SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the quarterly period ended January 31, 2004

For the transition period from                           to

Commission File Number 001-15167

BIOPURE CORPORATION

(617) 234-6500
(Registrant’s telephone number)

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 o

The number of shares outstanding of each of the issuer’s classes of common stock as of March 12, 2004 was:

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BIOPURE CORPORATION

INDEX TO FORM 10-Q

Biopure^®, Hemopure^® and Oxyglobin^® are registered trademarks of Biopure Corporation.

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BIOPURE CORPORATION

Condensed Consolidated Balance Sheets
(In thousands, except share and per share data)
(Unaudited)

Note: The balance sheet at October 31, 2003 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

See accompanying notes.

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BIOPURE CORPORATION
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)

See accompanying notes.

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BIOPURE CORPORATION
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)

See accompanying notes.

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BIOPURE CORPORATION
Notes to Condensed Consolidated Financial Statements
January 31, 2004
(Unaudited)

1.		Basis of Presentation
		The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three month period ended January 31, 2004 are not necessarily indicative of the results that may be expected for the year ending October 31, 2004; however, the Company expects to incur a substantial loss for the year ended October 31, 2004.
		The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Biopure Netherlands, BV, Biopure South Africa, Pty, Ltd., Neuroblok Incorporated, Reperfusion Systems Incorporated, DeNovo Technologies Corporation and Biopure Overseas Holding Company. All intercompany accounts and transactions have been eliminated in consolidation.
		Reclassifications have been made to the prior period’s financial statements presented to conform to the current period’s presentation.
		These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K/A for the fiscal year ended October 31, 2003 filed with the SEC on January 30, 2004.
		The Company has financed operations from inception primarily through sales of equity securities, development and license agreement payments, interest income and debt. The Company has not been profitable since inception and had an accumulated deficit of $439,651,000 as of January 31, 2004. To remain a going concern, the Company will require significant funding. The Company expects to incur additional operating losses over the next several years seeking regulatory approvals, conducting clinical trials and marketing Hemopure. The Company is assessing opportunities to raise capital, and expects to continue financing operations until it is profitable through sales of securities, strategic alliances and other financing vehicles, if any, that might become available. However, there can be no assurance that any such additional financing will be available to the Company on terms that it deems acceptable, if at all. At January 31, 2004, the Company had $17,291,000 in cash and cash equivalents. Since January 31, 2004, the Company has raised approximately $5,000,000 in additional funding (See Note 7 Subsequent Events). The Company expects this funding, in addition to the cash and cash equivalents at January 31, 2004, to be sufficient to fund operations into September 2004 under the Company’s current operating plan.
2.		Net Loss per Share
		Basic net loss per common share is computed based on the weighted-average number of common shares outstanding during the period. Diluted net loss per common share is computed based upon the weighted-average number of common shares outstanding during the period, adjusted for the dilutive effect of the Company’s common stock equivalents, including the shares issuable upon the conversion of Class B Common Stock outstanding and the exercise of common stock options and warrants determined based upon the average market price of common stock for the period. However, basic and diluted net loss per common share is computed the same for all periods presented as the Company had losses for all periods presented and, consequently, the effect of Class B Common Stock, options and warrants is anti-dilutive. Dilutive weighted average shares outstanding do not include 8,119,828 common-equivalent shares for the three months ended January 31, 2004 and 6,449,830 common-equivalent shares for the three months ended January 31, 2003 as their effect would have been anti-dilutive.
3.		Stock Based Compensation
		The Company applies the intrinsic value method pursuant to Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations, in accounting for its stock-based compensation plans. Accordingly, no

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BIOPURE CORPORATION
Notes to Condensed Consolidated Financial Statements
January 31, 2004
(Unaudited)
(continued)

compensation expense has been recognized for stock-based awards to employees. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment of FASB Statement No. 123” (SFAS No. 148). Had compensation expense for the Company’s stock option plans been determined based on the fair value at the grant date for awards under these plans, consistent with the methodology prescribed under SFAS No. 148, the Company’s net loss and net loss per share would have approximated the pro forma amounts indicated below:

The weighted average fair value of each stock option included in the preceding pro forma amounts was estimated using the Black-Scholes option-pricing model and is amortized over the vesting period of the underlying options. The assumptions used to calculate the SFAS No. 148 pro forma disclosure and the weighted average information are as follows:

4.		Inventories
		Inventories are valued at the lower of cost (determined using the first-in, first-out method) or market. Inventories were as follows:

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BIOPURE CORPORATION
Notes to Condensed Consolidated Financial Statements
January 31, 2004
(Unaudited)
(continued)

5.		Accrued Expenses and Cost Reduction Plan
		Accrued expenses consisted of the following:

		On October 31, 2003 the Company announced a cost reduction plan to decrease its ongoing cash burn. Under the plan, the Company terminated 72 employees. The employees terminated were primarily employees from the Company’s manufacturing division. During the fiscal year ended October 31, 2003 in accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” the Company recorded within General and Administrative expense a charge of $875,000 related to this reduction in force. The charge recorded represented primarily severance costs and fees for outplacement services. During the first fiscal quarter of 2004, the Company paid approximately $768,000 of these costs. The remaining balance of $107,000 will be paid over the next 5 months.
6.		Commitments
		Guarantee
		In July 1994, the Company acquired a 50% general partnership interest in Eleven Hurley Street Associates (EHSA), a real estate partnership, which owns the Company’s principal office and research and development facility. The Company accounts for its investment in EHSA under the equity method of accounting. In the event EHSA became insolvent or was unable to pay its obligations, the Company, as a general partner, would be liable for all partnership obligations. EHSA’s liabilities as of January 31, 2004 consist of a promissory note to a bank with a balance of $1,102,077. The note accrues interest at 8.63% and matures on January 30, 2006. As of January 31, 2004, the maximum potential amount of future payments the Company would be required to make under its guarantee would be $1,278,000. The note is secured by the office and research and development facility which the Company believes has fair value sufficient to satisfy the current promissory note balance. Biopure currently leases this facility from EHSA for $262,000 annually under an operating lease expiring in December 2007 that is included as an operating lease commitment in our Annual Report on Form 10-K for the fiscal year ended October 31, 2002.
		Sumter Realty
		In December 2001, the Company signed an amended letter of intent with Sumter Realty Group, LLC for the construction and financing of a manufacturing plant in South Carolina, which is designed to produce 500,000 Hemopure units per year and expected to cost approximately $120,000,000. Under the letter of intent the financing would be in the form of a capital lease.
		The terms of any new lease, as outlined in the letter of intent, would be: (i) lease payments to start at substantial completion of the facility; (ii) annual lease payments of $13,750,000 per year for the first two years; and (iii) lease payments of $17,158,000 per year for the balance of a 240-month term. The Company would own the facility at the end of the lease term. The Company is

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BIOPURE CORPORATION
Notes to Condensed Consolidated Financial Statements
January 31, 2004
(Unaudited)
(continued)

		committed to pay a finder’s fee, of approximately 2 percent of the net amount financed, to CB Richard Ellis, a real estate consulting firm, when financing for the facility is completed if financing is provided through Sumter Realty Group or any of its principals. However, there is no assurance that the Company will be able to obtain financing under the terms set forth in the letter of intent.
		As of January 31, 2004, $14,348,000 has been included in property, plant and equipment and $9,847,000 in long-term debt reflecting capital costs to date for the engineering and design costs of the planned manufacturing facility, as well as for permits and acquisition of land. No additional expenditures will be incurred until a financing proposal has been accepted and a closing schedule has been developed.
		We examined our long-lived assets for potential impairment, with a particular emphasis on the asset related to the planned South Carolina manufacturing facility. As part of our review, we considered lack of financing for this facility to date, the potential timing of construction activities, the extent to which the asset is site specific, and our ongoing commitment to ultimately build our new facility in South Carolina. Based upon our analysis, we determined that while the delays in obtaining financing for this facility and FDA approval are significant and therefore indicators of potential impairment, we believe our plan for the South Carolina manufacturing facility is still valid and we fully expect we will be able to finance it on commercially reasonable terms in the future. Therefore, we determined that no impairment exists at January 31, 2004.
		Research Agreement
		On March 4, 2003, the Company entered into a Cooperative Research and Development Agreement (CRADA) with the United States Naval Medical Research Center (NMRC). The intent of the CRADA is to support a pivotal, randomized, standard therapy controlled clinical trial of Hemopure in the out-of-hospital setting in the resuscitation of patients with severe hemorrhagic shock (acute blood loss). Under the terms of the CRADA, the NMRC will contribute $4,000,000 and the Company is committed to contribute $8,753,000, exclusive of Biopure employee costs and expenses, through 2006. These amounts are estimates based upon a preliminary assessment of the current trial protocol. Completion of this pivotal trauma trial is contingent upon both parties securing the required funding. The CRADA has been modified to grant the Naval Medical Research Center primary responsibility for the design and conduct of the trial, which will require a separate investigational new drug application (IND) and the FDA’s agreement to the proposed study design.
7.		Subsequent Events
		On February 19, 2004, the Company announced it had adjusted its operating plan to reduce expenses and conserve cash while it works to achieve FDA approval of Hemopure. Under the plan, the Company terminated 55 employees, primarily from the Company’s manufacturing division. This workforce reduction will take effect in mid to late April. This reduction in force, in addition to other cost reductions is intended to reduce the company’s ongoing cash burn rate by approximately $8.0 million annually. The company expects to save approximately $3.0 million during the remainder of fiscal 2004, offset by approximately $1.5 million in additional anticipated expenses for the FDA response activities, described below, which will be charged to research and development.
		On February 20, 2004, the Company raised approximately $5,000,000 in net proceeds from the sale of 3,333,333 shares of common stock and warrants to purchase an aggregate of 833,333 shares of its Class A Common Stock at an exercise price of $2.50 per share. On February 26, 2004, the Company issued an additional 343,168 shares as a purchase price adjustment to the February 20 transaction and will incur a non-cash charge of approximately $467,000 in the second fiscal quarter of 2004 in connection with this issuance.

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BIOPURE CORPORATION
Notes to Condensed Consolidated Financial Statements
January 31, 2004
(Unaudited)
(continued)

		On February 24, 2004 the Company announced the resignation of Thomas A. Moore from his positions as President, Chief Executive Officer and a member of the Board of Directors, effective immediately. Francis H. Murphy, the Company’s Senior Vice President of Engineering and Process Technology and former Chief Financial Officer, is serving as interim CEO until Mr. Moore’s replacement is named.
8.		Recently Issued Accounting Standards
		In May 2003, the Financial Accounting Standard Board (“FASB”) issued SFAS No. 150, “Accounting for Certain Instruments with Characteristics of both Liabilities and Equity” (“SFAS 150”), which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company’s adoption of the initial recognition and initial measurement provisions of SFAS 150, effective June 1, 2003, did not have an impact on the Company’s results of operations or financial position.
		In January 2003, the FASB issued FIN No. 46, “Consolidation of Variable Interest Entities,” to expand upon and strengthen existing accounting guidance that addresses when a company should include in its financial statements the assets, liabilities and activities of another entity; in December 2003 FASB issued a revision to FIN 46(FIN46R). Until now, one company generally has included another entity in its consolidated financial statements only if it controlled the entity through voting interests. FIN No. 46 changes that by requiring a variable interest entity, as defined, to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both. FIN No. 46 also requires disclosures about variable interest entities that the company is not required to consolidate but in which it has a significant variable interest. In October 2003, the FASB issued Proposed Interpretation of FIN No. 46, which would require consolidation of variable interest entities created before February 1, 2003 for financial statements issued for the first reporting period ending after December 15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. The Company believes the adoption of FIN 46 will not have a material adverse impact on its overall financial position or results of operations. See Note 6 for additional information.
9.		Litigation
		SEC Investigation. During the fourth quarter of fiscal 2003, the Company was notified of a confidential investigation by the Securities and Exchange Commission (SEC). On December 22, 2003, the Company, its former Chief Executive Officer and its former Senior Vice President, Regulatory and Operations, received “Wells Notices” from the staff of the SEC stating the staff’s preliminary determination to recommend that the SEC bring a civil injunctive proceeding against the Company and the individuals. Biopure and the individuals responded in writing to the notices on January 9, 2004. The staff is continuing to gather information.
		Biopure believes the notices relate to Company disclosures concerning communications with the FDA about a clinical hold imposed on a clinical study protocol the Company submitted to the agency in March 2003 and the status of the Company’s BLA. In March 2003, the Company filed a proposed protocol for a Phase II clinical trial in trauma patients in a hospital setting. The FDA put the protocol and its related investigational new drug application (IND) on “clinical hold,” meaning the trial could not begin as proposed. The FDA cited safety concerns based on a preliminary review of data from the Company’s Phase III clinical trial in patients undergoing orthopedic surgery. After the Company responded in two written submissions, the clinical hold was reasserted twice in writing, most recently on July 30, 2003. The Company did not disclose the clinical hold because the Company did not consider correspondence with the agency about data interpretation in the development of a protocol to be material, notwithstanding the references to data in the BLA. The staff’s investigation also concerns the Company’s disclosures concerning the FDA’s review of the BLA, after receipt of the complete response letter dated July 30, 2003. The Company has been cooperating throughout the investigation with the SEC staff. At this time, the Company cannot estimate what impact, if any, this inquiry may have on its financial position or results of operations.

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BIOPURE CORPORATION
Notes to Condensed Consolidated Financial Statements
January 31, 2004
(Unaudited)
(continued)

		Litigation.
		Biopure, its former Chief Executive Officer, its Chief Technology Officer and its Chief Financial Officer were named as defendants in a number of similar, purported class action complaints, filed between December 30, 2003 and January 28, 2004 (the “complaints”), in the U.S. District Court for the District of Massachusetts (the “Court”) by alleged purchasers of Biopure’s common stock. The complaints claim that Biopure violated the federal securities laws by publicly disseminating materially false and misleading statements regarding the status of its biologic license application pending with the U.S. Food and Drug Administration and of its trauma development program, resulting in the artificial inflation of Biopure’s common stock price during the purported class period. The complaints do not specify the amount of alleged damages plaintiffs seek to recover. The complaints set forth varying class periods but generally focus on March 2003 through December 24, 2003. The defendants believe that the complaints are without merit and intend to defend the actions vigorously. At this time, the Company cannot estimate what impact, if any, these cases may have on its financial position or results of operations.
		The seven board members of Biopure’s Board of Directors, including its former Chief Executive Officer, now a former board member, were named as defendants in two shareholder derivative actions filed on January 26, 2004 and January 29, 2004 in the same Court. The Company is named as a defendant, even though in a derivative action any award is for the benefit of the Company, not individual stockholders. The complaints allege in derivative actions brought by shareholders on behalf of the Company that the individual directors breached fiduciary duties in connection with the same disclosures set forth in the purported securities class action complaints. The complaints do not specify the amount of the alleged damages plaintiffs seek to recover. At this time, the Company cannot estimate what impact, if any, these cases may have on its financial position or results of operations.
		The Company is a defendant in a case filed on or about June 16, 2003, by plaintiff Steelhead Investments, Ltd. The complaint alleges that the Company breached a contract with the plaintiff by giving insufficient notice and failing to give notice of offerings of common stock and warrants by the Company in March and April 2003. The complaint states that the plaintiff has suffered monetary damages in an amount to be determined, but not less than $15.5 million. On September 5, 2003, the Company filed an Amended Answer, Counterclaims, and Third Party Compliant that denied the material allegations of the complaint, asserted defenses, and brought counterclaims against the plaintiff and an affiliate for fraud and other misconduct in connection with execution and performance of the contract described in the complaint. On September 24, 2003, plaintiff and its affiliate filed a motion to dismiss the counterclaims. On October 2, 2003, plaintiff filed an amended complaint that asserts the same claims for breach of contract against the Company that were asserted in the original complaint filed on June 16, 2003. In addition to those claims, the amended complaint asserts tort claims against Thomas A. Moore, former President and Chief Executive Officer of Biopure; David N. Judelson, Vice Chairman of Biopure’s Board of Directors; and HTV Industries, Inc., a company affiliated with one of Biopure’s directors. Plaintiff alleges that Moore, Judelson, and HTV intentionally interfered with plaintiff’s contractual rights and caused Biopure to breach the contract. On November 12, 2003, the Company and the individual defendants filed an answer denying the material allegations of the amended complaint and interposing defenses. The Company re-asserted its counterclaims and third party claims against plaintiff and its affiliate described above. On January 26, 2004, the court denied the plaintiff’s motion to dismiss the counterclaims and third-party claims in its entirety. The Company and the individual defendants intend to defend this case vigorously. At this time, the Company cannot estimate what impact this case may have on it. However, the Company believes resolution of this case will not have a material adverse impact on its overall financial position or results of operations.

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BIOPURE CORPORATION
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
January 31, 2004

Cautionary Statement Regarding Forward-Looking Information

The following discussion of our financial condition and results of operations should be read in conjunction with the Condensed Consolidated Financial Statements and the related Notes included elsewhere in this report. The content of this report does not necessarily reflect the position or the policy of the Government or the Department of Defense, and no official endorsement should be inferred. Except for strictly historical information contained herein, matters discussed in this report constitute forward-looking statements. When used herein, the words “expects,” “estimates,” “intends,” “plans,” “should,” “anticipates” and similar expressions are intended to identify such forward-looking statements. Actual results could differ materially from those set forth in the forward-looking statements. There can be no assurance that Biopure will be able to commercially develop Hemopure, that necessary regulatory approvals will be obtained, that anticipated milestones will be met in the expected timetable, that any clinical trials will be successful, or that any approved product will attain market acceptance and be manufactured and sold in the quantities anticipated. Actual results may differ from those projected in forward-looking statements due to risks and uncertainties that exist in the Company’s operations and business environment. These risks include, without limitation, the availability of sufficient financing to support operations, the Company’s stage of product development, history of operating losses, accumulated deficit, and uncertainties and possible delays related to clinical trials and regulatory approvals, possible healthcare reform, manufacturing capability, market acceptance and competition. In light of the substantial risks and uncertainties inherent in all future projections, the inclusion of forward-looking statements in this report should not be regarded as representations by the Company that the objectives or plans of the Company will be achieved. The Company undertakes no obligation to release publicly the results of revisions to these forward-looking statements to reflect events or circumstances after the date hereof. Reference is made in particular to the risk factors and the discussions set forth below in this report under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Overview

Since inception, we have devoted substantially all of our resources to our research and development programs and manufacturing. We have been dependent upon funding from equity financings, strategic alliances, interest income and debt. We have not been profitable since inception and had an accumulated deficit of $440 million as of January 31, 2004. We expect to incur additional operating losses over the next several years seeking regulatory approvals, conducting clinical trials and marketing Hemopure. We began generating revenue from the sale of Oxyglobin in fiscal 1998, but these sales are not profitable because the fixed and variable manufacturing costs allocated to producing Oxyglobin exceed the corresponding revenues.

We believe our cash and cash equivalents, as of January 31, 2004, in addition to the cash raised on February 20, 2004 (See Liquidity and Capital Resources) to be sufficient to fund our operations into September 2004. Under this plan, our activities and expenditures for the balance of fiscal 2004 will be associated primarily with maintaining our manufacturing capability, our activities in replying to the FDA’s complete response letter for our Hemopure biologics license application (BLA), conducting FDA-requested preclinical animal studies and continuing clinical development of Hemopure. Because the Company’s funds on hand at January 31, 2004 and forecasted sales are insufficient to fund our operations into fiscal 2005, the audit report of Ernst & Young LLP, the Company’s independent auditor, on our fiscal 2003 financial statements includes a going concern modification, which states that the Company’s recurring losses from operations and the current lack of sufficient funds to sustain its operations through the end of fiscal 2004 raise substantial doubt about our ability to continue as a going concern.

A number of factors pose uncertainties in estimating the amount of funds we may need to sustain operations:

As described in Note 9 to the financial statements, Biopure is a defendant in litigation, the outcomes of which are unknown. It is also the subject of an investigation by the Securities and Exchange Commission and has received a “Wells Notice” from the Commission staff. The outcomes and financial effects of these matters cannot be determined at this time, nor can any adverse effect they may have on the price of our common stock and our ability to raise capital from sales of equity.

The process of obtaining U.S. marketing approval for a first indication for Hemopure also has risks of delays that make the ultimate development cost unpredictable.

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BIOPURE CORPORATION
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
January 31, 2004
(continued)

We may decide to or be required to do additional clinical investigation before the FDA will grant marketing approval. Even a small clinical trial would have the effect of delaying regulatory approval to market the product in the United States.

Our one major research and development project continues to be developing Hemopure for a surgery indication. We monitor our spending on trauma and other programs, but none has yet to become substantial in aggregate or annual spending.

Although Hemopure is approved for commercial sale in South Africa, the product has not yet been offered for sale. Surgeons continue to administer Hemopure units that we had previously provided without charge. We gave notice to our exclusive distributor in South Africa that we were terminating our distribution agreement according to its terms and intend, following completion of a termination arrangement with the former distributor, to market through a wholly-owned subsidiary. We cannot predict when our first sales might occur.

On October 30, 2003, the Company announced a cost reduction plan to decrease its ongoing cash burn. Under the plan, the Company terminated 72 employees. The employees terminated were primarily employees from the Company’s manufacturing division. On February 19, 2004 the Company announced that it will reduce its workforce by an additional 55 employees (See Note 7, Subsequent Events). This reduction and other cost cutting measures are expected to reduce manufacturing and marketing expenses. The workforce reduction will take effect in mid to late April 2004. The Company is considering additional measures to reduce its cash burn, but significant additional capital will be required to fund the Company’s operations until the Company becomes profitable. The Company is assessing opportunities to raise capital, and expects to continue financing operations until we are profitable through sales of securities, strategic alliances and other financing vehicles, if any, that might become available.

Critical Accounting Policies

The Company’s significant accounting policies are described in the Notes to the Consolidated Financial Statements, as disclosed in our Form 10-K/A for the fiscal year ended October 31, 2003. The application of our critical accounting policies is particularly important to the accurate portrayal of the Company’s financial position and results of operations. These critical accounting policies require the Company to make subjective judgements in determining estimates about the effect of matters that are inherently uncertain. The following critical accounting policies are considered most significant:

Inventories

Inventories are stated at the lower of cost (determined using the first-in, first-out method) or market. Inventories consist of raw material, work-in-process and Hemopure and Oxyglobin finished goods. Both Oxyglobin and Hemopure have a shelf life of 3 years from the date of manufacture. Inventories of these products are reviewed periodically to identify expired units and units with a remaining life too short to be commercially viable based on projected and historical sales activity. Inventories are also subject to quality compliance investigations. Reserves are established for inventory that falls into these categories.

Long-Lived Assets

SFAS 144 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Our investments in property and equipment, such as construction in progress and new facility construction; real property license rights related to the source, supply and initial processing of our major raw material; and the asset related to the expenditures for a planned manufacturing facility in South Carolina. Pursuant to SFAS 144, during the first quarter we assessed our long-lived assets for potential impairment, with a particular emphasis on the asset related to the planned South Carolina manufacturing facility. As part of our review, we considered lack of financing for this facility to date, the potential timing of construction activities, the extent to which the asset is site specific, and our ongoing commitment to ultimately build our new facility in South Carolina. Based upon our analysis we believe that, while the delays in obtaining financing for this facility and FDA approval are significant and therefore indicators of potential impairment, we believe our plan for the South Carolina manufacturing facility is

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BIOPURE CORPORATION
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
January 31, 2004
(continued)

still valid and we fully expect we will be able to finance it on commercially reasonable terms in the future. Therefore, we determined that no impairment exists at January 31, 2004.

Revenue Recognition

The Company recognizes revenue from sales of Oxyglobin upon shipment provided that there is evidence of a final arrangement, there are no uncertainties surrounding acceptance, collectibility is probable and the price is fixed. The Company sells Oxyglobin to veterinarians in the United States through veterinary product distributors, who purchase product for immediate and direct resale to veterinary practices. The Company sells Oxyglobin to a distributor in the United Kingdom that sells product in selected European countries through local veterinary distributors in Germany, France and the UK. Collectibility is reasonably assured once pricing arrangements are established, as these agreements establish the distributor’s intent to pay. The Company’s customers do not have a right to return product. The Company and its distributors have an ongoing business relationship, and the Company monitors creditworthiness on a regular basis. The Company believes collectibility of product revenues is reasonably assured at the time of sale.

Research and Development

Since its founding in 1984, Biopure has been primarily a research and development company focused on developing Hemopure, our oxygen therapeutic for human use, and obtaining regulatory approval in the United States. Our research and development expenses have been devoted to basic research, product development, process development, pre-clinical studies, clinical trials and filing a Hemopure BLA with the FDA. In addition, our development expenses historically have included the design, construction, validation and maintenance of a large-scale pilot manufacturing plant in Cambridge, Massachusetts. The existing pilot plant was completed in 1995, expanded in 1998 and expanded again in 2002.

Such a facility is a necessary part of developing a product like Hemopure. Hemopure is classified by the FDA as a biologic, because it is derived from animal-source material. Unlike drugs that are chemical compounds, biologics are defined by their manufacturing process and composition. Any change in the manufacturing process could be considered, under FDA regulations, to produce an altered, possibly different product. Therefore, demonstration of manufacturing capability at greater than laboratory scale is necessary for an application for regulatory approval of a biologic to be accepted for review. This requirement results in high manufacturing research and development costs in the development of a biologic relative to other types of drugs.

The only product made in our plant prior to 1998 was product for use in pre-clinical and clinical trials. As an offshoot of the research and development for Hemopure, Oxyglobin, a similar product, gained approval for veterinary use in 1998. This product was then produced for sale in the pilot manufacturing plant built and maintained for the development of Hemopure. Consequently, costs of production of Oxyglobin for sale and an allocation of overhead based on capacity used for Oxyglobin are charged to inventory and to cost of revenues. The remaining costs of the pilot plant continued to be included in research and development expenses through May 2002.

Beginning in May 2002, when we began to make Hemopure for sale under our regulatory approval in South Africa, the primary function of the pilot plant changed from support of the development of Hemopure to production of goods for sale. Since then, all costs of maintaining and operating the pilot plant have been charged to inventory and cost of revenues. Any actual future use of the facility for research and development activities will be expensed. In addition, clinical trial materials taken from inventory for use in research and development are charged to research and development.

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BIOPURE CORPORATION
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
January 31, 2004
(continued)

Results of Operations

As the Company generates net losses, the key drivers of the losses are cost of revenues, research and development and other expenses consisting of sales and marketing and general and administrative. Oxyglobin revenues are an offset to these expenses. For the first fiscal quarters of 2004 and 2003, these items were as follows:

Three months ended January 31, 2004 compared to three months ended January 31, 2003

Total revenues, consisting of sales of the company’s veterinary product Oxyglobin, were $750,000 for the first quarter of fiscal 2004 compared to $21,000 for the same period in 2003. During the first quarter of fiscal 2003, Oxyglobin sales were constrained by limited product availability resulting from a temporary shutdown of production during the expansion of the company’s manufacturing facilities in 2002. Oxyglobin shipments resumed in February 2003 after the U.S. Food and Drug Administration (FDA) completed its review of the validation data for the expanded facilities. For the first quarter of fiscal 2002, total revenues were $728,000. In our efforts to conserve cash, we are limiting manufacturing capacity and the amount of Oxyglobin we will be able to sell. As a result, we expect revenues for the fiscal year ending October 31, 2004 to be substantially lower than last fiscal year.

Cost of revenues was basically unchanged for the first quarter of fiscal 2004 compared to the same period in 2003. Cost of revenues includes costs of both Oxyglobin and Hemopure, the company’s product for human use, although Hemopure is not currently being offered for sale. Oxyglobin cost of revenues was $1,570,000 for the first quarter of fiscal 2004 compared to $733,000 for the same period in 2003. The increase for the quarter was primarily due to the increased number of Oxyglobin units sold in 2004. Due to fixed manufacturing costs, Biopure expects that costs to produce Oxyglobin will exceed Oxyglobin revenues until the company more fully utilizes its manufacturing capacity. Hemopure cost of revenues, consisting of the allocation of unabsorbed fixed manufacturing costs,

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