Item 2. Management's Discussion and Analysis of Financial Condition and Result of Operations

Forward Looking Information

This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the Company, intends that such forward-looking statements be subject to the safe harbors created thereby. These forward-looking statements, which can be identified by the use of words such as "may," "will," "expect," "anticipate," "estimate," or "continue," or variations thereon or comparable terminology, include the plans and objectives of Management for future operations, including plans and objectives relating to the products and future economic performance of the Company. In addition, all statements other than statements of historical facts that address activities, events, or developments the Company expects, believes, or anticipates will or may occur in the future, and other such matters, are forward-looking statements.

The forward-looking statements included herein are based on current expectations that involve a number of risks and uncertainties. These forward-looking statements are based on assumptions that the Company will retain key management personnel, the Company will be successful in the development of the BACcel™ system, the Company will obtain sufficient capital to complete the development of the BACcel™ system, the Company will find a long term strategic partner to assist in developing, manufacturing and taking the BACcel™ system to market, the Company will be able to protect its intellectual property, the Company's ability to respond to technological change, that the Company will continue as a going concern, that the Company will accurately anticipate market demand for the Company's products and that there will be no material adverse change in the Company's operations or business. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the Company. Although the Company believes that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, there can be no assurance that the results contemplated in forward-looking statements will be realized. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

The following discussion should be read in conjunction with the Company's unaudited condensed financial statements and related notes included elsewhere herein. The Company's future operating results may be affected by various trends and factors which are beyond the Company's control. These include, among other factors, general public perception of issues and solutions, and other uncertain business conditions that may affect the Company's business. The Company cautions the reader that a number of important factors discussed herein, and in other reports, filed with the Securities and Exchange Commission including but not limited to the risks in the section entitled "Risk Factors" are in its 10-K for the year ended July 31, 2011, could affect the Company's actual results and cause actual results to differ materially from those discussed in forward-looking statements.

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Overview

Our vision is to develop and commercialize an innovative, integrated system to rapidly identify bacteria and their mechanisms of antibiotic resistance in critically ill patients. Our business strategy for primary products in vertical markets is to prove the validity of our technology and recruit an industry leader as a commercial partner or licensee. We also plan to spin off specific OEM technology components through additional licensed applications that do not compete with our platform licensees.

We envision our continuing role as licensor and alliance partner as one of leading the technical development of new technology, validating the application methods, expanding platform applications, and integrating additional capabilities into our proprietary platforms.

Since 2007, we have focused our efforts on the development of an innovative rapid diagnostic platform, the BACcel™ system, intended for rapid diagnosis in life-threatening bacterial infections. Our goal is to reduce the failure rate of initial therapy by shortening the lab turnaround time to less than 8 hours, rather than the 2-3 days now required. Rapid testing would provide guidance in time to influence initial therapy from the first day.

The BACcel™ system applies our proprietary technology to eliminate time-consuming bacterial culturing, thus eliminating the major source of delay with current testing methods. Proprietary technologies include our patented analytical methods, and our patented OptiChem® surface coatings. The BACcel™ system includes a fixed instrument and proprietary single-use (disposable) test cassettes. Each cassette tests a single patient specimen and then must be discarded.

The BACcel™ system uses long-accepted clinical microbiology principles, but applies our proprietary technology to adapt them to analyze live bacteria extracted directly from a patient specimen. The instrumentation uses an automated digital microscope to measure the responses of extracted live bacterial cells to various test conditions. The system analyzes thousands of these individual cells to arrive at organism identification and antibiotic resistance characteristics.

Based on data obtained during development, Management believes that the BACcel™ system will identify the organisms present in a patient's specimen and count the number of organisms of each type in less than 2 hours after receiving a specimen. Management believes that the BACcel™ system will then additionally report major categories of antibiotic resistance mechanism present for each type of organism within a total of 4-6 hours after receiving a specimen. The clinical purpose is to narrow the drug choices available for initial therapy by rapidly reporting presumptive identification and major resistance types, thus ruling out antibiotic classes that are most likely to fail.

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Management believes that the BACcel™ system is the only new diagnostic technology under development that will address a clinically adequate range of species and antibiotic resistance mechanisms needed to help manage critical infectious diseases. Management also believes that other rapid technologies, such as gene detection, are better suited to screening non-infected carriers of a small number of species and resistance mechanisms, but are too limited to compete with the BACcel™ platform for managing infected and especially critically ill ICU patients.

During the nine months ended April 30, 2012 the Company applied the latest prototype version of the automated BACcel(tm) system to define technical specifications needed for product design and market launch in international clinical markets and research markets in the US.

Accelr8 also began to expand the diagnostic scope of the BACcel™ system with studies on additional specimen types and medical indications. In particular, the Company began studies for rapid analysis of positive blood cultures. Feasibility studies showed that the BACcel™ system has the potential to reduce the typical 3-4 day turnaround time for cultures to second-day results.

In addition, the Company demonstrated feasibility for an innovative specimen preparation method that can reduce specimen handling time from 45 minutes to 10 minutes. The new BAC-Xtrax™ technology can be fully automated and integrated into the BACcel™ system for full "specimen-to-answer" performance. The BAC-Xtrax™ technology could also enable a stand-alone product for hospital and research labs and integrate into other analytical platforms.

The Company received notice of abstract acceptance to make two technical presentations at the annual General Meeting of the American Society for Microbiology on June 17, 2012. One of the presentations, co-authored with investigators at Denver Health, will disclose rapid analysis in positive blood cultures of a complex, major type of antibiotic resistance known as "extended-spectrum beta-lactamase" or "ESBL." This resistance phenotype has proven problematic in hospital laboratories and is continually increasing in prevalence. The second presentation will describe performance of the BAC-Xtrax™ rapid specimen preparation method that Accelr8 has now demonstrated in its automated laboratory prototype. The BAC-Xtrax™ preparation method is the subject of a new patent filed during the 9-month period.

On June 14, 2010, the Company entered into an Evaluation Agreement and Letter of Intent with Novartis for a technical evaluation project with the Company's BACcel™ rapid diagnostic technology. . Under the agreements with Novartis, Accelr8 received technical development fees of $ 842,408 during the fiscal year ended July 31, 2011 and $140,000 in the quarter ended October 31, 2011. The evaluation agreement with Novartis expired on September 30, 2011 without Novartis exercising its option for licensing the Company's BACcel™ system intellectual property.

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On April 20, 2012, the Company entered into a Securities Purchase Agreement with Abeja Ventures, LLC ("Investor") pursuant to which the Company agreed to sell and issue to Investor (1) 14,000,000 shares of the Company's common stock at a purchase price of $1.03 per share for an aggregate purchase price of $14,420,000 (the "Purchase Price"); (2) a warrant to purchase 7,000,000 shares of the Company's common stock at an exercise price of $1.03 per share; and (3) another warrant to purchase 7,000,000 shares of the Company's common stock at an exercise price of $2.00 per share, with each warrant exercisable prior to the fifth anniversary of the closing of the transactions contemplated by the Securities Purchase Agreement (collectively, the "Investment"). See Note 7 to the condensed financial statements, above.

The purpose is to complete the product development and market introduction of the Company's BACcel™ culture-free, diagnostic system for same-shift identification and antibiotic resistance testing of bacterial and fungal pathogens. Subsequent to shareholder approval and closing, Larry Mehren will become CEO and David Howson will become the Chief Scientific Officer of the Company.

Recently Issued Accounting Pronouncements

In May 2011, the FASB issued Accounting Standards Update No. 2011-04, "Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs". The amendments result in common fair value measurement and disclosure requirements in U.S. generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRSs), and do not require additional fair value measurements and are not intended to establish valuation standards or affect valuation practices. The amendments in this update are effective during interim and annual periods beginning after December 15, 2011. Adoption of the new requirement in the current quarter did not have an effect on the Company's financial position, results of operations or cash flow.

In June 2011, the FASB issued Accounting Standards Update No. 2011-05, "Comprehensive Income (Topic 220): Presentation of Comprehensive Income". In this update, FASB eliminated the option to present components of other comprehensive income as part of the statement of changes in stockholders' equity. The amendments require that all non-owner changes in equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The amendments in this update are effective for fiscal years, and interim periods within these years, beginning after December 15, 2011. Adoption of the new requirement is not expected to have an effect on the Company's financial position, results of operations or cash flow.

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In September 2011, the FASB issued ASU No. 2011-08, Intangibles - Goodwill and Other (Topic 350). ASU No. 2011-08 redefines the approach to goodwill impairment testing by providing companies with the option to qualitatively evaluate the likelihood of impairment before proceeding to Step 1 of the impairment test (i.e. comparison of the fair value of a reporting unit to its carrying value). The amendment also provides more guidance on the types of events and circumstances that an entity should consider between annual impairment tests in determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity's financial statements for the most recent annual or interim period have not yet been issued, or for nonpublic entities, that have not been made available for issuance. Adoption of the new requirement is not expected to have an effect on the Company's financial position, results of operations, cash flow and the annual goodwill impairment test.

Changes in Results of Operations: three months ended April 30, 2012 compared to three months ended April 30, 2011.

During the three months ended April 30, 2012, OptiChem(R) revenues were $13,207 as compared to $25,772 during the three month period ended April 30, 2011, a decrease of $12,565 or 48.8%. The decrease was due to the decreased royalties earned from sales of slides H and HS sold by Schott .

Technical development fees during the three-month period ended April 30, 2012 were $0 as compared to $214,500 during the three-month period ended April 30, 2011, a decrease of $214,500 or 100%. The decrease in technical development fees were the result of the Evaluation Agreement and the Letter of Intent, each as amended, with Novartis which expired on September 30, 2011.

Research and development expenses for the three months ended April 30, 2012 were $109,860 as compared to $126,918 during the three months ended April 30, 2011, a decrease of $17,058 or 13.4%. This decrease was primarily due to decreased laboratory supplies totaling $23,883.

During the three months ended April 30, 2012, general and administrative expenses were $248,207 as compared to $181,881 during the three months ended April 30, 2011, an increase of $66,326 or 36.7%. The increase was primarily due to an increase in stock based and deferred compensation costs totaling $97,793.

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The increase in amortization was negligible for the three months ended April 30, 2012 as compared to the three month period ended April 30, 2011.

Marketing and sales expenses for the three months ended April 30, 2012 were $344 as compared to $1,246 during the three months ended April 30, 2011, a decrease of $902. Marketing related charges consist of costs incurred to attend business meetings.

Depreciation for the three months ended April 30, 2012 was $516 as compared to $599 during the three months ended April 30, 2011, a decrease of $83 or 13.86%. The decreased depreciation was the result of assets becoming fully depreciated, coupled with no new purchases of on-site lab equipment during the quarter ended April 30, 2012.

As a result of the above factors, loss from operations for the three months ended April 30, 2012 was $410,217 as compared to a loss of $133,835 during the three months ended April 30, 2011, an increased loss of $276,382 or 206.5%.

Interest and dividend income during the three months ended April 30, 2012 was $4,061 as compared to $4,077 during the three months ended April 30, 2011, a decrease of $16 Interest income decreased primarily as a result of the interest that accrued on the Company's long term receivable.

An unrealized holding gain on investments held in the deferred compensation trust for the three months ended April 30, 2012 was $17,773 as compared to an unrealized gain of $5,764 during the three months ended April 30, 2011, an increase of $12,009 or 208.3%. The change was a result of market fluctuations in the price of marketable securities held in the deferred compensation trust for employee benefit.

As a result of these factors, net loss for the three months ended April 30, 2012 was $388,383 as compared to $123,994 during the three months ended April 30, 2011, an increased loss of $264,389 or 213.2%.

Changes in Results of Operations: Nine months ended April 30, 2012 compared to nine months ended april 30, 2011.

During the nine months ended April 30, 2012, OptiChem(R) revenues were $33,543 as compared to $40,813 during the nine month period ended April 30, 2011, a decrease of $7,270 or 17.8%. The decrease was due to reduced royalties earned from sales of slides H and HS sold by Schott. Of the $33,543 of OptiChem(R) revenues, $16,343 was applied toward deferred revenue from pre-paid royalties.

Technical development fees during the nine-month period ended April 30, 2012 were $140,000 as compared to $734,908 during the nine-month period ended April 30, 2011, a decrease of $594,908 or 81%. Technical development fees were the result of the Evaluation Agreement and the Letter of Intent, each as amended, with Novartis which expired on September 30, 2011.

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During the nine months ended April 30, 2011, the Company received a grant in the amount of $244,479 as part of a new Internal Revenue Code 48D program created by the Patient Protection and Affordable Care Act. No such grants were obtained during the nine months ended April 30, 2012.

Research and development expenses for the nine months ended April 30, 2012 were $302,900 as compared to $345,602 during the nine months ended April 30, 2011, a decrease of $42,702 or 12.4%. This decrease was primarily the result of a reduction in laboratory wages and laboratory supplies and other research and development costs associated with the Novartis evaluation agreement.

During the nine months ended April 30, 2012, general and administrative expenses were $905,453 as compared to $606,693 during the nine month period ended April 30, 2011, an increase of $298,760 or 49.2%. The increase was primarily due to stock based and deferred compensation costs.

Marketing and sales expenses for the nine months ended April 30, 2012 were $4,560 as compared to $7,739 during the nine months ended April 30, 2011, a decrease of $3,179 or 41.1%. The decreased marketing and sales expenses were primarily due to lower travel related costs in connection with industry conferences and other travel expenses.

Depreciation for the nine months ended April 30, 2012 was $1,546 as compared to $1,797 during the nine months ended April 30, 2011, a decrease of $251 or 13.9%. The decreased depreciation was the result of some assets becoming fully depreciated, coupled with no new purchases of lab equipment during the nine months ended April 30, 2011As a result of the above factors, loss from operations for the nine months ended April 30, 2012 was $1,183,761 as compared to a loss of $131,491 during the nine months ended April 30, 2011, an increase of $1,052,270 or 800.3%.

Investment and dividend income during the nine months ended April 30, 2012 was $11,898 as compared to $11,481 during the nine months ended April 30, 2011 an increase of $417 or 3.6%. Interest income increased primarily as a result of the interest that accrued on the Company's long term receivable.

Gain on the sale of equipment was the result of the sale of certain laboratory equipment for $1,000 during the nine months ended April 30, 2012 that was not present during the nine months ended April 30, 2011.

An unrealized holding gain on investments held in the deferred compensation trust for the nine months ended April 30, 2012 was a gain of $29,017, as compared to a gain of $36,907 for the nine months ended April 30, 2011, a decreased gain of $7,890 or 21.4%. The change was the result of market fluctuations in the price of marketable securities held in the deferred compensation trust for employee benefit.

As a result of these factors, net loss for the nine months ended April 30, 2012 was $1,141,846 as compared to $83,013 during the nine months ended April 30, 2011.

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Capital Resources and Liquidity

During the nine months ended April 30, 2012 we did not generate positive cash flows from operating activities.

At April 30, 2012, as compared to July 31, 2011, cash and cash equivalents decreased by $562,861 from $775,856 to $212,995, or approximately 72.54% and the Company's working capital decreased $672,734 or 49.7% from $1,353,499 to $680,765. During the same period, shareholders' equity decreased from $4,815,476 to $4,021,254.

The net cash used in operating activities was $431,665 during the nine months ended April 30, 2012 compared to cash provided by operating activities of $211,056 during the nine months ended April 30, 2011. The principal element that gave rise to the decrease of cash used in operating activities was the net loss of $1,141,846 adjusted by items not currently requiring the use of cash such as depreciation, amortization, stock based compensation totaling $507,269 and other changes in accruals totaling $202,912.

The Company has historically funded its operations generally through its existing cash balances, cash flow generated from operations and sales of equity securities. Our primary use of capital has been for the research and development of the BACcel(TM) system.

Notwithstanding our investments in research and development, there can be no assurance that the BACcel(TM) system or any of our other products will be successful, or even if they are successful, will provide sufficient revenues to continue our current operations.

Our working capital requirements are expected to increase in line with the growth of our business. We have no lines of credit or other bank or off balance sheet financing arrangements.

On April 20, 2012, the Company entered into a Securities Purchase Agreement with Abeja Ventures, LLC ("Investor") pursuant to which the Company agreed to sell and issue to Investor (1) 14,000,000 shares of the Company's common stock at a purchase price of $1.03 per share for an aggregate purchase price of $14,420,000 (the "Purchase Price"); (2) a warrant to purchase 7,000,000 shares of the Company's common stock at an exercise price of $1.03 per share; and (3) another warrant to purchase 7,000,000 shares of the Company's common stock at an exercise price of $2.00 per share, with each warrant exercisable prior to the fifth anniversary of the closing of the transactions contemplated by the Securities Purchase Agreement (collectively, the "Investment"). See Note 7 above.

The Company anticipates this Investment will occur on or about June 26, 2012. Subject to the receipt of the Investment, management believes that current cash balances plus cash flow from operations will be sufficient to fund our capital and liquidity needs for the foreseeable future. However, the closing on the Investment is subject to certain conditions to closing that have not yet occurred and there can be no assurance that they will occur. If the Company did not close on the Investment, it would not have sufficient capital to fund its capital and liquidity needs for the next 12 months and we would be required to obtain additional capital through the issuance of debt or equity securities or other means to execute our plans. There can be no assurance that such capital would be available in sufficient amounts or on terms acceptable to us, if at all.

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Any additional issuances of equity or convertible debt securities in the future, including but not limited to the exercise of the warrants issued in connection with the Investment, will result in dilution to our current common stockholders.