This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, which are subject to the "safe harbor" created by those sections. Forward-looking statements are based on our management's beliefs and assumptions and on information currently available to them. In some cases you can identify forward-looking statements by words such as "may," "will," "should," "could," "would," "expects," "plans," "anticipates," "believes," "estimates," "projects," "predicts," "potential" and similar expressions intended to identify forward-looking statements. Examples of these statements include, but are not limited to, statements regarding: the implications of interim or final results of our clinical trials, the progress of our research programs, including clinical testing, the extent to which our issued and pending patents may protect our products and technology, our ability to identify new product candidates, the potential of such product candidates to lead to the development of commercial products, our anticipated timing for initiation or completion of our clinical trials for any of our product candidates, our future operating expenses, our future losses, our future expenditures for research and development, and the sufficiency of our cash resources. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including the risks faced by us and described in Part II, Item 1A of this Quarterly Report on Form 10-Q, Part I, Item IA of our Annual Report on Form 10-K and our other filings with the Securities and Exchange Commission, or SEC. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report on Form 10-Q. You should read this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from those we expect. Except as required by law, we assume no obligation to update these forward-looking statements, whether as a result of new information, future events or otherwise.

The following discussion and analysis should be read in conjunction with the unaudited financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with the audited consolidated financial statements and related notes thereto included as part of our Annual Report on Form 10-K for the year ended April 30, 2012.

All references in this Quarterly Report to "Oxygen Biotherapeutics", "we", "our" and "us" means Oxygen Biotherapeutics, Inc.

Overview

Strategy

We are a development stage biomedical company focused on developing oxygen-carrying intravenous and topical products. Our principal business objective is to discover, develop, and commercialize novel therapeutic products for disease indications that represent significant areas of clinical need and commercial opportunity.

Our current strategy is to:

? Efficiently conduct clinical development to establish clinical proof of concept with our lead product candidates;

? Advance the development of the perfluorocarbon, or PFC, therapeutic modality and supporting capabilities;

? Efficiently explore new high-potential therapeutic applications, leveraging third-party research collaborations and our results from related areas;

? Continue to expand our intellectual property portfolio; and

? Enter into licensing or product co-development arrangements in certain areas, while out-licensing opportunities in non-core areas.

We believe that this strategy will allow us to develop a portfolio of high quality product development opportunities, expand our clinical development and commercialization capabilities, and enhance our ability to generate value from our proprietary technologies

First Quarter 2013 Highlights

The following summarizes certain key financial measures for the three months ended July 31, 2012:

? Cash and cash equivalents were $2.7 million at July 31, 2012.

? Net product sales from Dermacyte were $5,500 for the first quarter of 2013 compared to $25,000 for the three months ended July 31, 2011.

? Revenue earned under our research grant was $267,000 for the first quarter of 2013 compared to $0 for the three months ended July 31, 2011.

? Our loss from operations was $1.7 million for the first quarter of 2013 compared to $2.4 million for the three months ended July 31, 2011.

? Net cash used in operating activities was $1.6 million for the first quarter of 2013 compared to $2.1 million for the three months ended July 31, 2011.

Consistent with our strategy, during the three months ended July 31, 2012, we
(i) secured our long-term supply of GMP-grade Oxycyte to be used in ongoing STOP-TBI clinical trials and to support the research and development efforts our partners, (ii) completed the first proof-of-concept clinical trial for the topical application of a PFC-based gel to treat dermatologic indications and
(iii) entered into a new research agreement with the U.S. Navy to evaluate Oxycyte for the treatment of hemorrhagic shock.

Opportunities and Trends

We continue to execute on our strategic plan, which calls for resuming our Phase II-B clinical trials for STOP-TBI; supporting our collaborations to gather proof-of-concept data for additional therapeutic areas with unmet medical needs; and continuing our business development efforts to expand our product portfolio. We also continue to progress Oxycyte through the regulatory approval process by conducting a comprehensive group of preclinical studies to confirm the safety profile of our product. These studies are particularly focused on platelet activity and immunocompetence. We believe these actions position us well to drive future growth and create stockholder value.

As we focus on the development of our existing products and product candidates, we also continue to position ourselves to execute upon licensing and other partnering opportunities. In order to do so, we will need to continue to maintain our strategic direction, manage and deploy our available cash efficiently and strengthen our collaborative research development and partner relationships.

During fiscal year 2013 we are focused on the following four key initiatives:

? Conducting well-designed studies early in the clinical development process to establish a robust foundation for subsequent development, partnership and expansion into complementary areas;

? Working with collaborators and partners to accelerate product development, reduce our development costs, and broaden our commercialization capabilities;

? Gaining regulatory approval for the continued development and commercialization of Oxycyte in the United States; and

? Developing new intellectual property will enable us to file patent applications that cover new applications of our existing technologies and product candidates.

Critical Accounting Policies and Significant Judgments and Estimates

There have been no significant changes in critical accounting policies during the three months ended July 31, 2012, as compared to the critical accounting policies described in "Item 7-Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Significant Judgments and Estimates" in our Annual Report on Form 10-K for the fiscal year ended April 30, 2012.

Financial Overview

Results of Operations- Comparison of the Three Months Ended July 31, 2012 and 2011

Revenue

Product Revenue and Gross Profit

We generate revenue through the sale of DermacyteŽ through on-line retailers,
physician and medical spa facilities, and through distribution agreements with
unrelated companies. Product revenue and percentage changes for the three months
ended July 31, 2012 and 2011, respectively, are as follows:

                                              The three months ended July 31,          Increase/        % Increase/
                                                2012                  2011             (Decrease)        (Decrease)
Product revenue                                     11,458                59,477           (48,019 )              (81 ) %
Cost of sales                                        5,911                34,604           (28,693 )              (83 ) %
Gross profit                                         5,547                24,873           (19,326 )              (78 ) %

The decrease in product revenue for the three months ended July 31, 2012 was primarily due to the reduction in our internal sales force and the termination of existing distribution agreements in the prior year. During the three months ended July 31, 2011, we recorded $26,000 in revenue from sales to our distributer that did not occur in the current period. During the current period, we employed only one internal salesperson compared to three during the same period in the prior year.

Gross profit as a percentage of revenue was 48% and 42% for three months ended July 31, 2012 and 2011, respectively. The increase for the three months ended July 31, 2012 was due to a greater proportion of total sales through retail regional sales versus wholesale and distributor channels as compared to the same period in the prior year.

Government Grant Revenue

We earn revenues through a cost-reimbursement grant sponsored by the United States Army, or Grant Revenue. Grant Revenue is recognized as milestones under the Grant program are achieved. Grant Revenue is earned through reimbursements for the direct costs of labor, travel, and supplies, as well as the pass-through costs of subcontracts with third-party CROs.

Three months ended July 31, Increase/ 2012 2011 (Decrease) % Increase/(Decrease) Government grant revenue $ 266,549 $ - $ 266,549 - %

For the three months ended July 31, 2012, we recorded approximately $267,000 in revenue under the grant program. In addition to the revenue earned, we have recorded approximately $235,000 in deferred revenue associated with the grant. Deferred revenue under the grant represents pass-through costs that have been reimbursed in advance of performing the studies underlying the subcontracts.

Marketing and Sales Expenses

Marketing and sales expenses consisted primarily of personnel-related costs, including salaries, commissions, and the costs of marketing programs aimed at increasing revenue, such as advertising, trade shows, public relations and other market development programs. Marketing and sales expenses and percentage changes for the three months ended July 31, 2012 and 2011, respectively, are as follows:

Three months ended July 31, Increase/ 2012 2011 (Decrease) % Increase/(Decrease) Marketing and sales expense $ 38,605 $ 229,333 $ (190,728 ) (83 ) %

The decrease in marketing and sales expenses for the three months ended July 31, 2012 was driven primarily by a decrease in the costs incurred for compensation and direct advertising.

- We reduced compensation costs related to marketing and selling the cosmetic topical product line Dermacyte approximately $96,000 compared to the same period in the prior year. These costs include salaries, commissions, and employee benefits.

- Costs related to direct marketing and advertising decreased approximately $59,000 compared to the same period in the prior year. These costs include attendance at trade shows and conferences, fees paid to a third party public relations firm, the costs of product samples distributed to potential customers, and the costs of direct print and online advertisements.

- We significantly reduced our travel and marketing sample expenses by $36,000 during the three months ended July 31, 2012 as compared to the prior year. This decrease was a result of our regional market focus and our reduction in overall headcount.

General and Administrative Expenses

General and administrative expenses consist primarily of compensation for
executive, finance, legal and administrative personnel, including stock-based
compensation. Other general and administrative expenses include facility costs
not otherwise included in research and development expenses, legal and
accounting services, other professional services, and consulting fees. General
and administrative expenses and percentage changes for the three months ended
July 31, 2012 and 2011, respectively, are as follows:

                                               Three months ended July 31,          Increase/
                                                2012                 2011          (Decrease)       % Increase/(Decrease)
Legal and professional fees                $      693,924       $      834,310     $  (140,386 )                       (17 ) %
Personnel costs                                   365,635              460,737         (95,102 )                       (21 ) %
Other costs                                        90,608              114,147         (23,539 )                       (21 ) %
Facilities                                         47,016               82,783         (35,767 )                       (43 ) %
Depreciation and amortization                      27,002               79,679         (52,677 )                       (66 ) %

Legal and professional fees:

Legal and professional fees decreased approximately $140,000 for the three months ended July 31, 2012 compared to the prior year. This decrease was primarily due to decreases of $116,000 in consulting fees, $85,000 in investor relations costs, and $38,000 in accounting fees; offset by an increase of $98,000 in legal fees. The increase in legal expenses was primarily related to the costs to defend the Tenor matter and fees associated with the second closing of the Series A Preferred Stock. The decrease in consulting fees was primarily related to Board of Director recruiting fees in the prior period. The decrease in investor relations costs was the result of terminating existing agreements with Swiss-based public relations firms and the decision to delist from the SIX Swiss Exchange.

Personnel costs:

Personnel costs decreased approximately $95,000 for the three months ended July 31, 2012 compared to the prior year. The decrease was due primarily to the elimination of three executive positions in the prior year.

Other costs:

Other costs include costs incurred for travel, supplies, insurance and other miscellaneous charges. The $24,000 reduction in other costs was due primarily to a $30,000 reduction in administrative travel costs partially offset by increases in insurance premiums and taxes paid.

Facilities:

Facilities include costs paid for rent and utilities at our corporate headquarters in North Carolina. The $36,000 reduction during the three months ended July 31, 2012 compared to the prior year was the result of our relocation from Durham, NC to Morrisville, NC in March 2011.

Depreciation and Amortization:

The $53,000 decrease in depreciation and amortization costs for the three months ended July 31, 2012 compared to the prior year was primarily due to assets becoming fully depreciated in the current period.

Research and Development Expenses

Research and development expenses include, but are not limited to, (i) expenses incurred under agreements with CROs and investigative sites, which conduct our clinical trials and a substantial portion of our pre-clinical studies; (ii) the cost of manufacturing and supplying clinical trial materials; (iii) payments to contract service organizations, as well as consultants; (iv) employee-related expenses, which include salaries and benefits; and (v) facilities, depreciation and other allocated expenses, which include direct and allocated expenses for rent and maintenance of facilities and equipment, depreciation of leasehold improvements, equipment, laboratory and other supplies. All research and development expenses are expensed as incurred. Research and development expenses and percentage changes for the three months ended July 31, 2012 and 2011, respectively, are as follows:

                                               Three months ended July 31,           Increase/          % Increase/
                                                2012                 2011           (Decrease)          (Decrease)
Clinical and preclinical development       $      347,021       $      216,536     $      130,485                   60 %
Personnel costs                                   174,812              245,857            (71,045 )                (29 )%
Consulting                                         37,989              117,169            (79,180 )                (68 )%
Other costs                                        19,288               15,872              3,416                   22 %
Depreciation                                       10,090               11,393             (1,303 )                (11 )%
Facilities                                         48,072               45,134              2,938                    7 %

Clinical and preclinical development:

The increase of approximately $130,000 in clinical and preclinical development costs for the three months ended July 31, 2012 compared to the prior year was primarily due to increases of $218,000 and $50,000 in costs associated with the pre-clinical studies and Phase II-b trials for OxycyteŽ, respectively; offset by decreases of $123,000 and $15,000 in development costs incurred for Dermacyte and Oxycyte, respectively.

Personnel costs:

Personnel costs decreased approximately $71,000 for the three months ended July 31, 2012 compared to the prior year primarily due to headcount reductions in the California lab facility.

Consulting fees:

Consulting fees decreased approximately $79,000 for the three months ended July 31, 2012 compared to the prior year primarily due to charges under the consulting and separation agreement for our former President and COO.

Other costs:

Other costs remained relatively consistent for the three months ended July 31, 2012 and 2011.

Depreciation:

Depreciation expense remained relatively consistent for the three months ended July 31, 2012 and 2011.

Facilities:

Facilities expense remained relatively consistent for the three months ended July 31, 2012 and 2011.

Conducting a significant amount of research and development is central to our business model. Product candidates in later-stage clinical development generally have higher development costs than those in earlier stages of development, primarily due to the significantly increased size and duration of clinical trials. We plan to incur substantial research and development expenses for the foreseeable future in order to complete development of our most advanced product candidate, Oxycyte, and to conduct earlier-stage research and development on our topical applications.

The process of conducting preclinical studies and clinical trials necessary to obtain approval from the U.S. Food and Drug Administration, or the FDA, is costly and time consuming. The probability of success for each product candidate and clinical trial may be affected by a variety of factors, including, among other things, the quality of the product candidate's early clinical data, investment in the program, competition, manufacturing capabilities and commercial viability. As a result of the uncertainties discussed above, uncertainty associated with clinical trial enrollment and risks inherent in the development process, we are unable to determine the duration and completion costs of current or future clinical stages of our product candidates or when, or to what extent, we will generate revenues from the commercialization and sale of any of our product candidates. Development timelines, probability of success and development costs vary widely. We are currently focused on developing our most advanced product candidate, Oxycyte, and our topical dermatologic indications; however, we will need substantial additional capital in the future in order to complete the development and potential commercialization of Oxycyte and other product candidates.

Restructuring expense

                                             Three months ended July 31,        Increase/
                                              2012                2011          (Decrease)       % Increase/(Decrease)
Restructuring expense                      $    47,476         $         -     $     47,476                           - %

During the three months ended July 31, 2012, the Company recorded one-time charges of approximately $47,000 of severance and benefits related charges.

Interest expense

                                             Three months ended July 31,         Increase/
                                                 2012               2011        (Decrease)       % Increase/(Decrease)
Interest expense                           $      1,925,903       $ 435,798     $ 1,490,105                         342 %

During the three months ended July 31, 2012, interest expense increased approximately $1.5 million compared to the same period in the prior year.

Long-term notes payable:

Interest expense for our long-term notes payable was $0 and approximately $227,000 for the three months ended July 31, 2012 and 2011, respectively. The decrease in interest expense for the current year was primarily due to the prepayment of the notes in November 2011.

Convertible notes payable:

Interest expense on our outstanding convertible notes was approximately $628,000 and $208,000 for the three months ended July 31, 2012 and 2011, respectively. The recorded interest for the three months ended July 31, 2012 was comprised of approximately $188,000 for quarterly interest payable, $408,000 in amortization of debt discounts and $32,000 in amortization of debt issue costs.

Series A Convertible Preferred Stock:

Interest expense on our outstanding Preferred Stock was approximately $1.3 million for the three months ended July 31, 2012. The recorded interest was comprised of approximately $657,000 for the calculated fair value of the warrants issued with the Preferred Stock, $266,000 for the excess of the fair-value of the shares issued upon conversion over the fair value of the Preferred Stock and $204,000 for the fair value adjustment to the remaining Preferred Stock outstanding at July 31, 2012. No Preferred Stock was outstanding for the three months ended July 31, 2011.

Preferred Stock Dividends:

Interest expense recorded for the payment of dividends on the Preferred Stock was approximately $171,000 for the three months ended July 31, 2012. No Preferred Stock was outstanding for the three months ended July 31, 2011.

Other income and expense

                                     Three months ended July 31,          Increase/
                                       2012                 2011          (Decrease)
    Other expense (income), net   $       (14,803 )     $      5,433     $    (20,236 )

Other expense (income) decreased approximately $20,000 for the three months ended July 31, 2012 compared to the prior year primarily due to $7,000 foreign currency exchange losses recognized in the prior year; offset by approximately $13,000 of sub lease income from our California facility in the current period that were not earned in the same period during the prior year.

Liquidity, Capital Resources and Plan of Operation

We have incurred losses since our inception and as of July 31, 2012 we had an accumulated deficit of $111.2 million. We will continue to incur losses until we generate sufficient revenue to offset our expenses, and we anticipate that we will continue to incur net losses for at least the next several years. We expect to incur increased expenses related to our development and potential commercialization of Oxycyte and other product candidates and, as a result, we will need to generate significant net product sales, royalty and other revenues to achieve profitability.

Liquidity

We have financed our operations since September 1990 through the issuance of debt and equity securities and loans from stockholders. We had $3,654,234 and $2,631,032 of total current assets and working capital of $(344,641) and $(495,838) as of July 31, 2012 and April 30, 2012, respectively. Our practice is to invest excess cash, where available, in short-term money market investment instruments.

We are in the preclinical and clinical trial stages in the development of our product candidates. We are currently conducting Phase II-b clinical trials for the use of Oxycyte in the treatment of severe traumatic brain injury. Even if we are successful with our Phase II-b study, we must then conduct a Phase III clinical study and, if that is successful, file with the FDA and obtain approval of a Biologics License Application to begin commercial distribution, all of which will take more time and funding to complete. Our other product candidates must undergo further development and testing prior to submission to the FDA for approval to initiate clinical trials, which also requires additional funding. Management is actively pursuing private and institutional financing, as well as strategic alliances and/or joint venture agreements to obtain the necessary additional financing and reduce the cost burden related to the development and commercialization of our products though we can give no assurance that any such initiative will be successful. We expect our primary focus will be on funding the continued testing of Oxycyte, since this product is the furthest along in the regulatory review process. Our ability to continue to pursue testing and development of our products beyond December 31, 2012 depends on obtaining license income or outside financial resources. There is no assurance that we will obtain any license agreement or outside financing or that we will otherwise succeed in obtaining the necessary resources.

In December 2011, we entered into a Securities Purchase Agreement with certain institutional investors that provided for the sale and issuance of units ("Units") consisting of Series A Convertible Preferred Stock and warrants in aggregate amount of up to $7.5 million in two installments (the "2011 Offering"). The first installment of $3.5 million closed on December 12, 2011, and the second installment of $4.0 million was scheduled to have occurred in June 2012, subject to certain closing conditions. Because certain closing conditions for the second installment were not satisfied, on June 14, 2012, the Company entered into an Amendment Agreement with each of the institutional investors that, among other things, divided the remaining installment into two . . .