SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the quarterly period ended January 31, 2005

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. þ Yes o No

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

The number of shares outstanding of each of the issuer’s classes of common stock as of March 10, 2005 was:

Class A Common Stock, $.01 par value                145,927,446
Class B Common Stock, $1.00 par value                          117.7

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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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Part I

BIOPURE CORPORATION

Note: The balance sheet at October 31, 2004 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.

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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 month period ended January 31, 2005 are not necessarily indicative of the results that may be expected for the year ending October 31, 2005; however, the Company expects to incur a substantial loss for the year ending October 31, 2005.

During the first fiscal quarter of fiscal 2004 expenses for certain departments were charged to research and development. In connection with changes in the nature of the work being performed by people in these departments, the Company decided to charge the costs of the departments to cost of goods sold and general and administrative. Consequently it reclassified the charges in the first quarter of fiscal 2004. For the first fiscal quarter of 2004, $577,000 has been reclassified from research and development. Of these costs, $441,000 and $136,000 are now shown as cost of revenues and general and administrative, respectively. These reclassifications had no impact on the loss from operations.

The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Biopure Netherlands, BV, Biopure South Africa, Pty, 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 for the fiscal year ended October 31, 2004, filed with the SEC on January 14, 2005.

The Company has financed operations from inception primarily through sales of equity securities, development and license agreement payments. The Company has not been profitable since inception and had an accumulated deficit of $477,884,000 at January 31, 2005. As of January 31, 2005, the Company had $25,273,000 in cash and cash equivalents. The Company expects this funding to be sufficient to fund operations through January 2006 under the Company’s current operating plan. Additional capital will be required to fund the Company’s operations until the Company becomes profitable. The Company does not expect to be profitable for at least the next several years, and may never become profitable. The Company intends to seek additional capital through sales of equity securities and, if appropriate, to consider strategic collaborations for sharing development and commercialization costs. However, there can be no assurance that adequate additional financing will be available to the Company on terms that it deems acceptable, if at all.

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. The dilutive effect of stock options and warrants is determined based on the treasury stock method using 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,

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BIOPURE CORPORATION
Notes to Condensed Consolidated Financial Statements
January 31, 2005
(Unaudited)
(continued)

options and warrants is anti-dilutive. Dilutive weighted average shares outstanding do not include 34,359,754 potential common-equivalent shares for the three months ended January 31, 2005 and 8,119,828 common-equivalent shares for the three months ended January 31, 2004, as their effect would have been anti-dilutive.

3.	Capital Stock

During the three months ended January 31, 2005, warrants were exercised to acquire an aggregate of 10,175,464 shares of the Company’s class A common stock at a weighted average exercise price of $0.32 per share. Total proceeds from these warrant exercises were approximately $3,286,000.

4.	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:

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BIOPURE CORPORATION
Notes to Condensed Consolidated Financial Statements
January 31, 2005
(Unaudited)
(continued)

5.	Inventories

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

6.	Accrued Expenses

Accrued expenses consisted of the following:

On January 21, 2005 the Company entered into a settlement agreement with Network Healthcare Holdings Limited and Tshepo Pharmaceuticals (Pty) Limited (“Tshepo”) relating to reimbursable expenses and distribution rights for Hemopure in South Africa. As part of the settlement, the Company agreed to issue 1,600,000 shares of its class A common stock to affiliates of Tshepo. As a result, the Company recorded a one-time non-cash expense of $824,000, which represents the fair market value of the stock on the settlement date, and is recorded as an accrued expense as of January 31, 2005.

7.	Commitments

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 2/3 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. In

8

BIOPURE CORPORATION
Notes to Condensed Consolidated Financial Statements
January 31, 2005
(Unaudited)
(continued)

August 2004, President Bush signed 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 military administrative costs. Of this amount, approximately $5 million is being administered by the Army to help fund the Company’s obligations under the CRADA.⁽²⁾ During 2004, the NMRC worked to address FDA questions arising from a pre-investigational new drug (IND) meeting held in April 2004 to discuss the trauma trial protocol, entitled “Restore Effective Survival in Shock (RESUS)”. In preparation for the submission of an IND application to conduct the proposed RESUS trial, the NMRC is currently conducting an FDA-requested preclinical animal study of Hemopure in uncontrolled hemorrhage with traumatic brain injury, which it expects to complete this spring.

8.	Recently Issued Accounting Standards

On December 16, 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123 (revised 2004), Share-Based Payment, which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation. Statement 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows. Generally, the approach in Statement 123(R) is similar to the approach described in Statement 123. However, Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. Statement 123(R) must be adopted in the first interim or annual period beginning after June 15, 2005, irrespective of the entity’s fiscal year. Early adoption will be permitted in periods in which financial statements have not yet been issued. The Company will adopt this new standard effective for the fourth fiscal quarter of 2005.

Statement 123(R) permits public companies to adopt its requirements using one of two methods: a “modified prospective” and a “modified retrospective” method. In the modified prospective method compensation cost is recognized beginning with the effective date (a) based on the requirements of Statement 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of Statement 123 for all awards granted to employees prior to the effective date of Statement 123(R) that remain unvested on the effective date. The “modified retrospective” method includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under Statement 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption. The Company is evaluating which method of adoption it will apply for Statement 123(R).

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BIOPURE CORPORATION
Notes to Condensed Consolidated Financial Statements
January 31, 2005
(Unaudited)
(continued)

As permitted by Statement 123, the Company currently accounts for share-based payments to employees using Opinion 25’s intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of Statement 123(R) fair value method will have a significant impact on our result of operations, although it will have no impact on our overall financial position. The impact of adoption of Statement 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had we adopted Statement 123(R) in prior periods, the impact of that standard would have approximated the impact of Statement 123 as described in the disclosure of pro forma net loss per share in Note 4 to our consolidated financial statements.

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, but the staff has indicated that it intends to make such a recommendation.

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 2 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 3 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 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. A motion to dismiss the amended complaint is pending with

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BIOPURE CORPORATION
Notes to Condensed Consolidated Financial Statements
January 31, 2005
(Unaudited)
(continued)

oral argument expected to be scheduled. 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. A motion to dismiss the amended complaint is pending. 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.

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BIOPURE CORPORATION
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
January 31, 2005

Management’ s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Statement Regarding Forward-Looking Information

The following discussion of our financial condition and results of operations includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Exchange Act. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements in these provisions. These forward-looking statements include, without limitation, statements about our market opportunity, strategies, competition, expected activities, expected profitability and investments as we pursue our business plan, and the adequacy of our available cash resources. These forward-looking statements are usually accompanied by words such as “believe,” “anticipate,” “plan,” “seek,” “expect,” “intend” and similar expressions. The forward-looking information is based on various factors and was derived using numerous assumptions.

These forward-looking statements involve risk and uncertainties. Forward-looking statements include those that imply that we will be able to commercially develop Hemopure, that in pursuing the cardiovascular and trauma indications we will be able to address the safety and other questions of the U.S. Food and Drug Administration arising out of our previously submitted biologics license application (BLA) for an orthopedic surgery indication, that our expectations regarding the role of the U.S. Naval Medical Research Center in assuming and carrying out primary responsibility for conducting a two-stage Phase 2/3 clinical trial in the out-of-hospital setting will be met, that we 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 preclinical 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, that we will be able to successfully increase our manufacturing capacity for Hemopure if it receives regulatory approval, that we will be able to manage our expenses effectively and raise the funds needed to operate our business, or that we will be able to stabilize and enhance our financial position. Actual results may differ materially from those set forth in the forward-looking statements due to risks and uncertainties that exist in our operations and business environment. These risks include, without limitation, the availability of sufficient financing to continue operations, changes in our cash needs, our stage of product development, history of operating losses and accumulated deficit, uncertainties and possible delays related to clinical trials and regulatory approvals, possible healthcare reform, our limited manufacturing capability, our lack of marketing experience, 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 this report are based on information available to us 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 us that our objectives or plans will be achieved. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any additional disclosures we make in our Form 10-Q, 8-K and 10-K reports to the SEC.

The content of this document does not necessarily reflect the position or the policy of the U.S. Government or the Department of Defense, and no official endorsement should be inferred.

Overview

The Company’s primary focus is on the development of Hemopure for a cardiovascular ischemia indication, while also supporting our cooperative research and development agreement with the U.S. Naval Medical Research Center for a potential trauma indication.

12

BIOPURE CORPORATION
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
January 31, 2005
(continued)

During the first fiscal quarter of 2005 the Company received approximately $21.1 million, after offering costs, from the sale of common stock and warrants. The Company also received approximately $3.3 million from the exercise of warrants by investors. We believe the Company’s cash on hand at January 31, 2005, will be sufficient to fund operations through January 2006.

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 public or private sales of equity securities and, if appropriate, consider 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 69 employees at January 31, 2005, significantly decreased marketing and manufacturing-related expenditures and deferred capital expenditures.

We expect that our activities and expenditures for the remainder of fiscal 2005 will be associated primarily with developing Hemopure for a cardiovascular disease indication and for a trauma indication, replying to questions posed by the FDA arising out of our previously submitted BLA to market Hemopure in the United States for an orthopedic surgery indication and working to stabilize and enhance our financial position by raising additional capital.

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. On December 16, 2004 we received a notice from the Nasdaq NM providing the Company an additional 180 calendar days (until June 13, 2005) to regain compliance with the daily minimum bid price requirement for continued listing. To regain compliance, the bid price of our common stock must close at $1.00 per share or more for a minimum of 10 consecutive business days. If we do not regain compliance by June 13, 2005, we will be delisted. We are asking our stockholders to approve, at the 2005 annual meeting, an amendment to our restated certificate of incorporation that, at the discretion of the Board of Directors, would cause a reverse split of our Class A common stock to reduce the number of shares outstanding and increase the price per share at ratios of 1:2, 1:3, 1:4, 1:5 or 1:6. However, the Company may not effect such a reverse stock split, even if approved by the stockholders, and might instead, based on weighing positive and negative factors about the effect of reverse stock splits as well as market conditions and the Company’s prospects, permit the stock to be delisted. We are currently evaluating all options, including the possibility of trading on the over-the-counter market maintained by the NASD Electronic Bulletin Board and the potential for regaining compliance over the next few months by improvement of our stock price.

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 3 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 2 clinical trial, assessing the safety of Hemopure in patients undergoing elective coronary angioplasty, has enrolled 41 patients as of March 9, 2005. We believe the data from this trial may help us address FDA questions about the product’s safety in patients with coronary artery disease.

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BIOPURE CORPORATION
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
January 31, 2005
(continued)

		In South Africa, a 50-patient Phase 2 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 enrolled 10 patients. Enrollment is suspended at our request while staff are trained and other procedural (not product related) issues are being addressed. We anticipate that the trial will resume shortly.
	•	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 contained in our Form 10-K for the fiscal year ended October 31, 2004. 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.

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, and 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. Inventories are also subject to quality compliance investigations. Reserves are established for inventory that falls into these categories. The inventory of Hemopure finished goods represents the units the Company expects to sell in South Africa or use in preclinical and clinical studies. We will be reimbursed for the cost of units used in a proposed trauma trial to be conducted by or on behalf of the U. S. Naval Medical Research Center (NMRC). If the Company experiences future delays in sales in South Africa or in the use of Hemopure by the NMRC, we may have to reserve for additional units in the future.

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.

At the end of Fiscal 2004, the Company assessed its long-lived assets for impairment and determined that no impairment existed at that time. The Company continually monitors business and market conditions to asses whether an impairment indicator exists. If the Company were to determine that an impairment indicator exists, it

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BIOPURE CORPORATION
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
January 31, 2005
(continued)

would be required to perform an impairment test which might result in a material impairment charge to the statement of operations.

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.

The Company recognizes revenue from the U.S. military upon invoicing for reimbursable expenses incurred in connection with developing Hemopure for a trauma indication. Amounts received for future inventory purchases, recorded as deferred revenue, will be recognized upon shipment. Although Hemopure is approved for commercial sale in South Africa for the treatment of acutely anemic surgery patients, the product has not yet been offered for sale. Until 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.

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, preclinical 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 plant was completed in 1995, expanded in 1998 and expanded again in 2002.

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.

Our production prior to 1998 was product for use only in preclinical and clinical trials and was charged wholly to research and development. 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, because of marketing approval, 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.

15

BIOPURE CORPORATION
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
January 31, 2005
(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. For the three month periods ended January 31, 2005 and 2004, these items were as follows:

Three months ended January 31, 2005 compared to three months ended January 31, 2004

Total revenues for the first quarter of 2005 were $679,000, including $387,000 received from past congressional appropriations^* administered by the U.S. Army and $292,000 from sales of the company’s veterinary product Oxyglobin^®. The Army payment reimburses Biopure for certain trauma development expenses for Hemopure^®, the company’s product under development for human use. Total revenues for the same period in 2004 were $750,000, entirely from Oxyglobin sales. Fixed manufacturing costs cause Oxyglobin’s production costs to exceed Oxyglobin revenues and are expected to continue to do so until the Company is able to significantly increase its manufacturing operations by generating substantial sales of Hemopure. The Company began limiting its marketing and sales of Oxyglobin in the second quarter of fiscal 2004. The company plans to have substantially lower Oxyglobin sales for the balance of fiscal 2005 and in the foreseeable future than it had in fiscal 2004.

Cost of revenues was $3.1 million for the first quarter of fiscal 2005, compared to $5.2 million for the same period in 2004. Cost of revenues includes costs of both Oxyglobin and Hemopure, although Hemopure has not yet been offered for sale. Hemopure cost of revenues, consisting primarily of the allocation of unabsorbed fixed manufacturing costs, was $2.5 million for the first quarter of fiscal 2005 compared to $3.7 million for the same period in 2004 when production levels were greater. This decrease is largely due to the workforce and other cost reductions in October 2003 and April and June 2004. Oxyglobin cost of revenues was $609,000 for the first quarter of fiscal 2005 compared to $1.6 million for the same period in 2004. The decrease for the quarter was primarily due to fewer Oxyglobin units sold and to the decreased production level.

Research and development expenses include preclinical studies, clinical trials and clinical trial materials. Our research and development expenses have continued to be primarily for our one major project—Hemopure

16

BIOPURE CORPORATION
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
January 31, 2005
(continued)

development for use in patients undergoing surgery. A breakdown of our research and development expenses by major activity is as follows: