our investment in Langley securities during the six months ended June 30, 2007, resulting in a total comprehensive loss of $1,358,700 for the period.  Our net loss per share was $0.02 for each of the respective six months ended June 30, 2007 and 2006.



Liquidity and Capital Resources



Our operating plan for 2007 is focused on development of our products. It is our estimate that a cash requirement of $4 million is required to support this plan for the next twelve months.  During the six months ended June 30, 2007, we received an aggregate of $1,027,400 from the issuance of common stock, including $500,800 from our agreement with Dutchess, and $385,000 from borrowings on notes payable, compared to aggregate proceeds of $724,400 from the issuance of common stock during the comparable period in 2006, including $260,200 from Dutchess, and $75,000 from borrowings on notes payable.  We are actively seeking additional funding.  Once we receive the required additional financing, we anticipate continued growth in our operations and a corresponding growth in our operating expenses and capital expenditures.  We do not anticipate any revenue from operations for the next two or three years. Therefore, our success will be dependent on funding from private placements of equity securities.  Although we have entered into certain agreements with Dutchess, Ascendiant and La Jolla Cove (see below), there can be no assurance that we will be successful in raising significant capital pursuant to any of these agreements.  At the present time, we have no other agreements or arrangements for any private placements.



20





In 2003, we experienced increased difficulty in raising outside capital.  This difficulty continued through the third quarter of 2004.  Although research continued in organ preservation, we were forced to suspend animal testing and human infusion testing due to a lack of funds.  Our employees accepted a temporary 50% salary reduction in January 2004 to conserve cash, and several of these employees as well as certain of our outside consultants elected to convert a portion of their deferred compensation to shares of our common stock.  On September 1, 2004, we restored all employee salaries; however, employees received 50% of their salaries in stock and 50% in shares or restricted common stock.  In February 2005, we changed our overall compensation structure to reduce recurring payroll expenses in non-critical areas in order to provide additional resources for the completion of our scientific objectives.  In March 2005, we made the decision to pay all of the accrued salaries in cash rather than in stock.



We are in the tenth year of research and development, with an accumulated loss during the development stage (through June 30, 2007) of $25,449,600.  As of June 30, 2007, we are uncertain as to the completion date of our research and development, or if products will ever be completed as a result of this research and development activity.    We anticipate that the funds spent on research and development activities will need to increase prior to completion of a product.  Additionally, we may not be able to secure funding in the future necessary to complete our intended research and development activities.



These conditions give rise to substantial doubt about our ability to continue as a going concern. Our financial statements do not include adjustments relating to the recoverability and classification of reported asset amounts or the amount and classification of liabilities that might be necessary should we be unable to continue as a going concern.  Our continuation as a going concern is dependent upon our ability to obtain additional financing from the sale of our common stock, as may be required, and ultimately to attain profitability.  The report of our independent certified public accountants, included in our Annual Report on Form 10-KSB for the year ended December 31, 2006, contains a paragraph regarding our ability to continue as a going concern.



During the six months ended June 30, 2007, we continued to spend cash to fund our operations.  Cash used by operating activities for the six months ended June 30, 2007 equaled $1,336,400, and consisted principally of our net loss of $2,231,800, plus an increase in other assets of $35,000, offset by $263,300 in public relations expenses paid or to be paid in common stock, $21,100 provided by stock-based compensation, an increase in accounts payable of $262,800, an increase in amortization and accretion of loan fees and discounts of $233,600, an increase in accrued liabilities of $115,900, a decrease in prepaid expenses of $18,300, a loss of $7,600 on an investment in marketable securities and $7,800 in depreciation.  For the comparable period in 2006, cash used by operating activities equaled $662,900, and consisted principally of our net loss of $1,355,500 plus a decrease of $4,100 in accrued liabilities, a decrease of $30,900 in prepaid expenses and an increase of $3,400 in other assets, offset by increases of $539,100 in public relations expenses paid or to be paid in common stock, $52,600 provided by stock-based compensation, $68,700 in accrued liabilities, $7,300 in amortization of discount and loan fees on notes payable, and $1,500 in depreciation.



We used $189,400 of cash for investing activities during the six months ended June 30, 2007.   Of this amount, $239,700 was utilized for a deposit on the purchase of land and $82,800 was utilized for purchasing fixed assets, consisting of equipment, furnishings and fixtures for our new research facilities in Michigan, offset by $133,100 from the sale of investments.  We did not utilize any cash for investing activities during the six months ended June 30, 2006.



21



Cash flow from financing activities for the six months ended June 30, 2007 produced a net increase in cash of $1,113,100, consisting of $1,027,400 in proceeds from the issuance of common stock, an increase of $501,800 in amounts due to stockholders and $385,000 from borrowing on notes payable, offset by $771,300 in principal payments on notes payable, and $29,800 in principal payments on a note payable for directors and officers liability insurance.  Cash flows from financing activities for the six-month period ended June 30, 2006 produced a net increase in cash of $692,600, consisting of $724,400 from the issuance of common stock and $75,000 from borrowing on notes payable, offset by $39,400 of principal payments on a note payable for directors and officers insurance and a decrease of $67,400 in amounts due to shareholders.



As of June 30, 2007, we had cash and cash equivalents amounting to $200,900, a decrease from the balance of $613,600 at December 31, 2006.  Our working capital deficit increased to $1,250,200 at June 30, 2007, from $538,600 at December 31, 2006.  At June 30, 2007, we had no capital commitments.



From 2004 through 2006, we pursued various alternatives for raising capital.  We entered into the Investment Agreement with Dutchess effective June 28, 2004.  Pursuant to the terms of the Investment Agreement, we may offer, through a series of puts, and Dutchess must purchase from time to time, up to a maximum of 38,000,000 shares of our common stock, provided that Dutchess shall not be required to purchase shares of our stock with an aggregate purchase price in excess of $5,000,000.  The purchase price of shares purchased under the Investment Agreement shall be equal to 95% of the lowest closing "best bid" price (the highest posted bid price) of the common stock during the five consecutive trading days immediately following the date of our notice to Dutchess of our election to put shares pursuant to the Investment Agreement. The dollar value that we will be permitted to put pursuant to the Investment Agreement will be either: (A) 200% of the average daily volume in the US market of the common stock for the ten trading days prior to the notice of our put, multiplied by the average of the three daily closing bid prices immediately preceding the date of the put, or (B) $10,000.  No single put can exceed $1,000,000.  We filed a registration statement on Form SB-2 in July 2004 to register for resale an aggregate of 38,000,000 shares of common stock issuable under the Investment Agreement; this registration statement was declared effective on August 23, 2004.  Pursuant to the Investment Agreement, Dutchess acquired a total of 434,615 shares of our common stock for approximately $297,500 during the year ended December 31, 2005, 3,880,000 shares for approximately $643,700 during the year ended December 31, 2006 and 1,041,100 shares of common stock in exchange for approximately $71,400 during January 2007, 292,000 shares for approximately $29,500 during February 2007, 190,700 shares for approximately $16,500 during March 2007, 2,408,300 shares for approximately $179,600 during April 2007, 1,178,300 shares for approximately $123,400 during May 2007 and 1,436,300 shares for approximately $80,400 during June 2007.  We anticipate exercising additional puts under the Investment Agreement in 2007 to provide funding for our operations.



In July 2004, we entered into the Stock Purchase Agreement, whereby we would sell shares of our restricted common stock for shares in Langley, a London-based institutional investment trust.  Langley was formed in February 2004 to invest in a diverse portfolio of U.S. small-cap companies (defined by Langley management as those public companies having a market capitalization of less than U.K. $100 million).  Although Langley's investments are not limited to specific sectors, it has concentrated on mining, oil and gas, energy-related and technology companies since it commenced operations in February 2004.  Langley's stated investment objective is to achieve long-term capital growth.  The Langley ordinary shares are registered as a unit investment trust on the London Stock Exchange ("LSE").  The trading symbol for the ordinary shares is LSE:LPI.  The Langley Investment Trust consists of a portfolio of the common stock of 23 U.S. publicly traded small cap companies.



Langley purchased 7,000,000 shares of our restricted stock at a price of $910,000, or approximately $0.13 per share.  The shares issued to Langley constituted 17.9% of our outstanding common stock at July 31, 2004.  In lieu of cash, Langley issued to us an aggregate of 512,665 Langley ordinary shares at a price of U.K. $1.00 per share (one British Pound Sterling = US $1.8160 on July 30, 2004).  The Langley ordinary shares issued to us constituted less than one percent of Langley's issued and outstanding ordinary shares at September 30, 2004.  The total sales price of $910,000 was determined by multiplying the 7,000,000 shares by the average of the closing bid price of our common stock during the ten trading days preceding the date of the Agreement.  The 512,665 shares in Langley received as consideration was calculated by dividing the total sales price by the conversion rate of the British Pound Sterling to the U.S. dollar as of the close of business on July 26, 2004.  Upon the closing of this transaction, Langley and we were required to issue our respective shares into an escrow account, whereby we could immediately liquidate up to 50% of the Langley shares.  We and the other portfolio companies have received one-half of the free-trading Langley ordinary shares sold to us under the Stock Purchase Agreement.  The remaining 50% of the free-trading Langley ordinary shares will be held in escrow for two years as a downside price protection against our shares issued to Langley.  In the event of a decline in the market price of our common stock at the end of two years, we will be required to sell to Langley the amount of our Langley shares equal to (i) the original number of Langley shares issued as consideration under the Stock Purchase Agreement multiplied by (ii) the percentage decrease in the market price of our common stock.  If at the end of the two-year period the trading price of our common stock falls below $0.065, we will have to sell back to Langley all the escrowed Langley shares.  If at the end of the trading period the trading price of our common stock is more than $0.065 but less than $0.13, we will need to sell back to Langley only a proportionate amount of our Langley ordinary shares.  We have no obligation to register for resale our shares that are held by Langley.     In January 2007, we sold the Langley ordinary shares at a loss of $7,600 from the fair value of said shares at December 31, 2006.





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Effective October 28, 2004, we entered into the Loan Agreement with Ben David.  Ben David is not, and has not been during the past two years, an affiliate of us or any of our current or former affiliates.  The Loan Agreement called for Ben David to loan us an aggregate of 2,300,000 euros (the "Loan").  The Loan was to bear interest at the rate of three percent per annum, with payments of interest due monthly and all principal plus accrued but unpaid interest due and payable on November 1, 2007.  Repayment of the Loan was secured by 23,000,000 shares of our common stock (the "Shares") issuable pursuant to Regulation S under the Securities Act.  Pursuant to the Loan Agreement and an Escrow Agreement between Ben David and us, a certificate representing the Shares (the "Certificates"), containing a legend restricting transfer, was w delivered to Ben David to hold until funds for repayment of the Loan were delivered to the escrow agent.  We believe that the parties intended that when the loan funds were delivered by Ben David to the escrow agent, Ben David would also deliver the stock certificate to the escrow agent, who would disburse the funds and certificates to the appropriate parities.  The Loan Agreement provided that it would terminate, and the Shares immediately returned to us, in the event that the Loan funds were not delivered to us by the 15th calendar day following the date of the Loan Agreement (November 13, 2004). Pursuant to Ben David's request, we extended the date for receipt of Loan funds to December 23, 2004 and exchanged the certificate for three certificates (one to Ben David and one to each of two affiliates); however, no Loan funds were received by that date.  On January 11, 2005, we instructed our transfer agent to cancel the Certificates, and notified Ben David that the Loan Agreement was cancelled and of no further force or effect.  We did not incur any early termination penalties in connection with the cancellation of the Loan Agreement.



In the second quarter of 2005, it came to our attention that shares of our common stock (the Reg S Stock) may have been sold in Germany without our authorization, possibly in connection with the canceled Ben David certificates.  In order to halt these unauthorized issuances, we commenced an exchange offer (the Offer) in July 2005 to exchange one share of our common stock (the New Stock) for each share of Reg S Stock outstanding before or upon the delisting date (the Record Date) when the Reg S Stock is no longer tradable.  The offer covers 10,000,000 shares of our common stock, and is intended to reduce potential liability for the unauthorized issuances.  The Offer was scheduled to expire on December 29, 2005.  However, on January 11, 2006, we extended the Offer deadline to January 31, 2006, due to delays encountered in the early confusion regarding procedures and subsequent changes to those procedures.  Any shares of Reg S Stock not tendered for exchange by January 31, 2006, will no longer be exchangeable for New Stock and will no longer be tradable on any German stock exchange.  To date, holders of an aggregate of 9,591,592 shares of the Reg S Stock have forwarded certificates and required documents, leaving an aggregate of 408,408 shares outstanding.  On June 15, 2006, the registration statement for these shares of New Stock was declared effective by the Securities and Exchange Commission.



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In March 2005, we entered into an agreement with Abernathy (which was subsequently amended in April 2005).  The Abernathy agreement provided that Abernathy would promote us to the investment community and the general public through press releases and other communications, all of which we must approve in advance.  The term of the Abernathy agreement was six months, subject to prior termination.  In consideration for the public relations services, we were required to issue compensation shares to Abernathy equal to 30% of the increase in buy volume of our common stock that was directly attributable to Abernathy. In addition, we were required to issue bonus shares to Abernathy equal to 10% of the increase in buy volume in the event that the sales price of our common stock as quoted on the OTC Bulletin Board equaled or exceeded $0.25 per share.  We were required to place an aggregate of 3,000,000 free trading shares of common stock in escrow in advance of the services under the Abernathy agreement. As of December 31, 2005, we had issued all of these shares of common stock to Abernathy.



In June 2005, we entered into a second agreement with Abernathy for additional public relations consulting services and issued an additional 750,000 shares of free trading shares of common stock for these services. We also became obligated to issue an additional 899,500 shares to Abernathy as a bonus under this second agreement.  These shares will be issued at a future date.



In November 2005, we entered into a third public relations consulting agreement with Abernathy for a term of three months and issued an additional 500,000 shares of free trading common stock in consideration of these services.  The services were valued at $345,000.   In addition, we are required to issue bonus shares to Abernathy equal to 20% of the increase in trade volume in excess of 100,000 shares (exclusive of shares traded on any exchange other than the OTCBB) after the initial five days of the agreement.  Through December 31, 2005, we released 4,963,600 shares of common stock totaling $3,125,200 in consideration of these agreements.  Additionally, we recorded a public relations payable for approximately 219,400 additional compensation and bonus shares to be released at a future date, valued at $187,900.   During the year ended December 31, 2006, there were no shares issued pursuant to this potential bonus because the agreement had lapsed and the milestone to achieve that bonus was not met.



In October 2005, we entered into an agreement with Ascendiant Securities, LLC ("Ascendiant") providing that Ascendiant would act on a best-efforts basis as our financial advisor and non-exclusive placement agent in connection with the structuring, issuance and sale of our debt and equity securities for financing purposes.  The agreement, which has a term of six months, requires us to pay Ascendiant a cash success fee and warrants for completed transactions that we approve.  The success fee is equal to ten percent of the gross proceeds from the sale of our securities; in addition, for transactions generating gross proceeds of $2,000,000 or more, we must issue Ascendiant 175,000 shares of our restricted common stock.  To date, no transactions have been presented to us by Ascendiant.



In March 2006, we entered into a loan agreement with an independent lender.  The lender agreed to loan us an amount based on 50% of the value of a portfolio of 500,000 shares of our common stock (approximately $90,000).  These shares are held as collateral only.  The lender will receive a loan fee equal to five percent of the gross loan proceeds.  We received net funds of $71,250 from this loan, which was based on a formula and pricing period following the agreement date.  The agreement calls for interest at the annual rate of 4.99% of the loan amount, payable quarterly, for a period of three years.  At maturity, we have the option to pay off the loan balance and receive the same number of shares pledged, sell the pledged shares under certain conditions, renew the loan under certain conditions, or forfeit the shares and not repay the loan.



In March 2006, we entered into a Securities Purchase Agreement (the Agreement) with La Jolla Cove.  Pursuant to the Agreement, La Jolla Cove agreed to purchase from the Company a 63⁄4% Convertible Debenture in the aggregate principal amount of $30,000 (the Debenture).  Pursuant to the terms of the Agreement, we received the sum of $30,000, the purchase price of the Debenture.  In connection with the Debenture, we also issued to La Jolla Cove a Warrant to Purchase Common Stock (the Warrant), dated as of March 7, 2006, to purchase an aggregate of 3,000,000 shares of our common stock.  Pursuant to the terms of the Warrant, we received $95,000 as a prepayment towards the future exercise of the Warrant.



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In May 2006, we returned to La Jolla Cove the aggregate advances of $125,000.  Management believed that due to substantially modified terms proposed for the transaction by La Jolla Cove, the parties failed to agree on the material terms and conditions of this proposed transaction.  We and La Jolla Cove subsequently mutually agreed not to pursue this transaction.



On November 6, 2006, we entered into a loan transaction with Dutchess, and issued to Dutchess a promissory note (the Note) with a face value of $1,200,000.  The net proceeds from this transaction, approximately $1,000,000, will be used for working capital.  The Note matures on August 31, 2007.  Repayment of the face value will be made monthly in the amount of $120,000, plus 50% of any proceeds raised over $120,000 per month from puts under the Investment Agreement (discussed above).  The first payment on the Note is due on December 6, 2006, and subsequent payments are due every 30 days thereafter.  There is no prepayment penalty.  If the face value of the Note is not paid in full by the maturity date or if any other event of default (as defined in the Note) occurs, the face value of the Note will be increased by 10% as an initial penalty, and we will pay an additional 2.5% per month on the face value, compounded daily, until paid off.  If we raise financing of more than $2,000,000, Dutchess may require that we use the balance of any amount over $2,000,000 to pay any amounts due on the Note.  We have also issued to Dutchess 500,000 Holder Shares, which will carry piggyback registration rights and be included in our next registration statement.  In the event we do not register the Holder Shares at the next eligible registration, we must issue to Dutchess an additional 500,000 shares of common stock for each time a registration statement is filed and such Holder Shares are not included.



In March 2007, we entered into a loan agreement with Dr. Larry McCleary, a member of our Board of  Directors.  Dr. McCleary agreed to loan us the sum of $500,000 for a term of two years from March 21, 2007, with a closing cost of $1,717.95 to be added into the first months interest payment. The loan is interest only for the term at 9.25%, with a balloon payment at the end of the term for the principle amount. We issued 100,000 shares of restricted common stock and 900,000 warrants valued at $30,000, to Dr. McCleary, for loan fees.



During April 2007, HBS Bio entered into an agreement for consulting services relating to raising capital for HBS Bio. Under the agreement HBS Bio will pay the consultant a consulting/finders fee of 4% of the units of the venture funded as a result of the consultants efforts and $500,000 with regard to the first $20 million or pro-rata amount thereof invested or loaned by a party introduced by the consultant and the lesser of 2.5% or $100,000 with regard to each subsequent $10 million invested or loaned by a party introduced by the consultant.



In April 2007, we also entered into a new agreement with Abernathy for providing investor relations and awareness services.  Under this agreement, we will make cash payments to Abernathy equal to 35% of the buy volume of our common stock attributable to the agreement.  Abernathy will promote us to the investment community and the general public through press releases and other communications, all of which we must approve in advance.  We have paid $167,100 pursuant to this agreement through June 30, 2007.



On May 15, 2007, we entered into a second loan transaction with Dutchess, and issued to Dutchess a Promissory Note (Note) with a face value of $462,000.  The net proceeds from the transaction, approximately $385,000, will be used for general working capital.  The Note matures on April 15, 2008.  Repayment of the Note will be made monthly in the amount of (i) 100% of any proceeds raised over $120,000 per month from Puts made by us pursuant to the Investment Agreement, or (ii) $51,333, whichever is greater.  The payment shall be made on the 15th of each month or upon immediately available funds exceeding the threshold amount of proceeds raised from Puts.  If we raise financing of more than $2,000,000, Dutchess may require that we use the balance of any amount over $2,000,000 to pay any amounts due on the Note.  If the Note is not paid in full by the maturity date, the face value of the Note will be increased by 10% as an initial penalty, and we will pay an additional 2.5% per month on the face value, compounded daily, until paid in full.  In addition to the failure to pay the face value by the maturity date, the following events are also Events of Default:  failure to make a payment within 10 calendar days of its due date; bankruptcy; our common stock is suspended or no longer listed on a recognized exchange; the registration statement for the underlying shares in the Equity Line is not effective and not cured within five days; we fail to carry out Puts in a timely manner; any of our representations contained in the Agreement were false when made; or we breach the Note.

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Upon each and every Event of Default, Dutchess may elect to execute the Puts in an amount that will repay it and fully enforce its rights under the Agreement.  Dutchess may also increase the face value of the Note by 10% and an additional 2.5% per month, compounded daily until the default is cured or the Note is paid in full.  Dutchess may also elect to stop any further funding (excluding the equity line of credit), or may switch any residual amount of the face value of the Note not paid at maturity into a three-year convertible debenture.  If Dutchess so chooses, we have 10 days to file a registration statement for the shares issuable upon conversion of the convertible debenture equal to 300% of the residual amount, plus interest and liquidated damages.  If we do not file the registration statement within 10 days, or the registration statement is not declared effective within 60 days, the residual amount will be increased by $5,000 per day.  Moreover, if we have an opportunity to accelerate the effectiveness of the registration statement but fail to do so, the residual amount will increase by $5,000 per day commencing the date the statement would have been declared effective.  The conversion rate will be the lesser of 50% of the lowest closing bid price for the previous 15 days or 100% of the lowest bid price for the  preceding 20 days.  If Dutchess does not elect to convert the debenture into common stock prior to maturity, it will automatically be converted into shares upon maturity.  Finally, Dutchess may increase the monthly payment amount to fulfill the repayment of the residual amount.  If we do not cooperate, Dutchess may elect to increase the face value of the Note by 2.5% per day, compounded daily.



We have further agreed that we will not enter into any additional financing agreements without Dutchess express written consent.  We may not file any registration statement which includes any of our common stock exceeding one million shares, including those on From S-8 exceeding 800,000 shares, until the Note is paid in full or Dutchess gives written consent.  Dutchess agrees to allow one registration statement on Form SB-2 not to exceed 25,000,000 shares as a shelf registration.  If we issue any shares to a third party while the Note is outstanding under terms Dutchess deems more favorable to the third party, Dutchess may elect to modify the terms to conform to the more favorable term or terms of the third party financing.   We have issued 250,000 shares of unregistered restricted common stock to Dutchess as an incentive for entering into the Note.



In June 2007, we entered into a representation and finders agreement to raise investment capital from potential Korean investment sources, including institutions and individual investors. The finders fee is set at 5% of capital raised and up to $10 million of capital raised. In addition, a warrant to purchase 1,000,000 shares of our common stock was granted, provided that for each $100,000 raised, 10,000 shares shall vest up to the maximum amount of 1,000,000 shares if the full $10 million of capital is raised.  To date, no funds have been raised pursuant to this agreement.



In June 2007, we entered into a consulting and finders agreement to coordinate and support potential Korean investment opportunities. We will pay a cash fee of 5% of the capital raised up to $10 million.  To date, no funds have been raised pursuant to this agreement.



We have also registered 20,000,000 shares of our common stock for use in raising capital.  Through June 30, 2007, we have not issued any of these shares.



Critical Accounting Policies



The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires us to make judgments, assumptions and estimates that affect the amounts reported. Note 1 of Notes to Financial Statements describes the significant accounting policies used in the preparation of the financial statements. Certain of these significant accounting policies are considered to be critical accounting policies, as defined below.



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A critical accounting policy is defined as one that is both material to the presentation of our financial statements and requires management to make difficult, subjective or complex judgments that could have a material effect on our financial condition and results of operations. Specifically, critical accounting estimates have the following attributes: 1) we are required to make assumptions about matters that are highly uncertain at the time of the estimate; and 2) different estimates we could reasonably have used, or changes in the estimate that are reasonably likely to occur, would have a material effect on our financial condition or results of operations.



Estimates and assumptions about future events and their effects cannot be determined with certainty. We base our estimates on historical experience and on various other assumptions believed to be applicable and reasonable under the circumstances. These estimates may change as new events occur, as additional information is obtained and as our operating environment changes.  These changes have historically been minor and have been included in the consolidated financial statements as soon as they became known. Based on a critical assessment of our accounting policies and the underlying judgments and uncertainties affecting the application of those policies, management believes that our financial statements are fairly stated in accordance with accounting principles generally accepted in the United States, and present a meaningful presentation of our financial condition and results of operations.



In preparing our financial statements to conform to accounting principles generally accepted in the United States, we make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. These estimates include useful lives for fixed assets for depreciation calculations and assumptions for valuing options and warrants. Actual results could differ from these estimates.



We consider that the following are critical accounting policies:



Research and Development Expenses



All research and development costs are expensed as incurred. The value of acquired in-process research and development is charged to expense on the date of acquisition. Research and development expenses include, but are not limited to, payroll and personnel expense, lab supplies, preclinical studies, raw materials to manufacture our solution, manufacturing costs, consulting, legal fees and research-related overhead. Accrued liabilities for raw materials to manufacture our solution, manufacturing costs and patent legal fees are included in accrued liabilities and included in research and development expenses.



Employee Stock Plans



On January 1, 2006, we adopted Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment, requiring us to recognize expense related to the fair value of its employee stock option awards.  We recognize the cost of all share-based awards on a graded vested basis over the vesting period of the award.



Prior to January 1, 2006, we accounted for our stock option plans under the recognition and measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations, as permitted by SFAS No. 123, Accounting for Stock-Based Compensation.  Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS No. 123(R), using the modified-prospective-transition method.  Under that transition method, compensation cost recognized in 2006 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions on SFAS No. 123(R). Results for prior periods have not been restated.



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Determining the appropriate fair value model and calculating the fair value of stock-based awards at the date of grant requires judgment.  We use a modified Black-Scholes option pricing model to estimate the fair value of employee stock options under our stock option plans, consistent with the provisions of SFAS No. 123(R).  Option pricing models, including the modified Black-Scholes model, also require the use of input assumptions, including expected stock price volatility, expected life, expected dividend rate and expected risk-free rate of return.  Expected stock price volatility is based on the historical volatility of our common stock.  We use historical data to estimate option exercise and employee termination within the valuation model.  The expected term of options granted is derived from the output of the option valuation model and represents the period of time that options granted are expected to be outstanding.  The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.



We will continue to review our input assumptions and make changes as deemed appropriate depending on new information that becomes available.  Higher volatility and expected lives will result in a proportional increase to stock-based compensation determined at the date of grant.  The expected dividend rate and expected risk-free rate of return would not have as significant an effect on the calculation of fair value.



In addition, SFAS No. 123(R) requires us to develop an estimate of the number of stock-based awards which will be forfeited due to employee turnover.  Quarterly changes in the estimated forfeiture rate have an effect on reported stock-based compensation, as the effect of adjusting the rate for al expense amortization after April 1, 2006 is recognized in the period the forfeiture estimate is changed.  If the actual forfeiture rate is higher than the estimated forfeiture rate, then an adjustment will be made to decrease the estimated forfeiture rate, which will result in an increase to the expense recognized in the consolidated financial statements.  The effect of forfeiture adjustments in fiscal 2006 was insignificant.  The expense we recognize in future periods could also differ significantly from the current period and/or our forecasts due to adjustments in the assumed forfeiture rates.





ITEM 3.  Controls and Procedures



Based on an evaluation conducted within 90 days prior to the filing date of this Quarterly Report on Form 10-QSB, our Chief Executive Officer and acting Chief Financial Officer concluded that we maintain effective disclosure controls and procedures that ensure information required to be disclosed in our reports under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms.  Specifically, the disclosure controls and procedures assure that information is accumulated and communicated to our management, including our Chief Executive Officer and acting Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.  There have been no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of management's evaluation.



PART II -- OTHER INFORMATION



ITEM 1.  Legal Proceedings.



Not applicable.



ITEM 1A.  Risk Factors



Our business, financial condition or results of operations could be materially and adversely affected by any of the following risks:





Risk Factors Related To Our Company



Our business, financial condition or results of operations could be materially and adversely affected by any of the following risks:





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We have a history of losses, and our independent certified public accountants have raised doubts about our ability to continue as a going concern.



Since our inception in 1998, we have incurred substantial losses from operations, resulting primarily from costs related to research and development and building our infrastructure.  Because of our status as a development stage company and the need to conduct additional research and development prior to introducing products and services to the market, we expect to incur net losses for the foreseeable future.  If our growth is slower than we anticipate or our operating expenses exceed our expectations, our losses will be significantly greater.  We may never achieve profitability.  Primarily as a result of these recurring losses, our independent certified public accountants have modified their report on our December 31, 2006 financial statements to include an uncertainty paragraph wherein they expressed substantial doubt about our ability to continue as a going concern.



We are in the tenth year of research and development, with an accumulated loss during the development stage (through June 30, 2007) of $25,449,600.  We currently do not know when our research and development will be completed, or if a product will ever result from this research and development activity.  We anticipate that the funds spent on research and development activities will need to increase significantly prior to completion of research and development and commercialization of a product. In addition, we anticipate that we will need substantial additional funding to acquire real property and develop ethanol and biodiesel production facilities.   We may not be able to secure funding in the future necessary to complete our intended preservation research and development activities or our ethanol and biodiesel production activities.



These conditions give rise to substantial doubt about our ability to continue as a going concern. Our financial statements do not include adjustments relating to the recoverability and classification of reported asset amounts or the amount and classification of liabilities that might be necessary should we be unable to continue as a going concern.  Our continuation as a going concern is dependent upon our ability to obtain additional financing from the sale of our securities, as may be required, and ultimately to attain profitability.



We require immediate additional capital.



Our operating plan for 2007 is focused on development of our products. It is our estimate that approximately $4 million in cash is required to support this plan for the next twelve months.  During the six-month period ended June 30, 2007, we received an aggregate of $1,027,400 from the issuance of common stock and $385,000 in proceeds from borrowing on notes payable, compared to an aggregate of $724,400 received from the issuance of common stock and $75,000 in proceeds from borrowing on notes payable in the six-month period ended June 30, 2006.  We also received a $1,000,000 loan from Dutchess in November 2006.  We are actively seeking additional funding.  There can be no assurance that the required additional financing will be available on terms favorable to us or at all.  Although we have entered into certain agreements with Dutchess and other prospective funding resources, there can be no assurance that we will be successful in raising any capital pursuant to the Dutchess agreement or these other agreements.



Obtaining capital will be challenging in a difficult environment, due to the slow recovery from the downturn in the United States economy and current world instability. We currently have no commitments for funding and there can be no assurance that we will be able to obtain additional funding in the future from either debt or equity financings, bank loans, collaborative arrangements or other sources on terms acceptable to us, or at all. If our human infusion studies are successful, we believe that we will be able to obtain additional funding through a license agreement with one or more of the potential strategic partners with whom we have had discussions to date, thereby satisfying our financial needs for at least 2007; however, we currently do not have the capital to complete our infusion studies and there can be no assurance that we will achieve successful results in our human infusion studies or that we can enter into a license agreement or agreements providing adequate financing for 2007 and beyond.





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If adequate funds are not available or are not available on acceptable terms when required, we may be required to significantly curtail our operations or may not be able to fund expansion, take advantage of unanticipated acquisition opportunities, develop or enhance services or products or respond to competitive pressures. Such inability could have a material adverse effect on our business, results of operations and financial condition.  If additional funds are raised through the issuance of equity or convertible debt securities, the percentage ownership of our shareholders will be reduced, shareholders may experience additional dilution, and such securities may have rights, preferences and privileges senior to those of our common stock.



We and our Chief Executive Officer are the subject of SEC and Justice Department proceedings for securities fraud.



On August 7, 2002, the United States Attorney for the Eastern District of New York and the Securities and Exchange Commission announced that they were bringing securities fraud charges against Harry Masuda, our Chief Executive Officer, for allegedly paying an unregistered broker an undisclosed commission in September 1999 and February 2000 private placements. The allegations generally charge Mr. Masuda with the failure to adequately disclose to investors in this private placement a commission agreement with Larry Bryant, an unlicensed broker-dealer. Remedies sought in these proceedings include criminal penalties and a bar from service as an officer or director of a publicly-traded company. The SEC also brought securities fraud charges against us for the same transactions, and these charges are still pending.



In June 2000, we undertook a rescission offer to those shareholders who had purchased an aggregate of 427,300 shares of common stock and warrants in the private placements for aggregate proceeds of $640,950. Holders of 222,900 shares of common stock accepted the rescission offer. The other shareholders elected not to rescind their stock purchases.  We paid an aggregate of approximately $300,000 in cash to rescinding shareholders, but could not afford to pay the balance of the rescission offer in cash. Instead, we issued promissory notes, with interest at the rate of 10% per annum, payable upon the earlier of (i) one year from the date of the note or (ii) our receipt of funding sufficient to permit repayment of the principal and interest on the notes.  In 2000 and 2001, holders of $67,500 in principal and interest in the above-referenced promissory notes elected to convert their notes to an aggregate of 206,700 shares of our common stock. The other rescinding holders were paid in full in cash prior to December 31, 2002. As all of the shareholders electing to rescind have now been paid in full (whether in cash or in shares of common stock), we believe that the issues raised by the alleged failure to disclose have been fully resolved. Although we believe that the charges are unwarranted there can be no assurance that Mr. Masuda will be able to continue to serve as our Chief Executive Officer in the event that the Securities and Exchange Commission receives the remedies that it seeks. In January 2005, the United States Government and Mr. Masuda entered into a deferred prosecution agreement which led to a dismissal of all charges against Mr. Masuda following an 18-month deferred prosecution term, which ended in July 2006.  The civil case against us has been stayed at the request of the U.S. Attorney pending completion of the deferred prosecution term.



We are a development stage company, and have a limited operating history on which to evaluate our potential for future success.



We are a development stage company, and have yet to produce or sell any products or services.  We have only a limited operating history upon which you can evaluate our business and prospects, and have yet to develop sufficient experience regarding actual revenues to be received from our products and services.

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You must consider the risks and uncertainties frequently encountered by early stage companies in new and rapidly evolving markets.  If we are unsuccessful in addressing these risks and uncertainties, our business, results of operations and financial condition will be materially and adversely affected.



Our future revenues are unpredictable and our quarterly operating results may fluctuate significantly.



We have a very limited operating history, and have no revenue to date. We cannot forecast with any degree of certainty whether any of our products or services will ever generate revenue or the amount of revenue to be generated by any of our products or services. In addition, we cannot predict the consistency of our quarterly operating results. Factors which may cause our operating results to fluctuate significantly from quarter to quarter include:



-  our ability to attract new and repeat customers;



-  our ability to keep current  with  the evolving requirements of our target market;



-  our ability to protect our proprietary technology;



-  the ability of our  competitors to offer new or enhanced products or  services; and



-  unanticipated  delays or cost  increases  with  respect to research and development.



Because of these and other factors, we believe that quarter-to-quarter comparisons of our results of operations are not good indicators of our future performance.  If our operating results fall below the expectations of securities analysts and investors in some future periods, then our stock price may decline.



Acts of terrorism, responses to acts of terrorism and acts of war may impact our business and our ability to raise capital.



Future acts of war or terrorism, national or international responses to such acts, and measures taken to prevent such acts may harm our ability to raise capital or our ability to operate, especially to the extent we depend upon activities conducted in foreign countries, such as Russia where we currently maintain a branch office.  In addition, the threat of future terrorist acts or acts of war may have effects on the general economy or on our business that are difficult to predict.  We are not insured against damage or interruption of our business caused by terrorist acts or acts of war.



We may fail to establish and maintain strategic relationships.



We believe that the establishment of strategic partnerships will greatly benefit the growth of our business, and we intend to seek out and enter into strategic alliances.  We may not be able to enter into these strategic partnerships on commercially reasonable terms, or at all.  Even if we enter into strategic alliances, our partners may not attract significant numbers of customers or otherwise prove advantageous to our business. Our inability to enter into new distribution relationships or strategic alliances could have a material and adverse effect on our business.



Risk Factors Related To Our Platelet And Organ Preservation Business



Establishing our revenues and achieving profitability will depend on our ability to develop and commercialize our products.



Much of our ability to establish revenues and to achieve profitability and positive cash flows from operations will depend on the successful introduction of our products in development.  Products based on our technologies will represent new methods of treatment and preservation. Our prospective customers, including blood banks, hospitals and clinics, will not use our products unless they determine that the benefits provided by these products are greater than those available from competing products.  Even if the advantage from our planned products is clinically established, prospective customers may not elect to use such products for a variety of reasons.





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We may be required to undertake time-consuming and costly development activities and seek regulatory clearance or approval for new products. The completion of the development and commercialization of any of our products under development remains subject to all of the risks associated with the commercialization of new products based on innovative technologies, including unanticipated technical or other problems, manufacturing difficulties and the possible insufficiency of the funds allocated for the completion of such development.



We may fail to obtain government approval of our processes.



The FDA regulates the commercial distribution and marketability of medical solutions and equipment.  In the event that we determine that these regulations apply to our proposed tissue preservation products, we will need to obtain FDA approval for such distribution.  The process of obtaining FDA approval may be expensive, lengthy and unpredictable.  We have not developed our products to the level where these approval processes can be started.  We do not know if such approval could be obtained in a timely fashion, if at all.  In the event that we do not receive any required FDA approval for certain products, we would not be able to sell such products in the United States.



The regulation of our processes and products outside the United States will vary by country. Noncompliance with foreign country requirements may include some or all of the risks associated with noncompliance with FDA regulation as well as other risks.

We may not be able to compete successfully.



As a development stage company, we are entering a biological material preservation market that is presently addressed by large companies with extensive financial resources.  Those companies include DuPont and Baxter, among others.  Additionally, smaller companies with which we may compete include LifeCell Corporation for platelet preservation, Cerus for viral inactivation of platelets and other blood products and Cryo Life for preserving heart valves by cryo-preservation. These companies are active in research and development of biological material preservation.  We have limited funds with which to develop products and services.  These companies are active in research and development of biological material preservation, and we do not know the current status of their development efforts.  We have limited funds with which to develop products and services, and most of the above competitors have significantly greater financial resources, technical expertise and managerial capabilities than we currently possess.



Risk Factors Related To Our Planned Ethanol Production Business



We have no prior experience in the development or operation of ethanol production facilities.



Effective September 1, 2006, we entered into the alternative energy market through our agreement with EXL, discussed above.  Prior to that time, we had not been involved in any aspect of the alternative energy or ethanol production industries.  Although we have retained the services of EXL pursuant to the Consulting Services Agreement, EXL has only participated in the development of one ethanol production facility (which development has not yet been completed).  There can be no assurance that we will be successful in developing any ethanol production facilities or operate them profitably.  We have not generated revenues since our inception and we may never achieve profitability.



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The cost of developing our ethanol production facilities could increase significantly, requiring additional capital.  We may not be able to raise all of the capital required to fund the development of ethanol production facilities.



We have estimated the initial cost of developing two ethanol production facilities at approximately $2,000,000 each, based on a budget provided by EXL. Development costs include the securing of appropriate sites through an option or conditional sales contract on each property, permits necessary to construct an ethanol facility, engineering drawing and the necessary conditions required by long term debt and equity funding sources to proceed with construction.  The development budget does not include construction of ethanol production facilities.  We currently estimate that a typical ethanol production plant will cost between $200 million and $250 million dollars to complete construction.  There can be no assurance that the final cost of the facilities will not be higher.   Certain events and conditions, such as delays, change orders and site conditions that may differ from what we expect could lead to significant increases in our project costs.  Delays and changes are not uncommon in construction projects.  We may modify or change the location of the ethanol facilities if we run into problems or delays at our planned sites.  Increases in the estimated costs of our ethanol production facilities would require us to obtain additional financing, which may be difficult to obtain on favorable terms, if at all.  See We Require Immediate Additional Capital above.



Delays in constructing our ethanol production facilities may hinder our ability to timely commence operations.



Delays in completing the construction of our ethanol production facilities could occur because of, among other things, acts of God, defects in material or workmanship, labor or material shortages, permitting or zoning delays, failure to locate or reach acceptable agreements for the real property upon which our facilities will be built, changes in the location of our proposed facilities for a variety of reasons, or the need to obtain additional capital.  We have developed what we believe to be a reasonable timetable for completing the facilities.  Our schedule depends on the accuracy of the assumptions underlying our plan of operations, and these assumptions are based upon agreements and plans that we have not yet begun to negotiate or are not yet final or executed.  These include, among others, our construction schedule, obtaining appropriate sites on acceptable terms, our ability to obtain necessary permits, and our ability to secure third party purchasers or marketers for our products before the ethanol plant is completed.   There can be no assurance that we can reach acceptable terms for any of these agreements, or that the plans will materialize according to our assumptions.  Any of these could delay completion of the ethanol production facilities.  Delays will hinder our ability to timely commence operations and generate revenue.



We will depend on contractors and others to construct our ethanol production facilities, and any defects in material, workmanship or design will hinder our ability to operate the facilities.



We will depend on the services of third party contractors and others to design and build our ethanol production facilities.  We have not entered into any agreements with such contractors or third parties, and there can be no assurance that we will reach agreements with any of them.  We anticipate that these contractors and third parties will be involved with other ethanol projects.  Such involvement may take time and attention away from our project, which could delay the completion and start-up operation of our ethanol production facilities.  Defects in material, workmanship or design are not uncommon in construction projects such as ours.  We will rely on our contractors and third party service providers to address any such deficiencies.  Any such failures could cause a delay or halt in operations, which could damage our ability to generate revenues from ethanol production.



If the expected increase in ethanol demand does not occur, or if the demand for ethanol decreases, there may be excess capacity in our industry.



Domestic ethanol production capacity has increased steadily from 1.7 billion gallons per year in January of 1999 to 4.8 billion gallons per year at June 2006 according to the Renewable Fuels Association, or RFA. In addition, there is a significant amount of capacity being added to our industry. We believe that approximately 2.0 billion gallons per year of production capacity is currently under construction. This capacity is being added to address anticipated increases in demand. Moreover, under the United States Department of Agricultures CCC Bioenergy Program, which expired September 30, 2006 but is currently subject to a proposal for extension, the federal government would make payments of up to $300 million annually to ethanol producers that increase their production. While there can be no assurance that the CCC Bioenergy Program will be extended, such extension could create an additional incentive to develop excess capacity. However, demand for ethanol may not increase as quickly as expected, or at all. If the ethanol industry has excess capacity, a fall in prices will likely occur which will have an adverse impact on our results of operations, cash flows and financial condition. Excess capacity may result from the increases in capacity coupled with insufficient demand. Demand could be impaired due to a number of factors, including regulatory developments and reduced United States gasoline consumption. Reduced gasoline consumption could occur as a result of increased gasoline or oil prices. For example, price increases could cause businesses and consumers to reduce driving or acquire vehicles with more favorable gasoline mileage capabilities.



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Corn prices will fluctuate and could increase significantly in the future, which will increase our operating results if we cannot pass on any of the increased costs to our customers.



We will require significant amounts of corn to produce ethanol.  The price of corn, as with most other crops, is affected by weather, disease, changes in government incentives, demand and other factors.  A significant reduction in the supply of corn, or an increase in the demand for corn, could result in higher corn prices.  There is little correlation between the price of corn and the price of ethanol, and therefore increases in corn prices would most likely reduce our profit margin.  Substantial increases in the price of corn in 1996 caused some ethanol plants to temporarily cease production or operate at a loss.  The price of corn has fluctuated significantly in the past and may fluctuate significantly in the future.  If corn prices increase, our production costs will increase and our profit margins will decrease because we may not be able to pass any of the increased costs on to our customers.



The ethanol and alternative fuel industries are extremely competitive, and we may not have sufficient resources to compete.



Competition in the ethanol industry is intense.  We will face competition from other companies seeking to develop large-scale ethanol facilities.  Many of these developers have significantly more experience and financial and other resources than us.  In addition, our ethanol production facilities will compete with those of other ethanol producers, many of whom are more experienced and have access to greater financial resources.  Some of these producers will be capable of producing a significantly greater amount of ethanol and will compete with us for corn and product markets.  Nationally, the ethanol industry may become more competitive given the substantial amount of construction and expansion that is occurring in the industry.  We may also compete with ethanol that is produced or processed in certain countries in Central America and the Caribbean, Brazil and other countries.  Although tariffs presently impede large imports of Brazilian ethanol into the United States, low production costs, other factors or tariff reductions could make ethanol imports from various countries a major competitive factor in the United States.



In addition, we will compete against producers of other gasoline additives having similar octane and oxygenate values as ethanol, such as producers of methyl tertiary butyl ether or MTBE.  Many major oil companies produce MTBE and strongly support its use because it is petroleum-based.  These major oil companies have substantial resources to market MTBE, to develop alternative products and to influence legislation and the publics perception about the relative benefits of MTBE and ethanol.  These companies also have resources to build plants and begin producing ethanol should they choose to do so.  We may not have sufficient resources to compete against the ethanol and other fuel additive producers in the industry.



Technological advances could significantly decrease the cost of producing ethanol or result in the production of higher quality ethanol, and if we are unable to adopt or incorporate technological advances into our operations, our proposed ethanol plant could become noncompetitive or obsolete.

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We anticipate that technological advances in the processes and procedures for producing ethanol will continue to occur.  It is possible that those advances could decrease the cost of producing ethanol or result in the production of higher quality ethanol.  If we are unable to adopt or incorporate these technological advances, our ethanol production methods and processes could be less efficient than our competitors, which could cause our ethanol plant to become uncompetitive.  In addition, alternative fuels, additives and oxygenates are continually under development.  Alternative fuel additives that can replace ethanol may be developed, which may decrease the demand for ethanol.  It is also possible that technological advances in engine and exhaust system design and performance could reduce the use of oxygenates, which would lower the demand for ethanol.  Any of these factors could have a material adverse effect on our business or financial condition.



We may experience problems in selling our ethanol.



We do not intend to hire a sales staff to market our ethanol.  We expect to enter into agreements with third party distributors to market and sell our ethanol; however, we have not yet reached any such agreements or understandings.  If we are unable to secure the services of third party distributors, we will not have any readily available means to sell our ethanol.



Competition for qualified personnel in the ethanol industry is intense, and we may not be able to hire or retain qualified managers or employees.



When completion of our ethanol production facilities nears completion, we will need a significant number of employees to operate the facilities.  Our success will depend in part upon our ability to attract and retain qualified personnel to a rural community.  Competition for employees in the ethanol industry is intense.  We cannot assure you that we will be able to attract and retain qualified personnel.



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The ethanol industry is highly dependent upon a myriad of federal and state legislation and regulation and any changes in such legislation or regulation could materially adversely affect our results of operations and financial condition.



The elimination or significant reduction in the Federal Excise Tax Credit could have a material adverse effect on our results of operations.



The production of ethanol is made significantly more competitive by federal tax incentives. The Federal Excise Tax Credit, or FETC, program, which is scheduled to expire on December 31, 2010, allows gasoline distributors who blend ethanol with gasoline to receive a federal excise tax rate reduction for each blended gallon they sell regardless of the blend rate. The current federal excise tax on gasoline is $0.184 per gallon, and is paid at the terminal by refiners and marketers. If the fuel is blended with ethanol, the blender may claim a $0.51 tax credit for each gallon of ethanol used in the mixture. The FETC may not be renewed prior to its expiration in 2010, or if renewed, it may be renewed on terms significantly less favorable than current tax incentives. The elimination or significant reduction in the FETC could have a material adverse effect on our results of operations.



Waivers of the Renewable Fuels Standard minimum levels of renewable fuels included in gasoline could have a material adverse affect on our results of operations.



Under the Energy Policy Act of 2005, the Department of Energy, in consultation with the Secretary of Agriculture and the Secretary of Energy, may waive the Renewable Fuels Standard, or RFS, mandate with respect to one or more states if the Administrator determines that implementing the requirements would severely harm the economy or the environment of a state, a region or the United States, or that there is inadequate supply to meet the requirement. In addition, the Department of Energy was directed under the Energy Policy Act of 2005 to conduct a study by January 2006 to determine if the RFS will have a severe adverse impact on consumers in 2006 on a national, regional or state basis. Based on the results of the study, the Secretary of Energy must make a recommendation to the EPA as to whether the RFS should be waived for 2006. Any waiver of the RFS with respect to one or more states or with respect to 2006 would adversely offset demand for ethanol and could have a material adverse effect on our results of operations and financial condition.



While the Energy Policy Act of 2005 imposes the RFS, it does not mandate the use of ethanol and eliminates the oxygenate requirement for reformulated gasoline in the Reformulated Gasoline Program included in the Clean Air Act.



The Reformulated Gasoline, or RFG, programs oxygenate requirements contained in the Clean Air Act, which, according to the RFA, accounted for approximately 2.0 billion gallons of ethanol use in 2004, was completely eliminated on May 5, 2006 by the Energy Policy Act of 2005. While the RFA expects that ethanol should account for the largest share of renewable fuels produced and consumed under the RFS, the RFS is not limited to ethanol and also includes biodiesel and any other liquid fuel produced from biomass or biogas. The elimination of the oxygenate requirement for reformulated gasoline in the RFG program included in the Clean Air Act may result in a decline in ethanol consumption in favor of other alternative fuels, which in turn could have a material adverse effect on our results of operations and financial condition.



We may be adversely affected by environmental, health and safety laws, regulations and liabilities.



We are subject to various federal, state and local environmental laws and regulations, including those relating to the discharge of materials into the air, water and ground, the generation, storage, handling, use, transportation and disposal of hazardous materials, and the health and safety of our employees. In addition, some of these laws and regulations require our facilities to operate under permits that are subject to renewal or modification. These laws, regulations and permits can often require expensive pollution control

equipment or operational changes to limit actual or potential impacts to the environment. A violation of these laws and regulations or permit conditions can result in substantial fines, natural resource damages, criminal sanctions, permit revocations and/or facility shutdowns. In addition, we expect to make, significant capital expenditures on an ongoing basis to comply with increasingly stringent environmental laws, regulations and permits.



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We may be liable for the investigation and cleanup of environmental contamination at each of the properties that we own or operate and at off-site locations where we arrange for the disposal of hazardous substances. If these substances have been or are disposed of or released at sites that undergo investigation and/or remediation by regulatory agencies, we may be responsible under certain environmental laws for all or part of the costs of investigation and/or remediation, and for damages to natural resources. We may also be subject to related claims by private parties alleging property damage and personal injury due to exposure to hazardous or other materials at or from those properties. Some of these matters may require us to expend significant amounts for investigation, cleanup or other costs.



In addition, new laws, new interpretations of existing laws, increased governmental enforcement of environmental laws or other developments could require us to make additional significant expenditures. Continued government and public emphasis on environmental issues can be expected to result in increased future investments for environmental controls at our production facilities. Present and future environmental laws and regulations (and interpretations thereof) applicable to our operations, more vigorous enforcement policies and discovery of currently unknown conditions may require substantial expenditures that could have a material adverse effect on our results of operations and financial position.



The hazards and risks associated with producing and transporting our products (such as fires, natural disasters, explosions, and abnormal pressures and blowouts) may also result in personal injury claims or damage to property and third parties. Events that result in significant personal injury or damage to our property or third parties or other losses that are not fully covered by insurance could have a material adverse effect on our results of operations and financial position.



We may not be able to compete successfully in the ethanol production and marketing industry.



The ethanol production and marketing industry is extremely competitive. Many of our significant competitors in the ethanol production and marketing industry, such as Archer Daniels Midland Company, or ADM, Cargill, Inc., VeraSun Energy Corporation, Aventine Renewable Energy, Inc., and Abengoa Bioenergy Corp., have substantially greater production, financial, research and development, personnel and marketing resources than we do. In addition, we are not currently producing any ethanol that we sell and therefore are unable to capture the higher gross profit margins generally associated with production activities. As a result, our competitors, who are presently producing ethanol, may have greater relative advantages resulting from greater capital resources due to higher gross profit margins. As a result, our competitors may be able to compete more aggressively and sustain that competition over a longer period of time than we could. Our lack of resources relative to many of our significant competitors may cause us to fail to anticipate or respond adequately to new developments and other competitive pressures. This failure could reduce our competitiveness and cause a decline in our market share, sales and profitability.



Risk Factors Related To Our Securities



Shares eligible for future sale by our current stockholders may adversely affect our stock price.



To date, we have had a very limited trading volume in our common stock.  As long as this condition continues, the sale of a significant number of shares of common stock at any particular time could be difficult to achieve at the market prices prevailing immediately before such shares are offered.  In addition, sales of substantial amounts of common stock, including shares issued upon the exercise of outstanding options and warrants, under Securities and Exchange Commission Rule 144 or otherwise could adversely affect the prevailing market price of our common stock and could impair our ability to raise capital at that time through the sale of our securities.  A number of our employees and consultants have elected to convert a portion of their compensation to shares of our common stock, and these shares have been registered for resale to the public.



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Our common stock price is likely to be highly volatile; our common stock is penny stock.



The market price of our common stock is likely to be highly volatile as the stock market in general, and the market for technology companies in particular, has been highly volatile.  The trading prices of many technology companies' stocks have recently been highly volatile and have recorded lows well below historical highs.



Factors that could cause such volatility in our common stock may include, among other things:



-  actual or anticipated fluctuations in our quarterly operating results;



-  announcements of  technological innovations;



-  changes in financial estimates by securities analysts;



-  conditions or trends in our industry; and



-  changes in the market valuations of other comparable companies.



In addition, our stock is currently traded on the NASD OTC Bulletin Board and it is uncertain that we will be able to successfully apply for listing on the AMEX or the NASDAQ Capital Market in the foreseeable future due to the trading price of our common stock, our working capital and revenue history.  Failure to list our shares on the AMEX or the NASDAQ Capital Market will impair the liquidity of our common stock.



The Securities and Exchange Commission has adopted regulations which generally define a "penny stock" to be any security that 1) is priced under five dollars, 2) is not traded on a national stock exchange or on NASDAQ, 3) may be listed in the "pink sheets" or the NASD OTC Bulletin Board, and 4) is issued by a company that has less than $5 million in net tangible assets and has been in business less than three years, or by a company that has under $2 million in net tangible assets and has been in business for at least three years, or by a company that has revenues of less than $6 million for three years.



Penny stocks can be very risky, as they are low-priced shares of small companies not traded on an exchange or quoted on NASDAQ.  Prices often are not available. Investors in penny stocks are often unable to sell stock back to the dealer that sold them the stock.  Thus, an investor may lose his/her investment.  Our common stock is a penny stock and thus is subject to rules that impose additional sales practice requirements on broker/dealers who sell such securities to persons other than established customers and accredited investors, unless the common stock is listed on NASDAQ. Consequently, the penny stock rules may restrict the ability of broker/dealers to sell our securities, and may adversely affect the ability of holders of our common stock to resell their shares in the secondary market.



Some of the information in this quarterly report contains forward-looking statements.



Some of the information in this Quarterly Report contains forward-looking statements that involve substantial risks and uncertainties.  You can identify these statements by forward-looking words such as "may," "will," "expect," "intend," "anticipate," "believe," "estimate" and "continue" or similar words.  You should read statements that contain these words carefully because they:



-     discuss our expectations about our future performance;



-     contain projections of our future operating results or of our future financial condition; or



-     state other "forward-looking" information.



We believe it is important to communicate our expectations to our shareholders.  There may be events in the future, however, that we are not able to predict accurately or over which we have no control.  The risk factors listed in this section, as well as any cautionary language in this Quarterly Report, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements.



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ITEM 2.  Unregistered Sales of Equity Securities and Use of Proceeds.



Set forth in chronological order is information regarding shares of common stock issued and options and warrants and other convertible securities granted by us during the three months ended June 30, 2007.  Also included is the consideration, if any, received by us for such shares, options and warrants, and information relating to the section of the Securities Act of 1933, as amended (the "Securities Act"), or the rule of the Securities and Exchange Commission, under which an exemption from registration was claimed.



In April 2007, we issued an aggregate of 100,000 shares of common stock and warrants to purchase an aggregate of 900,000 shares of common stock, valued at $30,000, to a lender as loan fees. The issuance was made in reliance on Section 4(2) of the Act and was made without general solicitation or advertising. The recipient was a sophisticated investor with access to all relevant information necessary to evaluate the investment, who represented to us that the shares were being acquired for investment purposes.



In April 2007, we issued an aggregate of 50,000 shares of common stock, valued at $4,000, and warrants to purchase an aggregate of 50,000 shares of common stock, also valued at $4,000, for services related to a project for HBS Bio.  The issuance was made in reliance on Section 4(2) of the Act and was made without general solicitation or advertising.  The recipient was a sophisticated investor with access to all relevant information necessary to evaluate the investment, who represented to us that the shares were being acquired for investment purposes.



In May 2007, we issued an aggregate of 250,000 shares of common stock, valued at $25,000, to a lender as loan fees. The issuance was made in reliance on Section 4(2) of the Act and was made without general solicitation or advertising. The recipient was a sophisticated investor with access to all relevant information necessary to evaluate the investment, who represented to us that the shares were being acquired for investment purposes.



In June 2007, we issued an aggregate of 200,000 shares of common stock, valued at $10,000, to a director in consideration for certain services.   The issuance was made in reliance on Section 4(2) of the Act and was made without general solicitation or advertising. The recipient was a sophisticated investor with access to all relevant information necessary to evaluate the investment, who represented to us that the shares were being acquired for investment purposes.



In June 2007, we issued 50,000 shares of common stock to an investor in consideration for cash in the amount of $2,300.  The issuance was made in reliance on Section 4(2) of the Act and was made without general solicitation or advertising.  The recipient was a sophisticated investor with access to all relevant information necessary to evaluate the investment, who represented to us that the shares were being acquired for investment purposes.



In June 2007, we issued warrants to purchase an aggregate of 91,700 shares of common stock, valued at an aggregate of $9,100, in satisfaction of certain accounts payable.   The issuance was made in reliance on Section 4(2) of the Act and was made without general solicitation or advertising.  The recipient was a sophisticated investor with access to all relevant information necessary to evaluate the investment, who represented to us that the shares were being acquired for investment purposes.



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In the second quarter of 2007, we issued an aggregate of 31,200 shares of common stock valued at an aggregate of $3,100 in satisfaction of certain accounts payable.   The issuances were made in reliance on Section 4(2) of the Act and were made without general solicitation or advertising.  The recipients were sophisticated investors with access to all relevant information necessary to evaluate the investment, who represented to us that the shares were being acquired for investment purposes.



In the second quarter of 2007, we issued an aggregate of 64,100 shares of restricted common stock and an aggregate of 64,000 shares of free-trading common stock, valued at an aggregate of $11,900, for certain services related to public relations.   The issuances were made in reliance on Section 4(2) of the Act and were made without general solicitation or advertising.  The recipient was a sophisticated investor with access to all relevant information necessary to evaluate the investment, who represented to us that the shares were being acquired for investment purposes.



ITEM 3.  Defaults Upon Senior Securities.



Not applicable.



ITEM 4.  Submission of Matters to a Vote of Security Holders.



We held our annual meeting of stockholders at the offices of Silicon Valley Law Group, 25 Metro Drive, Suite 600, San Jose, California 95110, on May 11, 2007. At the annual meeting, our shareholders were asked to vote on the following proposals:



1.

Elect three members of our Board of Directors, each to serve on our Board until the 2008 annual meeting of stockholders or until his respective successor is duly elected and qualified;

2.

Amend our Amended and Restated 2001 Stock Option Plan (the Plan) to increase the number of shares of common stock issuable under the Plan;

3.

Amend our Amended and Restated Articles of Incorporation to increase the number of authorized shares of common stock, no par value, from 150,000,000 to 300,000,000;

4.

Amend our Amended and Restated Articles of Incorporation to increase the number of authorized shares of preferred stock, no par value, from 5,000,000 to 10,000,000;

5.

Amend our Bylaws to modify the number of our Directors to a range between three and seven, with the exact number of Directors to be fixed by a resolution of the Board of Directors; and

6.

Transact such other business as may properly come before the annual meeting and any adjournments or postponements.

60,501,881 of the 99,169,163 shares of issued and outstanding common stock were represented at the annual meeting. The proposals were voted on as follows:



1.

Election of the following persons to our Board of Directors:

|               |            |               |                         
|-------------- | ---------- | ------------- | ------------------------
|Nominee        | Votes For  | Votes Against | Votes Withheld/Abstained
|Harry Masuda   | 59,368,585 | 1,125,296     | 8,000                   
|Paul Okimoto   | 59,377,435 | 1,115,196     | 9,250                   
|Larry McCleary | 59,373,875 | 1,118,756     | 9,250                   



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2.

Proposal to amend the Plan to increase the number of shares of common stock issuable under the Plan:

For:

33,694,359

Against:

736,425

Abstain/Withhold:

814,950



3.

Proposal to amend our Amended and Restated Articles of Incorporation to increase the number of shares of authorized common stock from 150,000,000 to 300,000,000:

For:

57,583,636

Against:

2,897,760

Abstain/Withhold:

20,485



4.

Proposal to amend our Amended and Restated Articles of Incorporation to increase the number of shares of authorized preferred stock from 5,000,000 to 10,000,000:

For:

34,412,824

Against:

2,897,760

Abstain/Withhold:

15,783



5.

Proposal to amend our Bylaws to modify the number of our Directors to a range between three and seven, with the exact number of Directors to be fixed by a resolution of the Board of Directors:

For:

58,625,181

Against:

1,009,371

Abstain/Withhold:

867,329



.



ITEM 5.  Other Information.



Not applicable.



ITEM 6.  Exhibits.



|              |                                     
|------------- | ------------------------------------
|Exhibit No.   | Description                         
|------------- | ------------                        
|              |                                     
|31.01         | Rule 13a-14(a)/15d-14a Certification
|              |                                     
|32.01         | Section 1350 Certification          



Signatures



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



|                                                          
|----------------------------------------------------------
|HUMAN BIOSYSTEMS                                          
|                                                          
|Date: August 14, 2007                                     
|                                                          
|/s/ Harry Masuda                                          
|Harry Masuda                                              
|Chief Executive Officer and Acting Chief Financial Officer





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