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 Condensed 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.

At June 30, 2009, approximately $120,000 remained as available funds at TTUHSC and are included in the company's prepaid assets.

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 cash available of $141,000 at June 30, 2009 will not be sufficient to fund our immediate current operations beyond four months. During the current quarter, the Company sold 457,142 shares of the Company's common stock and generated proceeds of $256,000. On August 7, 2009, the Company had approximately $60,000 in cash and cash equivalents. This cash position will not be sufficient to carry on current operations beyond two to three months. The Company recently significantly reduced its actual and projected expenses and plans to aggressively manage cash costs. 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, and the production of HemoTech; collectively at a cost ranging from $5,000,000 to $7,000,000, we will need to raise at least $7 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.

The financial statements have been prepared assuming that the Company will continue as a going concern which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has incurred cumulative losses of $16,287,000 from inception through June 30, 2009, has not generated any revenue, and has been dependent on funding operations through the private sale of convertible debt and equity securities. These conditions indicate that there is substantial doubt upon the company's ability to continue as a going concern. Management's plans include continuing to fund operations through one or more public or private offerings of equity securities, although there is no assurance they will be able to do so in the future, and monitoring and reducing discretionary expenses.

RECENT DEVELOPMENTS

During February 2009 the Company announced that R.E. "Corky" Dragoo, Jr. has joined its Board of Directors. Mr. Dragoo is Executive Assistant to the Chancellor of Texas Tech University and is Director of Policy for Texas Tech University. Mr. Dragoo was formerly Ernst and Young National Director for the energy industry and was a Senior Partner of Ernst and Young's Center for Business Innovation located in Cambridge, Massachusetts. Mr. Dragoo received 15,000 stock options upon joining our board and will receive compensation of $15,000 per year plus 7,000 options per quarter. All stock options vest immediately. Stock based compensation expense for the six months ended June 30, 2009 using the Black Scholes option pricing model was $14,000.

In February 2009, the Company engaged an advisor who is a major HIV/AIDS advocate to help the company in the development of HemoTech to address the global need for safe
blood substitute. About 10% of new HIV/AIDS cases result from HIV contaminated blood. Also, in March 2009, the Company added a new member to its Scientific Advisory Board. The new member is a former U.S. Assistant and Surgeon General with experience in national and global medical needs. Both advisors will help the company in advocating congressional leaders in the need for a safe blood substitute and exploring federal and private funding opportunities.

On March 10, 2009, the Company reported results from the testing of its ORTH technology for the clearance of prions (which can cause mad cow disease) and viruses from biological fluids. Since a component of HemoTech is bovine hemoglobin, it is necessary to have a high clearance of prions and viruses. This analysis was one of the recommendations from the FDA. Our technology resulted in the clearance of prions during the purification process of bovine hemoglobin that was 10-10 which is approximately 100,000 times better than required by the FDA. This ORTH technology could also be used for other products from bovine sources and human plasma. The Company is marketing the ORTH technology for potential sub-licensing clients.

RESEARCH AND DEVELOPMENT

We currently have two licensed technologies, "HemoTech" and "ORTH". We expect that the remaining production, development, testing and FDA approval of HemoTech, could occur over a period of approximately four years. Our ORTH technology is essentially ready for commercialization during 2009 and requires minimal additional research and development.

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 were based on recommendations from the FDA.

· 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, 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 $7,000,000 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.

Our ORTH technology can be used not only for HemoTech production but also has the potential for generating sublicensing revenue from pharmaceutical, biotechnology and the cosmetic industries. There can be no assurance that regulatory approval, if required, for this product will be obtained on a timely basis.

RESULTS OF OPERATIONS

We are a development stage company and have not generated any revenue from inception through June 30, 2009. 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.

Total expenses, and thus our losses, totaled $16,287,000 from October 3, 2001 (inception) through June 30, 2009.

THREE MONTHS ENDED JUNE 30, 2009 COMPARED TO THREE MONTHS ENDED JUNE 30, 2008

Total expenses, and thus our losses, for the three months ended June 30, 2009, were $502,000 compared with $1,674,000 for the same period a year ago resulting from significantly lower research and development and general and administrative costs.

Research and Development expenses were $108,000 for the 2009 period, a decrease of $990,000 compared with the same period in 2008, 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) in 2008, and from significantly lower costs paid to outside laboratories, consultants and Texas Tech University in the current period. Charges related to the Sponsored Research Agreement with TTUHSC were approximately $100,000 lower resulting from increased spending on laboratory upgrades in 2008 which did not repeat in the current period. Additionally, approximately $270,000 of costs associated with outside laboratories incurred in 2008 did not repeat in the current period.

General and Administrative costs were $394,000 for the three months ended June 30, 2009, compared with $584,000 in the year ago period resulting from lower overall compensation costs including lower cash compensations by approximately $100,000, stock based compensation of approximately $100,000 and lower office related expenditures including lower investor relations costs collectively offsetted by higher professional fees. Lower stock based compensation in the current period resulted from both issuing fewer warrants and options and a lower share price in the current period when compared to the prior year.

FOR THE SIX MONTHS ENDED JUNE 30, 2009 COMPARED TO THE SIX MONTHS ENDED JUNE 30,
2008

Total expenses, and thus our losses, for the six months ended June 30, 2009 were $964,000 compared with $2,411,000 for the same period a year ago resulting from both significantly lower research and development costs and general and administrative expenses.

Research and Development expenses were $185,000 for the 2009 period, decreasing $1,145,000 from the $1,330,000 in the same period in 2008 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) in 2008; and from significantly lower cash spending to outside laboratories and consultants and lower costs related to our Stage IV Sponsored Research Agreement with Texas Tech Health Sciences Center. Charges related to the Sponsored Research Agreement with TTUHSC were approximately $120,000 lower resulting from increased spending on laboratory upgrades in 2008 which did not repeat in the current period. Additionally, approximately $300,000 of costs associated with outside laboratories incurred in 2008 did not repeat in the current period.

General and Administrative costs were $782,000 for the six months ended June 30, 2009, a decrease of $325,000 from the prior year amount of $1,107,000 resulting from significantly lower compensation costs of approximately $230,000 and lower professional fees of approximately $100,000. Lower compensation costs included both non cash stock based compensation and reduced salary spending.

Interest income decreased $23,000 in the 2009 period compared to the prior period due to lower cash balances in the current year.

Liquidity and Capital Resources

During the six months ended June 30, 2009, net cash used in operating activities was $558,000 compared to $1,305,000 in the same period during 2008. This 57% reduction in operating cash spending resulted primarily from lower cash spending related to outside research laboratories and cash compensation costs. 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.

During the current period the Company received $256,000 from two shareholders of the Company in exchange for 457,142 common shares and warrants representing an equal number of common shares. During the 2008 period the Company received gross proceeds from investors of $534,000. After financing costs the Company received net proceeds of $412,000.

On August 7, 2009, the company had approximately $60,000 in cash and cash equivalents. This cash position will not be sufficient to carry on current operations beyond two to three months.

The Company recently significantly reduced its actual and projected expenses and plans to aggressively manage cash costs. 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, and the production of HemoTech; collectively at a cost ranging from $5,000,000 to $8,000,000, we will need to raise at least $7 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.

These conditions indicate that the Company may not be able to continue as a going concern. Management's plans include continuing to fund operations through one or more public or private offerings of equity securities, although there is no assurance they will be able to do so in the future, and monitoring and reducing discretionary expenses.

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.