<PAGE>   1
                                    FORM 10-K

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K
                ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

                    FOR THE FISCAL YEAR ENDED APRIL 30, 1998

                           COMMISSION FILE NO. 2-31909

                       SYNTHETIC BLOOD INTERNATIONAL, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

      NEW JERSEY                                        22-3067701
(STATE OF INCORPORATION)                    (IRS EMPLOYER IDENTIFICATION NUMBER)

                    2685 CULVER AVENUE, KETTERING, OHIO 45429
               (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (937) 298-6070

        SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE

        SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE

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

(1)           YES (X) NO

(2)           YES (X) NO

       Indicate by check mark if disclosure of delinquent filings pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K.

              YES (X) NO

       Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: The aggregate market
value of the shares held by non-affiliates of the registrant (assuming officers,
directors and 10% shareholders are affiliates) was approximately $9,923,625
based on the closing bid price of the Registrants Common Stock on April 30, 1998
of $0.22 per share.

       List hereunder the following documents if incorporated by reference and
the Part of the Form 10-K into which the document is incorporated: (1) Any
annual report to security holders; (2) Any proxy or information statement; and
(3) Any prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act
of 1933. None of the above-listed documents are incorporated by reference.


<PAGE>   2
                                            PART 1

ITEM 1 - BUSINESS

       Synthetic Blood International, Inc. ("SBI" or the "Company") is a
development-stage company which is developing OXYCYTE, a proprietary synthetic
blood emulsion and FLUOROVENT, a liquid for assisting oxygen exchange in damaged
or diseased lungs for human and non-human applications based upon
perfluorocarbon ("PFC") technology. In addition the Company has developed an
implantable continuous reading glucose biosensor. The Company is now in the
preclinical stage and is completing activities necessary for the preparation of
applications with the United States Food and Drug Administration ("FDA") to
begin clinical testing. After the submission to the FDA, the Company's products
will require extensive clinical testing before FDA approval may be granted. No
assurance may be given that FDA approval will be granted.

       SBI's scientific team has been led by Dr. Leland C. Clark, Jr. who is a
pioneer and leader with a world-wide reputation in the development of PFC-based
synthetic blood. Dr. Clark invented the first heart-lung machine which
successfully provided oxygen to the blood stream of a human being. The treatment
of this patient showed the feasibility of using an artificial heart and lung to
sustain life. Dr. Clark also invented the Clark Electrode, which is utilized
worldwide to measure oxygen in the blood and for many other commercial oxygen
measuring needs in industry. The research that led to the Clark Electrode became
the basis for a growing biosensor industry which has included electrochemical
devices to measure glucose, lactate and other chemical compounds produced in the
human body. Dr. Clark has also experimented with fluorocarbon liquid breathing
which was the catalyst for the development of fluorocarbon based synthetic blood
substitutes.

       The Company began conducting business in its current form in September
1990, shortly thereafter changed its name to Synthetic Blood International,
Inc., and revised its business purpose to developing a line of blood
substitutes.

MARKET

        FLUOROVENT - Thousands of premature infants are born each year with
underdeveloped lungs and a condition of impaired pulmonary function known as
infant respiratory distress syndrome (IRDS). This syndrome has multiple causes
and also occurs in children and adults (ARDS). Although many of these patients
are treated with mechanical ventilation, this treatment can add further injury
to the lungs and the mortality rate is still high. This has prompted research
for a safer, more effective treatment. While more research is needed, current
studies with partial liquid ventilation in animals and patients, both infants
and adult suggest that liquid ventilation may be a safe and effective treatment
of ARDS.

       Fluorovent, a unique oxygen-carrying perfluorocarbon, has been selected
for the treatment of ARDS after screening dozens of available perfluorocarbons
for optimal properties. When given as a liquid directly into the lungs, it acts
as a surfactant and a highly effective medium for gas exchange, thus increasing
pulmonary function and the diffusion of oxygen and carbon dioxide.

       Based on laboratory and animal studies thus far, SYBD believes that
Fluorovent has significant competitive advantages as a liquid ventilation
treatment. Its boiling point and vapor pressure result in longer pulmonary
retention without the need for continuous replacement of evaporated fluid,
offering the potential for less costly, less time-intensive procedures. It doses
not contain bromine or chlorine and thus presents no environmental hazard. In
animals, it does not produce a hyperinflated, noncollapsible lung condition seen
with other perfluorocarbon liquids being tested.

       The incident of ARDS in the US is about 250,000 cases annually. While
ARDS is the primary disease target for Fluorovent at this time, SYBD believes
that it may also be beneficial in chronic obstructive pulmonary disease (COPD),
a condition that occurs in 10 million people in the US. The number of ARDS and
COPD cases in the rest of the world is estimated to be at least twice that of
the US. The company believes that the ultimate market for Fluorovent may be in
the multi billion dollar range.



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<PAGE>   3
        OXYCYTE - The search for blood replacement fluids began centuries ago.
In modern times, this search has been given a new impetus by the threat of
disease transmission, most notably HIV and hepatitis C. The risks are low but
unacceptable because of the high death rate from these diseases. In
underdeveloped countries, the risk of serious disease transmission is much
greater.

        An increasingly short supply of blood is also driving this research. In
the US, the number of blood donors continues to fall while the number of
elderly, the group that needs blood the most, is growing. By 2030, experts
project an annual shortfall of 4 million units in the US. In other countries
where cultural and logistical issues constrain blood collection even more, the
shortfall will be much greater.

       The third major force behind this search is the military's desire for a
blood substitute that can be stockpiled and used immediately when needed in
battlefield conditions without special storage and matching of human donor
blood. Current techniques for blood transfusions do not, of course, meet these
requirements.

       SYBD is developing Oxycyte, an oxygen-carrying intravenous emulsion made
from the same base perfluorocarbon in Fluorovent. Blood gases such as oxygen and
carbon dioxide are highly soluble in perfluorocarbons, making Oxycyte an
effective means of transporting oxygen to tissues and carbon dioxide to the
lungs. In comparison to hemaglobin, the component of blood that binds with and
transports oxygen, Oxycyte can carry at least five times more oxygen.
Additionally, perfluorocarbons are much more effective than hemoglobin at
unloading oxygen at the tissue level. Potential uses for Oxycyte include
surgery, trauma, angioplasty, open heart surgery and oxygenation of tumors
during radiation or chemotherapy.

       Approximately 100 million units of human donor blood are collected in the
US each year. The global market for blood substitutes has been estimated at $2-5
billion.

       GLUCOSE SENSOR - Diabetes and its associated complications are among the
most prevalent, costly diseases in the world. Its incidence is increasing at a
significant rate. Diabetes affects men and women equally but occurs most
frequently in the elderly. Direct costs are estimated at about $50 billion,
almost 6% of the total personal healthcare expenditures in the US.

       A ten-year study, the Diabetes Control and Complications Trial (DCCT)
sponsored by the national Institutes of Diabetes and Digestive and Kidney
Diseases, showed that "tight diabetes control", keeping blood sugar levels close
to normal by frequent blood sugar testing, several daily insulin shots and
lifestyle changes, was associated with a major reduction in diabetic
complications. These findings led the American Diabetes Association to recommend
tight control as an important way to delay the onset and dramatically slow the
progression of complications from diabetes.

       People with diabetes measure their blood glucose levels by sticking a
finger with a needle to obtain a blood drop that is placed on a test strip and
analyzed by a portable instrument. Repeating this procedure several times a day
becomes painful, leading many patients, especially the elderly, to perform the
procedure infrequently. Furthermore the accuracy of some blood glucose analyzers
is poor.

       SYBD has developed an implantable glucose biosensor to monitor blood
glucose without the need for finger sticks. Termed a biosensor because it
utilizes an enzyme specific for glucose, it provides glucose measurements
significantly more accurate than possible from current portable measuring
devices. Once implanted in subcutaneous tissue during a simple outpatient
procedure, the biosensor, which is about the size of a cardiac pacemaker,
provides continuous, accurate monitoring of blood glucose which is displayed as
a digital readout in a wearable beeper-sized device. Ultimately, the biosensor
will be linked to an implanted insulin pump, creating a closed-loop mechanical
pancreas. It is anticipated that the implant life of the biosensor will exceed
one year.

       More than 16 million people, approximately half undiagnosed, are
estimated to suffer from diabetes in the US. Between 600,000 and 700,000 new
cases are diagnosed each year. Mortality from diabetes and its associated



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<PAGE>   4
complications is high: it is the seventh leading cause of death in the US. SYBD
estimates the global market for the implanted glucose sensor may exceed $1
billion.

MARKETING

       The Company intends to search for strategic partners in Europe, the Far
East or elsewhere for the purposes of completing development of its products,
manufacturing, testing and marketing its products under development for
distribution in these areas. To date no agreements have been completed although
a number of negotiations are in progress. There can be no assurance that any
such agreement will be consummated.

       The Company plans on initially contracting for the manufacturing of its
products in the United States for the purpose of supplying sufficient quantity
for the proposed clinical testing. The company then has the option to license
out on a royalty basis all or part of its manufacturing and distribution or
establish an organization for the distribution and sale of its products in North
and South America. These sales are anticipated to be made either through a sales
force selling to drug or medical distribution systems or direct sales to end
users such as hospitals and other institutions by future company sales force.

       The marketing of the biosensor device if FDA approval is achieved will
probably be by manufacturing and distribution via licensing agreements with
companies presently involved with distributing products in the diabetic field.
Several of such companies have been contacted and are at present reviewing the
patents and discussing the technology with our Company.

COMPETITION

       Synthetic blood research to date has been focused virtually exclusively
on red cell substitutes. PFC-based hemoglobin substitute, bovine hemoglobin,
modified human hemoglobin and recombinant (genetically engineered) human
hemoglobin are the four main categories of red cell substitutes currently being
pursued.

       PFC's are based on elements and minerals which occur naturally and are in
abundant supply. PFC's must be emulsified with a surfactant before it can be
administered intravenously. Two other companies are developing products using
PFC's.

       Bovine hemoglobin is derived from cow blood. It is not compatible with
human blood and, therefore, requires substantial processing in order to become
usable. Various proteins present in bovine blood must be eliminated lest they
cause an immune response in humans. One other company is working with bovine
hemoglobin.

       Modified human hemoglobin is based on reconstituted, old or otherwise
discarded human blood. Although it is derived from human blood, modified human
hemoglobin can only be used after it has undergone substantial processing.
Several companies are developing modified human hemoglobin.

       Recombinant human hemoglobin has been produced in bacteria, yeast and in
swine. Current efforts are underway to engineer genes which will allow
sufficient quantities of oxygen to be released for the oxygenation of tissues.
Organ toxicity remains a problem to be solved. One company is using bacteria to
grow human hemoglobin for developing a blood substitute.

       One other company is involved with the development of a PFC based liquid
ventilation method utilizing a mechanical ventilator to move the PFC in and out
of the lung. It is currently in Phase II/III Clinical testing.

       There are a number of companies and researchers attempting to develop an
implantable glucose sensor or other approaches which include the use of infrared
light rays, drawing glucose through the skin surface and other noninvasive
mechanical devices. None of these methods have been successful in spite of the
renewed emphasis on the development



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<PAGE>   5
of such a sensor. There are over 10 public and closely held companies involved
worldwide in the development of synthetic blood and related products.

MANUFACTURING AND SOURCES OF SUPPLY

       PFC'S, traditionally manufactured as lubricants for military and
industrial use, are available from a large number of sources. However, the
degree of purity ultimately required by the FDA for the use of PFC'S for medical
purposes could limit the sources for raw materials. Surfactants are also
generally available, although quality varies between different manufacturers.
Certain types of egg yolk phospholipids are superior to others.

PATENTS AND PROPRIETARY RIGHTS

        Patent No. 5,674,9130, issued October 7, 1997,"A Method of Assisting
Normal Breathing in a Mammal Having a Lung Disorder". It utilizes one of the
PFC'S being developed for a synthetic blood emulsion for therapeutic treatment
of certain lung disorders. Foreign application filed in December 1996 in Canada,
Australia, Japan and in the European Communities.

        Patent Application No. 603-03 A Continuation in Part, filed May 12, 1995
for 14 additional claims, was allowed and will be issued later this year.

        Patent application No. 603-01 "Selected C-10 Perfluorinated Hydrocarbons
For Liquid Ventilation and Artificial Blood" was filed November 20, 1997 and is
pending.

       A "Glucose Sensor" patent application was filed in December 1996 for a
method of restricting the flow of glucose through the outer filter membrane and
the ability to store oxygen in the sensor. This enables the implanted sensor to
operate in the low oxygen and high glucose levels found in body tissues. This
application contains 32 claims.

       An "Implantable Sensor Employing an Auxiliary Electrode" patent
application was filed in January 1997 containing 20 claims covering the design
of the titanium case as a reference electrode. This alleviates the need to force
the reference electrode to carry the current allowing the reference electrode to
remain constant and stable, improving the accuracy of the glucose measurement.

       Additional patent applications are in the process of preparation and will
be filed soon for "A Copolymer Screen Membrane with Enhanced Oxygen Transport
for Use in an Implanted Biosensor"and "A Method of Correcting the Temperature
Coefficient of the Glucose Probe Output Signal".

GOVERNMENT REGULATION

       All of the Company's proposed products will require governmental approval
before production and marketing can commence. The regulatory approval process is
administered by the FDA in the United States, and by similar agencies in foreign
countries. FDA review of new drugs, devices or biologicals is an uncertain,
costly and lengthy process. Various state, federal and foreign statutes also
govern or influence the manufacturing, safety, labeling, storage, record keeping
and marketing of such products, ongoing compliance with these requirements can
require the expenditure of substantial resources.

       At the present time, the Company intends to file a "Request for
Jurisdiction" with the FDA for its OXYCYTE(TM) artificial blood product and
FLUOROVENT(TM) for its liquid ventilation product. The FDA's response to these
requests will likely determine whether a subsequent filing by the Company for
that product will be classified as a drug, device or biological. The implantable
glucose sensor will be filed as a device and many of its parts are off-
the-shelf material already approved for human implantation by the FDA. The FDA
has different procedures for drugs, devices and biologicals.



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<PAGE>   6
       Whether or not FDA approval has been obtained, approval of a product by
regulatory authorities in foreign countries must be obtained prior to the
commencement of marketing of the product in such countries. The requirement
governing the conduct of clinical trials and product approvals vary widely from
country to country, and the time required for approval may be longer or shorter
than that required for FDA approval. Although there are some procedures for
unified filings for certain European countries, in general, each country has its
own procedures and requirements.

EMPLOYEES

       On April 30, 1998, the Company employed 9 individuals, four of whom were
scientific personnel with Ph.D.'s, four are executives, and one technician. None
of its employees are currently represented by a union or any other form of
collective bargaining unit.

ITEM 2 - PROPERTIES

       The Company owns no real property and currently leases on a month to
month basis its administrative offices at 4667 MacArthur Blvd., Suite 423,
Newport Beach, California 92660. In addition the company leases office and
workshop space at the Kettering Research Center in Kettering, Ohio. The current
total monthly rent is $1,878 per month.

ITEM 3 - LEGAL PROCEEDINGS

       A legal action against Wright State University and its officers and
directors to protect the privacy of research records held by them under the
Federal Animal Protection Act was settled satisfactorily in June 1996. In
addition, two legal actions filed against the company in Fiscal 1997 where a
liability of $124,000 was established were settled in Fiscal 1998 for a total of
$78,000.

ITEM 4 - SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS

       None.

ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

       On February 26, 1993 the Common Stock of the Company began limited public
trading in the over-the-counter market with prices quoted in the "Pink Sheets"
published by the National Quotation Bureau under the symbol SYBD. On March 15,
1993 the Common Stock of the company began limited public trading on the OTC
Electronic Bulletin Board. From 1973 to February 26, 1993 Management believes
there was no public trading market for any of the registrant's securities. This
past year the lowest bid and highest ask prices as determined by Company records
were as follows:

<TABLE>
<CAPTION>
                                     1998                   1997
            Quarter       Low        High        Low        High
<S>                      <C>         <C>         <C>        <C> 
             lst         $ .13       $.175       $.25       $.65
             2nd           .19         .36        .24        .55
             3rd           .15         .29        .13        .18
             4th          .125         .36        .13        .18
</TABLE>

       As of April 30, 1998 the approximate number of holders of the Common
Stock of the Company was 989. To the best knowledge of management, the Company
has never paid dividends since the date of its incorporation. The Company does
not expect to declare or pay dividends in the foreseeable future.



                                        6

<PAGE>   7
        In March, 1998, a current stockholder of the Company acquired 2,000,000
shares of Common Stock for $.25 per share. The common stock was issued in
reliance upon the exemption from registration pursuant to Section 4(2) of the
Securities Act. Written investment representations were obtained from the
purchaser and a legend was placed on the shares.

ITEM 6 - SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                 April 30,          April 30,          April 30,           April 30,         April 30,
                                   1994                1995               1996               1997               1998
                                ------------       ------------       ------------       ------------       ------------
<S>                             <C>                <C>                <C>                <C>                <C>         
Income                          $        698       $     35,181       $      5,916       $        914       $      3,069
                                ------------       ------------       ------------       ------------       ------------

Total Expenses                  $    874,997       $  1,917,004       $  2,352,143       $  1,911,290       $  1,284,101
                                ------------       ------------       ------------       ------------       ------------

Net Loss from Operations        $    874,299       $  1,881,823       $  2,346,227       $  1,910,376       $  1,281,032
                                ------------       ------------       ------------       ------------       ------------

Weighted average number of
   shares outstanding
   Basic and diluted              21,857,475         26,330,838         28,894,248         36,053,557         46,000,749

Net Loss per share              $      (0.04)      $      (0.07)      $      (0.08)      $      (0.05)      $      (0.03)
   Basic and diluted

Cash                            $  1,653,497       $    767,825       $     76,312       $     53,857       $    740,215

Working Capital                 $  1,296,560       $  1,061,178       $   (581,030)      $   (529,393)      $    228,400

Total Assets                    $  3,075,689       $  1,179,085       $    393,939       $    318,163       $    985,914

Total Liabilities               $    490,299       $    117,907       $    974,969       $    600,675       $    531,340

Long Term Debt                  $          0       $     32,736       $     16,573       $          0       $    103,021

Stockholder's Equity            $  1,585,390       $  1,028,442       $   (597,603)      $   (282,512)      $    351,553
   (Deficit)
</TABLE>

ITEM 7 - MANAGEMENTS DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

RESULTS OF OPERATIONS
FISCAL 1998 COMPARED TO FISCAL 1997

       The Company is a development-stage company which is developing products
in the medical field and therefore has no revenue from operations.

       For the fiscal year ended April 30, 1998, other income increased to
$3,069 from $914 for the fiscal year ended April 30, 1997. This increase was due
to more funds available to earn interest.

       The General and Administrative expenses decreased 20% from $1,437,353 in
the fiscal year ended April 30, 1997 to $1,144,810 during the fiscal year ended
April 30, 1998. This decrease was the result lower legal fees, public relations
and travel expenses.

       The Research and Development expenses decreased 76% from $460,978 for the
fiscal year ended April 30, 1997 to $111,766 during the fiscal year ended April
30, 1998. This decrease was due to a reduction in staffing and outside testing
and raw material costs associated with changing the focus from basic research to
product development with the emphasis on patent application filing.



                                        7

<PAGE>   8
       The interest expense increased 112% from $12,959 for the fiscal year
ended April 30, 1997 compared to the fiscal year ended April 30, 1998 of
$27,525. This increase was due to additional finance and carrying charges
necessitated by the reduced cash flow.

FISCAL 1997 COMPARED TO FISCAL 1996

       For the fiscal year ended April 30, 1997, other income decreased to $914
from $5,916 for the fiscal year ended April 30, 1996 due to a reduction of funds
available for investment.

       The General and Administrative expenses increased 1% from $1,422,809 for
the fiscal year ended April 30, 1996 to $1,437,353 during the fiscal year ended
April 30, 1997.

       The Research and Development expenses decreased 50% from $924,093 for the
fiscal year ended April 30, 1996 to $460,978 for the fiscal year ended April 30,
1997. This decrease was due to a reduction in staffing and outside testing and
raw material costs associated with changing the focus from basic research to
product development with emphasis on patent application filing.

       The interest expense increased for the fiscal year ended April 30, 1996
or $5,241 compared to $12,959 for the fiscal year ended April 30, 1997. This
increase was due to additional finance and carrying charges necessitated by the
reduced cash flow.

EQUITY AND CAPITAL RESOURCES

       The Company has financed its operations since September 1990, when
current management became involved, through the issuance of debt and equity
securities and loans from stockholders. For the fiscal year ended April 30, 1998
the Company had $759,740 in total current assets and working capital of $251,182
compared to $71,282 in total current assets and a working capital deficit of
$529,393 during the fiscal year ended April 30, 1997.

       The Company is in the pre-clinical trial stage in the development of its
products. These products must undergo further development and testing prior to
submission to the FDA for approval to market its products. This additional
development and testing will require significant additional financing.
Additional funds are needed immediately to continue to operate as a going
concern. Funding in the form of bridge loans and future options are currently
being negotiated. There can be no assurance these proposed funding arrangements
will be successful, or that if they are not the Company will be able to secure
additional capital.

       As a result of the Company's accumulated losses from operations, its
accumulated deficit, and its necessity to obtain additional financing to fund
operations until the necessary regulatory approvals are obtained, if ever, its
continuation as a going concern is dependent on its ability to obtain additional
financing as may be required. These factors, among others, raise doubts about
the Company's ability to continue as a going concern.

FORWARD LOOKING STATEMENTS

       Certain statements in this annual report include forward looking
statements which involve risks and uncertainties. Potential risks and
uncertainties include, but are not limited to the company's ability to obtain
financing and FDA approval to market their products.

ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

       The financial statements and supplementary data as required by this item
are set forth in a separate section of this report.

ITEM 9 - CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES



                                        8

<PAGE>   9
       None.

ITEM 10- DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES OF THE REGISTRANT

       The directors, officers and key employees of the Company are as follows:

<TABLE>
<CAPTION>
        Name                         Age    Position
<S>                                  <C>    <C>
        Roger A. Ekbom               71     Chairman of the Board
                                            Director

        Robert W. Nicora             58     President and Chief Executive Officer
                                            Director

        Robert J. Larsen             69     Secretary-Treasurer
                                            Director

        Gerald D. Schlatter          64     Director

        Leland C. Clark, Jr., Ph.D.  79     Director of Research

        Richard Kiral, Ph.D.         57     Vice President, Product Development

        Douglas Kornbrust, Ph.D.     47     Vice President, PreClinical Toxicology 
                                            & Pharmacology

        Elmo Blubaugh, Jr., Ph.D.    45     Manager, Biosensor Research

        James Reavis                 63     Director of Marketing
</TABLE>

DIRECTORS AND EXECUTIVE OFFICERS

       Roger A. Ekbom, Chairman of the Board of Directors since 1990, has
extensive experience with medical device companies including managing companies
from startup through full development and subsequent sale. He is the founder and
former President of Cardio Vista Systems, Inc., and founder and chairman of
Tronomed, Inc. From 1976 until 1993, Mr. Ekbom was Vice President of and a major
stockholder in Respiratory Support Products, Inc., and Tronomed International,
Inc. Mr. Ekbom was formerly the general manager of a division of Becton
Dickinson, an international pharmaceutical company, and of Marion Scientific, a
subsidiary of Marion Laboratories. Mr Ekbom graduated from the University of
Minnesota.

       Robert W. Nicora became the President, Chief Executive Officer and
Director on March 1, 1998. Mr. Nicora has a BS in chemistry, five years of
graduate study in biochemistry and medical sciences, and over 30 years of
experience in various laboratory, management and regulatory positions with
pharmaceutical and medical device companies. While at McGaw Laboratories, he was
responsible for the development and FDA approval of hetastarch, a synthetic
blood expander, now marketed by DuPont Pharma. He led the team that evaluated a
joint partnership with Green Cross to develop their perfluorocarbon blood
substitute, Fluosol. From 1994 through March, 1998, he was director of
scientific and regulatory services with Quintiles, the world's largest global
contract pharmaceutical company. He provided preclinical and clinical drug and
device consulting services to a number of startup biomedical companies,
including SYBD.

        Robert J. Larsen, Secretary-Treasurer and Director since 1990, is a
former President and Chief Executive Officer of Bay Hospital Medical Center,
Chula Vista, California. Mr. Larsen has 25 years of experience in the
development and management of hospitals and other related enterprises in
California and Oregon. Mr. Larsen is a former trustee of



                                        9

<PAGE>   10
the California Hospital Association and the past president of the San Diego
Healthcare Financial Management Association. Mr. Larsen received his graduate
degree in Hospital Administration from the University of California, Santa
Barbara, and his B.A. from the University of Washington.

       Gerald D. Schlatter, Director and former President from 1990 to 1998, has
over 25 years of experience in sales and marketing of medical supplies and
devices. He has served as sales manager with both American Hospital Supply and
Xerox in their new medical products division. He is the founder and former
president of Delamesa Leasing Co., Irvine, California specializing in equipping
and financing new start up medical, dental and optical health care clinics. Mr.
Schlatter obtained his B.S. degree in business finance and labor law from the
University of California, Fresno.

       Leland C. Clark, Jr., Ph.D., director of research, is recognized for
pioneering several medical milestones credited with saving thousands of lives
and advancing the technology of modern medicine. His research accomplishments
include the development of the first successful heart-lung machine in 1949, the
advancement of technology leading to the development of one of the first
intensive care units in the world, and pioneering research in biomedical
application of perfluorocarbons and biosensors. He has published more than 400
scientific papers in biomedicine and has generated numerous US and foreign
patents, mainly in the field of medical instrumentation and fluorocarbons. He is
the recipient of numerous honors and awards. He received his Ph.D. in
biochemistry and physiology at the University of Rochester School of Medicine.

KEY EMPLOYEES

       Richard Kiral, Ph.D., Vice President of Product Development, holds a
Ph.D. in analytical chemistry and has over 20 years of experience in the
pharmaceutical and medical device industries. He has held vice president
positions in R&D at Anthony Products, Ioptex Research, Allergan and McGaw
Laboratories, where he was responsible for development of a nutritional fat
emulsion.

       Douglas Kornbrust, Ph.D., director of toxicology, holds a Ph.D., in
toxicology and currently is vice president and scientific director at Sierra
Biomedical, a leading contract primate testing facility for the pharmaceutical
and biotechnology industries. He previously held senior technical and management
positions at ISIS Pharmaceuticals, Rhone-Poulenc-Rorer, Merck and Alliance
Pharmaceuticals, where he was responsible for the development and implementation
of preclinical toxicology programs for their perfluorocarbon liquid ventilation
and blood substitute products.

       Elmo Blubaugh, Ph.D., manager of biosensor research, is an
electro-chemist specializing in the chemical modification of electrode surfaces
with thin polymer films. Dr. Blubaugh previously was laboratory research manager
at the University of Cincinnati. He taught both graduate and undergraduate
courses at the university and holds a patent in the field of polymer-film
electrodes. He received his graduate degree in analytical chemistry from the
University of Cincinnati.

       James Reavis, director of marketing, received a BS in chemistry and has a
career of over 35 years in sales and marketing of pharmaceutical products and
biomedical devices. He has owned and operated full-service advertising agencies
and, for the last ten years, has consulted with high technology healthcare
clients. His client roster includes Abbott, Baxter Edwards, Allergan, Genentech,
Invacare, Kyocera, Advanced Cardiovascular Systems, IVAC and IMED. Mr. Reavis
provides qualitative and quantitative market research services to help guide
product development, product positioning and partnering strategies.

ITEM 11 - EXECUTIVE COMPENSATION

        The summary compensation table shows the compensation for Roger A.
Ekbom, Chairman, Robert W. Nicora, President, Robert J. Larsen, Chief Financial
Officer and Secretary-Treasurer of the Company and Mr. Schlatter, former
President. Mr. Ekbom, Mr. Larsen and Mr. Schlatter have been directors and
executive officers for six years ended April 30, 1998. Mr. Nicora became
President on the resignation of Mr. Schlatter on March 1, 1998. This information



                                       10

<PAGE>   11
includes the dollar amount of base salaries, bonus awards, stock options and all
other compensation, if any, whether paid or deferred.

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                Long Term
                                                                               Compensation
                                         Annual Compensation                     Awards
                           -------------------------------------------------   ------------
                                                                                Securities
                                                                Other Annual     Underlying       All Other
                                       Salary          Bonus    Compensation    Options/SARs    Compensation
Name & Principal Position  Year          ($)            ($)         ($)             ($)              ($)
-------------------------  ----       ---------        -----    -------------  -------------    ------------
<S>                        <C>        <C>             <C>       <C>            <C>              <C>
Roger A. Ekbom             1998       $  46,250*           0          0           26,911              0
                           1997       $  43,746            0          0                0              0
                           1996         100,000            0          0                0              0
Chairman                   1995          34,333            0          0                0              0
                           1994          13,000            0          0                0              0

Robert W. Nicora           1998       $  20,833(1)    45,000          0                0              0
President

Gerald D. Schlatter        1998       $  75,750*           0          0           26,911              0
                           1997       $  87,000            0          0                0              0
                           1996          96,000            0          0                0              0
Former President           1995          85,500            0          0                0              0
                           1994          13,000            0          0                0              0

Leland C. Clark, Jr.       1998       $  63,750*           0          0                0              0
                           1997          96,000            0          0                0              0
                           1996         114,000            0          0                0              0
Vice President             1995         114,000            0          0                0              0
                           1994          96,000            0          0                0              0

Robert J. Larsen           1998      $   46,252*           0          0           26,911              0
                           1997         $62,502            0          0                0              0
                           1996         100,000            0          0                0              0
Chief Financial Officer    1995          72,333       35,000          0                0              0
                           1994          55,000            0          0                0              0
</TABLE>

*       Of the total $232,002 reported as paid, $186,851 was contributed to the
        company as additional paid in capital, leaving $45,151 salaries accrued.

(1)     Mr. Nicora began his employment on March, 1998 at an annual base salary
        of $125,000.




                                       11

<PAGE>   12
OPTION GRANTS

        The following table sets forth certain information as of April 30, 1998
concerning the stock option grants to all of the Company's executive officers
made for the fiscal year ended April 30, 1998. No stock appreciation rights,
restricted stock awards or long-term performance awards have been granted as of
the date hereof and no options have been exercised.

                               OPTION GRANTS IN LAST FISCAL YEAR


<TABLE>
<CAPTION>
                                                                                                       POTENTIAL REALIZABLE
                         NUMBER OF                                                                      VALUE AT ASSUMED
                        SECURITIES          % OF TOTAL                                                   ANNUAL RATES OF
                        UNDERLYING        OPTIONS GRANTED                                                  STOCK PRICE
                          OPTIONS          TO EMPLOYEES        EXERCISE OR BASE      EXPIRATION          APPRECIATION OF
NAME                      GRANTED          IN FISCAL YEAR      PRICE PER SHARE          DATE              OPTION TERMS
----                    ----------        ----------------     ----------------     -------------      --------------------
<S>                     <C>               <C>                  <C>                  <C>                 <C>
Roger A. Ekbom            300,000               25%                 $.13            February 2008       $25,295   $66,976
Robert J. Larsen          300,000               25%                 $.13            February 2008       $25,295   $66,976
Gerald D. Schlatter       300,000               25%                 $.13            February 2008       $25,295   $66,976
Robert W. Nicora          300,000               25%                 $.28            February 2008       $54,480  $144,256
</TABLE>

STOCK OPTION PLAN

       The Company's 1995 Stock Option Plan ("Plan") was adopted by the Board of
Directors in April 1995. Pursuant to the Plan, the Company may grant both
incentive stock options intended to qualify for preferential tax treatment under
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), and
nonstatutory stock options that do not qualify for such treatment. Incentive
stock options may be granted only to employees, while consultant, employees,
officers and directors are eligible for the grant of nonstatutory options. The
Plan also provides for the grant of stock purchase rights, stock appreciation
rights and long term performance awards.

       The purpose of the plan is to provide an incentive to eligible employees,
consultants and officers whose present and potential contributions are important
to the continued success of the company, to afford those individuals the
opportunity to acquire a proprietary interest in the Company and to enable the
Company to enlist and retain in its employment qualified personnel for the
successful conduct of its business.

       The total number of shares of Common Stock of the Company reserved and
available for distribution under the Plan is 2,500,000 shares. Pursuant to the
Plan, the administrators of the Plan shall be either the Board of Directors or
one or more committees designated by the Board of Directors to administer the
Plan. Subject to the express terms of the Plan, the administrators have full
power to select, from among the officers, employees and consultants of the
Company eligible for award rights and options, the individuals to whom awards,
rights or options will be granted, and to determine the specific terms of each
award or grant.

       The maximum term of a stock option under the Plan is ten years, but if
the optionee at the time of the grant has voting power over more than 10% of the
Company's outstanding capital stock, the terms is five years. The exercise price
of incentive stock options granted under the Plan must be at least equal to the
fair market value of such shares on the date of the grant. The exercise price of
nonstatutory stock options granted under the Plan is determined by the
administrators. Option may be exercisable in installments, and the
exercisability of options may be accelerated by the administrators.



                                       12

<PAGE>   13
       Options and rights granted pursuant to the Plan are nontransferable by
their participants, other than by will or by the laws of descent or
distribution, and may be exercised during the lifetime of the participant only
by the participant. Appropriate transfer restrictions shall apply to any such
stock awards.

       In the event of any change in capitalization in the company that results
in an increase or decrease in the number of outstanding shares without receipt
of consideration by the Company, an appropriate adjustment shall be made in the
number of shares which have been reserved for issuance under the Plan and the
price per share or number of shares covered by each outstanding option or right.

       The Plan may be amended by the Board at any time. However, stockholder
approval will be required to increase the number of shares reserved for issuance
under the Plan or where an amendment to the Plan would materially increase the
benefits accruing to participants under the Plan or materially modify the
requirements as to eligibility for participation in the Plan.

DEFINED BENEFIT AND ACTUARIAL PLANS

       The Company has not supplied Defined Benefits, or similar Pension,
Benefit or Actuarial Plan Benefits to its Executive Officers.

COMPENSATION OF DIRECTORS

        Mr. Ekbom became a full time employee in April 1995, prior to that he
received compensation as a board member. Mr. Schlatter became a full time
employee in August 1994 and prior to that received compensation as a board
member. Mr. Larsen became a full time consultant and prior to that time received
compensation as a board member and part time consultant.

EMPLOYMENT CONTRACTS

       On March 1, 1998 the Board of Directors approved a three year employment
contract with Robert W. Nicora, President and Chief Operating Officer. The
employment contract specifies a base annual salary of $125,000, an automobile
allowance, Medical and Dental coverage, $200,000 life insurance payable by the
corporation and payable to a beneficiary named by the insured, and participation
in the 1995 Stock Plan with the right to have an option for 100,000 shares to be
granted annually. The contract covers the duties and responsibilities as chief
Executive officer for the corporation. As of May 18, 1998 Mr. Nicora assumed the
title of Chief Executive Officer. Mr. Nicora's employment agreement provides
that Mr. Nicora may, at his election, receive a severance payment equal to 299%
of his average annual salary and bonuses received during the prior two-year
period in the event of a change in control as defined.

       On March 31, 1998 the three year employment contract with Roger A. Ekbom
expired and was not renewed. On March 31, 1998 the three year employment
contract with Gerald D. Schlatter expired and was not renewed. On March 31, 1998
the three year employment contract with Robert J. Larsen expired and was not
renewed.

       On October 1, 1991, Dr. Leland C. Clark, Jr., signed a five year contract
with the Company as Research and Development Director. That contract has been
extended on a month to month basis since October 1, 1996. On April 18, 1998 Dr.
Clark submitted his resignation as Vice President and Director and agreed to
continue managing research activities on a consulting basis.

REPRICING OF OPTIONS

       During the last fiscal year the Company has not adjusted or amended the
exercise price of stock options.



                                       13

<PAGE>   14
ADDITIONAL INFORMATION WITH RESPECT TO COMPENSATION COMMITTEE, INTERLOCKS AND
INSIDER PARTICIPATION IN COMPENSATION DECISIONS

       The Company does not presently have a Compensation Committee of the Board
of Directors, or other Board Committees performing equivalent functions, and did
not at any time during the last four years. The entire Board of Directors
presently performs these functions. All of the Executive officers are members of
the Company's Board of Directors.

ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

       The following tables sets forth the stock ownership of all persons who,
to the registrants knowledge, own of record and beneficially five (5%) per cent
or more of its outstanding Common Stock, and for the officers and directors as a
group.

       MANAGEMENT OWNERS


<TABLE>
<CAPTION>
                                                              Amount & Nature of          Percent
Title of Class      Name of Beneficial Owner                   Beneficial Owner           of Class
<S>                 <C>                                       <C>                         <C>
Common Stock        Roger A. Ekbom                                891,670(2)               1.94%
Common Stock        Robert W. Nicora                                50,000                 0.10%
Common Stock        Gerald D. Schlatter                            612,860(2)              1.27%
Common Stock        Robert J. Larsen(1)                            814,445(2)              1.61%
Common Stock        Leland C. Clark, Jr.                         2,440,785(2)              4.81%
All Directors and Officers as a group (5 persons)                4,809,760                 9.48%
</TABLE>

(1)     Robert J. Larsen owns 814,445 beneficial by virtue of his control of
        Peso, Inc. and Jada, Inc.

ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

       Roger A. Ekbom, a Chairman of the board of directors, loaned the Company
$5,000 as of April 30, 1998. Gerald D. Schlatter, a director, loaned the Company
$5,000 as of April 30, 1998. Robert J. Larsen, a director and Chief Financial
officer, loaned the Company $5,000 as of April 30, 1998. These loans totaling
$15,000 were made to enable the Company to continue its business operations,
pending receipt of additional funding.

ITEM      14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM S-K

          Response to Item 8.

A.        Documents Filed as a Part of This Report:

(1)     FINANCIAL STATEMENTS

(a)     Independent Auditors Report.

(b)     Balance Sheets as of April 30, 1998 & 1997.



                                       14

<PAGE>   15
(c)     Statements of operations for each of the three years in the period ended
        April 30, 1998.

(d)     Statements of Stockholders, Equity for each of the three years in the
        period ended April 30, 1998.

(e)     Statements of Cash Flows for the three years in the period ended April
        30, 1998.

(f)     Notes to the Financial Statements.

                                INDEX TO EXHIBITS

<TABLE>
<CAPTION>
   Exhibits Required by                                                Exhibits To      Exhibits to
   Item 601 of Regulation S-K                                         Prior Reports      This Year
<S>                                                                   <C>               <C>
      3 (a)    Registrants Amended Articles of Incorporation                A-1

      3 (b)    Specimen Form of Common Stock Certificate                    x

      4 (a)    Specimen three year Warrants to Purchase Stock dated         x
               July 24, 1992 with amendments

      4 (b)    Specimen three years Warrants to Purchase Stock dated        x
               September 30, 1992 with amendments

      4 (c)    Specimen three year Warrants to Purchase Stock dated         x

      4 (d)    Warrant to Purchase Stock issued February 28,1994 to
               American Heritage Fund

      4 (e)    Warrant to Purchase Stock issued July 24, 1992 to Cato       x
               Portfolio AG

      4 (f)    Specimen two year Warrant to Purchase Stock dated            x
               September 30, 1992 and November 20, 1992

      4 (g)    Warrant to Purchase Stock issued April 29, 1994 to Cato      x
               Portfolio AG

      (k)      Warrant to Purchase Stock issued August 19, 1993 and         x
               September 9, 1993 to Cato Portfolio

      (1)      Specimen two year Warrants to Purchase Stock issued on       x
               various dates from January 21, 1993 to February 23, 1994

      10(a)    Agreement between the Registrant and Leland C. Clark, Jr.,   x
               Ph.D. dated October 1, 1991 with amendments, Re:
               Assignment of Intellectual Property and Trade Secrets

      10(b)    Agreement between the Registrant and Keith R. Watson,        x
               Ph.D. Re: Assignment of Invention

      10(c)    Agreement between the Registrant and Children's Hospital     x
               Medical Center dated July 6, 1992
</TABLE>



                                       15

<PAGE>   16
<TABLE>
<CAPTION>
   Exhibits Required by                                                Exhibits To      Exhibits to
   Item 601 of Regulation S-K                                         Prior Reports      This Year
<S>                                                                   <C>               <C>
      10(d)    Agreement between the Registrant and Children's              x
               Hospital Medical Center dated July 6, 1993

      10(e)    Agreement between the Registrant and Children's              x
               Hospital Medical Center dated July 6, 1993

      10(f)    Agreement between the Registrant and Roger A. Ekbom          x
               dated April 1, 1995

      10(g)    Agreement between the Registrant and Gerald D.               x
               Schlatter dated July 11, 1994 with Amendments

      10(h)    Agreement between the Registrant and Robert J. Larsen        x
               dated April 1, 1995

      10(i)    Agreement between the Registrant and L.G. Kurtz &            x
               Associates dated July 22, 1994

      10(j)    Agreement between the Registrant and Broadgate               x
               Consultant, Inc. dated July 29, 1994

      10(k)    Agreement between the Registrant and San Diego Contract      x
               Research Associates, Inc. dated November 21, 1995

      10(l)    Agreement between the Registrant and Glen Wegner, M.D.,      x
               J.D. dated April 27, 1995

      10(m)    Employee Stock Plan dated April 28, 1995                     x

      10(n)    Indemnification Agreement between the Registrant and         x
               members of the Board of Directors dated April 26, 1995

      10(o)    Agreement between the Registrant and Air Products &          x
               Chemical, Inc. dated January 30, 1995
</TABLE>

Pursuant to the requirements of Section 13 of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereto duly authorized.



                                       16

<PAGE>   17
                       SYNTHETIC BLOOD INTERNATIONAL, INC.




                         Roger A. Ekbom, Chairman & CEO

                             By: /S/ ROGER A. EKBOM


              Robert J. Larsen, Secretary & Chief Financial Officer

                            BY: /S/ ROBERT J. LARSEN


Dated: 7/22/98

Pursuant to the requirements of Instruction D to Form 10-K under the Securities
and Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates
indicated. The following represent at least a majority of the Board of Directors
of the Registrant.


Date                Name & Title

                    Roger A. Ekbom
                    Chairman of the
7/22/98             Board of Directors
                    By: /S/ ROGER A. EKBOM


                    Robert W. Nicora
7/22/98             President & Director
                    By: /S/ ROBERT W. NICORA


                    Robert J. Larsen
                    Director & Secretary
7 / 22 / 98         Treasurer
                    By: /S/ ROBERT J. LARSEN


                    Gerald D. Schlatter
7/22/98             Director
                    By: /S/GERALD D. SCHLATTER

                    Howard Jones
7/22/98             Director
                    By: /S/ HOWARD JONES



                                       17

<PAGE>   18
INDEPENDENT AUDITORS' REPORT



To the Board of Directors and Stockholders of
  Synthetic Blood International, Inc.:


We have audited the accompanying balance sheets of Synthetic Blood
International, Inc. (a development stage enterprise) (the Company) as of April
30, 1998 and 1997, and the related statements of operations, stockholders'
equity (deficiency) and cash flows for each of the three years in the period
ended April 30, 1998 and for the period from May 26, 1967 (date of
incorporation) to April 30, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements based on our audits. The financial
statements for the period May 26, 1967 through April 30, 1994 were audited by
other auditors and reflected an accumulated net loss of $2,148,706. The other
auditors' report has been furnished to us, and our opinion, insofar as it
relates to the amounts included for such prior period, is based solely on the
report of such other auditors.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.

In our opinion, based on our audits and the report of other auditors, such
financial statements present fairly, in all material respects, the financial
position of Synthetic Blood International, Inc. as of April 30, 1998 and 1997,
and the results of its operations and its cash flows for the three years in the
period ended April 30, 1998, and for the period from May 26, 1967 (date of
incorporation) to April 30, 1998 in conformity with generally accepted
accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company is a development stage
enterprise engaged in developing certain medical products. As discussed in Note
1 to the financial statements, the Company's accumulated losses from operations
and negative operating cash flows; its necessity to obtain additional financing
to fund operations until the necessary regulatory approvals are obtained, if
ever; and its ability to ultimately attain successful operations raise




                                      -18-
<PAGE>   19
substantial doubt about its ability to continue as a going concern. Management's
plans concerning these matters are described in Note 1. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.




Costa Mesa, California
June 26, 1998



                                      -19-
<PAGE>   20
SYNTHETIC BLOOD INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)


BALANCE SHEETS
AS OF APRIL 30, 1998 AND 1997
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                          1998                1997
<S>                                    <C>                 <C>      
ASSETS

CURRENT ASSETS:
Cash and cash equivalents              $ 740,215           $  53,857
Prepaid expenses:
  Insurance                                9,125              11,925
  Other                                   10,400               5,500
                                       ---------           ---------

                                          19,525              17,425
                                       ---------           ---------

    Total current assets                 759,740              71,282

PROPERTY AND EQUIPMENT:
Laboratory equipment                     235,133             235,133
Furniture and fixtures                    69,147              68,385
                                       ---------           ---------

                                         304,280             303,518
Less accumulated depreciation           (219,627)           (166,085)
                                       ---------           ---------

PROPERTY AND EQUIPMENT, net               84,653             137,433

PATENTS, net (Note 2)                    141,521             109,448
                                       ---------           ---------

                                       $ 985,914           $ 318,163
                                       =========           =========
</TABLE>




See independent auditors' report and 
notes to financial statements.



                                      -20-
<PAGE>   21
SYNTHETIC BLOOD INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

BALANCE SHEETS
AS OF APRIL 30, 1998 AND 1997 (CONTINUED)
--------------------------------------------------------------------------------



<TABLE>
<CAPTION>
                                                                                1998                 1997
<S>                                                                        <C>                   <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)

CURRENT LIABILITIES:
Current portion of capital lease obligation                                $      --             $    16,573
Current portion of notes payable (Note 5)                                       59,972
Accounts payable                                                               339,540               323,401
Accrued payroll                                                                 78,189                50,722
Other accrued liabilities                                                       38,639               134,000
Notes payable to stockholders (Note 4)                                          15,000                75,979
                                                                           -----------           -----------

    Total current liabilities                                                  531,340               600,675

NOTES PAYABLE, less current portion (Note 5)                                   103,021

COMMITMENTS AND CONTINGENCIES (Notes 1 and 3)

STOCKHOLDERS' EQUITY (DEFICIENCY) (Notes 6 and 7):
Common stock, par value $0.01 per share; authorized 100,000,000
  shares; 50,729,302 and 42,829,477 shares issued and outstanding
  at April 30, 1998 and 1997, respectively                                     507,293               428,295
Additional paid-in capital                                                   9,412,424             7,576,325
Deficit accumulated during the development stage                            (9,568,164)           (8,287,132)
                                                                           -----------           -----------

    Total stockholders' equity (deficiency)                                    351,553              (282,512)
                                                                           -----------           -----------

                                                                           $   985,914           $   318,163
                                                                           ===========           ===========
</TABLE>



See independent auditors' report and 
notes to financial statements.



                                      -21-
<PAGE>   22
SYNTHETIC BLOOD INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

STATEMENTS OF OPERATIONS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED
APRIL 30, 1998 AND FOR THE PERIOD MAY 26, 1967 (DATE OF INCORPORATION)
TO APRIL 30, 1998
--------------------------------------------------------------------------------



<TABLE>
<CAPTION>
                                      PERIOD FROM
                                     MAY 26, 1967
                                   (INCORPORATION)
                                         TO
                                   APRIL 30, 1998              1998                   1997                   1996
                                   ---------------         ------------           ------------           ------------
<S>                                 <C>                    <C>                    <C>                    <C>         
EXPENSES:
Research and development            $  2,904,199           $    111,766           $    460,978           $    924,093
General and administrative             6,586,138              1,144,810              1,437,353              1,422,809
Interest                                 129,197                 27,525                 12,959                  5,241
                                    ------------           ------------           ------------           ------------

    Total expenses                     9,619,534              1,284,101              1,911,290              2,352,143

OTHER INCOME                             (51,370)                (3,069)                  (914)                (5,916)
                                    ------------           ------------           ------------           ------------

NET LOSS                            $ (9,568,164)          $ (1,281,032)          $ (1,910,376)          $ (2,346,227)
                                    ============           ============           ============           ============

NET LOSS PER SHARE -
  Basic and diluted                                              ($0.03)                ($0.05)                ($0.08)
                                                           ============           ============           ============

WEIGHTED AVERAGE NUMBER
  OF COMMON SHARES
  OUTSTANDING -
  Basic and diluted                                          46,000,749             36,053,557             28,894,248
                                                           ============           ============           ============
</TABLE>





See independent auditors' report and 
notes to financial statements.



                                      -22-
<PAGE>   23
SYNTHETIC BLOOD INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED
APRIL 30, 1998 AND FOR THE PERIOD MAY 26, 1967 (DATE OF INCORPORATION)
TO APRIL 30, 1998
--------------------------------------------------------------------------------


<TABLE>
<CAPTION>
                                                                                            DEFICIT
                                                                                           ACCUMULATED             TOTAL
                                                                         ADDITIONAL         DURING THE         STOCKHOLDERS'
                                     NUMBER OF          COMMON             PAID-IN         DEVELOPMENT             EQUITY
                                      SHARES             STOCK             CAPITAL            STAGE             (DEFICIENCY)
                                    ----------        -----------        -----------       ------------         ------------
<S>                                 <C>               <C>                <C>                <C>                 <C>      
BALANCES, May 26, 1967                    --          $      --          $      --          $      --           $      --

Issuance of common stock            25,907,710            259,077          3,780,019                              4,039,096

Conversion of convertible
  debentures into common
  stock                                870,199              8,702            771,298                                780,000

Issuance of common stock
  to employees and
  compensatory options                 218,800              2,188             81,312                                 83,500

Common stock issued upon
  conversion of notes
  payable                              500,000              5,000            120,000                                125,000

Exercise of warrants                    13,750                137              1,238                                  1,375

Contributions of capital
  through services rendered                                                   30,000                                 30,000

Net loss                                                                                     (4,030,529)         (4,030,529)
                                    ----------            -------          ---------         ----------           ---------
BALANCES, April 30, 1995            27,510,459            275,104          4,783,867         (4,030,529)          1,028,442

</TABLE>



See independent auditors' report and 
notes to financial statements.



                                      -23-
<PAGE>   24
SYNTHETIC BLOOD INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED
APRIL 30, 1998 AND FOR THE PERIOD MAY 26, 1967 (DATE OF INCORPORATION)
TO APRIL 30, 1998 (CONTINUED)
--------------------------------------------------------------------------------


<TABLE>
<CAPTION>
                                                                                              DEFICIT
                                                                                             ACCUMULATED            TOTAL
                                                                          ADDITIONAL          DURING THE        STOCKHOLDERS'
                                       NUMBER OF           COMMON          PAID-IN           DEVELOPMENT            EQUITY
                                        SHARES             STOCK            CAPITAL              STAGE           (DEFICIENCY)
                                       ---------        -----------       ------------       ------------       -------------
<S>                                    <C>              <C>               <C>                <C>                <C>        
Issuance of common stock                 358,333        $     3,583        $    71,417        $      --           $    75,000

Issuance of common stock
  in conjunction with funding
  agreements and services
  rendered (Note 6)                    1,444,090             14,441            317,291                                331,732

Issuance of common stock
  to officers (Note 6)                    26,250                263              8,362                                  8,625

Common stock issued upon
  conversion of notes
  payable (Note 6)                       400,000              4,000             76,000                                 80,000

Exercise of warrants
  (Note 7)                             1,291,250             12,913            116,212                                129,125

Issuance of warrants
 (Note 7)                                                                       60,000                                 60,000

Contribution of capital from
  officer (Note 6)                                                              35,700                                 35,700

Net loss                                                                                       (2,346,227)         (2,346,227)
                                     -----------        -----------        -----------        -----------         -----------
BALANCES,
  April 30, 1996                      31,030,382            310,304          5,468,849         (6,376,756)           (597,603)
</TABLE>





See independent auditors' report and 
notes to financial statements.



                                      -24-
<PAGE>   25
SYNTHETIC BLOOD INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED
APRIL 30, 1998 AND FOR THE PERIOD MAY 26, 1967 (DATE OF INCORPORATION)
TO APRIL 30, 1998 (CONTINUED)
--------------------------------------------------------------------------------





<TABLE>
<CAPTION>
                                                                                                  DEFICIT
                                                                                                 ACCUMULATED           TOTAL
                                                                              ADDITIONAL         DURING THE         STOCKHOLDERS'
                                        NUMBER OF            COMMON             PAID-IN          DEVELOPMENT           EQUITY
                                         SHARES               STOCK             CAPITAL             STAGE           (DEFICIENCY)
                                        ---------         -----------        ------------        -----------        -------------   
<S>                                     <C>               <C>                 <C>                <C>                 <C>        
Issuance of common stock                4,000,000         $    40,000         $ 1,100,000        $      --           $ 1,140,000

Common stock issued upon
  conversion of note
  payable (Note 6)                        133,500               1,335              18,165                                 19,500

Common stock issued upon
  conversion of notes
  payable to officers (Note 6)          3,733,320              37,333             423,442                                460,775

Issuance of common stock
  in exchange for services
  rendered (Note 6)                     3,932,275              39,323             565,869                                605,192

Net loss                                                                                          (1,910,376)         (1,910,376)
                                      -----------         -----------         -----------        -----------         -----------

BALANCES, April 30, 1997               42,829,477             428,295           7,576,325         (8,287,132)           (282,512)

Issuance of common stock                6,000,000              60,000             850,033                                910,033

Issuance of common stock
  upon conversion
  of debentures (Note 6)                  531,200               5,312              46,936                                 52,248

Issuance of common stock
  to officers to retire
  shareholder loans (Note 6)            1,044,450              10,444             177,556                                188,000

Issuance of common stock
  for services rendered
  (Note 6)                                324,175               3,242              49,350                                 52,592

Contribution of capital
  by shareholders (Note 6)                                                        581,818                                581,818

Issuance of warrants
  (Note 7)                                                                        130,406                                130,406

Net loss                                                                                          (1,281,032)         (1,281,032)
                                      -----------         -----------         -----------        -----------         -----------

BALANCES, April 30, 1998               50,729,302         $   507,293         $ 9,412,424        $(9,568,164)        $   351,553
                                      ===========         ===========         ===========        ===========         ===========
</TABLE>




See independent auditors' report and 
notes to financial statements.


                                      -25-
<PAGE>   26
SYNTHETIC BLOOD INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED
APRIL 30, 1998 AND FOR THE PERIOD MAY 26, 1967 (DATE OF INCORPORATION)
TO APRIL 30, 1998
--------------------------------------------------------------------------------


<TABLE>
<CAPTION>
                                                       PERIOD FROM
                                                       MAY 26, 1967
                                                     (INCORPORATION)
                                                           TO
                                                     APRIL 30, 1998          1998                 1997                1996
CASH FLOWS FROM OPERATING
  ACTIVITIES:
<S>                                                   <C>                 <C>                 <C>                 <C>
Net loss                                              $(9,568,164)        $(1,281,032)        $(1,910,376)        $(2,346,227)
Adjustments to reconcile net loss to net
  cash used in operating activities:
  Depreciation and amortization                           309,557              71,107              83,073              87,459
  Write-down of other assets                              126,800
  Issuance of compensatory stock options/
    warrants                                              248,906             130,406                                  60,000
  Issuance of stock below fair market value               695,248             155,248             540,000
  Issuance of stock for services rendered                 989,516              52,592             605,192             331,732
  Contribution of capital through services
    rendered by stockholders                              216,851             186,851
  Changes in operating assets and liabilities:
    Prepaid expenses                                      (19,525)             (2,100)             12,387              60,282
    Accounts payable and accrued expenses                 619,361             111,238            (202,423)            608,263
                                                      -----------         -----------         -----------         -----------

        Net cash used in operating activities          (6,381,450)           (575,690)           (872,147)         (1,198,491)

CASH FLOWS FROM INVESTING
  ACTIVITIES:
Purchase of property and equipment                       (271,402)               (762)             (2,128)            (33,699)
Proceeds from sale of property and
  equipment                                                15,457                                                      15,457
Purchase of other assets                                 (354,248)            (49,638)            (40,011)            (35,866)
                                                      -----------         -----------         -----------         -----------
        Net cash used in investing activities            (610,193)            (50,400)            (42,139)            (54,108)
</TABLE>



See independent auditors' report and 
notes to financial statements.



                                      -26-
<PAGE>   27
SYNTHETIC BLOOD INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED
APRIL 30, 1998 AND FOR THE PERIOD MAY 26, 1967 (DATE OF INCORPORATION)
TO APRIL 30, 1998 (CONTINUED)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                     PERIOD FROM
                                                      MAY 26, 1967
                                                    (INCORPORATION)
                                                         TO
                                                    APRIL 30, 1998           1998                1997               1996
<S>                                                  <C>                 <C>                 <C>                 <C>
CASH FLOWS FROM FINANCING
  ACTIVITIES:
Proceeds from issuance of notes payable
   to stockholder                                    $   915,792         $    79,538         $   309,553         $   326,701
Repayments of notes payable
  to stockholder                                        (121,517)            (46,517)
Proceeds from issuance of convertible
  debentures                                             811,000              31,000
Payments on capital lease obligation                     (52,338)            (16,573)            (17,722)            (14,065)
Contribution of capital from stockholders                 40,700               5,000                                  35,700
Proceeds from issuance of common stock                 6,138,221           1,260,000             600,000             212,750
                                                     -----------         -----------         -----------         -----------

    Net cash provided by financing activities          7,731,858           1,312,448             891,831             561,086
                                                     -----------         -----------         -----------         -----------

NET INCREASE (DECREASE) IN CASH
  AND CASH EQUIVALENTS                                   740,215             686,358             (22,455)           (691,513)

CASH AND CASH EQUIVALENTS,
  beginning of period                                                         53,857              76,312             767,825
                                                     -----------         -----------         -----------         -----------

CASH AND CASH EQUIVALENTS,
  end of period                                          740,215             740,215              53,857              76,312
                                                     -----------         -----------         -----------         -----------

CASH PAID FOR:
Interest                                             $    88,281         $     3,174         $     3,339         $     5,241
                                                     ===========         ===========         ===========         ===========
Taxes                                                $     4,527         $       527         $       800         $       800
                                                     ===========         ===========         ===========         ===========

SUPPLEMENTAL INFORMATION:
During fiscal 1998:
  Transfer of trade accounts payable and
    accrued liabilities to notes payable                                 $   162,993
                                                                         ===========
</TABLE>
  For information relating to equity noncash
    transactions, see Note 6





See independent auditors' report and 
notes to financial statements.



                                      -27-
<PAGE>   28
SYNTHETIC BLOOD INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED
APRIL 30, 1998 AND FOR THE PERIOD MAY 26, 1967 (DATE OF INCORPORATION)
TO APRIL 30, 1998
--------------------------------------------------------------------------------

1.      GENERAL

        The Company was incorporated on May 26, 1967 and was inactive through
        September 1990, when it began conducting operations for the purpose of
        developing a synthetic blood emulsion to act as a human blood
        substitute, and a method of using a perfluorocarbon compound to
        facilitate oxygen exchange for individuals with respiratory distress
        syndrome. Shortly after commencing these operations, the Company changed
        its name to Synthetic Blood International, Inc. The Company is also
        developing an implantable, continuous reading glucose biosensor to be
        used primarily by individuals with diabetes. All of the Company's
        products are currently in the preclinical trial stage. This stage
        requires a sufficient level of animal testing to be performed in order
        to file certain applications with the United States Food and Drug
        Administration (FDA), which is necessary to obtain FDA approval to
        proceed with human testing and, ultimately, approval to market the
        products. No assurances can be given that such approvals, once applied
        for, will be granted.

        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 and, at April 30, 1998, has
        accumulated losses from operations amounting to $9,568,164 and, in
        fiscal 1998, incurred negative cash flow of $575,690 from operations. As
        mentioned in the preceding paragraph, the Company is in the preclinical
        trial stage of its products. These products must undergo further
        development and testing prior to submission to the FDA for approval to
        market the products. The additional development and testing will require
        significant additional financing. Management intends to seek such
        additional financing through future private placement offerings and/or
        joint ventures. The Company's continuation as a going concern is
        dependent on its ability to obtain additional financing to fund
        operations until the necessary regulatory approvals are obtained, if
        ever, and its ability to ultimately attain successful operations. These
        factors, among others, raise substantial doubt about the Company's
        ability to continue as a going concern. The financial statements do not
        include any adjustments that might result from the outcome of this
        uncertainty.


2.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

        Development Stage - Because the Company has not commenced principal
        operations, it is considered a "Development Stage Enterprise," as
        defined by Statement of Financial Accounting Standards (SFAS) No. 7,
        Accounting and Reporting by Development Stage Enterprises.




                                      -28-
<PAGE>   29
SYNTHETIC BLOOD INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED
APRIL 30, 1998 AND FOR THE PERIOD MAY 26, 1967 (DATE OF INCORPORATION)
TO APRIL 30, 1998 (CONTINUED)
--------------------------------------------------------------------------------


        Cash and Cash Equivalents - The Company considers highly-liquid
        investments with original maturities of three months or less to be cash
        equivalents.

        Property and Equipment - Property and equipment are recorded at cost.
        Depreciation and amortization are computed using the straight-line
        method over the shorter of the estimated useful lives of the related
        assets, ranging from three to ten years, or the lease term, if
        applicable.

        Patents - Patent costs are being amortized over the lesser of the
        remaining life of the patent or the estimated useful life of the related
        product, ranging from eight to ten years. Patent costs totaled $199,439
        and $149,801, net of accumulated amortization of $57,918 and $40,353, at
        April 30, 1998 and 1997, respectively. The Company evaluates
        recoverability of patents on at least an annual basis by comparing the
        estimated resale value of the patents to the remaining carrying values.
        An adjustment to the carrying value of the patent rights would be made
        if the estimated resale value of the patents is determined to be
        insufficient to recover such value.

        Pricing of Common Stock and Options to Purchase Common Stock - The
        Company's Board of Directors determines the issuance price of its common
        stock and the exercise price of options to purchase common stock, based
        on a good faith estimate of fair market value, which is derived from
        recent issuances of common stock to unrelated parties and/or from common
        stock market quotations, after giving effect to the restricted nature of
        the stock issued. In the event that stock is issued at a price below
        fair market value, an expense is recorded for the difference between
        fair market value and the issuance price and is included in general and
        administrative expenses.

        Loss Per Share - In fiscal 1998, the Company adopted Statement of
        Financial Accounting Standards (SFAS) No. 128, Earnings Per Share (EPS),
        which replaces the presentation of "primary" EPS with "basic" EPS and
        the presentation of "fully diluted" EPS with "diluted" EPS. All
        previously reported EPS amounts have been restated based on the
        provisions of the new standard. Basic loss per share, which would
        include no dilution, would be computed by dividing loss available to
        common shareholders by the weighted-average number of shares outstanding
        for that particular period. In contrast, diluted loss per share
        considers the potential dilution that could occur from other financial
        instruments that would increase the total number of outstanding shares
        of common stock. Common stock equivalents, however, have not been
        included in the diluted loss per share computation because their effect
        is antidilutive.

        Income Taxes - The Company accounts for its income taxes in accordance
        with the standards specified in SFAS No. 109, Accounting for Income
        Taxes.

        Reclassifications - Certain amounts as previously reported have been
        reclassified to conform to the 1998 presentation.



                                      -29-
<PAGE>   30
SYNTHETIC BLOOD INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED
APRIL 30, 1998 AND FOR THE PERIOD MAY 26, 1967 (DATE OF INCORPORATION)
TO APRIL 30, 1998 (CONTINUED)
--------------------------------------------------------------------------------



        Use of Estimates - The preparation of financial statements in conformity
        with generally accepted accounting principles requires management to
        make estimates and assumptions that affect the reported amounts of
        assets and liabilities at the date of the financial statements and the
        reported amounts of other income and expenses during the reporting
        periods. Actual results could differ from those estimates.

        Fair Value of Financial Instruments - The Company's balance sheet
        includes the following financial instruments: cash and cash equivalents,
        accounts payable, accrued expenses, capital lease obligation and notes
        payable to stockholders. The Company considers the carrying amount in
        the financial statements to approximate fair value for these financial
        instruments because of the relatively short period of time between
        origination of the instruments and their expected realization. The
        Company considers the carrying value of its notes payable to approximate
        fair market value based on the borrowing rates currently available to
        the Company for bank loans with similar terms and maturities.

        Stock-Based Compensation - The Company accounts for stock-based awards
        to employees using the intrinsic value method in accordance with
        Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
        Issued to Employees (Note 6).


3.      COMMITMENTS AND CONTINGENCIES

        Employment Contracts - The Company has an employment agreement with a
        certain officer, with an aggregate future commitment of $125,000 in
        1998.

        Litigation - The Company is subject to litigation in the normal course
        of business, none of which management believes will have a material
        adverse effect on the Company's financial statements.


4.      NOTES PAYABLE TO STOCKHOLDERS

        Notes payable to stockholders amounted to $15,000 and $75,979 at April
        30, 1998 and 1997, respectively. Such loans are due on demand and are
        noninterest-bearing.



                                      -30-
<PAGE>   31
SYNTHETIC BLOOD INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED
APRIL 30, 1998 AND FOR THE PERIOD MAY 26, 1967 (DATE OF INCORPORATION)
TO APRIL 30, 1998 (CONTINUED)
--------------------------------------------------------------------------------



5.      NOTES PAYABLE

        Notes payable consist of the following at April 30, 1998:


<TABLE>
<S>                                                                                           <C>
         Unsecured subordinated notes payable to former employees, bearing interest at
           10% per annum, payable in monthly principal and interest installments of
           $1,500, due at various dates through June 2003                                     $  70,692

         Unsecured subordinated notes payable to vendor, bearing interest at 10% per
           annum, payable in monthly principal and interest installments of $5,000,
           remaining balance due in August 1999                                                  92,301
                                                                                              ---------

                                                                                                162,993
         Less current maturities of notes payable                                               (59,972)
                                                                                              ---------

                                                                                              $ 103,021
                                                                                              =========
</TABLE>


        Principal payments on notes payable are due approximately as follows:



<TABLE>
<S>                                                          <C>     
         1999                                                $ 59,972
         2000                                                  56,416
         2001                                                  13,967
         2002                                                  15,430
         2003                                                  15,667
         2004                                                   1,541
                                                             --------
                                                             $162,993
                                                             ========
</TABLE>


6.      STOCKHOLDERS' EQUITY

        During fiscal 1996, the Company issued 1,200,000 shares of its common
        stock in conjunction with a standby funding agreement with a
        stockholder, which allowed the Company to borrow up to $450,000 from
        this stockholder during the period from August 1995 through October
        1995. As a result of this agreement, the Company recognized an expense
        of $240,000, which represented the fair market value of the shares at
        the date of the agreement.



                                      -31-
<PAGE>   32
SYNTHETIC BLOOD INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED
APRIL 30, 1998 AND FOR THE PERIOD MAY 26, 1967 (DATE OF INCORPORATION)
TO APRIL 30, 1998 (CONTINUED)
--------------------------------------------------------------------------------



        During fiscal 1996, the Company issued 26,250 shares of common stock to
        officers for $8,625 in cash, which represented the fair market value at
        the date of issuance. The officers exercised warrants granted during
        1994 to purchase 91,250 shares of common stock. The exercise price of
        the warrants of $.10 per share approximated the fair market value of the
        warrants on the date of grant.

        During fiscal 1996, the Company converted an outstanding note payable to
        a stockholder of $80,000 into 400,000 shares of the Company's common
        stock, pursuant to a conversion option granted by the Company.

        During fiscal 1996, an officer of the Company contributed $35,700 in
        cash to fund operations.

        During fiscal 1996, the Company expensed $45,000, which was paid to a
        stockholder as an inducement to retain shares of the Company's common
        stock.

        During fiscal 1997, the Company converted an outstanding note payable to
        a stockholder in the amount of $19,500 into 133,500 shares of the
        Company's common stock. As a result of this transaction, the Company
        recognized expense of $14,685, representing the difference between the
        fair market value and the issuing value of the common stock.

        During fiscal 1997, the Company converted outstanding notes payable to
        officers totaling $460,775 into 3,733,320 shares of the Company's common
        stock. In addition, the Company issued 3,330,175 shares of the Company's
        common stock in exchange for services rendered by officers, which were
        valued at an average per share price of $.15.

        During fiscal 1997, the Company issued 602,100 shares of the Company's
        common stock in exchange for services rendered by stockholders, which
        were valued at an average per share price of $.18.

        During fiscal 1998, the Company issued and subsequently converted
        outstanding debentures to shareholders totaling $31,000 into 531,200
        shares of common stock. As a result of this transaction, the Company
        recorded $21,248 of interest expense associated with the conversion
        feature, which represents the difference between the fair market value
        and the conversion price of the common stock.

        During fiscal 1998, the Company issued 1,044,450 shares of common stock
        to retire $94,000 of officer loans. As a result of this transaction, the
        Company recognized expense of $94,000, representing the difference
        between the fair market value and the issuing value of the common stock.

        During fiscal 1998, the Company issued 324,175 shares of common stock in
        exchange for services rendered by stockholders. As a result of this
        transaction, the Company recognized expense of $52,592, representing the
        fair market value of the common stock issued.



                                      -32-
<PAGE>   33
SYNTHETIC BLOOD INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED
APRIL 30, 1998 AND FOR THE PERIOD MAY 26, 1967 (DATE OF INCORPORATION)
TO APRIL 30, 1998 (CONTINUED)
--------------------------------------------------------------------------------



        During fiscal 1998, the Company issued 6,000,000 shares in private
        placements for aggregate proceeds of $1,260,000. In conjunction with
        such offerings, the Company recognized a charge of $40,000, which
        represents the difference between the fair market value and issuance
        price of one of the offerings. Additionally, the Company's officers
        contributed personal holdings of the Company's stock to certain
        investors on behalf of the Company. The fair market value of such stock
        was $389,967. Such has been recorded in the financial statements as a
        contribution of capital by the shareholders and as a direct cost of the
        private placement, offset against the proceeds received.

        During fiscal 1998, the Company's officers forgave salaries totaling
        $186,851, related to services performed in fiscal year 1998.
        Additionally, a stockholder contributed $5,000. Such have been recorded
        in the financial statements as contributions of capital.


7.      STOCK OPTIONS AND WARRANTS

        In April 1995, the Company adopted a stock option plan providing for the
        granting of options to officers, directors, consultants and key
        employees to purchase up to 2,500,000 shares of the Company's common
        stock at prices not less than the fair market value of the stock at the
        date of grant. The option expiration dates are determined at the date of
        grant, but may not exceed ten years.

        Changes in shares under options for the years ended April 30, 1998, 1997
        and 1996 are summarized as follows:


<TABLE>
<CAPTION>
                                                                              YEARS ENDED APRIL 30,
                                                   ------------------------------------------------------------------------------
                                                             1998                        1997                       1996
                                                   ------------------------      ---------------------      ---------------------
                                                                  WEIGHTED                   WEIGHTED                   WEIGHTED
                                                                   AVERAGE                    AVERAGE                    AVERAGE
         OPTIONS                                     SHARES         PRICE        SHARES        PRICE        SHARES        PRICE
<S>                                                <C>             <C>           <C>         <C>            <C>          <C>
         OUTSTANDING, beginning of year              100,000       $   0.25      100,000      $   0.25      100,000      $   0.25

         Granted                                   1,200,000       $   0.17
         Forfeited                                  (100,000)      $   0.25
                                                   ---------                     -------                    -------

         OUTSTANDING, end of year                  1,200,000       $   0.17      100,000      $   0.25      100,000      $   0.25
                                                   =========       ========      =======      ========      =======      ========

         Options exercisable, end of year            900,000       $   0.13
                                                   =========       ========

         Weighted average fair value granted
           during the year                                         $   0.11
                                                                   ========
</TABLE>



                                      -33-
<PAGE>   34
SYNTHETIC BLOOD INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED
APRIL 30, 1998 AND FOR THE PERIOD MAY 26, 1967 (DATE OF INCORPORATION)
TO APRIL 30, 1998 (CONTINUED)
--------------------------------------------------------------------------------



        The Company accounts for its stock option plan in accordance with the
        provisions of APB Opinion No. 25, Accounting for Stock Issued to
        Employees. Had compensation cost for the stock option plan been
        determined based on the fair value at the grant date consistent with the
        method of SFAS No. 123, Accounting for Stock-Based Compensation, the
        Company's net loss and net loss per share would have been the pro forma
        accounts indicated below:




<TABLE>
<CAPTION>
                                                             YEARS ENDED APRIL 30,
                                           -----------------------------------------------------
                                                1998                 1997                1996
<S>                                        <C>                 <C>                 <C>           
         Actual net loss                   $  (1,281,032)      $  (1,910,376)      $  (2,346,227)
         Pro forma net loss                   (1,364,429)         (1,910,376)         (2,346,227)

         Actual net loss per share                  (.04)               (.05)               (.08)
         Pro forma net loss per share               (.04)               (.05)               (.08)
</TABLE>


        The fair value of each option grant was estimated at the grant date
        using the Black-Scholes option-pricing model for the year ended April
        30, 1998, assuming a risk-free interest rate of 6.35%, volatility of
        97%, zero dividend yield, and expected lives of 24 to 120 months.
        Options outstanding at the beginning of fiscal 1996 were fully vested at
        the date of grant.

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

        Furthermore, in connection with various agreements for the sale of the
        Company's common stock (Note 6) and in lieu of payment for services
        rendered, the Company issues warrants to purchase shares of its common
        stock.



                                      -34-
<PAGE>   35
SYNTHETIC BLOOD INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED
APRIL 30, 1998 AND FOR THE PERIOD MAY 26, 1967 (DATE OF INCORPORATION)
TO APRIL 30, 1998 (CONTINUED)
--------------------------------------------------------------------------------



<TABLE>
<CAPTION>
                                                                         YEARS ENDED APRIL 30,
                                            -------------------------------------------------------------------------------
                                                     1998                        1997                        1996
                                            -----------------------    -----------------------     ------------------------
                                                           WEIGHTED                   WEIGHTED                    WEIGHTED
                                                           AVERAGE                     AVERAGE                     AVERAGE
         WARRANTS                             SHARES        PRICE         SHARES        PRICE         SHARES        PRICE
<S>                                         <C>            <C>            <C>         <C>           <C>           <C>  
         OUTSTANDING, beginning of
           year                               600,000       $0.67         600,000       $0.67       2,189,973       $1.31

         Granted                            2,000,000       $0.53                                   1,200,000       $0.10
         Expired                             (600,000)      $0.67                                  (1,498,723)      $1.64
         Exercised                                                                                 (1,291,250)      $0.10
                                            ---------                     -------                  ----------

         OUTSTANDING, end of year           2,000,000       $0.53         600,000       $0.67         600,000       $0.67
                                            =========       =====         =======       =====      ==========       =====

         Warrants exercisable, end of
           year                             2,000,000       $0.53
                                            =========       =====

         Weighted average fair value
           granted during the year                          $0.07
                                                            =====
</TABLE>


        The aggregate estimated fair value of warrants issued in fiscal 1998 was
        $130,406, which was recorded as expense in the accompanying statement of
        operations.

        Outstanding stock options and warrants at April 30, 1998 consist of the
        following:


<TABLE>
<CAPTION>
                                                                          AVERAGE
                                                                           LIFE       AVERAGE
                                                        SHARES           REMAINING     PRICE
                                                      ---------------------------------------
                                                                          (YEARS)
<S>                                                   <C>                <C>         <C>     
         OPTIONS OUTSTANDING

         Range of exercise prices - $.13-$.28         1,200,000            9.77      $   0.17

         WARRANTS OUTSTANDING

         Range of exercise prices - $.35-$.70         2,000,000            1.50      $   0.53
</TABLE>



                                      -35-
<PAGE>   36
SYNTHETIC BLOOD INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED
APRIL 30, 1998 AND FOR THE PERIOD MAY 26, 1967 (DATE OF INCORPORATION)
TO APRIL 30, 1998 (CONTINUED)
--------------------------------------------------------------------------------



8.      INCOME TAXES

        As of April 30, 1998 and 1997, the Company had net deferred tax assets
        of approximately $3,373,000 and $2,818,000, respectively, all of which
        has been offset by a valuation allowance. These deferred tax assets are
        comprised of net operating loss and research and development credit
        carryforwards that expire from 2005 to 2013.


9.      RELATED PARTIES

        During fiscal 1998, 1997 and 1996, the Company recorded expenses of
        approximately $49,000, $63,000 and $100,000, respectively, for services
        provided by a company in which an officer of the Company has a
        controlling interest.

        Included in accounts payable at April 30, 1998 and 1997 are payables to
        officers of $56,540 and $52,038, respectively.



                                      -36-