MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion should be read in conjunction with Ampio Pharmaceuticals, Inc.'s historical financial statements filed with this report. The following discussion and analysis contain forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. For additional information regarding these risks and uncertainties, please see Part II, Item 1A of this Form 10-Q, "Risk Factors," and the risk factors included in Ampio's Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 9, 2012.

Overview

Ampio maintains an Internet website at www.ampiopharma.com. Information on or linked to the Company website is not incorporated by reference into this Quarterly Report on Form 10Q. Filings with the SEC can also be obtained at the SEC's website, www.sec.gov.

We are a development stage biopharmaceutical company engaged in discovering and developing innovative, proprietary pharmaceutical drugs and diagnostic products to identify, treat and prevent a broad range of human diseases including metabolic disorders, eye disease, kidney disease, cancer, acute and chronic inflammation and male sexual dysfunction. We intend to develop proprietary pharmaceutical drugs and diagnostic products, which capitalize on our intellectual property that includes assigned patents, pending patent applications, and trade secrets and know-how, some of which may be the subject of future patent applications. Our intellectual property is strategically focused on three primary areas: new uses for FDA-approved drugs, referred to as repositioned drugs, new molecular entities, or NMEs, and rapid point-of-care tests for diagnosis, monitoring and screening.

On March 23, 2011, we acquired all of the outstanding stock of DMI BioSciences, Inc. ("BioSciences") for 8,667,905 shares of our common stock (the "merger stock"). We acquired BioSciences in order to obtain all rights to Zertane, BioSciences' male sexual dysfunction drug for premature ejaculation ("PE"). The business combination occurred following the satisfaction or waiver of all conditions to closing. As called for in the merger agreement, Ampio issued 405,066 shares of merger stock to holders of BioSciences in-the-money stock options and warrants, 500,000 shares of merger stock to holders of two BioSciences promissory notes in extinguishment of the notes, and placed 250,000 shares of merger stock in an indemnification escrow until December 31, 2011. The remaining 7,512,839 shares of merger stock were issued to the holders of BioSciences common stock on a pro rata basis. All shares were subject to receipt from each such stockholder of a signed lock-up agreement, under which each agreed not to sell, pledge or hypothecate the merger stock until on or after December 31, 2011. Certain of these lock-up agreements were modified after September 30, 2011. As required by the merger agreement, at the closing BioSciences donated back to Ampio's capital 3,500,000 shares of Ampio common stock formerly owned by BioSciences. Ampio separately issued 212,693 options in replacement of 250,850 Biosciences options that were "out-of-the-money" as of the date of execution of the merger agreement. On June 17, 2011, an additional 223,024 options were issued in exchange for 98,416 previously issued shares of Ampio stock pursuant to an agreement with three former BioSciences option holders. During 2011, we filed a claim on the indemnification escrow and were awarded 95,700 shares of Ampio stock to reflect the full value of the 223,024 options issued in exchange for the shares relinquished. On December 31, 2011 the remaining 154,300 indemnification escrow shares were allocated to the appropriate shareholders. All shares donated back, relinquished and escrow shares awarded to Ampio have been cancelled.

Business Update/Financing Activities

On February 28, 2011, we issued an aggregate of 1,281,852 shares of our common stock in retirement of the Senior Convertible Debentures issued to 21 holders of such debentures. The convertible debentures were previously issued in five tranches. The first tranche consisted of $430,000 in principal amount issued in August 2010 to two directors and an affiliate of one of those directors. The next three tranches consisted of $1.38 million in principal amount issued in October, November and December 2010 to 19 unaffiliated holders (seven of whom were already our shareholders), and the remaining tranche in January 2011 was an increase of $382,000 in principal amount of debentures purchased by five holders who originally purchased debentures in November 2010. The principal amount of the debentures and accrued interest were converted into our common stock at $1.75 per share. Debentures held by two directors and an affiliate of one director were converted on the same terms as debentures held by unaffiliated parties. The debenture holders were collectively issued warrants to purchase 256,389 shares of our common stock as additional consideration for the purchase of the debentures. Those warrants are exercisable at $1.75 per share.

On March 31, April 8 and April 18, 2011, we closed private placements of our common stock (the "2011 Private Placement"). A total of 5,092,880 shares of common stock were issued resulting in gross proceeds of $12,732,200, of which we received net proceeds of $10,916,538, after placement agent commissions, non-accountable expenses and other offering costs. The placement agent also received 509,288 warrants valued at $888,664 in connection with the closing. We applied a portion of the private placement proceeds in March and April 2011 to pay accrued expenses, to pay accrued salaries owed to certain of our officers, to reduce accounts payable, and to repay a $100,000 promissory note to Michael Macaluso, our chief executive officer and chairman of the board.

On December 27, 2011, we completed a registered direct offering of our common stock A total of 2,220,255 shares were issued at a price of $4.25 per share resulting in gross proceeds of $9,436,084, of which we received net proceeds of $8,454,001, after placement agent commissions, non-accountable expenses and other offering costs. No warrants were issued.

On July 18, 2012, we completed an underwritten public offering for the sale of 5,203,860 shares of common stock at a price of $3.25 per share. Gross proceeds to the Company totaled $16,912,545 with net proceeds estimated to be approximately $15,200,000 after underwriter fees and offering expenses. Ampio also issued warrants to purchase 138,462 shares of common stock to the underwriters. These warrants have an exercise price of $4.0625 with a five year term but are not exercisable until July 18, 2013.

The net proceeds of the 2011 and 2012 offerings have been or will be used for general corporate purposes and working capital, including conducting pivotal trials for Ampion and Zertane, Phase II and III trials for Optina, development of the methylphenidate family of compounds through the pre-IND submission, development of the ORP device and commercialization of Zertane and Zertane-ED.

Product Update

We continue to execute our business plan and have moved forward on our three main drug candidates and our device development. In addition, we have evaluated our methlphenidate derivatives family of compounds and have accelerated the development of these compounds. We will continue to evaluate our pre-clinical portfolio and advance drug candidates accordingly.

Ampion for Osteoarthritis of the Knee

The clinical trial has been completed and the preliminary results have been evaluated. A pre-IND meeting with the FDA to obtain clarity for a Phase III pivotal trial was held on May 10, 2012. The first batch of the study drug supply has been manufactured and is undergoing stability studies. We have identified initial sites and investigators and we have received quotes from clinical research organizations, which we are assessing. We anticipate that this United States trial will begin in the fourth quarter of 2012.

Optina for Diabetic Macula Edema

The clinical trial was discontinued after the planned interim review indicated encouraging results. The detailed analysis of the multiple data point per patient was released on June 11, 2012. Despite the small number of patients, the results showed statistical significance. The results of data analysis of the Canadian trial also indicated important changes in study design and dosage. A successful pre-IND meeting with the FDA's ophthalmology division of the Center for Drug Evaluation and Research ("CDER") took place July 31, 2012. Among other things, the meeting provided guidance for approval through the 505(b)2 pathway in the United States, indicated no safety or CMC concerns, confirmed agreement that no additional non-clinical studies are necessary and provided that the measure of efficacy will be based on visual acuity end points.

Zertane for Male Sexual Dysfunction

We reached agreement with the Australian Therapeutic Goods Administration ("TGA") on a plan for preparation of manufacturing and common technical documents to obtain regulatory approval for Zertane in Australia. The submission is dependent upon the completion of batch processes by an independent manufacturer but is expected to be made late in the fourth quarter of 2012 or first quarter of 2013 and we hope to obtain approval in Australia as early as 2013.

A Type B pre-IND meeting was held with the FDA on June 20, 2012 to discuss the approval path for Zertane in the U.S. under the 505(b)2 regulations. We are proceeding based on the guidance received and anticipate the completion of modification of the patient reported outcome ("PRO") measure as suggested by the FDA and the completion of protocol design for submission of the IND in the first quarter of 2013. As with the TGA submission, the IND submission is also dependent on the manufacturer.

Our sexual drug therapy portfolio was recently expanded with the allowance of the PE-ED patent in Europe and Canada. We expect the United States patent allowance to follow shortly. As a first step for the clinical study of Zertane-ED, we entered into an

We also entered into a license and distribution agreement with a Brazilian pharmaceutical company for exclusive rights to market Zertane in Brazil.

Methylphenidate Derivatives for Cancer

We have accelerated the development of our methlphenidate derivatives family of compounds ("NCE-001") to preclinical development for the treatment of glioblastoma multiforme ("brain tumor"), renal cell ("clear cell") carcinoma and inflammatory breast cancer following the granting of multiple composition of matter and use patents in the USA, Canada, Europe and China. We have preliminarily agreed with Syngene International that Syngene will manufacture relevant compounds and conduct all preclinical stages of development to an IND submission to the FDA and we are in the process of finalizing a definitive agreement relating thereto. These cancers do not have adequate treatment options so NCE-001 may qualify for an accelerated approval path by regulatory agencies, including the FDA.

ORP, Point-of-Care Diagnostic Device

Enrollment of patients has been completed for our clinical trials and the analysis of the results has begun. The results will determine the clinical utility of this technology. We intend to prepare a 510(K) FDA submission upon completion of data analysis.

Management Update

On January 9, 2012, we announced that our Chief Executive Officer, Donald B. Wingerter, Jr., had requested and was granted a compassionate leave from all duties as CEO, member of the Board of Directors and an employee. Compensation and benefits totaling $634,000 have been paid to Mr. Wingerter pursuant to terms of his employment contract. This includes a lump sum payment of two years' salary, a supplemental payment and two years of continued health benefits. All of his outstanding stock option awards vested, bringing total stock options exercisable at $1.03 per share to 600,000 shares. The 325,000 shares of Ampio common stock owned by Mr. Wingerter were subject to the terms of a lock-up agreement that has expired. Ampio's Chairman of the Board, Michael Macaluso, was appointed Chief Executive Officer concurrent with this departure with his compensation set at $195,000 per year.

Lockups

All lockup agreements related to the stock issued in connection with the acquisition of BioSciences expired on June 30, 2012.

In October 2011, Ampio management and employees holding an aggregate of 8,250,000 shares agreed to extend their existing lock-up restrictions until July 15, 2012. The management and employee lockups exclude their pro rata portion of holdings of up to 1,000,000 aggregate shares for all selling shareholders should Ampio decide to sell stock in a future public offering, as previously detailed in our Form S-3 Registration Statement effective October 28, 2011.

In July 2012 two of the executive officers and directors of Ampio holding approximately 4,700,000 shares of common stock voluntarily extended their lockup restrictions to January 1, 2013. These two voluntary lockups allow for the sale of collectively up to 429,400 shares as selling stockholders should we decide to sell stock in a future public offering. These executives did not participate as selling shareholders in the July 2012 offering.

Known Trends or Future Events

We have not generated any significant revenues and have therefore incurred significant net losses since our inception in December 2008. The assets we purchased from BioSciences in April 2009 generated minimal revenues prior to their acquisition. Unless we secure a collaborator for one or more of our product candidates and generate substantial license revenues, we will need additional capital in order to continue to implement our business strategy. Although we have raised capital in the past and raised net proceeds of approximately $15.2 million and $19.4 million through the sale of common stock in 2012 and 2011, respectively, we cannot assure you that we will be able to secure such additional financing, if needed, or that it will be adequate to execute our business strategy. Even if we obtain additional financing, it may be costly and may require us to agree to covenants or other provisions that will favor new investors over existing shareholders. Due to the time required to conduct clinical trials and obtain regulatory approval for any of our product candidates, we anticipate it will be some time before we generate substantial revenues, if ever. We expect to generate operating losses for the foreseeable future, but intend to try to limit the extent of these losses by entering into co-development or collaboration agreements with one or more strategic partners, such as the license agreement entered into in September 2011 with a major Korean pharmaceutical company.

Significant Accounting Policies and Estimates

Our financial statements have been prepared in accordance with accounting policies generally accepted in the United States of America. The preparation of the financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to recoverability of long-lived assets, fair value of our derivative instruments, allowances and contingencies. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The methods, estimates, and judgments used by us in applying these most critical accounting policies have a significant impact on the results we report in our financial statements.

Results of Operations - June 30, 2012 Compared to June 30, 2011

Results of operations for the three months ended June 30, 2012 (the "2012 quarter") and the three months ended June 30, 2011 (the "2011 quarter") reflected losses of approximately $2,496,000 and $2,818,000, respectively. These losses include non-cash charges related to derivative expense, stock based compensation and depreciation and amortization in the amount of $580,000 in the 2012 quarter and $1.5 million in the 2011 quarter.

Results of operations for the six months ended June 30, 2012 (the "2012 period") and the six months ended June 30, 2011 (the "2011 period") reflected losses of approximately $5,332,000 and $11,598,000, respectively. These losses include non-cash charges related to derivative expense, common stock and stock based compensation, losses on the fair value of debt instruments and depreciation and amortization in the amount of $679,000 in the 2012 period and $8.8 million in the 2011 period.

Revenue

We are a development stage enterprise and have not generated material revenue in our operating history. The $25,000 license revenue recognized in the 2012 period represents the amortization of the upfront payment received on our license agreement. The initial payment of $500,000 from the license agreement with a Korean pharmaceutical company was deferred and is being recognized over 10 years.

Expenses

Research and Development

                                             Three Months Ended June 30,            Six Months Ended June 30,
                                               2012                2011               2012              2011
Labor                                     $       336,000       $   353,000      $      733,000      $   578,000
Patent costs                                      323,000           202,000             676,000          333,000
Stock-based compensation                          119,000            58,000             176,000          115,000
Clinical trials and sponsored research            730,000           360,000           1,198,000          571,000
Consultants                                        43,000            36,000             241,000           45,000

                                          $     1,551,000       $ 1,009,000      $    3,024,000      $ 1,642,000

Research and development costs consist of labor, research and development of patents and intellectual property, stock-based compensation as well as drug development and clinical trials. Costs of research and development increased $542,000 or 54% for the 2012 quarter compared to the 2011 quarter and increased $1,382,000 or 84% for the 2012 period compared to the 2011 period due to continued focus on the development of and pursuit of regulatory clarity on our primary product candidates, Ampion, Optina and Zertane, and the development of our ORP device. We also continued to maintain and strengthen our patent portfolio on our primary product candidates. Labor costs also increased as a result of the increased efforts in this area.

General and Administrative

General and administrative costs are summarized as follows:



                                           Three Months Ended June 30,           Six Months Ended June 30,
                                            2012                 2011               2012             2011
Labor                                  $      152,000       $      164,000     $      911,000     $   453,000
Stock-based compensation                      213,000              103,000            396,000         836,000
Professional fees                             102,000               23,000            233,000         370,000
Occupancy, travel and other                   197,000              184,000            593,000         323,000
Directors fees                                 63,000               94,000            130,000         190,000

                                       $      727,000       $      568,000     $    2,263,000     $ 2,172,000

General and administrative expenses increased $159,000 or 28% for the 2012 quarter compared to 2011 quarter. The increase is due primarily to the non-cash stock-based compensation award expense recognized during the 2012 quarter.

The increase in general and administrative costs in the 2012 period compared to the 2011 period was $91,000 or 4%. Labor costs increased as the result of the employment agreement payout to our former CEO upon the granting of indefinite compassionate leave of absence. Stock based compensation decreased in the 2012 period from the 2011 period due to the reduction of new options being issued and the majority of previously issued options having vested. Professional fees consist primarily of legal, audit and accounting costs, costs related to public company compliance costs, and consulting related to capital formation. In the 2011 period we had higher professional fees related to the filing of an S-4 document and the acquisition of BioSciences. Occupancy, travel and other expenses consist of rent, insurance, investor relations and other public company costs such as exchange listing. The increase in the 2012 period relates primarily to NASDAQ annual fees and increased investor relations activities.

Derivative income (expense)

We recorded non-cash derivative expense in connection with our hybrid financial instruments consisting of debentures and related warrants. This expense was $233,226 in the 2012 quarter compared to $1,243,642 in the 2011 quarter, and $76,247 in the 2012 period compared to $2,192,097 in the 2011 period. These amounts relate to the fair value at inception and subsequent changes in fair value of the debentures issued in 2011 and 2010 stemming from the embedded derivative features (conversion options, down-round protection and mandatory conversion provisions) and the changes in fair value of warrants issued in conjunction with the debentures.

Unrealized loss on fair value of debt instruments

We recorded $5.6 million in non-cash unrealized loss on fair value of debt instruments in the first quarter of 2011. The expense reflects the change in fair value of our debentures prior to their conversion to common stock in February 2011 and stemmed primarily from the increase in our common stock price between December 31, 2010 and February 28, 2011, when the debentures were converted.

During the 2012 period our operating activities used approximately $5.2 million in cash. The use of cash was approximately the same as the $5.3 million net loss. Non-cash charges for common stock and stock based compensation, depreciation and amortization was $679,000. Current assets in the form of prepaid expenses used cash of $263,000 and the decrease in accounts payable used cash of approximately $272,000.

During the 2011 period our operating activities used approxiately $3.4 million in cash. The use of cash was significantly lower than the $11.6 million net loss, primarily as a result of non-cash charges of $981,000 for common stock issued for services and stock based compensation and $7.8 million in unrealized loss on fair value of debt instruments and derivative expense. Net of these non-cash expenses, our operations used $2.8 million in cash. We also used $642,000 in cash from operations to pay deferred salaries, accounts payable, related party payables and net changes in other current assets and $75,000 for the purchase of fixed assets and rent deposits.

Net Cash from Financing Activities

Net cash provided by financing activities in the 2012 period was due to a cash exercise of stock options of $618,000 and a repayment of $37,000 related to the stockholders advances made in 2010.

Net cash provided by our financing activities was $11.2 million for the 2011 period. During this period, we received $382,000 from the sale of additional senior unsecured debentures and $10.9 million from the sale of common stock. We also repaid a $100,000 note to a director of Ampio.

Liquidity and Capital Resources

At June 30, 2012, Ampio had cash of approximately $6.8 million and payables of approximately $358,000.

As a development stage biopharmaceutical company, we have not generated significant revenue as our primary activities are focused on research and development, advancing our primary product candidates, and raising capital. In the six months ended June 30, 2012, we used net cash in operating activities of $5.2 million and inception to date of $18.3 million. We have historically funded our operations through sales of common stock and debt securities.

During the first six months of 2012, we completed two pre-IND meetings with the FDA that provided clarity for pivotal trials of Ampion and Zertane, completed the submission package for Optina and held a successful pre-IND meeting with the FDA on July 31, 2012 and accelerated the development of our methylphenidate family of compounds. In July 2012, we completed a public offering of 5,203,860 shares of common stock resulting in gross proceeds to the Company of $16,912,545 . . .