##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended July 31, 2006
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from            to
 Commission File Number 001-15167
 BIOPURE CORPORATION
  Delaware
    
    04-2836871(State of Incorporation)
    
    (IRS Employer Identification Number)11 Hurley Street, Cambridge, Massachusetts
    
    02141(Address of principal executive offices)
    
    (Zip Code)
 (617) 234-6500
 þ o
  o o þ
 o þ
  Class A Common Stock, $.01 par value
    
    
    49,365,124Class B Common Stock, $1.00 par value
    
    
    117.7




---



##### 



BIOPURE CORPORATION
 INDEX TO FORM 10-Q
 PagePart I  Financial Information:Item 1  Financial Statements (Unaudited)Condensed Consolidated Balance Sheets at July 31, 2006 and October 31, 2005
    
    
    3Condensed Consolidated Statements of Operations for the three and nine months ended July
31, 2006 and July 31, 2005
    
    
    4Condensed Consolidated Statements of Cash Flows for the nine months ended July 31, 2006
and July 31, 2005
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 3  Quantitative and Qualitative Disclosure of Market Risk
    
    
    20Item 4  Controls and Procedures
    
    
    21Part II  Other Information:Item 1  Legal Proceedings
    
    
    22Item 1A  Risk Factors
    
    
    22Item 2  Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    32Item 3  Defaults Upon Senior Securities
    
    
    32Item 4  Submission of Matters to a Vote of Security Holders
    
    
    32Item 5  Other Information
    
    
    32Item 6  Exhibits
    
    
    32Signatures
    
    
    33Exhibit Index
    
    
    34Biopure®, Hemopure®, and Oxyglobin® are registered trademarks of
Biopure Corporation.EX-4.8 Amended Form of Investor Warrant, dated as of December 27, 2005EX-4.9 Form of Underwriters' Investor Warrant, dated January 17, 2006EX-4.10 Form of Underwriters' Warrant underlying the Unit Warrant, dated August 23, 2006EX-31.1 Section 302 Certification of C.E.O.EX-31.2 Section 302 Certification of C.F.O.EX-32.1 Section 906 Certification of C.E.O.EX-32.2 Section 906 Certification of C.F.O.
  2




---



##### Table of Contents



July 31, 2006
    
    
    October 31, 2005Assets:Current assets:Cash and cash equivalents
    
    $
    7,008
    
    
    $
    10,542Accounts receivable, net
    
    
    104
    
    
    
    144Inventories
    
    
    2,837
    
    
    
    3,449Other current assets
    
    
    1,335
    
    
    
    1,440Total current assets
    
    
    11,284
    
    
    
    15,575Property, plant and equipment, net
    
    
    23,326
    
    
    
    26,000Other assets
    
    
    819
    
    
    
    860Total assets
    
    $
    35,429
    
    
    $
    42,435Liabilities and stockholders equity:Current liabilities:Accounts payable
    
    $
    971
    
    
    $
    547Accrued expenses
    
    
    3,263
    
    
    
    3,096Current portion of deferred revenue
    
    
    98
    
    
    
    190Current portion of restructuring charges
    
    
    215
    
    
    
    219Total current liabilities
    
    
    4,547
    
    
    
    4,052Deferred revenue, net of current portion
    
    
    1,079
    
    
    
    987Restructuring charges, net of current portion
    
    
    89
    
    
    
    221Other long-term liabilities
    
    
    41
    
    
    
    41Total long-term liabilities
    
    
    1,209
    
    
    
    1,249Stockholders equity:Preferred stock, $0.01 par value, 30,000,000 shares authorized, no shares
outstanding
    
    
    
    
    
    
    Common stock:Class A, $0.01 par value, 200,000,000 shares authorized, 41,789,370
shares outstanding at July 31, 2006 and 24,359,170 at October 31, 2005
    
    
    418
    
    
    
    244Class B, $1.00 par value, 179 shares authorized, 117.7 shares outstanding
    
    
    
    
    
    
    Capital in excess of par value
    
    
    524,098
    
    
    
    511,560Contributed capital
    
    
    24,574
    
    
    
    24,574Notes receivable
    
    
    (235
    )
    
    
    (235
    )Accumulated deficit
    
    
    (519,182
    )
    
    
    (499,009
    )Total stockholders equity
    
    
    29,673
    
    
    
    37,134Total liabilities and stockholders equity
    
    $
    35,429
    
    
    $
    42,435
  3




---



##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedJuly 31, 2006
    
    
    July 31, 2005
    
    
    July 31, 2006
    
    
    July 31, 2005Revenues:Product revenue
    
    $
    313
    
    
    $
    358
    
    
    $
    988
    
    
    $
    955Research and development revenues
    
    
    83
    
    
    
    125
    
    
    
    296
    
    
    
    827Total revenues
    
    
    396
    
    
    
    483
    
    
    
    1,284
    
    
    
    1,782Cost of product revenues
    
    
    2,939
    
    
    
    3,166
    
    
    
    9,351
    
    
    
    9,139Gross loss
    
    
    (2,543
    )
    
    
    (2,683
    )
    
    
    (8,067
    )
    
    
    (7,357
    )Operating expenses:Research and development
    
    
    1,772
    
    
    
    1,268
    
    
    
    5,112
    
    
    
    4,178Sales and marketing
    
    
    197
    
    
    
    143
    
    
    
    524
    
    
    
    373General and administrative
    
    
    2,239
    
    
    
    2,412
    
    
    
    6,826
    
    
    
    8,896Total operating expenses
    
    
    4,208
    
    
    
    3,823
    
    
    
    12,462
    
    
    
    13,447Loss from operations
    
    
    (6,751
    )
    
    
    (6,506
    )
    
    
    (20,529
    )
    
    
    (20,804
    )Other income, net
    
    
    127
    
    
    
    128
    
    
    
    356
    
    
    
    312Net loss
    
    $
    (6,624
    )
    
    $
    (6,378
    )
    
    $
    (20,173
    )
    
    $
    (20,492
    )Per share dataBasic and diluted net loss per common share
    
    $
    (0.16
    )
    
    $
    (0.26
    )
    
    $
    (0.55
    )
    
    $
    (0.94
    )Weighted-average shares used in computing
basic and diluted net loss per common
share
    
    
    41,616
    
    
    
    24,359
    
    
    
    36,695
    
    
    
    21,716
  4




---



##### Table of Contents



Nine Months EndedJuly 31, 2006
    
    
    July 31, 2005Operating activities:Net loss
    
    $
    (20,173
    )
    
    $
    (20,492
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    2,836
    
    
    
    3,096Stock compensation expense
    
    
    810
    
    
    
    Deferred compensation
    
    
    
    
    
    
    (121
    )Cancellation of note receivable and accrued interest
    
    
    
    
    
    
    23Non-cash charge related to issuance of stock
    
    
    
    
    
    
    808Accretion of restructuring charge
    
    
    26
    
    
    
    37Inventory writedowns
    
    
    962
    
    
    
    3,237Changes in assets and liabilities:Accounts receivable
    
    
    40
    
    
    
    (89
    )Inventories
    
    
    (350
    )
    
    
    (2,179
    )Other current assets
    
    
    105
    
    
    
    (251
    )Accounts payable
    
    
    424
    
    
    
    1,344Accrued expenses
    
    
    167
    
    
    
    (1,087
    )Restructuring charges
    
    
    (162
    )
    
    
    472Net cash used in operating activities
    
    
    (15,315
    )
    
    
    (15,202
    )Investing activities:Purchases of property, plant and equipment
    
    
    (121
    )
    
    
    (57
    )Other assets
    
    
    
    
    
    
    26Net cash used in investing activities
    
    
    (121
    )
    
    
    (31
    )Financing activities:Net proceeds from sales of common stock
    
    
    9,116
    
    
    
    21,042Proceeds from the exercise of warrants and options
    
    
    2,786
    
    
    
    4,197Net cash provided by financing activities
    
    
    11,902
    
    
    
    25,239Net increase/(decrease) in cash and cash equivalents
    
    
    (3,534
    )
    
    
    10,006Cash and cash equivalents at beginning of period
    
    
    10,542
    
    
    
    6,448Cash and cash equivalents at end of period
    
    $
    7,008
    
    
    $
    16,454Supplemental disclosure of cash flow information:Fair value of warrants issued related to sales of common stock
    
    $
    8,263
    
    
    $
    4,857
  5




---



##### Table of Contents



1.
    
    Basis of PresentationThe accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States for interim
financial information and pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC). Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States for complete financial
statements. In the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included. Operating results
for the three and nine month periods ended July 31, 2006 are not necessarily indicative of the
results that may be expected for the year ending October 31, 2006; however, the Company expects
to incur a substantial loss for the year ending October 31, 2006.The accompanying consolidated financial statements include the accounts of the Company and its
wholly owned subsidiaries, Biopure Netherlands, BV, Biopure South Africa, Pty, Ltd., Reperfusion
Systems Incorporated, DeNovo Technologies Corporation and Biopure Overseas Holding Company, and
NeuroBlok Incorporated, a 60% owned subsidiary. All intercompany accounts and transactions have
been eliminated in consolidation. Comprehensive loss approximated net loss for all periods
presented.These financial statements should be read in conjunction with the audited consolidated financial
statements and notes thereto included in the Companys Annual Report on Form 10-K for the fiscal
year ended October 31, 2005, filed with the SEC on January 17, 2006.The Company has financed operations from inception primarily through sales of equity securities
and development and license agreement payments. The Company has not been profitable since
inception and had an accumulated deficit of $519,182,000 at July 31, 2006. As of July 31, 2006,
the Company had $7,008,000 in cash and cash equivalents. Since July 31, 2006, the Company has
raised approximately $5.0 million in additional funding. (See Note 11, Subsequent Events). The
Company expects this funding, in addition to the cash and cash equivalents at July 31, 2006 to
be sufficient to fund operations until late January 2007 under the current operating plan. 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. The Company intends to seek
additional capital through sales of equity securities and, if appropriate, to consider strategic
collaborations for sharing development and commercialization costs. However, there can be no
assurance that adequate additional financing will be available to the Company on terms that it
deems acceptable, if at all.2.
    
    Net Loss per ShareBasic 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 weighted-average number of common shares outstanding during the period, adjusted for the
dilutive effect of 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. The dilutive effect of stock options and warrants is determined based on the treasury
stock method using the average market price of common stock for the period. However, basic and
diluted net loss per common share are presented as 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. Consequently, dilutive weighted average shares
outstanding do not include 19,462, 944 potential common-equivalent shares for the three and nine
months ended July 31, 2006 and 6,348,791 common-equivalent shares for the three and nine months
ended July 31, 2005, as their effect would have been anti-dilutive.
 6




---



##### Table of Contents



3.
    
    Capital StockDuring the three months ended July 31, 2006, options and warrants were exercised to acquire an
aggregate of 740,600 shares of the Companys class A common stock at a weighted average exercise
price of $0.898 per share. Total proceeds from these exercises were approximately $665,000.4.
    
    Stock Based CompensationAs of July 31, 2006, the Company had one share-based compensation plan, the Biopure Corporation
Omnibus Securities and Incentive Plan (the Plan). The Plan as amended, which is
shareholder-approved, permits the grant of share options to the Companys employees, consultants
and directors for up to 4.37 million shares of common stock. Option awards are generally granted
with an exercise price equal to the market price of the Companys stock at the date of grant.
Options vest at various periods of up to four years and may be exercised within ten years of the
date of grant. Shares issued upon exercise of options are generally issued from new shares of
the Company.The Company 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. Under the modified prospective transition method, financial statements for
periods prior to the adoption date are not retrospectively adjusted. However, compensation
expense is recognized, based on the requirements of SFAS 123(R), for (a) all share-based
payments granted after the effective date and (b) all awards granted to employees prior to the
effective date that remain unvested on the effective date.Prior to adopting SFAS 123(R), the Company used the intrinsic value method to account for
stock-based compensation under Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees. As a result of the adoption of SFAS 123(R), the Company is amortizing the
unamortized stock-based compensation expense related to unvested option grants issued prior to
the adoption of SFAS 123(R). Historically the fair value of options granted was calculated using
the Black-Scholes Option pricing model. The Company has elected to continue to use this model.
SFAS 123(R) also requires companies to utilize an estimated forfeiture rate when calculating the
expense for the period, while SFAS 123 permitted companies to record forfeitures based on actual
forfeitures, which was the Companys historical policy. The Company has applied an estimated
forfeiture rate to remaining unvested awards based on historical experience in determining the
expense recorded in the Companys consolidated statement of operations. This estimate will be
evaluated quarterly and the forfeiture rate will be adjusted as necessary. Ultimately, the
actual expense recognized over the vesting period will only be for those shares that vest. The
Company has elected to recognize compensation cost for awards with pro-rata vesting using the
straight-line method.Total compensation expense for all stock-based compensation recorded under SFAS 123(R) for the
three and nine months ended July 31, 2006 (no expense in fiscal 2005) is as follows:
 Three Months Ended
    
    
    Nine Months EndedJuly 31,
    
    
    July 31,2006
    
    
    2006Cost of revenues
    
    $
    38
    
    
    $
    120Research and development
    
    
    23
    
    
    
    96Selling and marketing
    
    
    1
    
    
    
    3General and administrative
    
    
    145
    
    
    
    494Total
    
    $
    207
    
    
    $
    713
 The compensation expense increased both basic and diluted net loss per share by $0.005 and
$0.019 for the three and nine months ended July 31, 2006, respectively. In accordance with the
modified-prospective transition method of SFAS 123(R), results for prior periods have not been
restated. As of July 31, 2006, there was $1.5 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 2.41 years.
 7




---



##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedJuly 31,
    
    
    July 31,In thousands (except per share data)
    
    2005
    
    
    2005Net loss, as reported
    
    $
    (6,378
    )
    
    $
    (20,492
    )Deduct: Total stock-based compensation expense determined under
fair value based method for all employee awards
    
    
    (171
    )
    
    
    (1,740
    )Pro forma net loss
    
    $
    (6,549
    )
    
    $
    (22,232
    )Net loss per common equivalent share:Basic and diluted  as reported
    
    $
    (0.26
    )
    
    $
    (0.94
    )Basic and diluted  pro forma
    
    $
    (0.27
    )
    
    $
    (1.02
    )
  Three Months Ended
    
    Nine Months EndedJuly 31,
    
    July 31,
    
    July 31,
    
    July 31,2006
    
    2005
    
    2006
    
    2005Risk-free interest rate
    
    
    4.49
    %
    
    
    4.03
    %
    
    
    4.58
    %
    
    
    3.81
    %Expected volatility
    
    
    85
    %
    
    
    83
    %
    
    
    85
    %
    
    
    82
    %Expected lives (years)
    
    
    5.13
    
    
    
    7.0
    
    
    
    5.27
    
    
    
    5.0Expected dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
   Weighted-
    
    Weighted-Number
    
    Average
    
    Averageof Stock
    
    Exercise
    
    Remaining
    
    AggregateOptions
    
    Price
    
    Life in Years
    
    Intrinsic ValueOutstanding at October 31, 2005
    
    
    2,582
    
    
    $
    12.74Granted
    
    
    312
    
    
    
    1.20Exercised
    
    
    (12
    )
    
    
    0.92Forfeited/Cancelled/ Expired
    
    
    (221
    )
    
    
    18.76Outstanding at July 31, 2006
    
    
    2,661
    
    
    
    10.94
    
    
    
    7.33
    
    
    $
    8Exercisable at July 31, 2006
    
    
    1,147
    
    
    
    23.01
    
    
    
    5.13
    
    
    $
    6Vested and expected to vest at July 31, 2006
    
    
    2,604
    
    
    $
    11.15
    
    
    
    7.29
    
    
    $
    
  Common Stock Options to Advisory Board
  8




---



##### Table of Contents



recorded a charge to operations for these grants of approximately $89,000 for the third fiscal
quarter calculated under the Black-Scholes Model using a volatility of 85.1%, risk-free rate of
4.39% and a term of five years. There was no comparable charge during fiscal 2005.5.
    
    InventoriesInventories are valued at the lower of cost (determined using the first-in, first-out method) or
market. Inventories were as follows at the following dates:
 In thousands
    
    July 31, 2006
    
    
    October 31, 2005Raw materials
    
    $
    679
    
    
    $
    619Work-in-process
    
    
    329
    
    
    
    388Finished goods-Oxyglobin
    
    
    854
    
    
    
    792Finished goods-Hemopure
    
    
    975
    
    
    
    1,650$
    2,837
    
    
    $
    3,449
 The inventory of Hemopure [hemoglobin glutamer  250 (bovine)] finished goods represents those
units the Company expects to sell in South Africa or those units to be used in preclinical or
clinical trials conducted by or on behalf of the U.S. Naval Medical Research Center (NMRC), for
which the Company is reimbursed. Each quarter the Company reviews the
inventory of Hemopure finished goods and, if necessary, writes off
any units beyond those forecast for these purposes, resulting in a
charge to operations through cost of revenues. Accordingly, in the
third fiscal quarter of 2006 the Company charged $241,000 to cost of
revenues. If the Company continues to experience a lack of or extremely
limited sales in South Africa or further delays in the use of Hemopure by the NMRC, it expects
to write off additional units in the future.6.
    
    Accrued ExpensesAccrued expenses were as follows at the following dates:
 In thousands
    
    July 31, 2006
    
    
    October 31, 2005Accrued severance
    
    $
    696
    
    
    $
    935Financing fees
    
    
    537
    
    
    
    537Accrued legal and audit fees
    
    
    247
    
    
    
    277Accrued payroll and related employee expenses
    
    
    981
    
    
    
    639Other
    
    
    802
    
    
    
    708$
    3,263
    
    
    $
    3,096
 Included in accrued severance are costs relating to the resignation, in fiscal 2005, of the
Companys Chief Technology Officer. At October 31, 2005, the Company had an accrual of $917,000,
representing the amount owed to him in accordance with his employment agreement. During the
first nine months of fiscal 2006, the Company paid $256,000 of this amount. The remaining
accrual of $661,000, included in the above total, at July 31, 2006 will be paid over the next 21
months in accordance with his employment agreement.7.
    
    RestructuringDuring the first quarter of fiscal 2005, the Company vacated leased office space and sublet it
for a period of 38 months. The Company accounted for the transaction in accordance with FAS 146,
Accounting for Costs Associated with Exit or Disposal Activities. These costs were included in
general and administrative expense in the consolidated statement of operations during fiscal
2005, and the remaining obligation is accrued both in the current portion of restructuring
charges, and in restructuring charges, net of current portion on the condensed consolidated
balance sheet at July 31, 2006 and October 31, 2005.
 9




---



##### Table of Contents



The following table shows the restructuring activity and liability balances (in thousands):
 Balance at October 31, 2005
    
    $
    440Accretion of liability
    
    
    26Payments
    
    
    (162
    )Balance at July 31, 2006
    
    $
    304
 8.
    
    CommitmentsResearch Agreement(1)In 2003, the Company entered into a Cooperative Research and Development Agreement (CRADA) with
the NMRC. Under the CRADA, as amended, the NMRC has primary responsibility for designing,
seeking U.S. Food and Drug Administration (FDA) acceptance of, and conducting a planned Phase
2/3 clinical trial of Hemopure in trauma patients with severe hemorrhagic shock (acute blood
loss) in the out-of-hospital setting. The Company believes that all or most of its costs could
be covered by government funding. To date, Congress has appropriated a total of $22.5 million to
the U.S. Navy and Army for the development of Hemopure for potential use in military and
civilian trauma and to cover military administrative costs. Of this amount, approximately $5
million is being administered by the Army.(2)9.
    
    Recently Issued Accounting StandardsIn May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections (SFAS No.
154). This statement establishes new standards on accounting for changes in accounting
principles. Pursuant to SFAS No. 154, all such changes must be accounted for by retrospective
application to the financial statements of prior periods unless it is impracticable to do so.
SFAS No. 154 replaces APB Opinion No. 20 and SFAS No. 3, though it carries forward the guidance
in those pronouncements with respect to accounting for changes in estimates, changes in the
reporting entity and the correction of errors. This statement shall be effective for accounting
changes and corrections of errors made in fiscal years beginning after December 15, 2005
(beginning of the Companys 2007 fiscal year). The Company does not believe the adoption of this
standard will have a material impact on its financial position or results of operations.In July 2006, the FASB issued FIN 48 Accounting for Uncertainty in Income Taxes. This
interpretation requires that the Company recognize in its financial statements, the impact of a
tax position, if that position is more likely than not of being sustained on audit, based on the
technical merits of the position. The provisions of FIN 48 are effective for fiscal years
beginning after December 15, 2006 (beginning of the Companys 2008 fiscal year), with the
cumulative effect of the change in accounting principle recorded as an adjustment to opening
retained earnings. The Company is currently evaluating the impact of adopting FIN 48 on its
financial statements, but does not believe the adoption of this standard will have a material
impact on its financial position or results of operations.
 
 (1)
    
    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.
Completion of the proposed RESUS clinical trial of Hemopure in trauma is contingent upon
funding.(2)
    
    $5,102,306 is from Grant DAMD17-02-1-0697. The U.S. Army Medical Research Acquisition
Activity, 820 Chandler Street, Fort Detrick MD 21702-5014 is the awarding and administering
acquisition office. 10




---



##### Table of Contents



10.
    
    LitigationSEC Civil Injunctive ProceedingOn September 14, 2005, the U.S. Securities and Exchange Commission (SEC) filed a civil
injunctive proceeding against Biopure, two former officers and one current officer in the U.S.
District Court for the District of Massachusetts (the District Court). The proceeding seeks a
permanent injunction restraining and enjoining the defendants from violating or aiding and
abetting violations of federal securities laws, a civil monetary penalty from each of the
defendants, and an order barring the former and current officer defendants from serving as
officers or directors of any publicly-traded company. A principal claim by the SEC is that the
Company should have disclosed in April 2003 that the FDA put on hold a proposed clinical trial
of Hemopure in trauma patients in the hospital setting.A second contention in the SEC suit concerns a separate communication by the FDA with the
Company about the orthopedic surgery BLA. The SEC staff has claimed, among other things, that,
in its view, the disclosures concerning a July 30, 2003 FDA letter about the BLA were too
positive in tone.In October 2005, the Company filed an answer to the SEC complaint.On March 11, 2006, the Company and the current officer defendant reached an agreement in
principle with the SEC staff to recommend settlement of this matter. Under the proposed
settlement, no fines or disgorgement would be required of the Company and it would have no
effect on the employment or officer status of the individual. The Company would agree to an
injunction against violations of certain securities laws and regulations and to retain an
independent consultant to review the Companys disclosure practices. The agreement in principle
has been approved by the SEC and is pending court action.Private Class Action and Derivative LitigationFollowing the announcement in December 2003 that the Company was being investigated by the SEC,
Biopure, two directors (one a former director), its former Chief Executive Officer, former Chief
Technology Officer and former Chief Financial Officer were named as defendants in a number of
similar, purported class action complaints, filed between December 30, 2003 and January 28,
2004, in the District Court by alleged purchasers of the Companys common stock. Those
complaints have since been consolidated in a single action, in regards to Biopure Corporation
Securities Litigation. The consolidated complaint claims that the Company violated the federal
securities laws based on the same allegations pursued by the SEC. The complaint does not specify
the amount of alleged damages plaintiffs seek to recover. The plaintiffs filed a motion to amend
again to include allegations made by the SEC; the motion was granted and the Companys motion to
dismiss was denied. This most recent complaint sets forth a class period of April 9, 2003
through December 24, 2003. The Company believes that the complaint is without merit and intends
to defend the actions vigorously. At this time, the Company cannot estimate what impact these
cases may have on its financial position or results of operations.The seven members of the Companys Board of Directors during the period March through December
2003 and certain officers during that period were named as defendants in two stockholder
derivative actions filed on January 26, 2004 and January 29, 2004 in the same District Court. A
consolidated, amended complaint was filed, in regard to Biopure Corporation Derivative
Litigation. Another request to amend again to copy the SECs civil injunctive complaint was also
filed and granted. The Company filed a motion to dismiss, which was denied. Biopure is named as
a defendant, even though in a derivative action any award is for the benefit of the Company, not
individual stockholders. The consolidated, amended complaint alleges that the individual
directors and officers breached fiduciary duties in connection with the same disclosures
referenced in the purported securities class action. The complaint does not specify the amount
of the alleged damages plaintiffs seek to recover. The Company has appointed two disinterested
directors as a special litigation committee to determine whether or not
 11




---



##### Table of Contents



the Company should pursue this action. It has filed a motion to stay the case during its
investigation and deliberation. A different stockholder also made demand on the Companys
directors on June 30, 2004 that they pursue similar claims on behalf of Biopure, and a similar
derivative case was filed in the Trial Court of Massachusetts, Middlesex County, on September
25, 2005. The court stayed the case in Middlesex County pending the outcome of the case in
federal court. At this time, the Company cannot estimate what impact, if any, these cases may
have on its financial position or results of operations. No amounts have been accrued to date
with regard to these actions.11.
    
    Subsequent EventsIn August 2006, Biopure completed a private placement of its common stock and warrants that
raised proceeds of approximately $5.0 million for the Company after placement fees. The Company
sold 7,575,754 shares of its common stock and warrants to acquire an additional 7,575,754
shares. The Company also issued unit warrants to the placement agent to acquire up to 378,788
units, at an exercise price of $0.89 per unit. Each unit consists of one share of common stock
and one five-year warrant to purchase an additional share of common stock. The unit warrant
will be exercisable at any time between February 23, 2007 and August 23, 2011.
 12




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Cautionary Statement Regarding Forward-Looking Information
    Overview
  
    
    A Phase 2 trial, completed in 2005, that was designed to assess the products safety and
feasibility in patients with single-vessel coronary artery disease who were undergoing
angioplasty and stent procedures, or percutaneous coronary intervention (PCI). This trial
enrolled a total of 46 patients at five hospitals in Germany, Belgium and the Netherlands;
    
    A 60-patient Phase 2 trial in patients undergoing multi-vessel coronary artery bypass
graft (CABG) surgery has enrolled 17 patients to date in Greece and the U.K., and the
Company intends to add sites;
    
    A 100-patient Phase 2 trial in patients with peripheral vascular disease who are
undergoing limb amputation below or through the knee has enrolled eight patients to date in
South Africa, and patient screening has begun in the U.K.;
 13




---



##### Table of Contents




    
    A proposed Phase 2 trial in 15 patients with multi-vessel coronary artery disease who
are undergoing PCI has been authorized in Belgium and is pending hospital authorization at
the lead trial site in the Netherlands.
   www.clinicaltrials.gov
   Significant Estimates and Assumptions
   Critical Accounting Policies
  14




---



##### Table of Contents



Inventories
  Stock-based Compensation
     Long-Lived Assets
   15




---



##### Table of Contents



Revenue Recognition
   Research and Development
    Results of Operations
  16




---



##### Table of Contents



Three Months Ended
    
    Nine Months EndedJuly 31, 2006
    
    July 31, 2005
    
    July 31, 2006
    
    July 31, 2005Percent of
    
    
    
    
    
    Percent of
    
    
    
    
    
    Percent of
    
    
    
    
    
    Percent ofAmount
    
    Total Costs
    
    Amount
    
    Total Costs
    
    Amount
    
    Total Costs
    
    Amount
    
    Total CostsOxyglobin Product Sales
    
    $
    312
    
    
    
    
    
    
    $
    358
    
    
    
    
    
    
    $
    980
    
    
    
    
    
    
    $
    955Hemopure Product Sales
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    Research and DevelopmentRevenues
    
    
    83
    
    
    
    
    
    
    
    125
    
    
    
    
    
    
    
    296
    
    
    
    
    
    
    
    826Other Revenues
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1Total Revenues
    
    
    396
    
    
    
    
    
    
    
    483
    
    
    
    
    
    
    
    1,284
    
    
    
    
    
    
    
    1,782Cost of RevenuesOxyglobin
    
    
    725
    
    
    
    10
    %
    
    
    641
    
    
    
    9
    %
    
    
    2,140
    
    
    
    10
    %
    
    
    1,948
    
    
    
    9
    %Hemopure
    
    
    2,214
    
    
    
    31
    %
    
    
    2,525
    
    
    
    36
    %
    
    
    7,211
    
    
    
    33
    %
    
    
    7,191
    
    
    
    32
    %Total Cost of Revenues
    
    
    2,939
    
    
    
    41
    %
    
    
    3,166
    
    
    
    45
    %
    
    
    9,351
    
    
    
    43
    %
    
    
    9,139
    
    
    
    41
    %Research and Development
    
    
    1,772
    
    
    
    25
    %
    
    
    1,268
    
    
    
    18
    %
    
    
    5,112
    
    
    
    24
    %
    
    
    4,178
    
    
    
    18
    %Sales and MarketingOxyglobin
    
    
    16
    
    
    
    0
    %
    
    
    7
    
    
    
    0
    %
    
    
    57
    
    
    
    0
    %
    
    
    17
    
    
    
    0
    %Hemopure
    
    
    181
    
    
    
    3
    %
    
    
    136
    
    
    
    2
    %
    
    
    467
    
    
    
    2
    %
    
    
    356
    
    
    
    2
    %Total Sales and Marketing
    
    
    197
    
    
    
    3
    %
    
    
    143
    
    
    
    2
    %
    
    
    524
    
    
    
    2
    %
    
    
    373
    
    
    
    2
    %General and Administrative
    
    
    2,239
    
    
    
    31
    %
    
    
    2,412
    
    
    
    35
    %
    
    
    6,826
    
    
    
    31
    %
    
    
    8,896
    
    
    
    39
    %Total Costs
    
    $
    7,147
    
    
    
    100
    %
    
    $
    6,989
    
    
    
    100
    %
    
    $
    21,813
    
    
    
    100
    %
    
    $
    22,586
    
    
    
    100
    %
 Three months ended July 31, 2006 compared to three months ended July 31, 2005
   17




---



##### Table of Contents



Three Months EndedJuly 31, 2006
    
    
    July 31, 2005Percent of
    
    
    
    
    
    
    Percent ofIn thousands
    
    Amount
    
    
    Total R&D Costs
    
    
    Amount
    
    
    Total R&D CostsEuropean Surgical Anemia Application
    
    $
    696
    
    
    
    39
    %
    
    $
    
    
    
    
    Ischemia Program
    
    
    360
    
    
    
    20
    %
    
    
    419
    
    
    
    33
    %Trauma Program
    
    
    351
    
    
    
    20
    %
    
    
    50
    
    
    
    4
    %BLA-Derived FDA Review Process
    
    
    98
    
    
    
    6
    %
    
    
    682
    
    
    
    54
    %Other Projects
    
    
    267
    
    
    
    15
    %
    
    
    117
    
    
    
    9
    %Total
    
    $
    1,772
    
    
    
    100
    %
    
    $
    1,268
    
    
    
    100
    %
  European Surgical Anemia Application
  Ischemia and Trauma Projects
   BLA Derived FDA Review Process
  18




---



##### Table of Contents



Nine months ended July 31, 2006 compared to nine months ended July 31, 2005
    Nine Months EndedJuly 31, 2006
    
    
    July 31, 2005Percent of
    
    
    
    
    
    
    Percent ofIn thousands
    
    Amount
    
    
    Total R&D Costs
    
    
    Amount
    
    
    Total R&D CostsEuropean Surgical Anemia Application
    
    
    1,484
    
    
    
    29
    %
    
    
    
    
    
    
    Ischemia Program
    
    
    1,272
    
    
    
    25
    %
    
    
    1,313
    
    
    
    31
    %Trauma Program
    
    
    772
    
    
    
    15
    %
    
    
    526
    
    
    
    13
    %BLA Derived FDA Review Process
    
    
    562
    
    
    
    11
    %
    
    
    2,092
    
    
    
    50
    %Other Projects
    
    
    1,022
    
    
    
    20
    %
    
    
    247
    
    
    
    6
    %Total
    
    $
    5,112
    
    
    
    100
    %
    
    $
    4,178
    
    
    
    100
    %
    19




---



##### Table of Contents



Liquidity and Capital Resources
     Recently Issued Accounting Standards
   
 Item 3. Quantitative and Qualitative Disclosure About Market Risk
  20




---



##### Table of Contents



Item 4. Controls and Procedures
     21




---



##### Table of Contents



Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  Company Risks
 We have a history of losses and expect future losses.
  We require significant funding in order to continue to operate.
   Failure to raise sufficient additional funds will significantly impair or possibly cause us to
cease the development, manufacture and sale of our products and our ability to operate.
  22




---



##### Table of Contents



We may not be able to continue as a going concern, as our funds are only sufficient to fund
operations until late January 2007.
   If we cannot retain the personnel we need, our costs will rise significantly. If we cannot hire or
retain the best people, our operations will suffer.
  If we fail to obtain FDA approval for Hemopure, we will not be able to market Hemopure in the
United States, and as a consequence will be highly adversely affected.
    23




---



##### Table of Contents



If we fail to obtain regulatory approvals in foreign jurisdictions, we will not be able to market
Hemopure abroad.
  Clinical trials are extremely costly and subject to numerous risks and uncertainties.
   If we do not have the financial resources to fund trials required to develop Hemopure for multiple
potential indications, our success as a company will be adversely affected.
  24




---



##### Table of Contents



We are subject to significant litigation risk.
   The litigation matters described above, and any other litigation matters with which we become
involved, may harm our business and financial condition if they result in substantial judgments or
settlements that exceed the amount of coverage under our insurance policies, or if such judgments
or settlements are not covered by our insurance policies.
  If we cannot find appropriate marketing partners, we may not be able to market and distribute
Hemopure effectively.
  
    
    might not be successful in marketing Hemopure;
    
    might, at its discretion, limit the amount and timing of resources it devotes to marketing Hemopure; and
    
    might terminate its agreement with us and abandon our products at any time whether or not
permitted by the applicable agreement.
  25




---



##### Table of Contents



If we cannot generate adequate, profitable sales of Hemopure, we will not be successful.
  If we cannot obtain market acceptance of Hemopure, we will not be able to generate adequate,
profitable sales.
  
    
    whether and how quickly physicians accept Hemopure as a cost-effective and therapeutic
alternative to other products;
    
    whether medical care providers or the public accept the use of a bovine-derived protein as
a therapeutic in ischemia or any other indication, particularly in light of public
perceptions in the United States, Europe and elsewhere about the risk of mad cow disease;
    
    product price, which we believe is an important factor in South Africa and may be
elsewhere.
 If we fail to comply with good manufacturing practices, we may not be able to sell our products.
  The manufacturing process for Hemopure is complicated and time-consuming, and we may experience
problems that would limit our ability to manufacture and sell Hemopure.
   If we were unable to use our manufacturing facilities in Massachusetts or Pennsylvania, we would
not be able to manufacture for an extended period of time.
  26




---



##### Table of Contents



If Hemopure receives regulatory approval in a major market, we will be required to expand our
manufacturing capacity to develop our business, which will require substantial third party
financing. Failure to increase our manufacturing capacity may impair Hemopures market acceptance
and prevent us from achieving profitability.
   If we are not able to finance additional manufacturing capacity, we will incur a substantial
write-off of assets.
  Our lack of operating history makes evaluating our business difficult.
  If we are not able to protect our intellectual property, competition could force us to lower our
prices, which might reduce profitability.
   27




---



##### Table of Contents



Failure to avoid infringement of others intellectual property rights could impair our ability to
manufacture and market our products.
   Our profitability will be adversely affected if we incur product liability claims in excess of our
insurance coverage.
   Replacing our sole source suppliers for key materials could result in unexpected delays and
expenses.
   Changes in the securities laws and regulations are likely to increase our costs.
  28




---



##### Table of Contents



Provisions of our restated certificate of incorporation and by-laws could impair or delay
stockholders ability to replace or remove our management and could discourage takeover
transactions that a stockholder might consider to be in its best interest.
  
    
    Our restated certificate of incorporation does not permit stockholders to take action
by written consent and provides for a classified board of directors, and our by-laws
provide that stockholders who wish to bring business before an annual meeting of
stockholders or to nominate candidates for election of directors at an annual meeting of
stockholders must deliver advance notice of their proposals to us before the meeting. These
provisions could make it more difficult for a party to replace our board of directors by
requiring two annual stockholder meetings to replace a majority of the directors, making it
impossible to remove or elect directors by written consent in lieu of a meeting and making
it more difficult to introduce business at meetings.
    
    Our stockholder rights plan may have the effect of discouraging any person or group
that wishes to acquire more than 20 percent of our Class A common stock from doing so
without obtaining our agreement to redeem the rights. If our agreement to redeem the rights
is not obtained, the acquiring person or group would suffer substantial dilution.
 Industry Risks
 Intense competition could harm our financial performance.
   
    
    are conducting clinical trials of their products;
 29




---



##### Table of Contents




    
    might have or be able to access substantially greater resources than we have and be
better equipped to develop, manufacture and market their products;
    
    may have their products approved for marketing prior to Hemopure; and
    
    may develop superior technologies or products rendering our technology and products
non-competitive or obsolete.
 Stringent, ongoing government regulation and inspection of our products could lead to delays in the
manufacture, marketing and sale of our products.
  Health care reform and controls on health care spending may limit the price we can charge for
Hemopure and the amount we can sell.
  Uncertainty of third party reimbursement could affect our profitability.
  Investment Risks
 We may not continue to qualify for continued listing on the Nasdaq Global Market, which may cause
the value of an investment in our company to substantially decrease.
  30




---



##### Table of Contents



As we sell additional shares, our stock price may decline as a result of the dilution which will
occur to existing stockholders.
    Shares eligible for future sale may cause the market price for our common stock to drop
significantly, even if our business is doing well.
  Our stock price has been and may continue to be highly volatile, which may adversely affect
holders of our stock and our ability to raise capital.
  
    
    failure to identify and hire key personnel or the loss of key personnel;
    
    an inability to obtain or the perception that we will be unable to obtain adequate
financing to fund our operations;
    
    FDA action or delays in FDA action on Hemopure or competitors products;
    
    the outcome of litigation;
    
    publicity regarding actual or potential medical results relating to products under
development by us or our competitors;
 31




---



##### Table of Contents




    
    actual or potential preclinical or clinical trial results relating to products under
development by us or our competitors;
    
    delays in our testing and development schedules;
    
    announcements of technological innovations or new products by our competitors;
    
    developments or disputes concerning patents or proprietary rights;
    
    regulatory developments in the United States and foreign countries;
    
    economic and other factors, as well as period-to-period fluctuations in our financial results;
    
    market conditions for pharmaceutical and biotechnology stocks; and
    
    additional, future communications from the Nasdaq Stock Market concerning delisting or
potential delisting.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information.
  
 Item 6. Exhibits
  32




---



##### Table of Contents



SIGNATURES
  BIOPURE CORPORATIONDate: September 11, 2006
    
    By:
    
    /s/ Francis H MurphyFrancis H. MurphyChief Financial Officer
 33




---



##### Table of Contents



EXHIBIT INDEX
 Number
    

Description
    
    Location3 (i)
    
    Restated Certificate of Incorporation and amendments through May 27, 2005
    
    
    (1
    )3 (ii)
    
    By-laws of Biopure, as amended
    
    
    (2
    )4.1
    
    Form of Underwriter Warrant dated March 27, 2003
    
    
    (3
    )4.2
    
    Form of Investor Warrant dated April 16, 2003
    
    
    (3
    )4.3
    
    Form of Underwriter Warrant dated April 16, 2003
    
    
    (3
    )4.4
    
    Form of Investor Warrant dated May 2, 2003
    
    
    (3
    )4.5
    
    Form of Investor Warrant dated May 6, 2003
    
    
    (3
    )4.7
    
    Amended Form of Underwriters Investor Warrant, dated as of December 27, 2005
    
    
    (4
    )4.8
    
    Amended Form of Investor Warrant, dated as of December 27, 20054.9
    
    Form of Underwriters Investor Warrant, dated January 17, 20064.10
    
    Form of Underwriters Warrant underlying the Unit Warrant, dated August 23, 200631.1
    
    Certification of Zafiris G. Zafirelis pursuant to Section 302 of the
Sarbanes-Oxley Act of 200231.2
    
    Certification of Francis H. Murphy pursuant to Section 302 of the
Sarbanes-Oxley Act of 200232.1
    
    Certification of Zafiris G. Zafirelis pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification of Francis H. Murphy pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 (1)
    
    Previously filed as an exhibit to the Companys Quarterly Report on Form 10-Q for the quarter
ended April 30, 2005, and incorporated herein by reference thereto.(2)
    
    Previously filed as an exhibit to the Companys Registration Statement on Form S-1 (File No.
333-78829) and incorporated herein by reference thereto.(3)
    
    Previously filed as an exhibit to the Companys Quarterly Report on Form 10-Q for the quarter
ended April 30, 2003, and incorporated herein by reference thereto.(4)
    
    Previously filed as an exhibit to the Companys Annual Report on Form 10-K for the year ended
October 31, 2005, and incorporated herein by reference thereto. 34