Notes to Consolidated Financial Statements

Included in property, plant and equipment for the fiscal years ended October 31, 2002 and 2001 is $12,757,000 and $5,205,000, respectively, reflecting expenditures made by Biopure for the engineering and design costs of a new 500,000 unit Hemopure plant to be constructed in South Carolina. The new plant is expected to cost $120,000,000 and is to be financed through a capital lease. As such, the financial statements also include $9,847,000 and $5,205,000 in long-term debt for the fiscal years 2002 and 2001, respectively. See Note 7 for more information.

Other Assets

Acquired licenses, stated at amortized cost of $675,000 as of October 31, 2002, are included in other assets. Amortization is calculated using the straight-line method over the estimated useful life of the amortized assets, which is 13 years.

Long-Lived Assets

In accordance with Financial Accounting Standards Board Statement (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the Company recognizes impairment losses on long-lived assets when indicators of impairment are present and future undiscounted cash flows are insufficient to support the assets' recovery. Management believes that no such indicators of impairment of its long-lived assets exist at October 31, 2002.

Revenue Recognition

The Company recognizes revenue from product sales upon shipment provided that there is evidence of a final arrangement, there are no uncertainties surrounding acceptance, collectibility is probable, the price is fixed and only perfunctory company obligations included in the arrangement, if any, remain to be completed.

Research and Development Costs

Research and development costs are expensed as they are incurred. These costs include product and process development and engineering, pre-clinical studies, clinical trials, costs of product used in trials and tests and an allocation of a portion of the unabsorbed fixed costs of manufacturing.

Stock-Based Compensation

The Company generally grants stock options for a fixed number of shares, with an exercise price equal to the market value of the shares at the date of grant. The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25), and related interpretations, in accounting for its stock-based compensation plans, rather than the alternative fair value accounting method provided under SFAS 123, "Accounting for Stock-Based Compensation." Under APB 25, when the exercise price of options granted to employees equals the market price of the underlying stock on the date of grant, no compensation expense is required.
The Company applies SFAS 123 and EITF 96-18 "Accounting for Equity Instruments That Are Issued to Other than Employees for Acquiring, or in Conjunction with Selling Goods or Services" with respect to options issued to nonemployees.

Net Loss Per Common 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 weightedaverage number of common shares outstanding during the year, adjusted for the dilutive effect 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 determined based upon average market price of common stock for the period. 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, options and warrants is anti-dilutive.

Dilutive weighted average shares does not include 4,199,178, 3,252,627 and 2,726,222 common stock equivalents for the years ended October 31, 2002, 2001 and 2000 respectively, as their effects would be antidilutive.

Concentration of Credit Risk and Significant Customers

SFAS No. 105, "Disclosure of Information about Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit Risk," requires disclosure of any significant offbalance- sheet risks and credit risk concentrations. The Company has no significant off-balance-sheet risk. Financial instruments, which subject the Company to credit risk, principally consist of cash, cash equivalents, accounts receivable and notes receivable from two officers. The Company maintains the majority of its cash balances with high quality financial institutions. Three customers represented 68% of total accounts receivable at October 31, 2002 while two customers represented 65% of total accounts receivable on October 31, 2001 and four customers represented 87% of total accounts receivable on October 31, 2000. The Company derived revenue from five unrelated parties in 2002 individually accounting for a total of 37%, 15%, 13%, 13% and 11% of total revenues. The Company derived revenue from four unrelated parties in 2001 individually accounting for a total of 42%, 20%, 11% and 11% of total revenues. The Company derived revenue from three unrelated parties in 2000 individually accounting for a total of 45%, 16%, and 11% of total revenues.

Fair Value of Financial Instruments

SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires disclosure of the fair value of financial instruments. The Company has estimated the fair value of financial instruments using available market information and appropriate valuation methodologies. The carrying value of cash, cash equivalents, accounts receivable, notes receivable from two officers and accounts payable approximate fair value due to the short-term nature of these financial instruments. The carrying value of the Company's longterm debt also approximates fair value based on comparable market terms and conditions.

Comprehensive Income (Loss)

Comprehensive income (loss) is defined as the change in net assets of the Company during a period from transactions generated from non-owner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. The Company had no other components of comprehensive loss other than its net loss for all periods presented.

Segment Information

SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," establishes standards for reporting information regarding operating segments and for related disclosures about products and services and geographical areas.

Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision making group, in making decisions regarding resource allocation and assessing performance. To date the Company has viewed its operations and manages its business as principally one operating segment, which is developing, manufacturing and supplying a new class of pharmaceuticals, called oxygen therapeutics, which are intravenously administered to deliver oxygen to the body's tissues. As of October 31, 2002 most of the Company's assets are located in the United States. For the fiscal year ended October 31, 2002, customers in the United States and the United Kingdom accounted for 87% and 13% of the Company's revenue recognized, respectively. For the fiscal year ended October 31, 2001 customers in the United States and the United Kingdom accounted for 95% and 5% of the Company's revenue recognized, respectively. For the fiscal year ended October 31, 2000, all revenue recognized was derived from customers within the United States.

Recently Issued Accounting Standards

In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long- Lived Assets." This statement supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and certain accounting and reporting provisions of Accounting Principles Board (APB) Opinion No. 30, "Reporting the Results of Operations Ì Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." Statement 144 requires that one accounting model be used for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired, and it broadens the presentation of discontinued operations to include more disposal transactions. The provisions of this statement are effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years, with early adoption permitted. The Company does not believe the adoption of this statement will have a material impact on its results of operations or financial position.

SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," issued in July 2002, addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The principal difference between Statement 146 and Issue 94-3 relates to Statement 146's requirements for recognition of a liability for a cost associated with an exit or disposal activity. Statement 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a liability for an exit costs as generally defined in Issue 94-3 was recognized at the date of an entity's commitment to an exit plan. Therefore, this Statement eliminates the definition and requirements for recognition of exit costs in Issue 94-3. This Statement also established that fair value is the objective for initial measurement of the liability. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The Company does not believe the adoption of this statement will have a material impact on its results of operations or financial position.

FASB Interpretation No. 45, "Guarantor Accounting," will significantly change current practice in the accounting for, and disclosure of, guarantees. Most guarantees are to be recognized and initially measured at fair value, which is a change from current practice. In addition, guarantors will be required to make significant new disclosures, even when the likelihood of the guarantor making payments under the guarantee is remote. In general, the Interpretation applies to contracts or indemnification agreements that contingently require the guarantor to make payments to the guaranteed party based on changes in an underlying that is related to an asset, liability, or an equity security of the guaranteed party. The Interpretation's disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002, while the initial recognition and initial measurement provisions are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The Company does not believe the adoption of this statement will have a material impact on its results of operations or financial position.

At the November 21, 2002 meeting, the Task Force reached a consensus on Issue 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables," which addresses how to account for arrangements that may involve the delivery or performance of multiple products, services, and/or rights to use assets. The final consensus will be applicable to agreements entered into in fiscal periods beginning after June 15, 2003 with early adoption permitted. Additionally, companies will be permitted to apply the consensus guidance to all existing arrangements as the cumulative effect of a change in accounting principle in accordance with APB Opinion No. 20, Accounting Changes. Following is a brief summary of the final model approved by the Task Force.

• Revenue arrangements with multiple deliverables should be divided into separate units of accounting if the deliverables in the arrangement meet the following criteria:
  
  
• The delivered item(s) has value to the customer on a standalone basis. That item(s) has value on a standalone basis if it is sold separately by any vendor or the customer could resell the deliverable on a standalone basis. In the context of a customer's ability to resell the deliverable, the Task Force observed that this criterion does not require the existence of an observable market.
  
  
• There is objective and reliable evidence of the fair value of the undelivered item(s).
  
  
• If the arrangement includes a general right of return, delivery or performance of the undelivered item(s) is considered probable and substantially in the control of the vendor.
  
  
• Arrangement consideration should be allocated among the separate units of accounting based on their relative fair values. The amount allocated to the delivered item(s) is limited to the amount that is not contingent on the delivery of additional items or meeting other specified performance conditions.
  
  
• Applicable revenue recognition criteria should be considered separately for separate units of accounting.
  
  

The Company does not believe the adoption of EITF 00-21 will have a material impact on its results of operations or financial position.

3. Transactions with Related Parties

In August 1990, the Company made loans to certain directors and officers to allow them to purchase Class A Common Stock. The principal and interest for the loan that remains outstanding, not including the loan made to Carl Rausch, the Company's Vice Chairman and Chief Technology Officer, is approximately $22,000 and was due on October 31, 2002. The principal balance continues to bear interest until all principal and interest are paid. The note receivable for the loan bears interest at the prime rate (4.75% at October 31, 2002) and is included in stockholders' equity in the accompanying consolidated financial statements. The Company is currently negotiating a payment agreement with the officer in regards to this note.

In August 1990, the Company awarded deferred compensation of $700,000 to Carl Rausch, then Chairman and Chief Executive Officer. The deferred amount with interest was to be paid on July 31, 2003. The Company also made a loan of $700,000 to Mr. Rausch in August 1990, the proceeds of which were used to purchase shares of the Company's Class A Common Stock. On July 29, 2002, Mr. Rausch settled the interest accrued on his deferred compensation and the Company settled the interest due on the loan which were both $901,000. Biopure accelerated the deferred compensation payment of $700,000 to Mr. Rausch, of which $233,100 was withheld for taxes and the balance of $466,900 was paid on the loan, leaving a principal loan balance of $233,100. This remaining loan balance bears interest at the prime rate (4.75% at October 31, 2002) and is included in stockholders' equity as notes receivable in the accompanying consolidated financial statements. Interest payments are made on a current basis and the principal on the loan is due on July 31, 2007.

On May 24, 2001 the Company acquired by merger the 74% of Reperfusion Systems, Inc., a Delaware corporation, it did not already own. Reperfusion was formed in 1993 to investigate a device for resuscitation to be used with Hemopure or other oxygen carrying fluids. Related to this acquisition, the Company issued 67,270 shares of Class A Common Stock and paid $55,000 to the Reperfusion shareholders. A one-time expense of $1,604,000, of which $1,511,000 is non-cash, was recorded as research and development for intellectual property and pre-clinical studies.

4. Inventories

Inventories, net of reserves, consisted of the following:

		October 31,
		2002		2001
		(In thousands)
Raw materials		$2,122	$ 771
Work-in-process		676	243
Finished goods Ì Oxyglobin		1,992	1,886
Finished goods Ì Hemopure		3,238	1,765
		$8,028	$4,665

5. Investment in Affiliate

The Company accounts for its investments in affiliated companies under the equity method of accounting. In July 1994, the Company acquired a 50% general partnership interest in Eleven Hurley Street Associates (EHSA), a real estate partnership, which owns the Company's principal office and research and development facilities. The Company's lease with EHSA requires annual rental payments of $239,000 through 2002 and $262,000 from 2003 through 2007. The partnership's income was not significant for any of the periods presented. In fiscal 2002 the Company received a $35,000 distribution which reduced the remaining investment of $31,500 to zero and the remainder is recorded in other income on the consolidated statements of operations for the fiscal year ended October 31, 2002.

6. Accrued Expenses

Accrued expenses consisted of the following:

		October 31,
		2002		2001
		(In thousands)
Clinical trials		27	662
Preparation of biologic license application		186	306
Accrued payroll and related employee expenses		562	1,365
Accrued vacation		651	398
Accrued legal and audit fees		301	257
South Carolina capital project		551	---
Other		1,748	1,961
		$4,026	$4,949

7. Long-Term Debt

In December 2001, the Company signed an amended letter of intent with Sumter Realty Group, LLC for the construction and financing of a 500,000-unit Hemopure plant in South Carolina expected to cost $120 million. Sumter Realty Group, LLC has accepted a letter of commitment from a potential investor for the full $120 million required to finance construction of the new manufacturing facility in South Carolina. In December 2002, Biopure signed a lease agreement with Sumter Realty Group, LLC (the Lease). In addition, the Company also expects to issue a warrant to purchase up to 2.5 million shares of Class A Common Stock at $0.01 per share, exercisable five years from the start of construction and is committed to pay a finder's fee, of approximately 2 percent of the net amount financed, to a consultant when financing for the facility is completed. Under the terms of the Lease, minimum lease payments will start at substantial completion of the facility, which the Company expects to be in the beginning of fiscal 2005. The annual lease payments will be $13.8 million per year for the first two years and $17.2 million per year for the balance of the 25-year term. At the conclusion of the 25-year term, the Company will own the facility. The terms of the Lease are subject to financial closing and construction beginning within 75 days of the date of the lease. The Company can cancel the lease if the definitive financing documentation is not acceptable or based on the outcome of continuing site assessment. The lease will be void if the financing is not completed. Subject to diligence and definitive documentation, closing and start of construction could occur in early calendar year 2003.

As of October 31, 2002, $12.8 million has been included in property, plant and equipment and $9.8 million in long-term debt reflecting expenses to date for the engineering and design costs of the planned manufacturing facility in Sumter, S.C. Through December 2002, the Company incurred an additional $500,000 of costs for detailed engineering work, including shop drawings for major equipment and steel fabrication, to maintain the timeline for a validated, FDA-approved plant in fiscal 2005. The total $13.3 million of expenditures by the Company will be returned as described below.

During fiscal 2001, the Company paid $10 million, Biopure's initial contribution to the cost of the facility, into an escrow account to fund certain initial expenditures related to the construction of the new facility. Under the proposed agreement for the construction and financing of the new plant, the $10 million in project cost funded by Biopure is expected to be refunded upon receipt of FDA approval for Hemopure and if a final lease agreement has been executed. The $10 million has been accounted for as a deposit in long-term assets as of October 31, 2002. If FDA approval is not received, the $10 million deposit will not be returned to the Company and will be treated as a capital expenditure, and as a capital expenditure will be subject to immediate impairment review pursuant to SFAS No. 121 (and SFAS No. 144, applicable in fiscal 2003). Under the terms of the Lease, Sumter Realty Group, LLC will refund the $3.3 million of additional spending by the Company in fiscal 2003 once financing is completed.

8. Stockholders' Equity

Equity Line Stock Purchase Agreement

Biopure is a party to an equity line stock purchase agreement with SociƒÎetƒÎe GƒÎenƒÎ erale. In December 2001 and January 2002, the Company drew a total of $7,250,000 in exchange for 516,531 shares of Class A Common Stock under this agreement. The agreement will terminate in June 2003. The Company is currently unable to raise funds through this agreement because its recent stock prices have been below the minimum price ($13) speciNed in the agreement

Stock Issuances

On March 11, 2002, the Company Nled a common stock shelf registration statement with the SEC. On April 23, 2002, the Company sold 2,766,665 of these registered shares. The Company received proceeds of $19,863,000 before expenses of $174,000 and recorded an increase in stockholders' equity of $19,689,000. On May 9, 2002, the Company sold an additional 690,000 shares for proceeds of $4,916,000 before expenses of $21,000 and recorded an increase in stockholders' equity of $4,895,000. On September 19, 2002 the Company sold an additional 1,148,101 shares for proceeds of $4,340,000 before expenses of $34,000 and recorded an increase in stockholders' equity of $4,306,000.

On March 24, 2000, the Company completed a public offering of 2,565,000 shares of Class A Common Stock. The Company received proceeds of $84,388,000 before expenses of $637,000 and recorded an increase in stockholders' equity of $83,751,000.

In fiscal 1994, one of the Company's vendors was granted options to acquire 80,000 shares and in fiscal 2000 it was granted an option for an additional 8,000 shares of Class A Common Stock in exchange for certain land and real property lease and license rights. In 2001 and 2002, the vendor exercised its option to acquire 80,000 and 8,000 shares, respectively, of Class A Common Stock for consideration consisting of land and real property lease and license rights valued at $1,138,500, $396,000 of which was recorded as land and $742,500 was recorded as other assets.

Common Stock

The holder of Class B Common Stock is not entitled to vote or receive dividends. The Class B Common Stock is convertible into shares of Class A Common Stock according to a formula that is based upon a future fair market value of the Company and is conditioned upon the Company achieving U.S. FDA approval for Hemopure. The number of shares of Class A Common Stock to be issued in exchange for the Class B Common Stock will be determined based upon an independent valuation of the Company, after FDA approval of the Company's human oxygen therapeutic product. The valuation is then divided by 13,635,525 shares to arrive at a fair value per share of Class A Common Stock. The total investment in the Company, $142.3 million, divided by such per share fair value of Class A Common Stock, results in the number of shares of Class A Common Stock the holder will receive, limited to a maximum of 1,272,119 shares.

Of the Company's currently outstanding Class A Common Stock, 1,000,052 shares are restricted from transfer by a restriction that can only be removed upon payment to the Company, in cash of Class A Common Stock, of $7.92 per restricted share.

Dividends

At this time, the Company does not intend to pay dividends.

Contributed Capital

The Company recorded as contributed capital research and development costs incurred by the holder of the Class B Common Stock on behalf of the Company. Upon conversion of the Class B Common Stock, the cumulative amount of contributed capital will be treated as consideration for the Class A Common Stock issued in the conversion.

Stock Options and Warrants

The Company has options outstanding under three plans, the 2002 Omnibus Securities and Incentive Plan (the 2002 Plan), the 1999 Omnibus Securities and Incentive Plan (the 1999 Plan) the 1998 Stock Option Plan (the 1998 Plan), under which key employees, directors and consultants may be granted options to purchase Class A Common Stock at the average of the high and low trading price on the date of grant. Under most of the option grants the options become exercisable over a four-year period and expire ten years from date of grant.

Presented below is a summary of transactions under the stock option plans during 2002, 2001 and 2000:

		Year Ended October 31,
		2002				2001				2000
		Shares		Weighted- Average Exercise Price		Shares		Weighted- Average Exercise Price		Shares		Weighted- Average Exercise Price
Options outstanding at beginning of year		2,079,538		$15.28		2,179,600		$14.98		1,945,161		$13.84
Granted		1,049,950		7.66		87,500		17.46		435,200		18.94
Exercised		(2,776)		14.15		(162,715)		12.52		(34,816)		11.90
Forfeited		(161,254)		16.46		(24,847)		14.30		(165,945)		12.65
Expired		(5,134)		13.50		---		---		---		---
Options outstanding at end of year		2,960,324		$12.50		2,079,538		$15.28		2,179,600		$14.98
Options exercisable	1,872,793		1,352,406		748,000

The following table summarizes information about options outstanding at October 31, 2002:

		Options Outstanding						Options Exercisable
		Shares		Weighted Average Remaining Contractual Life (Yrs.)		Weighted- Average Exercise Price		Shares		Weighted- Average Exercise Price
$5.40-$11.81		1,123,383		9.4		$ 7.75		359,166		$ 8.22
$12.00-$13.50		1,077,391		6.8		12.00		922,052		12.00
$16.69-$22.50		679,550		6.1;		18.83		551,575		19.05
$26.10-$35.69		80,000		7.8		32.09		40,000		32.09
		2,960,324		7.7		$12.50		1,872,793		$13.78

During 1998, the Company's 1988 Stock Option Plan expired. In March 1998, the Board of Directors approved the adoption of the 1998 Plan to provide for the granting of options for up to 98,293 shares of Class A Common Stock, the number of shares remaining in the expired 1988 plan.

In June 1999, the Company established the 1999 Plan, which provides for the granting of incentive stock options, non-qualified stock options, restricted stock awards, deferred stock awards, unrestricted stock awards, performance share awards, distribution equivalent rights, or any combination of the foregoing to key management, employees and directors. The maximum number of shares of Class A Common Stock reserved for issuance under the 1999 Plan is 1,866,666.

In April 2002, the Company established the 2002 Plan, which provides for the granting of incentive stock options, non-qualified stock options, restricted stock awards, deferred stock awards, unrestricted stock awards, performance share awards, distribution equivalent rights, or any combination of the foregoing to key management, employees and directors. The maximum number of shares of Class A Common Stock reserved for issuance under the 2002 Plan is 1,200,000.

At October 31, 2002, there were 501,846 shares available for future grants under stock option plans.

During fiscal 2001, Biopure granted to unrelated parties an aggregate of 400,000 warrants at an exercise price of $19.30 per share and 350,000 warrants with an exercise price of $35.00 per share. Both warrants vested in April 2001 and expire three years from the date of grant. The Company recorded $4,174,500 as a one-time compensation expense in April 2001. The weighted-average fair value per warrant was $5.57. In November 1999, the Company granted 25,000 warrants to consultants at an exercise price of $12.00 per share. The warrants vested immediately and expire five years from the date of grant. The related compensation expense was recorded on the grant date and was not significant. At October 31, 2002, all such warrants were outstanding.
During fiscal 2002, Biopure granted a total of 85,700 warrants to unrelated parties in connection with the sale of the registered shares mentioned above. On April 23, 2002, 65,000 shares were granted, at an exercise price of $7.53 per share, which vested immediately and expire four years from the date of grant. On May 9, 2002, 20,700 shares were granted, at an exercise price of $7.67 per share, which vested immediately and expire three years from the date of grant.

SFAS No. 123 Disclosures

The Company has adopted the disclosure provisions only of SFAS No. 123. The fair value of options and warrants granted was estimated at the date of grant using the Black-Scholes option pricing model for 2002, 2001 and 2000, with the following assumptions: risk-free interest rates ranging from 4.20% to 6.32%; dividend yield of 0% and an expected life between one and seven years. For 2002, 2001 and 2000 a volatility factor of the expected market price of the Company's Common Stock of .80 was used. If the compensation cost for options and warrants granted had been determined based on the fair value of the options and warrants at the date of grant, the SFAS No. 123 pro forma net loss applicable to common stockholders for 2002, 2001, and 2000 would have been $47,371,000, $53,692,000 and $38,901,000, respectively.

The SFAS No. 123 pro forma net loss per share for 2002, 2001 and 2000 would have been $(1.72), $(2.14)and $(1.62), respectively. Compensation expense under SFAS No. 123 for 2002, 2001 and 2000 is not representative of future expense, as it includes only four, three and two years of grants, respectively. In future years, the effect of determining compensation cost using the fair value method will include additional vesting and associated expense.

The weighted-average fair value per option and warrant for grants during 2002, 2001 and 2000 was $5.66, $7.73 and $13.89, respectively.

Reserved Shares

At October 31, 2002, there were 6,524,484 shares of Class A Common Stock reserved for issuance under the stock option plans, stock option agreements and warrants and upon conversion of Class B Common Stock. In addition at October 31, 2002 there were 4,483,469 shares of Class A Common Stock reserved for issuance in connection with the Societe General equity line mentioned above.

Rights Agreement

Each holder of Class A Common Stock has a preferred stock purchase right for each share owned. The rights entitle the holders to acquire preferred stock following an acquisition of more than 20% of the Company's Class A Common Stock by any person or group, if the board of directors does not redeem the rights. If the rights were not redeemed, their exercise would cause substantial dilution to the acquiring person or group.

9. Employee Benefit Plan

The Company has a defined contribution plan, the Biopure Corporation Capital Accumulation Plan, qualified under the provisions of Internal Revenue Code section 401(k). Employees are eligible for enrollment upon becoming employed and for discretionary matching after one year of service. The Company's discretionary contribution vests after a period of three years from the date of employment. In 2002, 2001 and 2000, the Company contributed $279,000, $223,000, and $225,000 respectively, to the plan.

10. Income Taxes

At October 31, 2002, the Company had available for the reduction of future years' federal taxable income and income taxes, net operating loss carryforwards of approximately $225,560,000, expiring from the year ended October 31, 2004 through 2022, along with research and development and investment tax credits of approximately $5,602,000, expiring from the year ended October 31, 2002 through 2022. Since the Company has incurred only losses since inception and due to the degree of uncertainty with respect to future profitability, the Company believes at this time that it is more likely than not that sufficient taxable income will not be earned to allow for realization of the tax loss and credit carryforwards and other deferred tax assets. Accordingly, the tax benefit of these items has been fully reserved.

Upon subsequent recognition of any tax benefit relating to the valuation allowance of deferred tax assets, approximately $3,090,000, as of October 31, 2002 would be reported in additional paid in capital.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities as of October 31, 2002 and 2001 were as follows:

		2002		2001
		(In thousands)
Deferred tax assets:
Net operating loss carryforward	$ 85,166	$ 75,522
Capitalized research and development	46,565	39,644
Accruals and reserves	2,828	2,368
Tax credit carryforwards	8,041	7,442
Total deferred tax assets	142,600
Deferred tax liabilities:
Depreciation	1,977	2,169
Total deferred tax liabilities	1,977	2,169
Net deferred tax assets	140,623	122,807
Valuation allowance for deferred tax assets	(140,623)	(122,807)
Net deferred tax assets	$ ---	$ ---

In 2002, the valuation allowance increased by $17,816,000 due primarily to the increase in net operating losses, capitalized research and development costs, and research and development tax credits.

11. Commitments

In 1997, the Company entered into an agreement with B. Braun Melsungen A.G. (Braun) to repurchase shares of the Company's common stock. This agreement was terminated in 1999 and resulted in a requirement that the Company pay Braun a royalty of two percent of the Company's revenues from human product sales and license fees in a certain European region. Payments must be made on a quarterly basis until such amounts aggregate $7,500,000. In exchange for this royalty commitment, the rights to manufacture and market specified products in Braun's territory were reacquired by the Company. No payments have been required or made as of October 31, 2002.

If the Company is unable to draw down additional funds through the equity line stock purchase agreement explained in Note 8 the Company will be subject to a penalty of $537,500.

Future minimum lease payments under operating leases for the Company's various office, laboratory, warehouse and processing facilities at October 31, 2002 are as follows:

2003		$1,023,385
2004		1,003,051
2005		945,720
2006		662,889
2007		591,150
Thereafter		153,324
		$4,379,519

Rent expense was approximately $1,093,000, $977,000 and $992,000 in 2002, 2001 and 2000, respectively.

12. Subsequent Events

On December 24, 2002, the Company signed a lease with Sumter Realty Group, LLC. Under the terms of the lease, Sumter Realty Group, LLC will refund the $3.5 million of additional spending by the Company in fiscal 2003 (see Note 7). The lease payments will start at substantial completion of the facility, which the Company expects to be in the beginning of fiscal 2005. The annual lease payments will be $13,750,000 per year for years one and two and $17,150,000 per year thereafter. The Company will own the facility at the end of the lease term. These terms are subject to financing closing and construction to begin within 75 days of the signing of the lease. The Company can cancel the agreement if due diligence on the suitability of the site and financing documentation is not favorable to the Company.

On December 31, 2002, the Company sold to an investor 522,193 shares of its Class A Common Stock at a price of $3.83 per share and warrants to acquire 522,193 shares of its Class A Common Stock at an exercise price of $4.84 per share. The aggregate proceeds to the Company, before expenses, were approximately $2,000,000.

13. Quarterly Financial Information (Unaudited)

The following is a summary of quarterly financial results for the fiscal years 2002 and 2001:

		4Q '02		3Q '02		2Q '02		1Q '02
		(In thousands, except per share data)
Statements of Operations Data:
Total revenues	$ 73	$ 260	$ 928	$ 728
Gross profit (loss)	(3,023)	(2,299)	9	(99)
Operating expenses:
Research & development	3,794	7,063	8,153	6,972
Sales and marketing	1,075	875	615	463
General & administration	2,932	2,569	4,129	2,605
Total operating expenses	7,801	10,507	12,897	10,040
Loss from operations	(10,824)	(12,806)	(12,888)	(10,139)
Other income, net	53	210	161	450
Net loss	$(10,771)	$(12,596)	$(12,727)	$ (9,689)
Per share data:
Basic net loss per common share	$ (0.36)	$ (0.43)	$ (0.49)	$ (0.38)
Weighted-average shares used in computing       basic net loss per common share	29,742	29,141	25,993	25,401

		4Q '01		3Q '01		2Q '01		1Q '01
		(In thousands, except per share data)
Statements of Operations Data:
Total revenues	$ 970	$ 946	$ 838	$ 735
Gross profit (loss)	(108)	43	(76)	(35)
Operating expenses:
Research & development	7,123	10,297	9,002	8,187
Sales and marketing	737	784	664	622
General & administration	2,001	1,538	8,753	3,073
Total operating expenses	9,861	12,619	18,419	11,882
Loss from operations	(9,969)	(12,576)	(18,495)	(11,917)
Other income, net	578	654	990	1,316
Net loss	$ (9,391)	$(11,922)	$(17,505)	$(10,601)
Per share data:
Basic net loss per common share	$ (0.37)	$ (0.47)	$ (0.70)	$ (0.42)
Weighted-average shares used in computing       basic net loss per common share	25,208	25,134	24,958	24,960

In the third quarter of fiscal 2001, research and development expenses include a one-time expense of $1,604,000, of which $1,511,000 is non-cash, for intellectual property and pre-clinical studies related to the acquisition of Reperfusion Systems, Inc., an inactive company previously 26% owned by Biopure.

General and administrative expenses include non-cash compensation expense for stock options and warrants granted to certain consultants and directors. This non-cash compensation 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. The quarterly expenses/(credits) to operations for fiscal 2002 were $16,000, $55,000, $13,000 and ($145,000) for the fourth, third, second and first quarters, respectively. The quarterly expenses/(credits) to operations for fiscal 2001 were ($80,000), ($793,000), $6,370,000 and $1,347,000 for the fourth, third, second and first quarters, respectively.