Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Statement Regarding Forward-Looking Information

The following discussion of the Company's financial condition and results of operations includes forward-looking statements. These forward-looking statements include, without limitation, statements about the clinical development program, other expected activities, and the adequacy of the Company's available cash resources. Forward-looking statements include those that imply that the Company will be able to manage its expenses effectively and raise the funds needed to continue its business, that the Company will be able to stabilize and enhance its financial position, that the Company will be able to commercially develop Hemopure, that in pursuing anemia, cardiovascular and trauma indications the Company will be able to address safety and efficacy questions of regulatory agencies, that the U.S. Naval Medical Research Center (NMRC) may conduct a clinical trial in trauma patients, and that anticipated milestones will be met in the expected timetable or at all, 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 amounts to attain profitability and that the Company will be able to successfully increase its manufacturing capacity for Hemopure if it receives regulatory approval. 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 and judgments.

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 the 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 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 us that the Company's objectives or plans will be achieved. The Company undertakes 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 the Company makes in its reports to the SEC on Forms 10-Q, 8-K and 10-K.

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

Since its founding in 1984, Biopure has been primarily a research and development company focused on developing Hemopure, the Company's oxygen therapeutic for human use, and obtaining regulatory approval in the United States and other markets. The Company's research and development expenses have been devoted to basic research, product development, process development, preclinical studies, clinical trials and regulatory activity. In addition, the Company's development expenses in the past included the design, construction, validation and maintenance of a large-scale pilot manufacturing plant in Cambridge, Massachusetts.

A manufacturing facility is a necessary part of developing a product like Hemopure. The FDA classifies Hemopure 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. Under FDA regulations, any change in the manufacturing process could be considered to produce an altered, possibly different product. Therefore, it is necessary to demonstrate manufacturing capability at greater than laboratory scale for an application for regulatory approval of a biologic to be accepted for review. This requirement has resulted in high manufacturing research and development costs in the development of our products relative to other types of drugs and high costs in keeping the manufacturing facility operational.

Prior to 1998, the Company manufactured products solely for use in preclinical and clinical trials, and production costs were charged wholly to research and development. As an offshoot of the research and development for Hemopure, Oxyglobin, a similar product, gained marketing approval for veterinary use in the U.S. in 1998 and in the European Union in 1999. Following the U.S. approval, Oxyglobin was produced for sale in the same pilot manufacturing plant that was built and maintained primarily for the development of Hemopure. Because of this marketing approval, costs of production of Oxyglobin for sale and an allocation of manufacturing overhead based on capacity used for Oxyglobin are charged to inventory and to cost of revenues. Since marketing approval of Hemopure for human use was granted in South Africa in 2001, costs of production of Hemopure for sale and an allocation of manufacturing overhead based on capacity used for Hemopure have been charged to inventory and to cost of revenues.

Thus a substantial majority of our costs comprise research and development and cost of revenues. The revenues from products we now market defray some of the manufacturing costs we have incurred to manufacture Hemopure. We suspended manufacturing operations during the fiscal quarter to reduce our burn rate.

Our research and development activities in 2007 and 2008 are described below. We do not currently have any trials enrolling patients.

Ischemia

Biopure conducted Phase 2 clinical trials of Hemopure in Europe and South Africa to assess the product's potential safety and feasibility in ischemia applications, such as cardiac surgery and acute coronary ischemia (e.g., heart attack). The primary goal of these trials was to provide preliminary data to support advanced trials in heart attack patients. In contrast to trials where Hemopure was administered as a red blood cell replacement, in these ischemia trials, Hemopure was being administered as an oxygen-carrying drug.

Trauma

The Company has been working with the NMRC to develop Hemopure for use in trauma patients in out-of-hospital settings (for example, at accident scenes, in ambulances or on the battlefield). In June 2005, the NMRC submitted an IND application to the FDA for a clinical trial called RESUS (Restore Effective Survival in Shock). The application, which has been on clinical hold at the FDA since July 2005, proposes a government-funded, NMRC sponsored clinical trial to assess the safety and efficacy of out-of-hospital administration of Hemopure in reducing morbidity and mortality in severely injured patients experiencing hemorrhagic shock (acute blood loss). In order for RESUS to proceed, the FDA must lift the clinical hold, and the Department of Defense and the internal review boards of participating hospitals in the communities where the study would take place must provide final authorization.

In June 2008 the NMRC submitted and subsequently withdrew a new protocol for a Phase 2 clinical trial of Hemopure for resuscitation of operational casualties with severe traumatic hemorrhagic shock without availability of blood transfusions, pending further discussion and a pre-IND meeting with the FDA. The proposed trial hypothesis is that for such casualties Hemopure will improve survival and other clinical parameters, and will be relatively safe and well tolerated, in comparison with "standard fluid." Subjects will sign an informed consent prospectively. The study is entitled "Operational Restore Effective Survival in Shock" (Op RESUS). The primary aim of the proposed study is to compare the 28-day relative rate of death in patients receiving Hemopure versus the group of patients receiving the "standard fluid" for resuscitation (Hextend).

The Company sponsored a separate Phase 2, 50-patient clinical trial at the Johannesburg Hospital Trauma unit in South Africa that was designed to assess the safety and tolerability of Hemopure in the hospital emergency room setting for treatment of unstable trauma patients who have significant blood loss and low blood pressure. Of 50 planned patients, as of June 9, 2008, 33 patients had been enrolled. On that date the Company terminated the trial for several reasons, including cost and slow enrollment. The Company had already reported interim data on 22 patients to regulatory agencies and intends to report the balance when final data are available.

Anemia in Acute Myelogenous Leukemia

The Company has had discussions with the FDA on identifying an acceptable patient population for a new clinical trial of Hemopure. The Company has proposed to study the use of Hemopure in patients suffering from Acute Myelogenous Leukemia (AML) who refuse transfusion with blood components. Currently, AML patients who do not accept blood transfusions are unable to undergo potentially life-saving induction chemotherapy because of the profound anemia the chemotherapy causes. Biopure is preparing to submit a protocol for such patients for consideration by FDA. Patients would give informed consent before being enrolled in this study. An effective treatment for this patient population represents an unmet medical need because of an expected 100% mortality within 6 months in the absence of induction chemotherapy. The purpose of the study would be to assess the efficacy of Hemopure in providing an oxygen carrier in lieu of transfusion with red blood cells, as an adjunct to other special procedures, following induction chemotherapy for AML. A successful trial in this population could be pivotal to establish an intended use for Hemopure in this clinical setting. The protocol is currently in preparation.

Surgical Anemia Marketing Application

In July 2006, the Company submitted a marketing authorization application (MAA) to the United Kingdom's Medicines and Healthcare products Regulatory Agency (MHRA). The application sought authorization to market Hemopure in the U.K. for the treatment of acutely anemic adult orthopedic surgery patients less than 80 years of age.

In December 2006, the Company received a provisional opinion letter from the United Kingdom Commission on Human Medicines containing comments and questions. The Company met with the MHRA during 2007 and responded to its letter in early November 2007, requesting market authorization for the treatment of acutely anemic adult orthopedic surgery patients less than 80 years of age when blood is not readily available or not an option. In April 2008 the Company received a comment letter from the U.K.'s Commission on Human Medicines addressing the Company's application. The comment letter states that the Commission was reassured on a number of the clinical questions raised in its initial opinion letter, but indicated that both "major" and "other" pharmacological and clinical issues either were not yet resolved by the Company's submission made in November 2007 or were only resolved in part. In addition the comment letter poses several new questions. The Company met with the MHRA on May 29, 2008 to discuss manufacturing and quality issues. The Company postponed a meeting planned for July 2008 in order to apply the Company's limited resources, a result of the reductions in force described below, to the submission of the AML protocol and working with the FDA.

Cost Cutting Measures

During the third fiscal quarter of 2008 the Company took measures to reduce its ongoing cash burn. Those measures included the termination of 52 employees, cutting facilities maintenance costs and suspension of manufacturing. The employees terminated were primarily employees from the Company's manufacturing division. These cost cutting measures are expected to reduce the Company's ongoing cash burn by approximately $8.8 million annually. Notwithstanding the cost reductions, 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 it is profitable through sales of securities, strategic alliances and other financing vehicles, if any, that might become available.

Significant Estimates and Assumptions

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting periods. Significant estimates and assumptions by management affect accrued expenses, stock-based compensation, long-lived assets and inventory valuation.

Although the Company regularly assesses these estimates, actual results could differ materially from these estimates. Changes in estimates are recorded in the period in which they occur. The Company bases its estimates on historical experience and various other assumptions that it believes to be reasonable under the circumstances.

Critical Accounting Policies

The Company's significant accounting policies are described in the Notes to the Consolidated Financial Statements contained in its Annual Report on Form 10-K for the fiscal year ended October 31, 2007. The application of the Company's critical accounting policies is particularly important to the accurate portrayal of its 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 finished Hemopure and Oxyglobin. Inventories are reviewed periodically to identify expired units and units with a remaining life too short to be commercially viable. Inventories are also subject to internal quality compliance investigations. Inventory that is not expected to be utilized based on projected demand or fails quality assessment is written off. The inventory of Hemopure finished goods represents the units the Company expects to sell in South Africa or use in preclinical and clinical studies where payment is received for the trial material. The Company expects to be paid for the units to be used in a proposed trauma trial to be conducted by or on behalf of the NMRC and in preclinical studies by or under the guidance of the NMRC. Any units expected to be consumed by the Company in its own preclinical or clinical trials are expensed to research and development when manufactured.

Stock-Based Compensation

The Company adopted the provisions of Statement of Financial Accounting Standards 123R, "Share-Based Payment" ("SFAS 123R"), beginning November 1, 2005, using the modified prospective transition method. SFAS 123R requires the Company to measure the cost of employee services in exchange for an award of equity instruments based on the grant-date fair value of the award and to recognize cost over the requisite service period. Option valuation models require the input of subjective assumptions, including stock price volatility and expected term of options.

Revenue Recognition

The Company recognizes revenue from sales of Hemopure and Oxyglobin in accordance with Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition," whereby sales are recorded upon shipment, provided that there is evidence of a final arrangement, there are no uncertainties surrounding acceptance, title has passed, collectability is probable and the price is fixed or determinable. Through the second fiscal quarter of 2008 the Company sold Oxyglobin directly to veterinarians in the United States. In May 2008 the Company began selling Oxyglobin directly to a distributor for resale in the U.S. It has a similar arrangement in Europe. Collectability with these distributors is reasonably assured as pricing arrangements are established, and these agreements establish the respective distributor's intent to pay. The Company recognizes revenue from the U.S. military upon invoicing for reimbursable expenses in connection with developing Hemopure for a trauma indication. Amounts received for prepaid inventory purchases, recorded as deferred revenue, will not be recognized as sales until shipment.

The Company's foreign sales are generally through distributors. There is no right of return provided for distributors. For sales of products made to distributors, the Company considers a number of factors in determining whether revenue is recognized upon transfer of title to the distributor, or when payment is received. These factors include, but are not limited to, whether the payment terms offered to the distributor are considered to be non-standard, the distributor history of adhering to the terms of its contractual arrangements with the Company, the level of inventories maintained by the distributor, whether the Company has a pattern of granting concessions for the benefit of the distributor, and whether there are other conditions that may indicate that the sale to the distributor is not substantive. The Company currently recognizes revenue primarily on the "sell-in" method with its distributors.

Results of Operations

As the Company generates net losses, the key drivers of the losses are cost of revenues, research and development and general and administrative expenses. Inflation and changing prices have not had a significant impact on the revenues or loss from operations in the periods presented below. For the three-month and nine-month periods ended July 31, 2008 and 2007, these items were as follows (dollars in thousands):

                                                  Three Months Ended                                    Nine Months Ended
                                        July 31, 2008             July 31, 2007             July 31, 2008              July 31, 2007
                                              Percent of                Percent of                 Percent of                 Percent of
                                    Amount    Total Costs     Amount    Total Costs      Amount    Total Costs      Amount    Total Costs
Oxyglobin Product Sales             $   534                   $   470                   $  1,730                   $  1,414
Hemopure Product Sales                   46                        58                        193                         80
Research and Development Revenues        -                         22                        132                        269
Other Revenues                          128                        -                         128                         -

Total Revenues                          708                       550                      2,183                      1,763
Cost of Revenues
Oxyglobin                               747            14 %       636             9 %      1,961            11 %      2,098            10 %
Hemopure                              1,615            30 %     2,453            34 %      5,002            28 %      6,928            33 %

Total Cost of Revenues                2,362            44 %     3,089            43 %      6,963            39 %      9,026            43 %
Research and Development                914            17 %     1,618            23 %      4,157            23 %      5,397            24 %
Sales and Marketing
Oxyglobin                                80             1 %        20             0 %        153             1 %         60             0 %
Hemopure                                152             3 %       321             5 %        807             5 %      1,039             2 %

Total Sales and Marketing               232             4 %       341             5 %        960             6 %      1,099             2 %
General and Administrative            1,849            35 %     2,107            29 %      5,795            32 %      6,365            31 %

Total Costs                         $ 5,357           100 %   $ 7,155           100 %   $ 17,875           100 %   $ 21,813           100 %

Three months ended July 31, 2008 compared to three months ended July 31, 2007

Total revenues for the third fiscal quarter of 2008 were $708,000, or 29% higher than revenues of $550,000 for the same period in fiscal 2007. The increase is attributable to sales and royalties on sales of the Company's veterinary product, Oxyglobin, totaling $643,000 in revenue versus $470,000 in Oxyglobin revenues in the third fiscal quarter of 2007. The increase in Oxyglobin revenues results from higher unit sales. As previously announced, in the third fiscal quarter of 2008 the Company appointed an exclusive distributor for Oxyglobin in the U.S. This distributor buys product for its inventory upon shipment by the Company and pays royalties in negotiated amounts. Previously the Company sold directly to veterinarians.

Hemopure sales decreased to $46,000 during the third fiscal quarter of 2008 from $58,000 in the third fiscal quarter of 2007. The clinical use of the product in South Africa has been without serious adverse effects caused by Hemopure. However, sales have declined because of a meta-analysis published in the April 2008 Journal of the American Medical Association, which reached negative conclusions about hemoglobin-based oxygen carriers (HBOCs) as a class of products. Some of the article's authors also corresponded with regulatory authorities disparaging Hemopure. Notwithstanding the absence in clinical use of the adverse effects for HBOCs noted by the authors, citing the article, one South African state recommended against using Hemopure and an insurer suspended coverage of the product. The Company is in discussions with health agencies in South Africa and other countries to respond to their concerns.

Cost of revenues includes costs of both Oxyglobin and Hemopure. Cost of revenues was $2.4 million for the third quarter of fiscal 2008, compared to $3.1 million for the same period in 2007. Hemopure cost of revenues decreased $838,000 during the third fiscal quarter of 2008 because of the suspension of manufacturing and reduction of manufacturing personnel described above in "Overview - Cost Cutting Measures." Oxyglobin cost of revenues increased primarily due to the increased unit sales mentioned above partially offset by savings from cost cutting measures.

Historically, virtually all research and development expenses were related to an anticipated surgical anemia indication whereby Hemopure would be used to eliminate or reduce the need for red blood cell transfusion. Beginning in fiscal 2004, the Company's focus became the development of Hemopure for ischemia and trauma indications, discussed below. Currently the Company is incurring the majority of its research and development expenses on the development of the product for anemia uses while continuing to support the Navy in its pursuit of a trauma indication and working to the extent feasible on gathering and making final data from ischemia trials. Anemia expenditures are generally in two categories: Funds have been spent on an application for authorization to market Hemopure in the United Kingdom for use in orthopedic surgery where blood is not available. The second category of anemia expenditures is the Company's newest initiative, preparing for a proposed clinical trial in the United States to treat anemia in patients with acute myelogenous leukemia. If the FDA permits the Company to undertake a clinical trial in AML, that area is likely to be the Company's most active research and development program.

Both the ischemia and the trauma projects are in early stages. Cumulative ischemia project expenditures from the inception of the projects consisted primarily of the costs of preparing and carrying out Phase 2 clinical trials in Europe. When the Company's personnel resources permit, compiling the data from those trials and proceeding to other ischemia trials may again require significant research and development funding. Cumulative trauma expenditures have consisted of costs to conduct preclinical studies and preparation costs primarily associated with protocol design and preparation of the IND application for the proposed NMRC sponsored out-of-hospital trauma trials. The majority of these trauma expenses to date, has been reimbursed by payments from funds described in Note 7 to the condensed consolidated financial statements.

Regulatory agency requirements for additional clinical trials and any further preclinical studies that might be necessary for either an ischemia indication, for use in trauma patients or for an anemia indication cannot be estimated at this time. The risks and uncertainties associated with the early stage of planning and execution of the ischemia, trauma and AML clinical development programs include, among other things, uncertainties about results that at any time could require us to abandon or greatly modify either project. Accordingly, the Company cannot estimate the period in which material net cash inflows for any indication might commence, if ever.

Research and development expenses were $914,000 for the third quarter of fiscal 2008 compared to $1.6 million for the same period in 2007. The decrease compared to the same period in 2007 is due to a $313,000 reduction in spending on clinical and preclinical trials, a $178,000 reduction in consulting and outside services and an $111,000 reduction in salaries expense.

Sales and marketing expenses decreased to $232,000 for the third quarter of fiscal 2008, from $341,000 for the same period in 2007. During fiscal 2007 the Company spent $84,000 in market research for the U.K.

General and administrative expenses were $1.8 million for the third fiscal quarter of 2008 compared to $2.1 million for the same period in 2007. Insurance premiums, travel expense and audit fees decreased during the third fiscal quarter of 2008 compared to the same period in 2007. Compensation expense, including salaries and equity compensation, decreased during the third fiscal quarter of 2008 compared to the same period in 2007 but were offset by a one-time severance charge of $252,000 related to the reduction in force described above.

Nine months ended July 31, 2008 compared to nine months ended July 31, 2007

Total revenues for the first nine months of fiscal year 2008 were $2.2 million, including $1.8 million from sales and royalties on sales of Oxyglobin, $193,000 from sales of Hemopure in South Africa and $151,000 from funds received from the U.S. Government. Total revenues for the same period in 2007 were $1.8 million, including $1.4 million from Oxyglobin sales, $80,000 from sales of Hemopure and $269,000 from the U.S. Government. The increase in Hemopure sales reflects the Company's marketing efforts and increasing use of the product in South Africa during the early part of fiscal 2008. However, sales of Hemopure in South Africa have recently declined due to the meta-analysis published in the April issue of JAMA, as previously discussed.

Oxyglobin revenues increased during the first nine months of fiscal 2008 compared to the same period in 2007 primarily due to higher unit sales in the . . .