TENAX THERAPEUTICS, INC. - Annual Report: 2003 (Form 10-K)

FORM 10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C., 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended April 30, 2003

Commission File No. 2-31909

SYNTHETIC BLOOD INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

3189 Airway Avenue, Building C, Costa Mesa, California 92626

(Address of Principal Executive Offices) (Zip Code)

Registrant’s Telephone Number and area code: (714) 427-6363

Securities registered pursuant to Section 12(b) of the Act: NONE

Securities registered pursuant to Section 12(g) of the Act: NONE

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO  ¨

Indicate by check mark if disclosure of delinquent filings pursuant to Item 405 of Regulation S-K is not contained herein, and will not be continued, to the best of registrant’s knowledge in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    YES  x    NO  ¨

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date, July 15, 2003: 88,783,874 shares of $.01 par value common stock. The aggregate market value of the shares held by non-affiliates of the registrant (assuming officers, directors and 10% shareholders are affiliates) was approximately $19,514,372 based on the closing bid price of the Registrants Common Stock on July 15, 2003 of $0.23 per share.

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

FORWARD-LOOKING STATEMENTS

This Form 10-K contains forward-looking statements in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may”, “will”, “should”, “expects”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “potential” or “continue” or the negative of such terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks outlined under “Risk Factors,” that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activities, performance or achievements expressed or implied by such forward-looking statements.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of such statements. We are under no duty to update any of the forward-looking statements after the date of this Form 10-K or to conform such statements to actual results.

PART I

ITEM 1—BUSINESS

Synthetic Blood International, Inc. (“SBI” or the “Company”) is a development-stage company which is developing OXYCYTE, a proprietary synthetic blood substitute and FLUOROVENT, a liquid for assisting oxygen exchange in damaged or diseased lungs based upon perfluorocarbon (“PFC”) technology. In addition the Company has developed an implantable continuous reading glucose biosensor for diabetics. The Company has completed preclinical animal studies with Oxycyte and filed an Investigative New Drug Application (IND), which has been approved by the Food and Drug Administration (FDA). The Company expects to conduct a Phase I clinical study with Oxycyte in the last half of calendar 2003. Fluorovent and the implantable glucose monitor are in the preclinical stage of development and testing. After IND submissions to the FDA, the Company’s products will require extensive clinical testing before FDA approval may be granted. No assurance may be given that FDA approval will be granted.

The Company’s technology is based on research done by Dr. Leland C. Clark, Jr., a widely recognized, pioneering inventor and scientist. Dr. Clark, who is credited with developing the first blood oxygenator for open heart surgery as well as biomedical applications for perfluorocarbons and biosensors, was the Company’s Vice President of R&D until 1998.

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

MARKET

The Company’s lead products—Oxycyte^™, Fluorovent^™, and an implantable glucose biosensor—will compete in what the Company believes are four multibillion-dollar markets: blood substitutes, oxygen therapeutics, acute respiratory distress, and diabetes.

Blood Substitutes

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

An increasingly short supply of blood is also driving this research. In the US, the number of blood donors continues to fall while the number of elderly, the group that needs blood the most, is growing. By 2030, experts project an annual

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shortfall of 4 million units in the US. In other countries where cultural and logistical issues constrain blood collection even more, the shortfall is believed to be much greater.

The third major force behind this search is the military’s desire for a blood substitute that can be stockpiled and used immediately when needed in battlefield conditions without special storage and matching of human donor blood. Current techniques for blood transfusions do not meet these requirements. Approximately 100 million units of human donor blood are collected annually worldwide. About 15 million units are collected in the US each year. The global market for blood substitutes has been estimated at $2-5 billion.

Oxygen Therapeutics

The availability of parenteral oxygen-carrying products for animal and clinical research has lead to the identification of potential new uses for products traditionally defined as blood substitutes. These uses, for example in ischemic conditions, specifically depend on the ability to deliver oxygen, not on a patient’s need for blood or blood components. These new uses include stroke, myocardial infarction, angioplasty, and malignant disease. In ischemic conditions, cell damage is caused by a lack of oxygen. In cancer, enhanced oxygen delivery is thought to make solid tumors, and possibly diffuse cancer cells, more susceptible to radiation and chemotherapy. Combined, these conditions affect 3-4 million people in the U.S. The Company estimates these new uses for oxygen-carrying blood substitutes constitute a multibillion-dollar market.

Acute Respiratory Distress

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

The incident of ARDS in the U.S. is about 250,000 cases annually. While ARDS is the primary disease target for liquid ventilation at this time, SBI believes that it may also be beneficial in chronic obstructive pulmonary disease, or COPD, a condition that occurs in 10 million people in the U.S. However, no research with liquid ventilation in COPD has been done, and there are no assurances that any benefits can be shown. The Company believes that the ultimate market for liquid ventilation is in the multibillion-dollar range.

Diabetes

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

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

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

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continues to be a major problem. A less invasive system for accurately measuring blood glucose on demand would increase glucose monitoring compliance and provide a better basis for tight diabetes control.

More than 16 million people, approximately half of them undiagnosed, are estimated to suffer from diabetes in the U.S. Between 600,000 and 700,000 new cases are diagnosed each year. About 800,000 diabetics are insulin-dependent. Mortality from diabetes and its associated complications is high; it is the seventh leading cause of death in the U.S. Globally, the incidence of diabetes is estimated at 120 million people. This number is projected by some experts to increase to over 500 million by 2025. While insulin-dependant diabetics are thought to have the greatest need for tight diabetic control, evidence is increasing that better control of blood glucose in type 2 diabetics also leads to a reduction in diabetic complications. The Company estimates the global market for a less invasive glucose monitoring system to be a multibillion-dollar market.

TECHNOLOGY

The Company’s principal technologies, biomedical uses for perfluorocarbons and substrate analysis with biosensors, were conceptualized and advanced by Dr. Leland C. Clark, Jr. While his pioneering discoveries in these two areas spawned decades of research worldwide, Dr. Clark has been one of the most prolific contributors and has remained at the forefront of scientific advances in these areas, leading to the Company’s patented perfluorocarbon and biosensor technology platforms.

Perfluorocarbons in Biomedicine

Following an experiment showing that a mouse could live and breathe submerged in oxygen-saturated silicone oil, Dr. Clark showed in 1965 that animals could be kept alive submerged for several hours in oxygen-saturated perfluorocarbon liquids. These experiments suggested that perfluorocarbons might be useful in medicine, principally in liquid breathing and in blood substitutes, and in 1975, Dr. Clark was issued the first patent for an oxygen-carrying, perfluorocarbon-based blood substitute. Although the technology described in this patent was used by the Green Cross Corporation in Japan to develop and obtain FDA approval for Fluosol DA, Dr. Clark recognized that further research would be necessary before safe, effective perfluorocarbons could be identified. Since that time, a principal focus of his and SBI’s subsequent research has been the identification of optimal properties for biomedical perfluorocarbons, and the screening of numerous compounds.

Biosensor Substrate Analysis

In the mid-1950’s, Dr. Clark developed the first oxygen electrode. Ten years later, he applied for a patent describing enzyme-based biosensors that could accurately measure glucose, lactate, and other substrates. By 1974, Yellow Springs Instrument Company had developed and marketed the Clark glucose analyzer based on this technology. In the early 1980’s, Dr. Clark published studies with implanted glucose biosensors, and in the late 1980’s and early 1990’s, was issued several seminal patents on implanted glucose biosensors. Since then, research and development efforts at SBI have focused on optimizing performance and design characteristics of the implanted glucose biosensor.

PRODUCTS

Fluorovent^™

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

Based on laboratory and animal studies thus far, the Company believes that Fluorovent™ has significant competitive advantages as a liquid ventilation treatment. Its boiling point and vapor pressure result in longer pulmonary retention without the need for continuous replacement of evaporated fluid, offering the potential for less costly, less time-intensive

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procedures. It does not contain bromine or chlorine and thus presents no environmental hazard. In animals, it does not produce a hyperinflated, noncollapsible lung condition seen with other perfluorocarbon liquids being tested. There can be no assurance any such advantages will be demonstrated in further animal studies, or in clinical trials, or that it will ever be marketed, sold or generate revenue for the Company.

Oxycyte^™

SBI is developing Oxycyte^™, an oxygen-carrying intravenous emulsion made from the same base perfluorocarbon in Fluorovent^™. Blood gases such as oxygen and carbon dioxide are highly soluble in perfluorocarbons, making Oxycyte^™ an effective means of transporting oxygen to tissues and carbon dioxide to the lungs. In comparison to hemoglobin, the component of blood that binds with and transports oxygen, Oxycyte^™ can offload at least three times more oxygen. Additionally, perfluorocarbons are much more effective than hemoglobin at unloading oxygen at the tissue level. Oxycyte^™ is directed at the blood substitute and oxygen therapeutics markets. There can be no assurance any such advantages will be demonstrated when Oxycyte^™ enters clinical trials during the last half of calendar 2003 or that it will ever be marketed, sold or generate revenue for the Company.

Implanted Glucose Biosensor

SBI has developed an implanted glucose biosensor to monitor blood glucose without the need for finger sticks. Termed a biosensor because it utilizes an enzyme specific for glucose, SBI believes it will provide glucose measurement significantly more accurate than possible from current portable measuring devices. Once implanted in subcutaneous tissue during a simple outpatient procedure, the biosensor provides continuous, accurate monitoring of glucose levels. A radio frequency signal from the implanted biosensor is transmitted to an external receiving device the size of a pager that displays glucose levels as a digital readout, has high and low glucose alarms, and stores data for downloading at the physician’s office. The external device can also be programmed to monitor glucose according to a preset schedule, eliminating the monitoring compliance problem and providing the data necessary for tight glucose control. Ultimately, it is intended the biosensor will be linked to an insulin pump, creating a closed-loop mechanical pancreas. It is anticipated the implant life of the biosensor will exceed one year. There can be no assurance any such advantages will be demonstrated if the biosensor enters clinical trials, or that it will ever be marketed, sold or generate revenue for the Company.

OTHER PRODUCTS

Biosensors

SBI has identified potential new applications for its biosensor technology in the following areas:

There is, however, no assurance that any products for these markets will ever be marketed or generate revenue for the Company.

MARKETING/BUSINESS STRATEGY

Three important elements to the Company’s strategy are:

Minimize Fixed Expenses

The Company’s strategy is to minimize fixed expenses by staffing only as necessary to meet the Company’s goals, minimize fixed expenses, and utilize contract services where possible to assist the Company in its goal to move quickly and maximize the return and progress from invested funds.

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Partnering

SBI intends to partner with global and/or national pharmaceutical and medical device companies to attain additional funding, commercial-scale manufacturing capabilities, and maximum global market penetration for the Company’s products. While major partnerships many times are not consummated until clinical trials are under way, SBI has begun to systematically identify and meet with interested and appropriate candidate companies. The Company has not entered into any partnership arrangements and there can be no assurance it will enter into such arrangements in the future.

Market Entry

A final important element of the Company’s strategy deals with the timing of market entry. The Company’s current product markets—liquid ventilation, blood substitutes, oxygen therapeutics, and implantable biosensors—are new and will require considerable effort and money to develop. If SBI is not the first company to market these products, the Company believes it should benefit from the investment made by the competition, and its future strategy will be to enter established markets and capture market share with superior products that have significant competitive advantages. Additionally, SBI intends to be selective in picking the most appropriate corporate marketing partner for each product.

COMPETITION

Fluorovent^™

SBI is aware of only one other company developing a liquid ventilation product. Alliance Pharmaceuticals, who is also developing PFC based products, completed a Phase III study with their liquid ventilation product (which contains a different PFC than Fluorovent) in adults with ARDS last year. The study failed to meet the primary efficacy endpoints of mortality and days on the ventilator, and Alliance has suspended further liquid ventilation studies.

Oxycyte^™

Six other companies in addition to SBI are believed to be developing oxygen-carrying blood substitutes. Three -Biopure, Hemosol, and Northfield Laboratories—are developing hemoglobin-based products and three—Alliance Pharmaceutical, Sonus and Sanquine—are developing a perfluorocarbon-based product. Sonus has announced it will divest its PFC technology. Alliance, Hemosol, Biopure, and Northfield are in Phase III clinical trials. Clinical development of Alliance’s PFC blood substitute has ceased pending new financing.

Implanted Glucose Sensor

Historically, the critical issues that have confronted the development and commercialization of effective, less-invasive glucose monitoring systems include stable sensor life, accuracy through a wide glucose range, inappropriate biological ratios of oxygen and glucose to optimally drive enzyme biosensors, and biocompatibility. Many research groups and companies have attempted to resolve these problems with varying success.

SBI is aware of over 20 other companies that have or are developing less invasive glucose monitoring systems. Two, Mini-Med and Cygnus, are marketing wearable devices in the U.S. that withdraw and test interstitutial fluid. Mini-Med has recently been acquired by Medtronic for $3.7 billion dollars. Biocontrol Technology is marketing a similar product in Europe with no apparent plans to enter the U.S. market. Two companies are developing devices for hospital or office use. Eight companies are testing interstitutial fluid-directed devices in clinical trials, and two companies are testing completely implanted systems in human studies.

MANUFACTURING AND SOURCES OF SUPPLY

The Company believes it has suitable sources of supply for key ingredients and components, e.g. perfluorocarbons and biosensor materials, for all three products under development. The Company also believes it has, or will be able to

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reach, suitable agreements with appropriate contract manufacturers to implement its strategy for not manufacturing these products internally at commercial scale. The Company is using its best efforts to secure these relationships on a long-term basis. However, there cannot be complete assurance that these relationships can be secured or maintained to the benefit of the Company.

PATENTS/INTELLECTUAL PROPERTY

Perfluorocarbon products:

SBI has four issued U.S. (5,674,913; 5,824,703; 5,840,767; 56,167,887) and two Australian (690,277; 720,712) perfluorocarbon patents that protect the use of perfluorocarbons of interest to the Company as gas transport agents in blood substitutes and liquid ventilation. Additionally, through an exclusive supply agreement with the Company’s perfluorocarbon supplier, SBI benefits from eight perfluorocarbon manufacturing process patents that further protect the perfluorocarbons with which the Company is working.

Biosensor:

The Company has three issued U.S. biosensor patents (5,914,026; 5,964,993 6,343,225) and two Australian biosensor patents (720,712; 734,003) that protect what the Company believes are important design features of the Company’s implanted glucose biosensor and other biosensor applications, both medical and industrial. SBI has also exclusively licensed three fundamental biosensor patents issued to Dr. Clark that have been assigned to Children’s Hospital in Cincinnati.

For all U.S. patents and applications, the Company also submits applications and pursues patents in Europe, Canada, Japan and Australia. There can be no assurance that any issued patents would survive a challenge and be valid and enforceable. Also, there can be no assurance any pending applications will result in issued U.S. or foreign patents. SBI therefore has a number of foreign perfluorocarbon and biosensor patent applications submitted and pending.

GOVERNMENT REGULATION

Regulation by governmental authorities in the United States and other countries is a significant factor in the manufacture and marketing of pharmaceuticals and in the Company’s ongoing research and development activities. With the exception of an industrial biosensor, all of the Company’s products will require regulatory approval by governmental agencies prior to commercialization. In particular, human therapeutic products are subject to rigorous preclinical testing and clinical trials and other pre-marketing approval requirements by the FDA and regulatory authorities in other countries. In the United States, various federal, and in some cases state statutes and regulations also govern the Company’s impact upon the manufacturing, safety, labeling, storage, record-keeping and marketing of such products. The lengthy process of seeking required approvals and the continuing need for compliance with applicable statutes and regulations, require the expenditure of substantial resources. Regulatory approval, when and if obtained, may be limited in scope, which may significantly limit the indicated uses for which a product may be marketed. Further, approved drugs, as well as their manufacturers, are subject to ongoing review, and discovery of previously unknown problems with such products may result in restrictions on their manufacture, sale or use or in their withdrawal from the market.

To obtain FDA approval, the FDA requires clinical trials to demonstrate the safety, efficacy, and potency of the product candidates. Clinical trials are the means by which experimental drugs or treatments are tested in humans. New therapies typically advance from laboratory, research, testing through animal, preclinical testing and finally through several phases of clinical, human testing. Upon successful completion of clinical trials, approval to market the therapy for a particular patient population may be requested from the FDA in the United States and/or its counterparts in other countries.

Clinical trials are normally done in three phases. In Phase I, trials are conducted with a small number of patients or healthy volunteers to determine the safety profile, the pattern of drug distribution and metabolism. In Phase II, trials are conducted with a larger group of patients afflicted with a target disease in order to determine preliminary efficacy and optimal dosages. Phase III trials are large, pivotal safety and efficacy trials.

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Obtaining FDA approval is a costly and time-consuming process. Generally, in order to gain FDA pre-market approval, preclinical studies must be conducted in the laboratory and in animal model systems to gain preliminary information on an agent’s efficacy and to identify any major safety concerns. The results of these studies are submitted as a part of an application for an Investigational New Drug, or IND, which the FDA must review and allow before human clinical trials can start. The IND includes a detailed description of the clinical investigations.

A company must sponsor and file an IND for each proposed product and must conduct clinical studies to demonstrate the safety, efficacy and potency that are necessary to obtain FDA approval. The FDA receives reports on the progress of each phase of clinical testing, and it may require the modification, suspension, or termination of clinical trials if an unwarranted risk is presented to patients.

After completion of clinical trials of a new product, FDA marketing approval must be obtained. If the product is classified as a new drug, a New Drug Application, or NDA, is required. The NDA must include results of product development activities, preclinical studies and clinical trials in addition to detailed manufacturing information. A new Class III medical device such as the implanted glucose monitor requires submission of a Premarket Approval Application, or PMA, which contains similar information.

Applications submitted to the FDA are subject to an unpredictable and potentially prolonged approval process. The FDA may ultimately decide that the application does not satisfy its criteria for approval or require additional preclinical or clinical studies. Before marketing clearance is secured, the manufacturing facility will be inspected for current Good Manufacturing Practices, or GMP, compliance by FDA inspectors. The manufacturing facility must satisfy current GMP requirements prior to marketing clearance. In addition, after marketing clearance is secured, the manufacturing facility will be inspected periodically for GMP compliance by FDA inspectors, and, if the facility is located in California, by inspectors from the Food and Drug Branch of the California Department of Health Services.

The Company is also 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 used in connection with our research. The extent of government regulation which might result from any future legislation or administrative action cannot be accurately predicted.

EMPLOYEES

On April 30, 2003, the Company employed six individuals, three of whom are scientific personnel, two are executives, and one office manager/bookkeeper. None of its employees are currently represented by a union or any other form of collective bargaining unit.

ITEM 2—PROPERTIES

The Company owns no real property and currently leases, on a month to month basis, its principal administrative and laboratory facilities at 3189 Airway Avenue, Building C, Costa Mesa, California 92626. The current rent is approximately $10,700 per month.

ITEM 3—LEGAL PROCEEDINGS

None

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

None

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PART II

ITEM 5—MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Common Stock of the Company is traded on the OTC Electronic Bulletin Board. The over-the-counter quotations set forth below reflect inter-dealer prices, without retail mark-up, mark-down or commissions and may not necessarily represent actual transactions. For the past two fiscal years, the minimum bid and highest ask prices as determined by Company records were as follows:

During the fiscal year ended April 30, 2003, the Company issued 170,000 shares of common stock for legal services rendered. The Company recorded an expense of $30,600, which represents the fair value of the common stock on the date the liability was settled.

During the fiscal year ended April 30, 2003, the Company issued 36,629 shares of common stock for cash proceeds of $367 resulting from the exercise of previously issued warrants. The Company recorded an expense in a previous period for the fair value of the warrants at the date they were issued.

The sale and issuance of each of the transactions referenced above were deemed to be exempt transactions under Section 4(2) of the Securities Act of 1933, as transactions by an issuer not involving any public offering. In each of the referenced transactions appropriate legends were placed on the certificates issued to the purchasers.

During the fiscal year ended April 30, 2003, the Company granted employee incentive stock options under its 1999 Stock Option Plan totaling 490,000 shares with exercise prices ranging from $0.15 to $0.23 per share. The stock options granted had an exercise price equal to the fair market value of the Company’s common stock on the date of grant.

As of April 30, 2003 the approximate number of registered holders of the common stock of the Company was 1,227. To the best knowledge of management, the Company has never paid dividends since the date of its incorporation. The Company does not expect to declare or pay dividends in the foreseeable future.

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ITEM 6—SELECTED FINANCIAL DATA

ITEM 7—MANAGEMENT’S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations is based upon the Company’s financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. On an on-going basis, we evaluate our estimates, including those related to stock-based compensation and contingencies. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following critical accounting policy affects our more significant judgments and estimates used in the preparation of our consolidated financial statements:

Stock-Based Compensation—The Company accounts for stock-based employee compensation as prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees, and, effective April 30, 2003, has adopted Statement of Financial Accounting Standards (“SFAS”) 148, Accounting for Stock-Based Compensation-Transition and Disclosure (“SFAS 148”) that supercedes Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (“SFAS 123”). SFAS 148 requires pro forma disclosures of net income and net income per share as if the fair value based method of accounting for stock-based awards had been applied for both employee and non-employee grants. It also requires disclosure of option status on a more prominent and frequent basis. The Company

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accounts for stock options and warrants issued to non-employees based on the fair value method, but has not elected this treatment for grants to employees and board members. Under the fair value based method, compensation cost is recorded based on the value of the award at the grant date and is recognized over the service period.

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

Long-Lived Assets—The Company’s intangible assets consist of patents related to the Company’s various technologies. These assets are amortized on a straight-line method over their estimated useful life, which ranges from eight to ten years. The Company reviews these intangible assets for impairment on a quarterly basis in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS 144”). At April 30, 2003, management believes no indications of impairment existed.

RESULTS OF OPERATIONS

FISCAL 2003 COMPARED TO FISCAL 2002

The Company is a development-stage company that is developing products in the medical field and therefore has no revenue from operations. Currently all operations relate to the research and development of the Company’s products discussed previously.

For the fiscal year ended April 30, 2003, Other Income decreased to $48,558 from $130,288 in the fiscal year ended April 30, 2002. Other Income consists principally of interest income and rental income. This decrease is attributed to a reduction of the cash available for investment and a decline in the interest rate on invested funds from fiscal 2002 to 2003.

General and Administrative expenses of $840,352 for fiscal year 2003 decreased $1,450,771or 63% over fiscal year 2002 expenses of $2,291,123. This decrease is mainly the result of an expense recorded in 2002 of $1,549,000 for the issuance of stock warrants resulting from the sale of common stock in previous years. General office and operating expenses have remained relatively constant from fiscal 2002 to 2003.

Research and Development expenses increased 9% from $1,313,382 for the fiscal year ended April 30, 2002, to $1,433,040 for the fiscal year ended April 30, 2003. The increase is attributed to increased expenditures for consulting, laboratory supplies and increased depreciation on laboratory equipment. The Company increased expenditures relating to Oxycyte^™ as the product moves toward Phase I clinical trials while decreasing expenditures on its two other developmental products. Because of the nature of the Company’s ongoing research and development activities, accounting periods may reflect significant changes in expenses resulting from the timing of research related to the Company’s three developmental products.

Interest expense decreased to $2,503 for fiscal year ended April 30, 2003 from $13,596 for fiscal year ended April 30, 2002. This decrease resulted from the repayment of the Company’s short-term notes payable during 2003.

FISCAL 2002 COMPARED TO FISCAL 2001

For the fiscal year ended April 30, 2002, Other Income decreased to $130,288 from $331,019 in the fiscal year ended April 30, 2001. Other Income consists principally of interest income on excess cash balances and this decrease is attributed to a reduction of the cash available for investment from fiscal 2001 to 2002.

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General and Administrative expenses of $2,291,123 for fiscal year 2002 increased $1,071,271 or 88% over fiscal year 2001 expenses of $1,219,852. This increase is mainly the result of $1,549,000 of expense recognized from the issuance of stock warrants resulting from the sale of common stock in previous years. General office and operating expenses have remained fairly constant form fiscal 2001 to 2002.

Research and Development expenses increased 68% from $782,339 for the fiscal year ended April 30, 2001, to $1,313,382 for the fiscal year ended April 30, 2002. The Company has substantially increased its research and development activities as the result of cash made available from capital investment in previous years. The increased expenditures were made principally in research wages and consulting services. Interest expense increased to $13,596 in fiscal year ended April 30, 2002 from $1,070 for fiscal year ended April 30, 2001. This increase resulted from the Company’s financing of purchased research equipment through short-term notes payable.

QUARTERLY RESULTS OF OPERATIONS

The following table presents the Company’s operating results for each of the eight fiscal quarters in the period ended April 30, 2003. The information for each of these quarters is unaudited and has been prepared on the same basis as the audited financial statements included in this Form 10-K. In the opinion of management, all necessary adjustments, which consist only of normal and recurring accruals, have been included to fairly present the unaudited quarterly results. This data should be read together with the financial statements and the notes thereto included in this Form 10-K.

STATEMENTS OF OPERATIONS DATA

LIQUIDITY AND CAPITAL RESOURCES

The Company has financed its operations since September 1990, when current management became involved, through the issuance of debt and equity securities and loans from stockholders. As of April 30, 2003 the Company had $251,402 in total current assets and working capital of $236,869, compared to $2,531,552 in total current assets and working capital of $2,352,474 as of April 30, 2002.

During the year ended April 30, 2003, the Company had a net decrease in cash and cash equivalents of $2,263,573, of which $2,093,762 was used in operations, $64,609 was used for investing activities, primarily for the purchase of

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additional laboratory equipment and additional patent expenditures, and $105,202 was used for financing activities, primarily the payment of notes payable. The Company does not have any lines of credit or other arrangements with lenders.

Subsequent to April 30, 2003 and through June 30, 2003, as part of an anticipated $2,000,000 common stock placement, the Company received $900,000 in deposits for the purchase of common stock to be issued subsequent to April 30, 2003 at a price of $0.08 per share. In connection with this transaction, the placement agent will receive 8,500,000 stock warrants for the purchase of common stock at an average exercise price of $0.22 per share, a one year extension of existing stock warrants for the purchase of 2,000,000 shares of common stock with an exercise price of $0.20 per share and a 5% cash finders fee. Management believes that this additional cash raised from this offering will be sufficient to fund current operations for approximately 1 year.

The Company is in the pre-clinical trial stage in the development of its products. These products must undergo further development and testing prior to submission to the FDA for approval to market its products. This additional development and testing will require significant additional financing. There can be no assurance these proposed funding arrangements will be successful, or that if they are not the Company will be able to secure additional capital.

RISK FACTORS

You should carefully consider the risks described below together with all of the other information included in this report on Form 10-K. An investment in the Company’s common stock is very risky. If any of the following risks actually occur, our business, financial condition or results of operations could be harmed. In such an event, the trading price of the Company’s common stock could decline, and you may lose part or all of your investment.

The Company expects to incur losses for the foreseeable future and may never achieve profitability.

The Company has incurred net losses since the business was revised in 1990 to develop a line of blood substitutes. Net losses were ($1,672,242) in 2001, ($3,487,813) in 2002 and $(2,227,337) in 2003. As of April 30, 2003, the Company had working capital of $236,869 and its accumulated deficit was ($18,700,730). Cash on hand at April 30, 2003 was $178,442 and, although the Company received additional cash subsequent to April 30, 2003 and through June 30, 2003 of $900,000 as part of an anticipated $2,000,000 common stock placement, the Company believes this additional cash is sufficient to fund current operations for only 1 year.

The Company expects to incur substantial and increasing losses for the foreseeable future as a result of increases in research and development costs, including costs associated with conducting preclinical testing and clinical trials. It is expected that the amount of operating losses will fluctuate significantly from quarter to quarter as a result of increases or decreases in research and development efforts, the initiation, success or failure of clinical trials, or other factors.

Chances for achieving profitability will depend on numerous factors, including success in:

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Many of these factors will depend on circumstances beyond the Company’s control. The Company expects to rely heavily on third parties with respect to many aspects of its business, including research and development, clinical testing, manufacturing and marketing. It cannot be assured the Company will ever become profitable.

The Company’s Independent Certified Public Accountants have concluded there is substantial doubt as to the Company’s ability to continue as a going concern for a reasonable period if time, and have, therefore, modified their report in the form of an explanatory paragraph describing the events that have given rise to this uncertainty.

The Company needs substantial additional financing to complete development and introduce products.

The costs to complete preclinical tests and to begin and complete the Company’s proposed clinical trials are very high. It is expected existing capital resources will satisfy capital requirements through approximately April 2003. However, substantial additional financing will be needed to begin and continue clinical trials on its products. Other than the anticipated $2,000,000 common stock placement, of which $900,000 has been received subsequent to April 30, 2003, there are currently no other commitments for any additional financing. The anticipated $2,000,000 common stock sale will have a dilutive effect on existing shareholders. Any additional equity financing may be dilutive to stockholders, and debt financing, if available, may include restrictive covenants and there can be no assurance additional financing will be received. Future capital requirements will depend on many factors, including:

If adequate funds are not available, the Company may be required to curtail operations or to cease operations. The amount of additional financing required cannot be estimated, however it will be substantial.

If the Company is unable to develop and successfully commercialize its product candidates, it may never generate significant revenues or become profitable.

The Company must successfully complete preclinical tests on product candidates before applying for or beginning clinical trials on any of the product candidates. To date, Oxycyte^™ is the only product that has been approved for clinical trials, which are expected to begin in the last half of calendar 2003. The Company has not commercialized any products or recognized any revenue from product sales. It will require significant additional investment in research and development, preclinical testing and clinical trials, regulatory approval, and sales and marketing activities. Product candidates, if successfully developed, may not generate sufficient or sustainable revenues to enable the Company to be profitable.

The Company must overcome significant obstacles to successfully develop or market product candidates.

The development of product candidates is subject to the significant risks of failure which are inherent in the development of new pharmaceutical products and products based on new technologies. These risks include:

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Research and development efforts may not result in any commercially viable products if those risks materialize.

Commercialization of products depends on collaborations with others. If the Company is unable to find collaborators in the future, it may not be able to develop products.

The Company’s strategy for the research, development and commercialization of products requires it to enter into contractual arrangements with corporate collaborators, licensors, licensees and others. The Company does not have the funds to develop products and intends to depend on collaborators to develop products. Currently there are no contractual arrangements with any corporate collaborators, licensors, licensees or others to develop products. Even if collaborative partners are found, it may not be possible to completely control the amount and timing of resources future collaborative partners will devote to products. The Company intends to seek collaborative arrangements for Oxycyte, Fluorovent and its implantable glucose biosensor to help cover the cost of development; however, there is no assurance this will be successful. If collaborative relationships or other sources of financing cannot be found, the Company may not be able to continue development programs and may be forced to sell assets, including technology, to raise capital.

Dependence on collaborative arrangements with third parties subjects the Company to a number of risks. These future collaborative arrangements may not be on terms favorable to the Company. Agreements with collaborative partners typically allow partners significant discretion in electing whether to pursue any of the planned activities. The Company cannot control the amount and timing of resources collaborative partners may devote to the product candidates, and partners may choose to pursue alternative products. Partners may not perform their obligations as expected. Business combinations or significant changes in a collaborative partner’s business strategy may adversely affect a partner’s willingness or ability to complete its obligations under the arrangement. Moreover, the Company could become involved in disputes with partners, which could lead to delays or termination of development programs with them and time-consuming and expensive litigation or arbitration. Even if the Company fulfills its obligations under a collaborative agreement, a partner can terminate the agreement under certain circumstances. If any collaborative partner were to terminate or breach an agreement with it, or otherwise fail to complete its obligations in a timely manner, chances of successfully commercializing products would be materially and adversely affected.

If clinical trials for the Company’s products are unsuccessful or delayed, the stock price may decline.

The Company must demonstrate first through preclinical testing and then through clinical trials that its product candidates are safe and effective for use in humans before it obtains regulatory approvals for the commercial sale of any products. The Company has completed preclinical testing only on Oxycyte^™. None of the Company’s other products have completed preclinical trials. Conducting clinical trials is a lengthy, time-consuming and expensive process.

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If there is progress to beginning clinical trials, completion of clinical trials may take several years or more. The start of and rate of completion of clinical trials may be delayed by many factors, including:

The results from preclinical testing and early clinical trials are often not predictive of results obtained in later clinical trials. A number of new drugs have shown promising results in clinical trials, but subsequently failed to establish sufficient safety and efficacy data to obtain necessary regulatory approvals. Data obtained from preclinical and clinical activities are susceptible to varying interpretations, which may delay, limit or prevent regulatory approval. In addition, regulatory delays or rejections may be encountered as a result of many factors, including perceived defects in the design of clinical trials and changes in regulatory policy during the period of product development.

The Company has submitted an investigational new drug application to commence clinical trials for Oxycyte^™ and expects to conduct a Phase I clinical trials in the last half of calendar 2003. The Company’s other product candidates are in preclinical development and the Company has not submitted investigational new drug applications to commence clinical trials involving these products. Preclinical development efforts may not be successfully completed and the Company may not file any further investigational new drug applications. If there is progress to clinical trials, any delays in, or termination of, clinical trials will materially and adversely affect development and commercialization timelines, which would cause the stock price to decline. Any of these events would also seriously impede the ability to obtain additional financing.

If future third party clinical trial managers do not perform, clinical trials for product candidates may be delayed or unsuccessful.

The Company has no experience in conducting and managing clinical trials. The Company intends to rely on third parties, including future collaborative partners, clinical research organizations and outside consultants, to assist in managing and monitoring future clinical trials. Reliance on these third parties may result in delays in completing, or failing to complete, these trials if they fail to perform under the terms of agreements with them.

If the Company’s products are not accepted by the market, it is not likely to generate significant revenues or become profitable.

Even if the Company obtains regulatory approval to market a product, products may not gain market acceptance among physicians, patients, healthcare payors and the medical community. The degree of market acceptance of any pharmaceutical product that is developed will depend on a number of factors, including:

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Physicians will not recommend therapies using products until clinical data or other factors demonstrate their safety and efficacy as compared to other drugs or treatments. Even if the clinical safety and efficacy of therapies using products is established, physicians may elect not to recommend the therapies for any number of other reasons, including whether the mode of administration of products is effective for certain indications. Physicians, patients, third-party payors and the medical community may not accept and utilize any product candidates that the Company or its future collaborative partners, if any, develop. If products do not achieve significant market acceptance, the Company is not likely to generate significant revenues or become profitable.

If the Company is unable to attract and retain key employees and consultants, it will be unable to develop and commercialize products.

The Company is highly dependent on the principal members of its scientific and management staff. In order to pursue product development, marketing and commercialization plans, the Company will need to hire personnel with experience in clinical testing, government regulation, manufacturing, marketing and finance. The Company may not be able to attract and retain personnel on acceptable terms given the intense competition for such personnel among high technology enterprises, including biotechnology, pharmaceutical and healthcare companies, universities and non-profit research institutions. Most of the Company’s scientific and management staff does not have employment contracts. If the Company loses any of these persons, or is unable to attract and retain qualified personnel, business, financial condition and results of operations may be materially and adversely affected.

If the Company fails to enter into successful marketing arrangements with third parties, it would not be able to commercialize products and it would not become profitable.

The Company currently has no sales and marketing infrastructure and has no experience in marketing, sales and distribution. Future profitability will depend in part on plans to enter into successful marketing arrangements with third parties. To the extent that the Company enters into marketing and sales arrangements with other companies, revenues will depend on the efforts of others. These efforts may not be successful. If the Company is unable to enter into third-party arrangements, it may not be able to commercialize its products.

If the Company does not compete successfully in the development and commercialization of products and keep pace with rapid technological change, it will be unable to capture and sustain a meaningful market position.

The biotechnology and pharmaceutical industries are highly competitive and subject to significant and rapid technological change. The Company is aware of several pharmaceutical and biotechnology companies that are actively engaged in research and development in areas related to the Company’s products. Most of these companies have commenced clinical trials. Many of these companies are addressing the same diseases and disease indications.

Many of these companies and institutions, either alone or together with their collaborative partners, have substantially greater financial resources and larger research and development staffs. In addition, many of these competitors, either alone or together with their collaborative partners, have significantly greater experience in:

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Developments by others may render the Company’s product candidates or technologies obsolete or noncompetitive. The Company faces and will continue to face intense competition from other companies for collaborative arrangements with pharmaceutical and biotechnology companies for establishing relationships with academic and research institutions and for licenses of proprietary technology. These competitors, either alone or with their collaborative partners, may succeed in developing technologies or products that are more effective than those the Company has.

If the Company’s intellectual property does not adequately protect product candidates, others could compete more directly against the Company, which would hurt profitability.

Success depends in part on the Company’s ability to:

The Company will be able to protect proprietary rights from unauthorized use by third parties only to the extent that proprietary rights are covered by valid and enforceable patents or are effectively maintained as trade secrets. The patent position of biopharmaceutical companies involves complex legal and factual questions and, therefore, enforceability cannot be predicted with certainty. Patents, if issued, may be challenged, invalidated or circumvented. Thus, any patents that are owned or licensed from third parties may not provide any protection against competitors. Pending patent applications, those that the Company may file in the future, or those that may be licensed from third parties, may not result in patents being issued. Also, patent rights may not provide adequate proprietary protection or competitive advantages against competitors with similar technologies. The laws of certain foreign countries do not protect intellectual property rights to the same extent as do the laws of the United States.

In addition to patents, the Company relies on trade secrets and proprietary know-how. Protection is sought, in part, through confidentiality and proprietary information agreements. These agreements may not provide meaningful protection or adequate remedies for technology in the event of unauthorized use or disclosure of confidential and proprietary information. Failure to protect proprietary rights could seriously impair the Company’s competitive position.

If third parties claim the Company is infringing their intellectual property rights, it could suffer significant litigation or licensing expenses or be prevented from marketing its products.

The areas in which the Company has focused research and development have a number of competitors. This has resulted in a number of issued patents and still-pending patent applications. Patent applications in the United States are, in most cases, maintained in secrecy until patent issue. The publication of discoveries in the scientific or patent literature frequently occurs substantially later than the date on which the underlying discoveries were made. Commercial success depends significantly on the Company’s ability to operate without infringing the patents and other proprietary rights of third parties. The Company’s technologies may infringe the patents or violate other proprietary rights of third parties. In the event of such infringement or violation, the Company may be prevented from pursuing product development or commercialization.

The biotechnology and pharmaceutical industries have been characterized by extensive litigation regarding patents and other intellectual property rights. The defense and prosecution of intellectual property suits, U.S. Patent and Trademark Office interference proceedings and related legal and administrative proceedings in the United States and internationally involve complex legal and factual questions. As a result, such proceedings are costly and time-consuming to pursue and their outcome is uncertain. Litigation may be necessary to:

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If the Company became involved in any litigation, interference or other administrative proceedings, it will incur substantial expense and the efforts of technical and management personnel will be significantly diverted. An adverse determination may subject the Company to loss of proprietary position or to significant liabilities, or require licenses that may not be available from third parties. The Company may be restricted or prevented from manufacturing and selling products, if any, in the event of an adverse determination in a judicial or administrative proceeding or if we fail to obtain necessary licenses. Costs associated with these arrangements may be substantial and may include ongoing royalties. Furthermore, the necessary licenses may not be obtained on satisfactory terms, if at all.

If the government and third party payors fail to provide adequate coverage and reimbursement rates for product candidates, the market acceptance of products may be adversely affected.

In both domestic and foreign markets, sales of product candidates will depend in part upon the availability of reimbursement from third-party payors. Such third-party payors include government health administration authorities, managed care providers, private health insurers and other organizations. These third-party payors are increasingly challenging the price and examining the cost effectiveness of medical products and services. In addition, significant uncertainty exists as to the reimbursement status of newly approved healthcare products. The Company may need to conduct post-marketing studies in order to demonstrate the cost-effectiveness of products. Such studies may require the commitment of a significant amount of management time and financial and other resources. Product candidates may not be considered cost-effective. Adequate third-party reimbursement may not be available to maintain price levels sufficient to realize an appropriate return on investment in product development. Domestic and foreign governments continue to propose and pass legislation designed to reduce the cost of healthcare. Accordingly, legislation and regulations affecting the pricing of pharmaceuticals may change before proposed products are approved for marketing. Adoption of such legislation could further limit reimbursement for pharmaceuticals.

If a successful product liability claim or series of claims is brought against the Company for uninsured liabilities or in excess of insured liabilities, it could be forced to pay substantial damage awards.

The use of any of product candidates in clinical trials, and the sale of any approved products, may expose the Company to liability claims and financial losses resulting from the use or sale of our products. Although it is intended that insurance coverage will be obtained before the Company begins clinical trials, currently there is no liability insurance. The Company intends to obtain insurance coverage to include the sale of commercial products if marketing approval is obtained for product candidates in development. Insurance coverage may not be able to be maintained at a reasonable cost or in sufficient amounts or scope to protect against losses.

If the Company fails to manage growth, business could be harmed.

The business plan contemplates a period of substantial growth if clinical trials begin on one or more products and the Company develops other products that will place a strain on administrative and operational infrastructure. Management infrastructure has been very limited. The ability to manage effectively its operations and growth requires the Company to expand and improve operational, financial and management controls, reporting systems and procedures and to attract and retain sufficient numbers of talented employees. The Company may not successfully implement improvements to management information and control systems in an efficient or timely manner and may discover deficiencies in existing systems and controls.

If use of hazardous materials results in contamination or injury, the Company could suffer significant financial loss.

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Research and manufacturing activities involve the controlled use of hazardous materials. The Company cannot eliminate the risk of accidental contamination or injury from these materials. In the event of an accident or environmental discharge, the Company may be held liable for any resulting damages, which may exceed available financial resources.

The Company’s stock price could continue to be highly volatile and investors may not be able to resell shares at or above the price paid for them.

The market price of the Company’s common stock, like that of many other life sciences companies, has been highly volatile and is likely to continue to be highly volatile. The following factors, among others, could have a significant impact on the market price of the common stock:

ITEM 8—FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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

None

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

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

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DIRECTORS AND EXECUTIVE OFFICERS

Howard Jones, Ph.D., is Chairman of the Board of Directors. Dr. Jones’ most recent position was president of the biopharmaceutical business unit of Curative Health Services where he was responsible for R&D, licensing, and manufacturing of wound healing technology that incorporates growth factors from patient blood. He has more than 30 years of experience in directing research and development of drugs at Revlon, Bristol-Myers Squibb, Amylin Pharmaceuticals, and Cypros Pharmaceuticals, a company he co-founded. He started his career at Merck where he discovered Clinoril, a drug for the treatment of rheumatoid arthritis that has annual sales of $400,000,000. He has had more than 84 patents issued for his biopharmaceutical developments.

Roger A. Ekbom is Vice Chairman of the Board of Directors. Mr. Ekbom was Chief Executive Officer from 1991 to March 1998 and has extensive experience with medical device companies including managing companies from startup through full development and subsequent sales. He is the founder and former President of Cardio Vista Systems, Inc., and founder and Chairman of Tronomed, Inc. From 1976 until 1993, Mr. Ekbom was the Vice President of and a major stockholder in Respiratory Support Products, Inc. and Tronomed International, Inc. Mr. Ekbom was formerly the general manager of a division of Becton Dickinson, an international medical device company, and of Marion Scientific, a subsidiary of Marion Laboratories. Mr. Ekbom graduated from the University of Minnesota.

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

David H. Johnson, CPA, is Chief Financial Officer. Mr. Johnson has over 25 years of financial and administrative management experience, including President and Chief Financial Officer of FirstPlus Bank. Previously Mr. Johnson was a regional partner at McGladrey and Pullen, a major public accounting firm. Mr. Johnson has a BA in accounting and is a certified public accountant.

KEY EMPLOYEES AND CONSULTANTS

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

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

James Kelly, management and financial advisor to the CEO. Mr. Kelly has more than 30 years of senior management experience in the healthcare industry including Becton Dickenson. Ha has managed 20 operating companies, and has initiated start-ups and negotiated acquisitions, joint ventures, licensing agreements, divestitures, and liquidations. He has

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also secured private and public financing for several businesses. He has served on the Boards of public and private companies, and has been a member of the American Management Association’s General Management Council for Growing Businesses.

Robert Kaufman, Ph.D., scientific and management consultant. Dr. Kaufman, who holds a Ph.D. in chemistry, currently is the founder and President of Gateway Chemical Technology, a custom chemical development and manufacturing company. Previously, he was founding Vice President, R&D and then President of Hemagen where he was responsible for development and testing of their perfluorocarbon based blood substitute.

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

Anthony Fox, MD, Ph.D., consulting clinical pharmacologist. Dr. Fox currently is President of the consulting firm EBD Group. Dr. Fox previously held senior positions with Cypros Pharmaceuticals, Glaxo, Inc., and Procter and Gamble Pharmaceuticals.

The Company currently contracts or utilizes 7 scientific consultants, most with Ph.D. or MD degrees. Four previously held senior positions at competing blood substitute companies.

ITEM 11—EXECUTIVE COMPENSATION

The following table provides certain summary information concerning compensation earned for services rendered in all capacities to the Company for the fiscal years ended April 30, 2003, 2002 and 2001, by the other most highly compensated executive officers of the Company (“Named Executive Officers”). This information includes the dollar amount of base salaries, bonus awards, stock options and all other compensation, if any, whether paid or deferred.

SUMMARY COMPENSATION TABLE

OPTION GRANTS

The Company adopted a stock option plan in October 1999, which was ratified by a vote of the shareholders during fiscal year ended April 30, 2001. The 1999 plan provides for the granting of incentive and non-qualified options to officers, directors, consultants and key employees to purchase up to 4,000,000 shares of the Company’s common stock at

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prices not less than the fair market value of the stock at the date of grant for incentive options. The option expiration dates are determined at the date of grant, but may not exceed ten years. The total number of options issued under the Plan at April 30, 2003 were 2,085,000 with a weighted average exercise price of $0.24.

In addition, the Company has issued options outside the Plan. At April 30, 2003 the total non-qualified options outstanding were 2,450,000 with a weighted average exercise price of $0.14.

The following table summarizes certain information as of April 30, 2003 concerning the stock option grants to the Company’s Chief Executive Officer and the other Named Executive Officers made for the fiscal year ended April 30, 2003. No stock appreciation rights, restricted stock awards or long-term performance awards have been granted as of the date hereof and no options have been exercised.

Option Grants in Last Fiscal Year

Aggregate Options Exercised in Last Fiscal Year and Year End Option Values

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DEFINED BENEFIT AND ACTUARIAL PLANS

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

COMPENSATION OF DIRECTORS

The Company currently has two outside members of the board of directors. Each Board member received compensation of $12,000 for fiscal year 2003.

EMPLOYMENT CONTRACTS

During March 2002, the Board of Directors approved a three-year employment contract with Robert W. Nicora, as President and Chief Executive Officer. Mr. Nicora’s base annual salary is $180,000 per year with minimum 5% annual increases and includes an automobile allowance, medical and dental coverage, participation in the Executive Bonus Plan, $500,000 life insurance payable by the corporation and payable to a beneficiary named by the insured, and participation in the Company’s stock option plan with the grant of 150,000 options annually. At the end of the contract, Mr. Nicora’s contract will renew automatically annually unless terminated by either party. Mr. Nicora’s employment agreement provides that he may, at his election, receive a severance payment equal to 299% of his average annual salary and bonuses received during the prior two-year period in the event of a change in control as defined.

On February 1, 2000 the Board of Directors approved a two-year employment contract with Richard Kiral, as Vice President of Product Development. Mr. Kiral’s base annual salary is $148,000 per year and includes an automobile allowance, medical and dental coverage, participation in the Executive Bonus Plan, $200,000 life insurance payable by the corporation and payable to a beneficiary named by the insured, and participation in the Company’s stock option plan with the grant of an option for 100,000 shares annually. The contract will renew automatically annually unless terminated by either party. Mr. Kiral’s employment agreement provides that he is to a minimum severance payment equal to 9 months of his annual salary period in the event of a change in control as defined.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION DECISIONS

The Company does not presently have a Compensation Committee of the Board of Directors, or other Board Committees performing equivalent functions, and did not at any time during the last four years. The Board of Directors presently performs these functions and participated in deliberations concerning executive officer compensation during the last fiscal year. None of the Company’s executive officers serves as a member of the board of directors or compensation committee of any entity that has one or more of its executive officers serving as a member of the Company’s Board of Directors or Compensation Committee.

ITEM 12—SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following tables sets forth as of April 30, 2003 the stock ownership of all persons who, to the registrants knowledge, own of record and beneficially five (5%) percent or more of its outstanding Common Stock, and for the officers and directors as a group.

MANAGEMENT OWNERS

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ITEM 13—CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

During fiscal 2002 and 2001, the Company recorded expenses of approximately $9,000 and $12,400, respectively, for services provided by a company in which an officer of the Company had a controlling interest. There were no related party transactions in fiscal 2003.

ITEM 14—EVALUATION OF CONTROLS AND PROCEDURES

Our management is responsible for maintaining effective disclosure controls and procedures. Within the 90-day period prior to the date of this report, we evaluated the effectiveness and operation of our disclosure controls and procedures pursuant to Rule 13a-14 of the Securities Exchange Act of 1934. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective. There have been no significant changes in internal controls or other factors that could significantly affect internal controls subsequent to the date we carried out our evaluation.

PART IV

ITEM 15—EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

A. Documents Filed as a Part of This Report:

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None

INDEX TO EXHIBITS

26

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

Dated: 7/15/03

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

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Financial Statements and Report of

Independent Certified Public Accountants

SYNTHETIC BLOOD INTERNATIONAL, INC.

(A Development Stage Enterprise)

April 30, 2003 and 2002

F-1

C O N T E N T S

F-2

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors

Synthetic Blood International, Inc.

We have audited the accompanying balance sheets of Synthetic Blood International, Inc. (a Company in the development stage) as of April 30, 2003 and 2002, and the related statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended April 30, 2003 and for the period from inception (May 26, 1967) to April 30, 2003. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit 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 Synthetic Blood International, Inc. as of April 30, 2003 and 2002, and the results of its operations and its cash flows for each of the three years in the period ended April 30, 2003 and for the period from inception (May 26, 1967) to April 30, 2003, 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. The Company is a development stage enterprise engaged in developing certain medical products. The Company has accumulated deficit during the development stage of $18,700,730 as of April 30, 2003, and has used cash in operations of $2,093,762 during the year ended April 30, 2003. The Company will require substantial additional financing to fund operations until the necessary regulatory approvals are obtained, if ever. These factors, among others as described in Note A, raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans concerning these matters are described in Note A. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

F-3

SYNTHETIC BLOOD INTERNATIONAL, INC.

(A Development Stage Enterprise)

BALANCE SHEETS

April 30,

ASSETS

The accompanying notes are an integral part of these financial statements.

F-4

SYNTHETIC BLOOD INTERNATIONAL, INC.

(A Development Stage Enterprise)

BALANCE SHEETS—CONTINUED

April 30,

LIABILITIES AND STOCKHOLDERS’ EQUITY

The accompanying notes are an integral part of these financial statements.

F-5

SYNTHETIC BLOOD INTERNATIONAL, INC.

(A Development Stage Enterprise)

STATEMENTS OF OPERATIONS

For Each of the Three Years in the Period ended April 30, 2003 and For the Period

May 26, 1967 (Date of Inception) to April 30, 2003

The accompanying notes are an integral part of these financial statements.

F-6

SYNTHETIC BLOOD INTERNATIONAL, INC.

(A Development Stage Enterprise)

STATEMENT OF STOCKHOLDERS’ EQUITY

For the Three Years Ended April 30, 2003 and for the Period

May 26, 1967 (Date of Inception) to April 30, 2003

The accompanying notes are an integral part of these financial statements.

F-7

SYNTHETIC BLOOD INTERNATIONAL, INC.

(A Development Stage Enterprise)

STATEMENT OF STOCKHOLDERS’ EQUITY—CONTINUED

For the Three Years Ended April 30, 2003 and for the Period

May 26, 1967 (Date of Inception) to April 30, 2003