UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON, D.C.
20549




FORM
10-K





x ANNUAL REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934


For the
fiscal year ended December 31, 2007





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


For the
transition period from __________ to __________




COMMISSION
FILE NUMBER 0-24050


HEMOBIOTECH,
INC.


(Exact
name of Registrant as Specified in Its Charter)





DELAWARE
            
            33-0995817(State
      or other jurisdiction of
            
            (I.R.S.
      Employerincorporation
      or organization)
            
            Identification
      No.)5001
      SPRING VALLEY RD, SUITE 1040 - WESTDALLAS,
      TEXAS
            
            75244(Address
      of principal executive offices)
            
            (Zip
      Code)




Registrant's
telephone number, including area code: (972) 455-8950




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





SECURITIES
REGISTERED PURSUANT TO SECTION 12(G) OF THE EXCHANGE ACT: COMMON
STOCK, PAR VALUE $.001 PER SHARE




Indicate
by check mark if the registrant is a well-known seasoned issuer. 
 ̈
Yes  þ
No





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act.  ̈





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 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. þ Yes
 ̈ No




Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is not contained herein, and will not be contained, to the best
of the 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.  ̈





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated
filer o     Accelerated
filer o     Non-accelerated
filer þ     
Smaller Reporting Company o




The
issuer's revenues for the fiscal year ended December 31, 2007 were
$0.




As of
March 17, 2008, 19,144,007
shares of the Registrant's common stock, par value $.001 per share, were
outstanding.




On that
date, the aggregate market value of voting stock (based upon the closing price
of the Registrant's common stock on March 17, 2008) held by nonaffiliates of the
Registrant was $7,111,953 (7,041,538 shares at $1.01 per share).





Documents Incorporated By Reference:Portions of the Issuer’s definitive Proxy Statement for the 2008 Annual
Meeting of Stockholders, to be filed within 120 days after the end of the fiscal
year covered by this Form 10-K, are incorporated by reference into Part III of
this Form 10-K.










CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING INFORMATION




Except
for historical information, the matters discussed in this document may be
considered "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Such statements include declarations regarding the
intent, belief or current expectations of HemoBioTech, Inc., and its management
and are valid only as of today, and we disclaim any obligation to update this
information. These statements are subject to known and unknown risks and
uncertainties that may cause actual future experience and results to differ
materially from the statements made. Factors that might cause such a difference
include, among others the successful pre-clinical development, the successful
completion of clinical trials, the FDA review process and other governmental
regulation, pharmaceutical collaborator interest and ability to successfully
develop and commercialize drug candidates, competition from other pharmaceutical
companies, product pricing and third party reimbursement, and other factors
which are included in this report and HemoBioTech, Inc.'s other reports filed
with the Securities and Exchange Commission.




- 2
-




PART
I




ITEM
1. BUSINESS




We were
founded in 2001 as "HemoBioTech, Inc.," a Texas corporation. In 2003, we
incorporated a sister corporation named "HemoBioTech, Inc." in the State of
Delaware. On December 1, 2003, HemoBioTech, Inc. (Texas) was merged with and
into HemoBioTech, Inc., (Delaware) with HemoBioTech, Inc. (Delaware) as the
surviving entity. Our principal executive offices are located at 5001 Spring
Valley Road, Suite 1040-West, Dallas, TX 75244, and our telephone number is
(972) 455-8950.




We are
the exclusive licensee of what we believe is an innovative human blood
substitute product, which we call "HemoTech". HemoTech is comprised of
hemoglobin that has been isolated from bovine blood and then chemically altered
to make the resulting product non-toxic. It is the combination of these elements
that we believe makes HemoTech a novel product. HemoTech is intended to address
an increasing, yet unmet, demand for safe and inexpensive blood in the United
States and around the world. We believe HemoTech is non-toxic based on initial
foreign clinical studies.




Dr. Mario
Feola and Dr. Jan Simoni, Texas Tech University Health Science Center School of
Medicine ("TTUHSC") researchers and recognized blood substitute authorities,
developed HemoTech over 20 years of research. HemoTech has been tested in a
European pre-clinical regulatory study conducted at the Research Toxicology
Centre S.p.A. in Rome, Italy, in 1990 to 1992 and preclinical studies at ISI St.
Antimo in Naples, Italy from 1989 to 1991 and a limited human clinical trial in
Africa in 1990, with what we believe to be favorable results. These initial
studies suggest, although no FDA approved studies have been undertaken and there
can be no assurance that later stage trials will confirm these findings, that
this novel red blood cell substitute:





·
            can
      act as a carrier of oxygen;


·
            produces
      no adverse toxicity of the kidneys, or the nervous
  system;


·
            produces
      no adverse inflammatory reactions;


·
            can
      dilate the blood vessels (which is called vasodilatory activity) and can
      reduce narrowing of blood vessels (or vasoconstriction) that follows
      hemorrhage;


·
            has
      erythropoietic activity (which is the production of red blood cells in the
      body);


·
            has
      lower oxygen affinity (which is how tightly oxygen binds to the
      hemoglobin) than other competing blood substitutes, approximating the
      oxygen affinity of native human red blood
cells;


·
            has
      the ability to remain in the blood vessels; and can sustain a
      close-to-normal amount of plasma in the
blood.




We have
obtained an exclusive, worldwide license from Texas Tech University for the core
patents covering certain key markets, including primary markets in North
America, Europe and Asia. We also have a strategic partnership with TTUHSC that
allows us to utilize research and production facilities at TTUHSC and TTUHSC
scientists, surgeons and medical staff. Our relationship with TTUHSC is governed
by license and research agreements that, among other things, grant us the
exclusive worldwide intellectual property rights to the HemoTech technology in
exchange for equity ownership and payment of the fees associated with our use of
TTUHSC facilities, materials and personnel.




We
believe the structure of these license and research agreements could be
attractive to potential pharmaceutical company partners and could be positive
factors for the commercializing of HemoTech.




Background




The
development of HemoTech is based on the idea that free hemoglobin-based blood
substitutes can no longer be considered simply vehicles for transporting oxygen
and carbon dioxide. Rather, they should possess properties that diminish the
intrinsic toxic effects of hemoglobin and help eliminate the abnormal reactions
associated with the loss of blood pressure and the lowering of vital signs
resulting from the loss of blood during hemorrhage. We believe we have a
purification method necessary for the purity of our hemoglobin solutions. We
believe this purification method will allow us to produce HemoTech in a
cost-effective manner by avoiding many of the expensive and capital intensive
purification methods used by some of our competitors.




We
believe the potential market for red blood cell substitutes is large and
growing. The Theta Reports indicate that each year in the United States, over
four million patients receive transfusions of over 14 million units of red blood
cells in HemoBioTech, Inc.'s targeted markets of acute anemia, cancer and
ischemia (the inadequate flow of blood due to constriction or obstruction of
blood supply).





- 3
-


In
addition to peacetime need, emergencies typically add to the demand for blood
substitutes. For many years, the U.S. military has had an interest in an
effective blood substitute.




There are
several critical factors shaping the U.S. blood market. The market is facing
increasing demand while the available supply remains stagnant. Banked blood
continues to increase in cost and still entails risks related to infection and
immune response. A safe, cost effective blood substitute has numerous advantages
over the current blood supply:





·
            minimize
      the risk of infections by infectious agents such as hepatitis and HIV
      (which causes AIDS) and adverse reactions in
  patients;


·
            be
      compatible with all blood types, allowing earlier administration,
      increasing survivability for trauma patients and preventing supply
      shortages related to specific blood
types;


·
            possess
      a significantly longer shelf life (six months or greater) than that of
      donated red blood cells (42 days), allowing a wider range of
      administration and increased stockpiling;
and


·
            derived
      from a potentially large supply, countering the critical shortage of
      banked human blood worldwide.





HemoBioTech,
Inc.'s scientific team has delineated molecular mechanisms to explain both
HemoTech's non-toxicity and pharmacological activities. This team first
identified the factors that lead to toxicity. They then developed both an
isolation method that ensures the purity of Hb solutions and a chemical
modification method that results in the lack of intrinsic toxicity. This
research led to the development of HemoTech, which, in addition to its
physiological properties of Hb, has additional pharmacological activities that
effectively eliminate blood vessel constriction, improve the release of oxygen
into the body and produce an anti-oxidant and anti-inflammatory effect and
induces erythropoiesis production (production of red blood cells).




Our
Product




Our
product, HemoTech, is an oxygen-carrying solution that performs like red blood
cells. It can address an increasing yet unmet demand for safe and inexpensive
blood in the US and around the world. It also can address many of the medical,
logistical and economical concerns associated with red blood cell
transfusion.




HemoTech
is created by reacting pure bovine hemoglobin with three chemicals: o-adenosine
5'-triphosphate ("o-ATP"), o-adenosine and reduced glutathione ("GSH"). These
chemicals permit chemical modification of the hemoglobin to create the observed
beneficial activities of HemoTech and introduce necessary changes to the
hemoglobin that control oxygen affinity and other biological
activities.




The use
of o-adenosine has a number of biological benefits. First, it counteracts the
properties of hemoglobin that cause narrowing of the blood vessels.
Additionally, the o-adenosine reduces the potential of hemoglobin to cause
inflammation in the body. HemoTech also relaxes hemorrhage-induced narrowing of
the blood vessels. GSH permits the alteration of the surface charge of HemoTech,
which is also an essential feature of our novel hemoglobin modification
procedure. GSH also lowers oxygen affinity to a level that is near that of
native red blood cells.




Bovine
blood isolated and utilized for the commercial production of HemoTech will be
taken only from healthy cows from a controlled herd with records over several
generations and a controlled diet to protect against "BSE" (bovine spongiform
encephalopathy, also known as mad cow disease). Immunological test for special
proteins called prions which cause BSE can be utilized to test brain and spinal
cord material.




We
believe that blood substitutes currently undergoing FDA trials have limited
potential for success in the broad human blood use market because they generate
various levels of hemoglobin-based toxicity. A number of blood substitute
candidates were developed before the intrinsic toxicity of hemoglobin was
identified, and few companies have modified their approach to creating blood
substitutes based on recent findings related to hemoglobin toxicity because of
significant investments already made to advance lead compounds through FDA
trials. Based on initial studies, we believe that HemoTech's primary benefits
include:





·
            non-toxicity:


·
            an
      oxygen affinity that closely mimics that of human red blood cells and does
      not cause an adverse affect that results from excessive interaction with
      oxygen;


·
            the
      stimulation of the production of red blood cells in the body, which allows
      the body to replace its native blood supply in half the time it would
      otherwise take following a
transfusion;


·
            a
      half life of approximately 24 hours, which is desirable given the body's
      ability to produce red blood cells, which allows the body to replace it
      with its own supply;


- 4
-


·
            high
      purification, which may eliminate the risk of infection and adverse immune
      reactions in patients;


·
            the
      ability to be stored at 4oC (39oF) for six months or more and for an
      extended period when frozen (compared to 42 days for banked blood at 4oC),
      and the ability to be stockpiled
easily;


·
            compatibility
      with all blood types and availability for administration within
      minutes;


·
            the
      ability to be produced from a ready and vast supply of cow blood;
      and


·
            the
      potential to be produced at a price competitive with current banked blood
      and other blood substitute
products.





Clinical
Status





HemoTech
underwent foreign pre-clinical and human clinical testing in the late 1980's and
early 1990's. Pre-clinical testing included research performed by TTUHSC at its
laboratories in Lubbock, Texas in the mid to late 1980's, at ISI St. Antimo
Laboratories in Naples, Italy from 1989 through 1991, and a European IND study
conducted from 1990 through 1992 at the Research Toxicology Center S.p.A. (the
"RTC") in Rome, Italy. This research was based on the following:





·
            in
      vivo animal studies; and


·
            in
      vitro testing using various human cell
lines.





These
tests focused on:





·
            toxicity;


·
            the
      way in which the product affects blood
vessels;


·
            immunological
      and inflammatory activity, as well as the way in which HemoTech interacts
      with oxygen (which is called oxidative
  activity);


·
            stability;
      and


·
            therapeutic
      potential.




We
believe the results of these pre-clinical tests support HemoTech's non-toxicity
and biological activity, although there can be no assurance that future later
stage trials will confirm these findings. These pre-clinical tests generated
more than 80 abstracts and papers, and an official European IND report has been
issued supporting the pre-clinical non-toxicity results in cell and animal
studies.





The human
non-FDA clinical trial was performed at the Institut de la Recherche en Sciences
de la Sante, Centre de l'Anemie S. S. (Kinshasa, Zaire)in 1990. In that study,
nine children suffering from sickle cell anemia received HemoTech in significant
volumes (approximately 25% of total blood volume) over a two-hour period. These
patients experienced significant near-term improvements as their general
condition improved, episodes in which sickle cells block the blood vessels were
reduced, pain was quickly relieved, and blood vessel dilatation and better
tissue oxygenation were indicated. The patients were monitored over a
three-month period. These studies showed no toxicity and an induction of red
blood cell production. These studies were published in the medical journal,
Surgical Gynecology & Obstetrics, volume 174, number 5, pages 379-386
(1992). In addition to the clinical improvements in the patients, these initial
studies indicate that HemoTech:





·
            produces
      no adverse kidney, nervous system, oxidative or inflammatory reactions in
      humans;


·
            can
      reduce the narrowing of blood vessels that follows
    hemorrhage;


·
            has
      low oxygen affinity and can work as a physiological oxygen
      carrier;


·
            induces
      red blood cells production in the
body;


·
            has
      prolonged intravascular persistence;
and


·
            can
      sustain a close-to-normal level of plasma in the
  blood.





- 5
-


The
results of the HemoTech clinical studies have not demonstrated any negative side
effects. Since the results of the HemoTech clinical studies showed that the
product promotes vasodilation, rather than narrowing of the blood vessels, and
that the product increases red blood cell production, the product has indicated,
in such clinical studies, that it is non-toxic. However, the corporation that
sponsored the European IND faced financial difficulties that were independent of
the HemoTech program and therefore was unable to continue to sponsor the
program. Accordingly, the HemoTech technology was returned to TTUHSC in 1995.
TTUHSC subsequently constructed a production facility for HemoTech and attempted
to raise money to support the research, development, testing and
commercialization of HemoTech, but these activities were outside the scope of
TTUHSC's expertise, so the university then sought to license the HemoTech
technology. In 2002, we entered into our license agreement with
TTUHSC.




We
believe the results of the HemoTech clinical trials are significant because they
represent a rare example of a non-toxic administration of a blood substitute
product. Furthermore, this trial demonstrated in humans the pharmacological
activity of HemoTech. There can be no assurance, however, that future later
stage trials will support or confirm these findings.





The
HemoBioTech team, under the direction of Dr. Simoni, is currently working on
advanced research in the fields of toxicity and efficacy which will be funded by
us, and expects to develop innovative modifications of the existing patented
technology resulting in new clinical applications for HemoTech in the following
areas:





·
            trauma
      and blood disorders;


·
            cardiopulmonary
      bypass surgery including
angioplasty;


·
            organ
      and tissue transplantation; and


·
            oncology
      (the treatment of cancer).





One of
the chief objectives of the team is to further evaluate the pharmacological
effects of HemoTech. The proposed research is aimed at further understanding the
vasodilatory and anti-inflammatory action of HemoTech at the molecular level.
The team also is developing improved laboratory methods for the evaluation of
clinical samples during HemoTech's human trials, which will be licensed by
us.




Research
and Development Activities





During
the years ended December 31, 2007, and 2006, the Company's financial statements
reflect, $998,000 and $638,000 respectively, charged to expense for research and
development activities.





On
January 22, 2002, the Company entered into an exclusive license agreement with
TTUHSC with respect to receiving certain patented rights.  The Company
is committed to the exploitation of such patented rights. In consideration for
entering into the agreement, the Company issued 678,820 shares of common stock
to TTUHSC (subject to anti-dilution protection).  In addition, the
Company has agreed to fund, over a four-year period, $1.2 million to support
efforts in incubating and commercializing other TTUHSC
technologies.  The funding of the $1.2 million is subject to the
Company obtaining FDA approval of a blood substitute product. Under the
agreement, the Company reserves the right of first refusal on licensing and
commercializing other technology developed from such funding. The shares issued
were valued at approximately $1,000, their estimated fair value, and charged to
operations.  As of December 31, 2007, such approval had not been
obtained.  In addition, the Company reimburses TTUHSC for all
intellectual property protection costs and patent maintenance fees related to
HemoTech.  On May 20, 2004, TTUHSC agreed to waive its anti-dilution
protection in exchange for 135,765 additional shares of common
stock.  Such shares were valued at approximately $115,000, their
estimated fair value, and charged to operations.





In
addition, in July 2002, the Company entered into a Sponsored Research Agreement
(“SRA”) with TTUHSC for the period September 1, 2002 through August 31, 2006,
subject to a two-year extension to be mutually agreed on by the parties in the
second year of the agreement and prior to December 31, 2006. Our Stage III SRA
was for the period January 1, 2006 through December 31, 2006.  Through
the SRA, the Company funds, on a yearly basis, costs associated with the further
research of HemoTech conducted at TTUHSC. In December 2004 and January 2006, the
Company paid approximately, $231,000 and $287,000 respectively, to fund the
ongoing phases of research under the SRA.




- 6
-


In
January 2007, the Company entered into a Stage IV SRA with TTUHSC for the period
beginning January 1, 2007. In connection therewith, the Company made an initial
payment of approximately $780,000.  This amount will be charged to
operations as incurred based on monthly reporting to the Company by TTUHSC.
Additional payments may be made to TTUHSC under the agreement based on mutually
agreed upon budgets. The SRA IV activities include maintaining the animal
facility which houses a controlled herd of Hereford cows needed for the
production of HemoTech and assistance in the implementation of FDA
recommendations received at a Pre-IND meeting with the FDA in April
2006.  The SRA IV activities also include the manufacture of HemoTech.
The product will be made at the production facility at TTUHSC and will be used
for pre-clinical and clinical studies upon acceptance of the IND.  The
agreement will also involve further research and development with a focus on
additional uses of HemoTech and expanded patent protection.





Intellectual
Property




We have
licensed from TTUHSC exclusive worldwide rights to HemoTech under a U.S. patent
issued in August 1995. The patent, U.S. Patent No. 5,439,882, entitled "Blood
Substitute," and its foreign counterparts, claim various alternative
compositions of the novel blood substitute based on hemoglobin of both bovine
and human origin as well as methods for its production and use. Protection under
this U.S. patent expires on August 8, 2012.





Under the
terms of the license agreement, in 2002 we issued to TTUHSC in lieu of any
royalties, licensing fees, sublicensing fees and any other payments (other than
certain patent maintenance costs), 678,820 shares (approximately 5% of our
then-authorized common stock) to TTUHSC. These shares initially were subject to
anti-dilution protection until such time as we expend at least $15,000,000 on
the research, development, testing and commercialization of HemoTech. In
connection with the issuance of units in our October 2004 Private Placement, in
lieu of receiving the entire number of shares of common stock to which it would
have been entitled as a result of our issuance of units, under the terms of a
letter agreement with us, dated May 20, 2004, TTUHSC agreed to accept an
additional 135,765 shares of our common stock and an aggregate payment of
$60,000 (including payment of patent maintenance costs and expenses paid by
TTUHSC) in exchange for removing the anti-dilution provision. We have not made
any other payments to TTUHSC under the license agreement and we are not required
to make any payments under the license agreement except as follows:





·
            to
      reimburse TTUHSC for certain patent maintenance costs of the HemoTech
      patent and any other patent that becomes covered by the license agreement,
      within 30 days of receiving notice from TTUHSC that such amounts are due;


·
            to
      pay prosecution costs and costs of foreign counterpart applications on all
      future "designated inventions," which includes patentable inventions
      created by TTUHSC's employees under the Sponsored Research Agreement;
      and


·
            cost
      to maintain our patent position in 21 foreign
  countries.




In May
2006 TTUHSC filed a new patent application to cover the induction of
erythropoiesis (which is the increase of red blood cell production), which is a
major activity of HemoTech. We have exercised our option to include this
technology in our license agreement with TTUHSC.  There can be no
assurance that TTUHSC will be granted a new patent prior to expiration in August
2012 or at all. If issued, this new patent, exclusively owned by TTUHSC, could
give us additional protection for the commercial use of HemoTech. Under the
terms of our license agreement with TTUHSC, title to inventions made solely by
inventive contributions of employees of TTUHSC shall be owned by TTUHSC; title
to inventions made solely by inventive contributions of employees of
HemoBioTech, shall be owned by HemoBioTech; and title to inventions made by
joint inventive contributions of employees of both TTUHSC and HemoBioTech shall
be jointly owned by TTUHSC and HemoBioTech. In addition to the proposed
erythropoiesis patent, the Company, working with TTUHSC, are developing a broad
patent strategy that focuses on improvements in production and purification
methods used in the manufacturing of HemoTech, use of HemoTech and other
potential future product formulations for specific medical indications,
formulaic modifications of HemoTech's platform technology and use of the
platform technology for other targets.




In
addition to our U.S. rights, we enjoy patent protection in several European and
Asian nations as well as Australia and Canada. In all, our licensed foreign
patents have been issued by or designated (in the case of patents issued by the
European Patent Office) in 21 foreign nations. Furthermore, continued testing of
HemoTech may, although there can be no assurance, result in refinements that are
patentable, thereby extending patent protection for forthcoming HemoTech
derivatives.


- 7
-


Supply
and Demand




According
to the Foundation for American Blood Centers, the United States faced an
estimated shortfall of more than one million units of safe blood in 2003. In the
face of this deficit, many cities are looking overseas to address their blood
shortages. For example, according to Crain's New York Business News, New York
City has imported more than 25% of its blood supply from Europe.




According
to BLOOD TRANSFUSIONS: KNOWING YOUR OPTIONS, a publication of the Pall
Corporation, more than 43% of all blood products are used for people 65 and
older. This older segment of the population is expected to grow 14% in the next
10 years, almost twice as fast as the rest of the population.
Thus, the shortage of red blood cells is expected to increase dramatically as
more baby boomers age and the number of cardiac surgeries, cancer treatments,
hip and knee replacements, head injury treatments, organ transplants and other
surgeries also increase. While blood donations have generally increased by 1-2%
annually, the American Red Cross estimates that blood transfusion demand is on
pace to increase by 6-8% annually. Worldwide, the shortage is even greater. The
World Health Organization estimated a worldwide shortage of 25 million units of
blood in 2002.




Increasing
Cost





According
to Tissue Link Medical, Technical Brief No. 305, the actual cost of a red blood
cell transfusion has increased dramatically in recent years and currently ranges
between $500-1,000 per unit of blood. The major factors contributing to this
increase include additional costs related to testing, screening, processing,
type matching and overhead. In light of recent stricter guidelines to ensure the
safety of blood, such as more stringent screening for transmittable diseases and
standard leukoreduction (eliminating the white blood cells that can carry
infections), the cost of blood is expected to continue to rise.





Blood
Supply Safety





Sensitive
screening tests in the United States have greatly reduced the risk of infectious
disease transmission in the domestic population, but unacceptable risks still
remain. According to the American Red Cross, the risk of infection from, or
adverse reaction to, a single blood transfusion is:





·
            1:1,000
      – 3,000 for bacterial infections


·
            1:205,000
      for Hepatitis B


·
            1:935,000
      for Hepatitis C


·
            1:2,135,000
      for HIV





These
probabilities compound quickly, however, for major procedures, such as organ
transplants and trauma, which require fifty units of blood on average. Even in
minor surgeries, which require six to eight units of blood, the probabilities of
contracting infections or experiencing adverse reactions are not
insignificant.





We
believe that our product's initial foreign clinical testing produced data that
supported HemoTech's biological activity and non-toxicity in humans.
Additionally, the product demonstrated anti-inflammatory and vasodilatory
activity, as well as erythropoietic activity. No negative side effects have been
seen to date, prompting more than 80 abstracts and papers, and an official
European Investigational New Drug Application supporting the preclinical
non-toxicity results in cell and animal studies. Subsequent to HemoTech's
clinical studies, HemoBioTech's researchers delineated the molecular mechanisms
of HemoTech. These data confirm the properties of HemoTech observed during
clinical studies and constitute positive support for potential future FDA
regulatory filings by HemoBioTech as well as valuable information for future
product research and development.




Production
and Material Supply




The
Company's proprietary production method consists of reacting pure bovine
hemoglobin with three chemicals--o-adenosine 5'-triphosphate (o-ATP),
o-adenosine, and reduced glutathione (GSH)--chemically modifying the hemoglobin
to create beneficial activities and effect changes that control oxygen affinity
and other biological activities. A benefit of o-adenosine is that it counteracts
the hemoglobin properties that cause the narrowing of blood vessels. It also
reduces the potential of hemoglobin to cause inflammation.




The
preference for bovine hemoglobin as an erythrocyte substitute, first proposed by
the TTUHSC researchers, was based on indications that bovine hemoglobin was more
effective than isolated human hemoglobin at transporting oxygen; that bovine
erythrocytes were widely available; and that human and bovine diseases
transmissible by blood could be avoided by collecting erythrocytes exclusively
from select healthy cattle. Bovine blood isolated and utilized for production of
HemoTech is taken only from healthy cows, from a controlled herd.




- 8
-




HemoBioTech
has the exclusive worldwide license from TTUHSC covering all intellectual
property associated with HemoTech. The Company further has access to TTUHSC
staff and equipment necessary to produce, test, and certify HemoTech, with
access to University laboratory facilities and a blood substitute production
facility TTUHSC has constructed on its campus specifically for the production of
HemoTech. HemoBioTech has the right to assist in recruiting personnel, including
student interns, and obtaining state and federal grants for its research,
development, and manufacturing programs.




Business
Strategies




We
believe the most likely path to commercialization of HemoTech, if ever developed
and approved for sale, will involve a partnership with a major pharmaceutical
company. Because commercialization of a major pharmaceutical product requires a
significant amount of capital, HemoBioTech will seek to identify and enter into
partnership agreements with one or more pharmaceutical companies to partner in
the late stages of clinical trials.




HemoBioTech's
ability to research, develop, and successfully commercialize HemoTech is
dependent upon its collaborative relationships with TTUHSC as well as outside
consultants. Our outside consultants will collaborate on key projects and are
assisting HemoBioTech in their creation and submission of the U.S. IND
(Investigational New Drug) application, clinical trials and conducting
additional research activities.




In order
to achieve its goal, HemoBioTech has determined that it must meet the following
objectives:




·
            Upgrade
      its Current Production Facilities. To produce HemoTech for Phase I U. S.
      clinical trials, HemoBioTech must complete upgrades to its current
      production facilities at TTUHSC. The initial phase of this plan was
      completed at the end of the second quarter of 2005. The second phase was
      completed during 2006. Financing the initial phase was included in
      HemoBioTech's Stage II Sponsored Research Agreement payment to TTUHSC in
      December 2004 and the additional upgrade is part of the Stage III sponsor
      agreement signed in 2006 as well as additional expenditures if necessary.
      Our Stage IV SRA includes upgrades to our production facilities based on
      FDA recommendations.




·
            Preparation
      and Submission of U.S. IND Application. Under terms of their Stage II
      sponsored research agreement, TTUHSC provided HemoBioTech support services
      for preparation of its U.S. IND application. This included conversion of
      data from European IND application into electronic format, summarization
      and analysis of its pre-clinical CMC ("Chemistry Manufacturing and
      Controls") data and analysis of its proposed Phase I U.S. clinical trial
      testing procedures. The Company expects to complete preparation of its
      U.S. IND application and is targeting to submit it to the FDA in 2008. The
      estimated cost of submitting the application as well as the production of
      HemoTech is approximately $6,000,000 or
greater.




·
            Phase
      I of our U.S. Clinical Trials. A Phase I U.S. clinical trial for HemoTech
      will commence subsequent to the acceptance of the IND
      application.  We estimate that our Phase I clinical trials
      (including costs of doing additional research and development of HemoTech
      during our Phase I U.S. clinical trials and the operational and overhead
      costs that we will incur during our Phase I U.S. clinical trials) could
      cost approximately $10.0 million, although the final cost could be more or
      less than this estimate.




·
            During
      June 2007 we engaged a U.S. based Clinical Research Organization to assist
      the Company in submitting technical information to the Drug Controller
      General of India (DCGI) for the purpose of obtaining regulatory authority
      to conduct clinical trials in India. A goal is to establish clinical
      trials in India and if successful commercialize HemoTech in
      India.  This strategy may be in place prior to clinical trials
      and commercialization in the
U.S.


- 9
-


Competition




If
approved for commercial manufacture and marketing, we believe HemoTech will have
a unique competitive advantage over other products under testing or under
development since we believe HemoTech is the only product that addresses all
aspects of the intrinsic toxicity (vasoconstriction, oxidative stress and
inflammatory reactions) of hemoglobin. We believe the lack of toxicity in
HemoTech, based on studies to date, is due to the chemical modification of the
hemoglobin in our product. Furthermore, we believe our bovine-derived red blood
cell product provides HemoTech with an additional competitive edge over products
developed from outdated human red blood cells or from perfluorochemicals (which
are synthetic chemical blood substitutes), because bovine blood is safer, more
readily available, more convenient and more cost effective.




Our key
competitors include:




·
            Northfield
      Laboratories has been developing PolyHeme®, which is based on hemoglobin
      from what we believe to be outdated human blood. Although Northfield
      completed its Phase III U.S. clinical trials, in 2002 Northfield's product
      was rejected by the FDA for use in elective surgery due to results
      concerning safety and efficacy. Northfield has completed the PolyHeme(R)
      Phase III U.S. clinical trial for use in ambulatory trauma cases. Since
      Northfield's product has completed the Phase III U.S. clinical trial, it
      could be deemed to be at a more advanced trial stage than HemoTech,
      although their product was previously rejected by the FDA for use in
      elective surgery.




·
            Biopure
      Corporation has been developing Hemopure®, a bovine hemoglobin-based blood
      substitute. Although Biopure completed its Phase III U. S. clinical
      trials, Biopure's product failed to receive a biologic license application
      clearance from the FDA in 2003. The FDA has asked Biopure to perform
      additional safety testing on its
product.




·
            Sangart,
      Inc. has created a hemoglobin-based blood substitute, Hemospan. The
      product is in clinical testing in
Europe.




·
            Synthetic
      Blood International, Inc. is a development stage company, developing
      biotechnology products. It specializes in creating pharmaceuticals and
      medical devices in the fields of liquid ventilation, oxygen therapeutics,
      implanted glucose sensing, and blood substitutes using flurocarbon-based
      technology. Prior flurocarbon-based technologies have suffered from
      toxicity.




Government
Regulation




HemoBioTech,
Inc.'s product, manufacturing activities, and proposed clinical trial of that
product are subject to regulation by the United States Food and Drug
Administration ("FDA") and by other federal, state, local and foreign
authorities. Pursuant to the Food, Drug, and Cosmetic Act of 1938, as amended
("FD&C Act"), the Public Health Service Act ("PHS Act"), and the regulations
promulgated thereunder, the FDA regulates the development, clinical testing,
manufacture, packaging, labeling, storage, distribution and promotion of drugs
and biologics, including blood and blood substitutes.




The FDA
has expansive regulatory authority which may be enforced through product
recalls, seizures and other civil and criminal sanctions. The FDA is considering
changes to its approach to "follow-on biological" products (which are the
biological product equivalent to generic pharmaceutical products). Changes that
would facilitate the approval of such products could have an adverse impact on
the Company's long term strategy to the extent that its product is deemed to be
a biological product.




FDA
APPROVAL PROCESS--PRECLINICAL AND CLINICAL TRIALS. A new drug or biologic cannot
be distributed in the United States unless approved by the FDA; FDA approval of
new drugs and biologics comes at end of a lengthy process and only after the FDA
determines that the article at issue is safe and effective for its intended use
or uses. Whether FDA approves a product is a function of the agency's
discretion.




In order
to gather sufficient data to demonstrate the safety and efficacy of a new drug
or biologic, the manufacturer is usually required to sponsor clinical trials,
i.e., trials in humans, under the jurisdiction of the FDA. In order to conduct
or sponsor a clinical trial of a new drug or biologic, the manufacturer must
submit an Investigational New Drug ("IND") application. The IND application must
contain sufficient and specific animal test data, toxicological, pharmacological
and other data to assure FDA that the initial clinical trial will not endanger
the health of the patients or subjects involved. The Company has not submitted
an IND to clinically test HemoTech in the United States, but anticipates
submitting its IND during 2008. The Company will include in its IND application
for HemoTech the results of the use of HemoTech in other countries. A Company
may not begin clinically testing until its IND has been approved by the FDA or
30 days have elapsed since the filing and the FDA has not objected. However, as
a practical matter, few manufacturers will begin clinical testing if the FDA has
expressed concern about the proposed study.




- 10
-




During
June 2007 we engaged a U.S. based Clinical Research Organization to assist the
Company in submitting technical information to the Drug Controller General of
India (DCGI) for the purpose of obtaining regulatory authority to conduct
clinical trials in India. A goal is to establish clinical trials in India and if
successful commercialize HemoTech in India.  This strategy may be in
place prior to clinical trials and commercialization in the U.S.




The FDA
recognizes three clinical trial phases. A Phase I study is typically closely
monitored and may be conducted in patients or volunteer subjects. These studies
are designed, in part, to determine the metabolic and pharmacologic actions of
the drug or biologic, the side effects associated with increasing doses, to gain
early evidence, if possible, of its effectiveness, and gather sufficient
information to permit the design of well-controlled, scientifically valid Phase
II study. Usually, a Phase I study involves between 20 and 80 subjects or
patients, as the case may be.




Phase II
studies include controlled clinical studies to evaluate the effectiveness of the
drug or biologic for a particular indication in patients with a given condition
under study to determine the common short-term side effects and risks associated
with the drug or biologic. Phase II studies are well controlled, closely
monitored, and conducted on a relatively small cohort usually involving no more
than several hundred patients.




Phase III
studies are expanded, well controlled and closely monitored studies designed to
provide sufficient data so that FDA can determine the product's effectiveness
and safety and to provide adequate basis for physician labeling. Phase III
studies usually include from several hundred to several thousand
patients.




Research
and development activities are costly, time-consuming, and may not be
successful, and there can be no assurance that our product candidate, HemoTech,
even if it is approved to enter Phase I clinical trials, will be approved to
enter subsequent phases or will be approved for marketing by the FDA. Moreover,
even after completion of a Phase III study, FDA may decline to approve the New
Drug Application or Biologics License Application, as the case may
be.




FDA
REGULATION. The FDA closely regulates companies that sponsor clinical trials,
that manufacture drugs or biologics that are being clinically tested or that
manufacture approved products. The FDA may conduct an inspection of any Company
facility and may take regulatory action if it believes that Company has violated
the FD&C Act or PHS Act, including by way of example, issuing observational
findings (FDA 483), issuing a Warning Letter, seizing products, placing a "hold"
on an IND, revoking INDs, revoking approved NDAs or BLAs, or criminally
prosecuting the Company or its employees. During clinical testing phases, FDA
may inspect to ensure, among other things, that the health and welfare of the
patients enrolled in clinical studies are being appropriately protected, that
all subjects have executed informed consent forms approved by an Institutional
Review Board, and that the product is being manufactured in a way that ensures
that it is not adulterated. Post approval surveillance by the FDA is equally
rigorous.




FDA GOOD
MANUFACTURING PRACTICES AND REPORTING. The FDA requires drug and biologics
manufacturers to comply with Good Manufacturing Practices (“GMP”) regulations.
The regulations require that manufacturers comply with various quality control
requirements pertaining to design controls, purchasing contracts, organization
and personnel, including manufacturing process design, buildings, environmental
control, cleaning and sanitation; equipment and calibration of equipment; drug
or biologics components or raw materials; manufacturing specifications and
processes; labeling and packaging; in-process and finished product inspection
and acceptance; and record keeping requirements. Generally, GMP status is
necessary to manufacture products for human use.





Employees





As of
December 31, 2007, the Company has five full-time employees and four employees
through a contract with TTUHSC. Outside consultants are employed as needed to
provide various services. We rely heavily on personnel employed by TTUHSC who
provide services to us under the Sponsored Research Agreement. In addition, we
also employ outside consultants from time to time to provide various services.
We have experienced good employee relations and are not and never have been a
party to a collective bargaining agreement.





- 11
-


The
Company’s Executive Officers are as follows:





NAME
            AGE
            POSITION
      WITH COMPANYArthur
      P. Bollon, Ph.D.
            65
            Chairman
      of the Board of Directors, President and Chief Executive
      OfficerMark
      J. Rosenblum
            54
            Chief
      Financial Officer and SecretaryJan
      Simoni, Ph.D., D.V.M.
            57
            Acting
      Vice President and Principal Investigator of Research and Development and
      AdvisorMario
      Feola, M.D.
            81
            Chief
      Medical Officer





ARTHUR
BOLLON, PH.D., Since April 8, 2003, Dr. Bollon has served on a full-time basis
as our Chairman, President and Chief Executive Officer. In 1991, Dr. Bollon was
a founder of Cytoclonal Pharmaceutics, Inc., a publicly traded biopharmaceutical
company, and served as Chairman, President and Chief Executive between 1991 and
2002. In 1987 Dr. Bollon was a founder of Wadley Biosciences Inc. / LPL, a joint
venture between Wadley Institute and Phillips Petroleum, and served as Chairman,
President and Chief Executive Officer from 1987 to 1991.




MARK J.
ROSENBLUM, Mr. Rosenblum has served as our Chief Financial Officer since April
1, 2005. From August 1985 through June 2003, Mr. Rosenblum was employed by
Wellman, Inc., a public chemical manufacturer.  Between 1996 and 2003,
Mr. Rosenblum was the Chief Accounting Officer, Vice President and Controller at
Wellman, Inc. Mr. Rosenblum is a certified public accountant.




JAN
SIMONI, Ph.D., DVM, Dr. Simoni has served as our Acting Vice President and
Principal Investigator of Research and Development since 2002, through a
Sponsored Research Agreement with Texas Tech University, where he is employed.
Dr. Simoni has also served as an Advisor since July, 2005. Since 1993, Dr.
Simoni has served as the Blood Substitute Group Leader at TTUHSC and is an
Associate Professor of Research in the Department of Surgery at TTUHSC, where
Dr. Simoni co-invented HemoTech.




MARIO
FEOLA, M.D., Dr. Feola has been our full-time Chief Medical Officer since
November 1, 2004. From December 14, 2003 through October 31, 2004, Dr. Feola
served as our Chief Medical Officer on a part-time basis. Dr. Feola has served
as a Professor of Surgery at TTUHSC, where Dr. Feola co-invented
HemoTech.









ITEM 1A. RISK
FACTORS




You
should consider the following matters when reviewing the information contained
in this document. You also should consider the other information incorporated by
reference in this document.




We
are a development stage company with no revenues or profits.




We are in
the development stage and, through December 31, 2007, have generated no sales
revenue and have no prospects for revenue in the foreseeable future. We
currently have no source of operating revenue and there can be no assurance that
we will be able to develop any revenue source or that our operations will become
profitable, even if we are able to commercialize any products. Further, as a
development stage company, we have a limited relevant operating history on which
an evaluation of our prospects can be made. Such prospects must be considered in
light of the risks, expenses and difficulties frequently encountered in
establishing a new business in the evolving, heavily regulated biotechnology industry, which is characterized by an increasing number of
market entrants, intense competition and a high failure rate. In addition,
significant challenges are often encountered by businesses shifting from
developmental to commercial activities.




We
have a history of losses and our future profitability is uncertain.





We have
earned no revenue since our inception and have incurred a net loss of
$11,861,000 from inception through December 31, 2007. We expect to continue to
incur substantial losses and may not generate significant revenue, if any, for
the foreseeable future. Our ability to generate revenue is dependent on
obtaining additional financing for our planned operations. Our immediate planned
operations for the next twelve months include the payment of our general and
administrative expenses (including salaries, legal and other professional fees,
consulting and advisory fees, the costs associated with making certain upgrades
to the HemoTech production facility, to begin the production of HemoTech,
conduct animal studies, including preparation of our U.S. IND application and
preparation for the review of our product in India. We believe our available
cash, cash equivalents and short-term investments of approximately $2,015,000 at
December 31, 2007, will be sufficient to complete our immediate planned
operations through the next twelve months, and possibly longer, based on a
current monthly normalized cash burn rate of approximately
$150,000.





- 12
-




Following
completion of our U.S. IND application, the next stage of our planned operations
will include submission of our U.S. IND application to the FDA, and upon
approval, commencement and completion of our Phase I U.S. clinical
trials.  Additional operations will include further research and
development of HemoTech and payment of operational and overhead expenses that we
will incur during our Phase I U.S. clinical trials as well as preparation for
Phase II clinical trials, assuming Phase I clinical trials are successful. In
order to complete these additional planned operations, we will need to raise
additional capital. If we fail to generate enough cash resources, either from
future equity or debt sales, exercise of our remaining warrants or revenue, our
ability to implement our business plan and complete these planned operations
will be materially affected, and you may lose all or substantially all of your
investment.




We
are reliant on the success of a single product, which is in an early stage of
product development and may never be successfully developed or, if successfully
developed, may never become a viable marketable product.




We are a
one product company, and if we fail to successfully develop this product we
currently have no other products on which our business can be developed. There
can be no assurance that our research and development activities will result in
any commercially viable human blood substitute product. The development of our
blood substitute product will be subject to the risks of failure inherent in the
development of products based on innovative technologies and the expense and
difficulty of obtaining regulatory approvals. Our human blood substitute product
currently under development will require significant additional research and
development and pre-clinical testing and clinical testing prior to submission of
any regulatory application for commercial use. There can be no assurance that
our research or product development efforts will be successfully completed, that
our human blood substitute product currently under development will be
successfully transformed into a marketable product, that required regulatory
approvals can be obtained, that the product can be manufactured at acceptable
cost in accordance with regulatory requirements or that any approved products
can be successfully marketed or achieve customer acceptance. Additional risks
include the possibility that:




·
            our
      proposed product will be found to be ineffective or toxic, or that, if
      safe and effective, will be difficult to manufacture on a large scale or
      uneconomical to market;




·
            that
      the proprietary rights of third parties will preclude our marketing of our
      proposed human blood substitute product;
and




·
            third
      parties will market superior or equivalent
  products.




We
depend on key personnel, and the loss of such personnel could significantly
impair our ability to further develop HemoTech, implement our business plan or
continue operations.




Our
success depends on the continued contributions of our executive officers and
scientific and technical personnel and consultants. We are particularly
dependent on Arthur P. Bollon, Ph.D., our Chairman, President and Chief
Executive Officer, Dr. Mario Feola, our Chief Medical Officer, and Dr. Jan
Simoni, our Acting Vice President and Principal Investigator or Research and
Development and Advisor. Drs. Feola and Simoni are the two principal TTUHSC
researchers who developed HemoTech. Drs. Feola and Simoni continue to be the two
main developers of HemoTech. Dr. Simoni is an employee of TTUHSC and his
services are made available to us under our Sponsored Research Agreement with
TTUHSC. Dr. Simoni's activities related to research and development, production,
regulatory and clinical testing of HemoTech are covered under the Sponsored
Research Agreement with TTUHSC, which may be terminated at any time by either
party on 90 days' prior written notice.





We
currently have five full-time employees including Drs. Bollon and Feola and Mr.
Mark Rosenblum, our Chief Financial Officer. We have entered into an employment
agreement with Dr. Bollon which expires in October 2009, and we have entered
into an employment agreement with Dr. Feola, in which Dr. Feola agreed to serve
as our Chief Medical Officer until such time as either party terminates Dr.
Feola's employment agreement. We have also entered into an employment agreement
with Mr. Rosenblum, which expires in April 2008. Thereafter, Mr. Rosenblum’s
employment agreement shall be automatically renewed for one year periods, unless
otherwise terminated by the Company or executive upon written notice. We do not
maintain "key person" life insurance on the lives of any executive officer and
their death or incapacity would have a material adverse effect on us. During our
limited operating history, many of our key responsibilities have been assigned
to a relatively small number of individuals. The competition for qualified
personnel is intense, and the loss of services of certain key personnel could
adversely affect our business, although we have not experienced problems
attracting or retaining key personnel to date.


- 13
-


If
our human blood substitute product offerings are not commercially successful, we
will be unable to successfully generate revenue.





We expect
a significant amount of our revenue to come from the production and distribution
of human blood substitute products. The success of these offerings depends
primarily on their acceptance by the public, the medical community, and other
third-party consumers and payers, which is difficult to predict. The commercial
success of a medical product depends on the availability of alternative forms of
technology and general economic conditions and other tangible and intangible
factors, all of which can change quickly. If we fail to produce human blood
substitute products with broad medical industry appeal, we will be unable to
successfully generate revenue.




The
market for human blood substitute products is competitive and we may not be able
to compete successfully against competitors that may have substantially more
development, marketing and sales resources than we do.




The
market for human blood substitute products is competitive, and there can be no
assurance that we will be able to compete successfully in this market. We cannot
be assured that some other competitive technology has not been, or will not be,
developed by either government, academic or private entities. Any competing
technology could make our technology either obsolete or of lesser value. Many of
our competitors have greater financial, personnel and other resources than we
have, which may limit our ability to compete effectively. See "Competition"
above.




Although
the proposed products of our main competitors have been rejected by the FDA,
have been abandoned and are not yet ready to submit their applications to the
FDA for approval of their products, many of these competitors are continuing to
develop and test their respective products. There can be no assurance that one
or all of these products may be approved by the FDA before HemoTech, to the
extent HemoTech ever receives FDA approval.





In
addition, our competitors also may generally be able to respond more quickly to
new or emerging technologies or changes in regulatory requirements. These
competitors may also:





·
            benefit
      from greater economies of scale;


·
            offer
      more aggressive pricing;


·
            devote
      greater resources to the promotion of their products;
  and


·
            be
      better positioned to develop future
  technologies.




We
depend on, and will continue to depend on, collaboration with and licenses from
third parties, and if we are not able to enter into such collaborations or
licenses, or if these collaborations or licenses expire, terminate or fail, we
may not be able to further develop HemoTech or implement our business plan
without substantial additional expenditures and delays, if at all.




In
addition to maintaining our collaborative relationship with TTUHSC, our strategy
for the development, clinical testing, manufacturing and commercialization of
our proposed human blood substitute product includes entering into various
collaborations with corporate partners, licensors, licensees and other third
parties in the future, and is dependent on the subsequent success of these third
parties in performing their responsibilities. We intend to seek to enter into
additional arrangements with other collaborators, although there can be no
assurance that we will be able to enter into such collaborations and licenses,
or, to the extent that we do, that such collaborations will be successful.
Further, there can be no assurance that any future arrangements we may enter
into will lead to the development of a human blood substitute product with
commercial potential, that we will be able to obtain proprietary rights or
licenses for proprietary rights with respect to any technology developed in
connection with these arrangements or that we will be able to insure the
confidentiality of any proprietary rights and information developed in such
collaborative arrangements or prevent the public disclosure
thereof.





In
general, collaborative agreements provide that they may be terminated under
certain circumstances. There can be no assurance that we will be able to extend
any of our HemoTech collaborative agreements on their termination or expiration,
or that we will be able to enter into new collaborative agreements with existing
or new partners in the future. To the extent we choose not to or are unable to
establish any additional collaborative arrangements, it would require
substantially greater capital to undertake research, development and marketing
of our proposed products into certain markets or find that the development,
manufacture or sale of our proposed products in such markets is adversely
affected by the absence of such collaborative agreements.




- 14
-


The
FDA regulatory process is costly, lengthy and requires specific expertise, and
even if we invest the time, money and other resources required to advance
through the FDA approval process, we may never receive FDA approval of our only
product, HemoTech.




We will
rely initially on consultants with prior experience working with the FDA. We
expect to hire experienced employees and consultants to analyze, prepare and
present an IND application to the FDA. The process of obtaining regulatory
approvals can be extremely costly and time-consuming and there is no guarantee
of success. If we do not receive approval of our IND application, we will not be
able to proceed with Phase I U.S. clinical testing. In addition, clinical testing is not predictable. Even if the FDA approves the IND
application, we cannot guarantee that the FDA will approve our Phase I U.S.
clinical results. Our failure to obtain required regulatory approvals would have
a material adverse effect on our business, financial condition and results of
operations and could require us to curtail or cease our
operations.




The FDA
and comparable agencies in foreign countries impose substantial requirements on
the introduction of therapeutic and diagnostic pharmaceutical and biological
products through lengthy and detailed laboratory and clinical testing
procedures, sampling activities and other costly and time-consuming procedures.
Satisfaction of these requirements typically takes several years or more and
varies substantially based on the type, complexity and novelty of the product.
The regulatory review may result in extensive delay in the regulatory approval
process. Regulatory requirements ultimately imposed could adversely affect our
ability to clinically test, manufacture or market potential products. Government
regulation also applies to the manufacture and marketing of pharmaceutical and
biological products.




The
effect of government regulation may be to delay marketing of new products for a
considerable period of time, to impose costly procedures on our activities and
to furnish a competitive advantage to larger companies that compete with us.
There can be no assurance that FDA or other regulatory approval for any products
developed by us will be granted on a timely basis or at all. Any such delay in
obtaining, or failure to obtain, such approvals would adversely affect the
marketing of any contemplated products and the ability to earn product revenue.
Further, regulation of manufacturing facilities by state, local and other
authorities is subject to change. Any additional regulation could result in
limitations or restrictions on our ability to utilize any of our technologies,
thereby adversely affecting our operations.




We
may in the future need to raise additional capital to continue our
business.




The
Company estimates that it has sufficient funds to meet the costs of its
immediate planned operations, upgrades to the HemoTech production facility and
covering expected general and administrative costs. To meet the costs of the
next stage of its planned operations, including the cost of additional upgrades
to the HemoTech production facility, commencing and completing Phase I U.S.
clinical trials, conducting additional research and development of HemoTech as
Phase I U. S. clinical trials progress, and paying for operational and overhead
costs that will be incurred during Phase I U.S. trials, the Company will need to
raise additional capital. It is likely that the Company will seek to meet these
liquidity requirements through public or private equity offerings or debt
financings. There can be no assurance that the Company will be able to secure
additional financing or obtain favorable terms on such financing if it is
available.




We plan
to raise additional funds in the future by issuing additional shares of common
stock or securities such as convertible notes, options, warrants or preferred
stock that are convertible into common stock. Any such sale of common stock or
other securities will lead to further dilution of the equity ownership of
existing holders of our common stock.




We
have no marketing experience, are dependent on third parties for marketing
services, and we may never be able to successfully market HemoTech, even if it
receives FDA approval.




We have
no marketing and sales personnel and no experience with respect to marketing
biochemical or pharmaceutical products. Significant additional expenditures and
management resources would be required to develop an internal sales force, and
there can be no assurance that such funds would be available. Further, there can
be no assurance that, with such a sales force, we would be successful in
penetrating the markets for any products developed. We will seek to enter a
partnership to develop and market our product. Under certain of these
agreements, our marketing partner may have the responsibility for all or a
significant portion of the development and regulatory approval. In the event
that the marketing and development partner fails to develop a marketable product
or fails to market a product successfully, our business may be adversely
affected. The sale of certain products outside the United States will also be
dependent on the successful completion of arrangements with future partners,
licensees or distributors in each territory. There can be no assurance that we
will be successful in establishing any additional collaborative arrangements, or
that, if established, such future partners will be successful in commercializing
products.




- 15
-




We
may be sued for product liability in the future, and since we currently maintain
no product liability insurance, in the event of a successful suit against us, we
may not be able to pay any awarded damages or, if we are able to do so, payment
of any such awarded damages could significantly deplete our financial
resources.




The use
of our proposed HemoTech blood substitute product in clinical trials and the
marketing of any product may expose us to product liability claims. We currently
have no product liability insurance, but will, however, attempt to obtain such
insurance prior to commencement of such trials, if any. We are required by our
license agreement with TTUHSC to obtain such insurance. There can be no
assurance that we will be able to obtain such insurance or, if obtainable, that
such insurance can be acquired at a reasonable cost or will be sufficient to
cover all possible liabilities. In the event of a successful suit against us,
lack or insufficiency of insurance coverage could have a material adverse effect
on us. Furthermore, certain distributors of pharmaceutical and biological
products require minimum product liability insurance coverage as a condition
precedent to purchasing or accepting products for distribution. Failure to
satisfy such insurance requirements could impede our ability to achieve broad
distribution of our proposed product, which would have a material adverse effect
on our business and financial condition.




We
currently use labs, equipment, personnel, research and development facilities
and production facilities located at TTUHSC, and if we ever seek to or need to
find or build alternate facilities, we may not be able to do so at all or, if we
are, it will be costly and may cause significant delays in the development and
commercialization of HemoTech, which could materially impair our
operations.




We do not
currently own, lease or operate any laboratory, research and development or
manufacturing facilities. Our current plans include using labs, equipment,
personnel and an upgraded blood substitute production facility located at TTUHSC
for the production of HemoTech under our Sponsored Research Agreement. After the
completion of Phase II U.S. clinical trials for HemoTech, if any, our Sponsored
Research Agreement with TTUHSC contemplates that we may establish independent
manufacturing facilities either alone or through partnering. Establishing our
own facilities would result in significant additional expenses and may result in
potential delays in testing and production. Building and operating our own
production facilities would require substantial additional funds and other
resources of which there can be no assurance that we will be able to secure nor
can there be any assurance that we would be able to enter into any arrangement
with third parties to manufacture our product, if any, on acceptable terms or at
all. Certain products outside the United States will also be dependent on the
successful completion of arrangements with future partners, licensees or
distributors in each territory. There can be no assurance that we will be
successful in establishing any additional collaborative arrangements, or that,
if established, such future partners will be successful in commercializing
products.




Uncertainty
over proposed health care reforms and whether the costs of using our proposed
product will be reimbursed to consumer health insurance companies could cause
our product to become unmarketable, which would result in our inability to
generate revenue.




Our
success in generating revenue from sales of our proposed HemoTech blood
substitute product may depend, in part, on the extent to which reimbursements
for the costs of such a product and related treatments will be available from
government health administration authorities, private health insurers and other
organizations. Significant uncertainty exists as to the reimbursement status of
newly-approved health care products. There can be no assurance that adequate
third-party insurance coverage will be available for us to establish and
maintain price levels sufficient for realization of an appropriate return on our
investment in developing new products. Government and other third-party payors
are increasingly attempting to contain health care costs by limiting both
coverage and the level of reimbursement of new therapeutic and diagnostic
products approved for marketing by the FDA and by refusing, in some cases, to
provide any coverage of uses of approved products for disease indications for
which the FDA has not granted marketing approval. If adequate coverage and
reimbursement levels are not provided by government and third-party payors for
uses of our product, then market acceptance of these products would be adversely
affected.




- 16
-


Risks Related to Our Intellectual Property





Our
success depends on our ability to protect our intellectual
property.





We intend
to protect our intellectual property through patents and trademarks. The patent
positions of biotechnology companies generally are highly uncertain and involve
complex legal and factual questions that will determine who has the right to
develop a particular product or process. As a result, we cannot predict which of
our patent applications will result in the granting of patents or the timing of
the granting of the patents. Additionally, many of our competitors have
significantly greater capital with which to pursue patent litigation. As of
December 31, 2007, we have no threatened or pending intellectual
property-related litigations, legal actions, investigations, court challenges,
negotiations or similar activities. There can be no assurance that we would have
the resources to defend our patents in the face of a lawsuit. Further, we rely
on trade secrets, know-how and other proprietary information. We seek to protect
this information, in part, through the use of confidentiality agreements with
employees, consultants, advisors and others. Nonetheless, there can be no
assurance that those agreements will provide adequate protection for our trade
secrets, know-how or other proprietary information and prevent their
unauthorized use or disclosure. There is also the risk that our employees,
consultants, advisors or others will not maintain confidentiality of our trade
secrets or proprietary information, or that this information may become known in
some other way or be independently developed by our competitors. We may also be
exposed to future litigation by third parties based on claims that our patents,
products or activities infringe on the intellectual property rights of others or
that we have misappropriated the trade secrets of others. Any litigation or
claims against us, whether or not valid, could result in substantial costs,
could place a significant strain on our financial and managerial resources, and
could harm our reputation. In addition, intellectual property litigation or
claims could force us to do one or more of the following, any of which could
have a material adverse effect on us or cause us to curtail or cease our
operations:





·
            cease
      testing, developing, using and commercializing
  HemoTech;


·
            obtain
      a license from the holder of the infringed intellectual property right,
      which could also be costly or may not be available on reasonable terms;
      or


·
            reformulate
      HemoTech, which may be impossible or too
costly.





The
patents underlying our sole product, HemoTech, may expire prior to our receipt,
if ever, of FDA or foreign approval, to the extent such approval is granted at
all.





We have
obtained from TTUHSC exclusive worldwide rights to HemoTech under a U.S. patent
issued in August 1995 as well as various foreign patents. The patent, U.S.
Patent No. 5,439,882, entitled "Blood Substitute" and its foregoing counterparts
claims various alternative compositions of the novel blood substitute based on
hemoglobin of both bovine and human origin as well as methods for its production
and use.




Protection
under the U.S. patent expires on August 8, 2012, which may coincide with or even
precede our receipt of FDA approval of HemoTech; to the extent FDA approval is
granted at all. The Japanese patent and certain of the European patents may also
expire on or after August 8, 2012. If the U.S. patent expires before we are able
to commercialize our proposed HemoTech product, then we could utilize new
potential patents related to HemoTech, such as the proposed pending
erythropoiesis patent, seek commercial exclusivity for a defined time with the
FDA and utilize our trade secrets for manufacturing and use of HemoTech. If we
are unable to obtain additional patent coverage in advance of the time the
existing patent expires or at all, and we fail to receive additional patents,
then our competitive position and our ability to successfully commercialize or
generate revenues from sales of HemoTech would be materially and adversely
affected.





Risks
related to Our Common Stock





The
public market for our common stock is thin and subject to
manipulation.




The
market price of our common stock, which is traded on the OTC Bulletin Board, may
fluctuate significantly in response to the following factors, most of which are
beyond our control:




·
            variations
      in our quarterly operating results;


·
            changes
      in securities analysts’ estimates of our financial
      performance;


·
            changes
      in general economic conditions and in the healthcare
    industry;


·
            changes
      in market valuations of similar
companies;


·
            announcements
      by us or our competitors of significant new contracts with artists,
      acquisitions, strategic partnerships or joint ventures, or capital
      commitments;


·
            loss
      of a major customer, partner or joint venture participant;
    and


- 17
-


·
            the
      addition or loss of key managerial and collaborative
      personnel.




The
equity markets have, on occasion, experienced significant price and volume
fluctuations that have affected the market prices for many companies’ securities
and that have often been unrelated to the operating performance of these
companies. Any such fluctuations may adversely affect the market price of our
common stock, regardless of our actual operating performance. As a result,
stockholders may be unable to sell their shares, or may be forced to sell them
at a loss.




Obtaining
additional capital through the future sale of common stock and derivative
securities will result in dilution of stockholder interests.




We plan
to raise additional funds in the future by issuing additional shares of common
stock or securities such as convertible notes, options, warrants or preferred
stock that are convertible into common stock. Any such sale of common stock or
other securities will lead to further dilution of the equity ownership of
existing holders of our common stock.




We
do not intend to pay dividends to our stockholders, so you will not receive any
return on your investment in our company prior to selling your interest in
HemoBioTech.




We have
never paid any dividends to our stockholders. We currently intend to retain any
future earnings for funding growth and, therefore, do not expect to pay any
dividends in the foreseeable future. If we determine that we will pay dividends
to the holders of our common stock, we cannot assure that such dividends will be
paid on a timely basis. As a result, you will not receive any return on your
investment prior to selling your shares in our company and, for the other
reasons discussed in this “Risk Factors” section, you may not receive any return
on your investment even when you sell your shares in our company.




We
have agreed to indemnify our officers and directors and, if an indemnification
claim is successfully made, we may be forced to use our working capital to pay
our indemnification obligations, which could result in our inability to use such
working capital for our operations.




Our
certificate of incorporation includes certain provisions permitted under
Delaware law allowing our officers and directors to be indemnified against
certain liabilities. Our certificate of incorporation also limits, to the
fullest extent permitted by Delaware law, a director’s liability for monetary
damages for breach of fiduciary duty, including gross negligence, except
liability for the following:




·
            breach
      of the director’s duty of loyalty;


·
            acts
      or omissions not in good faith or which involve intentional misconduct or
      a knowing violation of the law;


·
            the
      unlawful payment of a dividend or unlawful stock purchase or redemption;
      and


·
            any
      transaction from which the director derives an improper personal
      benefit.




Delaware
law does not eliminate a director’s duty of care and this provision has no
effect on the availability of equitable remedies such as injunction or
rescission based on a director’s breach of the duty of care. In December 2004,
we purchased a $5.0 million insurance policy providing coverage for certain
liabilities of our officers and directors. In addition, we have entered into
separate director and officer indemnification agreements with each of Arthur
Bollon, Ghassan Nino, Walter Haeussler, Robert Baron, Bernhard Mittemeyer, Mark
Rosenblum and Robert Comer, under which we agreed to indemnify and advance
expenses to each of these directors and officers, as the case may be, against
any losses arising out of or relating to any actual, alleged or suspected act or
failure to act by such person in his capacity as a director, officer, employee
or agent of HemoBioTech or any affiliated company, trust, joint venture,
corporation, limited liability company or partnership for which such person was
acting or had acted as a director, officer, employee or agent at HemoBioTech’s
request. Further, in connection with Ghassan Nino’s resignation as an officer of
HemoBioTech under an employment separation and release agreement dated as of
July 15, 2004, we agreed to indemnify Mr. Nino and his heirs, executors,
administrators and assigns, against all losses arising out of any claim made by
a third party against Mr. Nino or HemoBioTech as a result of an action taken or
not taken by Mr. Nino as an officer of HemoBioTech, so long as such actions or
inactions were taken or not taken by Mr. Nino in good faith within the scope of
his employment.


- 18
-


Our
common stock is considered a “penny stock” and is subject to regulations that
limit or restrict the potential market for our stock.




Our
common stock is deemed to be “penny stock” (as that term is defined under the
Securities Exchange Act of 1934, as amended) resulting in increased risk to our
investors and certain requirements being imposed on some brokers who execute
transactions in our common stock. In general, a penny stock is an equity
security that:




·
            is
      priced under $5.00;


·
            is
      not traded on a national securities exchange, the Nasdaq Global Market or
      the Nasdaq Capital Market;


·
            may
      be listed in the “pink sheets” or the OTC Bulletin
  Board;


·
            is
      issued by a company that has less than $5.0 million in net tangible assets
      (if it has been in business less than three years) or has less than $2.0
      million in net tangible assets (if it has been in business at least three
      years); and


·
            is
      issued by a company that has average revenues of less than $6.0 million
      for the past three years.




At any
time the common stock qualifies as a penny stock, the following requirements,
among others, will generally apply:




·
            certain
      broker-dealers who recommend penny stock to persons other than established
      customers and accredited investors must make a special written suitability
      determination for the purchaser and receive the purchaser’s written
      agreement to a transaction prior to
sale.


·
            Prior
      to executing any transaction involving a penny stock, certain
      broker-dealers must deliver to certain purchasers a disclosure schedule
      explaining the risks involved in owning penny stock, the broker-dealer’s
      duties to the customer, a toll-free telephone number for inquiries about
      the broker-dealer’s disciplinary history and the customer’s rights and
      remedies in case of fraud or abuse in the
sale.


·
            In
      connection with the execution of any transaction involving a penny stock,
      certain broker-dealers must deliver to certain purchasers the
      following:


·
            bid
      and offer price quotes and volume
information;


·
            the
      broker-dealer’s compensation for the
trade;


·
            the
      compensation received by certain salespersons for the
    trade;


·
            monthly
      accounts statements; and


·
            a
      written statement of the customer’s financial situation and investment
      goals.




Should a
broker-dealer required to provide the above disclosure or fail to deliver such
disclosure on the execution of any transaction involving a penny stock in
violation of federal or state securities laws, you may be able to cancel your
purchase and get your money back. In addition, if the stocks are sold in a
fraudulent manner, you may be able to sue the persons and firms that caused the
fraud for damages. If you have signed an arbitration agreement, however, you may
have to pursue your claim through arbitration.




These
requirements significantly add to the burden of the broker-dealer and limit the
market for penny stocks. These regulatory burdens may severely affect our
ability to create a market for our stock and the liquidity and market price for
our common stock.




A
significant number of our shares will be eligible for sale and their sale or
potential sale may depress the market price of our common stock.




Sales of
a significant number of shares of our common stock in the public market could
harm the market price of our common stock. In addition to the 19,144,007 shares
of our common stock that are currently outstanding as of December 31, 2007, an
aggregate of 3,481,628 shares of our common stock may be issued in the future
upon exercise of currently outstanding warrants, and 3,129,168 shares of our
common stock may be issued in the future upon exercise of outstanding stock
options or other awards granted and available for grant under our 2003 Stock
Option/Stock Issuance Plan.




If
additional shares of our common stock become available for resale in the public
market, the supply of our common stock will increase, which could decrease its
price. Some or all of the shares of common stock may be offered from time to
time in the open market under Rule 144, and these sales may have a depressive
effect on the market for our shares of common stock. In general, a
non-affiliates who have held restricted shares for a period of six months may
sell our common stock into the market.


- 19
-


Our
management and principal stockholders own a substantial amount of our common
stock and have effective control of HemoBioTech, which may not always be in the
best interests of all of our stockholders.




Our
officers, directors and principal stockholders control approximately 63% of our
outstanding common stock as of December 31, 2007, on a primary basis. If these
stockholders act together, they will be capable of controlling our management
and affairs requiring stockholder approval, including approval of significant
corporate transactions. This concentration of ownership may have the effect of
delaying or preventing a change in control and might adversely affect the market
price of our common stock. This concentration of ownership may not be in the
best interests of all our stockholders.




Some
provisions of our certificate of incorporation and bylaws may deter takeover
attempts, which may limit the opportunity of our stockholders to sell their
shares at a favorable price.




We are
governed by the provisions of Section 203 of the General Corporation Law of the
State of Delaware, an anti-takeover law enacted in 1988. In general, the law
prohibits a public Delaware corporation from engaging in a “business
combination” with an “interested stockholder” for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
“Business combination” is defined to include mergers, asset sales and certain
other transactions resulting in a financial benefit to the stockholders. An
“interested stockholder” is defined as a person who together with affiliates and
associates, owns (or, within the prior three years, did own) 15% or more of a
corporation’s voting stock. As a result of the application of Section 203, our
potential acquirors may be discouraged from attempting to effect an acquisition
transaction with us, thereby possibly depriving holders of our securities of
certain opportunities to sell or otherwise dispose of such securities at
above-market prices under such transaction. In addition, certain provisions
contained in the employment agreements with Dr. Bollon, our Chairman, President
and Chief Executive Officer, and Mr. Rosenblum, our Chief Financial Officer,
obligate us to make certain salary payments if their employment is terminated
without just cause or due to a disability. If Dr. Bollon’s employment is
terminated without just cause or as a result of Dr. Bollon’s disability (which
means Dr. Bollon’s inability to perform his duties under the agreement for three
consecutive months due to injury, illness or disability (mental or physical), as
determined by an independent physician selected by Dr. Bollon with our
approval), we will be required to pay Dr. Bollon a severance payment equal to
his base salary then in effect, payable in monthly installments until the
expiration of the remainder of the term of his employment agreement or the
expiration of 23 months, whichever is less. Dr. Bollon will be entitled to
receive severance payments totaling not less than six months’ of his base
salary. Similarly, if Mr. Rosenblum’s employment is terminated without just
cause or as a result of Mr. Rosenblum’s disability, we will be required to pay
Mr. Rosenblum a severance payment equal to his base salary then in effect,
payable in monthly installments until the expiration of the remainder of the
term of his employment agreement or the expiration of a fixed number of months,
based on the number of years Mr. Rosenblum has been employed by us. Mr.
Rosenblum will be entitled to receive severance payments totaling not less than
six months’ of his base salary. The foregoing factors, together with the
effective control of our outstanding common stock by our officers, directors and
principal stockholders, may serve as an incentive for our officers and directors
to discourage certain takeover transactions, possibly resulting in the
entrenchment of management and consequently reducing the value of our common
stock.




Anti-takeover, limited liability and indemnification
provisions





Certificate
of Incorporation and By-Laws





Under our
certificate of incorporation, our Board of Directors may issue additional shares
of common or preferred stock. Any additional issuance of common stock could have
the effect of impeding or discouraging the acquisition of control of us by means
of a merger, tender offer, proxy contest or otherwise, including a transaction
in which our stockholders would receive a premium over the market price for
their shares, and thereby protects the continuity of our management.
Specifically, if in the due exercise of its fiduciary obligations, the Board of
Directors were to determine that a takeover proposal was not in our best
interest, shares could be issued by our Board of Directors without stockholder
approval in one or more transactions that might prevent or render more difficult
or costly the completion of the takeover by:





·
            diluting
      the voting or other rights of the proposed acquirer or insurgent
      stockholder group,


·
            putting
      a substantial voting block in institutional or other hands that might
      undertake to support the incumbent Board of Directors,
  or


·
            effecting
      an acquisition that might complicate or preclude the
    takeover.




Our
certificate of incorporation also allows our Board of Directors to fix the
number of directors in the By-laws. Cumulative voting in the election of
directors is specifically denied in our certificate of incorporation. The effect
of these provisions may be to delay or prevent a tender offer or takeover
attempt that a stockholder may determine to be in his or its best interest,
including attempts that might result in a premium over the market price for the
shares held by the stockholders.




- 20
-




Delaware
Anti-Takeover Law




We are
subject to the provisions of Section 203 of the Delaware General Corporation Law
concerning corporate takeovers. This section prevents many Delaware corporations
from engaging in a business combination with any interested stockholder, under
specified circumstances. For these purposes, a business combination includes a
merger or sale of more than 10% of our assets, and an interested stockholder
includes a stockholder who owns 15% or more of our outstanding voting stock, as
well as affiliates and associates of these persons. Under these provisions, this
type of business combination is prohibited for three years following the date
that the stockholder became an interested stockholder unless:




·
            the
      transaction in which the stockholder became an interested stockholder is
      approved by the Board of Directors prior to the date the interested
      stockholder attained that status;




·
            on
      consummation of the transaction that resulted in the stockholder's
      becoming an interested stockholder, the interested stockholder owned at
      least 85% of the voting stock of the corporation outstanding at the time
      the transaction was commenced, excluding those shares owned by persons who
      are directors and also officers; or




·
            on
      or subsequent to that date, the business combination is approved by the
      Board of Directors and authorized at an annual or special meeting of
      stockholders by the affirmative vote of at least two-thirds of the
      outstanding voting stock that is not owned by the interested
      stockholder.




This
statute could prohibit or delay mergers or other takeover or change in control
attempts and, accordingly, may discourage attempts to acquire us.





ITEM
2. PROPERTIES




We
currently do not own any property. Our research and production facilities
currently operate out of an approximately 5,000 square foot facility provided to
us by TTUHSC under the Sponsored Research Agreement. This facility is located in
Lubbock, Texas.




From November 2004 through January 2007, we occupied
1,300 square feet of office space at the J. P. Morgan International Plaza
located at 14221 Dallas Parkway, Suite 1400 in Dallas, Texas.On February 23, 2007 we
entered into a lease, which expires in 2012, for approximately 2,600 square feet
at the Arch building located at 5001 Spring Valley Road, Suite 1040 – West in
Dallas, Texas, which we use as our corporate headquarters.




ITEM
3. LEGAL PROCEEDINGS




As of
March 17, 2008, we are not a party to any litigation.




ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS




None.







- 21
-


PART II.




ITEM
5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES.




MARKET
INFORMATION




Our
common stock is quoted on the Over-The-Counter Bulletin Board under the symbol
"HMBT.OB."




The range
of high and low bid quotations for our common stock during each quarter of the
fiscal years ended December 31, 2006 and December 31, 2007, is shown below.
Prices are inter-dealer quotations as reported by the NASD and do not
necessarily reflect transactions, retail markups, mark downs, or
commissions.





Years ended December 31,2007
            
            
            2006QUARTER ENDED
            
            HIGH
            
            
            LOW
            
            
            HIGH
            
            
            LOWMarch
      31
            
            $
            2.05
            
            
            $
            1.75
            
            
            $
            4.50
            
            
            $
            1.38June
      30
            
            $
            2.05
            
            
            $
            1.75
            
            
            $
            2.40
            
            
            $
            1.40September
      30
            
            $
            1.90
            
            
            $
            1.63
            
            
            $
            1.55
            
            
            $
            1.15December
      31
            
            $
            1.45
            
            
            $
            1.30
            
            
            $
            2.17
            
            
            $
            1.20





HOLDERS
OF RECORD




As of
March 17, 2008, there were approximately 73 holders of record of our common
stock.




DIVIDENDS




We have
never declared or paid dividends on our capital stock and do not anticipate
declaring or paying any dividends in the foreseeable future.




SECURITIES
AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS





Number
      of securities to be issued upon exercise of outstanding options, warrants
      and rights
              (a)
            
            
            Weighted-average
      exercise price of outstanding options, warrants and rights
              (b)
            
            
            Number
      of securities remaining available for future issuance under equity
      compensation plans (excluding securities reflected in column
      (a))
              (c)Equity
      compensation plans approved by security holders
            
            
            1,886,990
            
            
            $
            0.58
            
            
            
            1,242,178Equity
      compensation plans not approved by security holders
            
            
            -----
            
            
            
            -----
            
            
            
            -----Total
            
            
            1,886,990
            
            
            $
            0.58
            
            
            
            1,242,178





- 22
-


RECENT
SALES OF UNREGISTERED SECURITIES





PRIVATE
PLACEMENT





During
December 2007 the Company circulated a Private Placement Term Sheet and Exhibits
(“the Private Placement”) for the purpose of raising additional capital. Our
Private Placement offering of  units consists of one share of
HemoBiotech, Inc. common stock (“Share”) and one warrant (Warrant”) to purchase
one share of common stock (collectively, the “Unit”) may  result in up
to $6,000,000 in gross proceeds, subject to an over-allotment
option  for up to an additional $1,000,000 in gross
proceeds.  The purchase price per Unit is based on the average of the
closing price of our common stock on the OTC bulletin Board for the ten trading
days immediately preceding the date of the initial closing of the Private
Placement, discounted by 20%. Each Warrant is exercisable for the purchase of
one share of our common stock at 150% of the per Unit price for a period of five
years from the effective registration date of the shares underlying the
Warrants. The warrants may be redeemed in whole or in part by the Company, upon
30 day’s written notice, at price of $.01 share, provided the weighted average
closing price of the Common Stock exceeds 185% of the per-Unit purchase price
for a period of 20 consecutive trading days ending within 15 days prior to the
date on which the notice of redemption is given and the registration statement
for underlying shares is effective. This offering will be open to investors
until April 30, 2008, unless extended by the Company.




STOCK
OPTION GRANTS




The
Company granted 217,715 stock options for the year ended December 31, 2007 under
its Stock Option/Stock Issuance Plan. Information pertaining to these options is
as follows (see also Note F[6] to the accompanying financial
statements):





OPTIONS
      GRANTED IN 2007MONTH
            
            AMOUNT
            
            
            OPTION
              PRICE
      / RANGE
            
            
            TERM
              (IN
      YEARS)JAN
            
            
            ----
            
            
            
            ----
            
            
            
            ----FEB
            
            
            ----
            
            
            
            ----
            
            
            
            ----MAR
            
            
            125,000
            
            
            $
            2.00
      - $2.20
            
            
            
            5 -
      10APR
            
            
            ----
            
            
            
            ----
            
            
            
            ----MAY
            
            
            ----
            
            
            
            ----
            
            
            
            ----JUN
            
            
            35,000
            
            
            $
            1.80
      - $1.98
            
            
            
            5 -
      10JUL
            
            
            ----
            
            
            
            ----
            
            
            
            ----AUG
            
            
            ----
            
            
            
            ----
            
            
            
            ----SEP
            
            
            25,000
            
            
            $
            1.65
      - $1.82
            
            
            
            5 -
      10OCT
            
            
            5,000
            
            
            $
            1.75
            
            
            
            10NOV
            
            
            2,715
            
            
            $
            1.60
            
            
            
            10DEC
            
            
            25,000
            
            
            $
            1.40 - $1.54
            
            
            
            5 - 10TOTAL
            
            
            217,715







ITEM 6. SELECTED FINANCIAL
DATA.





Not
required.




- 23
-




ITEM
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION




PLAN
OF OPERATIONS




We are
primarily engaged in the research and development of human blood substitute
technology exclusively licensed from Texas Tech University Health Sciences
Center (“TTUHSC”). Since October 27, 2004 most of our working capital was used
to pay for general and administrative costs, salaries, legal and accounting fees
and the cost of raising money. After reviewing the blood substitute technology
developed by researchers at Texas Tech, in January 2002 we licensed from Texas
Tech the exclusive rights to various alternative compositions of HemoTech, a
novel blood substitute that is based on hemoglobin (which is the key protein in
red blood cells that carries oxygen) of both bovine (cow) and human origin, as
well as methods for its production and use. What makes HemoTech a novel
potential blood substitute product is the fact that it is comprised of
hemoglobin that has been isolated from bovine blood and then chemically modified
to make the product non-toxic. We also have an agreement with Texas Tech that
any patent issued from its patent application relating to the induction of
erythropoiesis (which is the production of red blood cells by the body) will be
included under our exclusive license with Texas Tech. In addition to our license
and patent agreement with Texas Tech, beginning in July 2002, we have entered
into a series of Sponsored Research Agreements (“SRA”) with TTUHSC under which
we are entitled to use certain of Texas Tech's production and research and
development facilities in Lubbock, Texas.





In
January 2007, the Company entered into a Stage IV SRA with TTUHSC for the period
beginning January 1, 2007. In connection therewith, the Company made an initial
payment of approximately $780,000. This amount will be charged to operations
over the period of the research (see Note D to the Financial Statements).
Additional payments may be made to TTUHSC under the agreement based on mutually
agreed upon budgets. The SRA IV activities include maintaining the animal
facility which houses a controlled herd of Hereford cows needed for the
production of HemoTech and assistance in the implementation of FDA
recommendations received at a Pre-IND meeting with the FDA in April
2006.  The SRA IV activities also include the manufacture of HemoTech.
The product will be made at the production facility at TTUHSC and will be used
for pre-clinical and clinical studies upon acceptance of the IND.  The
agreement will also involve further research and development with a focus on
additional uses of HemoTech and expanded patent protection.




During
June 2007 we engaged a U.S. based Clinical Research Organization to assist the
Company in submitting technical information to the Drug Controller General of
India (DCGI) for the purpose of obtaining regulatory authority to conduct
clinical trials in India. A goal is to establish clinical trials in India and if
successful commercialize HemoTech in India.  This strategy may be in
place prior to clinical trials and commercialization in the U.S.




Our goal
is to address an increasing demand for a safe and inexpensive human blood
substitute product in the United States and around the world through our
licensed technology. We believe that certain initial pre-clinical and early
stage human trials undertaken outside the U.S. by prior holders of this
technology suggest that our licensed technology may possess properties that
diminish the intrinsic toxic effects of hemoglobin and help reduce or eliminate
the abnormal reaction associated with hemorrhagic shock (which is the loss of
blood pressure and the lowering of vital signs resulting from the loss of
blood).




We have a
limited operating history, no customer base and no revenues to date. Our plan of
operations for the next twelve months is focused primarily on the development of
our licensed technology and business, production of our product, HemoTech, for
use in Phase I U.S. clinical trials, filing of an IND with the FDA, continuing
and enlarging the animal facility at Texas Tech University, upgrading our
existing production facility based on FDA recommendations and furthering our
intellectual property position through the introduction of additional patents
and initiation of Phase I U.S. clinical studies if the IND is accepted. Our cash
available at February 28, 2008, is $1,700,000.




We
believe our available cash noted above will be sufficient to complete our
immediate planned operations through the next twelve months, and possibly
longer, based on a current monthly normalized cash burn rate of approximately
$150,000.




- 24
-




RECENT
DEVELOPMENTS





On
December 31, 2007, we completed a private placement of 707,120 units (the
“Units”), each consisting of one share of our common stock (our “Common Stock”)
and one warrant to purchase our Common Stock (a “Warrant”),  resulting
in gross proceeds of $791,974 based on a per-Unit price of $1.12.  The
Warrants have an initial exercise price of $1.68.  The Warrants may be
redeemed in whole or in part by us, upon 30 days’ written notice, at a price of
$.01 per Warrant share, provided the weighted average closing price of our
Common Stock exceeds 185% of the per-Unit purchase price for a period of 20
consecutive trading days ending within 15 days prior to the date on which the
notice of redemption is given, and the registration statement for underlying
shares is effective.  Net of expenses, primarily to our financial
advisor, we received net proceeds from this private placement of $686,000, which
will be used for research and development activities, licensing and other
general working capital purposes. In addition, 212,136 Warrants were issued to
our placement agent with essentially the same terms as our investor Warrants;
however, these Warrants are only callable when we provide a notice of redemption
and a registration statement for the underlying shares is
effective.





On March
11, 2008, we completed the private placement of an additional 301,786 Units,
resulting in gross proceeds of $338,000 based on a per-Unit price of
$1.12.  The Warrants have an initial exercise price of
$1.68.  The Warrants may be redeemed in whole or in part by us, upon
30 days’ written notice, at a price of $.01 per Warrant share, provided the
weighted average closing price of our Common Stock exceeds 185% of the per-Unit
purchase price for a period of 20 consecutive trading days ending within 15 days
prior to the date on which the notice of redemption is given, and the
registration statement for underlying shares is effective.  Net of
expenses, primarily to our financial advisor, we received net proceeds from this
private placement of $295,000, which will be used for research and development
activities, licensing and other general working capital purposes.





In both
cases, the Units were offered in accordance with Regulation D (“Regulation D”)
under the Securities Act of 1933, as amended (the “Securities
Act”).  Accordingly, each investor qualified as an “accredited
investor” as defined in Regulation D in order to participate in these offerings,
as determined by representations made by such investors prior to their
participation.  Additionally, each investor’s right to transfer the
Shares and the shares of our common stock underlying the Warrants is restricted
as provided in the Securities Act and the rules and regulations adopted
thereunder, as well as pursuant to state securities laws.




RESEARCH
AND DEVELOPMENT OF HEMOTECH




HemoTech
is currently our only potential product. We expect that the remaining
production, development, testing and FDA approval of HemoTech, if ever, could
occur over a period of approximately four years.




HemoTech
must undergo several major stages of production, development, and clinical
testing before being in a position to submit its New Drug Application (“NDA”) to
the FDA, as follows:




·
            PRODUCTION
      OF HEMOTECH. In order to produce HemoTech for Phase I U.S. clinical
      trials, we must complete certain upgrades of the current HemoTech
      production facilities located at TTUHSC. A portion of these upgrades have
      been completed during 2006 and through 2007 and are based on
      recommendations from the FDA. We anticipate that these additional upgrades
      will be substantially complete in 2008, although there can be no assurance
      that this will be the case, depending on, among other things, worker
      schedules, available materials, unexpected costs associated with
      construction and our ability to raise sufficient capital in order to
      complete such upgrades.





·
            PREPARATION
      AND SUBMISSION OF U.S. IND APPLICATION. We started preparing material for
      our U.S. IND application on December 13, 2004, when we entered into our
      Stage II Sponsored Research Agreement with TTUHSC. We are actively
      planning and implementing the FDA recommendations including upgrading the
      production facility, preparing for clinical trials and the production of
      HemoTech and/or in preparation for clinical trials in India; collectively
      at a cost estimated to range from $5,000,000 to $8,000,000, which are
      necessary for submission of our U.S. IND application and production of the
      product, although there can be no assurance that we will be able to meet a
      specified timetable or budgeted amount. We currently do not have
      sufficient funds available to pay this amount.  We will need to
      raise at least $6,000,000 in the near term  in order to complete
      the above mentioned activities.




·
            During
      June 2007 we engaged a U.S. based Clinical Research Organization to assist
      the Company in submitting technical information to the Drug Controller
      General of India (DCGI) for the purpose of obtaining regulatory authority
      to conduct clinical trials in India. A goal is to establish clinical
      trials in India and if successful commercialize HemoTech in
      India.  This strategy may be in place prior to clinical trials
      and commercialization in the U.S.




·
            PHASE
      I OF OUR U.S. CLINICAL TRIALS. Once our U.S. IND application has been
      accepted by the FDA, we expect to be able to commence our Phase I U.S.
      clinical trials of HemoTech. Depending on whether the FDA accepts our U.S.
      IND application, we believe that we could begin Phase I U.S. clinical
      trials soon thereafter although there is no guarantee that we can meet
      this goal. We estimate that our Phase I U. S. clinical trials (including
      the costs of doing additional research and development of HemoTech during
      our Phase I U.S. clinical trials and the operational and overhead costs
      that we will incur during our Phase I U. S. clinical trials) could cost
      approximately $10.0 million, although the final cost could be more or less
      than this estimate, which includes the
  following:




- 25
-


·
            approximately
      $1.4 million for the production of
HemoTech;




·
            approximately
      $1.6 million for the testing of HemoTech on
  humans;




·
            approximately
      $1.9 million for personnel, administrative, and operational expenses that
      we expect to incur during our Phase I U. S. clinical
    trials;




·
            approximately
      $1.7 million for legal, accounting, consulting, technical and other
      professional fees that we expect to incur during our Phase I U. S.
      clinical trials;




·
            approximately
      $1.6 million for research and development costs that we expect to incur
      during our Phase I U. S. clinical trials;
and




·
            approximately
      $2.0 million for preparation of Phase II clinical
  trials.




We expect
that our Phase I U. S. clinical trials would take approximately six to nine
months to complete from the date we start such trials, though such trials could
take significantly longer to complete, depending on, among other things, the
rate of production of HemoTech and the availability of patients. We estimate
that we will be required to raise additional capital (although there can be no
assurance that we can meet this timeframe) in order to fund our Phase I U.S.
clinical trials, as well as preparation for Phase II clinical trials from start
to finish and to cover the related expenses described above. If submission or
acceptance of our U.S. IND application is delayed for any reason and if we are
unable to raise such additional capital in a timely manner, commencement of our
Phase I U. S. clinical trials would also be delayed.




·
            PHASE
      II OF OUR U.S. CLINICAL TRIALS. A Phase II clinical trial could commence
      subsequent to a successful Phase I trial.  We estimate that our
      Phase II U.S. clinical trials (including the costs of doing additional
      research and development of HemoTech during our Phase II U.S. clinical
      trials and the operational and overhead costs that we will incur during
      our Phase II U.S. clinical trials) will cost approximately $20.0 million,
      which includes the following:




·
            further
      production of HemoTech;




·
            further
      testing of HemoTech and related
activities;




·
            personnel,
      administrative, and operational expenses that we expect to incur during
      our Phase II U. S. clinical trials;




·
            legal,
      accounting, consulting, technical and other professional fees that we
      expect to incur during our Phase II U. S. clinical trials;
    and




·
            research
      and development costs that we expect to incur during our Phase II U. S.
      clinical trials.




The exact
cost of each step will be determined in the future and will depend on various
factors including FDA regulatory guidance and the availability of resources of
TTUHSC.




We expect
that our Phase II U.S. clinical trials could be completed within approximately
one year from the date we start such trials, though such trials could take
significantly longer to finish, depending on, among other things, the timely
completion of necessary upgrades to the HemoTech production facility and the
availability of patients. If commencement or completion of our Phase I U.S.
clinical trials are delayed for any reason, or if we are unable to raise
sufficient funds to begin our Phase II U.S. clinical trials immediately
following completion of our Phase I U.S. clinical trials, our Phase II U.S.
clinical trials will be delayed.




·
            PHASE
      III OF OUR U.S. CLINICAL TRIALS. If we are able to complete our Phase II
      U.S. clinical trials, we will seek approval from the FDA for our Phase III
      U. S. clinical trials soon
thereafter.




At such
time, and in order to cut the costs of conducting and completing our Phase III
U.S. clinical trials, we anticipate that we will seek to enter into a
partnership with a biopharmaceutical company that has expertise in the
production and marketing of biological products, although there can be no
assurance that we will be able to do so.




- 26
-




Alternatively,
if we are not able to enter into such a partnership, we may seek to enter into a
manufacturing arrangement with an experienced pharmaceutical manufacturer, under
which such manufacturer would produce HemoTech, which would significantly reduce
the costs of our Phase III U.S. clinical trials by eliminating the need to build
a production facility that meets the FDA's standards for Phase III U.S. clinical
trials.




If we are
not able to enter into a partnership or find a manufacturer that is willing to
manufacture HemoTech for us, we may be required to perform all aspects of the
Phase III U. S. clinical trials independently. In this case, we estimate that
our Phase III U.S. clinical trials (including the costs of doing additional
research and development of HemoTech during our Phase III U.S. clinical trials
and the operational and overhead costs that we will incur during our Phase III
U.S. clinical trials) could cost approximately $195.0 million, which includes
the following:





·
            approximately
      $100.0 million to build a production facility for HemoTech that is
      suitable for such advanced testing and that meets the standards of the FDA
      as a product testing facility;





·
            approximately
      $70.0 million for the further testing and production of
      HemoTech;





·
            approximately
      $10.0 million for personnel, administrative, and operational expenses that
      we expect to incur during our Phase III U.S. clinical
    trials;





·
            approximately
      $5.0 million for legal, accounting, consulting , technical and other
      professional fees that we expect to incur during our Phase III U.S.
      clinical trials; and





·
            approximately
      $5.0 million for research and development costs that we expect to incur
      during our Phase III U.S. clinical
trials.




We expect
that our Phase III U.S. clinical trials could be finished within fifteen to
eighteen months from the date we start such trials, though such trials could
take significantly longer to complete, depending on, among other things, the
timely completion of a suitable production facility for HemoTech and the
availability of patients. If we are unable to partner with a pharmaceutical
company, we estimate that we will be required to raise the approximately $200
million (or such lesser amount as may be required if we are successfully able to
enter into a partnership) that we will need in order to fund our Phase III U.S.
clinical trials from start to finish and to cover the related expenses described
above. If commencement or completion of our Phase II U.S. clinical trials are
delayed for any reason, or if we are unable to raise sufficient funds to begin
our Phase III U.S. clinical trials immediately following completion of our Phase
II U.S. clinical trials, our Phase III U.S. clinical trials will be
delayed.




The
estimated costs of each of the phases of our clinical trials set forth above
represent our best estimate of such expenses based on, among other things,
current economic conditions and availability of materials and personnel. Since
many of these phases will not even be commenced by us for another two to three
years, we cannot offer any assurance that such estimates will reflect the actual
amounts that we may be required to incur during each phase of our clinical
trials based on, among other things, then-current economic conditions,
availability of materials and personnel, and other factors that may be relevant
at the time. The amounts we may actually be required to expend during any phase
of our clinical trials may be significantly more than the amounts estimated by
us above.




If our
clinical trials are successful and we are able to meet the timelines set forth
above, it is possible that an NDA could be approved by the FDA as early as
mid-2010, although there can be no assurance that an NDA would be approved by
such time, if ever. There can also be no assurance that we will be able to
complete our clinical trials under the schedule described above, or ever, or
that we will be able to develop a viable and marketable human blood substitute,
even if we are able to complete our clinical trials. Further, we do not expect
to generate any revenues until after such time as HemoTech has received FDA
approval, if ever.




RESULTS
OF OPERATIONS




We are a
development stage company and have not generated any revenue from inception
through December 31, 2007. To date, our efforts have been principally devoted to
evaluating the HemoTech technology, negotiating and entering into our license
agreement and Sponsored Research Agreements with TTUHSC, hiring employees and
consultants, establishing our Board of Advisors, raising capital, and engaging
in other organizational and infrastructure development. In addition, during 2007
the Company upgraded the production facility at Texas Tech University and
maintained an animal donor facility. During 2007 we began implementing a global
strategy to include submission of technical information to the Drug Controller
General of India (“DCGI”) in early 2008 for the purpose of obtaining regulatory
authority to conduct clinical trials in India.




Total
expenses, and thus our losses, totaled $11,861,000 from October 3, 2001
(inception) through December 31, 2007. Such losses included $3,725,000 and
$2,571,000 for the years ended December 31, 2007 and 2006,
respectively.


- 27
-


FOR
THE YEAR ENDED DECEMBER 31, 2007 COMPARED TO THE YEAR ENDED DECEMBER 31, 2006





Total
expenses, and thus our losses, for the year ended December 31, 2007, were
$3,725,000 compared with $2,571,000 for the same period a year ago resulting
from significantly higher general and administrative costs and higher research
and development costs.





General
and Administrative costs were $2,843,000 for the year ended December 31, 2007,
an increase of $823,000 compared with the same period in the prior year. This
increase primarily results from increases in non-cash stock based compensation
to our financial consultant, employees and directors and increased salary and
related costs.  For the 2007 period, stock based compensation includes
charges of $1,185,000, compared with $478,000 for the same period in 2006, an
increase of $707,000 primarily resulting from the full year effect of a
financial services agreement signed in September 2006.





Research
and Development expenses were $998,000 for the 2007 period, increasing $360,000
from the $638,000 in the same period in 2006 resulting primarily from
significantly higher costs paid to outside laboratories and regulatory
consultants.  The Company also paid its Research and Development
laboratories and regulatory consultants approximately $411,000 during 2007
compared to $168,000 in the prior year. Spending related to the Stage IV
Sponsored Research Agreement with Texas Tech University Health Sciences Center
were slightly higher in the current year compared to the prior year. Stock based
compensation expense related to Research and Development activities was
essentially unchanged.





Net
Interest cost for  2006  includes an inducement expense of
$38,000 related to $200,000 principal value of our 10% Convertible Promissory
Notes converted to stock, representing the difference between the conversion
price and the market price at the date of conversion. Interest expense for 2007
was minimal due to all of the Company’s convertible promissory notes being
either converted to stock or paid prior to December 31, 2006. Interest income
decreased slightly in 2007 due to lower average bank balances compared to higher
average bank balances in 2006 resulting from the warrant exercise in that
period.





LIQUIDITY
AND CAPITAL RESOURCES





During
the twelve months ended December 31, 2007, net cash used in operating activities
of $2,766,000 includes approximately $780,000 paid to TTUHSC compared to
$287,000 in 2006. At December 31, 2007 approximately $440,000 of the TTUHSC 2007
payment is included in prepaid expenses on our Balance Sheet.   The
Company also paid its Research and Development laboratories and regulatory
consultants approximately $411,000 during 2007 compared to $168,000 in the prior
year.





Investing
activities during the 2007 include the maturation of a $1,000,000 short-term
investment made in 2006 and the purchase of a certificate of deposit (restricted
cash) in 2007 related to our current lease agreement.





Financing
activities in 2007 consisted of the initial close of our Private Placement on
December 31, 2007 providing net cash proceeds of $686,000. During 2006,
5,156,035 warrants were exercised, providing the company net proceeds of
approximately $5,190,000. The warrants were originally issued as part of an
October 2004 private placement by our company.





We
believe our cash available of $2,015,000 at December 31, 2007 and the cash
generated by our Private Placement offering that was circulated during December
2007 will be sufficient to fund our current operations for the next twelve
months. In order to complete our planned operations which includes implementing
FDA recommendations necessary for submitting our IND to the FDA, upgrading the
production facility, preparation for clinical trials, submitting technical
information to the Drug Controller General of India (“DCGI”) for the purpose of
obtaining regulatory approval to conduct clinical trials in that country, and
the production of HemoTech; collectively at a cost ranging from $6,000,000 to
$8,000,000, we will need to raise at least $6 million in the near term, although
there can be no assurance that we can meet this timeframe. If we fail to
generate enough working capital, either from future equity, or exercise of our
Warrants, or revenue, we will have to curtail our planned
operations.





As
discussed in Note I, during March 2008 the Company received net proceeds of
$295,000 through the Private Placement of equity securities. Management believes
that current cash resources and cash received subsequent to the balance sheet
date will be sufficient to fund operations for the next twelve months.
Management's plans include continuing to finance operations through one or more
private or public offerings of equity securities and monitoring and reducing
discretionary expenditures. See also Footnote H(3).




- 28
-


OFF
BALANCE SHEET ARRANGEMENTS




The
Company has no off-balance sheet arrangements.





ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





In the
normal course of business, our financial position is routinely subject to a
variety of risks, including market risk associated with interest rate movement.
We regularly assess these risks and have established policies and business
practices intended to protect against these and other exposures. As a result, we
do not anticipate material potential losses in these areas.





As of
December 31, 2007, we had cash and cash equivalents of $2,015,000. Declines
of interest rates over time will, however, reduce our interest
income.




ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA




The Index
to Financial Statements appears on page F-1, the Report of the Independent
Registered Public Accounting Firm appears on page F-2, and the Financial
Statements and Notes to Financial Statements appear on pages F-3 to F-16.




ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES.




None.




ITEM
9A(T). CONTROLS AND PROCEDURES




The chief
executive officer and the chief financial officer, after evaluating the
effectiveness of the Company's "disclosure controls and procedures" (as defined
in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e);
collectively, "Disclosure Controls") as of the end of the period covered by this
annual report (the "Evaluation Date") have concluded that as of the Evaluation
Date, our Disclosure Controls were effective to provide reasonable assurance
that information required to be disclosed in our reports filed or submitted
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified by the SEC, and that material
information relating to our company and any consolidated subsidiaries is made
known to management, including the chief executive officer and chief financial
officer, particularly during the period when our periodic reports are being
prepared to allow timely decisions regarding required disclosure.





In
connection with the evaluation referred to in the foregoing paragraph, we have
identified no change in our internal control of financial reporting that
occurred during the quarter ended December 31, 2007 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.





Management
assessed the effectiveness of our internal control over financial reporting
based on criteria for effective internal control over financial reporting
described in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission.





Based on
its assessment, management concluded that we maintained effective internal
control over financial reporting as of December 31, 2007.




ITEM
9B. OTHER INFORMATION





Please
see the discussion of our December 2007 Private Placement that appears under the
heading “Recent Developments” in Item 7 of this Annual Report on Form
10-K.





- 29
-


PART
III.




ITEM
10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CORPORATE
GOVERNANCE.




The
information called for by this item is incorporated by reference herein to the
definitive Proxy Statement to be filed by the Company pursuant to Regulation 14A
for the 2008 annual meeting of stockholders. Certain information with regard to
the executive officers of the Company is contained in Item 1 hereof and is
incorporated by reference in this Part III.




ITEM
11. EXECUTIVE COMPENSATION.




The
information called for by this item is incorporated herein by reference to the
definitive Proxy Statement to be filed by the Company pursuant to Regulation 14A
for the 2008 annual meeting of stockholders.




ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS.




The
information called for by this item is incorporated herein by reference to the
definitive Proxy Statement to be filed by the Company pursuant to Regulation 14A
for the 2008 annual meeting of stockholders.




ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, DIRECTOR
INDEPENDENCE.




The
information called for by this item is incorporated herein by reference to the
definitive Proxy Statement to be filed by the Company pursuant to Regulation 14A
for the 2008 annual meeting of stockholders.




ITEM
14. PRINCIPAL ACCOUNTING FEES AND SERVICES




The
information called for by this item is incorporated herein by reference to the
definitive Proxy Statement to be filed by the Company pursuant to Regulation 14A
for the 2008 annual meeting of stockholders.




ITEM
15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES




(b)


EXHIBIT
      NO.
            
            DESCRIPTION
      OF EXHIBIT3.1
            
            Certificate
      of Incorporation of HemoBioTech, Inc. (1)3.2
            
            Certificate
      of Amendment of the Certificate of Incorporation of HemoBioTech, Inc.
      (1)3.3
            
            By-Laws
      of HemoBioTech, Inc. (1)4.1
            
            Form
      of Warrant to Purchase Common Stock. (1)4.2
            
            Form
      of 10% Convertible Unsecured Promissory Note. (1)9.1
            
            Voting  Agreement,  dated
      as of July  15,  2004,  by
      and  among
      Ghassan  Nino,   Nino  Partners,   LLC  and  Biogress  LLC,  as
      acknowledged by HemoBioTech, Inc. and Arthur Bollon.
(1)10.1
            
            2003
      Stock Option/Stock Issuance Plan. (1)10.2
            
            Registration
      Rights Agreement, dated as of October 27, 2004, between HemoBioTech, Inc.
      and Meyers Associates, L.P., as agent for the purchasers named therein.
      (1)10.3
            
            Employment  Agreement,  dated
      as of  October  6,  2003,  by and
      between  Arthur  Bollon
      and  HemoBioTech,  Inc.,  as amended by
      Letter Agreements,  dated as of July 15, 2004, January 3, 2005,
      and  April  6,  2005,   by  and  between   Arthur
      Bollon and HemoBioTech, Inc. (2)10.4
            
            Employment  Agreement,  dated
      as of December 14,  2003,  by and
      between  Mario Feola
      and  HemoBioTech,  Inc.,  as amended by a
      Letter  Agreement,  dated as of July
      15,  2004,  by and between Mario Feola and
      HemoBioTech, Inc. (1)10.5
            
            Employment
      Separation and Release Agreement, dated as of July15, 2004, by and between
      HemoBioTech, Inc. and Ghassan Nino. (1)




- 30
-


EXHIBIT
      NO.
            
            DESCRIPTION
      OF EXHIBIT10.6
            
            Form
      of Director and
      Officer  Indemnification  Agreements  with
      each of Arthur Bollon,  Ghassan Nino, Walter
      Haeussler,  Robert Baron, Bernhard Mittemeyer, Mark Rosenblum
      and Robert Comer. (1)10.7
            
            Stockholders
      Agreement, dated as of October 31, 2003, by and among HemoBioTech, Inc.,
      Arthur Bollon, Ghassan Nino, Nino Partners, LLC and the other stockholders
      named therein. (1)10.8
            
            Service  Agreements,  dated  November
      23, 2004,  by and between HemoBioTech, Inc. and JPM-CEO
      Partners, Ltd. (1)10.9
            
            Sponsored
      Research Agreement, dated July 18, 2002, by and between HemoBioTech, Inc.
      and Texas Tech University Health Sciences Center. (3)+10.10
            
            Stage
      II Sponsored Research Agreement, dated December 13, 2004, by and between
      HemoBioTech, Inc. and Texas Tech University Health Sciences Center.
      (3)10.11
            
            License
      Agreement, dated January 22, 2002, by and between HemoBioTech, Inc. and
      Texas Tech University System. (3)+10.12
            
            Letter   Agreement,   dated
      May 14, 2004,   by and between HemoBioTech, Inc. and Texas
      Tech University Health Sciences Center. (3)10.13
            
            Consulting
      Agreement, dated October 14, 2004, by and between HemoBioTech, Inc. and
      Larry Helson. (1)10.14
            
            Service  Agreement,  dated
      as of May 25,  2004,  by and between HemoBioTech, Inc.
      and BioLink Life Sciences, Inc. (1)10.15
            
            Employment
      Agreement, dated April 1, 2005, by and between HemoBioTech, Inc. and Mark
      J. Rosenblum. (2)++10.16
            
            Stage
      III Sponsored Research Agreement, effective as of January 1, 2006, by and
      between HemoBioTech, Inc.  and Texas  Tech University
      Health Sciences Center. (5)++10.17
            
            Advisory
      agreement dated July 13, 2005 by and between HemoBioTech and Dr. Jan
      Simoni. (4)++10.18
            
            Stage
      IV Sponsored Research Agreement, effective as of January 1, 2007,by and between
      HemoBioTech, Inc. and Texas Tech University Health Sciences
      Center.10.19
            
            Form
      of Subscription Agreement10.20
            
            Form
      of Registration Rights Agreement21.1
            
            Subsidiaries
      of HemoBioTech, Inc. (1)31.1
            
            Certification
      of Principal Executive Officer31.2
            
            Certification
      of Principal Financial Officer32.1
            
            Section
      1350  Certification of Principal Executive Officer and Principal
      Financial Officer




+
Portions of this document have been omitted pursuant to an order granting
confidential treatment issued by the Commission on May 11, 2005, under Rule 406
of the Securities Act of 1933, as amended.




++
Portions of this document have been omitted pursuant to a request for
confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act
of 1934, as amended.




- 31
-




(1)
Incorporated by reference to the Registrant's Registration Statement on Form
SB-2 (Commission File No. 333-122097) filed with the Commission on January 18,
2005.




(2)
Incorporated by reference to Amendment No. 1 to the Registrant's Registration
Statement on Form SB-2 (Commission File No. 333-122097) filed with the
Commission on April 15, 2005.




(3)
Incorporated by reference to Amendment No. 2 to the Registrant's Registration
Statement on Form SB-2 (Commission File No. 333-122097) filed with the
Commission on May 13, 2005.




(4)
Incorporated by reference to the Registrant’s Form 10-KSB for the year ended
December 31, 2005.




(5)
Incorporated by reference to the Registrant's Current Report on Form 8-K filed
with the Commission on January 20, 2006.


- 32
-


SIGNATURES




Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1943, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.





HemoBioTech,
      Inc.(Registrant)By:/s/
      MARK J. ROSENBLUM
            
            /s/
      ARTHUR P. BOLLON, PH.D.Mark
      J. Rosenblum
            
            Arthur
      P. Bollon, Ph.D.Chief
      Financial Officer and Secretary
            
            Chairman
      of the Board, President and Chief Executive OfficerPrincipal
      Financial Officer
            
            Principal
      Executive OfficerDated:
      March 27, 2008







In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.





Signatures
            
            Title
            
            Date/s/
      ARTHUR P. BOLLON, PH.D.
            
            Chairman
      of the Board, President and
            
            March
      27, 2008Arthur
      P. Bollon, Ph.D.
            
            Chief Executive Officer/s/
      MARK J. ROSENBLUM
            
            Chief
      Financial Officer and Secretary
            
            March
      27, 2008Mark
      J. Rosenblum/s/
      ROBERT BARON
            
            Director
            
            March
      27, 2008Robert
      Baron/s/
      ROBERT COMER
            
            Director
            
            March
      27, 2008Robert
      Comer/s/
      BERNHARD MITTEMEYER, M.D.
            
            Director
            
            March
      27, 2008Bernhard
      Mittemeyer, M.D./s/
      GHASSAN NINO, C.P.A, CMA
            
            Director
            
            March
      27, 2008Ghassan
      Nino, C.P.A, CMA





- 33
-


HEMOBIOTECH,
INC.




(A
DEVELOPMENT STAGE COMPANY)


TABLE
OF CONTENTS





ITEM
            
            PAGEReport
      of Independent Registered Public Accounting Firm
            
            F-2Balance
      Sheet December 31, 2007
            
            F-3Statements
      of Operations, for the Years ended December 31, 2007 and 2006, and the
      cumulative period from October 3, 2001 (inception) through December 31,
      2007
            
            F-4Statements
      of changes in Shareholders' Equity (Capital Deficiency),for the period
      from October 3, 2001 (inception), through December 31, 2002 and for each
      of the years in the five-year period ended December 31,
    2007
            
            F-5Statements
      of Cash Flows, for the Years ended December 31, 2007 and 2006, and the
      cumulative period from October 3, 2001 (inception) through December 31,
      2007
            
            F-6Notes
      to Financial Statements
            
            F-7










F-1


REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





The Board
of Directors and Shareholders


HemoBioTech,
Inc.





We have
audited the accompanying balance sheet of HemoBioTech, Inc. (a development stage
company) as of December 31, 2007, and the related statements of operations,
changes in stockholders' equity (capital deficiency) and cash flows for each of
the years in the two-year period ended December 31, 2007 and for the period from
October 3, 2001 (inception) through December 31,


2007.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. We were not engaged to
perform an audit of the Company's internal control over financial reporting. Our
audits include consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. 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 provide a reasonable basis for our
opinion.





In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of HemoBioTech, Inc. as of December
31, 2007, and the results of its operations and its cash flows for each of the
years in the two-year period ended December 31, 2007, and for the period from
October 3, 2001 (inception) through December 31, 2007 in conformity with U.S.
generally accepted accounting principles.





As
discussed in Note C to the financial statements, effective January 1, 2006, the
Company changed its method of accounting for stock-based compensation in
accordance with the Statement of Financial Accounting Standards No. 123 (Revised
2004), "Share-Based Payment."





/s/
      Eisner LLPNew
      York, New YorkMarch
      26, 2008










F-2


HEMOBIOTECH,
INC.




(A
DEVELOPMENT STAGE COMPANY)




BALANCE
SHEET




DECEMBER
31, 2007







ASSETSCurrent
      assets:Cash
      and cash equivalents
            
            $
            2,015,000Prepaid
      Expenses
            
            
            521,000Total
      current assets
            
            $
            2,536,000Equipment,
      net
            
            
            50,000Restricted
      cash
            
            
            55,000Total
      Assets
            
            $
            2,641,000LIABILITIESCurrent
      liabilitiesAccounts
      payable and accrued expenses
            
            $
            254,000Total
      current liabilities
            
            $
            254,000Deferred
      rent
            
            $
            43,000STOCKHOLDERS’
      EQUITY
              Common
      stock ----- $.001 par value 55,000,000 shares authorized;19,144,007
      (includes 1,000,000 shares subject to forfeiture) shares issued
      and outstanding
            
            $
            19,000Additional
      paid-in capital
            
            
            14,186,000Deficit
      accumulated during the development stage
            
            
            (11,861,000
            )Total
      Equity
            
            $
            2,344,000$
            2,641,000








[See
accompanying notes to financial statements]





F-3


HEMOBIOTECH,
INC.




(A
DEVELOPMENT STAGE COMPANY)




STATEMENTS
OF OPERATIONS





YEARS
      ENDED DECEMBER 31,
            
            
            CUMULATIVE
      FROM
              OCTOBER
      3, 2001 THROUGH DECEMBER 31,2007
            
            
            2006
            
            
            2007Revenue
            
            $
            -
            
            
            $
            -
            
            
            $
            -Operating
      expenses:Research
      and development
            
            
            998,000
            
            
            
            638,000
            
            
            
            2,245,000General
      and administrative
            
            
            2,843,000
            
            
            
            2,020,000
            
            
            
            7,829,000Other
      (income) expenses:Interest
      expense
            
            
            1,000
            
            
            
            54,000
            
            
            
            2,111,000Interest
      income
            
            
            (117,000
            )
            
            
            (141,000
            )
            
            
            (324,000
            )Net
      loss
            
            $
            (3,725,000
            )
            
            $
            (2,571,000
            )
            
            $
            (11,861,000
            )Basic
      and diluted loss per common share
            
            $
            (.22
            )
            
            $
            (.17
            )Weighed
      average number of shares outstanding --- basic and diluted
            
            
            17,090,000
            
            
            
            15,196,000











[See
accompanying notes to financial statements]









F-4


HEMOBIOTECH,
INC.





(A
DEVELOPMENT STAGE COMPANY)





STATEMENTS
OF CHANGES IN STOCKHOLDERS’ EQUITY (CAPITAL DEFICIENCY) – NOTE F





Statements
      of Changes in Stockholders’ Equity
                    (Capital
      Deficiency)
                
                Common
      Shares
                
                
                Amount
                
                
                Additional
      Paid-In Capital
                
                
                Note
      Receivable Placement Agreement
                
                
                Unearned
      Compensation
                
                
                Deficit
      Accumulated During the Development Stage
                
                
                TotalIssuance
      of shares to Texas Tech University Health Service Center (January 22,
      2002) ($.001)
                
                
                678,820
                
                
                $
                1,000
                
                
                
                --
                
                
                
                --
                
                
                
                --
                
                
                
                
                
                $
                1,000Issuance
      of shares to Ghassan Nino (January 30, 2002 ($.001)
                
                
                1,086,113
                
                
                
                1,000
                
                
                
                1,000
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                2,000Estimated
      fair value of stock granted for services (January 30, 2002)
      ($.001)
                
                
                217,223
                
                
                
                
                
                
                
                1,000
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,000Issuance
      of shares to Ghassan Nino (January 31, 2002) ($.001)
                
                
                2,715,280
                
                
                
                3,000
                
                
                
                2,000
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                5,000Issuance
      of shares to Marlin and Evilene Nino (February 07, 2002)
      ($.001)
                
                
                678,820
                
                
                
                1,000
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,000Net
      loss for the year
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (235,000
                )
                
                
                (235,000
                )Balance
      –December
      31, 2002
                
                
                5,376,256
                
                
                $
                6,000
                
                
                $
                4,000
                
                
                
                
                
                
                
                
                
                
                
                (235,000
                )
                
                $
                (225,000
                )Estimated
      fair value of options granted to Board of Advisors
                
                
                
                
                
                
                
                
                
                
                0
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                0Issuance
      of shares to Munir Nino (January 20, 2003) ($.001)
                
                
                217,224Estimated
      fair value of stock granted for compensation (April 8, 2003)
      ($.001)
                
                
                977,502
                
                
                
                1,000
                
                
                
                1,000
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                2,000Estimated
      fair value of stock granted for services (April 14, 2003)
      ($.001)
                
                
                217,223
                
                
                
                
                
                
                
                1,000
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,000Issuance
      of shares to Evilene Nino (October 31, 2003) ($.001)
                
                
                108,613Expenses
      paid by stockholder
                
                
                
                
                
                
                
                
                
                
                10,000
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                10,000Net
      loss for the year
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (617,000
                )
                
                
                (617,000
                )Balance
      –December
      31, 2003
                
                
                6,896,818
                
                
                $
                7,000
                
                
                $
                16,000
                
                
                
                
                
                
                
                
                
                
                
                (852,000
                )
                
                $
                (829,000
                )Contribution
      of note and related interest (July 15, 2004)
                
                
                
                
                
                
                
                
                
                
                155,000
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                155,000Contribution
      of deferred salary (July 15, 2004)
                
                
                
                
                
                
                
                
                
                
                564,000
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                564,000Expenses
      paid by stockholder
                
                
                
                
                
                
                
                
                
                
                4,000
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                4,000Estimated
      fair value of shares to Texas Tech University Health Service Center (May
      22, 2004) ($.85)
                
                
                135,765
                
                
                
                
                
                
                
                115,000
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                115,000Return
      of shares (July 15, 2004) Note F[4]
                
                
                (1,086,113
                )
                
                
                (1,000
                )
                
                
                1,000
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                0Shares
      issued to placement agent (August 19, 2004) (Note H)
                
                
                1,500,000
                
                
                
                2,000
                
                
                
                13,000
                
                
                $
                (15,000
                )
                
                
                
                
                
                
                
                
                
                
                0Issuance
      of shares and warrants in Private Placement net of expenses of $528,000
      (October 13, 2004 and October 27, 2004)
                
                
                2,647,080
                
                
                
                2,000
                
                
                
                2,575,000
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                2,577,000Contribution
      of Salary (October 13, 2004)
                
                
                
                
                
                
                
                
                
                
                11,000
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                11,000Contribution
      of notes and related interest (October 13, 2004)
                
                
                
                
                
                
                
                
                
                
                125,000
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                125,000Unearned
      compensation
                
                
                
                
                
                
                
                
                
                
                13,000
                
                
                
                
                
                
                $
                (13,000
                )
                
                
                
                
                
                
                0Estimated
      fair value of vested options granted to Board of Advisors
                
                
                
                
                
                
                
                
                
                
                22,000
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                22,000Collection
      of note (October 13, 2004)
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                15,000
                
                
                
                
                
                
                
                
                
                
                
                15,000Valuation
      of placement agent’s warrants and shares attributable to debt (see
      F[3])
                
                
                
                
                
                
                
                
                
                
                803,000
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                803,000Net
      loss for the year
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (1,259,000
                )
                
                
                (1,259,000
                )Balance
      –December
      31, 2004
                
                
                10,093,550
                
                
                $
                10,000
                
                
                $
                4,417,000
                
                
                $
                0
                
                
                $
                (13,000
                )
                
                
                (2,111,000
                )
                
                $
                2,303,000Amortization
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                -
                
                
                
                6,000
                
                
                
                -
                
                
                
                6,000Estimated
      fair value of options vested issued to Board of Advisors
                
                
                
                
                
                
                
                
                
                
                25,000
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                25,000Estimated
      fair value of options issued to Advisor – July 13, 2005
                
                
                
                
                
                
                
                
                
                
                109,000
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                109,000Estimated
      fair value of warrants issued to consultant – July 28,
2005
                
                
                
                
                
                
                
                
                
                
                27,000
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                27,000Estimated
      fair value of warrants issued to consultant – September 13,
      2005
                
                
                
                
                
                
                
                
                
                
                7,000
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                7,000Conversion
      of promissory notes into Common Stock net of unamortized discount of
      $58,000 (at a conversion price of $1.06 per share) – August 17,
      2005
                
                
                765,132
                
                
                
                1,000
                
                
                
                752,000
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                753,000Conversion
      of promissory notes into Common Stock net of unamortized discount of
      $7,000 (at a conversion price of $1.06 per share) – September 16,
      2005
                
                
                205,451
                
                
                
                0
                
                
                
                211,000
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                211,000Conversion
      of promissory notes into Common Stock net of unamortized discount of
      $1,000 (at a conversion price of $1.06 per share) – October 21,
      2005
                
                
                66,122
                
                
                
                0
                
                
                
                69,000
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                69,000Conversion
      of promissory notes into Common Stock (at a conversion price of $1.06 per
      share) – October 27, 2005
                
                
                507,785
                
                
                
                1,000
                
                
                
                538,000
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                539,000Net
      Loss for the year
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (3,454,000
                )
                
                
                (3,454,000
                )Balance
      –December
      31, 2005
                
                
                11,638,040
                
                
                $
                12,000
                
                
                $
                6,155,000
                
                
                $
                0
                
                
                $
                (7,000
                )
                
                
                (5,565,000
                )
                
                $
                595,000Elimination
      of unvested compensation
                
                
                
                
                
                
                
                
                
                
                (7,000
                )
                
                
                
                
                
                
                7,000Stock
      based compensation – board of advisors and consultant
                
                
                
                
                
                
                
                
                
                
                110,000
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                110,000Stock
      based compensation – employees and directors
                
                
                
                
                
                
                
                
                
                
                178,000
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                178,000Conversion
      of promissory notes into Common Stock -March, 2006
                
                
                128,264
                
                
                
                
                
                
                
                251,000
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                251,000Conversion
      of promissory notes into Common Stock – April, 2006
                
                
                14,548
                
                
                
                
                
                
                
                35,000
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                35,000Exercise
      of warrants, net of expenses of $99,000 – January, 2006
                
                
                1,868,544
                
                
                
                2,000
                
                
                
                1,880,000
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,882,000Exercise
      of warrants, net of expenses of $1,000 – February, 2006
                
                
                9,412
                
                
                
                
                
                
                
                8,000
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                8,000Exercise
      of warrants, net of expenses of $19,000 – April, 2006
                
                
                355,885
                
                
                
                
                
                
                
                358,000
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                358,000Exercise
      of warrants, net of expenses of $5,000 -  May,
    2006
                
                
                97,118
                
                
                
                
                
                
                
                98,000
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                98,000Exercise
      of warrants, net of expenses of $28,000 – June, 2006
                
                
                534,652
                
                
                
                1,000
                
                
                
                537,000
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                538,000Exercise
      of warrants, net of expenses of $121,000 – July, 2006
                
                
                2,290,424
                
                
                
                2,000
                
                
                
                2,304,000
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                2,306,000Shares
      issued to financial advisor (September 12, 2006) See Note
    I[3]
                
                
                1,500,000
                
                
                
                2,000
                
                
                
                298,000
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                300,000Net
      Loss for the year
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (2,571,000
                )
                
                
                (2,571,000
                )Balance
      –December
      31, 2006
                
                
                18,436,887
                
                
                $
                19,000
                
                
                $
                12,205,000
                
                
                
                
                
                
                
                --
                
                
                
                (8,136,000
                )
                
                $
                4,088,000Net
      Loss for the period
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (3,725,000
                )
                
                
                (3,725,000
                )Stock
      based compensation – board of advisors and consultant
                
                
                
                
                
                
                
                
                
                
                107,000
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                107,000Stock
      based compensation – employees and directors
                
                
                
                
                
                
                
                
                
                
                276,000
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                276,000Stock
      based compensation relating to shares issued to financial
      advisor
                  (See
      Note H[3])
                
                
                
                
                
                
                
                
                
                
                855,000
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                855,000Estimated
      fair value of warrants issued to consultant – October 1,
    2007
                
                
                
                
                
                
                
                
                
                
                57,000
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                57,000Issuance
      of shares and warrants in Private Placement net of expenses of $106,000
      (December 31, 2007)
                
                
                707,120
                
                
                
                --
                
                
                
                686,000
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                686,000Balance
      –December
      31, 2007
                
                
                19,144,007
                
                
                $
                19,000
                
                
                $
                14,186,000
                
                
                
                
                
                
                
                --
                
                
                
                (11,861,000
                )
                
                $
                2,344,000






[See accompanying notes
to financial statements]





F-5


HEMOBIOTECH,
INC.





(A
DEVELOPMENT STAGE COMPANY)





STATEMENTS
OF CASH FLOWS





YEARS
      ENDED
            
            
            OCTOBER
      3, 2001
              (INCEPTION)
              THROUGH2007
            
            
            2006
            
            
            DECEMBER
      31, 2007CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      Loss
            
            $
            (3,725,000
            )
            
            $
            (2,571,000
            )
            
            $
            (11,861,000
            )Adjustments
      to reconcile net loss to net cash used inoperating
      activities:Estimated
      fair value of options, warrants andcompensatory
      stock
            
            
            1,295,000
            
            
            
            558,000
            
            
            
            2,209,000Conversion
      charge – interest expense
            
            
            -
            
            
            
            43,000
            
            
            
            43,000Notes
      issued for services – related party
            
            
            -
            
            
            
            -
            
            
            
            354,000Expenses
      paid by stockholder
            
            
            -
            
            
            
            -
            
            
            
            14,000Amortization
      of deferred financing costs
            
            
            -
            
            
            
            -
            
            
            
            1,023,000Amortization
      of debt discount
            
            
            -
            
            
            
            -
            
            
            
            789,000Depreciation
            
            
            5,000
            
            
            
            3,000
            
            
            
            10,000Deferred
      rent
            
            
            43,000
            
            
            
            
            
            
            
            43,000Contribution
      of salary
            
            
            -
            
            
            
            -
            
            
            
            11,000Changes
      in:Accounts
      payable and accrued expenses
            
            
            83,000
            
            
            
            (159,000
            )
            
            
            966,000Accrued
      interest
            
            
            -
            
            
            
            (3,000
            )
            
            
            139,000Prepaid
      expenses
            
            
            (467,000
            )
            
            
            (11,000
            )
            
            
            (520,000
            )Net
      cash used in operating activities
            
            $
            (2,766,000
            )
            
            $
            (2,140,000
            )
            
            $
            (6,780,000
            )CASH
      FLOWS FROM INVESTING ACTIVITIES:Sale/(Purchase)
      of Short-Term Investments
            
            $
            945,000
            
            
            $
            (1,000,000
            )
            
            $
            (55,000
            )Purchase
      of property and equipment
            
            $
            (43,000
            )
            
            $
            (3,000
            )
            
            $
            (59,000
            )Net
      cash used in investing activities
            
            $
            902,000
            
            
            $
            (1,003,000
            )
            
            $
            (114,000
            )CASH
      FLOWS FROM FINANCING ACTIVITIES:Net
      proceed from issuance of common stock and debt
            
            
            686,000
            
            
            
            -
            
            
            
            4,453,000Payment
      of Notes
            
            
            -
            
            
            
            (113,000
            )
            
            
            (734,000
            )Exercise
      of warrants, net
            
            
            -
            
            
            
            5,190,000
            
            
            
            5,190,000Net
      cash (used in) / provided by financing activities
            
            
            686,000
            
            
            
            5,077,000
            
            
            
            8,909,000INCREASE
      (DECREASE) IN CASH ANDCASH
      EQUIVALENTS
            
            
            (1,178,000
            )
            
            
            1,934,000
            
            
            
            2,015,000Cash
      and cash equivalents – beginning of period
            
            
            3,193,000
            
            
            
            1,259,000CASH
      AND CASH EQUIVALENTS – END OF PERIOD
            
            $
            2,015,000
            
            
            $
            3,193,000
            
            
            $
            2,015,000SUPPLEMENTARY
      CASH FLOW INFORMATION:Interest
      Paid
            
            $
            2,000
            
            
            $
            12,000
            
            
            $
            112,000SUPPLEMENTARY
      NON-CASH INVESTING AND FINANCING ACTIVITIES:Accrued
      salary exchanged for Note
            
            
            -
            
            
            
            -
            
            
            $
            150,000Employees
      / stockholders contribution of salary
            
            
            -
            
            
            
            -
            
            
            $
            564,000Stockholders
      contribution of convertible note payableand
      related interest
            
            
            -
            
            
            
            -
            
            
            $
            280,000Conversion
      of carrying value of convertible notespayable
      and accrued interest of $18,000 (2006) and  $97,000 (2005) into
              common stock
            
            
            -
            
            
            $
            243,000
            
            
            $
            1,815,000








[See accompanying notes to financial
statements]


F-6


HEMOBIOTECH,
INC.





(A
DEVELOPMENT STAGE COMPANY)





NOTES
TO FINANCIAL STATEMENTS





DECEMBER
31, 2007 AND 2006




NOTE
A - THE COMPANY





We were
founded in 2001 as “HemoBioTech, Inc.,” a Texas corporation.  In 2003,
we incorporated a sister corporation named “HemoBioTech, Inc.,” in the state of
Delaware.  On December 1, 2003, HemoBioTech, Inc. (Texas) was merged
with and into HemoBioTech, Inc., (Delaware), with HemoBioTech, Inc. (Delaware)
as the surviving entity.  This entity is referred to herein as the
“Company”.





The
accompanying financial statements include the predecessor operations of the
Texas corporation from its inception on October 3, 2001. The historical basis of
accounting was carried over in the merger, including the deficit accumulated in
the development stage. The Company is researching and developing human blood
substitute patented technology licensed exclusively from Texas Tech University
Health Service Center ("TTUHSC") (See Note D). The Company is in the development
stage and its efforts have been principally devoted to capital raising,
organizational infrastructure development and research and
development.





NOTE
B - BASIS OF PRESENTATION





The
Company has incurred cumulative losses of $11,861,000 through the year ended
December 31, 2007, and has been dependent on funding operations through the
private sale of convertible debt and equity securities. At December 31, 2007,
the Company had $2,015,000 in cash and cash equivalents. As discussed in Note I,
during March 2008 the Company received net proceeds of $295,000 through the
Private Placement of equity securities. Management believes that current cash
resources and cash received subsequent to the balance sheet date will be
sufficient to fund operations for the next twelve months. Management's plans
include continuing to finance operations through one or more private or public
offerings of equity securities and monitoring and reducing discretionary
expenditures. See also Footnotes H(3) and I.




NOTE  C - SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES




1)
RESEARCH AND DEVELOPMENT:




Research
and development costs are charged to expense as incurred.




2) LOSS
PER COMMON SHARE:





Basic and
diluted loss per common share is based on the net loss divided by the
weighted average number of common shares outstanding during the period. No
effect has been given to the following outstanding potential common shares such
as options, warrants and outstanding shares subject to forfeiture issued to a
financial services consultant during September 2006, as described in Note H(3)
in the diluted computation as their effect would be
antidilutive:





2007
            
            2006Stock
      Options
            1,886,990
            
            1,669,275Warrants
            3,481,628
            
            2,442,372Common
      shares subject to forfeiture
            1,000,000
            
            1,500,000Total
            6,368,618
            
            5,611,647





F-7


(3)
STOCK-BASED COMPENSATION:





Effective
January 1, 2006, the Company adopted SFAS No. 123 (Revised 2004), Share Based
Payment, (“SFAS No. 123(R)”) which requires a public entity to measure the cost
of employee, officer and director services received in exchange for an award of
equity instruments based on the grant-date fair value of the
award.  SFAS No. 123(R) supersedes previous accounting under SFAS No.
123, Accounting for Stock Based Compensation (“SFAS No. 123”), which permitted
the Company to account for such compensation under Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees (“APB No.
25”).  Pursuant to APB No. 25, and related interpretations, no
compensation cost had been recognized in connection with the issuance of stock
options, as all options granted under the Company’s 2003 Stock Option/Stock
Issuance Plan (the “Option Plan”) and all options granted outside the Option
Plan had an exercise price equal to or greater than the market value of the
underlying common stock on the date of grant.  The Company adopted
SFAS No. 123(R) using the modified prospective transition method, which requires
that compensation cost be recorded as earned for all unvested stock options
outstanding at the beginning of the first fiscal year of adoption of SFAS No.
123(R) based upon the grant date fair value estimated in accordance with the
original provisions of SFAS No. 123 and for compensation cost for all
share-based payments granted subsequent to the adoption, based on the grant date
fair value estimated in accordance with the provisions of SFAS No. 123(R)
effective January 1, 2006.  The Company’s financial statements reflect
the impact of SFAS No. 123(R).  In accordance with the modified
prospective transition method, the Company’s financial statements for prior
periods have not been restated to reflect, and do not include the impact of SFAS
No. 123(R).





(4) FAIR
VALUE OF FINANCIAL INSTRUMENTS:




The
carrying value of cash equivalents, accounts payable and accrued expenses
approximates their fair value due to the short period to maturity of these
instruments.




(5) USE
OF ESTIMATES:




The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. Such
estimates include the selection of assumptions underlying the calculation of the
fair value of options. Actual results could differ from those
estimates.




(6)
RECENT ACCOUNTING PRONOUNCEMENTS:





In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements.” (“SFAS No. 157”) Among other requirements, SFAS No. 157
defines fair value and establishes a framework for measuring fair value and also
expands disclosure about the use of fair value to measure assets and
liabilities. SFAS No. 157 is effective the first fiscal year that begins
after November 15, 2007. This statement will not have a material effect on our
financial position and results of operations.





In
February 2007, the FASB issued Statement of Financial Accounting Standards No.
159, “The Fair Value Option for Financial Assets and Financial Liabilities”
(“SFAS No. 159”).  SFAS No. 159 permits entities to choose to measure
many financial instruments and certain other items at fair value that are not
currently required to be measured at fair value.  SFAS 159 also
establishes presentation and disclosure requirements designed to facilitate
comparisons between entities that chose different measurement attributes for
similar assets and liabilities.  SFAS No. 159 is effective for
financial statements issued for fiscal years beginning after November 15,
2007.  We have determined that the adoption of SFAS No. 159 will have
no impact on our results of operations or financial condition.





In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (“SFAS No. 141R”).  SFAS No. 141R provides revised
guidance on how acquirers recognize and measure the consideration transferred,
identifiable assets required, liabilities assumed, noncontrolling interests, and
goodwill acquired in a business combination.  SFAS No. 141R also
expands required disclosures surrounding the nature and financial effects of
business combinations.  SFAS No. 141R is effective, on a prospective
basis, for us in the fiscal year beginning January 1, 2009.  This
statement will have no material effect on our financial position or results of
operations.




F-8


In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements.”  SFAS No. 160 establishes
requirements for ownership interests in subsidiaries held by parties other than
the Company (sometimes called “minority interests” be clearly identified,
presented and disclosed in the consolidated statement of financial position
within equity, but separate from the parent’s equity.  All changes in
the parent’s ownership interests are required to be accounted for consistently
as equity transactions and any noncontrolling equity investments in
deconsolidated subsidiaries must be measured initially at fair
value.  SFAS No. 160 is effective, on a prospective basis, for us in
the fiscal year beginning January 1, 2009.  However, presentation and
disclosure requirements must be retrospectively applied to comparative financial
statements.  This statement will have no material effect on our
financial position or results of operations.





(7) CASH,
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS:





The
Company considered all highly liquid short-term investments purchased with an
original maturity of three months or less to be cash
equivalents.  Restricted cash represents $55,000 of cash invested in a
certificate of deposit which the Company is obligated to hold under the terms of
their lease agreement.




(8)
INCOME TAXES:




The
Company accounts for income taxes using the asset and liability method described
in SFAS No. 109, "Accounting For Income Taxes," the objective of which is to
establish deferred tax assets and liabilities for the temporary differences
between the financial reporting and the tax bases of the Company's assets and
liabilities at enacted tax rates expected to be in effect when such amounts are
realized or settled. A valuation allowance related to deferred tax assets is
recorded when it is more likely than not that some portion or all of the
deferred tax assets will not be realized.





We
adopted the provisions of Financial Accounting Standards Board interpretation
No. 48 Accounting for Uncertainty in Income Taxes (“FIN 48”) an interpretation
of FASB Statement No. 109 (“SFAS 109”) on January 1, 2007.  As a
result of the implementation of FIN 48, we recognized no adjustment for
uncertain tax provisions.  At the adoption date of January 1, 2007, we
had a deferred tax asset which was fully reserved by a valuation allowance to
reduce the deferred tax asset to the amount that more likely than not to be
realized.





We
recognize interest and penalties related to uncertain tax positions in general
and administrative expense.  As of December 31, 2007, we have not
recorded any provisions for accrued interest and penalties related to uncertain
tax positions.





The tax
years 2003 through 2007 remain open to examination by the major tax
jurisdictions to which we are subject.





NOTE
D - AGREEMENTS WITH TEXAS TECH UNIVERSITY HEALTH SERVICE CENTER
("TTUHSC")





On
January 22, 2002, the Company entered into an exclusive license agreement with
TTUHSC with respect to receiving certain patented rights.  The Company
is committed to the exploitation of such patented rights.




In
consideration for entering into the agreement, the Company issued 678,820 shares
of common stock to TTUHSC (subject to anti-dilution
protection).  These shares issued were valued at approximately $1,000,
their estimated fair value, and charged to operations.  The Company
has agreed to reimburse TTUHSC for all intellectual property protection costs
and patent maintenance fees.  On May 20, 2004, TTUHSC agreed to waive
its anti-dilution protection in exchange for 135,765 additional shares of common
stock.  Such shares were valued at approximately $115,000, their
estimated fair value, and charged to operations. In addition, subject to
obtaining FDA approval of a blood substitute product, the Company has agreed to
fund, over a four-year period, $1.2 million to support efforts in incubating and
commercializing other TTUHSC technologies.  Under the agreement, the
Company reserves the right of first refusal on licensing and commercializing
other technology developed from such funding. As of December 31, 2007, such
approval had not been obtained.  In addition, in July 2002, the
Company entered into a Sponsored Research Agreement (“SRA”) with TTUHSC for the
period September 1, 2002 through August 31, 2006.  In December 2004,
the Company paid a fee of approximately $231,000 to fund the next phase of its
research under the SRA through December 31, 2005.




In
January 2006, the Company entered into a Stage III SRA with TTUHSC for the
period January 1, 2006, to December 31, 2006.  In connection
therewith, the Company made an initial payment of approximately $287,000 which
was amortized during 2006.





In
January 2007, the Company entered into a Stage IV SRA with TTUHSC for the period
beginning January 1, 2007. In connection therewith, the Company made an initial
payment of approximately $780,000. This amount will be charged to operations as
incurred based on monthly reporting to the Company by TTUHSC.  As of
December 31, 2007, approximately $440,000 is included in prepaid expenses on the
accompanying balance sheet. Additional payments may be made to TTUHSC under the
agreement based on mutually agreed upon budgets.


F-9


The
Sponsored Research Agreements may be terminated by either party on 90 days
written notice.





NOTE
E - ACCOUNTS PAYABLE AND ACCRUED EXPENSES




Accounts
payable and accrued expenses consist of the following:




December
      31, 2007Professional
      fees
            
            $
            188,000Liquidated
      damages (see Note F(1))
            
            
            38,000Other
            
            
            28,000Total
            
            $
            254,000




NOTE
F - STOCKHOLDER'S EQUITY




(1)
PRIVATE PLACEMENTS:





During
December 2007 the Company circulated a Private Placement Term Sheet and Exhibits
(“the Private Placement”) for the purpose of raising additional capital. Our
Private Placement offering of  units consists of one share of
HemoBiotech, Inc. common stock (“Share”) and one warrant (Warrant”) to purchase
one share of common stock (collectively, the “Unit”) may  result in up
to $6,000,000 in gross proceeds, subject to an over-allotment
option  for up to an additional $1,000,000 in gross
proceeds.  The purchase price per Unit is based on the average of the
closing price of our common stock on the OTC bulletin Board for the ten trading
days immediately preceding the date of the initial closing of the Private
Placement, discounted by 20%. Each Warrant is exercisable for the purchase of
one share of our common stock at 150% ($1.68) of the per Unit price for a period
of five years from the effective registration date of the shares underlying the
Warrants. The warrants may be redeemed in whole or in part by the Company, upon
30 day’s written notice, at price of $.01 share, provided the weighted average
closing price of the Common Stock exceeds 185% of the per-Unit purchase price
for a period of 20 consecutive trading days ending within 15 days prior to the
date on which the notice of redemption is given and the registration statement
for underlying shares is effective. In addition, the Company is obligated to
issue warrants to its placement agent in the amount of 30% of the total warrants
issued to investors on essentially the same terms; however, these warrants are
only callable when the Company provides a notice of redemption and a
registration statement for the underlying shares is effective. This offering
will be open to investors until April 30, 2008, unless extended by the
Company.  The warrants were valued at December 31, 2007 using the
Black-Scholes stock option valuation model and totaled $621,000 and $186,000 for
the investors and placement agents respectively.





On
December 31, 2007 the Company completed an initial close of the Private
Placement consisting of gross proceeds of approximately $792,000 at the per Unit
price of $1.12. As a result of this closing 707,120 shares of our common stock
was issued along with warrant agreements for the issuance of 707,120 additional
shares upon exercise of the warrants at an exercise price of $1.68. Net of
expenses, primarily to our financial advisor, the Company received net proceeds
of $686,000. In addition, 212,136 warrants were issued to our placement agent
with essentially the same terms as our investor warrants; however, these
warrants are only callable when the Company provides a notice of redemption and
a registration statement for the underlying shares is effective. The Company is
required to file a registration statement to register the Shares and the shares
of our common stock underlying the Warrants under Form SB-2 (or comparable form)
within 45 business days of the closing of the offering.  The Company
will respond to all Commission comments within 30 business days of receipt of
such comments.  We will cause the registration statement to become
effective within 10 business days after receipt of a “no review” notice from the
Commission. If the registration statement is not filed as indicated above, or
declared effective within 90 business days following the filing, we will pay
investors within 30 calendar days of the end of each month we are in violation
of the forgoing liquidated damages of 2% of the dollar amount invested
(pro-rated for partial months) for a maximum of 8 months commencing on the
scheduled filing deadline.  The payments can be made in cash or shares
of our common stock at our option. The Company has amended the registration
rights agreement to reflect the liquidated damage timeframes to begin at the
final closing date of the offering. The Company is in the process of obtaining
waivers from the initial close investors to extend these above timeframes
related to the liquidated damage penalty to timeframes beginning at the final
closing date of the offering.




On
October 27, 2004, the Company completed a Private Placement of 45 units, priced
at $100,000 per unit, and raised gross proceeds of $4,500,000. Each unit
consists of a $50,000 unsecured convertible promissory note, 58,824 shares of
common stock and 117,648 warrants. The notes bear interest at 10% per annum (an
effective rate of 77%) and are convertible at the option of the holder into
common stock or convertible securities to be sold by the Company in its next
financing, as defined, at a conversion price equal to the per share offering
price of such financing.


F-10


Based on
negotiations with the placement agent, the Company agreed to a fair value for
the common stock of $.85 per share and calculated the fair value of each warrant
to be $.53 using the Black-Scholes option pricing model.  Prior to the
revision in the method of valuing the common stock, the Company used
Black-Scholes to value both common stock and warrants. The
gross proceeds from the sale of each unit were allocated based on the relative
fair values to each of the components.





Convertible
      notes payable
            
            $
            31,000Common
      stock
            
            
            31,000Stock
      Warrants
            
            
            38,000Total
            
            $
            100,000





Based on
the allocation of the relative fair values to the components of the Private
Placement offering, the debt discount was calculated to be $855,000, which was
amortized as expense to interest expense over the term of the
notes.




The
Company agreed to file a registration statement within 60 days of final closing
of the Private Placement and to use commercially reasonable efforts to cause the
registration statement to be effective within 120 days of final
closing.  In the event the registration statement was not filed and
declared effective within the required time, the Company would incur liquidated
damages of 2% per month based on the subscription amount of each purchaser in
the Company October 2004 Private Placement. In connection therewith, during
2005, the Company incurred liquidating damages aggregating approximately
$48,000. As of December 31, 2007, the Company owes $38,000 of such damages. (See
Note E).




(2)
CONVERTIBLE NOTES PAYABLE:





Through
October 27, 2005, an aggregate of $1,540,000 principal amount of Notes and
approximately $97,000 accrued but unpaid interest thereon were converted into an
aggregate of 1,544,490 shares of the Company's common stock, at a negotiated
conversion price of $1.06 per share, in accordance with amendments to the
original terms of the Notes permitting such conversion. Effective October 27,
2005, holders of $337,000 aggregate principal amount of Notes agreed to extend
the maturity date of such Notes from October 27, 2005 to April 27, 2006.
Accordingly, the Company paid $372,000 aggregate principal amount of Notes,
together with approximately $97,000 of accrued interest thereon, to holders of
Notes that had not converted their Notes into shares of Company common stock or
did not agree for extension of maturity date, on or prior to October 27,
2005.





For the
period January 1, 2006 through April 27, 2006, an aggregate of $225,000
principal amount of Notes and approximately $18,000 accrued but unpaid interest
thereon were converted into an aggregate of 142,812 shares of the Company’s
common stock, at conversion prices ranging from $1.53 to $1.96 per share, in
accordance with amendments to the original terms of the Notes permitting such
conversion.  In connection therewith, the Company recorded a charge of
approximately $43,000 as interest expense representing the difference between
the conversion price and the market price at date of conversion. On April 27,
2006, the Company paid the remaining outstanding Notes in an aggregate of
$113,000 principal amount and accrued but unpaid interest thereon of
approximately $13,000.





(3) STOCK
WARRANTS




In
connection with the 2007 Private Placement, the Company issued 707,120 Class A
warrants exercisable at $1.68 per share through the fifth anniversary of the
effectiveness of a registration statement of shares underlying the warrants. The
warrants were subject to redemption, at the Company’s sole option, after one
year from the date of effectiveness of the registration statement of common
stock underlying the warrants if the common stock price equaled or exceeded
$2.07 for a period of at least 20 consecutive trading days at a redemption price
of $.01 per warrant. In addition, the Company issued to its placement agent
warrants totaling 30% of the total warrants issued to investors in the December
2007 Private Placement. Accordingly, the Company issued 212,136 warrants to the
placement agent on December 31, 2007.




In
connection with the 2004 Private Placement, the Company issued 5,294,162 Class A
warrants exercisable at $1.06 per share through the fifth anniversary of the
effectiveness of a registration statement of shares underlying the warrants. The
warrants were subject to redemption, at the Company’s sole option, after one
year from the date of effectiveness of the registration statement of common
stock underlying the warrants if the common stock price equaled or exceeded
$2.12 for a period of at least 20 consecutive trading days at a redemption price
of $.001 per warrant.


F-11


On June
12, 2006, the Company’s stock price had been at least $2.12 for 20 consecutive
trading days.  On that date, the Company provided notice of its
redemption of the Class A Warrant, effective July 14, 2006, in accordance with
the terms of the Class A Warrant.




Through
July 14, 2006, 5,156,035 Class A Warrants were exercised at an exercise price of
$1.06 per share, and the Company received net proceeds from such exercises of
approximately $5,190,000.   The remaining 138,127 Warrants were
redeemed by the Company during July 2006 at a minimal cost.




In
connection with the Private Placement, the placement agent was granted a warrant
to purchase 2,382,372 shares of common stock at an exercise price of $.90 per
share (“Placement Agent Warrants”), exercisable for five years from the
effective date of a registration statement to be filed on behalf of investors in
the offering but no later than March 13, 2010. The placement agent was granted
“piggyback” registration rights with respect to the shares underlying this
warrant. The warrants are subject to redemption, at the Company’s sole option,
after one year from the date of effectiveness of the registration statement
covering the resale of shares of common stock underlying these warrants if the
common stock price equals or exceeds $2.12 for a period of at least 20
consecutive trading days, at aredemption price of $.01 per
warrant.




During
the fourth quarter 2007, the Company granted 120,000 warrants to a service
provider.  The warrants vest over a nine month period.  In
connection therewith, the Company valued 60,000 vested warrants using the
Black-Scholes option pricing model with the following assumptions:





Exercise
      Price
            $1.90Maturity
            5
      YearsRisk
      Free Interest Rate
            3.5%
      - 4.0%Volatility
            80%





Accordingly,
the Company recorded a charge of $57,000.




During
the third quarter of 2005, the Company granted 50,000 and 10,000 warrants,
respectively to two service providers. In connection therewith, the Company
valued the warrants using Black-Scholes option pricing model and recorded a
charge of $34,000.





At
December 31, 2007, the Company had the following warrants
outstanding:





Exercise
      Price
            
            Expiration
      Date
            
            Number
      of Shares ReservedPlacement
      Agent – 2004
            
            
            .90
            
            May
      13, 2010
            
            
            2,382,372Other
            
            
            1.00
            
            July
      28, 2009
            
            
            50,000Other
            
            
            1.06
            
            September
      13, 2009
            
            
            10,000Other
            
            $
            1.90
            
            October
      12, 2012
            
            
            120,000
            (1)Class
      A – 2007
            
            $
            1.68
            
            December
      31, 2012
            
            
            707,120
            (2)Placement
      Agent – 2007
            
            $
            1.68
            
            December
      31, 2012
            
            
            212,136Total
            
            
            
            
            
            
            
            3,481,628





(1)
            Subject
      to vesting.


(2)
            Subject
      to redemption (see Note F(1)).





F-12


(4)
COMMON STOCK





In
connection with the initial capitalization of the Texas corporation,
HemoBioTech, Inc. agreed to issue 1,982,157 Class A shares and 2,715,280 Class B
shares between January 30, 2002 and January 20, 2003, and was valued at an
aggregate of approximately $8,000. On October 31, 2003, the Texas corporation
issued 108,613 Class A shares as an anti-dilutive issuance.  On
October 31, 2003, all the stockholders exchanged their Class A and B shares for
6,896,818 shares of common stock of the Company.  The accompanying
financial statements reflect the shares as outstanding from their dates of
original issuance. Under an agreement dated July 15, 2004, a principal
stockholder agreed to return 1,086,113 shares of common stock to the Company as
an inducement to the placement agent to serve as agent in the proposed Private
Placement (Note F(1)).  The return of such shares was treated as a
capital contribution.





(5)
VOTING AND STOCKHOLDERS AGREEMENTS





On
October 31, 2003, the Company entered into a stockholders agreement with certain
stockholders (aggregating 6,217,996 shares of common stock) under whom the
Company granted such stockholders a right of first offer with respect to future
sales of common stock or convertible securities by the Company.  In
addition, the Company granted each of the stockholders “piggyback registration
rights”.  Each of these stockholders waived their right of first
refusal in connection with the October 2004 Private Placement.  In
addition, each of these stockholders waived their piggyback registration rights
in connection with the registration of the shares underlying the October 2004
Private Placement.





On July
15, 2004, certain stockholders (aggregating 4,154,383 shares of common stock)
entered into a voting agreement whereby they agreed to vote all of their
respective shares together with the majority-in-interest of stockholders who are
also the Company’s executive officers on all matters submitted to a vote of the
stockholders. The voting agreement expired on October 27, 2006.




(6) STOCK
OPTION/STOCK ISSUANCE PLAN




During
2003, the Board of Directors of the Company approved a Stock Option/Stock
Issuance Plan (the "Old Plan") which provides for the granting of options or
stock to purchase up to 1,629,168 shares of common stock, under which directors,
employees and independent contractors are eligible to receive incentive and
non-statutory stock options and common shares (employees). The Company's
stockholders approved the Old Plan in August 2004.On June 9,
2006, the Company’s stockholders approved an increase of 1,500,000 shares of
common stock from the 1,629,168 shares of common stock available to be granted
under the Plan, increasing the number of shares to 3,129,168.




During
the year ended December 31, 2004, in connection with the change in status of an
option holder from a member of the Board of Advisors to Director, the Company
recorded deferred stock compensation of $13,000, representing the difference
between the exercise price and the market value of the Company’s common stock on
the date such stock option holder’s status was changed.  Such amount
is being amortized to expense over the remaining vested period of the stock
options.  Such amortization expenses were $4,000 for the year ended
December 31, 2006.





On July
13, 2005, the Company entered into an advisory agreement with its Acting Vice
President and Principal Investigator of Research and Development to receive
advisory services on technical, medical and market issues related to
HemoBioTech, including its second generation blood substitute, HemoTech. The
agreement provides for non-qualified stock options to purchase 271,528 shares of
Common Stock of HemoBioTech at an exercise price per share of $0.18, subject to
vesting through July 13, 2009. In connection therewith, the Company recorded a
charge of $59,000 and $37,000 for the years ended December 31, 2007 and 2006
respectively. As of December 31, 2007, 217,781 options had vested. The Company
will record additional charges as and when the options vest at the then fair
value.




During
the years ended December 31, 2007, 2006, 2005, 2004 and 2003, the Company
granted 7,715, 10,430, 10,430, 25,860, and 103,179 options, respectively, to
purchase common stock to members of the Company’s Board of
Advisors.  Accordingly, the Company recorded a charge of $48,000 and
$43,000 for the years ended December 31, 2007 and 2006.




As shown
in the Statement of Changes of Stockholders’ Equity for the year ended December
31, 2007, stock based compensation for employees and directors of the Company
was $276,000.




Additional
information on shares subject to options is as follows:





At
December 31, 2007, 1,242,178 options were available for grant under the Plan.
The following tables present information relating to stock options under the
Plan as of December 31, 2007.




F-13


2007
            
            
            2006Shares
            
            
            Aggregate
      Intrinsic Value
            
            
            Weighted
      Average Exercise Price
            
            
            Shares
            
            
            Weighted
      Average
              Exercise
      PriceOptions
      outstanding at beginning of period
            
            
            1,669,275
            
            
            
            
            
            $
            0.41
            
            
            
            1,546,345
            
            
            $
            0.30Granted
            
            
            217,715
            
            
            
            
            
            $
            1.87
            
            
            
            122,930
            
            
            $
            1.82Options
      outstanding at end of period
            
            
            1,886,990
            
            
            
            1,710,876
            
            
            $
            0.58
            
            
            
            1,669,275
            
            
            $
            0.41Options
      exercisable at end of period
            
            
            1,726,306
            
            
            
            1,625,611
            
            
            $
            0.53
            
            
            
            1,395,312
            
            
            $
            0.40Options
      not vested at end of period
            
            
            160,684
            
            
            
            85,265
            
            
            $
            1.08
            
            
            
            273,963
            
            
            $
            0.48Options
      vested or expected to vest
            
            
            1,886,990
            
            
            
            1,710,876
            
            
            $
            0.58
            
            
            
            1,669,275
            
            
            $
            0.41







2007OPTIONS
      OUTSTANDING
            
            
            OPTIONS
      EXERCISABLERange
      of Exercise Price
            
            
            Shares
            
            
            Weighted
      Average
              Exercise
      Price
            
            
            Weighted
      Average Remaining Life in Years
            
            
            Shares
            
            
            Weighted
      Average Price$
            0.18
      – 0.20
            
            
            
            1,325,055
            
            
            $
            0.19
            
            
            
            3.8
            
            
            
            1,271,308
            
            
            $
            0.19$
            0.85
      – 0.94
            
            
            
            178,360
            
            
            $
            0.85
            
            
            
            6.9
            
            
            
            147,789
            
            
            $
            0.86$
            1.06
      – 1.65
            
            
            
            135,860
            
            
            $
            1.40
            
            
            
            8.1
            
            
            
            119,242
            
            
            $
            1.41$
            1.75
      – 2.42
            
            
            
            247,715
            
            
            $
            2.02
            
            
            
            8.6
            
            
            
            187,967
            
            
            $
            2.041,886,990
            
            
            $
            0.58
            
            
            
            5.0
            
            
            
            1,726,306
            
            
            $
            0.53





At
December 31, 2007, 1,726,306 options were fully vested. A summary of the status
of the Company’s nonvested options as of December 31, 2007 and changes during
the twelve months ended December 31, 2007, is presented below.




Stock
      Options
            
            
            Weighted
      Average
              Grant-Date
              Fair
      ValueNonvested
      at January 1, 2007
            
            
            273,963
            
            
            $
            0.58Options
      granted during 2007
            
            
            217,715
            
            
            $
            1.52Options
      vesting during 2007
            
            
            (330,994
            )
            
            $
            0.94Nonvested
      at December 31, 2007
            
            
            160,684
            
            
            $
            1.12





F-14


As of
December 31, 2007, there was $104,000 of total unrecognized compensation cost
related to non-vested employee and director share-based compensation
arrangements granted under the Plan.  That cost is expected to be
recognized over a weighted-average period of 1.88 years.





The
weighted-average fair values at date of grant for options granted during the
year ended December 31, 2007 and 2006 were $1.52 and $1.45
respectively.  The value of the options was estimated using the
Black-Scholes option pricing model with the following weighted average
assumptions:





2007
            2006Expected
      life in years
            5-10
            5-10Interest
      rate
            3.97%
      - 5.03%
            4.16%
      - 5.15%Volatility
            80%
            80%Dividend
      yield
            0%
            0%





NOTE
G – INCOME TAXES





The net
deferred tax asset in the accompanying balance sheet includes the following
amounts of deferred tax assets and liabilities.





2007Deferred
      Tax AssetNet
      operating loss
            
            $
            3,428,000Stock
      based compensation
            
            
            312,000Other
            
            
            86,000Research
      & development credit
            
            
            91,000$
            3,917,000Valuation
      Allowance
            
            $
            (3,917,000
            )Net
      deferred tax asset
            
            
            (--
            )





The
deferred tax assets represents the benefits of its net operating loss and
certain expenses not currently deductible for tax purposes.  The
Company has provided a full valuation allowance for such deferred tax assets due
to uncertainty to realize such benefits in the future.





At
December 31, 2007 the Company had approximately $9,518,000 and $91,000 in net
operating loss and research and development credit carryforwards for federal
income tax purposes which expire as follows:




Year
            
            Net
      Operating
              Year
      Losses
            
            
            Research
      & Development Credit2023
            
            $
            134,000
            
            
            $
            02024
            
            
            928,000
            
            
            
            11,0002025
            
            
            3,424,000
            
            
            
            12,0002026
            
            
            2,162,000
            
            
            
            27,0002027
            
            
            3,435,000
            
            
            
            41,000$
            10,083,000
            
            
            $
            91,000




The
difference between the statutory tax rate of 34% and the company's effective tax
rate is due to the increase in the valuation allowance of $1,257,000 (2007) and
$1,094,000 (2006) and certain expenses not deductible for tax
purposes.




F-15





NOTE
H  –  COMMITMENTS AND OTHER MATTERS





(1)
LEASES:




During
the period November 2004 through January 2007, the Company leased office space
for a monthly fee of approximately $5,000. Rent expense was
approximately $50,000 and $67,000 for the years ended December 31, 2007 and
2006, respectively. During February 2007 the Company moved into new office space
and agreed to a sixty-six month office lease.  The lease agreement
includes rent abatement for approximately ten months during 2007 and
2008.  Provisions of the lease include a security deposit of
approximately $5,800 and a thirty six month letter of credit in the amount of
approximately $55,000.  In addition, if the Company cancels this lease
after the forty-second month, and prior to its full sixty-six month term, the
Company will be obligated to pay a cancellation charge of approximately $46,000.
The estimated minimum lease payments for the next five years are:  In
2008 - $65,000; in 2009 - $66,000; in 2010 - $67,000; in 2011 - $68,000; in 2012
- $70,000 and none thereafter.





(2)
CONSULTING AGREEMENTS




On
October 14, 2004, the Company entered into an advisory agreement with a member
of our scientific advisory board to receive technical advisory services. The
agreement can be terminated by either party on 30 days' written notice. The
agreement provides for $1,500 per month and the issuance of an option under the
Plan to purchase 15,000  shares of common stock of the Company at an
exercise price of $0.85 per share. In addition, at the end of each year of
service on the advisory board, the company will grant an additional
non-qualified stock option to purchase 5,000 shares of Common Stock at an
exercise price equal to the then fair market value of the Common Stock. Such
options vest 25% on the first anniversary and then monthly thereafter over a
period of thirty six months.





(3) FINANCIAL
ADVISOR AGREEMENT





On
September 12, 2006, the Company entered into a three year agreement with its
placement agent and financial advisor for consulting services related to
corporate finance and other financial services. The financial advisor is also a
significant shareholder in the Company. The services shall include assisting the
Company in evaluating and negotiating particular contracts or transactions, if
requested to do so by the Company and to raise for the Company its next
financing of up to $10 million with a minimum of $6 million in the next 18
months from the date of the agreement.   As compensation for such
services, the Company agreed to issue 1,500,000 shares of its common stock. The
agreement states that 500,000 shares would vest to the consultant on the one
year anniversary of the agreement.  Accordingly, on September 12,
2007, 500,000 shares vested to the financial consultant. The remaining 1,000,000
shares are subject to forfeiture in the event that the consultant fails to
achieve certain performance criteria set forth in the agreement. In addition,
the agreement provides for a fee if the financial advisor acts as a finder or
financial consultant in various business transactions in which the Company may
be involved such as mergers, acquisitions or joint ventures during the term of
the agreement. Accordingly, the Company has recorded $855,000 in charges for the
year ended December 31, 2007 for the estimated cost of those financial services
and $1,155,000 has been charged to operations since the inception of the
agreement. The Company will record an additional expense over the service period
related to this stock issuance as and when the performance criteria are met at
the then market price of the stock.





NOTE
I  –  SUBSEQUENT EVENT





As
discussed in Note F, the Company initiated a Private Placement offering in the
fourth quarter of 2007.  The Company received net proceeds of $686,000
through December 31, 2007. For the period January 1, 2008 through March 20, 2008
the Company completed an additional close of the Private Placement consisting of
gross proceeds of $338,000 at the per Unit price of $1.12. As a result of this
closing 301,786 shares of our common stock will be issued along with warrant
agreements for the issuance of 301,786 additional shares upon exercise of the
warrants at an exercise price of $1.68. Net of expenses, primarily to our
financial advisor, the Company received net proceeds of $295,000. In addition,
90,536 warrants were issued to our placement agent with essentially the same
terms as our investor warrants; however, these warrants are only callable when
the Company provides a notice of redemption and a registration statement for the
underlying shares is effective.


F-16