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 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.

Second Quarter 2013 Highlights

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

? Cash and cash equivalents were $1.5 million at October 31, 2012.

? Net product sales from DermacyteŽ were $14,600 for the second quarter of 2013 compared to $27,400 for the three months ended October 31, 2011.

? Revenue earned under our research grant was $509,000 for the second quarter of 2013 compared to $78,000 for the three months ended October 31, 2011.

? Our loss from operations was $0.7 million for the second quarter of 2013 compared to $2.1 million for the three months ended October 31, 2011.

? Net cash used in operating activities was $1.1 million for the second quarter of 2013 compared to $2.5 million for the three months ended October 31, 2011.

Consistent with our strategy, during the three months ended October 31, 2012, we
(i) completed the preclinical pharmacokinetics studies of Oxycyte, (ii) completed the in vitro platelet function studies in healthy volunteers and began the repeat studies using TBI subjects, (iii) began the in-life portion of the preclinical studies to evaluate the impact of Oxycyte on the immune system and
(iv) engaged a CRO to manage our Phase II-B TBI clinical trials, which are expected to resume enrollment during the next fiscal quarter.

Opportunities and Trends

We continue to execute on our strategic plan, which calls for resuming our STOP-TBI (Safety and Tolerability of Oxycyte in Patients with Severe non-Penetrating Traumatic Brain Injury) Phase II-B clinical trials; 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 OxycyteŽ 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

Critical accounting policies and estimates are those policies and estimates that are most important and material to the preparation of our financial statements, and which require management's most subjective and complex judgment due to the need to select policies from among alternatives available, and to make estimates about matters that are inherently uncertain.

As further discussed in Note 7, Commitments and Contingencies, of our Notes to Financial Statements of this quarterly report on Form 10-Q, during the three months ended October 31, 2012, management recorded a significant change to its estimate of the accrued liability relating to Section 409A of the Internal Revenue Code of 1986, as amended, or 409A, as compared to the critical accounting policies and estimates described in "Part II, 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 October 31, 2012 and 2011

Revenue

Product Revenue and Gross Profit

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

                                                               Increase/        % Increase/
                       Three months ended October 31,          (Decrease)       (Decrease )
                         2012                  2011
  Product revenue   $        14,571       $        27,415     $    (12,844 )            (47) %
  Cost of sales               9,134                10,500           (1,366 )            (13) %
  Gross Profit      $         5,437       $        16,915     $    (11,478 )            (68) %

The decrease in product revenue for the three months ended October 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 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 37% and 62% for three months ended October 31, 2012 and 2011, respectively. The decrease for the three months ended October 31, 2012 was due to an increase in the unit cost of our product mix 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 contract research organizations, or CROs.

Increase/ % Increase/ Three months ended October 31, (Decrease) (Decrease ) 2012 2011 Government grant revenue $ 509,435 $ 78,244 $ 431,191 551 %

For the three months ended October 31, 2012, we recorded an increase of approximately $431,000 in revenue under the grant program as compared to the same period in the prior year. This increase is due to the progress of the underlying studies and the achievement of contractual milestones under the grant.

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 October 31, 2012 and 2011, respectively, are as follows:

Increase/ % Increase/ Three months ended October 31, (Decrease) (Decrease ) 2012 2011 Marketing and sales expense $ 53,293 $ 134,035 $ (80,742 ) (60 ) %

The decrease in marketing and sales expenses for the three months ended October 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 by approximately $50,000 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 by approximately $24,000 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 reduced our travel and marketing sample expenses by approximately $7,000 during the three months ended October 31, 2012 as compared to the same period in 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
October 31, 2012 and 2011, respectively, are as follows:

                                                                                       Increase/       % Increase/
                                               Three months ended October 31,         (Decrease)       (Decrease)
                                                 2012                  2011
Personnel costs                            $        384,997       $       416,132     $   (31,135 )              (7 ) %
Legal and professional fees                         361,079               919,730        (558,651 )             (61 ) %
Facilities                                           43,800                72,907         (29,107 )             (40 ) %
Depreciation and amortization                        27,162                17,792           9,370                53 %
Other costs                                        (447,488 )             100,214        (547,702 )            (547 ) %

Personnel costs:

Personnel costs decreased approximately $31,000 for the three months ended October 31, 2012 compared to the same period in the prior year. The decrease was due primarily to our termination of our Chief Executive Officer in the prior year.

Legal and professional fees:

Legal and professional fees decreased approximately $560,000 for the three months ended October 31, 2012 compared to the same period in the prior year. This decrease was primarily due to decreases of approximately $320,000 in legal fees, $200,000 in board of director severance costs, and $40,000 in consulting fees.

In the prior period we recorded approximately $200,000 in severance costs associated with our previous President's resignation from our Board of Directors. The decrease in legal fees was due primarily to the costs incurred during the prior period for the Audit Committee investigation, 409A review, and the 2011 Convertible Note transaction. The decrease in consulting fees is primarily due to associated with recruiting additional directors in the prior year.

Facilities:

Facilities include costs paid for rent and utilities at our corporate headquarters in North Carolina, the allocation of lease costs not otherwise included in Research and Development expenses, and the costs incurred for third party Information Technology ("IT") support services. The $29,000 reduction in facilities costs during the three months ended October 31, 2012 as compared to the same period in the prior year was the result of the closure of our California facility.

Depreciation and Amortization:

The $9,000 increase in depreciation and amortization costs for the three months ended October 31, 2012 compared to the same period in the prior year was primarily due to an increase in capitalized patent expenses in the current period.

Other costs:

Other costs include costs incurred for travel, supplies, insurance and other miscellaneous charges. The $548,000 reduction in other costs was due primarily to a $532,000 reduction in our estimate of the accrued liability related to potential 409A violations and an overall decrease in administrative and office expenses as a result of headcount reductions as compared to the same period in the prior year.

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 October 31, 2012 and 2011, respectively, are as follows:

                                                                                      Increase/        % Increase/
                                              Three months ended October 31,          (Decrease)       (Decrease )
                                                2012                  2011
Clinical and preclinical development       $       374,683       $       105,355     $    269,328               256 %
Personnel costs                                    162,419               221,064          (58,645 )             (27 ) %
Consulting                                          49,470                93,460          (43,990 )             (47 ) %
Depreciation                                        10,988                10,925               63                 1 %
Other costs                                          4,388                20,834          (16,446 )             (79 ) %
Facilities                                           2,626                36,939          (34,313 )             (93 ) %

Clinical and preclinical development:

The increase of approximately $269,000 in clinical and preclinical development costs for the three months ended October 31, 2012 compared to the prior year was primarily due to increases in costs associated with our pre-clinical safety studies and current Good Manufacturing Practices, or cGMP, development for Oxycyte, costs incurred to resume our Phase II-b clinical trials, and development costs for Dermacyte.

- We incurred an increase of approximately $125,000 in pre-clinical study costs. These costs are the result of CRO fees for the completion for milestones under the Grant-funded preclinical program to assess the safety of Oxycyte for the treatment of patients with traumatic brain injury, or TBI.

- We incurred an increase of approximately $15,000 in Dermacyte development costs. These costs are the result of consulting fees for developing dermatologic indications, costs incurred for the proof of concept clinical trials and on-going product stability and development costs.

- We incurred an increase of approximately $50,000 in Oxycyte development costs. These costs are the result of developing cGMP supply and manufacturing capabilities and validated release methods for our clinical drug product.

- We incurred an increase of approximately $80,000 in costs for our Phase II-b clinical trials. These costs are the result of manufacturing clinical drug product for use in the second cohort and other costs incurred to resume our TBI trials.

Personnel costs:

Personnel costs decreased approximately $59,000 for the three months ended October 31, 2012 compared to the same period in the prior year, primarily due to headcount reductions in the California lab facility and the resignation of our Chief Medical Officer in the prior year.

Consulting fees:

Consulting fees decreased approximately $44,000 for the three months ended October 31, 2012 compared to the same period in the prior year, primarily due to charges under the consulting and separation agreement for our former President and Chief Operating Officer that were not incurred in the current period.

Depreciation:

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

Other costs:

Other costs decreased approximately $16,000 for the three months ended October 31, 2012 as compared to the same period in the prior year, due primarily to a decrease of $6,000 in travel and $9,000 in supplies as a result of closing our California facility.

Facilities:

Facilities expense decreased approximately $34,000 for the three months ended October 31, 2012 as compared to the same period in the prior year, primarily as a result of closing our California facility.

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

                                                                                 Increase/             % Increase/
                                           Three months ended October 31,       (Decrease)              (Decrease)
                                              2012                2011
Restructuring expense                      $   170,298         $         -     $     170,298                     - %

During the three months ended October 31, 2012, the Company recorded one-time charges of approximately $7,000 for severance and benefits related charges, $135,000 for net future lease obligations and $29,000 for other exit costs.

Interest expense

Interest expense includes the interest payments due under our long-term debt, amortization of debt issuance costs and accretion of discounts recorded against our outstanding notes. Interest expense also includes dividends and fair-value adjustments to the carrying value on our Series A Convertible Preferred Stock. Interest expense and percentage changes for the three months ended October 31, 2012 and 2011, respectively, are as follows:

Increase/ % Increase/ Three months ended October 31, (Decrease) (Decrease) 2012 2011 Interest expense $ 867,524 $ 871,768 $ (4,244 ) (0 ) %

Long-term notes payable:

Interest expense for our long-term notes payable was $0 and approximately $243,000 for the three months ended October 31, 2012 and 2011, respectively. These notes payable were repaid in full in November 2011.

Convertible notes payable:

Interest expense on our outstanding convertible notes was approximately $628,000 and $629,000 for the three months ended October 31, 2012 and 2011, respectively. The recorded interest for the three months ended October 31, 2012 was comprised of approximately $188,000 for quarterly interest payable, $408,000 for amortization of debt discounts and $32,000 for amortization of debt issue costs.

Series A Convertible Preferred Stock:

Interest expense on our outstanding Series A Convertible Preferred Stock was approximately $239,000 and $0 for the three months ended October 31, 2012 and 2011, respectively. The recorded interest for the three months ended October 31, 2012 includes approximately $195,000 for the excess of the fair-value of the shares issued upon conversion over the fair value of the Series A Convertible Preferred Stock. There were no shares of Series A Convertible Preferred Stock outstanding during the three months ended October 31, 2011.

Preferred Stock Dividends:

Interest expense recorded for the payment of dividends on the Preferred Stock was approximately $44,000 for the three months ended October 31, 2012. There were no shares of Series A Convertible Preferred Stock outstanding during the three months ended October 31, 2011.

Other income and expense

Other income and expense includes non-operating income and expense items not otherwise recorded in our statement of operations. These items include, but are not limited to, revenue earned under sublease agreements for our California facility, recognized gains and losses on foreign currency translations, interest income earned and fixed asset disposals. Other expense for the three months ended October 31, 2012 and 2011, respectively, is as follows:

Three months ended October 31, Increase/ (Decrease) 2012 2011 Other expense, net $ 6,911 $ 3,927 $ 2,984

During the three months ended October 31, 2012 compared to the prior year, we recorded income from sublease agreements and interest of approximately $5,000 and $3,000, respectively. We recorded losses of approximately $12,000 and $7,000 from the disposal of fixed assets and other non-operating expenses.

Results of Operations- Comparison of the Six Months Ended October 31, 2012 and 2011

Revenue

Product Revenue and Gross Profit

We generate revenue through the sale of DermacyteŽ through on-line retailers and
physician and medical spa facilities. Product revenue and percentage changes for
the six months ended October 31, 2012 and 2011, respectively, are as follows:
. . .