The following discussion of our 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. Except for historical information contained herein, matters discussed in this report constitute forward-looking statements. When used herein, the words “expects,” “estimates,” “intends,” “plans,” “should” and similar expressions are intended to identify such forward-looking statements. Actual results could differ materially from those set forth in the forward-looking statements. In light of the substantial risks and uncertainties inherent in all future projections, the inclusion of forward-looking statements in this report should not be regarded as representations by the Company that the objectives or plans of the Company will be achieved. Many factors could cause the Company’s actual results, performance or achievements to differ materially from those in the forward-looking statements. Reference is made in particular to the risk factors set forth in Exhibit 99.1 to this report and the discussions set forth below in this report under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

      We are a leading developer, manufacturer and supplier of a new class of pharmaceuticals, called oxygen therapeutics. Our oxygen therapeutics are pharmaceuticals that one administers intravenously into the circulatory system to increase oxygen delivery to the body’s tissues. We have developed and manufacture, using a proprietary process and patented technology, two hemoglobin-based oxygen carriers. A pivotal Phase III clinical trial has been completed for Hemopure and is expected to be the basis for our application to the FDA for marketing approval in the United States. In 2001, Hemopure was approved in South Africa for use in adult patients undergoing elective surgery to treat acute anemia and eliminate, reduce or delay red blood cell transfusion. Oxyglobin, for veterinary use, is the only hemoglobin-based oxygen carrier approved by the FDA and the European Medicines Evaluation Agency.

      Since inception, we have devoted substantially all of our resources to our research and development programs and manufacturing. We have been dependent upon funding from debt and equity financings, strategic corporate alliances, licensing agreements and interest income. We have not been profitable since inception and had an accumulated deficit of $335.8 million as of October 31, 2001. We expect to incur additional operating losses over the next several years in connection with clinical trials, preparation of a marketing application for Hemopure and pre-marketing expenditures for Hemopure. We began generating revenue from the sale of Oxyglobin in fiscal 1998.

      We believe our cash and cash equivalents, as of January 22, 2002, are sufficient to fund our current plan into the first quarter of fiscal 2003. Under this plan our operations for the balance of fiscal 2002 will be in support of our application to the FDA for marketing approval of Hemopure, the capacity upgrade of our Cambridge manufacturing facility, sales to South Africa and sales of Oxyglobin. Efforts for development of additional indications for Hemopure and for preparation to market Hemopure in the United States will be deferred until additional funds are available.

      SFAS 121 (and SFAS 144, when applicable) 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, including construction in progress and the new facility construction; license agreements related to the source of supply of a major raw material; and the deposit related to the initial new facility project costs are the principal long-lived assets that could be subject to such a review. The events or changes in circumstances, among others, that may result in an impairment of these assets are a significant delay in expected regulatory approvals for our products; a change in the source of supply of the major raw material; or a significant reduction in the demand for our products.

      Total revenues, almost entirely from Oxyglobin sales, increased 13.9% to $3.5 million in fiscal 2001. Revenues in fiscal 2001 included the launch of Oxyglobin in Europe resulting in $173,000 in sales to our European distributors. Domestic sales increased 8.2% resulting from a 1.5% increase in unit sales and an increase in the average selling price per unit of 6.6%. We expect Oxyglobin revenue growth to remain limited until we are operating at our new manufacturing plant to be constructed in South Carolina and planned for completion in late 2004. We anticipate revenues from Hemopure to begin with sales to South Africa in the third quarter of fiscal 2002 and to be material to the Company in fiscal 2003.

      Cost of revenues totaled $3.7 million in fiscal 2001, a decrease of 23.3% from fiscal 2000. The decrease is due to increased manufacturing activity associated with the development of Hemopure and the resulting decrease in manufacturing expenses allocated to Oxyglobin. Cost of revenues in fiscal 2001 and 2000 reflects the direct costs associated with the production of Oxyglobin plus an allocation of a portion of the unabsorbed fixed costs of manufacturing. An allocation of these unabsorbed costs was also made to Hemopure units in finished goods inventory. The remainder of these fixed costs and the direct costs of production of clinical trial materials were allocated to research and development. The above allocations are based on current and expected production levels and annual production capacities and require management judgment. Our Cambridge manufacturing facility was shut down in November 2001 for a capacity upgrade. During the six-month shutdown, and a three-month production ramp-up period, we expect to have negative gross margins for Oxyglobin sales because of the allocation of unabsorbed manufacturing costs to costs of revenues. During the fourth quarter of fiscal 2002, when a higher level of production is reached, gross margins are expected to be positive.

     Research and development expenses include product and process development and engineering, pre-clinical studies, clinical trials, clinical trial materials and an allocation of unabsorbed fixed costs of manufacturing. Our research and development efforts have been focused on developing and gaining regulatory approval of Hemopure, our product for use in humans. These efforts are now in the data analysis stage and in the preparation of our biologic license application to be filed with the FDA. The development and approval of Oxyglobin, our veterinary product, was a result of the development of Hemopure. Hemopure is approved for use in South Africa. Failure to gain one or more additional regulatory approvals during the next several years would make it difficult for the Company to continue its development efforts.

     Research and development expenses increased 31.2% to $34.6 million in fiscal 2001. The increase was due to activities associated with data organization and analyses for the pivotal Phase III clinical trial of Hemopure, preparation for the filing of an electronic U.S. marketing application, ongoing research and development and an increase in the allocation of fixed costs of unused production capacity. Expenses in 2001 also included a one-time non-cash expense of $1.5 million for research and pre-clinical studies related to the acquisition in May of Reperfusion Systems, Inc., an inactive company 26% owned by Biopure, for approximately 67,000 shares of Biopure common stock and $55,000 in cash.

     Sales and marketing expenses, consisting of Oxyglobin expenses, increased to $2.8 million, or 14.0% in fiscal 2001. This increase was primarily due to selling, marketing and distribution expenses associated with the launch of Oxyglobin in Europe during 2001. We expect sales and marketing expenses relating to Oxyglobin for fiscal 2002 to remain at 2001 levels. Marketing expenses for Hemopure, currently classified as general and administrative expenses because there are no Hemopure revenues, are expected to be included as sales and marketing expenses in the third quarter of fiscal 2002 when sales to South Africa begin. These expenses are anticipated to be lower than such expenses for Oxyglobin for the same period.

     General and administrative expenses increased 55.6% to $15.4 million in fiscal 2001. This increase is primarily due to a $3.1 million increase in non-cash compensation expense for stock options and warrants granted to our South African distributor, consultants and two directors. This non-cash compensation was accounted for at fair value, per SFAS 123 and EITF 96-18. Prelaunch expenses for Hemopure, increased premiums for insurance and increased spending on corporate communications also contributed to the increase in 2001. Non-cash compensation expense is expected to be significantly lower in fiscal 2002 as compared to 2001, as the fair value of stock options granted to two directors were fully amortized in fiscal 2001 and fewer warrants are expected to be granted in fiscal 2002.

     Total other income consists primarily of interest income and other non-product related income partially offset by interest expense. Total other income was $3.5 million in fiscal 2001 compared to $4.4 million in fiscal 2000. This decrease was attributable to the Company’s decreased cash balance and lower interest rates. We anticipate a decrease in other income in fiscal 2002 due to further decreases in average cash balances and cannot predict interest rates in fiscal 2002.

     Basic net loss per common share for fiscal 2001 increased to $1.97 from $1.51 per share in 2000. Shares used to calculate these losses were the actual weighted-average number of common shares outstanding during 2001 of 25,066,132 and 23,947,251 for 2000. Diluted net losses per share are not presented because the Company had losses from all periods.

     Total revenues were $3.1 million in fiscal 2000, as compared to $2.9 million in fiscal 1999, an increase of approximately 6.9%. Revenues in fiscal 2000 included $3.1 million of Oxyglobin sales as compared to $2.8 million in fiscal 1999, an increase of approximately 11.2%. Total revenues also reflect $5,000 and $117,000 in fiscal 2000 and 1999 respectively, from license and development activities, grants and product sales unrelated to our oxygen therapeutic products.

     Cost of revenues totaled $4.8 million in fiscal 2000, a decrease of $2.0 million or 29.9% as compared to fiscal 1999. The decrease is due to improved yields and lower production volumes for Oxyglobin than in fiscal 1999. Cost of revenues in fiscal 2000 and 1999 reflects the direct costs associated with the production of Oxyglobin and allocation of a portion of the fixed costs of the unused production capacity. The remainder of these fixed costs and the direct costs of production of clinical trial materials were allocated to research and development.

     Research and development expenses increased 9.2% to $26.4 million in fiscal 2000 from $24.2 million in fiscal 1999. The increase was due to the expenses associated with the pivotal Phase III clinical trial activities for Hemopure and an increase in the allocation of fixed costs of unused production capacity. The increases were offset in part by decreases in the costs of clinical trial samples and decreases in other research and development activities. We expect that in the near-term, research and development expenses will remain stable as we prepare our marketing application for Hemopure and continue our development efforts with respect to potential uses for Hemopure.

     Sales and marketing expenses decreased 15.7% to $2.5 million in fiscal 2000 from $2.9 million in fiscal 1999. This decrease was primarily due to decreased selling, advertising, marketing and distribution expenses compared to these expenses related to the national product launch of Oxyglobin in 1999.

     General and administrative expenses increased 87.6% to $9.9 million in fiscal 2000 from $5.3 million in fiscal 1999. This increase is primarily due to non-cash compensation expense for stock options and warrants granted to certain consultants and directors. This non-cash compensation, which amounted to $3.7 million in fiscal 2000, must be accounted for at fair value, per SFAS 123 and EITF 96-18, and be amortized over the vesting period and revalued each quarter based on the closing stock price. There was no such expense in fiscal 1999. Expenses for the pre-marketing of Hemopure, directors and officers insurance and public and investor relations activities also contributed to the increase.

     Total other income consists primarily of interest income and other non-product related income partially offset by interest expense and other non-operating expenses. Total other income was $4.4 million in fiscal 2000 compared to $772,000 in fiscal 1999. This increase of $3.6 million was primarily attributable to interest income resulting from the increased cash balance of the Company.

     Basic net loss per common share for fiscal 2000 was $1.51, compared to a basic net loss per common share of $3.61 and a pro forma basic net loss per common share of $2.62 for the same period in 1999. The 1999 historical and pro forma basic net loss per common share include a one-time charge of $1.21 and $0.88, respectively, associated with $17,915,000 in common stock dividends issued to preferred stockholders. Shares outstanding used to calculate historic basic amounts were 23,947,251 for 2000 and 14,813,045 for 1999; pro forma shares for 1999 were 20,368,860. Basic net loss per share is computed based on the weighted-average number of common shares outstanding during the period. Pro forma basic net loss per share is computed using the weighted-average number of outstanding shares assuming conversion of all convertible preferred shares into common shares at date of original issuance.

     At October 31, 2001, we had $36.1 million in cash and cash equivalents and from November 1, 2001 through January 22, 2002, we have raised $7.2 million through the sale of equity as discussed below. Based on our fiscal 2002 operating plan we require cash of $35.6 million in fiscal 2002 to support the filing, in fiscal 2002, of our biologic license application with the FDA, to support our Oxyglobin business, to support our launch in South Africa and to complete the capacity upgrade of our Cambridge manufacturing facility. We believe our cash and cash equivalents, at January 22, 2002, should be sufficient to fund our current plan into the first quarter of fiscal 2003. Cash requirements are expected to be higher during the first half of fiscal 2002 during the manufacturing shutdown and prior to the start of sales to South Africa. The cash and cash equivalents do not include the $10.0 million placed in escrow for the South Carolina facility as discussed below. Biopure’s cash reserves plus the Societe Generale financing, if we are able to fully draw and do so, could fund operations through fiscal 2003 under the Company’s current operating plan. Expenditures, including the costs of additional personnel, for research and clinical development of additional indications for Hemopure and expenditures in preparation for marketing and sales of Hemopure in the U.S. will be deferred until sufficient funds, in addition to those on hand, are available. Should management’s plans not develop as anticipated, the Company will restrict certain of its planned activities and operations, as necessary, to sustain operations and conserve cash resources. Our cash requirements and our forecast of the period of time through which our financial resources would be adequate to support our operations may vary significantly from current projections and actual results may vary.

     During 2001, we paid $10.0 million into an escrow account to be used to fund certain initial expenditures related to the construction of a new 500,000 unit Hemopure manufacturing facility. Under the proposed agreement for the construction and financing of the new plant, the $10.0 million in project cost funded by Biopure will be refunded upon receipt of FDA approval for Hemopure. The $10.0 million has been accounted for as a deposit in long-term assets. If FDA approval is not received, the $10.0 million deposit will not be returned to the Company and will be treated as a capital expenditure, subject to immediate impairment review pursuant to SFAS No. 121 (and SFAS 144, when applicable). As of October 31, 2001, $5.2 million has been included in construction in progress and long term debt reflecting expenses to date for the engineering of the facility paid from the escrow.

     In fiscal 2001, based on the approval of Hemopure in South Africa, Biopure began including Hemopure units in inventory, as these units are saleable. The unit value in inventory is less than the expected unit selling price.

     On June 21, 2001, Biopure entered into a $75.0 million equity line stock purchase agreement with Societe Generale. Under this agreement, Biopure has the option of drawing up to a balance (as of January 22, 2002) of $67.8 million until June 2003, subject to certain limitations, in exchange for the issuance of Biopure common stock. The primary limitation is a minimum trading price for our common stock of $13 per share, unless waived. The maximum size of each drawdown may be up to $3.0 million in a five-day drawdown period or up to $4.5 million if the average daily dollar trading volume of the Company’s common stock increases to $7.5 million. The Company is under no obligation to draw down funds, and as of January 22, 2002, has drawn $7.2 million under this agreement. We intend, if able to do so, to continue to draw from this facility in fiscal 2002.

     We plan to continue financing our operations, until we are profitable, through sales of equity and debt securities, bank borrowings and leasing arrangements. We will also explore licensing and partnering arrangements where appropriate. We have not been profitable since inception and had an accumulated deficit of $335.8 million as of October 31, 2001. We will continue to generate losses for the next several years.

     We plan to spend approximately $11.0 million in fiscal 2002 and fiscal 2003 on capital projects for our existing facilities.

     As of October 31, 2001, we had net operating loss carryforwards of approximately $195.1 million to offset future federal and state taxable income through 2021. Due to the degree of uncertainty related to the ultimate realization of such prior losses, no benefit has been recognized in our financial statements as of October 31, 2001. Utilization of such losses in future years may be limited under the change of stock ownership rules of the Internal Revenue Service.

     In November 2000, the Company adopted Financial Accounting Standards Board Statement (FASB) SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement provides a comprehensive and consistent standard for the recognition and measurement of derivatives and hedging activities. Adoption of this standard had no material effect on the Company’s financial position or results of operations.

     In July 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 applies to all business combinations completed after June 30, 2001 which, among other things, requires the use of the purchase method of accounting. SFAS No. 141 also establishes new criteria for determining whether intangible assets should be recognized separately from goodwill. SFAS No. 142 provides that goodwill and intangible assets with indefinite lives will not be amortized, but rather will be reviewed for impairment at least annually. SFAS No. 142 is effective for fiscal years beginning after December 31, 2001. The Company will apply SFAS No. 142 beginning in the first quarter of fiscal 2002. Management does not expect that the application of SFAS No. 141 or No. 142 will have a significant impact on the results of operations or financial position of the Company.

     In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which superseded SFAS No. 121, Accounting for Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The Company is required to adopt SFAS No. 144 in the first quarter of fiscal 2003. The adoption of SFAS No. 144 is not expected to have a material effect on the Company’s financial position or results of operations.