Forward Looking Statements and Risk Factors

The following discussion of the Company's financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and the related Notes included elsewhere in this report and with the information contained elsewhere in this report under the captions "Cautionary Statement Regarding Forward Looking Information" and "Risk Factors."

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.

Prior to 1998, the Company manufactured product only 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 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 2002, 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.

Critical Accounting Policies

Our critical accounting policies are described in the Notes to the accompanying consolidated financial statements. The application of our critical accounting policies is particularly important to the portrayal of our financial position and results of operations. These critical accounting policies require us to make subjective judgments in determining estimates about the effect of matters that are inherently uncertain. The following critical accounting policies meet these characteristics and 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. Inventories are reviewed periodically to identify expired units and units with a remaining life too short to be commercially viable, based on projected sales activity, or for use in the proposed RESUS clinical trial. 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 has been and expects to continue to be reimbursed for the cost of units to be used in a proposed trauma trial to be conducted by or on behalf 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

We adopted the provisions of Statement of Financial Accounting Standards 123(R), "Share-Based Payment" ("SFAS 123(R)"), beginning November 1, 2005, using the modified prospective transition method. SFAS 123(R) requires us to measure the cost of employee services in exchange for an award of equity instruments based on the fair value of the award on the date the award is made and to recognize cost over the requisite service period. Under the modified prospective transition method, financial statements for periods prior to the date of adoption are not retrospectively adjusted. However, compensation expense is recognized for (a) all share-based payments granted after the effective date under SFAS 123(R), and (b) all awards granted under SFAS 123 to employees prior to the effective date that remain unvested on the effective date. We recognize compensation expense on fixed awards with pro rata vesting on a straight-line basis over the vesting period.

Prior to November 1, 2005, we used the intrinsic value method to account for stock-based employee compensation under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Consequently, we did not recognize compensation expense in association with options granted at or above the market price of our common stock at the date of grant.

As of October 31, 2008, there was $354,000 million of unrecognized compensation expense, net of forfeitures, related to non-vested market-based share awards, that is expected to be recognized over a weighted average period of 1.5 years.

Refer to Note 2 to the consolidated financial statements for further discussion and analysis of the impact of adoption in our statement of operations.

Long-Lived Assets

Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of 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; real property license rights related to the source, supply and initial processing of our major raw material; and the asset related to expenditures on engineering and plans for a large-scale manufacturing facility we plan to build in South Carolina have been the principal long-lived assets subject to such a review.

Pursuant to SFAS 144, during the fourth quarter of fiscal 2008 the Company assessed its long-lived assets for potential impairment. It shut down its manufacturing operations during fiscal 2008 and without definitive financing, it is not known at what time these operations may restart and produce. SFAS 144 requires evaluating

fixed assets as a group to determine if the realizable value of the fixed assets is equal to or greater than the carrying value of such assets. The Company had an asset appraisal done to evaluate possible impairment of fixed assets. Consequently, pursuant to SFAS 144, the Company recorded a one-time, non-cash impairment charge of $1.6 million during the fourth quarter of fiscal 2008.

During the fourth quarter of fiscal 2007, the Company assessed its long-lived assets for potential impairment. Regarding the design and engineering asset related to the planned South Carolina manufacturing facility, the Company had experienced continued delays in obtaining financing for this facility and in its plans to construct this facility. In addition, the Company has experienced significant delays in its clinical and regulatory activities, which in turn delay any commercialization of Hemopure outside South Africa. The Company was unable to reliably project the timing of a need for a new plant given the continued delays, uncertainties in drug development and uncertainties about its ability to gain, or the timing of its gaining, regulatory approval in a major market. Consequently, pursuant to SFAS 144, the Company recorded a one-time, non-cash impairment charge of $11.3 million during the fourth quarter of fiscal 2007 to fully impair the engineering and design asset.

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. Hemopure marketing in South Africa is directed toward institutions. Until May 2008, the Company sold Oxyglobin directly to veterinarians in the United States and sold Oxyglobin to a distributor in the United Kingdom for resale in the European Union. In May 2008, the Company began to sell Oxyglobin to a distributor in the United States for resale. Collectability is reasonably assured once pricing arrangements are established with the distributor, as these agreements establish the distributor's intent to pay. The Company's customers do not have a right to return product, and it monitors creditworthiness on a regular basis. It believes collectability of product revenues is reasonably assured at time of sale. The Company recognizes expenses to be reimbursed by the U.S. military as incurred and gross versus net in accordance with Emerging Issues Task Force ("EITF") Issue No. 99-19, "Reporting Revenue as a Principal Versus Net as an Agent." Amounts received for future inventory purchases, recorded as deferred revenue, will be recognized upon shipment. Revenues from Hemopure sold for clinical use in South Africa are recognized when sold, in accordance with SAB 104 described above.

Liquidity and Capital Resources

At October 31, 2008, the Company had $1,095,000 in cash and cash equivalents. At December 31, 2008, it had $356,000 in cash and cash equivalents. Since October 31, 2008, the Company has drastically reduced operations, a process begun during fiscal 2008, and collected limited revenue. In January 2009, the entire existing inventory of Oxyglobin was sold to its U.S. distributor, an affiliate of the Company's European distributor, for sale in Europe and the United States for total sales proceeds to the Company of $796,000. The Company's funds on hand are not sufficient to pay its current obligations. However, it is exploring opportunities to raise capital. It can expect no additional revenues from Oxyglobin sales during the remainder of fiscal 2009 and beyond, as there is no Oxyglobin inventory and currently no manufacturing. Further, the Company's distributors have sufficient inventory on hand for anticipated sales in the coming months.

If the Company does not raise capital or have commitments to raise capital by approximately the end of March 2009, it will be required to cease operations and sell the Company or its assets. It is in discussion with investors and does not expect to cease operations at that time but based on current cash on hand and expected cash inflows, the Company can continue operating at current reduced levels only until April 2009. There can be no assurance that ongoing discussions will lead to an investment of capital. The Company's primary commitments for future expenditures are its commitments under real property leases, which are described in Note 12 to the Consolidated Financial Statements.

In fiscal 2008, financing activities provided the Company with $16.4 million in cash, from the sale of common stock and warrants. Cash used in operating activities in fiscal 2008 and 2007 was $17.2 million and $20.7 million, respectively. The use of cash in each year was primarily attributable to the Company's recurring net losses, as adjusted to reflect noncash expenses, primarily depreciation and amortization, stock-based compensation and asset impairment charges.

Due to the degree of uncertainty related to the ultimate realization of the Company's prior losses, it recognizes no federal or state income tax benefit in its financial statements for operating loss carry forwards.

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. Inflation and changing prices have not had a significant impact on Company revenues or loss from operations in the two fiscal years ended October 31, 2008. For fiscal 2008 and 2007, these items were as follows (in thousands):

                                               2008                       2007
                                                 Percent of                 Percent of
                                       Amount    Total Costs      Amount    Total Costs
   Revenues
   Product Revenues                   $  2,871            -      $  2,275            -
   Research and Development Revenue        257            -           281            -

                                         3,128                      2,556
   Cost of Revenues
   Oxyglobin                             2,447            10 %      2,939             8 %
   Hemopure                              6,534            27 %      8,715            22 %

   Total Cost of Revenues                8,981            37 %     11,654            30 %
   Research and Development              4,971            21 %      6,972            18 %
   Impairment charge                     1,635             7 %     11,277            28 %
   Sales and Marketing
   Oxyglobin                               208             1 %         81             0 %
   Hemopure                              1,016             4 %      1,308             3 %

   Total Sales and Marketing             1,224             5 %      1,389             3 %
   General and Administrative            7,140            30 %      8,188            21 %

   Total Costs                        $ 23,951           100 %   $ 39,480           100 %

Fiscal Years Ended October 31, 2008 and 2007

The Company revenues consisted of product revenues from sales of Oxyglobin and Hemopure, and funds received from the United States government, primarily for product to be used in preclinical trials. The Company has agreements with the Navy to provide variations of Hemopure for this purpose.

Revenues from sales of Oxyglobin were $2.6 million in fiscal 2008 compared to $2.1 million in fiscal 2007. In May 2008, the Company entered into an exclusive distributorship for marketing Oxyglobin in the United States. The distributor then bought product for its own inventory. Consequently, the Company sold more units than in fiscal 2007, when selling was direct to veterinarians in the United States. However, the selling price per unit to the U.S. distributor was less than the former price per unit to veterinarians. The increase in sales is caused by the distributer buying in larger quantity than customers. In January 2009, the Company sold its entire remaining inventory of Oxyglobin for $796,000 and does not anticipate additional sales of Oxyglobin in fiscal 2009.

Revenues from sales of Hemopure were $252,000 in fiscal 2008 compared to $143,000 in fiscal 2007 because of increased market acceptance of Hemopure. In November 2008 the Company's sales personnel in South Africa were laid off. Sales are continuing, but the Company is not actively marketing to customers. In addition, the South Africa regulatory authority notified the Company in October 2008 that it had decided to revoke its marketing authorization for Hemopure. The Company is appealing that decision. The appeal may take one year to complete (until approximately October 2009), and in the meantime the Company is permitted to market product.

The Company records funds from the U.S. Navy as revenue in connection with research and development activities. These payments vary relative to the amount of activity the Company has and the amount of investigational material the Navy buys.

Cost of revenues includes costs of both Oxyglobin and Hemopure. Hemopure cost of revenues, which includes the allocation of unabsorbed fixed manufacturing costs, was $2.2 million less in fiscal 2008 than in fiscal 2007. Higher spending in fiscal 2007 includes significantly higher inventory writedowns in 2007 versus 2008 and greater personnel costs than in 2008, when there were lay-offs. Oxyglobin cost of revenues also decreased in fiscal 2008 as compared to the corresponding period in fiscal 2007 as a result of a reduction in costs from layoffs during 2008.

Research and development expenses include preclinical studies, clinical trials and clinical trial materials. In 2004, the Company began to focus on developing Hemopure for a potential indication in cardiovascular ischemia and on supporting the U.S. Navy's government-funded efforts to develop a potential out-of-hospital trauma indication. Prior to that time, the Company's primary focus was on one major project - Hemopure development for its use in patients undergoing surgery. During fiscal 2008, enrollment of patients stopped in the ischemia trials and in the in-hospital trauma trial sponsored by the Company in South Africa. Thereby, the external costs of clinical trials were reduced in 2008 compared with 2007. The Company also further reduced the cost of its own research and development personnel through staff reductions.

Pursuant to SFAS 144, during the fourth quarter of fiscal 2008 the Company assessed its long-lived assets for potential impairment. It shut down its manufacturing operations during fiscal 2008 and without definitive financing, it is not known at what time these operations may restart. SFAS 144 requires evaluating fixed assets as a group to determine if the realizable value of the fixed assets is equal to or greater than the carrying value of such assets. The Company had an asset appraisal done to evaluate possible impairment of fixed assets. Consequently, pursuant to SFAS 144, the Company recorded a one-time, non-cash impairment charge of $1.6 million during the fourth quarter of fiscal 2008. Similarly, pursuant to SFAS 144, the Company recorded a one-time, non-cash impairment charge of $11.3 million during the fourth quarter of fiscal 2007 to fully impair the engineering and design asset for a plant which will not likely be built due to lack of funding for the project.

Sales and marketing expense for Oxyglobin increased in 2008 versus 2007 due to higher stock-based compensation expense in 2008. Sales and marketing costs for Hemopure decreased because of European market research activities in 2007, which did not continue in 2008, due to the discontinuation of European marketing activities in 2008.

General and administrative costs decreased by $1 million in fiscal 2008 primarily as a result of a decreased number of personnel, which reduced compensation expense by $800,000.

Recently Issued Accounting Standards

Recently Issued Accounting Standards are described in Note 2 to Consolidated Financial Statements.