UNITED STATES


SECURITIES AND EXCHANGE
COMMISSION


WASHINGTON, D.C.
20549


_______________________





FORM
10-KSB





ANNUAL REPORT UNDER SECTION 13 OR 15
(d)


OF THE SECURITIES EXCHANGE ACT OF
1934





For
the fiscal year ended: June 30,
2006




Commission File Number:
0-21271


_______________________





SANGUI
BIOTECH INTERNATIONAL, INC.


(Name of
Small Business Issuer in Its Charter)




Colorado
            84-1330732(State or Other Jurisdiction of Incorporation or
      Organization)
            (I.R.S.
      EmployerIdentification No.)





Alfred Herrhausen
      Street 44, Witten
      Germany
              58455(Address
      of principal executive offices)
              (Zip
      Code)


49 (2302)
915-200


(Issuer’s
Telephone Number, including Area Code)





Securities
registered under Section 12(b) of the Exchange Act:





None





Securities
registered under Section 12(g) of the Exchange Act:





Common Stock, no par
value





Check
whether the issuer is not required to file reports pursuant to Section 13 or
15(d) of the Exchange Act.   o





Check
whether the issuer: (1) filed all reports required to be filed by Section 13 or
15 (d) of the Securities Exchange Act during the past 12 months (or for such
shorter period that a Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.  
Yes   xNo  
o





Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.   o




Indicate by check mark whether the
Registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).  Yes   oNo   x




The
Issuer's revenues for the most recent fiscal year ended June 30, 2006, were
approximately $137,257.





The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the Registrant on February 15, 2008 based upon the average bid
and ask price of the common stock on the pinksheets.com market segment for such
date, was approximately $10,000,000.





The
number of shares of the Registrant's common stock issued and outstanding on
February 1, 2008 was 50,000,000.





Transitional
Small Business Disclosure Format.   Yes   o  No  
x





Table of Contents


PART
      I
              
              
              PageITEM 1
              Description of Business
              
              
              1ITEM 2
              Description of Property
              
              
              11ITEM 3
              Legal Proceedings
              
              
              11ITEM 4
              Submission of Matters to a Vote of Security
      Holders
              
              
              15PART
      IIITEM 5
              Market for Common Equity, Related Stockholder Matters and
      Small Business Issuer Purchases of Equity Securities
              
              
              11ITEM 6
              Management’s Discussion and Analysis or Plan of
      Operation
              
              
              12ITEM 7
              Financial Statements
              
              
              14Independent Auditors’ Reports
              
              
              15Consolidated Balance Sheet
              
              
              17Consolidated Statements of
Operations
              
              
              19Consolidated Statements of Stockholders’
      Equity
              
              
              20Consolidated Statements of Cash
      Flows
              
              
              21Notes to Consolidated Financial
    Statements
              
              
              22ITEM 8
              Changes in and Disagreements with Accountants on Accounting
      and Financial Disclosure
              
              
              33ITEM 8A
              Controls and Procedures
              
              
              33ITEM 8B
              Other Information
              
              
              33PART
      IIIITEM 9
              Directors, Executive Officers, Promoters and Control
      Persons; Compliance with Section 16(a) of the Exchange
    Act
              
              
              34ITEM 10
              Executive Compensation
              
              
              36ITEM 11
              Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholders Matters
              
              
              38ITEM 12
              Certain Relationships and Related
      Transactions
              
              
              39ITEM 13
              Exhibits
              
              
              40ITEM 14
              Principal Accountant Fees and Services
              
              
              41









CAUTIONARY
STATEMENT





Some of
the statements contained in this Form 10-KSB for Sangui Biotech International,
Inc. (the “Company” or “SGBI”) discuss future expectations, contain projections
of results of operation or financial condition or state other “forward-looking”
information.  These statements are subject to known and unknown risks,
uncertainties, and other factors that could cause the actual results to differ
materially from those contemplated by the statements.  The
forward-looking information is based on various factors and is derived using
numerous assumptions.  Important factors that may cause actual results
to differ from projections include, for example:





·  the
success or failure of management's efforts to implement their business
strategy;


·  the
ability of the Company to raise sufficient capital to meet operating
requirements;


·  the
uncertainty of consumer demand for our product;


·  the
ability of the Company to protect its intellectual property rights;


·  the
ability of the Company to compete with major established companies;


·  the
effect of changing economic conditions;


·  the
ability of the Company to attract and retain quality employees; and


·  other
risks which may be described in future filings with the SEC.





Words
such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,”
“estimates,” and variations of such words and similar expressions are intended
to identify such forward-looking statements.  These statements are not
guarantees of future performance and are subject to certain risks, uncertainties
and assumptions that are difficult to predict.  Therefore, actual
results and outcomes may differ materially from what is expressed or forecasted
in any such forward-looking statements.  Such risks and uncertainties
include those set forth herein under “Risk Factors” as well as those noted in
the documents incorporated herein by reference.  Unless required by
law, the Company undertakes no obligation to update publicly any forward-looking
statements, whether as a result of new information, future events or
otherwise.











PART
1





ITEM 1.  DESCRIPTION
OF BUSINESS





HISTORY




Sangui
BioTech, Inc. was incorporated in Delaware on August 2, 1996, and began
operations in October 1996.  Shortly after the formation of Sangui
BioTech, Inc., the shareholders of SanguiBioTech AG and GlukoMediTech AG agreed
to a share swap in which all of the outstanding shares held by the shareholders
would be exchanged for shares of Sangui BioTech, Inc., thereby making
SanguiBioTech AG and GlukoMediTech AG wholly owned subsidiaries of Sangui
BioTech, Inc.  In August 1997, a publicly held company, Citadel
Investment System, Inc., a Colorado corporation (Citadel), acquired one hundred
percent (100%) of the outstanding common shares of Sangui BioTech, Inc., and as
a result, Sangui BioTech, Inc. became a wholly owned subsidiary of
Citadel.  Thereafter, Citadel changed its name to Sangui BioTech
International, Inc. (the Company or SGBI).





On March
30, 2000, SGBI acquired all the outstanding common stock of Felnam Investments,
Inc., a Nevada corporation (Felnam).  The transaction was funded
through the issuance of 100,000 shares of SGBI's stock valued at $0 per share
due to SGBI treating the transaction as a recapitalization of
SGBI.  In conjunction with the transaction, SGBI incurred
approximately $180,000 of transaction costs that were charged to
operations.





Until the
end of fiscal year 2002, SGBI's business operations were conducted through its
four wholly owned subsidiaries: Sangui BioTech, Inc., SanguiBioTech AG,
GlukoMediTech AG, and Sangui Biotech Singapore Pte Ltd.





Sangui BioTech,
Inc.





Sangui,
BioTech, Inc. (SBT) was principally engaged in the development and manufacturing
of immunodiagnostic kits, which were sold by SBT in niche markets in the United
States and Europe.  During the first quarter of the 2003 fiscal year,
SBT sold its assets, and commenced a wind-down of its U.S. business
operations.  SBT was merged with and into SGBI effective December 31,
2002.




Sangui Biotech Singapore Pte
Ltd.





Sangui
Biotech Singapore Pte Ltd. (Sangui Singapore) was incorporated as a wholly owned
subsidiary of SGBI in Singapore on May 15, 1999.  Sangui Singapore was
the Asian regional office for SGBI and was engaged in animal experiments in
conjunction with the German subsidiaries.  Effective as of January 31,
2003, Sangui Singapore was wound down and closed.  On February 25,
2004, the Registry of Companies and Businesses of the Republic of Singapore
informed the company, that it would announce the projected strike-off from its
register in its official Gazette on March 31, 2004 and that three months
following the name of Sangui Singapore would be struck off the register without
further notice.  The company assumes, therefore, that the strike-off
was executed on or about June 30, 2004.





GlukoMediTech
AG





GlukoMediTech
AG (Gluko AG) was established and organized under the laws of Germany in Mainz,
Germany on July 15, 1996.  Gluko AG was developing long-term
implantable glucose sensors, by-products thereof, and diverse other
sensors.  Since additional financing for the next planned step of
product development could not be secured, Gluko AG was merged with Sangui AG
effective June 30, 2002.  While further development work in this area
was halted, Sangui GmbH (see below) is working to secure the key patents
relating to the existing Glucose Sensors and will continue to seek out potential
strategic financial or industry partners.





SanguiBioTech
AG





SanguiBioTech
AG (Sangui GmbH) was established and organized under the laws of Germany in
Mainz, Germany on November 25, 1995.  Effective November 4, 2003,
SanguiBioTech AG was converted into SanguiBioTech GmbH, a limited liability
company under German law.  Sangui GmbH develops hemoglobin-based
artificial oxygen carriers for use as blood additives, blood volume substitutes
and variant products thereof.  Sangui GmbH has also developed an
anti-aging cosmetic and a number of related products aimed at improving oxygen
supply to the skin.  Enhanced oxygen supply is the key to improved
wound healing, therefore the company has extended its product portfolio to
contain wound pads and other wound management products with these goals in
mind.  The facilities of Sangui GmbH are located on the premises of
the Forschungs- und Entwicklungszentrum of the University of Witten/Herdecke,
Witten, Germany.





To date,
neither SGBI nor any of its subsidiaries has had profitable
operations.  The Company has never been profitable, and through June
30, 2006, SGBI's accumulated deficit has exceeded $21.8 million.  The
Company expects to continue to incur substantial losses over the next several
years as it pursues its research and development efforts, testing activities and
other growth operations.  SGBI's most promising potential products are
still in early development stages.  As such the Company will need to
obtain substantial additional capital to fulfill its business plan.





The Company has adopted a program aimed at cost reductions and at refocusing
SGBI’s funds to accelerate time to market for its most promising and mature
products.  Effective as of August 31, 2004, the company reduced any
extraneous activities for cost saving purposes.  The Company’s current
key focus is on selling its cosmetics and wound management products to
distribution partners, identifying additional industrial and distribution
partners for its patents and products, and on obtaining the additional financial
resources necessary to finalize the certification processes of its development
products.  No assurance can be given that SGBI’s program will be
successful.


1


BUSINESS OF THE
COMPANY




The
Company's mission is the development of novel and proprietary pharmaceutical,
medical and cosmetic products.  The Company develops its products
through its wholly owned German subsidiary Sangui GmbH.  The Company
is seeking to market and sell some, or all, of their products through
partnerships with industry partners.





The focus
of Sangui GmbH has been the development of oxygen carriers capable of providing
oxygen transport in humans in the event of acute and/or chronic lack of oxygen
due to arterial occlusion, anaemia or blood loss whether due to surgery, trauma,
or other causes.  Sangui GmbH has thus far focused its development and
commercialization efforts of such artificial oxygen carriers by reproducing and
synthesizing polymers out of native hemoglobin of defined molecular
sizes.  Sangui GmbH, has in addition developed external applications
of oxygen transporters in the medical and cosmetic fields in the form of gels
and emulsions for the regeneration of the skin.





Sangui
GmbH holds the exclusive distribution rights for Chitoskin wound pads for the
European Union and various other countries.  Sangui GmbH has filed a
patent cooperation treatment applications (PCT) for the production and use of
improved Chitoskin wound pads using gelatine instead of collagen as the carrier
substance.  In addition, Sangui GmbH is a co-filer for a PCT for the
production and use of glycosaminoglycansbased on Chitosan and its
derivatives.




ARTIFICIAL OXYGEN
CARRIERS




Sangui
GmbH develops several products based on polymers of purified natural porcine
hemoglobin with oxygen carrying abilities that are similar to native
hemoglobin.  These are (1) oxygen carrying blood additives; and, (2)
oxygen carrying blood volume substitutes.





In
December 1997, Sangui GmbH decided that porcine hemoglobin should be used as the
basic material for its artificial oxygen carriers.  In March 1999,
Sangui GmbH decided which hemoglobin hyperpolymer would go into preclinical
investigation, that glutaraldehyde would be utilized as a cross linker, and
further that the polymer hemoglobin be chemically masked to prevent protein
interaction in blood plasma.  The fine adjustment of the molecular
formula of the artificial oxygen carriers - optimized for laboratory scale
production - was finalized in the summer of 2000.





The
experiments completed in Sangui GmbH’s laboratories demonstrated that it is
possible to polymerize hemoglobins isolated from porcine blood resulting in huge
soluble molecules, so-called hyperpolymers.  In August 2000, Sangui
GmbH finalized its work on the pharmaceutical formulation of the oxygen carrier
for laboratory scale.  In February 2001 a pilot production in a
laboratory scale was carried out in SGBI's clean room.  The resulting
product was applied in single volunteers in pilot self-experiments.





The blood
additives and blood substitute projects were halted in 2003 due to the lack of
financing for the pre-clinical test phase.  In October 2006,
subsequent to the period covered by this report, a contract was entered into
between Sangui GmbH and ERC Nano Med S.A. de C.V. of Monterrey Mexico (ERC),
which provides that ERC will establish a production facility in Mexico to
produce sufficient quantities of the blood additive.  In cooperation
with the Mexican National Health Organizations, ERC will initiate all necessary
steps to begin the pre-clinical test phase for the products as soon as
possible.  It is anticipated that this will lead to the FDA
authorization process in due course.




According
to regulatory requirements, all drugs must complete preclinical and clinical
trials before approval (e.g. Federal Drug Administration approval, see Certain
Business Risks below) and market launch.  The Company’s management
believes that the European and FDA approval process will take at a minimum
several years to complete.





NANO FORMULATIONS FOR THE
REGENERATION OF THE SKIN




Healthy
skin is supplied with oxygen both from the inside, by way of the blood, as
well as through diffusion from the outside.  A lack of oxygen will
cause degenerative alterations, ranging from premature aging, to surface damage,
and even as extensive as causing open wounds.  The cause for the lack
of oxygen may be a part of the normal aging process, but it may also be caused
by burns, radiation, trauma, or a medical condition.  Impairment of
the blood flow, for example caused by diabetes mellitus or by chronic venous
insufficiency, can also lead to insufficient oxygen supply and the resulting
skin damage.





The
nano-emulsion-based preparations now being sold by Sangui GmbH have been
designed to support the regeneration of the skin by improving its oxygen
supply.  The products Sangui GmbH are currently focussing on are:
(1) an anti-aging formulation and treatment; and, (2) an
anti-cellulite formulation for the cosmetics market.  The products
were thoroughly tested by an independent research institute and received top
marks for skin moisturization, and enhanced skin elasticity,
respectively.





Sangui’s
cosmetic business model is reliant upon cooperation with its manufacturing and
distribution partners.  Sangui has its various formulations produced
by a contract manufacturer and sells quantities of the products either in bulk
or in customized private label packaging as requested.  In addition,
Sangui started to sell its cosmetic products under its own brand “Pure
MO2isture” via an internet shop subsequent to the period covered by this report
in September of 2006.





Sales of
the anti-cellulite products began in August of 2005 via two German TV shop
programs.  Additionally, distribution partners in Argentina and Mexico
have purchased launch quantities in November of 2005, and July of 2006,
respectively.






2





CHITOSKIN WOUND
PADS





In March
2005, SanguiBioTech GmbH was awarded the CE mark for this
product.  The CE mark authorizes the company to distribute and sell
this medical product in the member countries of the European
Union.  At the same time, Sangui GmbH successfully passed the ISO
9001:2000 (General Quality Management System) and ISO 13485:2003 (Quality
Management System Medical Products) audits, and obtained the respective
certifications.  The “Chitoskin” trademark was already granted to the
company for the European countries effective November 1, 2004.





Karl Beese GmbH, a leading German
vendor and distributor of hospital supplies, began marketing and distributing
the wound pad product in August 2005, and has placed several subsequent orders
with the company.  In addition, Karl Beese has delivered large
quantities of the wound pad product to a Czech distribution partner through
summer 2006.





PUBLIC
GRANTS




Sangui
GmbH was granted a subsidy amounting to $1,535,300 for the period from April 8,
1998 to March 31, 2001 for research and development in association with the
project known as “Development of a procedure for the production of synthetic
oxygen carriers on the basis of hyperpolymer hemoglobins as a blood additive and
a so-called blood substitute.”  In March 2001, an application to have
the subsidy period extended to June 30, 2002 was approved.  In March
2002, SGBI submitted a second application to the project authority, Jülich
(PtJ), to have the subsidy period extended again; this was approved for the
period up to December 31, 2002 in the notification of alteration dated July 2,
2002.  Funds in the amount of $1,166,210 were received in regard to
this project through December 31, 2002.





On
September 1, 1999, Gluko AG was granted $1,864,383 over a period of three years
to promote the project known as “Development of a permanently implantable
glucose sensor and a controllable insulin pump for diabetics into a technical
beta cell.”  In October 2001, an application was submitted to the
project authority, Jülich (PtJ), to have the subsidy period extended until
December 31, 2002; this was approved in a  notification of alteration
dated November 28, 2001.  SGBI had received funds in regard to this
project amounting to $563,775 through December 31, 2002.





All
remaining funds from both of the above-subsidized projects were returned as of
December 31, 2002.





In the fourth quarter of our fiscal
year ended June 30, 2005, a final project review was carried out by the state
authorities of Northrhine-Westfalia.  The review resulted in a final
accounting in our favor totalling to approximately $195,850 for both
projects.  $148,810 of this amount was received in the fourth quarter
of our fiscal year ended June 30, 2005, for the oxygen carrier project, and in
the first quarter of the fiscal year ended June 30, 2006 for the glucose sensor
project.  The remaining $47,040 was received in the first quarter of
the 2006 fiscal year.





PATENTS AND PROPRIETARY
RIGHTS




The
Company seeks patent protection for all of its research and development, and all
modifications and improvements thereto.  As of June 30, 2006, Sangui
GmbH had been granted 18 patents.  Furthermore, its subsidiary has
applied for 24 patents, most of which have been filed in Germany (DE), the
United States of America (US), and as an international patent application with
the European Patent Office (EP).  Global patent applications are
marked PCT.  Four (4) patent applications are related to progress made
in the final development stages of the external application of the artificial
oxygen carriers.  Below are listed the most pertinent of the rights
held by the Company.





1.
Haemoglobin-Polymers




EP-P
      0 685 492
            “Process
      for the preparation of haemoglobin hyperpolymers of uniform molecular
      weight” (Patent Granted)US-A
      10/878,724US-P
      5,985,332
            “Hemoglobins
      provided with ligands protecting the oxygen binding sites for use as
      artificial oxygen carriers for direct application in
      medicineEP-P
      0857 733
            and
      biolgy, and method for the preparation thereof” (Patent
      Granted)US-O
      2004/0014641
            “Mammalion
      haemoglobin compatible with blood plasma, cross-linked and conjugated with
      polyalkylene oxides as artificial medical oxygenEP-O
      1 299 457
            carriers, production
      and use thereof” (Patent Pending)US-O
      2004/0023851
            “Method
      for the production of artificial oxygen carriers from covalently cross
      linking haemoglobin with improved functional propertiesEP-O
      1 249 385
            of
      haemoglobin by cross-linking in the presence of chemically non-reacting
      effectors of the oxygen affinity of the haemoglobin” (Patent
      Pending)US-O
      2004/0029780
            “Synthetic
      oxygen transport made from cross-linked modified human or porcine
      haemoglobin with improved properties, methodEP-O
      1294386
            for
      a preparation thereof from purified material and use thereof” (Patent
      Pending)PCT-A
      103 52 692
            “Use
      of hypo-oncotic solutions of hyperpolymerised haemoglobins to be added to
      the human blood circulation in treatmentEP
      2004/012363
            of
      lung oedema” (Patents Pending)




3





2. GlucoTector




US-P
      4,775,514
              “Luminescent
      layers for use in apparatus for determining the oxygen concentration in
      gases and the like” (Patent Granted)DE-P
      198 15 932
              “Miniaturisation
      of a polarimetre for the analysis of low concentration components in
      liquid test materials on an opticalbasis
      as well as a device to perform the pertinent tests” (Patent
      Granted)US-P
      6,577,393
              “Polarimetric
      procedure for determining the (main) vibration plane of polarized light to
      about 0.1 m° and miniaturizedDE-P
      198 26 294
              device
      for its implmentation” (Patents Granted)DE-P
      199 11 265
              “Method
      for the measurement of the concentration of glucose in aequous solutions
      containing proteins, i.e. in interstitialtissue
      fluids in particular, as well as implantable devices for carrying out said
      method” (German Patent Granted)EP-A
      01 940
      355
              “Method
      for the long-term stable and well-reproducible spectrometric measurement
      of the concentrations of components ofDE-P
      100 20 615
              aqueous
      solutions, and device for carrying out said method” (German Patent
      Granted)DE-P
      100 20 613
              “Method
      and Device for reproducible polarimetric measurement of the concentration
      of the components of aequous solutions”(German
      Patent Granted)EP-A
      01 953
      958
              “Refractometric
      method for carrying out long-term stable accurate measurements of the
      concentrations of dissolved substancesDE-P
      100 30 927
              and
      miniaturizable device for carrying out said method” (German Patent
      Granted; EP Patent Pending)US-A
      10/312,142
              “Device
      for combined and simultaneous use of several measuring methods for
      analysing components of a liquid mixturePCT-O
      WO
      02/01202
              of
      several substances” (German Patent Granted; EP and US Patents
      Pending)DE-P
      100 30 920




3. External applications of
artificial oxygen carriers





EP-P
      1 301
      169
              “Preparation
      in the form of an emulsion that contains an oxygen carrier selected from
      hemoglobin or hemoglobin and myoglobin,US-O
      2004/0022839
              for
      use as a topically applicable cosmetic and for the natural regeneration of
      the skin in the case of oxygen deficiency” (European Patent
      Granted)EP-P
      1 303
      297
              “Preparation
      containing an oxygen carrier for regeneration of the skin in the case of
      oxygen deficiency” (European Patent Granted)US-O
      2003/0180365EP-A
      03 740 198
              “Microemulsions
      having a binary phase differentiability and active substance
      differentiability, the production thereof and their
use,US-A
      10/518,667
              particularly
      for the topical supply of oxygen” (Patents Pending)DE-O
      103 60 503
              “Combination
      set and method for the bio-regenerative treatment of skin”  (Patents
      Pending)PCT-O
      2005 /063193




4. Wound
Management




EP-A
      03 708 173
              “Use
      of one or more natural or modified oxygen carriers, devoid of plasma and
      cellular membrane constituents,US-A
      10/508,092
              for
      externally treating open, in particular chronic wounds” (Patents
      Pending)PCT-O
      2005/063311
              “Therapeutically
      active wound dressings, production thereof, and use of the same” (Patents
      Pending)
   4
 MANUFACTURING, MARKETING AND
DISTRIBUTION




For the
manufacturing of our products we rely on certified specialist contract
manufacturers who specialize in the fields of cosmetic and medical
products.  Production processes have been certified and comply with
the respective best practices in the industry.  Production is
constantly being monitored by us and by the respective certifying
authorities.





We still
have limited experience in the selling and marketing of our
products.  We are therefore dependent on attracting industry marketing
and distribution partners in order to succeed in selling our products in their
respective markets.





RESEARCH AND
DEVELOPMENT




Research
and development are charged to operations as they are incurred.  Legal
fees and other direct costs incurred in obtaining and protecting patents are
expensed as incurred. Research and development costs totaled $111,608 and
$426,831 during the fiscal years ended June 30, 2006 and 2005,
respectively.




GOVERNMENT
REGULATION




SGBI and
its former United States subsidiary were subject to governmental regulation
under the Occupational Safety and Health Act, the Environmental Protection Act,
the Toxic Substances Control Act, and other similar laws of general application,
as to all of which SGBI believes it and its subsidiaries are in material
compliance.





Although
it is believed that SGBI and its United States subsidiary were in material
compliance with all applicable governmental and environmental laws, rules,
regulations and policies, and although no government concerns were put forward
during the operation of or after the closing of the Santa Ana operations, there
can be no assurance that the business, financial condition, and results of
operations of SGBI and its subsidiaries will not be materially adversely
affected by future government claims with regard to unlikely, but not
impossible, infringements on these or other laws resulting from SGBI’s former
United States operations.





Additionally,
the clinical testing, manufacture, promotion and sale of a significant majority
of the products and technologies of the subsidiaries, and to a much less extent
of SGBI, if those products and technologies are to be offered and sold in the
United States, are subject to extensive regulation by numerous governmental
authorities in the United States, principally the Federal Drug Administration
(FDA), and corresponding state regulatory agencies.  To the extent
those products and technologies are to be offered and sold in markets other than
the United States, the clinical testing, manufacture, promotion and sale of
those products and technologies will be subject to similar regulation by
corresponding foreign regulatory agencies.  In general, the regulatory
framework for biological health care products is more rigorous than for
non-biological health care products.  Generally, biological health
care products must be shown to be safe, pure, potent and
effective.  There are numerous state and federal statutes and
regulations that govern or influence the testing, manufacture, safety,
effectiveness, labelling, storage, record keeping, approval, advertising,
distribution and promotion of biological health care
products.  Non-compliance with applicable requirements can result in,
among other things, fines, injunctions, seizures of products, total or partial
suspension of product marketing, and failure of the government to grant
pre-market approval, withdrawal of marketing approvals, product recall and
criminal prosecution.





COMPETITION




The
market for the products and technologies of SGBI is highly competitive, and SGBI
expects competition to increase.  Experiments and clinical testing in
the field of artificial oxygen carriers are being carried out by Alliance
Pharmaceutical Corp. of San Diego, California, as well as Biopure Corp. of
Cambridge, Massachusetts.  Companies researching into the possibility
of developing implantable glucose sensors include Roche Diagnostics, Animas,
Corp., Frazer, Pennsylvania, and Medtronic Inc. of Sylmar,
California.  In the fields of anti-aging and anti-cellulite cosmetics,
all major cosmetic vendors are actively marketing proprietary
formulations.  Leading wound pad providers include Johnson &
Johnson, Bristol-Myers Squibb, as well as Beiersdorf AG.




DEPENDENCE ON MAJOR
CUSTOMERS




As of
June 30, 2006, the company entertained business relationships with three major
customers, Mercatura Biocosmetics AG, Cosmed-Naturell GmbH and Karl Beese GmbH
& Co.  No assurance can be given that these companies will be
successful in marketing and distributing our products.  These three
companies combined constituteapproximately 70%of the Company’s gross revenues for the year ended June 30,
2006.




HUMAN
RESOURCES




The
Company considers its relations with its employees to be
favorable.  As of June 30, 2006 SGBI and its subsidiaries had two
fulltime employees, neither of whom was involved in research and
development.  For research and development purposes, the Company had
consulting arrangements with five individuals.





DIVIDENDS





The
Company anticipates that it will use any funds available to finance its growth
and that it will not pay cash dividends to stockholders in the foreseeable
future.





REPORTS TO SECURITY
HOLDERS





Copies of
the Company’s reports, as filed with the Securities and Exchange Commission, are
available and may be viewed as filed at the SEC’s Public Reference Room at 450
Fifth Street, N.W., Washington D.C. 20549 or by calling
1-800-SEC-0330.  Additionally they can be accessed and downloaded via
the internet at http://www.sec.gov/cgi-bin/srch-edgar
by simply typing in “Sangui Biotech International” or via the web links at the
corporate website http://www.sanguibiotech.com.











CERTAIN BUSINESS
RISKS





The risks
and uncertainties described below are not the only ones facing SGBI and there
may be additional risks that are not presently known or are currently deemed
immaterial.  All of these risks may impair business
operations.





The Company's present and proposed
business operations will be highly speculative and subject to the same types of
risks inherent in any new or unproven venture, as well as risk factors
particular to the industries in which it will operate, as well as other
significant risks not normally associated with investing in equity securities of
United States companies, among other things, those types of risk factors
outlined below.





Risk that SGBI's Common Stock may be
deemed a “Penny Stock”





The
Company's common stock may be deemed to be a “penny stock” as that term is
defined in Rule 3a51-1 of the Exchange Act of 1934.  Penny stocks are
stocks (i) with a price of less than five dollars per share; (ii) that are not
traded on a “recognized” national exchange; (iii) whose prices are not quoted on
the NASDAQ automated quotation system (NASDAQ-listed stocks must still meet
requirement (i) above); or (iv) of an issuer with net tangible assets of less
than US$2,000,000 or US$5,000,000 (if in continuous operation for less than
three years), or with average annual revenues of less than US$6,000,000 for the
last three years.





A principal exclusion from the
definition of a penny stock is an equity security that has a price of five
dollars ($5.00) or more, excluding any broker or dealer commissions, markups or
markdowns.  As of the date of this report SGBI's common stock has a price less than
$5.00.





If SGBI's
Common Stock is at any time deemed a penny stock, section 15(g) and Rule 3a51-1
of the Exchange Act of 1934 would require broker-dealers dealing in SGBI's
Common Stock to provide potential investors with a document disclosing the risks
of penny stocks and to obtain a manually signed and dated written receipt of the
document before effecting any transaction in a penny stock for the investor's
account.  Potential investors in SGBI's common stock are urged to
obtain and read such disclosure carefully before purchasing any shares that are
deemed to be “penny stock.”





Moreover,
Rule 15g-9 of the Exchange Act of 1934 requires broker-dealers in penny stocks
to approve the account of any investor for transactions in such stocks before
selling any penny stock to that investor.  This procedure requires the
broker-dealer to (i) obtain from the investor information concerning his or her
financial situation, investment experience and investment objectives; (ii)
reasonably determine, based on that information, that transactions in penny
stocks are suitable for the investor and that the investor has sufficient
knowledge and experience as to be reasonably capable of evaluating the risks of
penny stock transactions; (iii) provide the investor with a written statement
setting forth the basis on which the broker-dealer made the determination in
(ii) above; and (iv) receive a signed and dated copy of such statement from the
investor, confirming that it accurately reflects the investor's financial
situation, investment experience and investment
objectives.  Compliance with these requirements may make it more
difficult for investors in SGBI's common stock to resell their shares to third
parties or to otherwise dispose of them.




Conflicts of Interest; Related Party
Transactions





The
possibility exists that the Company may acquire or merge with a business or
company in which the Company's executive officers, directors, beneficial owners
or their affiliates may have an ownership interest.  Although there is
no formal bylaw, stockholder resolution or agreement authorizing any such
transaction, corporate policy does not forbid it and such a transaction may
occur if management deems it to be in the best interests of the Company and its
stockholders, after consideration of all factors.  A transaction of
this nature would present a conflict of interest to those parties with a
managerial position and/or an ownership interest in both the Company and the
acquired entity, and may compromise management's fiduciary duties to the
Company's stockholders.  An independent appraisal of the acquired
company may or may not be obtained in the event a related party transaction is
contemplated.  Furthermore, because management and/or beneficial
owners of the Company's common stock may be eligible for finder's fees or other
compensation related to potential acquisitions by the Company, such compensation
may become a factor in negotiations regarding such potential
acquisitions.  It is the Company's intention that all future
transactions be entered into on such terms as if negotiated at arms length,
unless the Company is able to receive more favorable terms from a related
party.





Limited Operating History of the
Company; Losses Are Expected To Continue





There can
be no assurance that unanticipated technical or other problems will not occur
which would result in material delays in product commercialisation or that the
efforts of SGBI will result in successful product
commercialisation.  SGBI has been operating at a loss and expects its
costs to increase as soon as its development efforts and testing activities
accelerate. It is currently unknown when profitable operations might be
achieved.





Substantial Doubt that the Company
Can Continue as a Going Concern





The
Company expects to continue to incur significant capital expenses in pursuing
its business plan to market its products and expand its product line, while
obtaining additional financing through stock offerings or other feasible
financing alternatives.  In order for the Company to continue its
operations at its existing levels, the Company will require significant
additional funds over the next twelve months.  Therefore, the Company
is dependent on funds raised through equity or debt
offerings.  Additional financing may not be available on terms
favorable to the Company, or at all.  If these funds are not available
the Company may not be able to execute its business plan or take advantage of
business opportunities.  The ability of the Company to obtain such
additional financing and to achieve its operating goals is
uncertain.  In the event that the Company does not obtain additional
capital or is not able to increase cash flow through the increase of sales,
there is a substantial doubt of its being able to continue as a going
concern.


6


Future Capital Needs and Uncertainty
of Additional Funding





Although
management believes that SGBI's cash position should be sufficient to cover its
financing for at least the current fiscal year, substantial funds will be
required to effect SGBI's development plans.  The Company will require
additional cash for: (i) payment of increased operating expenses; (ii) payment
of development expenses; and (iii) further implementation of its business
strategies.  Such additional capital may be raised by additional
public or private financing, as well as borrowings and other
resources.  To the extent that additional capital is received by SGBI
by the sale of equity or equity-related securities, the issuance of such
securities will result in dilution to SGBI's shareholders.  There can
be no assurance that additional funding will be available on favorable terms, if
at all.  SGBI may also seek arrangements with collaborative partners
in order to gain additional funding, marketing assistance or other
contributions.  However, such arrangements may require SGBI to
relinquish rights or reduce its interests in certain of its technologies or
product candidates.  The inability of SGBI to access the capital
markets or obtain acceptable financing could have a material adverse effect on
the results of operations and financial condition of SGBI.  Moreover,
if funds are not available from any sources, SGBI may not be able to continue to
operate.   As of June 30, 2006, the Company has issued all of its
common shares of stock as authorized by its Articles.  The
Company is unable to consummate any additional sales of common stock until
additional shares are authorized by the Board of Directors, the
shareholders of the Company, and an amendment to the Company’s
Articles of Incorporation is completed.





Dependence on Key
Personnel





The
future success of SGBI will depend on the service of its key scientific
personnel and, additionally, its ability to identify, hire and retain additional
qualified personnel.  There is intense competition for qualified
personnel in this industry and there can be no assurance that SGBI will be able
to attract and retain personnel necessary for the development of the business of
SGBI.  Because of the intense competition, there can be no assurance
that SGBI will be successful in adding technical personnel if needed to satisfy
its staffing requirements.  Failure to attract and retain key
personnel could have a material adverse effect on SGBI.




SGBI and
its subsidiaries are dependent on the efforts and abilities of their senior
management.  The loss of various members from management could have a
material adverse effect on the business and prospects of SGBI.  In
particular, SGBI will depend on the service of Professor Wolfgang Barnikol
because he is instrumental in his expertise in the development of the oxygen
carrier and glucose sensor products.  There can be no assurance that
upon the departure of key personnel from the service of SGBI or its subsidiaries
suitable replacements will be available.





Licenses and
Consents





The
utilization or other exploitation of the products and services developed by SGBI
or its subsidiaries may require SGBI or its subsidiaries to obtain licenses or
consents from the producers or other holders of patents, trademarks, copyrights
or other similar rights (Intellectual Property) relating to the products and
technologies of SGBI or its subsidiaries.  In the event SGBI or its
subsidiaries are unable, if so required, to obtain any necessary license or
consent on terms which the management of SGBI or its subsidiaries consider to be
reasonable, SGBI or its subsidiaries may be required to cease developing,
utilizing, or exploiting products or technologies affected by those Intellectual
Property rights.  In the event SGBI or its subsidiaries are challenged
by the holders of such Intellectual Property rights, there can be no assurance
that SGBI or its subsidiaries will have the financial or other resources to
defend any resulting legal action, which could be significant.





Technological
Factors





The
market for the products and technology developed by SGBI is characterized by
rapidly changing technology, which could result in product obsolescence or short
product life cycles.  Similarly, the industry is characterized by
continuous development and introduction of new products and technology to
replace outdated products and technology.  Accordingly, the ability of
SGBI to compete will be dependent upon the ability of SGBI to provide new and
innovative products and technology.  There can be no assurance that
competitors will not develop technologies or products that render the proposed
products and technology of SGBI obsolete or less marketable.  SGBI
will be required to adapt to technological changes in the industry and develop
products and technology to satisfy evolving industry or customer requirements,
any of which could require the expenditure of significant funds and resources,
and SGBI does not have a source or commitment for any such funds and
resources.  Development efforts relating to the technological aspects
of the various products and technologies to be developed by SGBI are not
substantially completed.  Accordingly, SGBI will continue to refine
and improve those products and technologies.  Continued refinement and
improvement efforts remain subject to the risks inherent in new product
development, including unanticipated technical or other problems, which could
result in material delays in product commercialisation or significantly
increased costs.  In addition, there can be no assurance that those
products and technologies will prove to be sufficiently reliable or durable in
wide spread commercial application.  The products or technologies
sought to be developed by SGBI will be the result of significant efforts, which
may result in errors that become apparent subsequent to widespread commercial
utilization.  In such event, SGBI would be required to modify such
products or technologies and continue with additional research and development,
which could delay the plans of SGBI and cause SGBI to incur additional
cost.





Early Stage of Product Development;
Lack of Commercial Products; No Assurance of Successful Product
Development





The
Company's primary efforts are devoted to the development of proprietary products
involving artificial oxygen carriers and glucose sensors.





The
potential products of SGBI will require additional pre-clinical and clinical
development, regulatory approval and additional investment prior to
commercialisation, either by SGBI independently or by others through
collaborative arrangements.  Potential products that appear to be
promising at early stages of development may be ineffective or be shown to cause
harmful side effects during pre-clinical testing or clinical trials, fail to
receive necessary regulatory approvals, be difficult to manufacture, be
uneconomical to produce, fail to achieve market acceptance or be precluded from
commercialisation by proprietary rights of others.  There can be no
assurance that any potential products will be successfully developed, prove to
be safe and efficacious in clinical trials, satisfy applicable regulatory
standards, be capable of being produced in commercial quantities at acceptable
costs or achieve commercial acceptance.




All
products and technologies under development by SGBI will require significant
commitment of personnel and financial resources.  Several products
will require extensive evaluation and pre-marketing clearance by the Federal
Drug Administration and comparable agencies in other countries prior to
commercial sale.  SGBI regularly re-evaluates its product development
efforts.  On the basis of these re-evaluations, SGBI may abandon
development efforts for particular products.  No assurance can be
given that any product or technology under development will result in the
successful introduction of any new product.  The failure to introduce
new products into the market on a timely basis could have a material adverse
effect on the business, financial conditions or results of operation of
SGBI.





There can
be no assurance that human testing of potential products based on such
technologies will be permitted by regulatory authorities or, even if human
testing is permitted, that products based on such technologies will be shown to
be safe and efficacious.  Potential products based on the technologies
of SGBI are at an early stage of testing and there can be no assurance that such
products will be shown to be safe or effective.


7


Market Acceptance





There can
be no assurance that the products and technologies of SGBI will achieve a
significant degree of market acceptance, and that acceptance, if achieved, will
be sustained for any significant period or that product life cycles will be
sufficient (or substitute products developed) to permit SGBI to achieve or
sustain market acceptance which could have a material adverse effect on the
business, financial condition, and results of operations of SGBI.





Government Regulation; No Assurance
of Product Approval





The
clinical testing, manufacture, promotion, and sale of biotechnology and
pharmaceutical products are subject to extensive regulation by numerous
governmental authorities in the United States, principally the Federal Drug
Administration (FDA), and corresponding state and foreign regulatory agencies
prior to the introduction of those products.  Management of SGBI
believes that many of the potential products of SGBI will be regulated by the
FDA, subject to the then current regulations of the FDA.  Other
federal and state statutes and regulations may govern or influence the testing,
manufacture, safety, effectiveness, labeling, storage, record-keeping, approval,
advertising, distribution and promotion of certain products developed by
SGBI.  Non-compliance with applicable requirements can result in,
among other things, fines, injunctions, seizure of products, suspensions of
regulatory approvals, product recalls, operating restrictions, re-labeling
costs, delays in sales, cessation of manufacture of products, the imposition of
civil or criminal sanctions, total or partial suspension of product marketing,
failure of the government to grant pre-market approval, withdrawal of marketing
approvals and criminal prosecution.





The FDA's
requirements include lengthy and detailed laboratory and clinical testing
procedures, sampling activities and other costly and time-consuming
procedures.  In particular, human therapeutic products are subject to
rigorous pre-clinical and clinical testing and other approval requirements by
the FDA, and other like agencies in Germany, Singapore and other
countries.  Although the time required for completing such testing and
obtaining such approvals is uncertain, satisfaction of these requirements
typically takes a number of years and varies substantially based on the type,
complexity and novelty of each product.  Neither SGBI nor its
subsidiaries can accurately predict when product applications or submissions for
FDA or other regulatory review may be submitted.  Management of SGBI
has no experience in obtaining regulatory clearance on these types of
products.  The lengthy process of obtaining regulatory approval and
ensuring compliance with applicable law requires the expenditure of substantial
resources.  Any delays or failure by SGBI or its subsidiaries to
obtain regulatory approval and ensure compliance with appropriate standards
could adversely affect the commercialization of such products, the ability of
SGBI to earn product or royalty revenue, and its results of operations,
liquidity and capital resources.





Pre-clinical
testing is generally conducted in laboratory animals to evaluate the potential
safety and effectiveness of a drug.  The results of these studies are
submitted to the FDA, which must be approved before clinical trials can
begin.  Typically, clinical evaluation involves a time consuming and
costly three-phase process.  In Phase I, clinical trials are conducted
with a small number of subjects to determine the early safety profile, the
pattern of drug distribution and metabolism.  In Phase II, clinical
trials are conducted with groups of patients afflicted with a specific disease
in order to determine preliminary efficacy, optimal dosages and expanded
evidence of safety.  In Phase III, large-scale, multi-center,
comparative trials are conducted with patients afflicted with a target disease
in order to provide enough data to demonstrate the efficacy and safety required
by the FDA.  The FDA closely monitors the progress of each of the
three phases of clinical trials and may, at its discretion, re-evaluate, alter,
suspend or terminate the testing based upon the data which have been accumulated
to that point and its assessment of the risk/benefit ratio to the
patient.





Clinical
trials and the marketing and manufacturing of products are subject to the
rigorous testing and approval processes of the FDA and foreign regulatory
authorities.  The process of obtaining FDA and other required
regulatory approvals is lengthy and expensive.  There can be no
assurance that SGBI will be able to obtain the necessary approvals to conduct
clinical trials for the manufacturing and marketing of products, that all
necessary clearances will be granted to SGBI or their licensors for future
products on a timely basis, or at all, or that FDA review or other actions will
not involve delays adversely affecting the marketing and sale of the products or
SGBI.  In addition, the testing and approval process with respect to
certain new products which SGBI may seek to introduce is likely to take a
substantial number of years and involve the expenditure of substantial
resources.  There can be no assurance that pharmaceutical products
currently in development will be cleared for marketing by the
FDA.  Failure to obtain any necessary approvals or failure to comply
with applicable regulatory requirements could have a material adverse effect on
the business, financial condition or results of operations of
SGBI.  Further, future government regulation could prevent or delay
regulatory approval of the products of SGBI.






There can
be no assurance as to the length of the clinical trial period or the number of
patients the FDA will require to be enrolled in the clinical trials in order to
establish the safety and effectiveness of the products of SGBI.  SGBI
may encounter significant delays or excessive costs in their efforts to secure
necessary approvals, and regulatory requirements are evolving and
uncertain.  Future United States or foreign legislative or
administrative acts could also prevent or delay regulatory approval of the
products of SGBI.  If commercial regulatory approvals are obtained,
they may include significant limitations on the indicated uses for which a
product may be marketed.  In addition, a marketed product is subject
to continual FDA review.  Later discovery of previously unknown
problems or the failure to comply with the applicable regulatory requirements
may result in restrictions on the marketing of a product, or even the removal of
the product from the market, as well as possible civil or criminal
sanctions.  Failure of SGBI to obtain marketing approval for any of
their products under development on a timely basis, or FDA withdrawal of
marketing approval once obtained, could have a material adverse effect on the
business, financial condition and results of operations of SGBI.





Any party
that manufactures therapeutic or pharmaceutical products is required to adhere
to applicable standards for manufacturing practices and to engage in extensive
record keeping and reporting.  Any of the manufacturing facilities of
SGBI are subject to periodic inspection by state and federal agencies, including
the FDA and comparable agencies in foreign countries.





The
effect of governmental regulation may be to delay the marketing of new products
for a considerable period of time, to impose costly requirements on the
activities of SGBI or to provide a competitive advantage to other companies that
compete with SGBI.  There can be no assurance that FDA or other
regulatory approval for any products developed by SGBI will be granted on a
timely basis, if at all or, if granted, that compliance with regulatory
standards will be maintained.  Adverse clinical results by SGBI could
have a negative impact on the regulatory process and timing.  A delay
in obtaining, or failure to obtain, regulatory approvals could preclude or
adversely affect the marketing of products and the liquidity and capital
resources of SGBI.  The extent of potentially adverse governmental
regulation that might result from future legislation or administrative action
cannot be predicted.


8


Additionally,
SGBI will be subject to regulatory authorities in Germany and other countries
governing clinical trials and product sales.  Even if FDA approval is
obtained, approval of a product by the comparable regulatory authorities of
other countries must be obtained prior to the commencement of marketing the
product in those countries.  The approval process varies from country
to country and the time required may be longer or shorter than that required for
FDA approval.  The foreign regulatory approval process includes all of
the risks associated with obtaining FDA approval set forth above, and approval
by the FDA does not ensure approval by the health authorities of any other
country.  There can be no assurance that any foreign regulatory agency
will approve any product submitted for review by SGBI.





SGBI is
subject to various federal, state and local laws, regulations and
recommendations relating to safe working conditions, laboratory and
manufacturing practices, the experimental use of animals and the use and
disposal of hazardous or potentially hazardous substances, including radioactive
compounds and infectious disease agents, used in connection with its research
work.  The extent and character of governmental regulation that might
result from future legislation or administrative action cannot be accurately
predicted.





Intense
Competition





Competition
in the biotechnology, pharmaceutical and cosmetic industries is intense and is
expected to increase.  In the field of its medical and cosmetic
products SGBI and its subsidiaries compete directly with the research
departments of biotechnology and pharmaceutical companies, chemical companies
and, possibly, joint collaborations between chemical companies and research and
academic institutions.  Management of SGBI is aware that other
companies and businesses have developed and are in the process of developing
technologies and products, which may be competitive with the products and
technologies developed and offered by SGBI.  Eventually, this might
include the field of blood additives where there is no direct competition at
present.  The biotechnology and pharmaceutical industries continue to
undergo rapid change.  There can be no assurance that competitors have
not or will not succeed in developing technologies and products that are more
effective than any which have been or are being developed by SGBI or which would
render the technology and products of SGBI obsolete.  Many of the
competitors of SGBI have substantially greater experience, financial and
technical resources and production, marketing and development capabilities than
SGBI.  Accordingly, certain of those competitors may succeed in
obtaining regulatory approval for products more rapidly or effectively than
SGBI.





Uncertainties Associated With Patents
and Proprietary Rights





The
success of SGBI and its subsidiaries may depend in part on their ability to
obtain patents for their technologies and products, if any, resulting from the
application of such technologies, to defend patents once obtained and to
maintain trade secrets, both in the United States and in foreign
countries.





The
success of SGBI will also depend upon avoiding the infringement of patents
issued to competitors.  There can be no assurance that SGBI will be
able to obtain patent protection for products based upon the technology of
SGBI.  Moreover, there can be no assurance that any patents issued to
SGBI or its subsidiaries will not be challenged, invalidated or circumvented or
that the rights granted there under will provide competitive advantages to
SGBI.  Litigation, which could result in substantial cost to SGBI, may
be necessary to enforce the patent and license rights of SGBI or to determine
the scope and validity of its and others' proprietary rights.





Due to
the length of time and expense associated with bringing new products through
development and the length of time required for the governmental approval
process, the biotechnology and pharmaceutical industries have traditionally
placed considerable importance on obtaining and maintaining patent and trade
secret protection for significant new technologies, products and
processes.  The enforceability of patents issued to biotechnology and
pharmaceutical firms can be highly uncertain.  U.S. Federal court
decisions establishing legal standards for determining the validity and scope of
patents in the field are in transition.  In addition, there can be no
assurance that patents will be issued or, if issued, any such patents will
afford SGBI protection from infringing patents granted to others.





A number
of biotechnology and pharmaceutical companies, and research and academic
institutions, have developed technologies, filed patent applications or received
patents on various technologies that may be related to the business of SGBI and
its subsidiaries.  Some of these technologies, applications or patents
may conflict with the technologies of SGBI.  Such conflicts could also
limit the scope of the patents, if any, that SGBI or its subsidiaries may be
able to obtain or result in the denial of the patent applications of
SGBI.





Many of
the competitors of SGBI are, have, or are affiliated with companies having,
substantially greater resources than SGBI, and such competitors may be able to
sustain the costs of complex patent litigation to a greater degree and for
longer periods of time than SGBI.  Uncertainties resulting from the
initiation and continuation of any patent or related litigation could have a
material adverse effect on the ability of SGBI to compete in the marketplace
pending resolution of the disputed matters.  Moreover, an adverse
outcome could subject SGBI to significant liabilities to third parties and
require SGBI to license disputed rights from third parties or cease using the
technology.  In the event that third parties have or obtain rights to
intellectual property or technology used or needed by SGBI, there can be no
assurance that any licenses would be available to SGBI or would be available on
terms reasonably acceptable to SGBI.





SGBI may
rely on certain proprietary technologies, trade secrets, and know-how that are
not patentable.  Although SGBI has taken steps to protect their
unpatented trade secrets and technology, in part through the use of
confidentiality agreements with their employees, consultants and certain of its
contractors, there can be no assurance that: (i) these agreements will not be
breached; (ii) SGBI would have adequate remedies for any breach; or (iii) the
proprietary trade secrets and know-how of SGBI will not otherwise become known
or be independently developed or discovered by competitors.





Risk of Product Liability; Potential
Unavailability of Insurance





The
business of SGBI will expose it to potential product liability risks that are
inherent in the testing, manufacturing and marketing of human pharmaceutical and
therapeutic products.  SGBI does not currently have product liability
insurance, and there can be no assurance that SGBI will be able to obtain or
maintain such insurance on acceptable terms or, if obtained, that such insurance
will be adequate to cover potential product liability claims or that a loss of
insurance coverage or the assertion of a product liability claim or claims would
not materially adversely affect the business, financial condition and results of
operations of SGBI.  SGBI faces an inherent business risk of exposure
to product liability and other claims in the event that the development or use
of its technology or products is alleged to have resulted in adverse
effects.  Such risk exists even with respect to those products that
are manufactured in licensed and regulated facilities or that otherwise possess
regulatory approval for commercial sale.  There can be no assurance
that SGBI will avoid significant product liability exposure.




While
SGBI has taken, and will continue to take, what it believes are appropriate
precautions, there can be no assurance that it will avoid significant liability
exposure.  An inability to obtain product liability insurance at
acceptable cost or to otherwise protect against potential product liability
claims could prevent or inhibit the commercialization of products developed by
SGBI.  A product liability claim could have a material adverse effect
on the business, financial condition and results of operations of
SGBI.


9


Uncertainties Relating to Pricing and
Third-Party Reimbursement





The
operating results of SGBI may depend in part on the availability of adequate
reimbursement for the products of SGBI from third-party payers, such as
government entities, private health insurers and managed care
organizations.  Third-party payers are increasingly seeking to
negotiate the pricing of medical services and products.  In some
cases, third-party payers will pay or reimburse a user or supplier of a product
for only a portion of the purchase price of the product.  In the case
of the products of SGBI, payment or reimbursement by third-party payers of only
a portion of the cost of such products could make such products less attractive,
from a cost perspective, to users, suppliers and physicians.  There
can be no assurance that reimbursement, if available, will be
adequate.  Moreover, certain of the products of SGBI may not be of the
type generally eligible for third-party reimbursement.  If adequate
reimbursement levels are not provided by government entities or other
third-party payers for the products of SGBI, the business, financial condition
and results of operations of SGBI would be materially adversely
affected.  A number of legislative and regulatory proposals aimed at
changing the United State's health care system have been proposed in recent
years.  While SGBI cannot predict whether any such proposals will be
adopted, or the effect that any such proposal may have on its business, such
proposals, if enacted, could have a material adverse effect on the business,
financial condition or results of operations of SGBI.





Risk of Product Recall; Product
Returns





Product
recalls may be issued at the discretion of SGBI, the FDA or other government
agencies having regulatory authority for product sales and may occur due to
disputed labeling claims, manufacturing issues, quality defects or other
reasons.  No assurance can be given that product recalls will not
occur in the future.  Any product recall could materially adversely
affect the business, financial condition or results of operations of
SGBI.  There can be no assurance that future recalls or returns would
not have a material adverse effect upon the business, financial condition and
results of operations of SGBI.





Risks of International Sales and
Operations





SGBI's
results of operations are subject to fluctuations in the value of the Euro
against the U.S. Dollar due to SGBI's German subsidiaries.  Although
management of SGBI will monitor exposure to currency fluctuations, there can be
no assurance that exchange rate fluctuations will not have a material adverse
effect on the results of operations or financial condition of
SGBI.  In the future, SGBI could be required to sell its products in
other currencies, which would make the management of currency fluctuations more
difficult and expose SGBI to greater risks in this regard.





The
products of SGBI will be subject to numerous foreign government standards and
regulations that are continually being amended.  Although SGBI will
endeavor to satisfy foreign technical and regulatory standards, there can be no
assurance that the products of SGBI will comply with foreign government
standards and regulations, or changes thereto, or that it will be cost effective
for SGBI to redesign its products to comply with such standards or
regulations.  The inability of SGBI to design or redesign products to
comply with foreign standards could have a material adverse effect on SGBI's
business, financial condition and results of operations.





Lack of Commercial Manufacturing and
Marketing Experience





SGBI has
not yet manufactured its products in commercial quantities.  The
Company and its manufacturing contractors and partners will be engaged in
manufacturing pharmaceutical products which will be subject to stringent
regulatory requirements.  No assurance can be given that the Company,
on a timely basis, will be able to make the transition from manufacturing
clinical trial quantities to commercial production quantities successfully or be
able to arrange for contract manufacturing.  SGBI and its subsidiaries
have no experience in the sales, marketing and distribution of
products.  There can be no assurance that SGBI will be able to
establish sales, marketing and distribution capabilities or make arrangements
with collaborators, licensees or others to perform such activities or that such
effort will be successful.




The
manufacture of the products of SGBI involves a number of steps and requires
compliance with stringent quality control specifications imposed by SGBI and by
the FDA or similar regulatory bodies under the law of the respective
countries.  Moreover, SGBI's products can only be manufactured in a
facility that has undergone a satisfactory inspection by the FDA.  For
these reasons, SGBI would not be able to quickly replace its manufacturing
capacity if one of its manufacturing contractors or partners were unable to use
their manufacturing facilities as a result of a fire, natural disaster,
equipment failure or other difficulty, or if such facilities are deemed not in
compliance with the FDA's Good Manufacturing Practice (GMP) requirements and the
non-compliance could not be rapidly rectified.  The inability or
reduced capacity of SGBI to manufacture their products would have a material
adverse effect on SGBI's business and results of operations.





SGBI has
entered and may enter into arrangements with contract manufacturing companies to
expand its production capacities in order to satisfy requirements for its
products, or to attempt to improve manufacturing efficiency.  If SGBI
chooses to contract for manufacturing services and encounters delays or
difficulties in establishing relationships with manufacturers to produce,
package and distribute its finished products, clinical trials, market
introduction and subsequent sales of such products would be adversely
affected.  Further, contract manufacturers must also operate in
compliance with the FDA's GMP requirements; failure to do so could result in,
among other things, the disruption of product supplies.





Currently,
SGBI has its products manufactured by contract manufacturers in Germany and
anticipates future production in Mexico.  No assurance can be given,
that these vendors will be willing or able to produce the products in the
required quality or quantitities or at prices which will enable SGBI to sell the
end products as requested by its customers.





Hazardous Materials And Environmental
Matters





The
research and development processes of SGBI involve the controlled storage, use
and disposal of hazardous materials.  SGBI is subject to federal,
state and local laws and regulations governing the use, generation,
manufacturing, storage, handling, and disposal of such materials and certain
waste products.  Although SGBI does not currently manufacture
commercial quantities of its product candidates, it produces limited quantities
of such products for its clinical trials or comparable testing and SGBI may
eventually intend to manufacture commercial quantities of its
products.  Although SGBI has passed the ISO 9001:2000 (General Quality
Management System) and ISO 13485:2003 (Quality Management System Medical
Products) audits, and obtained the respective certifications, and although it
believes that its safety procedures for handling and disposing of such materials
comply with the standards prescribed by such laws and regulations, the risk of
accidental contamination or injury from these materials cannot be completely
eliminated.  In the event of such an accident, SGBI could be held
liable for any damages that result, and any such liability could exceed the
resources of SGBI.  There can be no assurance that SGBI will not be
required to incur significant costs to comply with current or future
environmental laws and regulations nor that the operations, business or assets
of SGBI will not be materially or adversely affected by current or future
environmental laws or regulations.


10


Fluctuations in Foreign Currency
Exchange Rates could have an Adverse Impact.





Because a
portion of our total revenue is derived from international operations that are
conducted in foreign currencies, changes in value of these foreign currencies
relative to the US dollar may affect our results of operation and financial
position.  If for any reason exchange or price controls or other
restriction on the conversion of foreign currencies were imposed, our business
could be adversely affected.





ITEM 2.  PROPERTIES





The
Company leases its office and laboratory facilities and is housed in
approximately 8,600 square feet based in the Forschungs-und Entwicklungszentrum
of the University Witten/Herdecke, Germany.  Rent expense was
approximately $68,000 and $68,000 during the years ended June 30, 2006 and 2005,
respectively.





ITEM 3. LEGAL
PROCEEDINGS





On June 15, 2005, SanguiBioTech GmbH
was served with a lawsuit, Amtsgericht Witten, Case No. 2 C
429/05.  The plaintiff is a supplier of packaging foils for certain
medical products.  The plaintiff claims payment of invoices
amounting to approximately $8,500.  The Company had rejected the
delivery of the goods covered by the invoices due to poor
quality.  The claim was settled by order of the Court on September 7,
2005, whereby Sangui agreed to pay a lesser amount of approximately $6,406,
including court fees.
 The
Company is not aware of pending claims or assessments, other than as described
above, which may have a material adverse impact on the Company’s financial
position or results of operations.


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





No matter
was submitted to our security holders for approval during the period covered by
this Report.





PART
II





ITEM 5.  MARKET FOR
COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES
OF EQUITY SECURITIES





As of
June 30, 2006, SGBI's common stock was traded on www.pinksheets.com
under the symbol SGBI as well as on the OTC market of the Hamburg stock exchange
in Germany.





The
following table sets forth the high and low closing prices for shares of SGBI
common stock for the fiscal periods noted, as reported by www.pinksheets.com.  Quotations
reflect inter-dealer prices, without retail mark-up, markdown or commissions and
may not represent actual transactions.





CLOSING PRICES 
      (US$)FISCAL
      YEAR
            PERIOD
            
            HIGH
            
            
            LOW2005
            July
      - September
            
            
            0.27
            
            
            
            0.07October
      - December
            
            
            0.23
            
            
            
            0.05January
      - March
            
            
            0.27
            
            
            
            0.11April
      – June
            
            
            0.22
            
            
            
            0.122006
            July
      - September
            
            
            0.22
            
            
            
            0.13October
      - December
            
            
            0.15
            
            
            
            0.10January
      - March
            
            
            0.20
            
            
            
            0.11April
      – June
            
            
            0.16
            
            
            
            0.10





In
addition to freely tradable shares, SGBI has numerous shares of common stock
outstanding that could be sold pursuant to Rule 144.  In general,
under Rule 144, subject to the satisfaction of certain other conditions, a
person, including one of our affiliates, who has beneficially owned restricted
shares of common stock for at least one year is entitled to sell, in certain
brokerage transactions, within any three-month period, a number of shares that
does not exceed the greater of 1% of the total number of outstanding shares of
the same class, or the average weekly trading volume during the four calendar
weeks immediately preceding the sale.  A person who presently is not
and who has not been an affiliate for at least three months immediately
preceding the sale and who has beneficially owned the shares of common stock for
at least two years is entitled to sell such shares under Rule 144 without regard
to any of the volume limitations described above.





At
June 30, 2006, the number of record holders of the Company's common stock was
approximately 869.  The Company did not pay any cash dividends during
the past two fiscal years and does not contemplate paying dividends in the
foreseeable future.





RECENT SALES OF UNREGISTERED
SECURITIES





Sales of
Securities
  In August 2005, the
Company sold 1,000,000 shares of its common stock to a European investor
yielding a cash contribution of $87,500.  No underwriters were used. 
The offer and sale of the shares occurred outside of the United States and the
shares were sold and issued to individuals who reside outside of the United
States, pursuant to an exemption from registration under Rule 901, Regulation S
of the Securities Act of 1933, as amended.




11


ITEM  6.  MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF
OPERATIONS


CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
 
 The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States requires us to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenue,
expenses, and related disclosure of contingent assets and
liabilities.  We believe the following critical accounting policies
affect our more significant judgments and estimates used in the preparation of
our consolidated financial statements.  Actual results may differ from
these estimates under different assumptions or conditions.
 
 CRITICAL
ACCOUNTING POLICIES  Our significant accounting policies are described in
Note 1 to the consolidated financial statements for the year ended June 30,
2006.  The following are our critical accounting
policies:
  Revenue
Recognition
  Revenue
is recognized when the sales amount is determined, shipment of goods to the
customer has occurred and collection is reasonably assured. Product is shipped
FOB origination.
 
 Research and
Development
  Research
and development are charged to operations as they are incurred.  Legal
fees and other direct costs incurred in obtaining and protecting patents are
expensed as incurred. Research and development costs totaled $111,608 and
$426,831 during the fiscal years ended June 30, 2006 and 2005,
respectively.
 
 Foreign Currency
Translation
 
 Assets
and liabilities of the Company's foreign operations are translated into U.S.
dollars at period-end exchange rates.  Net exchange gains or losses
resulting from such translation are excluded from net loss but are included in
comprehensive income (loss) and accumulated in a separate component of
stockholders' equity.  Income and expenses are translated at weighted
average exchange rates for the period.
 
 New Accounting
Pronouncements
 
 In
December 2004, the FASB issued SFAS No. 123R "Shared Based Payment". This
statement is a revision of SFAS Statement No. 123, "Accounting for Stock-Based
Compensation" and supersedes APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and its related implementation guidance. SFAS 123R addresses all
forms of shared based payment ("SBP") awards, including shares issued under
employee stock purchase plans, stock options, restricted stock and stock
appreciation rights. Under SFAS 123R, SBP awards result in a cost that will be
measured at fair value on the awards' grant date, based on the estimated number
of awards that are expected to vest and will be reflected as compensation cost
in the historical financial statements. This statement is effective for public
entities as of the beginning of the first interim or annual reporting period
that begins after June 15, 2005.
  In May
2005, the FASB issued Statement of Financial Accounting Standards No. 154“Accounting Changes and Error
Corrections, an amendment of APB Opinion 20 and FASB Statement No. 3,”
which changes the requirements for accounting for and reporting on a change in
accounting principle. This statement is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005. We
believe that the adoption of SFAS No. 154 will not have a material impact on our
results of operations.
  In March
2006, the FASB issued SFAS No. 156“Accounting for Servicing of
Financial Assets, an amendment of FASB No. 140,” which modifies the
accounting for and reporting of servicing asset and servicing liabilities. This
statement is effective as of the beginning of our first fiscal year that begins
after September 15, 2006. SFAS No. 156 is not currently applicable to the
company and, we believe that the adoption of SFAS No. 156 will not have a
material impact on our results of operations.
  In June
2006, the FASB issued Financial Interpretation No. (FIN) 48, “Accounting for Uncertainty in Income
Taxes - an interpretation of FASB Statement 109.” FIN 48 prescribes a
recognition threshold and a measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. This interpretation also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. This interpretation is effective for fiscal years
beginning after December 15, 2006. The Company is currently evaluating the
impact of applying the various provisions of FIN 48.
  In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,”
that provides guidance for using fair value to measure assets and liabilities.
Under SFAS 157, fair value refers to the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market
participants in the market in which the reporting entity transacts. SFAS 157
establishes a fair value hierarchy that prioritizes the information used to
develop the assumptions that market participants would use when pricing the
asset or liability. The fair value hierarchy gives the highest priority to
quoted prices in active markets and the lowest priority to unobservable data. In
addition, SFAS 157 requires that fair value measurements be separately disclosed
by level within the fair value hierarchy. This standard will be effective for
financial statements issued for fiscal periods beginning after November 15, 2007
and interim periods within those fiscal years. The Company is currently
evaluating the impact of applying the various provisions of SFAS
157.
   
 FISCAL 2006 COMPARED TO
FISCAL 2005
 
 FINANCIAL
POSITION
 
 The
Company’s current assets increased by $36,246, or 85%, from June 30, 2005
to $70,929 at June 30, 2006.  The increase is primarily
attributable to a significant increase in cash, accounts receivable, and
inventory.  The increase in cash results primarily from sales of
common stock and receipts on notes payable during the 2006 fiscal
year.
 
 The
Company's net property and equipment decreased $21,900 or 65%, from June 30,
2005 to $11,708 at June 30, 2006.  The decrease is primarily
attributable to the current year depreciation of approximately $36,876,
partially offset by $7,530 in purchases of new property and equipment during the
year.
 
 The
Company funded its operations primarily through the sale of common stock and
borrowings on notes payable.  The Company’s stockholders’ equity
decreased $383,866, to a deficit of $383,704.  The primary decrease is
caused by the Company's current year net loss of $661,459.
  REVENUES.  Revenues
increased 203% to $137,257 during the year ended June 30, 2006 from $45,212
during 2005.  This increase is due primarily to the company’s
increased emphasis on sales and exploitation of existing research and
development.  The Company incurred Cost of Sales totaling $118,018
during the 2006 fiscal year, a 168% increase over the prior year.
 
 RESEARCH
AND DEVELOPMENT.  Research and development expenses decreased 72% to
$118,608 in 2006 from $426,831 in 2005.  This decrease of $308,223 was
primarily the result of decreased operations, and a decreased cash flow during
the period.
 
 GENERAL
AND ADMINISTRATIVE.  General and administrative expenses increased 27%
to $609,949 in 2006 from $480,666 in 2005.  This increase of $129,283
is attributed to increases in legal and accounting expenses, as well as expenses
incurred in pursuing new international markets for the Company’s
products.
 
 NET
LOSS.  As a result of the above factors, the Company's consolidated
net loss was approximately $731,000, or $0.02 per common share, in 2006,
compared to $705,000, or $0.02 per common share, in 2005.
  LIQUIDITY AND CAPITAL
RESOURCES
 
 For the
year ended June 30, 2006, net cash used in operating activities decreased to
$282,936 from $414,593 for the year ended June 30, 2005, primarily related to an
increase in current liabilities during the 2006 fiscal year.
 
 For the
year ended June 30, 2006, net cash flows from investing activities decreased to
an outflow of $7,530, from a surplus of $1,631 for the year ended June 30,
2005.  The principal decrease is due to purchase of equipment items
during the 2006 fiscal year.
 
 The
Company had a working capital deficit of $436,681 at June 30, 2006, compared to
working capital deficit of $126,750 at June 30, 2005, an overall decrease of
$309,931, due primarily to the Company’s net loss for the year.
 
 The
Company incurred a net loss applicable to common stockholders of $731,486 and
used cash in operating activities of $282,936 for the year ended June 30,
2006.  These conditions raise substantial doubt about the Company's
ability to continue as a going concern.  The Company expects to
continue to incur significant capital expenses in pursuing its business plan to
market its products and expand its product line, while obtaining additional
financing through stock offerings or other feasible financing
alternatives.  In order for the Company to continue its operations at
its existing levels, the Company will require significant additional funds over
the next twelve months.  Therefore, the Company is dependent on funds
raised through equity or debt offerings.  Additional financing may not
be available on terms favorable to the Company, or at all.  If these
funds are not available the Company may not be able to execute its business plan
or take advantage of business opportunities.  The ability of the
Company to obtain such additional financing and to achieve its operating goals
is uncertain.  In the event that the Company does not obtain
additional capital or is not able to increase cash flow through the increase of
sales, there is a substantial doubt of its being able to continue as a going
concern.  The accompanying condensed consolidated financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
 
 Sales of
our anti-aging formulation started in early 2005, sales of our product skin
regeneration as well as wound pad products have started in the course of the
first quarter of our 2007 fiscal year. The current state of the different sales
efforts has induced management to believe that revenues from these products may
be obtainable in the course of the current fiscal year.  However, the
Company will need substantial additional funding to fulfill its business plan
and the Company intends to explore financing sources for its future development
activities.  No assurance can be given that these efforts will be
successful.
  13


ITEM 7. FINANCIAL
STATEMENTS







SANGUI
BIOTECH INTERNATIONAL, INC.
 
 CONSOLIDATED
FINANCIAL STATEMENTS
 
 June 30,
2006


14





MOORE
& ASSOCIATES, CHARTERED


ACCOUNTANTS
AND ADVISORS
 PCAOB
REGISTERED
 
 
 REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
 
 
 To
the Board of Directors
 Sangui
Biotech International Inc.
   We
have audited the accompanying balance sheet of Sangui Biotech International Inc.
as of June 30, 2006, and the related statements of operations, stockholders’
equity and cash flows for the year ended June 30, 2006. 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. The financial statements of Sangui Biotech International Inc as of
June 30, 2005, were audited by other auditors whose report dated May 17, 2007
expressed an unqualified opinion on those statements.
  We
conducted our audits in accordance with 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.  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 Sangui Biotech International Inc.
as of June 30, 2006 and the results of its operations and its cash flows for the
years ended June 30, 2006, in conformity with accounting principles generally
accepted in the United States of America.
  The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern.  As discussed in Note 1 to the
financial statements, the Company has not yet established an ongoing source of
revenues sufficient to cover its operating costs, which raises substantial doubt
about its ability to continue as a going concern.  Management’s plans
concerning these matters are also described in Note 1.  The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
  /s/
Moore & Associates, Chartered
  Moore
& Associates Chartered
 Las
Vegas, Nevada
 February
7, 2008
 
 
 2675 S. Jones Blvd. Suite
109, Las Vegas, NV 89146 (702) 253-7499 Fax (702)
253-7501





15


Auditor Logo
  REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
 To the
Board of Directors
 Sangui
Biotech International, Inc. and Subsidiaries
 Witten
Germany
 
 
 We have
audited the accompanying consolidated statement of operations, stockholders’
equity (deficit), comprehensive income, and cash flows of Sangui Biotech
International, Inc. and Subsidiaries for the year ended June 30,
2005.  These consolidated financial statements are the responsibility
of the Company’s management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our
audit.
 
 We
conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial
statements.  An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Sangui Biotech
International, Inc. and Subsidiaries as of June 30, 2005 and the results of
their operations and their cash flows for the year ended June 30, 2005 in
conformity with U.S. generally accepted accounting principles.
 
 The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern.  As discussed in Note 1
to the consolidated financial statements, the Company has no significant
operating results to date, which raises substantial doubt about its ability to
continue as a going concern.  Management’s plans in regard to these
matters are also described in Note 1.  The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
 
  
 HJ &
Associates, LLC
 Salt Lake
City, Utah
 May 17,
2007
    
 SANGUI BIOTECH INTERNATIONAL, INC.Consolidated
      Balance SheetASSETSJune
      30,2006CURRENT
      ASSETSCash
                  
                  $
                  24,548Accounts
      receivable
                  
                  
                  16,601Inventory
                  
                  
                  14,720Prepaid
      expenses and other assets
                  
                  
                  15,060Total
      Current Assets
                  
                  
                  70,929FIXED
      ASSETS, Net
                  
                  
                  11,708OTHER
      ASSETSTax
      refunds receivable
                  
                  
                  23,460Deposits
                  
                  
                  17,809Total
      Other Assets
                  
                  
                  41,269TOTAL
      ASSETS
                  
                  $
                  123,906The
      accompanying notes are an integral part of these consolidated financial
      statements.









SANGUI BIOTECH INTERNATIONAL, INC.Consolidated
      Balance Sheets (Continued)LIABILITIES AND
      STOCKHOLDERS' EQUITY (DEFICIT)June
      30,2006CURRENT
      LIABILITIESAccounts
      payable and accrued expenses
              
              $
              335,488Notes
      payable - related
              
              
              -Notes
      payable
              
              
              172,122Total
      Current Liabilities
              
              
              507,610TOTAL
      LIABILITIES
              
              
              507,610STOCKHOLDERS'
      EQUITY (DEFICIT)Preferred
      stock, no par value; 5,000,000 sharesauthorized, -0- shares issued and outstanding
              
              
              -Common
      stock, no par value; 50,000,000 sharesauthorized, 50,000,000 shares issued and outstanding
              
              
              18,969,358Additional
      paid-in capital
              
              
              1,958,376Treasury
      stock
              
              
              -Accumulated
      other comprehensive income
              
              
              453,434Accumulated
      deficit
              
              
              (21,764,872
              )Total
      Stockholders' Equity (Deficit)
              
              
              (383,704
              )TOTAL
      LIABILITIES AND STOCKHOLDERS'EQUITY
      (DEFICIT)
              
              $
              123,906The
      accompanying notes are an integral part of these consolidated financial
      statements.










SANGUI BIOTECH INTERNATIONAL, INC.Consolidated
      Statements of OperationsFor
      the Years EndedJune
      30,2006
              
              
              2005REVENUES
              
              $
              137,257
              
              
              $
              45,212COST
      OF SALES
              
              
              118,018
              
              
              
              44,051GROSS
      PROFIT
              
              
              19,239
              
              
              
              1,161OPERATING
      EXPENSESResearch
      and development
              
              
              111,608
              
              
              
              426,831Depreciation
      and amortization
              
              
              36,876
              
              
              
              66,894General
      and administrative
              
              
              609,949
              
              
              
              480,666Total
      Operating Expenses
              
              
              758,433
              
              
              
              974,391OPERATING
      LOSS
              
              
              (739,194
              )
              
              
              (973,230
              )OTHER
      INCOME (EXPENSE)Interest
      income
              
              
              96
              
              
              
              704Interest
      expense
              
              
              (12,087
              )
              
              
              (3,498
              )Other
      income (loss)
              
              
              19,699
              
              
              
              271,412Total
      Other Income (Expense)
              
              
              7,708
              
              
              
              268,618NET
      LOSS
              
              
              (731,486
              )
              
              
              (704,612
              )OTHER
      COMPREHENSIVE INCOMEForeign
      currency translation adjustments
              
              
              70,027
              
              
              
              (145,262
              )Unrealized
      gain on marketable securities
              
              
              -
              
              
              
              -Total
      Other Comprehensive Income (Loss)
              
              
              70,027
              
              
              
              (145,262
              )COMPREHENSIVE
      LOSS
              
              $
              (661,459
              )
              
              $
              (849,874
              )BASIC
      AND DILUTEDLOSS
      PER SHARE
              
              $
              (0.02
              )
              
              $
              (0.02
              )WEIGHTED
      AVERAGENUMBER
      OF SHARESOUTSTANDING
              
              
              48,751,875
              
              
              
              44,312,968The
      accompanying notes are an integral part of these consolidated financial
      statements.






SANGUI BIOTECH INTERNATIONAL,
INC.Consolidated
      Statements of Stockholders' Equity (Deficit)AccumulatedAdditional
              
              
              
              
              OtherCommon
      Stock
              
              Paid-In
              
              Treasury
              
              Comprehensive
              AccumulatedShares
              
              Amount
              
              Capital
              
              Stock
              
              Income
              DeficitBalance,
      June 30, 2004
              40,655,363
              
              
              18,345,491
              
              2,000,000
              
              
              28,098
              
              528,669
              (20,328,774)Common
      stock issued toemployees
              1,200,000
              
              
              100,125
              
              -
              
              
              -
              
              -
              -Currency
      translation adjustment
              -
              
              
              -
              
              -
              
              
              -
              
              (145,262)
              -Purchase
      of treasury stock
              -
              
              
              -
              
              -
              
              
              118,166
              
              -
              -Sale
      of treasury stock
              -
              
              
              -
              
              (13,602)
              
              
              (63,907)
              
              -
              -Proceeds
      from sale of stock
              5,648,386
              
              
              300,484
              
              -
              
              
              -
              
              -
              -Net
      loss for the year endedJune
      30, 2005
              -
              
              
              -
              
              -
              
              
              -
              
              -
              (704,612)Balance,
      June 30, 2005
              47,503,749
              
              
              18,746,100
              
              1,986,398
              
              
              82,357
              
              383,407
              (21,033,386)Common
      shares issued forcash
      at $0.0875 per share
              1,000,000
              
              
              87,500
              
              -
              
              
              -
              
              -
              -Common
      shares issued forprepaid
      consulting fees at$0.0908
      per share
              1,496,251
              
              
              135,758
              
              -
              
              
              -
              
              -
              -Sale
      of treasury stock
              -
              
              
              -
              
              (28,022)
              
              
              (82,357)
              
              -
              -Currency
      translation adjustment
              -
              
              
              -
              
              -
              
              
              -
              
              70,027
              -Net
      loss for the year endedJune
      30, 2006
              -
              
              
              -
              
              -
              
              
              -
              
              -
              (731,486)Balance,
      June 30, 2006
              50,000,000
              
              
              18,969,358
              
              1,958,376
              
              
              -
              
              453,434
              (21,764,872)The
      accompanying notes are an integral part of these consolidated financial
      statements.





SANGUI BIOTECH INTERNATIONAL,
      INC.Statements
      of Cash FlowsFor
      the Years EndedJune
      30,2006
              
              
              2005CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      loss
              
              $
              (731,485
              )
              
              $
              (704,612
              )Adjustments
      to reconcile net loss to net cashused
      by operating activities:Depreciation,
      depletion and amortization
              
              
              36,876
              
              
              
              66,894Common
      stock issued for services
              
              
              -
              
              
              
              100,125Gain
      on sales of property and equipment
              
              
              -
              
              
              
              (3,101
              )Changes
      in operating assets and liabilitiesIncrease
      in accounts receivable
              
              
              (12,301
              )
              
              
              128,286Increase
      in inventory
              
              
              (7,657
              )
              
              
              (7,063
              )Increase
      in prepaid expenses and other assets
              
              
              244,488
              
              
              
              (50,298
              )Increase
      in accounts payable and accrued expenses
              
              
              187,143
              
              
              
              55,176Net
      Cash Used by Operating Activities
              
              
              (282,936
              )
              
              
              (414,593
              )CASH
      FLOWS FROM INVESTING ACTIVITIESPurchases
      of patents
              
              
              -
              
              
              
              (1,470
              )Sales
      of property and equipment
              
              
              -
              
              
              
              3,101Purchases
      of fixed assets
              
              
              (7,530
              )
              
              
              -Net
      Cash Used by Investing Activities
              
              
              (7,530
              )
              
              
              1,631CASH
      FLOWS FROM FINANCING ACTIVITIESCash
      received on note payable
              
              
              147,990
              
              
              
              24,132Purchases
      of treasury stock
              
              
              
              
              
              
              (118,166
              )Sales
      of treasury stock
              
              
              -
              
              
              
              50,305Sale
      of common stock for cash
              
              
              87,500
              
              
              
              300,484Net
      Cash Provided by Financing Activities
              
              
              235,490
              
              
              
              256,755EFFECTS
      OF EXCHANGE RATES
              
              
              70,027
              
              
              
              (145,255
              )NET
      DECREASE IN CASH
              
              
              15,051
              
              
              
              (301,462
              )CASH
      AT BEGINNING OF PERIOD
              
              
              9,497
              
              
              
              310,959CASH
      AT END OF PERIOD
              
              $
              24,548
              
              
              $
              9,497SUPPLIMENTAL
      DISCLOSURES OFCASH
      FLOW INFORMATIONCASH
      PAID FOR:Interest
              
              $
              -
              
              
              $
              2,834Income
      Taxes
              
              $
              -
              
              
              $
              -The
      accompanying notes are an integral part of these consolidated financial
      statements.






SANGUI BIOTECH INTERNATIONAL, INC.
 Notes to
the Consolidated Financial Statements
 June 30,
2006


NOTE 1 -
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Nature of
Business
  Sangui
Biotech International, Inc., incorporated in Colorado in 1995, and its wholly
owned subsidiaries, Sangui Biotech, Inc., SanguiBioTech AG, GlukoMediTech AG,
and Sangui BioTech PTE Ltd., (collectively, the "Company") have been engaged in
the research, development, manufacture, and sales of medical
products.
 
 On June 30,
2003, GlukoMediTech AG ("Gluko AG") was merged into Sangui BioTech AG ("Sangui
AG"). Effective November 4, 2003, Sangui AG was converted into Sangui BioTech
GmbH (Sangui GmbH). After completion of the restructuring, Sangui GmbH, which is
headquartered in Witten, Germany, is engaged in the development of artificial
oxygen carriers (external applications of haemoglobin, blood substitutes and
blood additives) and in the development of glucose implant sensors.
  The
operations of Sangui BioTech, Inc. ("Sangui USA") were discontinued during 2002
upon the sale of its in vitro immunodiagnostics business and the subsequent
merger of Sangui USA with and into the parent company, Sangui BioTech
International, Inc., effective December 31, 2002.  Sangui BioTech PTE Ltd
("Sangui Singapore") was a regional office for the Company that carried out
research and development projects in conjunction with Sangui GmbH and Sangui
Singapore. The Company discontinued the operations of Sangui Singapore in August
2002. The Singapore office was closed effective December 31, 2002.
  The Company
incurred a net loss applicable to common stockholders of $731,486 and used cash
in operating activities of $282,936 for the year ended June 30,
2006.  These, and other conditions raise substantial doubt about the
Company's ability to continue as a going concern. The Company expects to
continue to incur significant capital expenses in pursuing its business plan to
market its products and expand its product line, while obtaining additional
financing through stock offerings or other feasible financing alternatives. In
order for the Company to continue its operations at its existing levels, the
Company will require significant additional funds over the next twelve months.
Therefore, the Company is dependent on funds raised through equity or debt
offerings.
  Additional
financing may not be available on terms favorable to the Company, or at all. If
these funds are not available the Company may not be able to execute its
business plan or take advantage of business opportunities. The ability of the
Company to obtain such additional financing and to achieve its operating goals
is uncertain. In the event that the Company does not obtain additional capital
or is not able to increase cash flow through the increase of sales, there is a
substantial doubt of its being able to continue as a going concern. The
accompanying consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
 
 Consolidation
  The
consolidated financial statements include the accounts of Sangui BioTech
International, Inc. and its wholly owned domestic and foreign subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
   SANGUI
BIOTECH INTERNATIONAL, INC.
 Notes to
the Consolidated Financial Statements
 June 30,
2006
 NOTE 1 -
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Use of
Estimates
  The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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 respective reporting period. Actual results could differ from those
estimates. Significant estimates made by management are, among others, the
realization of receivables and long-lived assets, and valuation allowance on
deferred tax assets.
 
 Risks and
Uncertainties
  The Company's
line of future pharmaceutical and cosmetic products (artificial oxygen carriers
or blood substitute and additives) as well as other medical products being
developed by Sangui GmbH, are deemed as medical devices or biologics, and as
such are governed by the Federal Food and Drug and Cosmetics Act and by the
regulations of state agencies and various foreign government agencies. The
pharmaceutical and biosensor products, under development in Germany, will be
subject to more stringent regulatory requirements, because they are in vivo
products for humans. The Company and its subsidiaries have no experience in
obtaining regulatory clearance on these types of products. Therefore, the
Company will be subject to the risks of delays in obtaining or failing to obtain
regulatory clearance.
 
 Financial
Instruments
  The Company
has financial instruments whereby the fair market value of the financial
instruments could be different than that recorded on a historical basis. The
Company's financial instruments consist of its cash and cash equivalents,
marketable securities, and accounts payable and accrued expenses.  The
carrying amount of the Company's cash and cash equivalents and accounts payable
and accrued expenses approximate their estimated fair values due to the
short-term nature of these financial statements. Marketable securities are
stated at fair value based upon quoted market prices and are classified as
available-for-sale securities.
 
 Foreign
Currency Translation
  Assets and
liabilities of the Company's foreign operations are translated into U.S. dollars
at period-end exchange rates. Net exchange gains or losses resulting from such
translation are excluded from net loss but are included in comprehensive income
(loss) and accumulated in a separate component of stockholders' equity. Income
and expenses are translated at weighted average exchange rates for the
period.
 
 Cash and
Cash Equivalents
  The Company
maintains its cash in uninsured bank accounts in Germany. Cash and cash
equivalents include time deposits for which the Company has no requirements for
compensating balances. The Company has not experienced any losses in its
uninsured bank accounts.  The Company had no cash equivalents
outstanding as of June 30, 2006.
 
 
 SANGUI
BIOTECH INTERNATIONAL, INC.
 Notes to
the Consolidated Financial Statements
 June 30,
2006
 NOTE 1 -
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Property
and Equipment
  Property and
equipment are recorded at cost and are depreciated or amortized using the
straight-line method over the expected useful lives, which range from three to
five years. Leasehold improvements are amortized using the straight-line method
over the lesser of the estimated useful lives of the assets or the related lease
terms. Depreciation expense for the years ended June 30, 2006 and 2005 was
$36,876 and $66,894, respectively. Expenditures for normal maintenance and
routine repairs are charged to expense, and significant improvements are
capitalized. The cost and related accumulated depreciation of assets are removed
from the accounts upon retirement or other disposition; any resulting gain or
loss is reflected in the statement of operations.
 
 Patents
and Licenses
  Patents and
licenses are recorded at cost and are amortized using the straight-line method
over their estimated useful lives, which range from four to eight years.
Amortization expense for the years ended June 30, 2006 and 2005 was
$-0-.
 
 Impairment
of Long-Lived Assets
  Long-lived
assets and certain identifiable intangibles to be held and used by an entity are
reviewed by the management of the Company for impairment whenever events or
changes in circumstances indicate that the carrying value of an asset may not be
recoverable. As of June 30, 2006, management of the Company believes that no
impairment has been indicated. There can be no assurances, however, that market
conditions will not change or demand for the Company's products will continue
which could result in impairment on long-lived assets in the
future.
 
 Revenue
Recognition
  Revenue is
recognized when the sales amount is determined, shipment of goods to the
customer has occurred and collection is reasonably assured. Product is shipped
FOB origination.
 
 Research
and Development
  Research and
development are charged to operations as they are incurred.  Legal
fees and other direct costs incurred in obtaining and protecting patents are
expensed as incurred. Research and development costs totaled $111,608 and
$426,831 during the fiscal years ended June 30, 2006 and 2005,
respectively.
 
 Grants
  The Company
received grants from the German government which were used to fund certain
research and development activities and acquisitions of
equipment.  Revenue from grants for the reimbursement of research and
development expenses is offset against research and development expenses when
the related expenses we incurred.  The Company had no active grants at
June 30, 2006 and 2005.  However, the Company did derive other income
from additional reimbursements pertaining to the grants, during the fiscal year
ended June 30, 2005.
 
 
 SANGUI
BIOTECH INTERNATIONAL, INC.
 Notes to
the Consolidated Financial Statements
 June 30,
2006
 NOTE 1 -
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Income
Taxes
  The Company
accounts for income taxes in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes."  Deferred
tax assets and liabilities are recognized for future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. A valuation allowance is provided for certain deferred
tax assets when it is more likely than not that such tax assets will not be
realized through future operations.
 
 Basic and
Diluted Earnings (Loss) Per Common Share
  Basic
earnings (loss) per common share is computed by dividing income (loss) available
to common stockholders by the weighted average number of common shares
outstanding during the period of computation. Diluted earnings (loss) per share
gives effect to all potential dilutive common shares outstanding during the
period of compensation. The computation of diluted earnings (loss) per share
does not assume conversion, exercise or contingent exercise of securities that
would have an antidilutive effect on earnings. As of June 30, 2006 and 2005, the
Company had no potentially dilutive securities that would effect the loss per
share if they were to be dilutive.
 
 Comprehensive
Income (Loss)
  Total
comprehensive income (loss) represents the net change in stockholders' equity
during a period from sources other than transactions with stockholders and as
such, includes net earnings (loss). For the Company, the components of other
comprehensive income (loss) are the changes in the cumulative foreign currency
translation adjustments and unrealized gains (losses) on marketable securities
and cash equivalents and are recorded as components of stockholders'
equity.
 
 Segments
of an Enterprise and Related Information
  The Company
adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information." SFAS No. 131 establishes standards for the way public companies
report information about segments of their business in their annual financial
statements and requires them to report selected segment information in their
quarterly reports issued to stockholders. It also requires entity-wide
disclosures about the products and services an entity provides, the material
countries in which it holds assets and reports revenues and its major customers,
if any. As of June 30, 2007, the Company has only one segment of enterprise
which is medical products manufacturing and sales.
 
 Inventory
  Inventory is
stated at the lower of cost (computed on a first-in, first-out basis) or market
value.  At June 30, 2006 all inventory consists of finished
goods.  Inventory is evaluated periodically by management for
potential impairment.  During the years ended June 30, 2006 and 2005,
the Company recognized no impairment expense pertaining to
inventory.
 
 
 SANGUI
BIOTECH INTERNATIONAL, INC.
 Notes to
the Consolidated Financial Statements
 June 30,
2006
 NOTE 1 -
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Trade
Receivables
  The Company
periodically reviews its trade receivables for potential collectibility
issues.  The Company has implemented the policy to charge-off trade
receivables older than 120 days outstanding as bad-debt expense.  As
of June 30, 2006, the Company had an allowance for doubtful accounts of
$-0-.
 
 New
Accounting Pronouncements
  In December
2004, the FASB issued SFAS No. 123R "Shared Based Payment". This statement is a
revision of SFAS Statement No. 123, "Accounting for Stock-Based Compensation"
and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees,"
and its related implementation guidance. SFAS 123R addresses all forms of shared
based payment ("SBP") awards, including shares issued under employee stock
purchase plans, stock options, restricted stock and stock appreciation rights.
Under SFAS 123R, SBP awards result in a cost that will be measured at fair value
on the awards' grant date, based on the estimated number of awards that are
expected to vest and will be reflected as compensation cost in the historical
financial statements. This statement is effective for public entities as of the
beginning of the first interim or annual reporting period that begins after June
15, 2005.
  In May 2005,
the FASB issued Statement of Financial Accounting Standards No. 154“Accounting Changes and Error
Corrections, an amendment of APB Opinion 20 and FASB Statement No. 3,”
which changes the requirements for accounting for and reporting on a change in
accounting principle. This statement is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005. We
believe that the adoption of SFAS No. 154 will not have a material impact on our
results of operations.
  In March
2006, the FASB issued SFAS No. 156“Accounting for Servicing of
Financial Assets, an amendment of FASB No. 140,” which modifies the
accounting for and reporting of servicing asset and servicing liabilities. This
statement is effective as of the beginning of our first fiscal year that begins
after September 15, 2006. SFAS No. 156 is not currently applicable to the
company and, we believe that the adoption of SFAS No. 156 will not have a
material impact on our results of operations.
  In June 2006,
the FASB issued Financial Interpretation No. (FIN) 48, “Accounting for Uncertainty in Income
Taxes - an interpretation of FASB Statement 109.” FIN 48 prescribes a
recognition threshold and a measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. This interpretation also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. This interpretation is effective for fiscal years
beginning after December 15, 2006. The Company is currently evaluating the
impact of applying the various provisions of FIN 48.
  In September
2006, the FASB issued SFAS No. 157, “Fair Value Measurements,”
that provides guidance for using fair value to measure assets and liabilities.
Under SFAS 157, fair value refers to the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market
participants in the market in which the reporting entity transacts.
SFAS
 
 
 SANGUI
BIOTECH INTERNATIONAL, INC.
 Notes to
the Consolidated Financial Statements
 June 30,
2006
 NOTE 1 -
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 New
Accounting Pronouncements (Continued)
 
 157
establishes a fair value hierarchy that prioritizes the information used to
develop the assumptions that market participants would use when pricing the
asset or liability. The fair value hierarchy gives the highest priority to
quoted prices in active markets and the lowest priority to unobservable data. In
addition, SFAS 157 requires that fair value measurements be separately disclosed
by level within the fair value hierarchy. This standard will be effective for
financial statements issued for fiscal periods beginning after November 15, 2007
and interim periods within those fiscal years. The Company is currently
evaluating the impact of applying the various provisions of SFAS
157.
 
 Major
Customers
  During the
years ended June 30, 2006 and 2005 the Company had three customers to whom sales
exceeded 10% of the Company’s total sales for the period.  Each
customer is an unrelated third party.  These three companies combined
to constitute approximately 70% of the Company’s gross revenues for the years
ended June 30, 2006 and 2005.
 
 NOTE  2  -  PROPERTY  AND  EQUIPMENT
  Property and
equipment consists of the following at June 30, 2006:
  Technical and
laboratory
equipment                                   $         645,214
 Leasehold
improvements                                            
                     388,855
 Office
equipment                                                                           
    150,160
 Office
furniture                                                                                     26,962
 Other                                                                                           1,324
 
 Total property and
equipment                                             1,212,515
  Less
accumulated depreciation and
amortization                    
      (1,200,807)
  Total property and equipment,
net                             
$          11,708
 
 NOTE  3  -  PATENTS
AND LICENSES
  At June 30,
2006, patents and licenses totaled $124,186 less accumulated amortization of
$124,186.
 
 NOTE  4  -  STOCKHOLDERS'  EQUITY
  Common Stock - The
Company is authorized to issue 50,000,000 shares of no par value common stock.
The holders of the Company's common stock are entitled to one vote for each
share held of record on all matters to be voted on by those
stockholders.
 
 Preferred Stock - The
Company is authorized to issue 5,000,000 shares of non-voting no par value
preferred stock. The Board of Directors has not designated any liquidation value
or dividend rates.
 
 
 SANGUI
BIOTECH INTERNATIONAL, INC.
 Notes to
the Consolidated Financial Statements
 June 30,
2006
 NOTE  4  -  STOCKHOLDERS'  EQUITY
(Continued)
 
 Stock Options - From
time to time, the Company may issue stock options pursuant to various agreements
and other contemporary agreements.  At June 30, 2006 and 2005, and
during the years ended June 30, 2006 and 2005, no options were issued or
outstanding.
 
 Treasury Stock - On
July 1, 2004, the Company purchased 100,000 shares of its common stock from an
investor for approximately $0.278 per share.  The Company purchased an
additional 620,000 shares of its common stock on November 11, 2004 for
approximately $0.191 per share.  During the course of the 2005 fiscal
year the Company sold a total of 288,000 of these treasury shares for total
proceeds of approximately $63,907, resulting in a loss of approximately $13,602,
which was applied to additional paid-in capital.  During the 2006
fiscal year the remainder of these shares were sold, resulting in a loss of
approximately $28,022.  As of June 30, 2006 the Company held zero
shares of treasury stock.
  In August,
2005 the Company sold 1,000,000 shares of its common stock to a European
investor yielding cash contribution of $87,500.  In addition, the
Company sold 1,495,960 shares of its common stock to a European investor
yielding a cash inflow of $135,758
 
 NOTE
5  -  INCOME  TAX  PROVISION
  No current
provision for income taxes for the years ended June 30, 2006 and 2005 is
required, since the Company incurred net operating losses through June 30,
2006.
  Income tax
expense for the years ended June 30, 2006 and 2005 differed from the amounts
computed by applying the U.S. federal income tax rate of 34 percent as
follows:
  2006                2005
 
 Income tax
benefit at U.S. federal statutory
rates                                                                $   (514,987)    $    (274,799)
 Net operating
losses not
benefited                                                                             
                514,987     
       235,750
 Common stock
issued for
services                                                                                                          -         
      39,049
 State and
local income taxes, net of federal income tax
effect                                       
 -      -
 
 $ 
               -
    $               
 -
  The tax
effects of temporary differences that give rise to significant portions of the
deferred tax assets at June 30, 2006 are presented below:
 
 Deferred  tax  assets:
 Net  operating  losses                                                        $   7,500,000
 Less  valuation  allowance                                 
             (7,500,000)
 
 Net  deferred  tax  assets                                                  $                 -
  As of June
30, 2006, the Company had net operating loss carryforwards of approximately $7.5
million, $3.4 million and $10.2 available to offset future taxable federal,
state and foreign income, respectively. The federal and state carryforward
amounts expire in varying amounts between 2006 and 2026. The foreign net
operating loss carryforwards do not have an expiration period.
 
 SANGUI
BIOTECH INTERNATIONAL, INC.
 Notes to
the Consolidated Financial Statements
 June 30,
2006
 NOTE
6  -  BASIC  AND  DILUTED  LOSS  PER  COMMON  SHARE
  The following
is a reconciliation of the numerators and denominators of the basic and diluted
loss per common share computations for the years ended June 30, 2006 and
2005:
 
 2006                  2005
 
 Numerator for basic
and diluted loss per common
 share – net
loss                                                               $    (731,486)     $   (704,612)
 
 Denominator for basic
and diluted loss per common
 share – weighted
average
shares                                                        
48,751,875      44,312,968
 
 Basic and diluted
loss per common
share                                $         
 (0.02)     $        (0.02)
 
 NOTE 7 -
RELATED PARTY TRANSACTIONS
  The Company
has an agreement with Professor Barnikol, the Company's President and CEO,
pursuant to which he is entitled to 3% royalties of gross revenues earned with
any product based on his inventions. No royalties were paid or earned in fiscal
2006 and 2005.
 
 NOTE
8  -  COMMITMENTS  AND  CONTINGENCIES
 
 Operating
Leases
  The Company leases its
office and laboratory facilities in Germany under an operating lease that
expires in May, 2007.  Rent expense was $68,000 and $68,000 for the
years ended June 30, 2006 and 2005, respectively.
  The Company entered into an
automobile lease agreement in June, 2004.  The lease was for a term of
24 months, and expired on June 15, 2006.  The Lease called for monthly
payments of approximately $1,130.  Automobile lease expense was
approximately $13,560 and $13,556 for the years ended June 30, 2006 and 2005,
respectively.
 
 Litigation
  The Company
is, from time to time, involved in various litigations resulting in the ordinary
course of operating its business. Management is currently not able to predict
the outcome of these cases. However, management believes that the amount of
ultimate liability, if any, with respect to these actions will not have a
material effect on the Company's financial position and results of
operations.
  On November
27, 2003, the company was served with a lawsuit, Landgericht Bochum Court, Case
No. 6 O 435/03.  The lawsuit named, among others, SanguiBioTech AG as
defendant.  The plaintiff alleged that the Company, had neglected its
duty in dealing with some of the plaintiff’s Sangui BioTech International, Inc.
shares.  A judgement was handed down on July 28, 2004 whereby the
plaintiff’s action was been dismissed.  No appeal has been
lodged.  The Company recognized no financial impact from this
litigation.
 
 
 SANGUI
BIOTECH INTERNATIONAL, INC.
 Notes to
the Consolidated Financial Statements
 June 30,
2006
 NOTE
8  -  COMMITMENTS  AND  CONTINGENCIES
(Continued)
  On August 4,
2003, SanguiBioTech AG filed a lawsuit against a former director of SGBI,
claiming that some payments incurred by the defendant were unjustified under
German law, Landgericht
  On June 15,
2005, SanguiBioTech GmbH was served with a lawsuit, Amtsgericht Witten, Case No.
2 C 429/05.  The plaintiff is a supplier of packaging foils for
certain medical products.  He claims payment of invoices amounting to
approximately $ 8,500.  The Company had rejected the delivery of the
goods covered by the invoices due to poor quality.  The claim was
settled by order of the Court on September 7, 2005, whereby Sangui agreed to pay
a lesser amount of approximately $6,406, including court fees.
 
 Indemnities
and Guarantees
  During the
normal course of business, the Company has made certain indemnities and
guarantees under which it may be required to make payments in relation to
certain transactions. These indemnities include certain agreements with the
Company's officers, under which the Company may be required to indemnify such
person for liabilities arising out of their employment relationship. The
duration of these indemnities and guarantees varies and, in certain cases, is
indefinite. The majority of these indemnities and guarantees do not provide for
any limitation of the maximum potential future payments the Company could be
obligated to make. Historically, the Company has not been obligated to make
significant payments for these obligations. The Company has recorded a reserve
for indemnities and guarantees of $-0- and $-0- as of June 30, 2006 and 2005,
respectively.
 
 Other
  On April 14,
2005 the Company entered into a distribution agreement with an unrelated third
party.  According to the terms of the Agreement, the Company granted
exclusive marketing and distribution rights pertaining to the Company’s
Chitosan-based wound pads to the third party for a period of five
years.
 
 NOTE 9 -
STOCK-BASED COMPENSATION
  The Company
has applied the disclosure provisions of Statement of Financial Accounting
Standards No. 123(R), "Share
Based Payment,” for the year ended June 30, 2006. Released on December
16, 2004, SFAS No. 123(R) supersedes APB Opinion No. 25, “Accounting for Stock
Issued to Employees.” There were no common shares or stock options issued or
granted to employees during this reporting period.
  On April 28,
2004, the company adopted the 2004 Employee Stock Incentive Plan (the Plan).
Under the terms of this plan the Board was authorized to issue up to 1,000,000
shares of common stock to certain eligible employees of the company or its
subsidiaries.
  
 SANGUI
BIOTECH INTERNATIONAL, INC.
 Notes to
the Consolidated Financial Statements
 June 30,
2006
 NOTE 10 -
NOTES PAYABLE
  During the
year ended June 30, 2006, the Company borrowed money from four separate European
Companies in order to supplement its ongoing operational cash
flow.  The Company issued notes in exchange for cash pursuant to the
following terms.  All notes are due and payable on the fifth
anniversary of its issuance at a rate of 5% simple interest.  The
Company has the right to convert these notes, including all unpaid principal and
any interest thereon, into shares of the Company’s Common Stock at any time
prior to full repayment or the Due Date. The total amount borrowed under these
terms, through June 30, 2006 was $172,122.
  Loan Agreement with FID
Esprit AG
  On April 4,
2006, the Company entered into a loan agreement with FID Esprit AG. 
Pursuant to the terms of the loan agreement, FID Esprit AG loaned the Company
approximately $ 48,264 with interest of six percent per annum.  The Company
has the option of paying the loan and interest in cash or with shares of
SanguiBioTech AG common stock, its wholly-owned subsidiary, valued at 50% of the
average Hamburg OTC trading price over the four weeks prior to
repayment.
  Loan Agreement with Feedback
AG
  On June 9,
2006, the Company entered into a loan agreement with Feedback AG.  Two of
the Company's Directors are also signatories for Feedback AG.  Pursuant to
the terms of the loan agreement, Feedback AG loaned the Company approximately
$96,527 with interest of six percent per annum.  The Company has the option
of paying the loan and interest in cash or with shares of SanguiBioTech AG
common stock, its wholly-owned subsidiary, valued at 50% of the average Hamburg
OTC trading price over the four weeks prior to repayment.
 
 NOTE 11 –
SUBSEQUENT EVENTS
  Subsequent to
the period covered by this report, the Company continued to borrow money from
four separate European Companies in order to supplement its ongoing operational
cash flow.  The total amount borrowed under these terms was
$512,959.
  Second Loan Agreement with
Feedback AG
  Subsequent to
the period covered by this report, on July 21, 2006, the Company entered into a
loan agreement with Feedback AG.  Two of the Company's Directors are also
signatories for Feedback AG.  Pursuant to the terms of the loan agreement,
Feedback AG loaned the Company approximately $18,100 for the purpose of
preparing a shareholders meeting.  The interest on this loan is set at six
percent per annum.  The Company is to pay the loan and interest off
utilizing its common stock following the shareholders meeting, however, if a
shareholders meeting has not been held as of July 30, 2007, then the loan and
interest are due and payable in cash.
 
 Additional
Loans
  From July
2006 to January 2007 the Company borrowed money from four separate European
companies and their affiliates to supplement its ongoing operational cash
flow.  The Company issued notes in exchange for cash pursuant to the
following terms:  All notes are due and payable in the fifth
anniversary of issuance at a rate of 5% simple interest.  The Company,
in its sole discretion, has the right to convert these notes, including all
unpaid principal and any interest thereon, into shares of the Company’s common
stock at the rate of approximately $0.11 per share at any time prior to full
repayment or on the Due Date.
 
 
 SANGUI
BIOTECH INTERNATIONAL, INC.
 Notes to
the Consolidated Financial Statements
 June 30,
2006
 NOTE 11 –
SUBSEQUENT EVENTS (Continued)
 
 Agreements with ERC Nano Med
S.A. de C.V.
  On October
13, 2006 the Company entered into a Distribution, Collaboration, and
Commercialization Agreement with ERC S.A. de C.V., a division of ERC Nano Med.
of Mexico (“ERC”).  Under the terms of the Agreement, the Company is
granting exclusive distribution rights of its 1) hemospray, 2) wound cleaner
liquid gel, and 3) bloodadditiv to ERC.  In return, ERC is to work
with various Mexican Health Authorities necessary to grant government approvals
necessary for the products to be sold and distributed in Mexico.  All
costs for obtaining the necessary approvals in Mexico are to be born by
ERC.
  On the same
date the Company entered into a separate agreement with ERC pertaining to the
Company’s chitosin wound pads under the same terms.


ITEM  8. CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTANTS ON AN ACCOUNTING AND FINANCIAL
DISCLOSURE




Subsequent to
the period covered by this report, on September 18, 2007, the Board of Directors
of the Company dismissed HJ & Associates, LLC (“HJ & Associates”) as the
Company's independent auditors.HJ &
Associates audited report of the financial statements for the years ended June
30, 2005 and 2004, included language expressing substantial doubt as to the
Company's ability to continue as a going concern.  The audit report
contained no other adverse opinion or disclaimer of opinion and was not
qualified or modified as to uncertainty, audit scope or accounting
principles.  As such, in connection with these audits of the fiscal years
ended June 30, 2005 and 2004 and the subsequent interim period prior to such
dismissal, there were (1) no disagreements with HJ & Associates on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of HJ & Associates, would have caused them to make reference
thereto in their reports on the financial statements for such periods to the
subject matter of the disagreement, and (2) there were no reportable events as
that term is defined in Item 304(a)(1)(iv) of Regulation S-B. The change in
independent accountants did not result from any dissatisfaction with the quality
of professional services rendered by HJ & Associates.


Subsequent to the
period covered by this report, on September 18, 2007, the Company engaged of the
accounting firm of Moore & Associates, Chartered ("Moore & Associates")
as its independent auditors, effective immediately.  Moore & Associateshave been asked to audit the Company's financial statements for the years
ending June 30, 2006 and 2007.  During the two most recent fiscal years and
the subsequent interim periods prior to the engagement of Moore &
Associates, the Company did not consult with Moore & Associates with regard
to: (i) the application of accounting principles to a specific completed or
contemplated transaction, or the type of audit opinion that might be rendered on
the Company's financial statements; and further, Moore & Associates have not
provided written or oral advice to the Compnay that was an important factor
considered by the Company in reaching a decision as to any accounting, auditing
or financial reporting issue; or (ii) any matter that was either the subject of
a disagreement or a reportable event (as described in Item 304(a)(1)(iv) of
Regulation S-B).
  The decision
to change principal auditors and the engagement of the new principal auditor was
recommended and approved by the Company's Board of Directors.


ITEM
8A. CONTROLS AND
PROCEDURES





(a)             Evaluation of disclosure
controls and procedures.  Our principal executive officer and
principal financial officer have evaluated the effectiveness of our disclosure
controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the
Exchange Act), as of a date within 90 days of the filing date of this Annual
Report on Form 10-KSB.  Based on such evaluation, they have concluded
that as of such date, our disclosure controls and procedures are ineffective and
represent a material weakness.  Such controls are designed to ensure
that information required to be disclosed by us in reports that we file or
submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in applicable SEC
rules and forms and that such information is accumulated and communicated to our
management, including CEO, President and CFO, to allow timely decisions
regarding required disclosure.





(b)             Changes in internal
controls.  There were no significant changes in our internal
controls or in other factors that could significantly affect these controls
subsequent to the date of evaluation by our principal executive officer and
principal financial officer.





ITEM
8B. OTHER
INFORMATION





Loan Agreement with FID Esprit
AG





On April 4, 2006, the Company entered
into a loan agreement with FID Esprit AG.  Pursuant to the terms of
the loan agreement, FID Esprit AG loaned the Company $48,264 with interest of
six percent per annum.  The Company has the option of paying the loan
and interest in cash or with shares of SanguiBioTech AG common stock, its
wholly-owned subsidiary, valued at 50% of the average Hamburg OTC trading price
over the four weeks prior to repayment.





Loan Agreement with Feedback
AG





On
June 9, 2006, the Company entered into a loan agreement with Feedback
AG.  Two of the Company's Directors are also signatories for Feedback
AG.  Pursuant to the terms of the loan agreement, Feedback AG loaned
the Company $96,527 with interest of six percent per annum.  The
Company has the option of paying the loan and interest in cash or with shares of
SanguiBioTech AG common stock, its wholly-owned subsidiary, valued at 50% of the
average Hamburg OTC trading price over the four weeks prior to
repayment.






33





Second Loan Agreement with
Feedback AG





Subsequent to the period covered by
this report, on July 21, 2006, the Company entered into a loan agreement with
Feedback AG.  Two of the Company's Directors are also signatories for
Feedback AG.  Pursuant to the terms of the loan agreement, Feedback AG
loaned the Company approximately $18,000 for the purpose of preparing a
shareholders meeting.  The interest on this loan is set at six percent
per annum.  The Company is to pay the loan and interest off utilizing
its common stock following the shareholders meeting, however, if a shareholders
meeting has not been held as of July 30, 2007, then the loan and interest are
due and payable in cash.





Agreements with ERC Nano Med
S.A. de C.V.





Subsequent to the period covered by
this report, on October 13, 2006, the Company entered into a Distribution,
Collaboration, and Commercialization Agreement with ERC S.A. de C.V., a division
of ERC Nano Med. of Mexico (“ERC”).  Under the terms of the agreement
the Company is granting the exclusive distribution rights of its i) hemospray,
ii) wound cleaner liquid gel, iii) chitoskin wound pads and iv) bloodadditiv to
ERC.  In return ERC is to work with the various Mexican Health
Authorities necessary to grant government approvals necessary for the products
to be sold and distributed in Mexico.  All costs for obtaining the
necessary approvals in Mexico are to be born by ERC.





Subsequent Additional Loans
to the Company





From January
2006 to the period subsequent to that covered by this report, through
January 2007, the Company borrowed money from four separate European Companies
and their affiliates to supplement its ongoing operational cash
flow.  The Company issued notes in exchange for cash pursuant to the
following terms.  All notes are due and payable on the fifth
anniversary of its issuance at a rate of 5% simple interest.  The
Company, in its sole discretion, has the right to convert these notes, including
all unpaid principal and any interest thereon, into shares of the Borrower’s
Common Stock at any time prior to full repayment or the Due Date.  The
total amount borrowed under these notes was $512,959.




PART
III





ITEM 9. DIRECTORS,
EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS COMPLIANCE WITH SECTION 16(a)
OF THE EXCHANGE ACT.





The
following table sets forth the names and ages of the current directors and
executive officers of Sangui BioTech International, Inc.,  their principal
offices and positions and the date each such person became a director or
executive officer.  Our executive officers are elected annually by the
Board of Directors.  Our directors serve one-year terms until their
successors are elected.  The executive officers serve terms of one
year or until their death, resignation or removal by the Board of
Directors.  There are no family relationships between any of the
directors and executive officers.  In addition, there was no
arrangement or understanding between any executive officer and any other person
pursuant to which any person was selected as an executive officer.





The
directors as of June 30, 2006 were as follows:




Name
            
            Age
            
            Positions and
      Offices
            Directorship
      Term
            Period of Service as a
      DirectorProf.
      Wolfgang Barnikol, M.D., Ph.D:
            
            71
            
            Chairman,
      President, Chief Executive Officer, Executive Director
            One
      Year
            Apr
      18, 2001Joachim
      Fleing, Ph.D..
            
            53
            
            Non-Executive
      Director
            One
      Year
            Dec
      13, 2003Prof.
      Joachim Lutz, M.D., Ph.D.
            
            72
            
            Non-Executive
      Director
            One
      Year
            Aug,
      1997Thomas
      Striepe
            
            42
            
            Non-Executive
      Director
            One
      Year
            Feb
      7, 2005





None of
the Directors are related to one another.  None of the independent
Directors has a business or professional relationship with SGBI and/or the other
Directors and substantial shareholders of SGBI, except as follows:





The Company has an agreement with
Professor Barnikol, the Company’s President and CEO, pursuant to which he is
entitled to 3% royalties of gross revenues earned with any product based on his
inventions (See below: Item 12 Certain Relationships and Related
Transactions).  No royalties were paid or earned in fiscal 2006 and
2005.





Since
July, 2002, the Company has an agreement with Joachim Fleing under which the
latter serves as a communications specialist on an hourly basis.





The day-to-day operations of SGBI are
entrusted to the Executive Directors of SGBI.


34


The
business and working experience of the Directors and key Executive Officers of
SGBI as of June 30, 2005, are set out below:





PROFESSOR
WOLFGANG K. R. BARNIKOL, M.D., Ph.D., Chairman, President, Chief Executive
Officer, Chief Financial Officer, and Executive Director of SGBI, has studied
chemistry, physics and medicine at the Universities of Munster, Aachen and
Mainz, Germany. In 1961, he received a Diploma in chemistry from University of
Mainz, Mainz, Germany. In 1964, he obtained the doctorate in physical chemistry
(Dr. rer. nat.) and in 1973 the doctorate in medicine (Dr. med.) both from the
University of Mainz, Mainz, Germany. In that same year, he also was appointed
professor in medical physiology at University of Mainz, Mainz Germany. In 1996,
Dr. Barnikol was awarded a specialist in medical physiology by the medical
association of Rheinland-Pfalz Germany. His research interest in physical
chemistry focused on the polymerization of styrene and the determination of
molecular weights of polymers with the electron microscope. Dr. Barnikol's
research areas in medicine are: (i) respiration; and (ii) blood and circulation.
In the field of respiration, he works on the functional analysis of the
bronchial system and gas exchange. Moreover, he is engaged in the development of
respiratory and skin oxygen sensors. In the field of blood and circulation, he
works on the development of artificial oxygen carriers for medical use, which
are based on polymerised soluble hemoglobins. As a third sphere of work, Dr.
Barnikol is engaged in the development of an implantable glucose sensor. Dr.
Barnikol has published more than 100 scientific articles, a textbook in
physiology and a review on the situation of German universities.




PROFESSOR
JOACHIM LUTZ, M.D., Non-Executive Director, professor and lecturer in medical
physiology in the subject area of the vascular system and venous pressure at the
Physiological Institute of the Bavarian-Julius-Maximilian University in
Wuerzburg until his retirement in 1998. There he spent years evaluating
artificial oxygen carriers in small animal models such as the magneto metric
determination of the impairment of the body's own macrophages that are
responsible for detoxification. He is a member of the International Advisory
Committee on Blood Substitutes (ISABI) as well as the International Society on
Oxygen Transport to Tissue (ISOTT). He will accelerate development work as well
as the pre-clinical and clinical testing of blood with artificial oxygen
carriers with his technical knowledge and experience.





THOMAS
STRIEPE, Non-Executive Director, is Vice President Accounting and Controlling at
Dr. Ludz GmbH, Hamburg, Germany, a financial services company. Prior to joining
Dr. Ludz GmbH in 2004, he held management positions in the accounting
departments of several German and international corporations. He holds an MBA of
Hamburg University.





JOACHIM
FLEING, PhD, Non-Executive Director, is a communications specialist. His
professional experience includes the position of a communications officer and
the position as an account director at an international PR agency. Joachim
Fleing holds a PhD of Wuppertal University.





There are
no arrangements or understandings between any of the directors or executive
officers, or any other person or person pursuant to which they were selected as
directors and/or officers.





Significant
Employees





HUBERTUS
SCHMELZ is the General Manager of Sangui GmbH. He was appointed to this position
effective December 16, 2003. Prior to joining Sangui he acted as legal and
business consultant. During the last decade prior to 2000 he was entrusted with
numerous business development projects by the German Treuhandanstalt in
restructuring the economy of Eastern Germany. After having studied the Law he
acted as Legal Counsel in several positions.





Directorships





No
Director of the Company or person nominated or chosen to become a Director holds
any other directorship in any company with a class of securities registered
pursuant to section 12 of the Exchange Act or subject to the requirements of
section 15(d) of such Act or any other company registered as an investment
company under the Investment Company Act of 1940.





Family
Relationships





There are no family relationships
between any of the directors, officers or employees of the Company.





Involvement in Certain Legal
Proceedings





During the past five years, no
present or former director, executive officer or person nominated to become a
director or an executive officer of the Company:





(1)           was
a general partner or executive officer of any business against which any
bankruptcy petition was filed, either at the time of the bankruptcy or two years
prior to that time;





(2)           was
convicted in a criminal proceeding or named subject to a pending criminal
proceeding (excluding traffic violations and other minor offenses);





(3)           was
subject to any order, judgment or decree, not subsequently reversed, suspended
or vacated, of any court of competent jurisdiction, permanently or temporarily
enjoining, barring, suspending or otherwise limiting his involvement in any type
of business, securities or banking activities; or





(4)           was
found by a court of competent jurisdiction (in a civil action), the Securities
and Exchange Commission or the Commodity Futures Trading Commission to have
violated a Federal or state securities or commodities law, and the judgment has
not been reversed, suspended or vacated.




Audit Committee and Audit Committee
Financial Expert





The
Company has no separately designated standing audit committee nor another
committee performing similar functions.  The Board of Directors acts
as the audit committee.  None of the directors qualifies as an Audit
Committee Financial Expert.





Material Changes to The Method By
Which The Shareholders May Recommend Nominees To The Board Of
Directors





None.


35


Section 16 (a) Beneficial Ownership
Compliance





Section
16(a) of the Securities Exchange Act of 1934 requires the Company's executive
officers, directors and persons who own more than ten percent of the Company's
Common Stock, to file initial reports of beneficial ownership on Form 3, changes
in beneficial ownership on Form 4 and an annual statement of beneficial
ownership on Form 5, with the SEC.  Such executive officers, directors
and greater than ten percent shareholders are required by SEC rules to furnish
the Company with copies of all such forms that they have filed.





Based
solely upon a review of copies of the reports filed, SGBI believes that during
the year ended June 30, 2006, that all executive officers, directors and persons
who own more than ten percent of the Company's Common Stock are in compliance
with such regulations.





Code of Ethics





The
Company has not as of the date of this report adopted a code of
ethics.




ITEM
10.  EXECUTIVE
COMPENSATION AND OTHER INFORMATION




Summary Compensation
Table




The
table below summarizes all compensation awarded to, earned by, or paid to our
Officer for all services rendered in all capacities to us for the fiscal periods
indicated.








Name
              and
              Principal
              Position
              (a)
            Year
              (b)
            Salary
              ($)(1)
              (c)
            Bonus
              ($)
              (d)
            Stock
              Awards
              ($)
              (e)
            Option
      Awards
              ($)
              (f)
            Non-Equity Incentive Plan
      Compensation
              ($)
              (g)
            Nonqualified Deferred
      Compensation Earnings
              ($)
              (h)
            All Other
      Compensation
              ($)
              (i)
            Total
              ($)(1)
              (j)Prof.
      Wolfgang Barnikol
              Chairman,
      CEO, CFO
            2006
              2005
              2004
            0
              38,134
              126,858
            0
              0
              0
            0
              0
              0
            0
              0
              0
            0
              0
              0
            0
              0
              0
            0
              0
              0
            0
              38,134
              126,858





(1)
            All
      figures are expressed in United States Dollars (“USD”); for the German
      management personnel, the EURO or DM was converted to USD as of the fiscal
      year end of each year.




Narrative Disclosure to Summary
Compensation Table





The Company has an agreement with
Professor Barnikol, the Company’s President and CEO, pursuant to which he is
entitled to 3% royalties of gross revenues earned with any product based on his
inventions (See below: Item 12 Certain Relationships and Related
Transactions).  No royalties were paid or earned in fiscal 2006 and
2005.





There are no other employment
contracts, compensatory plans or arrangements, including payments to be received
from the Company with respect to any executive officer, that would result in
payments to such person because of his or her resignation, retirement or other
termination of employment with the Company, or its subsidiaries, any change in
control, or a change in the person’s responsibilities following a change in
control of the Company.




There are no agreements or
understandings for any executive officer to resign at the request of another
person. None of our executive officers acts or will act on behalf of or at the
direction of any other person.




36





Outstanding Equity Awards at Fiscal
Year-End Table and Narative





The Company had no outstanding equity
awards at fiscal year-end.




Compensation of
Directors





The table below summarizes all
compensation awarded to, earned by, or paid to our Directors for all services
rendered in all capacities to us for the fiscal periods indicated.





Name
              
              
              (a)
            Fees Earned or Paid in
      Cash
              
              (b)
            Stock
              Awards
              ($)
              (c)
            Option
      Awards
              ($)
              
              (d)
            Non-Equity Incentive Plan
      Compensation
              ($)
              (e)
            Nonqualified Deferred
      Compensation Earnings
              ($)
              (f)
            All Other
      Compensation
              ($)
              
              (g)
            Total
              ($)
              
              (j)Prof.
      Wolfgang Barnikol
            2006
              2005
              2004
            0
              0
              0
            0
              0
              0
            0
              0
              0
            0
              0
              0
            0
              0
              0
            $0
              $0
              $0Joachim
      Lutz
            2006
              2005
              2004
            0
              0
              0
            0
              0
              0
            0
              0
              0
            0
              0
              0
            0
              0
              0
            $0
              $0
              $0Thomas
      Striepe
            2006
              2005
              2004
            0
              0
              0
            0
              0
              0
            0
              0
              0
            0
              0
              0
            0
              0
              0
            $0
              $0
              $0Joachim
      Fleing
            2006
              2005
              2004
            0
              0
              0
            0
              0
              0
            0
              0
              0
            0
              0
              0
            0
              0
              0
            $0
              $0
              $0





Narrative to Director Compensation
Table





Directors serve without compensation
and there are no standard or other arrangements for their
compensation.  There are no employment contracts, compensatory plans
or arrangements, including payments to be received from the Company with respect
to any Director that would result in payments to such person because of his or
her resignation with the Company, or its subsidiaries, in the event of any
change in control of the Company.  There are no agreements or
understandings for any Director to resign at the request of another
person.  None of our Directors or executive officers acts or will act
on behalf of or at the direction of any other person.




Other Contracts





None.






37





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





Securities Authorized for Issuance
under Equity Compensation Plans





No securities
have been authorized for issuance as part of any Equity Compensation
Plan.





Stock Incentive
Plan





On April
28, 2004, the company adopted the 2004 Employee Stock Incentive Plan. Under the
terms of this plan the Board was authorized to issue up to 1,000,000 shares of
common stock to certain eligible employees of the company or its
subsidiaries.


Security Ownership of Certain
Beneficial Owners





As of June 30, 2006 the Company is not
aware of any person who is the beneficial owner of more than 5% of the
issued and outstanding Common Stock of the Company.




Security Ownership of
Management





The following table sets forth, as of
June 30, 2006, certain information concerning ownership of shares of Common
Stock by each director of the Company and by all executive officers and
directors of the Company as a group:





Title
      of Class
            Name
      and Address
              of
      Beneficial Owner
            Amount
      and Nature of Beneficial Ownership
            Percent
      of ClassCommon
      Stock
            Dr.
      Wolfgang Barnikol
              Arndstr.8
              58453
      Witten
              Germany
            1,853,600
      (1)
            3.9
      %Common
      Stock
            Dr.
      Joachim Fleing
              Am
      Vogelherd 43
              35043
      Marburg
              Germany
            202,000
            0.4
      %Common
      Stock
            Joachim
      Lutz
              Alfred
      Herrhausen Street 44
              58455
      Witten
              Germany
            0
            0.0%Common
      Stock
            Thomas
      Striepe
              Alfred
      Herrhausen Street 44
              58455
      Witten
              Germany
            0
            0.0%Common
      Stock
            All
      Officers and Directors as a Group (4 persons)
            2,055,600
            4.3
      %




(1) This
amount includes 1,153,600 shares held in the name of Dr. Doris Barnikol-Keuten,
Dr. Wolfgang Barnikol’s spouse.







38





Changes In
Control





To the
best of the Company’s knowledge there are no present arrangements or pledges of
the Company's securities, which may result in a change in control of the
Company.





ITEM
12. CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS





Transactions with related
persons





Except as
otherwise disclosed below, no Director, substantial shareholder or Executive
Officer of SGBI was or is an interested party in any transaction undertaken by
SGBI or its subsidiaries within the last two years.





Royalty Arrangment With
Professor Wolfgang Barnikol





On July 7, 1997, SGBI entered into
an agreement with Professor Barnikol pursuant to which Professor Barnikol
assigned certain patents to SGBI's German subsidiaries in exchange for a 3%
royalty on net revenues on products developed by SanguiBioTech AG or
GlukoMeditech AG based on those patents.  The royalty expires in 20
years or upon expiration of the patents.  Upon the merger of the two
former subsidiaries and subsequently upon their conversion into SanguiBioTech
GmbH, this agreement was transferred to the respective new legal
entities.





Consulting Contract
With Joachim Fleing, PhD.





The company signed a consulting
contract with Joachim Fleing, PhD, covering certain investor relations services
on July 17, 2002. When the latter was appointed a director of the company
effective December 16, 2003, the Board of Directors unanimously agreed that this
contract should persist. Under this resolution Joachim Fleing, like the other
directors will not obtain any remuneration for serving as a director, while
those services as rendered under the contract should be remunerated as
before.





Parents





Not applicable.





Promoters and Control
Persons





Not applicable.






39





ITEM
13. EXHIBITS





(a) Index
to Exhibits





Exhibit
No.





2.1    
  Exchange Agreement
between MRC Legal Services LLC and SanguiBioTech International, Inc., dated of
March 31, 2000 (1)





3.1     
 Articles of
Incorporation of SGBI (1)





3.2    
  Bylaws of
SGBI(1)





3.3      Articles of Association of
GlukoMeditech Aktiengesellschaft (2)





3.4      
Articles of Association of SanguiBiotech Aktiengesellschaft (2)





3.5      
Memorandum and Articles of Association of Sangui Biotech Singapore Pte. Ltd.
(3)





4.1      
Stock Option Agreement between Professor Wolfgang Barnikol and Sangui Biotech
International, Inc. dated October 12, 2000 (2) (cancelled as of June 30,
2003).





10.1    
Office Lease between Brookhollow Office Park and Sangui Biotech International,
Inc. dated September 4, 1996 and as amended 2000 (3)





10.2    
Fee Agreement between GlukoMeditech AG and Dr. Sieglinde Borchert dated June 15,
1998 (2)





10.3    
Fee Agreement between SanguiBiotech AG and Dr. Sieglinde Borchert dated June 15,
1998 (2)





10.4    
Service Contract between GlukoMeditech AG and Dr. Wolfgang Barnikol dated June
30, 1998 (2)





10.5    
Service Contract between SanguiBiotech AG and Dr. Wolfgang Barnikol dated June
30, 1998 (2)





10.6    
Service Agreement between Axel Kleinkorres Promotionsagentur and Sangui Biotech
International, Inc. dated April 26, 1999 (2)





10.7    
Amendment to Service Agreement between Axel Kleinkorres Promotionsagentur and
Sangui Biotech International, Inc. dated August 18, 2000 (2)




10.8    
Appropriation Notice from North-Rhine-Westphalia to GlukoMediTech AG dated
November 30, 1998 (2)





10.9    
Appropriation Notice from North-Rhine-Westphalia SanguiBiotech AG dated November
30, 1998 (2)





10.10   Lease
Contract for Business Rooms between Research and Development Centre, Witten,
Germany and GlukoMeditech AG dated June 6, 2000 (2)





10.11   Additional
Agreement to Lease Contract between Research and Development Centre, Witten,
Germany and GlukoMeditech AG dated June 7, 2000 (2)




10.12   Additional
Agreement to Lease Contract between Research and Development Centre, Witten,
Germany and SanguiBiotech AG dated June 7, 2000 (2)





10.13   Assignment
of Patents and Royalty Agreement with Dr. Wolfgang Barnikol (3)





10.14   Prolongation
Letter for SanguiBiotech AG Grants (4)





21.1    
Subsidiaries of SGBI (2)





31.1    
Certification of Chief Executive Officer and Chief Financial Officer pursuant to
Rule 13a-14(a) and 15d-14(a), filed herewith.





32       
Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, filed herewith.





(1) Filed as an
Exhibit to the Report on Form 8-K filed on or about April 4, 2000 and
incorporated herein by reference.





(2) Filed as an
Exhibit to the original Report on Form 10-KSB filed on October 13,
2000.





(3) Filed as an
Exhibit to the amended Report on Form 10-KSB filed on November 20,
2000.





(4) Filed as an
Exhibit to the Report on Form 10-KSB filed on September 28, 2002.






40





ITEM
14. Principal Accountant
Fees and Services.





Independent Public
Accountants




The Company's independent accountants
for the fiscal year ended June 30, 2005 was HJ & Associates,
LLP.




(a)           Audit
Fees.  During the fiscal year ended 2005, the aggregate fees
billed by HJ & Associates, LLP for services rendered for the review of the
financial statements included in our quarterly reports on Form 10-QSB or
services provided in connection with the statutory and regulatory filings or
engagements for that fiscal year, were $ 48,000 .





(b)           Audit-Related
Fees.  For the fiscal year ended 2005, fees billed by HJ &
Associates, LLP, were an aggregate $0 for any audit-related services other than
as set forth in paragraph (a) above.





(c)           Tax
Fees.  For the fiscal year ended 2005, HJ & Associates, LLP
did not bill any fees for tax compliance services.  The auditors did
not provide tax-planning advice for the fiscal year ended 2005.





(d)           All Other
Fees.  None.





The
Company’s independent accountants for the fiscal year ended June 30, 2006 were
Moore & Associates, Chartered.





(a)           Audit
Fees.  For the fiscal years ended 2006, the aggregate fees
billed by Moore & Associates, Chartered for services rendered for the audits
of the annual financial statements and the review of the financial statements
included in the quarterly reports on Form 10-QSB or services provided in
connection with the statutory and regulatory filings or engagements for those
fiscal years were $10,000 .





(b)           Audit-Related
Fees.  For the fiscal years ended 2006  fees billed by
Moore & Associates, Chartered , were an aggregate $0 for any audit-related
services other than as set forth in paragraph (a) above.





(c)           Tax
Fees.  For the fiscal years ended 2005 and 2005, Moore &
Associates, Chartered did not bill any fees for tax compliance
services.  The auditors did not provide tax-planning advice for the
fiscal years ended 2006.





(d)           All Other
Fees.  None.






41





SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act of 1934, the Company has duly
caused this report on Form 10-KSB to be signed on its behalf by the undersigned
hereunto duly authorized.





SANGUI BIOTECH INTERNATIONAL,
INC.





/s/ Wolfgang
      Barnikol
              Wolfgang  Barnikol
              President  and  Director
            March
      31, 2008





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





Signatures
            Title
            Date/s/ Wolfgang
      Barnikol
              Wolfgang
      Barnikol, M.D., Ph.D
            President,
      Chief Executive Officer and Director
            March
      31, 2008/s/ Joachim
      Lutz
              Joachim
      Lutz, M.D.
            Director
            March 31, 2008Thomas
      Striepe
            Director
            March 31, 2008/s/ Joachim
      Fleing
              Joachim
      Fleing, Ph.D
            Director
            March 31,
2008








42