SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the quarterly period ended July 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. [X] Yes [  ] No

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). [X] Yes [   ] No

The number of shares outstanding of each of the issuer’s classes of common stock as of September 10, 2004 was:

BIOPURE CORPORATION

INDEX TO FORM 10-Q

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

2

Part I

Item 1

BIOPURE CORPORATION

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.

3

BIOPURE CORPORATION

See accompanying notes.

4

BIOPURE CORPORATION

See accompanying notes.

5

BIOPURE CORPORATION

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 and nine month periods ended July 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 presentation of the unaudited condensed consolidated financial statements contained in the Company’s earnings release for the third fiscal quarter of 2004 (filed as an exhibit to the Company’s report on Form 8-K of August 18, 2004) contained prior period reclassifications affecting cost of revenues, research and development expenses and general and administrative expenses with consequent changes in gross loss and total operating expenses but not affecting net loss. Subsequent to filing the Form 8-K, the reclassifications were determined to be unnecessary. The unaudited condensed consolidated financial statements in this report contain no reclassifications of prior period amounts.

The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Biopure Netherlands, BV, Biopure South Africa, Ltd., Reperfusion Systems Incorporated, DeNovo Technologies Corporation and Biopure Overseas Holding Company, and NeuroBlok Incorporated, a 60% owned subsidiary. All intercompany accounts and transactions have been eliminated in consolidation.

These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s 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 $461,049,000 as of July 31, 2004. At July 31, 2004, the Company had $4,025,000 in cash and cash equivalents (not including accounts receivable from the U.S. Army of approximately $2.5 million) and total current liabilities of approximately $3.8 million (not including approximately $1.6 million annual premium payable for renewal of director and officer insurance). The Company expects its cash and cash equivalents on hand at July 31, 2004, and the approximately $2.5 million received on September 8, 2004 from the U.S. Army, will be sufficient to fund operations under the Company’s current operating plan into October 2004. To continue to operate, the Company will require significant additional funding. The Company expects to incur additional operating losses over the next several years while seeking regulatory approvals, conducting clinical trials and pre-marketing or marketing Hemopure in South Africa. The Company is assessing opportunities to raise capital, and expects to continue financing operations through sales of securities, strategic alliances and other financing vehicles, if any, that might become available. 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. Failure to timely obtain additional funding could force the Company to go out of business and/or file for bankruptcy protection.

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 11,955,710 common-equivalent shares for the three and nine months ended July 31, 2004 and 9,489,138 common-equivalent shares for the three and nine months ended July 31, 2003 as their effect would have been anti-dilutive.

6

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

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 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:

7

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

4. Inventories

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

5. Accrued Expenses and Cost Reduction Plan

Accrued expenses consisted of the following:

On June 23, 2004 the Company announced a restructuring plan which included the termination of 25 employees. Almost half of the employees terminated were from the Company’s manufacturing division and the remainder were from the research and development, sales and marketing and administration departments. During the third fiscal quarter ended July 31, 2004, 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 $584,000 related to this reduction in force. The charge primarily represented severance costs and fees for outplacement services. Through July 31, 2004, the Company paid $403,000 for costs related to this reduction in force and, as a result, had an accrual of $181,000 at July 31, 2004. It is anticipated that these costs will be paid by the end of the first fiscal quarter of 2005.

At the beginning of the third fiscal quarter of fiscal 2004, the Company had an accrual of $578,000 for costs related to the reduction in force announced on February 19, 2004, which became effective on April 23, 2004. During the third quarter of fiscal 2004, the Company paid $434,000 in severance costs and fees for outplacement services relating to this reduction in force. At July 31, 2004, the Company had a remaining accrual of $144,000 relating to this workforce reduction which is expected to be paid in its entirety during the fourth fiscal quarter of 2004.

At October 31, 2003, the Company had an accrual of $875,000 for costs related to the reduction in force announced on October 30, 2003. During the first six months of fiscal 2004, the Company paid $723,000 in severance costs and fees for outplacement services which represented the entire cash payments made pursuant to this reduction in force. The reduction in expected expenses was due to lower than anticipated costs for outplacement services. The remaining accrual of $152,000 was recorded as a credit to General and Administrative expenses during the second fiscal quarter ended April 30, 2004.

8

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

6. Commitments

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 one of the general partners, could be liable for all partnership obligations to the extent partnership assets are not sufficient to satisfy such obligations. EHSA’s liabilities as of July 31, 2004 consist of a promissory note to a bank with a principal balance of $1,075,570. The note accrues interest at 8.63% and matures on January 30, 2006. As of July 31, 2004, the maximum potential amount of future payments under the note would be $1,204,000. 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/A for the fiscal year ended October 31, 2003.

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 Sumter, 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.

In fiscal 2001, Biopure recorded on its balance sheet as a deposit a $10 million escrow of cash and began investing in the design and engineering of the proposed new manufacturing facility to be located in Sumter, S.C. Under the letter of intent with Sumter Realty Group, LLC, Biopure was to be reimbursed for up to $10 million upon FDA approval of Hemopure. As funds were invested the deposit remained at $10 million and Biopure recorded a fixed asset representing the investment and long-term debt of an equal amount representing the expected capital lease obligation if financing was obtained. However, Sumter Realty Group’s inability to obtain financing for the proposed facility, the lack of FDA approval of the Company’s previously submitted biologics license application (BLA) for Hemopure in an orthopedic surgery indication and Biopure’s new clinical focus on the development of Hemopure for a cardiac ischemia indication and a trauma indication have delayed the need for increased manufacturing capacity and make the terms of any future plant financing uncertain. These changes in circumstances have caused the Company to conclude that it could no longer expect to execute a financing agreement whereby the Company would finance 100% of the facility, or that the $10 million would be refundable. Therefore, the $10 million deposit and offsetting long-term debt of approximately $9.8 million have been eliminated.

Biopure had invested approximately $14.3 million in the proposed new South Carolina manufacturing facility before work on the plant design and engineering was suspended. This expenditure is recorded as a fixed asset and, beginning in the third fiscal quarter of 2004, is being depreciated to account for the probability that portions of the design may need to be re-engineered as time elapses and technology changes.

The Company has examined its long-lived assets for potential impairment, with a particular emphasis on the asset related to the planned South Carolina manufacturing facility. As part of the review, the Company considered its lack of financing for this facility to date, the potential timing of construction activities, the extent to which the asset is site specific, and the Company’s ongoing plan to ultimately build a new facility in South Carolina. Based upon this analysis, the Company determined that, while the delays in obtaining financing for this facility, delays in obtaining FDA approval for Hemopure and a change in the Company’s clinical focus are significant and therefore indicators of potential impairment, the sales resulting from an approval of Hemopure in a cardiac indication, if obtained, would, in the

9

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

Company’s view, ultimately exceed its current manufacturing capability. Based upon FAS 146, using an estimated undiscounted cash flow of the proposed facility, the Company believes that, if it obtains FDA approval of Hemopure for a cardiac ischemia indication, its plan for the South Carolina manufacturing facility should still be viable, it should be able to finance the proposed facility in the future on commercially reasonable terms and it should be able to generate sufficient positive future cash flows to recover the Company’s investment in the facility. Therefore, the Company has determined that no impairment exists at July 31, 2004. Modification of the Company’s clinical plans could, however, trigger impairment of certain long-term assets.

Research Agreement⁽¹⁾

In March 2003, the Company entered into a Cooperative Research and Development Agreement (CRADA) with the United States Naval Medical Research Center (NMRC). Under the CRADA, as amended, the Naval Medical Research Center has primary responsibility for designing, seeking FDA acceptance of and conducting a planned two-stage Phase II/III clinical trial of Hemopure in trauma patients with severe hemorrhagic shock (acute blood loss) in the out-of-hospital setting. Each of Biopure and the NMRC is expected to fund the activities for which it is responsible. The Company believes that all or most of its costs could be covered by government funding. On August 5, 2004, President Bush signed the FY2005 Defense Appropriations Bill, which includes $7 million for the U.S. Navy to continue research and development of Hemopure for potential use in military and civilian trauma indications. To date, Congress has appropriated a total of $18.5 million to the U.S. Army and Navy for the development of Hemopure for potential use in military and civilian trauma indications and to cover some military administrative costs. Of this amount, approximately $5 million is being administered by the Army to fund key ongoing preclinical animal studies of Hemopure and to help fund the Company’s obligations under the CRADA.⁽²⁾ Currently, the NMRC is addressing FDA questions arising from a pre-investigational new drug (IND) meeting with the FDA held in April 2004 to discuss a proposed two-stage Phase II/III trauma trial protocol entitled “Restore Effective Survival in Shock (RESUS)”.

7. Subsequent Events

On September 8, 2004, the Company received payment of approximately $2.5 million from the U.S. Military for reimbursement of expenses and pre-payment of clinical trial samples related to the Hemopure trauma development program described in Note 6 under “Research Agreement”.

8. Recently Issued Accounting Standards

In January 2003, the FASB issued FIN No. 46, “Consolidation of Variable Interest Entities,” (“FIN 46” or the “Interpretation”) 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 and, in December 2003, FASB issued a revision to FIN 46(FIN46R). Prior to FIN 46, 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

10

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

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. FIN 46 is applicable to entities subject to the Interpretation no later than the end of the first reporting period ended after March 15, 2004, and, accordingly, was applicable to the Company as of the end of the quarter ended April 30, 2004. The Company’s adoption of FIN 46, effective April 30, 2004, did not have an impact on the Company’s results of operations or financial position. 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, and on April 29, 2004 the Company’s Chairman, a former director, its Chief Technology Officer and General Counsel each 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 have each responded in writing to the notices and explained why the SEC ought not to initiate a proceeding. To our knowledge, no formal recommendation has been made to date and we do not know what action, if any, the SEC staff may finally recommend.

Biopure believes the notices relate to Company disclosures concerning communications with the FDA about a clinical hold imposed on a proposed clinical trial protocol the Company submitted to the agency in March 2003 and about the status of the Company’s BLA to market Hemopure in the United States for the treatment of acutely anemic patients undergoing orthopedic surgery. 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 (IND) application on “clinical hold,” meaning the trial could not begin as proposed. The FDA cited safety concerns based on, among other things, 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. The Company did not disclose the clinical hold because it did not consider, and does not consider, correspondence with the agency about data interpretation in the development of a proposed 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 the Company’s receipt of the FDA’s letter regarding the BLA dated July 30, 2003. The Company has been cooperating throughout the investigation with the SEC Staff. At this time, the Company cannot estimate the extent of the impact this inquiry may have on its financial position or results of operations.

Litigation.

Biopure, its former Chief Executive Officer, its Chief Technology Officer and its former 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. Those complaints have since been consolidated in a single action and an amended complaint has been filed against the Company, the previously named individuals and several of our current and former directors and officers. The complaint claims that Biopure violated the federal securities laws by publicly disseminating materially false and misleading statements regarding the status of its Hemopure BLA with the FDA and of its trauma development program, resulting in the artificial inflation of Biopure’s common stock price during the purported class period. The complaint

11

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

does not specify the amount of alleged damages plaintiffs seek to recover. The complaint sets forth a class period of March 2003 through December 24, 2003. The defendants believe that the complaint is without merit and intend to defend the actions vigorously. At this time, the Company cannot estimate what impact these cases may have on its financial position or results of operations.

The seven members of Biopure’s Board of Directors during the period March through December 2003, were named as defendants in two shareholder derivative actions filed on January 26, 2004 and January 29, 2004 in the same Court. A consolidated, amended complaint has now been filed. 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 consolidated, amended complaint alleges that the individual directors breached fiduciary duties in connection with the same disclosures referenced in the purported securities class action. The complaint does 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. A different shareholder also made demand on the Company’s directors on June 30, 2004 that they pursue similar claims on behalf of the Company, which the Board is addressing.

12

Part I

Item 2

BIOPURE CORPORATION
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
July 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. Forward-looking statements include those that imply that the Company will be able to commercially develop Hemopure, that in pursuing the cardiovascular and trauma indications the Company will be able to successfully address the safety and other questions of the FDA arising out of its previously submitted BLA for an orthopedic surgery indication, that the Company’s expectations regarding the NMRC assuming and carrying out primary responsibility for conducting a two-stage Phase II/III clinical trial in the out-of-hospital setting will be met, that the Company will be able to obtain regulatory approvals required for the marketing and sale of Hemopure or any other product in a major market, that anticipated milestones will be met in the expected timetable, that any pre-clinical or clinical trials will be successful, that Hemopure, if it receives regulatory approval, will attain market acceptance and be manufactured and sold in the quantities anticipated or that the Company will be able to stabilize and enhance its financial position. Actual results may differ materially from those set forth in the forward-looking statements due to risks and uncertainties that exist in the Company’s operations and business environment. These risks include, without limitation, uncertainties concerning the Company’s ability to complete its proposed offering or future offerings, the availability of sufficient financing to continue operations, changes in the Company’s limited manufacturing capability, marketing, market acceptance and competition and the other factors identified under “Risk Factors” in this report. All forward-looking statements included or incorporated by reference in the report are based on information available to the Company on the date such statements were made. 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 update any forward-looking statement or to release publicly the results of revisions to any forward-looking statements to reflect events or circumstances after the date hereof. Reference is made in particular to the risk factors in Part II and the discussions set forth below in this report under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Overview

On June 23, 2004, the Company announced that its board of directors had appointed Zafiris G. Zafirelis as the new president and chief executive officer and a board member, restructured the executive management team, eliminated an additional 25 positions to further reduce costs, and decided upon a change in corporate strategy to focus on the development of Hemopure for a cardiovascular disease indication, while also supporting our collaborative research and development agreement with the U.S. Naval Medical Research Center for a potential trauma indication. To facilitate this transition, Zafirelis has formed an interim operating team that includes several experienced senior advisors and has established a Medical Advisory Board of six persons with specialties in cardiovascular research, interventional cardiology and cardiac care.

As described in Note 7 to the financial statements, on September 8, 2004 the Company received approximately $2.5 million from the U.S. Military. We believe that these funds, together with the Company’s cash on hand at July 31, 2004, will be sufficient to fund operations into October 2004.

13

Part I

Item 2

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

Significant additional capital will be required to fund our operations until such time, if ever, that the Company becomes profitable. We intend to seek additional capital through sales of equity securities, strategic alliances and/or other financing vehicles, if any, that might become available, including potential corporate collaborations for sharing development and commercialization costs. We also plan to continue to aggressively manage expenses. Since September 2003, we have reduced our workforce by more than two-thirds, from 246 employees at September 30, 2003 to 70 employees at July 31, 2004, and have significantly decreased marketing and manufacturing-related expenditures and deferred capital expenditures.

We expect that our activities and expenditures for the next seven months will be associated primarily with developing Hemopure for a cardiovascular disease indication and for a trauma indication, replying to the FDA’s safety and certain other questions, in particular those related to our strategic focus on cardiovascular and trauma indications that arise out of our previously-filed BLA to market Hemopure in the United States for an orthopedic surgery indication, conducting preclinical animal studies, and maintaining some manufacturing capability.

In June 2004, we received notice from the Nasdaq National Market (Nasdaq NM) that the daily minimum bid price of our Class A common stock fell, and remained below, $1.00 for 30 consecutive business days. As a result, we are out of compliance with the $1.00 minimum bid price for continued inclusion of our Class A common stock in the Nasdaq NM. We have 180 calendar days (until December 14, 2004) to regain compliance, and we will have an additional 180 calendar days, if at December 14, 2004 we meet the initial listing criteria for the Nasdaq NM other than the bid price requirement. We may not be able to regain compliance with the minimum bid price requirement of the Nasdaq NM. If we are unable to regain compliance within the required period, and are further unable to meet the criteria for initial inclusion on the Nasdaq NM through other measures to increase our per share bid price, our Class A common stock may be delisted from the Nasdaq NM.

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

•		The process of obtaining FDA marketing approval of Hemopure has risks of delays that make the ultimate development cost unpredictable. We are hopeful that we can respond to all issues the FDA has raised to date regarding our previously filed BLA for Hemopure for an orthopedic surgery indication, but since it is likely that we will need to conduct one or more additional human clinical trials, including a Phase III trial, before the FDA will consider approving Hemopure for any indication, we are evaluating all of our clinical and regulatory options. To that end, we are in the early stages of clinical development of Hemopure for indications in both trauma and cardiology. In Europe, a 45-patient Phase II clinical trial, assessing the safety of Hemopure in patients undergoing coronary angioplasty, has reached approximately 45 percent enrollment. In South Africa, a 50-patient Phase II clinical trial, assessing the safety and tolerability of Hemopure in a hospital setting for emergency treatment of unstable patients who have significant blood loss as a result of blunt or penetrating trauma, has commenced enrollment.
•		Although Hemopure is already approved for commercial sale in South Africa for the treatment of acutely anemic surgery patients, the product has not yet been offered for sale in South Africa. Since we obtained marketing approval for Hemopure in South Africa clinicians have treated more than 330 patients in South Africa with Hemopure units that we 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. We cannot predict when our first sales of Hemopure might occur in South Africa.
•		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 or otherwise.

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 judgments in determining estimates about the effect of matters that are inherently uncertain.

14

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

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. Finished goods inventories 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. Finished goods inventories, including Oxyglobin and Hemopure, are also reviewed against sales forecasts, including anticipated sales of Hemopure to the NMRC for their use in the proposed RESUS trial and forecasts of Hemopure sales in South Africa, to determine if amounts in inventory exceed expected demand or if they are planned to be used in Company sponsored clinical trials. Inventories are also subject to quality compliance investigations. Reserves are established for inventory based on these reviews and investigations. The value of finished goods inventories on our financial statements reflect the standard cost of our product, net of these reserves. If our sales activity is significantly less than anticipated or quality compliance testing results in the rejection of inventory, then we may incur significant inventory write-downs, resulting in charges to cost of revenues in such period.

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 are the principal long-lived assets that could be subject to such a review. Pursuant to SFAS 144, during the third 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 the review, the Company considered its lack of financing for this facility to date, the potential timing of construction activities, the extent to which the asset is site specific, and the Company’s ongoing plan to ultimately build a new facility in South Carolina. Based upon this analysis, the Company determined that, while the delays in obtaining financing for this facility, delays in obtaining FDA approval for Hemopure and a change in the Company’s clinical focus are significant and therefore indicators of potential impairment, the sales resulting from an approval of Hemopure in a cardiac indication, if obtained, would, in the Company’s view, ultimately exceed its current manufacturing capability. Based upon FAS 146, using an estimated undiscounted cash flow of the proposed facility, the Company believes that, if it obtains FDA approval of Hemopure for a cardiac ischemia indication, its plan for the South Carolina manufacturing facility should still be viable, it should be able to finance the proposed facility in the future on commercially reasonable terms and it should be able to generate sufficient positive future cash flows to recover the Company’s investment in the facility. Therefore, the Company has determined that no impairment exists at July 31, 2004. However, should there be a change in circumstances with respect to the South Carolina manufacturing facility or other long-lived assets, such changes may result in our recording significant impairment charges in the future.

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 directly to veterinarians in the United States. The Company sells Oxyglobin to a distributor in the United Kingdom that sells the 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 monitors creditworthiness on a regular basis and believes collectibility of product revenues is reasonably assured at the time of sale. Although Hemopure is already approved for commercial sale in South Africa for the treatment of acutely anemic surgery patients, the product has not yet been offered for sale in South Africa. Until substantial transactions have occurred and circumstances of distribution, storage and dispensing at medical facilities are experienced, revenues from Hemopure that is sold for clinical use in South Africa or for use in third party sponsored clinical trials will not be recognized until the units are actually used.

15

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

Research and Development

Since its founding in 1984, Biopure has been primarily a research and development company focused on developing and obtaining U.S. regulatory approval of Hemopure, our oxygen therapeutic under development for human use. Our research and development expenses have been for basic research, product development, process development, pre-clinical studies, clinical trials and filing with the FDA a Hemopure BLA for an orthopedic surgery indication. 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 compared 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 FDA 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, we have fully reserved for any clinical trial material units planned for use in Company-sponsored projects.

16

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

Results of Operations