Summary of HEMOBIOTECH, INC.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

PLAN OF OPERATIONS

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

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

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

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

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

We believe our available cash and cash generated through the sale of our Private Placement will be sufficient to complete our immediate planned operations. While the Company has been able to obtain such funding in the past, there can be no assurance that they will be able to do so in the future. Management's plans include continuing to finance operations through one or more private or public offerings of equity securities and monitoring and reducing discretionary expenditures.

RECENT DEVELOPMENTS

(1) NEW TECHNOLOGY:

On May 5, 2008 the Company agreed to license certain technology from TTUHSC titled Orthogonal Method for the Removal of Transmissible Spongiform Encephalopathy Agents from Biological Fluids ("TSE Technology"). This is a technology that results in the removal and inactivation of infectious agents such as prions (which can cause Mad Cow Disease) and viruses. Such removal and inactivation is critical in the purification of animal products for human use. It can be used not only for HemoTech production but also has the potential for generating sublicensing revenue from pharmaceutical, biotechnology and the cosmetic industries. The term of the agreement extends to the full end of the term or terms for which patent rights have not expired or, if only technology rights are licensed and no patent rights are applicable, for a term of 15 years. The license agreement calls for a nonrefundable license documentation fee of $10,000 and 500,000 shares of the Company's common stock. The price per share of the Company's common stock on May 5, 2008 was $1.29 per share. Accordingly, the Company recorded a charge to research and development expense for $655,000. The agreement also contains an annual renewal fee of $10,000 per year and a royalty based on net sales of Licensed Products (as defined by the agreement) sold by the Company that contain the patented TSE Technology. The royalty percentage will be lower if Licensed Products are not protected by a valid patent. The agreement calls for a minimum royalty beginning six months after approval of a Licensed Product by the FDA. No royalty applies to the embedded TSE Technology in the sale of our HemoTech product. The Company is permitted to sublicense the TSE Technology and TTUHSC will receive a portion of both cash and non cash remuneration received by the Company for a sublicense. Additionally, the Company will pay a portion of any royalty received to TTUHSC.

The Company has also agreed to issue up to 275,000 additional shares of the Company's common stock in the event TTUHSC purchases certain equipment used in the HemoTech process. The equipment will be owned by TTUHSC, which will be used to further the development of HemoTech, among other possible research uses and will be charged to research and development expense when purchased. As of June 30, 2008, no such equipment has been purchased by TTUHSC.

The agreement may be terminated by either party by mutual written agreement upon 180 days notice, or by TTUHSC based on certain provisions relating to defaults according to the agreement.

(2) PRIVATE PLACEMENT:

Beginning December, 2007 through June 30, 2008, we completed a portion of our private placement of 1,183,904 units (the "Units"), each consisting of one share of our common stock (our "Common Stock") and one warrant to purchase our Common Stock (a "Warrant"), resulting in gross proceeds of $1,326,000 based on a per-Unit price of $1.12. The Warrants have an initial exercise price of $1.68. The Warrants may be redeemed in whole or in part by us, upon 30 days' written notice, at a price of $.01 per Warrant share, provided the weighted average closing price of our Common Stock exceeds 185% of the per-Unit purchase price for a period of 20 consecutive trading days ending within 15 days prior to the date on which the notice of redemption is given, and the registration statement for underlying shares is effective. Net of expenses, primarily to our financial advisor, we received net proceeds from this private placement of $1,098,000, which will be used for research and development activities, licensing and other general working capital purposes. In addition, 355,171 Warrants were issued to our placement agent with essentially the same terms as our investor Warrants; however, these Warrants are only callable when we provide a notice of redemption and a registration statement for the underlying shares is effective (see Note G(3) to the Condensed Financial Statements).

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

RESEARCH AND DEVELOPMENT OF HEMOTECH

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

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

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

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

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

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

· approximately $1.4 million for the production of HemoTech;

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

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

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

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

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

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

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

· further production of HemoTech;

· further testing of HemoTech and related activities;

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

RESULTS OF OPERATIONS

We are a development stage company and have not generated any revenue from inception through June 30, 2008. To date, our efforts have been principally devoted to evaluating the HemoTech technology, negotiating and entering into our license agreement and Sponsored Research Agreements with TTUHSC, hiring employees and consultants, establishing our Board of Advisors, raising capital, and engaging in other organizational and infrastructure development. In addition, during 2007 the Company upgraded the production facility at Texas Tech University and maintained an animal donor facility. During 2007 we began implementing a global strategy to include submission of technical information to the Drug Controller General of India ("DCGI"). We submitted this information in early April 2008 for the purpose of obtaining regulatory authority to conduct clinical trials in India.

Total expenses, and thus our losses, totaled $14,272,000 from October 3, 2001 (inception) through June 30, 2008.

THREE MONTHS ENDED JUNE 30, 2008 COMPARED TO THREE MONTHS ENDED JUNE 30, 2007

Total expenses, and thus our losses, for the three months ended June 30, 2008, were $1,674,000 compared with $882,000 for the same period a year ago resulting from significantly higher research and development and general and administrative costs.

Research and Development expenses were $1,098,000 for the 2008 period, an increase of $787,000 compared with the same period in 2007, resulting from the acquisition of a new TSE technology that results in the removal and inactivation of infectious agents (which can cause Mad Cow disease) and viruses valued at $655,000 (See also Note D of the Company's Notes to Condensed Financial Statements); and from higher costs paid to outside laboratories and consultants. Charges related to the Sponsored Research Agreement with TTUHSC were higher in the current period resulting from increased spending related to laboratory upgrades and costs associated with outside laboratory testing.

General and Administrative costs were $584,000 for the three months ended June 30, 2008, essentially flat compared with the same period in the prior year. In the current year, we incurred higher non-cash stock based compensation to our employees and directors and higher investor relations costs compared with the prior year. These were offset by lower costs related to our financial services agreement in the current period compared to the same period a year ago resulting from the number of shares issued to the financial advisor being somewhat lower than the previously estimated number of shares.

Interest income decreased in the 2008 period due to lower cash balances. Higher cash balances during the 2007 period resulted from the holders of our Class A Warrants exercising their warrants in 2006.

SIX MONTHS ENDED JUNE 30, 2008 COMPARED TO SIX MONTHS ENDED JUNE 30, 2007

Total expenses, and thus our losses, for the six months ended June 30, 2008, were $2,411,000 compared with $1,710,000 for the same period a year ago resulting from significantly higher research and development costs.

Research and Development expenses were $1,330,000 for the 2008 period, increasing $852,000 from the $478,000 in the same period in 2007 resulting from the acquisition of a new TSE technology that removes and inactivates infectious agents (which can cause Mad Cow disease) and viruses valued at $655,000 (See also Note D of the Company's Notes to Condensed Financial Statements); and from higher costs paid to outside laboratories and consultants. Spending related to the Stage IV Sponsored Research Agreement with Texas Tech Health Sciences Center was higher in the current period compared to the same period a year ago due to increased spending related to laboratory upgrades and costs associated with outside laboratory testing.

General and Administrative costs were $1,107,000 for the six months ended June 30, 2008, a decrease of $192,000 from the prior year. Higher professional fees and investor relations costs were more than offset by significantly lower stock based costs related to our financial services agreement. The costs related to our financial services agreement were $61,000 for the current period compared to $414,000 in the prior year resulting from the actual number of shares issued to the financial advisor (221,000 shares as of June 30, 2008) being somewhat lower than the previously estimated number of shares.

LIQUIDITY AND CAPITAL RESOURCES

During the six months ended June 30, 2008, net cash used in operating activities of $1,305,000 compared to $1,735,000 in the same period during 2007. During January, 2007 the company paid TTUHSC approximately $780,000 as an initial payment for its Stage IV Sponsored Research Agreement. At June 30, 2008, approximately $191,000 of the TTUHSC 2007 payment is included in prepaid expenses on our Balance Sheet. During May 2008, the Company purchased the TSE technology from TTUHSC at a cost of 500,000 shares of the Company's common stock valued at $1.29 per share and a $10,000 cash cost, a total of $655,000.

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

During 2008 the Company closed on a portion of our Private Placement offering that was initiated during December, 2007. The Company received gross proceeds from investors of $534,000 during 2008 and after financing costs the Company received net proceeds of $412,000.

We believe our cash available of $1,122,000 at June 30, 2008 and the cash generated by our Private Placement offering will be sufficient to fund our current operations. While the Company has been able to obtain such funding in the past, there can be no assurance that they will be able to do so in the future. Management's plans include continuing to finance operations through one or more private or public offerings of equity securities and monitoring and reducing discretionary expenditures. In order to complete our planned operations which includes implementing FDA recommendations necessary for submitting our IND to the FDA, upgrading the production facility, preparation for clinical trials, submitting technical information to the Drug Controller General of India ("DCGI") for the purpose of obtaining regulatory approval to conduct clinical trials in that country, and the production of HemoTech; collectively at a cost ranging from $6,000,000 to $8,000,000, we will need to raise at least $6 million in the near term, although there can be no assurance that we can meet this timeframe. If we fail to generate enough working capital, either from future equity, or exercise of our Warrants, or revenue, we will have to curtail our planned operations.

OFF-BALANCE SHEET ARRANGEMENTS

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.