You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes appearing elsewhere in this report. Some of the information contained in this discussion and analysis, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. You should read the "Risk Factors" section of this Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

We are a development stage biopharmaceutical company focused on the rapid development of therapies to treat prevalent inflammatory conditions for which there are limited treatment options. We are focused on providing medicines to improve the health and quality of life of patients with minimal side effects. We are developing compounds that decrease inflammation by (i) inhibition of specific pro-inflammatory compounds by affecting specific pathways at the protein expression and at the transcription level or (ii) activation of a specific phosphatase or depletion of the available phosphate needed for the inflammation process. We are also focused on monetizing our sexual dysfunction portfolio and a diagnostic device.

Financing Activities

On September 30, 2011 Ampio filed a "shelf" registration statement on Form S-3 with the Securities and Exchange Commission ("SEC") to register Ampio common stock and warrants in an aggregate amount of up to $80 million for offering from time to time in the future. The registration statement also registers for possible resale up to one million shares of common stock to be sold by directors and management (as selling shareholders) in future public offerings. On October 13, 2011 Ampio filed an amendment to identify potential selling stockholders and the number of shares they would be eligible to sell in the event of a future public offering. The shelf registration was declared effective on October 28, 2011 by the SEC. At December 31, 2012 Ampio had $53.7 million available for future public offerings along with 714,900 shares remaining for future sale by named selling shareholders.

In July 2012 Ampio 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 Ampio were $16,912,545 with net proceeds of $15,353,150 after underwriter fees and cash 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 and can be exercised from the period July 12, 2013 through July 12, 2017. Certain shareholders also became selling shareholders and received gross proceeds of $926,575 from the offering of 285,100 shares as provided in the registration statement. The net proceeds of the 2012 offering have been or will be used for general corporate purposes and working capital, including completion of the Ampion and Optina clinical trials and costs related to the regulatory approval and commercialization of Zertane.

Management Update

On December 15, 2012, Ampio entered into an employment agreement with Joshua R. Disbrow to serve as the Chief Operating Officer ("COO").

Effective January 9, 2012, at the request of Donald B. Wingerter, Jr., Chief Executive Officer ("CEO"), Ampio granted a compassionate leave to him from all his duties as CEO, member of the Board of Directors and as an employee. Ampio's Chairman of the Board, Michael Macaluso, was appointed CEO concurrent with Mr. Wingerter's departure.

Known Trends or Future Events; Outlook

We have not generated any significant revenues and have therefore incurred significant net losses totaling $39.5 million since our inception in December 2008. The assets we purchased from BioSciences in April 2009 generated minimal revenues prior to their acquisition. 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. Although we have raised capital in the past and raised net proceeds of $15.4 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.

Our primary focus is advancing the clinical development of our core assets:
Ampion and Optina. We have filed the proposed protocol for the upcoming Ampion study based on the new guidance received by the FDA in February 2013 with the FDA and are waiting for their response. We have previously announced the initiation of a 505(b)(2) clinical trial of Optina in diabetic macular edema. These trials will be blinded and conducted by third party clinical research organizations and we have announced that the costs associated with these contracts will be $6.0 million for the Optina trial and less than $3.0 million for the Ampion trial. In addition, we are involved in active discussions with other parties regarding potential licensing, marketing, and distribution opportunities worldwide as well as an outright asset purchase of the sexual dysfunction portfolio. Luoxis Diagnostics, Inc., a wholly-owned subsidiary, focused on commercialization of ORP is currently seeking private financing. We are also sponsoring the pre-clinical development of NCE001 and hope to file an IND with the FDA by the end of 2013 in order to pursue clinical development of this product candidate for the treatment of cancer. Vasaloc, another one of our product candidates whose formulation is the same as Optina, for diabetic nephropathy will be evaluated for clinical development after completion and evaluation of the Optina trial. At this time, due to the risks inherent in the clinical trials and the stage of development of our product candidates, we are unable to estimate with any certainty the additional costs we will incur for the continued development of our product candidates for commercialization as clinical development timelines, probability of success, and development costs vary widely.

We are also focused on monetizing several of our other assets: our sexual dysfunction portfolio, ORP, and copper chelating peptides. However, we cannot forecast with any degree of certainty which product candidates will be subject to future collaborative or licensing arrangements, when such arrangements will be secured, if at all, and to what degree such arrangements would affect our product candidate plans and capital requirements.

Significant Accounting Policies and Estimates

Our consolidated financial statements have been prepared in accordance with accounting policies generally accepted in the United States of America. The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of 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 consolidated financial statements.

Patents

Costs of establishing patents consisting of legal fees paid to third parties and related costs are currently expensed as incurred. We will continue this practice unless we can demonstrate that such costs add economic value to our business, in which case we will capitalize such costs as part of intangible assets. The primary consideration in making this determination is whether or not we can demonstrate that such costs have, in fact, increased the economic value of our intellectual property. Legal and related costs which do not meet the above criteria will be expensed as incurred. The $500,000 fair value of the Zertane patents acquired in connection with the March 2011 acquisition of BioSciences is being amortized over the remaining U.S. patent lives of approximately 11 years beginning April 2011.

In-Process Research and Development

In-process research and development ("IPRD") relates to the Zertane product and clinical trial data acquired in connection with the March 2011 business combination of BioSciences. The $7,500,000 recorded was based on an independent third party appraisal of the fair value of the assets acquired. IPRD is considered an indefinite-lived intangible asset and its fair value will be assessed for impairment annually and written down if impaired. Once the Zertane product obtains regulatory approval and commercial production begins, IPRD will be amortized over its estimated useful life. If the commercialization of Zertane becomes impracticable or we abandon this drug, we will expense the $7.5 million IPRD asset.

Product Technology License

Ampio acquired a Product Technology License for an orally disintegrating table ("ODT") formulation for Zertane. The $2 million license/asset purchase was expensed since the ODT formulation has not been petitioned for regulatory approval and the license does not have an alternative future use.

Research and Development

Research and development costs are expensed as incurred. These costs consist primarily of expenses for personnel engaged in the design and development of product candidates; the scientific research necessary to produce commercially viable applications of our proprietary drugs or compounds; early stage clinical testing of product candidates or compounds; expenditures for design and engineering of the ORP product; and development equipment and supplies, facilities costs and other related overhead.

Stock-Based Compensation

We account for stock-based payments by recognizing compensation expense based upon the estimated fair value of the awards on the date of grant. We determine the estimated grant fair value of options using the Black-Scholes option pricing model and recognize compensation costs ratably over the vesting period using the straight-line method. Common stock issued in exchange for services is recorded at the fair value of the common stock at the date at which we become obligated to issue the shares. The value of the shares is expensed over the requisite service period.

Derivatives

We account for hybrid financial instruments (debentures with embedded derivative features - conversion options, down-round protection and a mandatory conversion provision) and related warrants by recording the fair value of each hybrid instrument in its entirety and recording the fair value of the warrant derivative liability. The fair value of the hybrid financial instruments and warrants was calculated using a binomial-lattice-based valuation model. We recorded a derivative expense at the inception of each instrument reflecting the difference between the fair value and cash received. Changes in the fair value in subsequent periods were recorded as unrealized gain or loss on fair value of derivative instruments for the hybrid financial instruments and to derivative income or expense for the warrants.

Income Taxes

We use the liability method of accounting for income taxes. Under this method, we recognize deferred assets and liabilities based on the differences between the tax basis of assets and liabilities and their reported amounts in the financial statements that will result in taxable or deductible amounts in future years. We establish a valuation allowance for all deferred tax assets for which there is uncertainty regarding realization.

Results of Operations-Year Ended December 31, 2012, 2011 and 2010 See Notes to Consolidated Financial Statements.

Results of operations for the years ended December 31, 2012, 2011 and 2010 reflected losses of $ 11.6 million, $18.4 million and $8.1 million, respectively. These losses include non-cash charges related to depreciation and amortization expense, derivative expense, stock-based compensation and losses on the fair value of debt instruments in the amount of $1.5 million in 2012, $9.1 million in 2011 and $4.4 million in 2010.

Revenue

We are a development stage enterprise and have not generated material revenue in our operating history. The $50,000 and $18,750 license revenue recognized in 2012 and 2011, respectively, 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 being recognized over 10 years.

Expenses

Research and Development

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. These costs are summarized as follows:



                                                      Year Ended December 31,
                                               2012            2011            2010
   Labor                                    $ 1,424,000     $ 1,364,000     $   889,000
   Patent costs                               1,449,000         962,000         399,000
   Stock-based compensation                     396,000         316,000         381,000
   Clinical trials and sponsored research     3,756,000       1,694,000         239,000
   Technology license                                -        2,000,000              -
   Consultants                                  469,000         312,000          64,000

                                            $ 7,494,000     $ 6,648,000     $ 1,972,000

Comparison of Years Ended December 31, 2012 and 2011

Research and development expenses increased approximately 13% in 2012 over 2011. This was due primarily to costs associated with FDA pre-IND filings for our three major drug candidates, the IND submissions for Ampion and Optina, and clinical trials of Ampion and Optina. We also incurred costs related to the production of the study drugs for the Ampion and Optina trials. We continue to maintain and strengthen our patent portfolio while labor and stock compensation costs were relatively flat. These represent costs solely related to research and development without an allocation of general and administrative expenses.

Comparison of Years Ended December 31, 2011 and 2010

Research and development expenses increased approximately 237% in 2011 over 2010 as we refocused from building our corporate foundation to the corporate objective of research and development of drug candidates. The increase in expenses in 2011 relates to our primary product candidates as we began Ampion and Optina clinical trials early in 2011and acquired a $2,000,000 product technology license related to our Zertane product. We also continued to maintain and strengthen our patent portfolio on our primary product candidates. Labor costs increased as a result of several employees having job responsibilities change from administrative to research and development.

General and Administrative

General and administrative expenses consist of personnel costs for employees in
executive, business development and operational functions; professional fees
including legal, auditing and accounting; occupancy, travel and other including
rent, governmental and regulatory compliance; and outside director fees. These
costs are summarized as follows:



                                                Year Ended December 31,
                                         2012            2011            2010
        Labor                         $ 1,308,000     $   888,000     $   775,000
        Stock-based compensation        1,227,000       1,671,000       2,715,000
        Professional fees                 399,000         656,000         863,000
        Occupancy, travel and other     1,191,000         932,000         225,000
        Directors fees                    252,000         357,000         154,000

                                      $ 4,377,000     $ 4,504,000     $ 4,732,000

Comparison of Years Ended December 31, 2012 and 2011

There was an overall decrease of approximately 3% in general and administrative costs in 2012 from 2011. Labor costs increased in 2012 as the result of the employment agreement payout to our former CEO upon the granting of an indefinite compassionate leave of absence in January 2012. Stock-based compensation decreased in 2012 due to longer vesting periods being incorporated into new awards, resulting in straight line amortization of the fair value over a longer period. Professional fees consist primarily of legal, audit

and accounting costs, costs related to the Chay Enterprises merger, public company compliance costs, and consulting related to capital formation. Professional fees decreased in 2012 as compared to 2011 since we had only routine filing and reporting requirements in 2012. In 2011 we had additional professional fees related to the filing of a Form S-4 with the SEC and the acquisition of BioSciences. Travel and investor/public relations costs increased in 2012 as we pursued business development and financing opportunities. Directors' fees decreased because only regularly scheduled meetings were held during 2012, compared to 2011 when additional meetings were required. No general and administrative costs are currently being allocated to the research and development activities.

Comparison of Years Ended December 31, 2011 and 2010

General and administrative expenses decreased by 5% in 2011 from the 2010 expenses. Labor costs increased in 2011 over 2010 as we added new positions and transitioned from consultants to employees as workloads necessitated. Stock-based compensation decreased. Expansion of operations resulted in an increase of occupancy, travel and other costs increase in 2011. The director fees resulted from the adoption of a compensation plan for independent directors in August 2010. With the acceleration of research and development, job responsibilities of several existing employees changed from administrative functions so that the costs associated with those employees were more appropriately allocated to research and development beginning April 1, 2011.

Derivative Expense

We recorded approximately $206,000, ($1.6) million and ($1.4) million in non-cash derivative income (expense) in 2012, 2011 and 2010, respectively, in connection with our hybrid financial instruments consisting of debentures and related warrants. The expense relates 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. The debentures were redeemed in 2011 and any related unexercised warrants will expire on December 31, 2013.

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 and $38,000 of non-cash unrealized gain in 2010. 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.

Foreign income tax expense

The $82,500 of foreign income tax expense is the amount of Korean income taxes withheld in connection with the $500,000 payment received for the signing of the license agreement with the Korean pharmaceutical company.

Net Cash Used in Operating Activities

During 2012 our operating activities used approximately $9.7 million in cash. The use of cash was $1.5 million lower than the net loss due to non-cash charges for stock-based compensation, depreciation and amortization and also non-cash deferred revenue and derivative income. Net cash used in operating activities also included a $121,770 increase in prepaid expenses and cash provided by a $570,500 increase in accounts payable.

During 2011 our operating activities used approximately $9.1 million in cash. The use of cash was significantly lower than the $18.4 million net loss, primarily as a result of non-cash charges for depreciation and amortization, stock-based compensation, and derivative and unrealized loss on fair value of debt instruments of $9.2 million. Net cash used in operating activities included the receipt of revenue to be recognized over a ten year period, but was offset by the payment of deferred salaries.

During 2010 our operating activities used approximately $2.6 million in cash. The use of cash was significantly lower than the $8.1 million net loss, primarily as a result of non-cash charges of $3.1 million for common stock issued for services and stock-based compensation, and derivative expense of $1.4 million. Net cash used in operating activities was also lower as a result of $1.0 million related to changes in non-cash working capital, primarily an increase in accounts payables of $385,000 relating to professional fees and other expenses, an increase in accrued salaries and other liabilities of $453,000 resulting from deferral of salaries by our management team and fees by our directors, and an increase of $194,000 representing funds advanced from BioSciences.

Net Cash from Financing Activities

Net cash provided by financing activities in 2012 was $16 million. During the year, Ampio completed an underwritten public offering, with net proceeds of $15.4 million, options exercised of $618,000 and warrants exercised of $12,322. We also received a repayment of $36,883 related to the stockholders advances from BioSciences made in 2010.

Net cash provided by financing activities in 2011 was $20 million. During the year, Ampio completed private placement and registered direct offerings, with net proceeds of $19.4 million, debentures were issued for $382,000, options exercised of $109,045 and warrants exercised of $155,171. We also received a repayment of $22,660 related to the stockholders advances from BioSciences made in 2010.

Net cash provided by our financing activities was $3.2 million for 2010. During 2010, Ampio received $2.0 million in loans from related parties and debentures and approximately $1.4 million from the sale and subscription of common stock. Immediately prior to the Chay merger, we made advances of $150,183 to stockholders who were also executive and non-executive officers of Ampio. Those advances are non-interest bearing and due on demand. Pursuant to the terms of the Chay merger agreement, we were also required to place $125,000 in restricted cash into an escrow account, all of which was released during 2010. The escrow terminated on December 31, 2010 under the terms of the agreement with Chay.

Contractual Obligations and Commitments

The following table summarizes the commitments and contingencies as of
December 31, 2012 which are described below:



                                                       Less than 1                                     More than 5
Contractual Obligations                   Total            Year         1-3 Years      3-5 Years          Years
Sponsored Research Agreement with
Related Party                              439,583          263,750        175,833             -                 -
Clinical Research Obligations              663,293          663,293            -               -                 -
Operating Leases (Office)                  173,296          108,924         64,372             -                 -
Officers employment agreements           1,290,729          659,479        631,250             -                 -

Total                                    2,566,901        1,695,446        871,455             -                 -

Clinical Research Obligations

In connection with upcoming clinical trials, Ampio has a remaining commitment of $115,000 on contracts related to the Ampion study drug and $136,660 remaining contract commitments related to the Optina study drug. Ampio also has a contract related to the production of the Zertane study drug with a remaining unrecorded commitment of $414,633. Ampio has subsequently entered into agreements with clinical research organizations for upcoming trials.

Sponsored Research Agreement with Related Party

Ampio entered into a Sponsored Research Agreement with Trauma Research LLC, a related party, in September 2009. Under the terms of the Sponsored Research Agreement, Ampio is to provide personnel and pay for leased equipment. The Sponsored Research Agreement may be terminated without cause by either party on 180 day notice.

Leases

On May 20, 2011 Ampio entered into a 38 month non-cancellable operating lease for office space effective June 1, 2011. Commitments include the annual operating expense increase for 2013.

Employment Agreements

As of December 31, 2012, Ampio has employment agreements with four of its executive officers. Under the employment agreements, the executive officers are collectively entitled to receive $955,000 in annual salaries. The employment agreements expire July 2013 with respect to our chief scientific officer and chief regulatory affairs officer, January 2015 with respect to our chief executive officer and December 2015 with respect to our chief operating officer. The portion of the salary due to our chief scientific officer that is included in the Sponsored Research Agreement with Trauma Research LLC is excluded from the officers' employment agreements commitment.

Liquidity and Capital Resources

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. As of December 31, 2012, we had cash

and cash equivalents totaling $17.7 million available to fund our operations and $1.2 million in payables. Based upon our current expectations, we believe our capital resources at December 31, 2012 will be sufficient to fund our currently . . .