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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