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 viability of the Company, the prospects for further clinical development of its products, other expected activities, and finding 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 clinical development 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, 10-K and 10-K/A.

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.

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 United States 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 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.

A substantial majority of our costs have comprised research and development and cost of revenues. The revenues from products we have marketed defrayed some of the manufacturing costs we have incurred to manufacture Hemopure. The Company suspended manufacturing operations beginning in the third quarter of fiscal 2008 to conserve cash.

Our research and development activities in 2009 and 2008 are described below. We do not currently have any trials enrolling patients.

Cost Cutting Measures

During fiscal 2008 and 2009, the Company took measures to reduce its ongoing cash burn. In November 2008, it effected reductions in force and shut down its manufacturing facility in Cambridge and its processing facility in Pennsylvania. By November 2008, nearly all of its employees had been laid off. The Company has continued limited operations since then. Notwithstanding the cost reductions, significant additional capital will be required to fund the Company's operations.

Liquidity and Capital Resources

At January 31, 2009, the Company had $256,000 in cash and cash equivalents. During the first fiscal quarter of 2009, the Company drastically reduced operations, a process that began in the second quarter of fiscal 2008. In January 2009, the Company sold substantially all of its existing inventory of Oxyglobin to the Company's U.S. distributor, an affiliate of the Company's European distributor, for sale in Europe and the United States. The proceeds of that sale were $796,000. In March 2009, the Company also sold its manufacturing facility in Pennsylvania and entered into a lease of the facility from the purchaser. The consideration was for $1.2 million in cash and approximately $200,000 in rent abatements. The Company has leased the facility, and, as additional consideration from the purchaser, the initial term of the lease is at a rent the Company believes to be below market. The initial term of the lease is three years; during this term the rental is $6,100 per month. The Company has the option to renew for five additional terms of five years each at increasing rates.

The Company expects that its current cash, accounts receivable and the sale of its Pennsylvania facility will fund operations until April 2009. The Company will require significant additional funding to remain a going concern and to fund operations until such time, if ever, as it becomes profitable. If the Company does not raise capital or have commitments to raise capital or complete another transaction by approximately the end of April 2009, it may be required to cease operations and sell the Company or its assets. The Company is now engaged in discussions concerning its course of action. There can be no assurance that ongoing discussions will lead to an investment of capital or other transaction. The Company's primary commitments for future expenditures are its commitments under real property leases.

Net cash used in operating activities decreased $4,763,000 in the first three months of fiscal 2009 compared to the corresponding period in fiscal 2008 because of the work force reductions described above and other measures to control costs. Cash used in operating activities was $828,000 for the first three months of fiscal 2009.

Results of Operations

As the Company generates net losses, the key drivers of the losses have been 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. The key drivers of losses in the first quarter of 2009 have changed because of the suspension of Company activity in 2008 and the first quarter of fiscal 2009. For the three-month periods ended January 31, 2009 and 2008, these items were as follows (dollars in thousands):

                                                     Three Months Ended
                                         January 31, 2009          January 31, 2008
                                                 Percent of                Percent of
                                       Amount    Total Costs     Amount    Total Costs
   Oxyglobin Product Sales             $   797                   $   419
   Hemopure Product Sales                   68                        58
   Research and Development Revenues       293                        96

   Total Revenues                      $ 1,158                   $   573


   Cost of Revenues
   Oxyglobin                               706            20 %       569             9 %
   Hemopure                                294             8 %     2,219            34 %


   Total Cost of Revenues                1,000            28 %     2,788            43 %

   Research and Development              1,120            32 %     1,487            23 %

   Sales and Marketing
   Oxyglobin                                12             0 %        25             0 %
   Hemopure                                 84             2 %       255             4 %

                                                  Three Months Ended
                                      January 31, 2009          January 31, 2008
                                              Percent of                Percent of
                                    Amount    Total Costs     Amount    Total Costs
       Total Sales and Marketing         96             2 %       280             4 %

       General and Administrative     1,328            38 %     1,966            30 %

       Total Costs                  $ 3,544           100 %   $ 6,551           100 %

Three months ended January 31, 2009 compared to three months ended January 31, 2008

Total revenues for the first fiscal quarter of 2009 were $1.2 million, or 102% higher than revenues of $573,000 for the same period in fiscal 2008. The increase is attributable to the Company selling substantially all of its inventory of Oxyglobin to distributors. The Company does not expect additional revenue from sales of Oxyglobin for the balance of fiscal 2009 and until such later time as it resumes manufacturing.

Revenues from sales of Hemopure were $68,000 in the first quarter of fiscal 2009 compared to $58,000 in fiscal 2008 following increasing customer acceptance of the product during 2008. However, 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 and does not expect sales to increase in the balance of fiscal 2009 over comparable quarters of 2008. 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 until approximately October 2009 to complete, but in the meantime the Company is permitted to market product.

Cost of revenues includes costs of both Oxyglobin and Hemopure. Cost of revenues was $1.0 million for the first quarter of fiscal 2009, compared to $2.8 million for the same period in 2008. Hemopure cost of revenues were $1.9 million lower for the first fiscal quarter of 2009 than the first fiscal quarter of 2008 because of the suspension of manufacturing and reduction of manufacturing personnel described above in "Overview - Cost Cutting Measures." This suspension in operations caused are classification of the underlying costs, yielding a reduction in cost of goods sold with an increase in research and development expense. Oxyglobin cost of revenues increased due to the sale of substantially all remaining inventory in the first quarter of 2009.

Research and development costs decreased 25% from $1,487,000 in the first fiscal quarter of 2008 to $1,120,000 in the first quarter of fiscal 2009. The decrease in research and development costs is expected to continue to decrease going forward due to the Company's reduced operations.

Sales and marketing expenses decreased from $280,000 in fiscal 2008 to $96,000 in the first fiscal quarter of 2009 due to the reduced activity.

General and administrative expenses were $1.3 million for the first fiscal quarter of 2009 compared to $2.0 million for the same period in 2008 because of staff reductions and related reductions in expenses.