FORM
10-KSBU.S. SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

[   X   ]  ANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

| | For
the fiscal year ended: July 31, 2006
| | ----------------------------------------

[         ]
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.

For the
transition period from _______________ to ________________

Commission
file number 0-11485

ACCELR8
TECHNOLOGY CORPORATION(Name of small business issuer in its charter)

|Colorado                        | 84-1072256
|------------------------------- | ----------
|(State or other jurisdiction of |           
|incorporation or organization)  |           
|                                |           

7000
North Broadway, Building 3-307, Denver, CO 80221(Address of principal executive offices)

Issuers
telephone number: (303) 863-8088

Securities
registered pursuant to Section 12(b) of the Exchange Act:

Common
Stock, no par value(Title of class)

Securities
registered pursuant to Section 12(g) of the Exchange Act:      None.

Indicate
by check mark whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [   X   ] No [      ]

Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is not contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-KSB or any amendment to this Form 10-KSB. [     ]

The
Registrants revenues for the fiscal year ended July 31, 2006 were
$212,701.

The
aggregate market value of the voting stock held by non-affiliates of the
Registrant as of October 27,2006 was approximately $18,602,110 based
upon the last reported sale on that date. For purposes of this disclosure,
Common Stock held by persons who hold more than 5% of the outstanding voting
shares and Common Stock held by officers and directors of the Registrant have
been excluded in that such persons may be deemed to be affiliates as
that term is defined under the rules and regulations promulgated under the
Securities Act of 1933, as amended. This determination is not necessarily
conclusive.

The
number of shares of the Registrants Common Stock outstanding as of July
31, 2006 was 9,971,210.

Documents
incorporated by reference None

Transitional
Small Business Disclosure Format  Yes [      ]  No [   X   ]



---

TABLE OF
CONTENTS

| |  | PAGE
| |  | ----

PART I

|Item 1 |  | Description of Business                             |  | 3  | 
|------ |  | --------------------------------------------------- |  | -- | 
|       |  |                                                     |  |    | 
|Item 2 |  | Description of Property                             |  | 22 | 
|       |  |                                                     |  |    | 
|Item 3 |  | Legal Proceedings                                   |  | 22 | 
|       |  |                                                     |  |    | 
|Item 4 |  | Submission of Matters to a Vote of Security Holders |  | 22 | 
|       |  |                                                     |  |    | 

PART II

|        |  |                                                          
|------- |  | ---------------------------------------------------------
|Item 5  |  | Market for Common Equity and Related Stockholder Matters 
|        |  |                                                          
|Item 6  |  | Managements Discussion and Analysis or Plan of Operation
|        |  |                                                          
|Item 7  |  | Financial Statements                                     
|        |  |                                                          
|Item 8  |  | Changes in and Disagreements With Accountants on         
|        |  | Accounting and Financial Disclosure                      
|        |  |                                                          
|Item 8A |  | Controls and Procedures                                  
|        |  |                                                          
|Item 8B |  | Other Information                                        
|        |  |                                                          

PART III

|        |  |                                                           
|------- |  | ----------------------------------------------------------
|Item 9  |  | Directors, Executive Officers, Promoters and Control      
|        |  | Persons; Compliance With Section 16(a) of the Exchange Act
|        |  |                                                           
|Item 10 |  | Executive Compensation                                    
|        |  |                                                           
|Item 11 |  | Security Ownership of Certain Beneficial Owners and       
|        |  | Management and Related Stockholder Matters                
|        |  |                                                           
|Item 12 |  | Certain Relationships and Related Transactions            
|        |  |                                                           
|Item 13 |  | Exhibits                                                  
|        |  |                                                           
|Item 14 |  | Principal Accountant Fees and Services                    
|        |  |                                                           

|           | 
|---------- | 
|SIGNATURES | 
|           | 
|           | 
|           | 
|           | 
|           | 

2



---

FORWARD-LOOKING
STATEMENTS.

This
Annual Report on Form 10-KSB 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, as defined
below, intends that such forward-looking statements be subject to the safe
harbors created thereby. These forward-looking statements 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. 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, that the Companys forecasts 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 information
will be realized. Although management 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 information 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. In addition, as
disclosed elsewhere in this Annual Report, the business and operation of the
Company are subject to substantial risks that increase the uncertainty inherent
in such forward-looking statements. In light of the significant uncertainties
inherent in the forward-looking information included herein, the inclusion of
such information should not be regarded as a representation by the Company or
any other person that the objectives or plans of the Company will be achieved.

PART I

Item 1.
Description of Business

History And
Development Of The Company

Accelr8
Technology Corporation (Accelr8 or the Company), a
Colorado corporation was incorporated on May 26, 1982. The Companys office
and laboratory are located at 7000 North Broadway, Building 3-307, Denver,
Colorado 80221, and our telephone number is 303-863-8088.

On
January 18, 2001, we acquired the OpTest portfolio of technologies
(OpTest) from DDx, Inc. (DDx). Since the acquisition of
the OpTest assets, we have focused primarily upon furthering the research and
development of the acquired technologies, and the development of revenue
producing products related to that technology. The purchase of OpTest provided
us with a proprietary surface chemistry formulation and quantitative
bio-analytical measurement instruments. Recently, we have invested in the
BACcelr8r platform for applications related to rapid identification of bacteria
and their antibiotic resistance.

Before
our acquisition of OpTest, we provided software tools and consulting services
for system modernization solutions for Digital Equipment Corporation (DEC), VMS
legacy systems. On July 30, 2004, we completed the sale of the assets related to
the software business, which consisted of tools for legacy-code modernization
and the resale of third-party software (the Software Migration
Business) to Transoft Group Ltd (the Asset Sale).

3



---

Business
Strategy

Our
vision is to develop and commercialize an innovative, integrated system for
rapid identification of bacteria and the determination of their antibiotic
resistance in critically ill patients. Our business strategy is to penetrate a
large market segment, develop profitable sales growth, and demonstrate the value
of our technology in the broad market for biomedical products with the intent of
licensing our proprietary technology to market leaders.

Products

We
are developing an innovative bacterial analysis system, the BACcelr8r,
which we intend to eventually be used in clinical diagnostics for
life-threatening bacterial infections. The system integrates our proprietary
technologies to provide advantages in bacterial strain identification,
particularly with regard to antibiotic resistance. Proprietary technologies
include OptiChem(r) surface coatings and assay processing methods. We have
received patents or we have patent applications pending for the major technology
components and systems.

The
BACcelr8r project began with a number of innovative analytical biological
concepts that had no direct precedent, even though based on familiar
microbiological principles. However, these accepted principles had only been
applied to cultures that contain hundreds of millions of bacteria descended from
single organisms hand-selected as colonies grow from a patient specimen.

The
BACcelr8r is based on a simple transformation of standard methods. We believed
that speed and precision should be possible by analyzing, as individuals, many
thousands of cells extracted directly from the patient specimen. This contrasts
with standard culturing in which the descendants of fewer than ten cells are
presumed to represent the entire infectious bacterial population in a specimen,
and with which many hours of repeated growth are required to perform analyses.

Our
first laboratory BACcelr8r research model, Version 0.1, is used in our own
internal research to investigate and characterize the biological principles that
we believe confer advantages upon our analytical methods. We also developed
functional specifications and product requirements for the first clinical
version of the BACcelr8r. During development, we identified a product version
that we believe will shorten the path to market. We call this system the
BACcel-1.0.

We
plan the BACcel-1.0 to provide the same rapid (2-hour) bacterial quantitation
and identification functions as the clinical BACcelr8r. However, we plan to
augment the first reported ID with additional strain identification based on
major antibiotic resistance groups. The purpose of this version is to narrow the
drug choices for empiric therapy.

For
example, the first report might state that some quantity of Staph is
present. The second report might then state that all of the Staph fall into a
major antibiotic resistance group known as MRSA (methicillin
resistant Staph. aureus, sometimes referred to as superbugs
in news reports). However the BACcel-1.0 would not report specific antibiotic
resistance and susceptibility as would happen with the clinical BACcelr8r.
Instead it would report the numbers of organisms that fall within major groups
that are typically the most difficult to treat, and thus narrow the initial
empiric therapy options to help improve the chances of initial success. The
Company believes that with this information, the physician can rule out drugs
that are likely to fail.

We
plan to include such major category identification for the most difficult major
organism groups. Examples of such resistance groups include MRSA, ESBL producers
in Enterobacteriaceae, and multi-drug resistant Psuedomonadales.

4



---

In
addition to the BACcelr8r project, we have developed and out-licensed
OptiChem surface coatings for use in microarraying components. We have
granted Schott Jenaer Glas GmbH(SCHOTT), which is a global leader in
high-quality glass manufacturing, a two-year exclusive global license with an
additional one-year option to manufacture and market OptiChem microarraying
products. The current license includes the use of OptiChem on glass slides for
gene and protein microarraying. SCHOTT has exercised its right to a third year
of non-exclusive production.

OptiChem
slide revenues for the year ended July 31, 2006 were $155,701. Management
believes that substrate sales will continue and that there will be royalties and
licensing fees with SCHOTT in the next fiscal year; however, there can be no
assurance that sales will occur or that the anticipated revenues will be
generated.

In
a strategy similar to our OptiChem licensing program, we intend to customize our
technologies to the specific requirements of additional large licensees when
opportunities become available.

The Problem
of Antibiotic Resistance

Since
their first commercial introduction in the 1940s, antibiotics have
revolutionized the treatment of bacterial infections. However as antibiotic
usage has become widespread throughout the world, many bacterial strains have
emerged that express resistance to currently marketed antibiotics.

The
cost and risk of new drug development has continued to rise and the rate of new
antibiotic development has declined. As antibiotic resistance continues to
worsen and spread, we believe that the physicians challenge today is to
select from an ever-shrinking list of possible drugs; the antibiotics that might
succeed in each individual case.

Management
believes that ideal therapy consists of the narrowest-spectrum antibiotic
(limited range of affected species) that delivers the quickest and most complete
kill of the bacteria known to cause the infection. To do this, management
believes that the physician needs a detailed analysis of the exact antibiotic
responsiveness in each individual case.

The Medical
Microbiology Market Opportunity

The clinical
microbiology laboratory now typically requires from approximately two to five
days to grow and analyze a bacterial culture for antibiotic susceptibility. With
patients who have rapidly-progressing infections the physician cannot wait for
lab results before commencing drug therapy, and therefore must use a combination
of powerful, broad-spectrum drugs in the hope of arresting the infection.
Published studies have shown that in approximately 20% to 40% of such cases
empiric therapy fails to adequately control the infection. The goal
for the BACcel-1.0 is to rule out drugs that are likely to fail. The goal for
the BACcelr8r it is to proceed further and identify drugs that are likeliest to
work best when de-escalating to specific therapy from empiric therapy.

Furthermore,
a study of the therapy and outcome of Ventilator Associated Pneumonia
(VAP) showed that changing the therapy later than approximately 24
hours did not significantly improve outcomes for most patients. Management
believes that the inherent delay with current bacterial culturing methods can
significantly increase a patients medical risk. Patients who receive
inadequate initial therapy may face extended hospitalization and increased risk
of worsening disease severity and mortality.

Todays
tests still employ culturing methods that were first popularized in the 1870s.
Culturing consists of growing bacteria from a patient specimen (such
as blood) in an artificial nutrient medium that stimulates growth. After growing
colonies, which are discrete clusters of bacteria on a gel plate
surface, the microbiologist then physically picks representative sample colonies
for further growth and analysis. These isolates require many hours
to prepare and many additional hours to analyze. As a result, lab results
usually require from one to five days, or even longer for slow-growing
organisms, before the physician receives the results after submitting a patient
specimen.

5



---

Management
believes that standard lab methods only indicate which drug might
succeed, but do not indicate the potential superiority of one drug over
another.

We
believe that the BACcelr8r will help physicians reduce the severity of
life-threatening infections by providing much quicker and more precise analyses
than are possible with culturing. Our objective is to provide complete bacterial
strain characterization, including antimicrobial responsiveness, in less than 8
hours after the hospital lab receives a patient specimen. We also intend to
identify and count bacteria by species in less than 2 hours.

Hospital
Acquired Infections (HAI)

We
believe that the Intensive Care Unit (ICU) is the hospital area that has the
most urgent problems with regard to controlling aggressive infections.
Furthermore, severe illness often weakens a patients defenses against
infectious organisms of all types. Management believes that the hospital also
exposes patients to a reservoir of aggressive pathogens that may have evolved
resistance to the most commonly used antibiotics.

According
to the FDA, about 70% of bacteria that cause infections in hospitals are
resistant to at least one of the drugs most commonly used to treat
infections. The Centers for Disease Control and Prevention has stated that
antibiotic resistance is among the organizations top public health
concerns. The global spread of drug-resistant microbes has led to prolonged
hospitalizations, and increased health care costs. Despite the antibiotic
revolution, bacterial infections remain a leading cause of mortality in
critically ill patients. Once microbes become resistant, infections can become
difficult or impossible to treat.

Hospital-acquired
pneumonia is the leading cause of death from infections acquired in the
hospital. In the ICU, approximately 85% of hospital-acquired pneumonia is
ventilator-associated pneumonia (VAP). It is the most common life-threatening
infection contracted by ICU patients during their hospital stay. Worldwide, over
one million patients annually are at risk of developing VAP. Because these
patients are critically ill before contracting pneumonia, the infection can have
particularly serious consequences. A review of papers in medical journals
highlights the fact that no medical standard of care now exists for
diagnosing VAP and identifying the organisms that cause it.

VAP
is a direct result of mechanical ventilation (an element of life support), which
requires the insertion of a tube deep into the patients trachea (windpipe)
and connects to a sophisticated mechanical air pump. The airway tube renders the
patient vulnerable to infection because it facilitates leakage of microbes from
the mouth into the airway and the lungs. The longer the tube is in place, the
greater the risk that a patient will develop VAP.

Management
believes that there are approximately one million patients annually in the
United States, Europe, and Japan who are on mechanical ventilation for two or
more days and thus are at substantial risk of developing VAP. Approximately 9%
to 27% of patients who require mechanical ventilation for at least two days
develop VAP. In spite of empiric antibiotic therapy, patients who develop VAP
spend, on average, seven to nine extra days in the ICU, which adds incremental
costs that range approximately from $12,000 to $40,000. The Joint Commission on
Accreditation of Healthcare Organizations has identified VAP prevention as a
core ICU performance measure. Performance measurements are used by hospitals to
support performance improvements and to demonstrate accountability to external
stakeholders, including insurance companies.

6



---

Because
of these reasons, we believe that rapid antibiotic susceptibility testing for
the bacteria that cause VAP represents an urgent unmet medical need and an
attractive market opportunity. We are developing the BACcelr8r with the intent
of meeting this need.

The
BACcelr8r system will include a fixed instrument and proprietary single-use
analytical cartridges. By changing only a small set of cartridge assay
components we believe we can change the bacterial species identified by the
cartridge to fit new diagnostic application. Many such panels of
target organism overlap in medical diagnostics, reducing the complexity of new
application development.

After
introducing a diagnostic  system for  pneumonia,  we intend to add  cassettes for other
diagnostic  categories.  Because  antibiotic  resistance is so widespread,  most serious
bacterial  infections require the same  type of analysis as used for pneumonia.

Bacterial
meningitis provides an example of another rapidly-progressing infection that can
be difficult to treat, and in which very little time is available for antibiotic
testing. Some bacterial species are the same in pneumonia and meningitis. Other
species can be dropped from the pneumonia panel and replaced with
meningitis-specific pathogens in order to provide broad coverage for meningitis.

As
another example, premature babies in the neonatal ICU are prone to infection
because they have not yet developed their defenses. Because the babies are so
small, it is also difficult to obtain enough specimen volume for analysis. We
believe that the BACcelr8rs high sensitivity and speed could have
excellent potential in helping to manage these critical cases.

To
varying degrees, more familiar forms of hospital acquired infection are also
associated with resistant organisms. Examples include blood-borne infection
(bacteremia that can result in sepsis), wound infections, and other
infections. We believe that medical urgency arises with many of these infections
as in VAP. We intend to systematically approach these applications and develop
appropriate cassettes and specimen handling products.

Finally,
we believe that proof of the BACcelr8rs ability to perform rapid, highly
sensitive and specific analysis will also showcase the commercial value of all
of Accelr8s proprietary technology including novel surface chemistry
applications (implanted medical devices), detection and capture methodologies
and coatings for pharmaceutical packaging.

Quantum
Microbiology(tm)"

We
developed a new analytical strategy in order to eliminate bacterial culturing
and isolation, and thus eliminate the most time-consuming steps in bacterial
testing. We call this strategy Quantum Microbiology(tm)" (or
QM) to emphasize its ability to analyze each individual organism in
a sample that contains tens of thousands of bacterial cells. Management believes
that Quantum Microbiology adds substantial value to our intellectual property,
and it is the method embodied in the BACcelr8r.

The
QM method identifies and maps each individual bacterium extracted from a sample
and immobilized on an assay surface. It conducts a series of tests on the
immobilized cells and computes a statistical profile to identify each
significant strain type in the sample. Strain typing or phenotyping
includes assessment of antimicrobial responses.

We
believe that this strategy has major implications when compared to standard
culturing methods. Speed is only one aspect, as we believe that QM can produce a
complete analysis within the 8-hour objective established for the BACcelr8r. In
addition, we believe that QM has the potential to identify hidden or minority
resistant strains. We believe that standard methods only reveal the properties
of the fastest-growing organisms in a culture. We believe that they usually
ignore slow-growing strains or minor strains that can become late-onset or
secondary superinfections. Early tests also demonstrate that QM
makes it possible to automate certain types of sequential analysis that are
difficult to automate with todays high capacity systems. Therefore
management believes that QM and the BACcelr8r have the potential to make a
significant impact on the practice of clinical microbiology.

7



---

BACcelr8r
Technology

The
BACcelr8r implements QM methods by using a computerized microscope with
proprietary image analysis software to analyze each individual organisms
responses to a series of tests. The Version 0.1 lab model now in use at Accelr8
demonstrates the feasibility of automating QM.

The
BACcelr8r instrument will contain computer boards, analyzer optics,
electromechanical actuators, power supplies, and other subsystems that do not
need to be disposable. Each single-use cartridge (or cassette) will
contain assay surfaces, sample introduction ports, couplings for fluids and
electrical circuits, and optical interfaces. Cassettes may also contain reagents
in small on-board reservoirs. The single-use cassettes will contain most assay
components that cannot be re-used. In a typical application, the operator will
use one cassette per patient specimen and dispose of the cassette when the test
ends. Cassette and instrument designs are proprietary and wholly owned by
Accelr8.

As
envisioned in a typical application, the operator will perform basic specimen
preparation (on material such as blood, lung fluids, etc.) and introduce a
small, standardized volume of sample into a cassette, and insert the cassette
into the instrument. All remaining operations will take place under computer
control without operator intervention in normal operation. During the analysis
the system will automatically report its operating status and current results
for each cassette being processed.

We
believe that the system will perform four basic processes. First, it will
rapidly distribute the sample to multiple flow channels, each having its own
assay surface, then extract and immobilize individual bacteria from the sample
onto each of those surface areas. Second, it will perform presumptive species
identification and map the physical location of each immobilized organism in
each flow channel. Third, it will measure the growth rates of the individual
immobilized organisms for a brief period. Fourth, it will deliver a different
antibiotic to each flow channel and measure the rate at which each different
drug kills or attenuates the growth of each identified organism.

At
the end of the second step (presumptive species identification) we believe that
the system will report the number of organisms for each species in the
analytical panel. We plan the first hospital product to have a panel of
approximately five to nine species.

We
believe that the system will eliminate culturing and isolation by directly
analyzing all of the organisms extracted from the sample without requiring prior
growth. We believe that it will quickly extract the organisms using an
electrical field to drive the bacteria to a universal capture surface. We
believe that OptiChem coatings within the sample distribution flow passages will
prevent most bacteria from adhering to the passage walls. The OptiChem coatings
and the electrical extraction method are part of Accelr8s intellectual
property.

Management
believes that the BACcelr8r project illustrates the importance of discovering
new ways to perform analyses at a very small scale with high sensitivity and
ultra-low interference. Similar principles apply to other potential new versions
of the integrated platform. We believe that by developing this system we will be
in position to offer a customizable platform with short time to market for other
companies who are in the business of marker discovery useful for drug discovery,
molecular diagnostics, and other important vertical markets.

8



---

Research and
Development

We
conduct an aggressive research and development program to expand our
intellectual property portfolio and to adapt our licensable technologies to
specific applications. Research and development programs include new physical
coating methods for production of different substrate formats, additional
methods for linking coatings to base materials, and additional functionalization
for new applications. During the years ended July 31, 2006 and 2005, we spent
approximately $2,155,988 and $1,304,888, respectively, on research and
development activities. Primary research and development activities during the
year included cassette development and characterization of the underlying
biological principles.

At
the start of the development of the BACcelr8r, very little precedent existed for
single-cell analysis. The materials and methods for bacterial behavior at the
single cell level needed development and validation. The company started with
development of the highest-risk and necessary principles. We believe that we
have systematically resolved the technical issues from those having the highest
risk down through each subsequent risk level until characterizing all of the
individual principles. In July, 2006 we demonstrated that the integrated process
performed successfully on a limited, blinded set of laboratory model samples.
During the year ended July 31, 2006, we presented peer-reviewed technical
posters at two important scientific meetings, which summarized the evidence for
each of the BACcelr8rs analytical methods. These presentations were the
first exposure to the scientific and medical communities of the BACcelr8rs
innovative working principles.

We
believe that the BACcelr8r disposable, single-use cassette represents a
significant advance in active fluidic technology. The multi-channel cassette
carries multiple reagent reservoirs and fluidic valves that precisely deliver
on-cassette contents according to flow control programs executed by the
instrument. The cassette combines fluidic valving, multi-branch flow balancing,
bubble prevention and clearance features, reagent reservoirs, precision
flowcells, imaging-quality optical windows, electrokinetic electrodes,
anti-adsorption coatings to prevent sample loss, universal microbial cell
capture coatings, and the ability to sustain high internal operating pressures
while incubating live cells and being maintained near body temperature for
several hours.

We
do not believe that any other fluidic or microfluidic product contains such
flexibility and sophistication. Development required a diverse multidisciplinary
team of experts from different organizations, guided by Accelr8s
scientific and technical team. Management believes that, compared to industry
norms, this accomplishment required relatively low investment.

The
prototype laboratory instruments use off-the-shelf components as much as
possible. They are based on sophisticated, commercially available research
microscopes and accessories. We also started development of a custom microscope
using commercially available optical components combined with custom components.
The initial test fixture successfully demonstrated significant potential for
simplification and reduction of both size and cost for higher-capacity
instruments.

9



---

Our
research and development activities also focused on image analysis. Our image
analyzer is able to track individual live bacterial cells as they grow and
divide. The algorithms precisely measure individual cell and clone growth rates,
and responses to different analytical tests. We believe that the growth data
accurately parallels those obtained with standard culturing methods.
Biostatistical algorithms make it possible to further segregate data from
significant sub-populations of individual cells and clones.

Our
goal is for a single typical BACcelr8r analysis to analyze approximately 2.5
million images of single cells or clones and perform accurate statistical
analyses. We believe that this analytical power, performed in real time, will
confer substantial advantages over alternative microbiological methods.

We
believe that most standard laboratory sample handling materials may cause
extensive loss of bacteria by non-specific adsorption to container walls.
Examples of such commonplace disposable devices include specimen containers,
centrifuge tubes, micropipette tips, and inoculation loops. We believe that
applying OptiChem coatings to such devices might significantly reduce bacterial
loss during specimen preparation. We have therefore added OptiChem coated
labware development to the BACcelr8r program. If successful, we plan to include
such devices in supply kits to be used in specimen access and preparation with
the BACcelr8r. Low-loss sample preparation kits would improve the accuracy and
consistency of quantitative high-sensitivity methods such as those used in the
BACcelr8r.

We
further believe that these devices would have additional applications in
acquiring and preparing specimens that contain low-abundance analytes, whether
cellular or molecular. For example, gene amplification tests are capable of
multiplying even a single gene target to the level where it can be easily
detected. It is therefore critical to assure that low-level targets such as
these are not lost in the sample handling process. In addition, we may have the
opportunity to license OptiChem coatings to companies that manufacture such
devices for other purposes.

We
believe that the relatively modest research and development investment so far
has created an entirely new analytical approach to clinical microbiology and the
core technology needed to perform it reliably. We intend to proceed with product
development that embodies these methods. We have adjusted our product
development plan to take advantage of specific technical discoveries and careful
analysis of clinical applications that we believe will shorten the time to
market without compromising the products market value.

The
Microarray Market Opportunity

Microarraying
slides were our first commercial biomedical products. Our products derive their
advantages from OptiChem surface coatings. OptiChem can reduce background
interference from materials in the analytical sample. Examples of materials that
OptiChem sheds and that typically interfere with conventional surfaces include
microbes, blood cells, blood and serum proteins, sticky proteins in cell culture
lysates, and unbound dyes that remain after labeling test samples. Non-specific
binding (also referred to as adsorption or fouling) of
such materials is a dominant noise factor that limits the sensitivity of
bio-analytical assays.

Microarrays
typically consist of a microscopic grid of thousands of spots of a test
chemistry on a glass slide. Each spot is made of a different variation of a test
probe molecule, such as a unique short length of synthetic DNA that has a
particular gene sequence. The researcher exposes a sample, such as extracts from
a cell culture or blood, to the microarray. After incubation, washing, and
labeling, a computerized scanner measures the amount of dye or label on each
spot. The researcher can then compare the array pattern between two different
samples, such as a tumor biopsy against normal tissue.

10



---

Microarrays
are important because they allow the researcher to determine which genes or
biochemical pathways become more or less active during a disease or after
exposure to a new drug candidate molecule. They allow the scientist to conduct
thousands of analytical experiments at one time. This can reveal clues to
disease processes or help determine whether a potential new drug has the
expected biochemical effects in living tissues.

We
decided to enter the microarray market because it has been in existence long
enough to prove its potential application in clinical diagnostics, but we
believe that it still has most of its growth ahead of it. Although the current
research market is attractive in itself, we believe that emerging market
segments in drug discovery and molecular diagnostics have much larger potential.
In particular, we believe that research trends suggest that new array-based
methods for cancer diagnostics may drive market growth. In addition, we believe
that microarray technology has reached a crucial juncture, and that our unique
technology has the potential to resolve critical issues, such as reducing
complicated steps for sample preparation, that now retard the next phase of
market evolution. Customer experience with OptArray slides confirms our beliefs
about the nature of OptiChems superiority in bio-analytical assays such as
gene arrays and protein arrays.

On
November 24, 2004, the Company signed an exclusive two year manufacturing and
marketing license with SCHOTT Jenaer Glas GmbH of Jena, Germany
(SCHOTT). SCHOTT is a leading glass manufacturer in Europe. SCHOTT
formed a division (Nexterion) in 2002 to enter the microarray market. Since then
they have captured a share of the global microarray slide market selling several
different formulas of coated slides. The license includes the global right to
manufacturer and sell standard microarray slides using OptiChem amine-reactive
coatings (Slide H).

Under
the license, Accelr8 supplied SCHOTT with products manufactured by Accelr8 until
SCHOTTs new production facility achieved its production validation
requirements. SCHOTT obtained the right for a 2-year exclusive global
manufacturing and marketing license for OptiChem-coated microarraying products,
and the option for a 1-year extension. Accelr8 was SCHOTTs sole supplier
of permeable hydrogel coatings for microarraying slides during the term of the
Supply Agreement. Accelr8 also provided training to facilitate the transition to
the new SCHOTT manufacturing facility. SCHOTT has elected to exercise its right
for non-exclusive Slide H production through November 23, 2007.

On
June 2, 2005 the Company signed a second supply agreement with SCHOTT for
OptiChem-streptavidin coated microarraying slides (Slide HS). Accelr8 had been
manufacturing the streptavidin slides for SCHOTT since October 2004. Under the
second agreement Accelr8 extended production through December 2005. SCHOTT also
had a right during 2005 to enter into negotiations for an exclusive
manufacturing and distribution license, similar to the Slide H agreement signed
November 24, 2004. On September 27, 2005, SCHOTT also provided written
notification with the Amended Supply Agreement that it intended to exercise its
exclusive right to negotiate an exclusive license for the application of the
Companys OptiChem Streptavidin coated microarrying slides. During fiscal
year 2006 no agreement was reached for an exclusive license. However, SCHOTT did
elect to exercise its right to non-exclusive production for Slide HS through
December 31, 2006.

During
the fiscal year ended July 31, 2006 Accelr8 received revenues of $121,353 from
SCHOTT (including royalty fees, consulting fees, training fees, and product
sales).

Going
forward, we intend to continue to selectively pursue additional high-potential
opportunities in the microarray market. We also believe that OptiChem coatings
may have opportunities in microbial biofilm inhibition (as it applies to
implanted medical devices), specimen collection devices, pharmaceutical
packaging, and other areas that require exceptional anti-adsorptive surface
coatings.

11



---

Competition

If
the production of the BACcelr8r is successful, it will enter a market segment
whose constituent hospital laboratories now use automated bacterial culturing,
identification, and antibiotic susceptibility testing systems. Leading suppliers
of such systems include Becton Dickinson (NYSE: BDX), Dade Behring (NASDAQ:
DADE), Trek Diagnostics (private), and bioMerieux (France). These products
provide broad-based culturing and analysis of a wide variety of bacteria. In
contrast, we intend to position the BACcelr8r and BACcel-1.0 as disease-specific
analysis and monitoring systems for critically ill patients using a small and
specific subset of bacterial pathogens.

We
believe that we will not need to displace installed culturing systems in order
to sell the products. We have identified specific diseases for which there is an
urgent clinical need for rapid detection. These diseases also result in major
hospital costs that we believe can only be reduced, in the absence of effective
prevention, by a product that performs as we intend the BACcelr8r to perform
(results in eight hours or less).

We
believe that the rapid, augmented identification of the BACcel-1.0 product will
compete with certain rapid ID tests now on the market. Some rely on
standard culturing while others apply new technology, particularly gene
analysis. Examples of companies that sell clinical products in the latter group
include Becton Dickinson and AdvanDx (private). Applied Biosystems (NYSE: ABI)
sells genetic bacterial identification products for research applications.

To
date such methods only identify species, or identify a very limited gene set
(typically a single type of genetic mechanism for each product). We intend the
BACcel-1.0 to identify multiple species related to specific diagnostic
categories and multiple major antibiotic resistance types to which they may
belong, without culturing or strain isolation.

Approximately
20 companies around the world sell activated slides for use in microarray
printing. However, only a few of these produce high-performance products that we
view as competing with OptiChem coated microarraying substrates.

Although
Corning (NYSE:GLW) commands market leadership in activated microarray slides, we
do not compete directly with Corning. OptArray targets the emerging need for
high performance microarraying slides whereas Corning and others produce
lower-cost products primarily for first-generation DNA expression arraying.
Other companies that have similar products include TeleChem International
(private), Thermo Electron Corp (NYSE: TMO), and SCHOTT (Germany).

General
Electric (NYSE: GE) markets  activated slides and manufactured  microarrays under the
CodeLink(tm)  brand.  The coating on CodeLink slides is a hydrogel  polymer that competes
with OptiChem  coated slides.  However,  we view GE as a potential  customer and their
supplier,  SurModics Inc. (NASDAQ:  SRDX), as a competitor in surface  coatings.

Accelr8s
Business Models

We
intend to offer licenses to assay and instrumentation manufacturers. We intend
to offer such licenses in return for an up-front licensing fee plus a royalty on
the net sales price for finished products that contain our licensed assets,
subject to annual minimum royalties.

12



---

Before
we commit significant development effort to integrate our technologies into a
customers products and processes, we intend to require the customer to
fund our non-recurring development costs. This customary joint development phase
should help us to preserve a portion of our cash assets and help to qualify the
customers interest. However, there can be no assurance that we will enter
into a joint development agreement with any of our customers.

We
continue to evaluate the potential to produce fully integrated systems for sale
to end users in various market niches. The projected potential consumption for
coated substrates makes these niches attractive. Based upon our perception of
the high value to customers and low projected production costs, we believe that
this type of business model has attractive margin potential. However, there can
be no assurance that we will be successful in increasing the demand for any of
our products.

Customers

During
the fiscal year ended July 31, 2006, total revenues were $212,701, of which
$155,701 (73.2%) were OptiChem slide revenues and $57,000 were training and
consulting fees. Of the total OptiChem slide revenues, $91,353 (58.67%) was to
SCHOTT. We are still engaged in research and
development with respect to the OptiChem and BACcelr8r technologies. We believe
that the selling cycle (to a customer) for a product such as OptiChem will
average about nine to twelve months, because of the need to integrate our
products into the customers production processes.

We
continue to evaluate potential new products and the sale of products used in the
internal development of other companies.

Marketing
and Sales

We
currently market our technologies to potential industrial customers through five
primary routes:

| | Public
presentations at scientific symposia attended by key scientific staff and  research and
development decision makers from targeted companies and  institutions.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Invited
presentations at targeted companies by our own scientists or consultants.
| | ---------------------------------------------------------------------------------

| | Telephone
calls, emails, express letters, and personal visits to key executives, business
development managers, marketing managers, and research and development managers  at
targeted companies.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Our
web site (www.accelr8.com), the content of which is technical in nature and  targeted to
scientists within prospective accounts.
| | ------------------------------------------------------------------------------------------------------------------------------------

| | Exclusive
and non-exclusive agreements with well established distributors and  manufacturers who
have demonstrated effective marketing and have existing sales  channels.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We
believe that the executive selling process helps to assure that
high-quality, effective information is presented directly to individuals who
have decision making authority or who have strong influence over decisions to
adopt novel technologies in their businesss product development programs.

We
intend to continue to expand our exposure by means of research papers in
technical and professional journals, feature articles in the trade press, and
advertising.

13



---

Operations

We
own all of our laboratory equipment. We lease approximately 6,400 square feet of
laboratory and administrative space. Within the laboratory facility we
constructed a cleanroom pilot production operation. We believe the facility has
adequate capacity to implement the current product development plan.

We
have identified secondary sources for all materials used in OptiChem
formulation, and have qualified multiple sources for the most critical
constituents.

We
conduct an aggressive research and development program to expand our
intellectual property portfolio and to adapt our licensable technologies to
specific applications. Research and development programs include new physical
coating methods for production of different substrate formats, additional
methods for linking coatings to base materials, and additional functionalization
for new applications. During the years ended July 31, 2006 and 2005, we spent
approximately $2,155,988 and $1,304,888, respectively, on research and
development activities.

Instrumentation
development requires certain components that are custom-fabricated to our
specifications. Such components include injection-molded plastic components, and
machined mechanical components. In all applicable cases, we will own the
production tooling and believe that we will be able to qualify secondary
sources. We plan to maintain inventory levels sufficient to bridge second-source
response times and include an adequate safety factor.

We
do not directly employ product development engineers but contract with
independent engineering firms that have experience in each necessary technical
discipline. In all cases these organizations pre-assign all new intellectual
property to Accelr8 without future obligations by Accelr8. We retain full
ownership without needing a license or payment of royalties.

The
lead project engineering firm has been in the medical device development
business since the late 1980s. They are designing the instrument and system
software. This organization has extensive experience in designing medical
devices under FDA regulations and ISO requirements. An executive in this
organization has overall responsibility to supervise the other engineering
teams. Accelr8 technical staff and executives directly coordinate these
organizations and participate directly in technical project execution.

We
also are developing custom antibodies for species identification and other
assays. Commercial antibody sources do not exist for some of the species
contained in our panels. In other cases commercial sources cannot provide
antibodies that meet our criteria for performance or production. Management
believes that custom antibodies derived from this development program will add
significant asset value and competitive advantages. In this program we own the
antibodies and any intellectual property that may emerge as a result of the
contracts.

We
have sold a manufacturing and marketing license to SCHOTT for the production of
microarray slides (Slide H). We continue to use our own cleanroom pilot
operation for ongoing product development and process engineering. As we
approach commercialization for the BACcelr8r, we plan to engage experienced
outsource vendors to produce finished goods thus avoiding costly investment for
a manufacturing facility.

14



---

Intellectual
Property

We
rely on a combination of patent, copyright, trademark and trade secret laws,
employee and third party non-disclosure agreements, license agreements and other
intellectual property protection methods to protect our proprietary rights. We
are committed to aggressively develop a continuing stream of intellectual
property and to defend our position in key technologies.

We
have a number of issued patents for technology acquired from DDx and have filed
additional United States and international patent applications.

Accelr8s
first patent on the OptiChem  technology,  U.S. Patent No. 6,844,028 titled Functional
Surface  Coating was issued on January 18, 2005.  The patent  specification  covers
the core OptiChem  technology.  On June  27, 2006,  the United  States Patent  Office
issued  Patent No.  7,067,194  which awarded the Company a patent for  devices that use
OptiChem  coatings.  Additional  OptiChem  United States and  international  patent
filings are in  prosecution.

Accelr8
broadened the scope of its instrument patent claims by filing additional
provisional patent applications during the 2006 fiscal year. Management believes
that these filings address many of the core concepts of QM and include
additional instrumentation and specimen preparation inventions related to the
BACcelr8r system.

There
can be no assurance that third parties will not assert infringement or other
claims against us with respect to any existing or future products. We cannot
assure that licenses would be available if any of our technology was
successfully challenged by a third party, or if it became desirable to use any
third-party technology to enhance the Companys products. Litigation to
protect our proprietary information or to determine the validity of any
third-party claims could result in a significant expense to us and divert the
efforts of our technical and management personnel, whether or not such
litigation is determined in our favor.

While
we have no knowledge that we are infringing upon the proprietary rights of any
third party, there can be no assurance that such claims will not be asserted in
the future with respect to existing or future products. Any such assertion by a
third party could require us to pay royalties, to participate in costly
litigation and defend licensees in any such suit pursuant to indemnification
agreements, or to refrain from selling an alleged infringing product or service.

The
Company has secured or established trademarks for:

| | BACcel;
     BACcelr8r;       OptArray;       OptiChem®;       OptiPlate;       QuanDx;       YoDx;  and
     Quantum MicrobiologyTM.
| | -------------------------------------------------------------------------------------------------------------------------------------------

Employees
and Consultants

We
have 13 full-time employees and contracts with five consultants. We have not
entered into any collective bargaining agreements.

15



---

Factors That
May Affect Future Results

Dependence
On Key Employees.     Our success depends to a significant extent upon a
number of key management and technical personnel, the loss of one or more of
whom could have a material adverse effect on our results of operations. We carry
key man life insurance in the amount of $5 million on Thomas V. Geimer. The
Board of Directors has adopted resolutions under which one-half of the proceeds
of any such insurance will be dedicated to a beneficiary designated by the
insured. There can be no assurance that the proceeds from such life insurance
would be sufficient to compensate us for the loss of Mr. Geimer, and these
policies do not provide any benefits to the Company if Mr. Geimer becomes
disabled or is otherwise unable to render services to the Company. Further, the
loss of David Howson as President of the Company may have a significant adverse
effect upon the Company and its business. We believe that our continued success
will depend in large part upon our ability to attract and retain highly skilled
technical, managerial, sales and marketing personnel. There can be no assurance
that we will be successful in attracting and retaining the personnel we require
to develop and market new and enhanced products and to conduct our operations
successfully.

Need
To Develop Market For Products.     We have received only nominal revenue from
sales based on products using the new OptiChem technology. Our competitors
manufacture and market products that are similar to ours. Our principal
competitors and the areas in which they compete with us are described more fully
in Competition. While we have received nominal revenues from sales,
there is no assurance that we will be successful in marketing our products or
will receive additional revenues in the future. Further, we have experienced
losses from operations and negative cash flow that is likely to continue unless
we are able to complete the development of the BACcel and BACcelr8r and sell
them into the marketplace. If we continue to experience losses from operations
and negative cash flow as we have in the past, the price of our Common Stock may
be adversely affected.

Our
Success Depends Partly On Our Ability To Successfully Introduce New Products.     In a market primarily driven by the need for innovative products, our
revenue growth will depend on overcoming various technological challenges to
successfully introduce new products, including but not limited to the BACcel and
BACcelr8r into the marketplace in a timely manner. Our technology requires
significant knowledge and experience in biochemistry. In addition, we must
continue to develop new applications for our existing technologies. Market
acceptance of these products will depend on many factors, including, but not
limited to, demonstrating that our technologies are superior to other
technologies and products that are currently available or may become available
in the future.

If
we are unable to overcome these technological challenges, or even if we
experience difficulties or delays, we may be unable to attract additional
customers for our products, which would seriously harm our business and future
growth prospects.

If
We Are Unable To Effectively Protect Our Intellectual Property, We May Be Unable
To Prevent Infringement.      Our success depends in part on our ability to
obtain and maintain patent protection for the technology underlying our
products, both in the United States and in other countries. We cannot assure you
that any of the presently pending or future patent applications will result in
issued patents, or that any patents issued to us or licensed by us will not be
challenged, invalidated or held unenforceable. Further, we cannot guarantee that
any patents issued to us will provide us with a significant competitive
advantage.

If
we fail to successfully enforce our proprietary technology or otherwise maintain
the proprietary nature of our intellectual property with respect to our
significant current and proposed products, our competitive position and sales
could suffer or we may be unable to increase sales.

16



---

Notwithstanding
our efforts to protect our intellectual property, our competitors may
independently develop similar or alternative technologies or products that are
equal to or superior to our technology and products without infringing on any of
our intellectual property rights or design around our proprietary technologies.
If customers prefer these alternative technologies to our technology, sales
could be adversely affected.

Our
Products Could Infringe On The Intellectual Property Rights Of Others.      Due
to the significant number of U.S. and foreign patents issued to, and other
intellectual property rights owned by entities operating in the industry in
which we operate, we believe that there is a significant risk of litigation
arising from infringement of these patents and other rights. Third parties may
assert infringement or other intellectual property claims against us or our
licensees. We may have to pay substantial damages, including treble damages, for
past infringement if it is ultimately determined that our products infringe on a
third partys proprietary rights. In addition, even if such claims are
without merit, defending a lawsuit may result in substantial expense to us and
divert the efforts of our technical and management personnel.

We
may also be subject to significant damages or injunctions against development
and sale of some of our products, which could have a material adverse effect on
our future revenues.      Furthermore, claims of intellectual property
infringement may require us to enter into royalty or license agreements with
third parties, and we may be unable to obtain royalty or license agreements on
commercially acceptable terms, if at all.

Third
Parties May Seek To Challenge, Invalidate Or Circumvent Issued Patents Owned By  Or
Licensed To Us Or Claim That Our Products And Operations Infringe Their  Patent Or Other
Intellectual Property Rights.     In addition to our
patents, we  possess an array of unpatented proprietary technology and know-how.  The
measures  that we employ to protect this technology and these rights may not be adequate.
Moreover, in some cases, the licensor can terminate a license or convert it to a
non-exclusive arrangement if we fail to meet specified performance targets.

We
may incur significant expense in any legal proceedings to protect our
proprietary rights or to defend infringement claims by third parties.      In
addition, claims of third parties against us could result in awards of
substantial damages or court orders that could effectively prevent us from
manufacturing, using, importing or selling our products in the United States or
abroad.

Competition.
     Many of our competitors have greater financial, manufacturing, marketing and
sales resources than we do. In addition, some of our competitors may,
individually or together with companies affiliated with them, have greater human
and scientific resources than we do. Our competitors could develop technologies
and methods for materials that render our technologies and methodologies less
competitive. Accordingly, if new competitors introduce new products that are
more cost effective than our current and proposed technologies, we could
experience poor sales, revenues and operating results.

Ability
To Respond To Technological Change.     Our future success will depend
significantly on our ability to enhance our current products and develop or
acquire and market new products that keep pace with technological developments
and evolving industry standards as well as respond to changes in customer needs.
There can be no assurance that we will be successful in developing or acquiring
product enhancements or new products to address changing technologies and
customer requirements adequately, that we can introduce such products on a
timely basis or that any such products or enhancements will be successful in the
marketplace. Our delay or failure to develop or acquire technological
improvements or to adapt our products to technological change would have a
material adverse effect on our business, results of operations and financial
condition.

17



---

Control
By Management.     At October 27, 2006, our officers and directors
owned or controlled of record approximately 959,850 or 10.85% of the outstanding
shares of our Common Stock. If they exercise all of the options that they
currently hold, they will own 1,644,850 or 17.26% of the then outstanding shares
of our Common Stock. Due to their stock ownership, the officers, directors and
key employees may be in a position to elect the Board of Directors and to
control the business and affairs of the Company, including certain significant
corporate actions such as acquisitions, the sale or purchase of assets and the
issuance and sale of the Companys securities.

Shares
Eligible For Future Sale      As of July 31, 2006, we had reserved 1,500,000
shares of Common Stock for issuance upon exercise of options which have been or
may be granted pursuant to our stock option plans. As of July 31, 2006, 599,000
options had been granted pursuant to the Qualified Plan with 12,500 of these
options exercised, 179,000 options that expired, leaving 280,000 available for
grant. Pursuant to the Non-Qualified Plan, 300,000 options have been granted
with 75,000 of these options exercised and 50,000 options expired, leaving
50,000 available for grant. As of July 31, 2006, 377,500 options had been
granted pursuant to the Omnibus Plan with none of these options exercised and
15,000 expired leaving 137,500 available for grant. As of October 15, 2006,
there were 833,213 outstanding shares of our Common Stock, not held by our
officers, directors that are restricted securities as that term is defined in
Rule 144 under the Securities Act. Further, as of October 15, 2006, there were
approximately 1,093,405 shares that are deemed restricted securities whose
restrictions have lapsed and may be sold as unrestricted securities. Although
the Securities Act and Rule 144 place certain prohibitions on the sale of
restricted securities, restricted securities may be sold into the public market
under certain conditions.

The
1,129,110 warrants exercised by Mr. Geimer were exercised at $0.24 per share on
October 14, 1997 and contributed to a Rabbi Trust. Under the terms of the Rabbi
Trust, we will hold the shares in the trust, and carry them as treasury stock.
The Rabbi Trust provides that upon Mr. Geimers death, disability or
termination of his employment, the shares will be released ratably over the
subsequent ten (10) years, unless the Board of Directors determines otherwise.
See Note 8 to the Financial Statements for further information. Sales of Common
Stock underlying Plan Options may adversely affect the price of the Common
Stock.

The
Loss Of Our Major Customers Could Significantly Reduce Our Revenue.      During
the fiscal year ended July 31, 2006, total revenues from SCHOTT were $121,353 or
57.1% of revenues. During the fiscal year ended July 31, 2005, total revenues
from SCHOTT were $394,045 or 78.5% of total revenues. There can be no assurance
that revenue from SCHOTT or any customer will continue at their historical
levels. Loss of SCHOTT or another one or more of our current clients could have
a material adverse effect on our business, financial condition and results of
operations. If we cannot broaden our customer base, we will continue to depend
on a few clients for the majority of our revenue.

We
Use Hazardous Materials In Some Of Our Research, Development And Manufacturing
Processes.      Our research activities sometimes involve the controlled use of
various hazardous materials. Although we believe that our safety procedures for
handling and disposing of such materials comply with the standards prescribed by
state and federal regulations, the risk of accidental contamination or injury
from these materials cannot be completely eliminated. We could be held liable
for any damages that might result from any accident involving such materials.
Any such liability could have a material adverse effect on our business,
financial condition and results of operations.

Changes
In Governmental Regulations May Reduce Demand For Our Products Or Increase Our
Expenses.      We compete in markets in which we or our customers must comply
with federal, state, local and foreign regulations, such as environmental,
health and safety and food and drug regulations. We develop, configure and
market our products to meet customer needs created by these regulations. Any
significant change in these regulations could reduce demand for our products.

18



---

We
Have A Single Manufacturing and Research and Development Facility And We May
Lose Revenue And Be Unable To Continue to Conduct our Research and Development
and Product Development Activities If We Lose This Facility.      We manufacture
all of the products we sell and conduct all of our research and development and
product development activities in our existing facility in Denver, Colorado. If
our production facility becomes incapable of manufacturing products for any
reason, we would have no other means of manufacturing products incorporating our
coating technologies until we were able to restore the manufacturing capability
at our facility or develop an alternative manufacturing facility. Further, we
may be unable to meet production requirements, we may lose revenue and we may
not be able to maintain our relationships with our customers. If for any reason
our research and development and product development activities could not be
conducted at this facility, we would have no other location or means of
conducting our research and development and product development activities.
Although we carry business interruption insurance to cover lost revenue and
profits in an amount we consider adequate, this insurance does not cover all
possible situations. In addition, our business interruption insurance would not
compensate us for the loss of opportunity and potential adverse impact on
relations with our existing licensees resulting from our inability to produce
products for them or our failure to conduct our research and development and
product development activities.

Our
Results Of Operations Will Be Adversely Affected If We Fail To Realize The Full
Value Of Our Intangible Assets.       As of July 31, 2006, our total assets
included $3,712,286 of net intangible assets. Net intangible assets consist
principally of costs associated with securing patent rights, trademark rights
and technology licenses, net of accumulated amortization. These assets have
historically been amortized on a straight-line basis over their estimated useful
lives. Intangible assets to be held and used by the Company are reviewed for
impairment whenever events or circumstances indicate that the carrying amount of
the asset may not be recoverable. We continuously evaluate the recoverability of
these items based on estimated future cash flows from and estimated fair value
of such assets, and provide for impairment if such undiscounted cash flows are
insufficient to recover the carrying amount of the asset. Future impairment
testing may result in additional intangible asset write-offs, which could
adversely affect our financial condition and results of operations.

Our
business strategy approach may be adversely affected by potential healthcare
reform.       Our vision is to develop and commercialize an innovative, integrated
system for rapid identification of bacterial antibiotic resistance in critically
ill patients. Healthcare reform and the growth of managed care organizations
have been considerable forces in the diagnostics industry. These forces continue
to place constraints on the levels of overall pricing and thus could have a
material adverse effect on our future profit margins of our products. Such
continuing changes in the United States healthcare market could also force us to
alter our approach to selling, marketing, distributing and servicing our
customer base. In and outside the United States, changes to government
reimbursement policies could reduce the funding that healthcare service
providers have available for diagnostic product expenditures, which could have a
material adverse impact on our future sales and /or profit margin.

We
make significant investments in research and development, but there is no
guarantee that any of these investments will ultimately result in a commercial
product that will generate revenues.       The BACcelr8r will integrate many of
our component systems and processes. For the year ended July 31, 2006, we spent
$2,155,988 on research and development expenses. Notwithstanding these
investments, we anticipate that we will have to spend additional funds in the
research and development of the BACcel and BACcelr8r. There can be no assurance
that the BACcelr8r will be successful, or even if it is successful will be
accepted in the marketplace. Further, we might also encounter substantial delays
in getting products to market in a timely fashion.

19



---

Changes
in our business strategy or plans may adversely affect our operating results and
financial condition.      If our business strategy or plans change,
whether in response to changes in economic conditions or developments in the
diagnostics industry, or otherwise, we may be required to expend significantly
more resources than planned to develop the BACcelr8r or other new products. The
expense of such change could adversely affect our operating results and
financial condition.

Compliance
costs with recently enacted changes in the securities laws and regulations
pursuant to the Sarbanes-Oxley Act of 2002 will increase our costs.       The
Sarbanes-Oxley Act of 2002 that became law in July 2002 has required changes in
some of our corporate governance, securities disclosure, accounting and
compliance practices. In response to the requirements of that act, the
Securities and Exchange Commission and the American Stock Exchange have
promulgated new rules on a variety of subjects. Compliance with these new rules
as well as the Sarbanes-Oxley Act of 2002 has increased our legal, financial and
accounting costs, and we expect the cost of compliance with these new rules to
continue to increase and to be permanent. Further, the new rules may increase
the expenses associated with our director and officer liability insurance.

Our
stock price has been volatile and may continue to be volatile; Dividend
Policy.       The trading price of our common stock has been, and is likely to
continue to be, highly volatile, in large part attributable to developments and
circumstances related to factors identified in Forward-looking
Statements and Risk Factors. The market value of your
investment in our common stock may rise or fall sharply at any time because of
this volatility, and also because of significant short positions taken by
investors from time to time in our stock. During the fiscal year ended July 31,
2006, the closing sale price for our common stock ranged from $3.33 to $2.01 per
share. The market prices for securities of medical technology companies
historically have been highly volatile, and the market has experienced
significant price and volume fluctuations that are unrelated to the operating
performance of particular companies. We do not intend to pay any cash dividends
on our Common Stock in the foreseeable future.

Colorado
law and our Articles of Incorporation may protect our directors from certain
types of lawsuits.       Colorado law provides that our directors will not be
liable to us or our stockholders for monetary damages for all but certain types
of conduct as directors. Our Articles of Incorporation permit us to indemnify
our directors and officers against all damages incurred in connection with our
business to the fullest extent provided or allowed by law. The exculpation
provisions may have the effect of preventing stockholders from recovering
damages against our directors caused by their negligence, poor judgment or other
circumstances. The indemnification provisions may require us to use our limited
assets to defend our directors and officers against claims, including claims
arising out of their negligence, poor judgment, or other circumstances.

We
may require additional capital in the future and we cannot assure you that
capital will be available on reasonable terms, if at all, or on terms that would
not cause substantial dilution to your stock holdings.       We have historically
relied upon our cash assets to fund our operating losses and may continue to
incur operating losses until we are able to complete the development of the
BACcel and BACcelr8r and sell them into the marketplace. If capital requirements
vary materially from those currently planned, we may require additional capital
sooner than expected. There can be no assurance that such capital will be
available in sufficient amounts or on terms acceptable to us, if at all. Any
sale of a substantial number of additional shares will cause dilution to your
investment and could also cause the market price of our Common Stock to decline.

We
have the authority to issue up to 12,000,000, shares of Common Stock (of which,
as of October 17, 2006, 9,971,210 shares were outstanding) and to issue options
and warrants to purchase shares of our Common Stock. Issuances of additional
shares of our stock in the future could dilute existing shareholders and may
adversely affect the market price of our Common Stock.

20



---

Glossary

Antibody:
a specialized protein (immunoglobulin) produced by the immune response that
binds to a particular molecular surface that has previously been presented to
certain cells in the organisms blood. The end-product of the
humoral component of the immune response. Key component of
immunoassays detecting as the analyte-specific detection agent.

Antigen: the
material used to stimulate immune antibody production in an organism.

Assay,
Qualitative:  a chemical  test in which the result is  expressed  as the presence or
absence of an analyte.  Also referred to as "detection," as opposed to
measuring the amount of material.

Assay,
Quantitative: a test in which the result is expressed as the quantity of analyte
in a sample. Quantitative assays may be used to determine whether the amount of
analyte is above or below a cut-point that distinguishes an
acceptable level of the analyte, such as a food pathogen, from an unacceptable
level.

Culturing
(Bacterial):  the analytical process of growing bacteria from a patient specimen (blood,
sputum,  etc.)  to a quantity suitable for isolation and analysis.

DNA: the
nucleic acid  biomolecules  that carry an organism's  genetic code. The famous
"double  helix"  molecular  model of Watson and Crick.

Gene:
a sequence of DNA or RNA that produces a functional protein product when
translated by the normal biosynthetic route.

Genomics: the
study,  including sequencing,  of molecules that carry an organism's genetic code
(nucleic acids, DNA  and RNA).

Genotype:  the
DNA gene sequence makeup that distinguishes one type of organism from another.  Genotype
differences  may or may not directly correlate with phenotypes (see definition below).

Immunoassay:
any type of  biochemical  assay that uses  antigen-antibody  affinity as the assay basis
of selection  and detection.

Isolation
(Bacterial):  the  technique of growing  bacterial  cultures on selective  media in such
a way that only  particular species grow successfully, thereby isolating colonies of the
species for further analysis.

Microarray:
a regular geometric array (matrix or grid pattern) of individual reactive
chemical probes affixed to a physical substrate such as a microscope slide. Used
in assays to conduct thousands of analyses at one time on sample materials
presented to the microarray. The high-density evolution of the microtiter plate.

Microtiter
Plate: a multi-well  plate (typically 96 wells) of standard  dimensions in which
individual  reactions  occur  near-simultaneously  with  different  reagents.  Analyzed
visually or by automated  optical plate  readers.  Currently the most widely-used
standard laboratory assay format.

Nucleic
Acid: DNA (deoxyribo-nucleic acid) or RNA (ribo-nucleic acid). Polymeric chains
of nucleotides whose particular sequence constitutes an organisms genetic
code (DNA and genomic RNA) or that participate in the biosynthesis of new
protein molecules (other types of RNA such as messenger RNA, transfer RNA, and
ribosomal RNA).

Pathogen:
an infectious organism (bacteria, viruses, molds and fungi, prions) that when
invading a host causes a disease. Pathogens may be transmitted through food,
water, air, and/or contact with infected individuals or their biological fluids.

Phenotype:  for
microorganisms,  the functional responses or observable  characteristics that
differentiate one set  of  organisms  from another  within the same  species.  The basis
for strain  differentiation  based on  observable  behavior or properties other than
those expressed in the genotype.

21



---

Protein:
biological  polymeric  macromolecules  formed by long chains of amino acids  (twenty in
humans) and which  provide the mechanism for cellular physiology and metabolism. All life
functions are carried out  through the mediation of proteins (typically enzymes).

Sensitivity:
the  smallest  quantity  of  analyte  that the  assay  can  detect.  Same as  "Limit
Of  Detection."  Statistically, the proportion of false negatives reported for a
population sample.

Strain
(Bacterial): variants or phenotypes of a bacterial species that exhibit
significant characteristics that allow discrimination of one strain from
another. In clinical application usually distinguished on the basis of disease
severity, toxic products, antibiotic resistance, and other medically relevant
properties.

Superinfection:
a second infection that occurs after treatment has begun for a diagnosed
infection.

Surface
Chemistry:  the  chemistry  of  materials  that  provide a barrier or contact  surface.
In the context of  biochemical assays, the chemistry of all exposed surface area that may
come into contact with assay reagents.

Ventilator
Associated  Pneumonia  (VAP): a version of  hospital-acquired  pneumonia whose symptoms
first appear at  least 48 hours after starting mechanical ventilation.

Item 2.      
Description of Property.

We
lease approximately 6,400 square feet of office and laboratory space at 7000
North Broadway, Building 3-307, Denver, Colorado 80221. The monthly rent and
utilities average $5200 per month.

Item 3.
      Legal Proceedings

Not
Applicable.

Item  4.
      Submission of Matters to a Vote of Security Holders

No
matters were submitted by the Company to a vote of our security holders through
the solicitation of proxies or otherwise, during the fourth quarter of the
fiscal year covered by this Annual Report.

PART II

Item 5.
Market For Common Equity and Related Stockholder Matters

From
November 21, 2000 to October 8, 2003, the Companys common stock traded on
the NASDAQ Electronic Bulletin Board. On October 9, 2003, the Companys
common stock began trading on the American Stock Exchange under the trading
symbol AXK.

The
table set forth below presents the range, of the high and the low sales price
per share of Common Stock for the past two years on a quarterly basis.

22



---

|Quarter Ended    | High | Low    
|---------------- | ---- | -------
|
|
|Fiscal 2006      |      |        
|October 31, 2005 |      | $     3
|January 31, 2006 |      | $     3
|April 30, 2006   |      | $     3
|July 31, 2006    |      | $     3
|                 |      |        
|Fiscal 2005      |      |        
|October 31, 2004 |      | $     3
|January 31, 2005 |      | $     3
|April 30, 2005   |      | $     2
|July 31, 2005    |      | $     2
|                 |      |        

The
closing price for our Common Stock on October 27, 2006 was $2.36. On October 15,
2006, the Company had approximately 338 shareholders of record, which does not
include shareholders whose shares are held in street or nominee names. The
Company believes that there are approximately 1,652 beneficial owners of its
Common Stock.

Holders
of Common Stock are entitled to receive dividends as may be declared by the
Board of Directors out of funds legally available therefore. To date, no
dividends have been declared by the Board of Directors, nor does the Board of
Directors anticipate declaring and paying cash dividends in the foreseeable
future.

Item 6.      Management's
Discussion and Analysis of Financial Condition and Results of Operations

Overview

On
January 18, 2001, Accelr8 purchased the OpTest technology assets from DDx and
commenced investment in development and optimization of OpTests surface
chemistry (OptiChem) and quantitative instrument (QuanDx). Our proprietary
surface chemistry and its quantitative instruments support rapid assessment of
medical diagnostics, food-borne pathogens, water-borne pathogens and bio-warfare
assessments. The Company sells advanced microarray slides coated with its
proprietary OptiChem activated surface chemistry for use in academic research,
drug discovery and molecular diagnostics. This surface coating has the ability
to shed sticky biomolecules that interfere with bio-analytical assays such as
microarrays and immunoassays. This property substantially improves analytical
performance by enabling higher sensitivity, greater reproducibility, and higher
throughput by virtue of simplified application methods.

On
November 24, 2004, the Company entered into a worldwide exclusive manufacturing
and marketing license agreement (the License Agreement) with SCHOTT
Jenaer Glas GmbH (SCHOTT).

Pursuant
to the License Agreement SCHOTT paid the Company a non-refundable fee of
$100,000, of which $50,000 was credited against future royalties. An additional
$15,000 in revenue was paid for training supplied to SCHOTT. During the 2-year
term of the License Agreement SCHOTT agreed to pay Accelr8 a royalty payment
equal to 6% of net sales of products licensed under the License Agreement. If
the total net sales during the initial 2-year term equal or exceed, $1,125,000,
then the total royalty payable by SCHOTT for the initial term shall be a flat
fee of $90,000.An optional 1-year extension has been exercised by SCHOTT
for non-exclusive manufacturing through November 2007.

23



---

On
June 2, 2005, we entered into a second supply agreement (the Second Supply
Agreement) with SCHOTT Jenaer Glas GmbH (SCHOTT). Pursuant to  the
Second Supply Agreement, we supplied 5,000 OptArray Streptavidin coated  microarrying
slides (Slide HS) to SCHOTT on a non-exclusive basis at  a price of $20.82
each for the first 1,000 slides and $17.15 for the remaining  slides purchased under the
Second Supply Agreement. The Second Supply Agreement  with SCHOTT expired on December 31,
2005. We also granted an option to SCHOTT  for a non-exclusive right to manufacture and
sell, up to 12,500 glass  slides, from January 1, 2006 to December 31, 2006. In return
for this right,  SCHOTT agreed to provide 7,500 glass substrates to Accelr8 at no charge.
The  value of the slides is $12,750 and has been recorded as option revenue. On
September 27, 2005, SCHOTT exercised the worldwide non-exclusive right to make, use,
sell, offer to  sell, import and export 12,500 Slide HS from January 1, 2006 to December
31,  2006. In connection with the exercise of this right, SCHOTT paid the Company
$15,000 for training on manufacturing of Slide HS and the Company will receive  an 8%
royalty of SCHOTTs (or its affiliates) net sales of Slide HS. On  September 27,
2005, SCHOTT provided notice that it intended to exercise its  right to negotiate an
exclusive license for the application of the  Companys OptiChem streptavidin coated
microarrying slides. No agreement  was reached during fiscal year 2006. However, SCHOTT
did elect to exercise its  right to non-exclusive production through December 31, 2006.

For
a complete description of the research and development we intend to perform
during fiscal 2007, see Item 1. Description of Business. We also
intend to begin BACcel-1.0 product design and development for in fiscal 2007. In
addition, we expect to conduct further custom OptiChem coating development in
projects funded by industrial customers.

Selected
Financial Data

The
following selected financial data should be read in conjunction with the
financial statements and related notes thereto appearing elsewhere in this Form
10-KSB. The selected financial data as of July 31, 2006 and 2005 and for each of
the two years in the period ended July 31, 2006 have been derived from our
financial statements which have been audited by our independent auditors and
included elsewhere in this Form 10-KSB. The selected financial data provided
below is not necessarily indicative of our future results of operations or
financial performance.

24



---

|                                     | Year Ended July 31, |              
|------------------------------------ | ------------------- | -------------
|
|
|Total Revenue                        |                     | 213          
|                                     |                     |              
|                                     |                     |              
|Loss from operations                 |                     | (3,031       
|                                     |                     |              
|                                     |                     |              
|Weighted average shares outstanding  |                     | 9,967,034    
|                                     |                     |              
|                                     |                     |              
|Basic and diluted net loss per share |                     | $       (0.30
|                                     |                     |              

|Balance Sheet Data:  | 2006 | 2005  
|-------------------- | ---- | ------
|
|
|Working capital      |      | $2,922
|Current assets       |      | 3,084 
|Current liabilities  |      | 162   
|Total assets         |      | 7,848 
|Total liabilities    |      | 1,109 
|Shareholders equity |      | 6,739 
|                     |      |       
|                     |      |       

Results of
Operations

The
following table sets forth, for the periods indicated, the percentage of
net sales represented by certain items included in the Companys Statements
of Operations:

|Fiscal year ended July 31,     | 2006 | 2005 
|------------------------------ | ---- | -----
|Total revenues from operations |      | 100  
|Research and development       |      | (1014
|General and administrative     |      | (390 
|Amortization                   |      | (111 
|Cost of sales                  |      | (20  
|Marketing and sales            |      | (35  
|Depreciation                   |      | (37  
|                               |      |      
|                               |      |      
|Net loss                       |      | (1425
|                               |      |      

Changes in
Results of Operations: Year ended July 31, 2006 compared to year ended July 31, 2005

OptiChem
slide revenues for the year ended July 31, 2006 were $155,701 as compared to
$336,610 for the year ended July 31, 2005, resulting in a decrease of$180,909, or 53.7%. The decrease in OptiChem revenues was primarily due to a
decrease in sales of slide H to SCHOTT.

Consulting
fees and training for the year ended July 31, 2006 were $57,000. These fees were  the
result of $30,000 in training to SCHOTT and $27,000 in consulting fees for OptiChem
custom development. During the year ended July 31, 2005, consulting fees were  $90,000,
the result of License and Option fees that were not present during the  year ended July
31, 2006.

25



---

Research
and development expenses for the year ended July 31, 2006, were $2,155,988 as
compared to $1,304,888 during the year ended July 31, 2005, an increase of
$851,101 or 65.2%. The major increase was due to an increase in BACcelr8r
consulting fees paid to an outside engineering firm. The consulting fees were
$1,143,550 during the year ended July 31, 2006 as compared to $533,541during the
year ended July 31, 2005, an increase of $610,009 or 114.3% Another increase was
due to laboratory supplies related to the BACcelr8r. The laboratory expense and
supplies were $355,975 for the year ended July 31, 2006 as compared to $153,662
for the year ended July 31, 2005, an increase of $202,313 or 131.7%.

General
and administrative expenses for the year ended July 31, 2006 were$828,745 as compared to $933,183 during the year ended July 31, 2005, a
decrease of$104,438 or 11.2%. The following summarizes the major
components of the changes:

|                          | 2006 | 2005      | Increase(Decrease)
|------------------------- | ---- | --------- | ------------------
|Audit and Accounting      |      | $  37,170 |                   
|Consulting Fees           |      | 40,150    |                   
|Corporate and Shareholder |      | 51,023    |                   
|Corporate Insurance       |      | 43,161    |                   
|Deferred Compensation     |      | 86,169    |                   
|Employee Benefits         |      | 103,821   |                   
|Payroll Taxes             |      | 70,334    |                   
|Salaries                  |      | 319,227   |                   
|Travel                    |      | 13,105    |                   
|Legal                     |      | 30,078    |                   
|Miscellaneous Other       |      | 34,507    |                   
|                          |      |           |                   
|                          |      | $828,745  |                   
|                          |      |          
|                          |      |           |                   

The
decrease in audit and accounting was due to a change in auditors. The decrease
in consulting fees of $59,170 was due to a decrease in fees paid to several
consultants. Corporate and shareholder expenses were reduced by $23,135 because:
(i) a nine month investor relations contract was fulfilled early in the fiscal
year, and (ii) a public relations contract was converted to a per use basis. The
decrease in Corporate Insurance was the result of a renewal of D&O insurance
at a reducedrate through more competitive bidding. The change in
deferred compensation was due to a market loss on related investments. Employee
benefits were reduced by $11,227 during fiscal year ended July 31, 2006, because
of a fewer full time employees. Payroll taxes and salaries expense increased due
to several employee compensation increases. Legal fees decreased by $7,008
because $70,000 in legal fees were related to patentapplications andfilings relating to the BACcelr8r and were capitalized.

The
increase in amortization for the year ended July, 31 2006 was negligible.

Cost
of goods sold for the year ended July 31, 2006 were $41,604 compared to $155,508
during the year ended July 31, 2005, a decrease of $113,904 or 73.2%. This
decrease was due to a decrease in sales. The cost of goods sold as a percentage
of OptiChem revenues was19.6% for the year ended July 31, 2006 as
compared to46.2% for the year ended July 31, 2005. This decrease is due
to greater efficiency in production and decreased cost of materials.

Marketing
and sales expenses were $74,909 for the year ended July 31, 2006 as compared to
$61,795 during the year ended July 31, 2005, an increase of $13,114 or 21.2%.
The increase was due to a contract with a vendor to write an Executive
Informational Overview (EIO) for Accelr8 Technology Corp.

26



---

Depreciation
for the year ended July 31, 2005 was $79,295 as compared to $70,075 during the
year ended July 31, 2005 an increase of $9,220 or 13.2%. The increased
depreciation was primarily the result of additional laboratory equipment being
placed into service and depreciated.

As
a result of these factors, loss from operations for the year ended July 31, 2006
was$3,204,523 as compared to a loss of $2,258,947 for the year ended
July 31, 2005, an increased loss of$945,576 or 41.9%.

Interest
and dividend income for the year ended July 31, 2006 was $181,243 as compared to
$153,312 for the year ended July 31, 2005, an increase of $27,931 or 18.2%. The
increase was due to an increased in interest earned on our cash balance because
of increases in interest rates throughout the fiscal year.

Unrealized
loss on marketable securities held in the deferred compensation trust for the
year ended July 31, 2006 was $15,671 as compared to an unrealized gain of
$13,064 during the year ended July 31, 2005. The unrealized loss was a result of
market fluctuations.

Miscellaneous
Other Expenses were $34,507 for the year ended July 31, 2006 as compared to
$43,816 for the year ended July 31, 2005. A decrease of $9,309 or 21.2% was due
to a decrease in office supplies expense and printing costs.

As
a result of these factors, net loss for the year ended July 31, 2006 was
$3,030,621 as compared to $2,090,800 during the year ended July 31, 2005, an
increased loss of $939,821 or 45%.

Capital
Resources and Liquidity

As
of July 31, 2006, the Company had $3,004,336 in cash and cash equivalents, a
decrease of $2,559,923 from $5,564,259 at July 31, 2005. The primary reasons for
change in cash and cash equivalents were cash used for operating activities of
$2,737,796 offset by $177,873 net cash provided in investing activities.

During
the fiscal year ended July 31, 2006, the Companys current assets decreased
to $3,084,175 from $6,130,614 and the Companys liquidity during the same
period, as measured by cash and cash equivalents, decreased by 54.0% from
$5,564,259 to $3,004,336. The Companys working capital decreased by 30.2%
from $5,633,524 to $2,921,687 and shareholders equity decreased 30.9% from
$9,668,340 to $6,678,785 as a result of an increased in accumulated deficit of
$3,031,385.

For
the year ended July 31, 2006, we spent $2,155,988 on research and development  expenses.
As of the date of this annual report, we have only realized nominal  revenues from the
sale of our products. Notwithstanding our investments in  research and development, there
can be no assurance that the BACcelr8r or any of  our other products will be successful,
or even if they are successful, will  provide sufficient revenues to continue our current
operations. If we are unable  to realize any revenues from our products, we will require
additional funds from  other sources to continue operations. As of July 31, 2006,
management believes that current cash  balances will be sufficient to fund our capital
and liquidity needs for the next  twenty four months. If the company continues to expend
its capital resources at  the current rate in the research and development of the
BACcelr8r, it may have  to seek capital resources from other sources to meet its
obligations in the  future.

27



---

Capital
Commitments

As
of July 31, 2006, the Company had one outstanding lease commitment in the amount  of
$64,344 through September 30, 2007 and an employment agreement with our  Chairman and
Chief Executive Officer which calls for the aggregate payments of  approximately $340,000
over the next 18 months. See Note 12 to financial  statements Operating Leases and
Employment Agreement.

Recent
Accounting Pronouncements

In
December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based
Payment (SFAS 123R), which replaces SFAS 123 and supercedes APB Opinion
No. 25. SFAS 123R requires all share-based payments to employees, including
grants of employee stock options, to be recognized in the financial statements
based on their fair values. The proforma disclosures previously permitted under
SFAS 123 no longer will be an alternative to financial statement recognition.
For the Company, SFAS 123R is effective for periods beginning after December 15,
2005. Early application of SFAS 123R was encouraged, but not required. We
adopted SFAS 123R on February 1, 2006 using the modified prospective application
method described in the statement. Under the modified prospective application
method, we will apply the standard to new awards, and to awards modified,
repurchased, or cancelled after the required effective date. Additionally,
compensation cost for the unvested portion of awards outstanding as of the
required effected date will be recognized as compensation expense as the
requisite service is rendered after the required effective date.

The
Company has elected to use the modified prospective transition method for
adopting SFAS No. 123R, which requires the recognition of stock-based
compensation cost on a prospective basis; therefore, prior period financial
statements have not been restated. Under this method, the provisions of SFAS No.
123R are applied to all awards granted after the adoption date and to awards not
yet vested with unrecognized expense at the adoption date based on the estimated
fair value at grant date as determined under the original provisions of SFAS No.
123. The impact of forfeitures that may occur prior to vesting is also estimated
and considered in the amount recognized. Pursuant to the requirements of SFAS
No. 123R, the Company will continue to present the pro forma information for
periods prior to the adoption date.

The
Company has historically used the Black-Scholes option pricing model to
determine the fair value of stock options on the date of grant. This model
derives the fair value of stock options based on certain assumptions related to
expected stock price volatility, expected option life, risk-free interest rate
and dividend yield. The Companys expected volatility is based on the
historical volatility of the Companys stock price over the most recent
period commensurate with the expected term of the stock option award. The
estimated expected option life is based primarily on historical employee
exercise patterns. The Company has not paid dividends in the past and does not
have any plans to pay any dividends in the future.

As
of July 31, 2006, total unrecognized share-based compensation cost related to
unvested stock options was approximately $25,896. For the year ended July 31,
2006, the Company recognized $18,765 in stock based compensation costs related
to the issuance of options to employees under SFAS 123R. For the year ended July
31, 2006, the total recognized stock based compensation costs related to the
extension of currently existing, fully vested options was $67,836. This cost was
calculated in accordance with SFAS No. 123R and is reflected in operating
expenses.

In
August 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections. SFAS 154 changes the requirements for the accounting for and
reporting of a change in accounting principle, requiring, in general,
retrospective application to prior periods financial statements of changes
in accounting principle. The Company has adopted the provisions of SFAS No. 154
which are effective for accounting changes and corrections of errors beginning
after December 15, 2005. The adoption did not have a material effect on the
results of operations of the Company.

In
February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid
Financial  Instruments - an Amendment to FASB Statement Nos. 133 and 140 (SFAS
155). This issuance is  effective for fiscal year ends beginning after September 16,
2006. The Company does not expect the  issuance to effect current reporting.

In
March 2006,  the FASB issued SFAS No. 156, Accounting for Servicing of Financial
Assets - and  Amendment to FASB Stmt No. 140 (SFAS 156). This issuance is effective
for fiscal  year ends  beginning after September 16, 2006. The Company does not expect
the  issuance  to effect current reporting.

In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS
157). The  changes to current practice resulting from the application of this Statement
relate to the  definition of fair value, the methods used to measure fair value, and the
expanded disclosures  about fair value measurements. This issuance is effective for
fiscal year ends beginning after  November 15, 2007. The Company does not expect the
issuance to effect current reporting.

28



---

Application of
Critical Accounting Policies

Use of
Estimates

The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

Revenue
Recognition

We
generate revenue as follows:

| | Consulting
revenue is recognized as services are performed.
| | -----------------------------------------------------------

| | OptiChem
revenue is recognized upon shipping of the product to the customer.
| | ----------------------------------------------------------------------------

| | Deferred
revenue  represents amounts billed but not yet earned under consulting agreements.
| | -------------------------------------------------------------------------------------------

Deferred
Taxes

We
recognize deferred tax assets and liabilities based on the differences between
the financial statement carrying amounts and the tax bases of assets and
liabilities. We regularly review our deferred tax assets for recoverability and
establish a valuation allowance based on historical taxable income, projected
future taxable income, and the expected timing of the reversals of existing
temporary differences. As of July 31, 2006 and July 31, 2005, we have
established a valuation allowance equal to our net deferred tax asset, as we
have not been able to determine that we will generate sufficient future taxable
income to allow us to realize the deferred tax asset.

Intangible
Assets

We amortize
our intangible assets over the period the asset is expected to contribute
directly or indirectly to our future cash flows. We evaluate the remaining
useful life of each intangible asset that is being amortized each reporting
period to determine whether events and circumstances warrant a revision to the
remaining period of amortization.

We
review our intangible assets for impairment each reporting period as discussed
below under Impairment of long-lived and intangible assets. An
impairment loss will be recognized if the carrying amount of an intangible asset
is not recoverable and its carrying amount exceeds its fair value.

Impairment
of Long-Lived and Intangible Assets

We assess
the impairment of identifiable intangibles and long-lived assets whenever events
or changes in circumstances indicate that the carrying value may not be
recoverable. Factors we consider important which could trigger an impairment
review include the following:

| | significant
underperformance  relative to  expected  historical  or  projected  future  operating
results;
| | ----------------------------------------------------------------------------------------------------------

29



---

| | significant
changes  in the  manner of our use of the  acquired  assets or the  strategy  for our
overall business;
| | -------------------------------------------------------------------------------------------------------------------

| | significant
negative industry or economic trends;
| | -------------------------------------------------

| | significant
decline in our stock price for a sustained period; and
| | ------------------------------------------------------------------

| | our
market capitalization relative to net book value.
| | -----------------------------------------------------

When
we determine that the carrying value of intangibles and long-lived assets may
not be recoverable based upon the existence of one or more of the above
indicators of impairment, we measure any impairment based on a projected
discounted cash flow method using a discount rate determined by our management
to be commensurate with the risk inherent in our current business model. Our
judgments regarding the existence of impairment indicators are also based on
legal factors, market conditions and expected future operational performance of
related product lines of the identifiable intangible. Future events could cause
us to conclude that impairment indicators exist and that our identifiable assets
are impaired. Management believes that the amounts carried on our balance sheet
are recoverable, and that our intangible assets are not impaired at this time.
Managements belief is based upon an independent valuation of our
intangibles that was obtained from a third party valuation firm and
managements assessment of the fair value of our intangibles. Our
intangibles constitute a significant portion of our assets, and as a result, any
resulting impairment loss could have a material adverse impact on our financial
condition and results of operations in the future. We also evaluate the
remaining estimated useful lives of each asset each reporting period and
determine whether events or circumstances require revised useful lives.

Research and
Development

Research
and development expenses are expensed as incurred. Research and development
expenses include salaries and related expenses associated with the development
of our technology and include compensation paid to engineering personnel and
fees to consultants.

Contractual
Obligations

The following
table sets forth information with respect to our contractual obligations and
commercial commitments as of July 31, 2006.

Contractual
Obligations(3)

Payments Due By
Period

|                       | Total | 1 to 3 years | 4 to 5 years | More than5 years
|---------------------- | ----- | ------------ | ------------ | ----------------
|Office and Laboratory  |       | $  64,344    |              | $  64,344       
|Lease Payments(1)      |       |              |              |                 
|Thomas V. Geimer       |       | $340,000     |              | $340,000        
|Employment Contract(2) |       |              |              |                 

|(1) |  | Includes
monthly deposits for taxes and assessments,  landlord's  liability  insurance and common
facilities  charges.  We have a three-year  lease  agreement that began on October 1,
2004 for our office and laboratory  located at 7000 North Broadway, Building 3-307,
Denver, Colorado 80221.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Calculated
as of July 31, 2006.  Mr.  Geimers  employment  agreement  expires on December  31,
2007.  See  Item 10Executive Compensation.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Excludes
accounts payable and accrued liabilities.
|--- |  | --------------------------------------------------

30



---

Item 7.     
Financial Statements

The
response to this item is submitted as a separate section of this report beginning on page
F-1.

Item 8.      Changes
in and Disagreements With Accountants on Accounting and Financial Disclosure

Not
Applicable.

Item 8A.     
Controls and Procedures

An
evaluation  was  conducted  under  the  supervision  and  with  the  participation  of
the  Companys  management,  including Thomas V. Geimer,  the Companys Chief
Executive Officer (CEO) and Chief Financial Officer  (CFO),  of
the effectiveness of the design and operation of the Companys  disclosure  controls
and procedures as  of July 31, 2006.  Based on that  evaluation,  Mr.  Geimer  concluded
that the Companys  disclosure  controls and  procedures were effective as of such
date to ensure that  information  required to be disclosed in the reports that  it files
or submits  under the  Exchange  Act, is recorded,  processed,  summarized  and  reported
within the time  periods  specified in SEC rules and forms.  Such  officers  also confirm
that there was no change in the  Companys  internal control over financial
reporting during the year ended July 31, 2006.

Item 8B.      Other
Information.

Not
Applicable.

PART III

Item 9.     
Directors, Executive Officers, Promoters and Control Persons; Compliance With Section
16(a) of the Exchange Act

Set forth below
is certain  information  concerning  the directors,  executive  officers and key
employees  and consultants of the Company as of the date hereof.

|Directors, Executive Officers, and Key Employees and Key Consultants |  |   
|-------------------------------------------------------------------- |  | --
|Thomas V. Geimer                                                     |  | 59
|                                                                     |  |   
|David C. Howson                                                      |  | 63
|Charles E. Gerretson (1)                                             |  | 60
|A. Alexander Arnold III (1)                                          |  | 65
|Michael J. Lochhead, Ph.D                                            |  | 41
|Jeffrey D. Shafer, Ph.D                                              |  | 43
|Steven W. Metzger                                                    |  | 32
|David W. Grainger, Ph.D                                              |  | 45
|David Goldberg, Ph.D                                                 |  | 51
|Marin Kollef, MD                                                     |  | 48

__________

|(1) |  | Members
of the Audit and Compensation Committees
|--- |  | ------------------------------------------------

Officers are
appointed by and serve at the discretion of the Board of Directors. Each
director holds office until the next annual meeting of shareholders or until a
successor has been duly elected and qualified. All of our officers devote their
full-time to our business and affairs. There are no family relationships between
any directors, executive officers or key employees or consultants.

31



---

Thomas
V. Geimer has been the Chairman of the Board of Directors and a director of
Accelr8 since 1987. He currently serves as the Chief Executive Officer, Chief
Financial Officer and Secretary of the Company. Mr. Geimer is responsible for
development of our business strategy, day-to-day operations, accounting and
finance functions. Before assuming full-time responsibilities at the Company,
Mr. Geimer founded and operated an investment banking firm.

David
Howson became the President of the Company in April 2004. Previously Mr. Howson
was a consultant to the Company and had acted as the Director for Business
Development since January 2001. Mr. Howson is responsible for coordinating
business plan development and execution. Before assuming responsibilities at the
Company, Mr. Howson founded and operated the Altro Group, LLC, a medical
technology consulting firm. His clients at Altro included medical industry
leaders such as Pfizer, Boston Scientific, and Becton Dickinson. Mr. Howson had
previously founded and managed three companies for advanced medical devices.
From 1966 through 1970, Mr. Howson was enrolled in the Neurobiology Doctoral
Program at Cornell University and received a Bachelor of Science degree from
Hobart College in 1966.

A.
Alexander  Arnold III has served as a director of the Company since  September  1992.
For the past 25  years Mr.  Arnold has  served as a  Managing  Director  of  Trainer,
Wortham & Co.,  Inc.,  a New York  City-based  investment  counseling  firm.  Mr.  Arnold
received a Bachelor of Arts degree from  Rollins  College in 1964 and a  Masters of
Business Administration from Boston University in 1966.

Charles
E.  Gerretson  was  appointed a director of the Company on July 19,  2003.  For the past
28 years,  Mr.  Gerretson has served as the President of Gerretson  Realty,  Inc., a
Denver  Colorado  based real estate firm,  which Mr. Gerretson founded.  Mr. Gerretson
received a Bachelor of Science degree in Business  Administration  from  the  University
of  Minnesota  in 1968.  Mr.  Gerretson  was  formerly a CPA with Arthur  Andersen and
Company and  currently heads the Companys Audit Committee.

Employees
and Consultants

Michael
J.  Lochhead,  Ph.D. has been a Senior  Scientist  with Accelr8 since April 2001. Dr.
Lochhead is  responsible for product design and  development.  From 1998 through 2001,
Dr.  Lochhead was an Assistant  Professor  of Chemical  Engineering at the University of
New Hampshire.  Dr. Lochhead  received a Bachelor of Arts and Science  degree from the
University of Notre Dame and a Ph.D. in Chemical  Engineering  from the University of
Wisconsin in  1995. He is a surface chemist responsible for coating formulations and
scalable manufacturing processes.

Steven
W. Metzger has been a research  scientist  with the Company  since April 2001,  and is
now a Senior  Scientist.  From  2000  through  2001,  Mr.  Metzger  was  responsible  for
the  implementation  of  merging  core  technologies at Heska  Corporation.  He was
previously  employed by  Geo-Centers,  Inc. under contract at the Naval  Research
Laboratory in Washington,  D.C. where he focused on bio-warfare  pathogen detection.  Mr.
Metzger received  a Bachelor of Arts degree in Chemistry from Colorado College in 1996.

Jeffrey
D. Shafer Ph.D. has been a Senior Research Bio-Informatics Scientist since
September 9, 2006. Dr Shafer was previously employed as a Senior Performance
Analyst at Sun Microsystems from 2003-2006. At Sun Microsystems he developed and
implemented application software to facilitate the collection, display and
statistical analysis of storage array performance data, including configuration
and sizing. Dr Shafer received a Bachelor of Arts and Science degree from the
University of Colorado and a Ph.D in Theoretical Particle Physics from the
University of Colorado in 1998.

32



---

David
W.  Grainger,  Ph.D.  has been a consultant  to the Company  since  January  2001.  Since
1994,  Dr.  Grainger has taught as a Professor and Assistant  Professor of Chemistry at
Colorado  State  University.  From 1998  through 1999,  Dr.  Grainger was the  President
and Chief  Scientific  Officer for Gamma-A  Technologies,  Inc. Dr.  Grainger  received
a  Bachelor  of Arts  degree in  Engineering  from  Dartmouth  College  in 1983 and a
Ph.D.  in  Pharmaceutical  Chemistry  from the  University  of Utah in 1987.  Dr.
Grainger  chaired  the  prestigious  Gordon  Conference  on  Tissue  Engineering  and
Biomaterials  in 2001.  He has been a  consultant  to  companies  such as  Novartis,
Johnson & Johnson, 3M, Ciba-Geigy, and others.

David
Goldberg,  Ph.D. has been a consultant to the Company since October 2002. Dr. Goldberg
received his  Doctorate in Biology from the California  Institute of Technology.  He did
postdoctoral  studies at Harvard and at  the Molecular  Biology  Laboratory of the MRC,
Cambridge.  Dr. Goldberg has  wide-ranging  expertise in analytical  systems and
engineering as well as molecular  biology.  He is the inventor of the Companys
proprietary  molecular  capture  methodology  and has been an officer / founder of
various startup  technology  companies that have focused  on areas that apply to our
business, i.e. vapor deposition sputtering and tunable thin film filter technologies.

Marin
Kollef,  M.D.,  FACP,  FCCP has been a consultant to the Company since October of 2004.
For the past  five  years  Dr.  Kollef  has been self  employed  as a  consultant  to
Barnes-Jewish  Hospital.  Dr.  Kollef is a  Professor  of Medicine at the  Washington
University  School of  Medicine  in St.  Louis,  Director of the Medical  Intensive  Care
Unit,  and  Director of  Respiratory  Care  Services at  Barnes-Jewish  Hospital.  Dr.
Kollef is a  graduate of the United States  Military  Academy at West Point (1979) and
received his degree as Doctor of Medicine  at the  University  of Rochester  School of
Medicine and  Dentistry  (1983).  Dr. Kollef has advised the Company on  clinical
applications and the major issues involved in managing infectious diseases in critically
ill patients.

Scientific
Advisory Board

The
Company  established  a Scientific  Advisory  Board in 2003.  Dr.  David  Grainger is
Chairman and Dr.  David Goldberg is a member.

Involvement
in Certain Legal Proceedings

During
the past five years, none of our directors, executive officers or persons that
may be deemed promoters is or has been involved in any legal proceeding
concerning (i) any bankruptcy petition filed by or against any business of which
such person was a general partner or executive officer either at the time of the
bankruptcy or within two years prior to that time; (ii) any conviction in a
criminal proceeding or being subject to a pending criminal proceeding (excluding
traffic violations and other minor offenses); (iii) been subject to any order,
judgment or decree, not subsequently reversed, suspended or vacated, of any
court of competent jurisdiction permanently or temporarily enjoining, barring,
suspending or otherwise limiting involvement in any type of business, securities
or banking activity; or (iv) been found by a court, the SEC or the Commodity
Futures Trading Commission to have violated a federal or state securities or
commodities law (and the judgment has not been reversed, suspended or vacated).

Board
Committees

The
Board of Directors  maintains a  Compensation  Committee and an Audit  Committee.  The
members of the  Compensation  Committee  and the Audit  Committee  are Mr.  Arnold and
Mr.  Gerretson,  the  Companys  independent  directors.  The  Compensation
Committee did not meet during the last fiscal year.  The Audit  Committee  held five
meetings during the last fiscal year.  The Audit Committees financial expert is
Charles E. Gerretson.

33



---

Audit
Committee  Report

The
Audit Committee has reviewed and discussed with management the Companys
audited financial statements for the year ended July 31, 2006.

The
Audit Committee has also discussed with Comiskey & Company, P.C. the matters
required to be discussed by Statement on Auditing Standards No. 61,
Communication with Audit Committees, as amended, by the Auditing Standards Board
of the American Institute of Certified Public Accountants.

The
Audit  Committee  has received and reviewed  the written  disclosures  and the letter
from  Comiskey & Company,  P.C.  required by  Independence  Standards  Board  Standard
No. 1,  Independence  Discussions  with Audit  Committees, as amended, and has discussed
with Comiskey & Company, P.C. their independence.

Based
on the reviews and discussions referred to above, the Audit Committee has
recommended to the Board of Directors that the audited financial statements
referred to above be included in the Companys Annual Report on Form 10-KSB
for the year ended July 31, 2006 filed with the Securities and Exchange
Commission.

Audit
Committee of The Board of Directors

| | A.
Alexander Arnold III     Charles E. Gerretson
| | ------------------------------------------------

Compliance
With Section 16(a) of The Exchange Act

Section
16(a) of the Exchange Act, generally requires the Companys directors and
executive officers and persons who own more than 10% of a registered class of
the Companys equity securities (10% owners) to file with the
SEC initial reports of ownership and reports of changes in ownership of Common
Stock and other equity securities of the Company. Directors and executive
officers and 10% owners are required by Securities and Exchange Commission
regulation to furnish the Company with copies of all Section 16(a) forms they
file. To the Companys knowledge, based solely on review of copies of such
reports furnished to us and verbal representations that no other reports were
required to be filed during the fiscal year ended July 31, 2006, all Section
16(a) filing requirements applicable to its directors, executive officers and
10% owners were met.

Code of Ethics

The Company has adopted a code of ethics for its
principal executive officer and senior financial officers and a code of ethics
and standards of conduct, that is applicable to all directors, officers and
employees. Stockholders may request a free copy of these documents from:

| | Accelr8
Technology Corporation     7000 North Broadway, Building 3-307     Denver, Colorado 80221
| | -------------------------------------------------------------------------------------------------

Item 10.
Executive Compensation

Summary
Compensation Table. The following table sets forth the annual and long-term
compensation for services in all capacities to the Company in the three fiscal
years ended July 31, 2006, 2005, and 2004, of Thomas V. Geimer and David C.
Howson, the Companys most highly compensated executive officers.

34



---

|                  | Annual Compensation | Long Term Compensation |  |          |    
|----------------- | ------------------- | ---------------------- |  | -------- | ---
|
|Thomas V. Geimer  |                     | 2006                   |  | $165,000 |    
|Chief Executive   |                     | 2005                   |  | $165,000 |    
|Officer and Chief |                     | 2004                   |  | $165,000 |    
|Financial Officer |                     |                        |  |          |    
|                  |                     |                        |  |          |    
|                  |                     |                        |  |          |    
|David C. Howson   |                     | 2006                   |  | $120,000 |    
|President         |                     | 2005                   |  | $120,000 |    
|                  |                     | 2004                   |  | $102,039 | (2)
|                  |                     |                        |  |          |    

|(1) |  | Represents deferred compensation for Mr. Geimer pursuant to the Companys
deferred compensation plan, $75,000 of which vested during each of the fiscal
years ended July 31, 2006, 2005 and 2004.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Includes $66,500 paid to Mr. Howson as a consultant from August 1, 2003 to
March, 2004.
|--- |  | ---------------------------------------------------------------------------------------

|(3) |  | Options
at $2.57, of which 225,000 are vested and 75,000 are unvested.
|--- |  | ----------------------------------------------------------------------

Option/SAR
Grants in Last Fiscal Year

There
were no options granted during the fiscal year ended July 31, 2006 to either Thomas V.
Geimer or  David C. Howson.

Option Values

The
following  table  provides  certain  information  concerning the fiscal year end value of
unexercised  options held by Mr. Geimer and Mr. Howson.

Aggregated
Option Exercises in 2006 Fiscal Yearand Fiscal Year End Option Values

|Name             | SharesAcquired onExercise | ValueRealized | Number of UnexercisedOptions at Fiscal YearEnd | Value of UnexercisedIn-the-Money OptionsFiscal Year End(1) |  |        
|---------------- | ------------------------- | ------------- | ---------------------------------------------- | ---------------------------------------------------------- |  | -------
|
|Thomas V. Geimer |                           | 0             |                                                | 0                                                          |  | 300,000
|                 |                           |               |                                                |                                                            |  |        
|David Howson     |                           | 0             |                                                | 0                                                          |  | 225,000
|                 |                           |               |                                                |                                                            |  |        

__________

|(1) |  | Value
calculated by determining the difference between the closing sales price  on July 31,
2006, of $2.39 per share and the exercise price of the options. Fair  market value was
not discounted for restricted nature of any stock purchased on  exercise of these options.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Includes
200,000 options exercisable at a price of $1.45 per share and 100,000  options
exercisable at a price of $1.50 per share.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------

|(3) |  | The
options granted to Mr. Howson are exercisable at a price of $2.57 per share.
|--- |  | --------------------------------------------------------------------------------

Employment  Agreement



---

Effective
December 1, 2002, we entered into an employment agreement with our Chairman,
Chief Executive Officer and Chief Financial Officer and Secretary, Mr. Thomas V.
Geimer. The agreement was negotiated and approved by the Compensation Committee.
The agreement provides for an annual base salary of $165,000 with annual
deferred compensation of $75,000. The agreement expires on December 31, 2007. In
the event of termination by mutual agreement, termination with
cause, as defined in the agreement, death or permanent incapacity or
voluntary termination, Mr. Geimer or his estate would be entitled to the sum of
the base salary and unreimbursed expenses accrued to the date of termination and
any other amounts due under the agreement. In the event of termination
without cause, as defined in the agreement, Mr. Geimer would be
entitled to the sum of the base salary and unreimbursed expenses accrued to the
date of termination and any other amounts due under the agreement and an amount
equal to the greater of Mr. Geimers annual base salary (12 months of
salary) or any other amounts remaining due to Mr. Geimer under the agreement,
which as of July 31, 2006 would be $340,000. Additionally, in the event of a
change in control, any unpaid amounts due under the initial term of the
agreement for both base salary and deferred compensation would be payable plus
five times the sum of the base salary and deferred compensation.

Compensation
Pursuant to Plans

Deferred
Compensation Plan. In January 1996, we established a deferred compensation
plan for our employees. Contributions to the plan are provided for under the
employment agreement detailed above. For each of the fiscal years ended July 31,
2006 and 2005, we contributed $75,000 to the plan. The $75,000 contribution for
the fiscal year ended July 31, 2006 was made on October 12, 2006.

On
October 14, 1997, Thomas V. Geimer exercised an aggregate of 1,140,000 warrants
and options to acquire 1,140,000 shares of the Companys Common Stock at an
exercise price of $0.24 per share. Under the terms of the Rabbi Trust, we will
hold the shares in trust and carry the shares as held for employee benefit by
the Company. The Rabbi Trust provides that upon Mr. Geimers death,
disability, or termination of his employment the shares will be released ratably
over the subsequent ten (10) years, unless the Board of Directors determines
otherwise. See Note 14 to the Financial Statement for further information.

Securities
Authorized For Issuance Under Compensation Plans

The
table set forth below presents the securities authorized for issuance with
respect to compensation plans under which equity securities are authorized for
issuance as of July 31, 2006:

36



---

Equity
Compensation Plan Information

|Plan Category         | Number of securitiestobe issued uponexerciseof outstandingoptions,warrants and rights | Weighted-averageexercise price ofoutstandingoptions, warrantsand rights | Number of securities remainingavailable for future issuanceunder equity compensation plans(excluding securities reflectedin the 1st column)
|--------------------- | ------------------------------------------------------------------------------------- | ----------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------
|
|Equity Compensation   |                                                                                       | 970,000                                                                 |                                                                                                                                            
|Plans approved by     |                                                                                       |                                                                         |                                                                                                                                            
|security holders      |                                                                                       |                                                                         |                                                                                                                                            
|                      |                                                                                       |                                                                         |                                                                                                                                            
|Equity Compensation   |                                                                                       | 200,000                                                                 |                                                                                                                                            
|Plans not approved by |                                                                                       |                                                                         |                                                                                                                                            
|security holders      |                                                                                       |                                                                         |                                                                                                                                            
|                      |                                                                                       |                                                                         |                                                                                                                                            
|Total                 |                                                                                       | 1,170,000                                                               |                                                                                                                                            
|                      |                                                                                       |                                                                         |                                                                                                                                            

|(1) |  | In
connection with the purchase of the YoDx technology, the Company agreed to issue  an
additional 200,000 stock options with the same terms as the Companys  Non-Qualified
Stock Option Plan upon the earlier of (a) the Company achieving  certain accumulated
revenue levels associated with the YoDx technology or  (b) a change in control of
the Company prior to the expiration date of the  options. As of October 15, 2006, the
contingent provisions have not been met and  the options have not been granted. The
Company has reserved a sufficient number  of shares for such options.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The 1996
Stock Option Plans

The
Board of Directors of the Company has adopted an incentive stock option plan
(the Qualified Plan) which provides for the grant of options to
purchase an aggregate of not more than 700,000 shares of the Companys
Common Stock. The purpose of the Qualified Plan is to make options available to
management and employees of the Company in order to provide them with a more
direct stake in the future of the Company and to encourage them to remain with
the Company. The Qualified Plan provides for the granting to management and
employees of incentive stock options within the meaning of Section
422 of the Internal Revenue Code of 1986 (the Code).

The
Board of Directors of the Company has adopted a non-qualified stock option plan
(the Non-Qualified Plan) which provides for the grant of options to
purchase an aggregate of not more than 300,000 shares of the Companys
Common Stock. The purpose of the Non-Qualified Plan is to provide certain key
consultants, independent contractors, technical advisors and directors of the
Company with options in order to provide additional rewards and incentives for
contributing to the success of the Company. These options are not incentive
stock options within the meaning of Section 422 of the Code.

The
Qualified Plan and the Non-Qualified Plan (the Stock Option Plans)
are administered by a committee (the Committee) appointed by the
Board of Directors which determines the persons to be granted options under the
Stock Option Plans and the number of shares subject to each option. No options
granted under the Stock Option Plans are transferable by the optionee other than
by will or the laws of descent and distribution and each option is exercisable,
during the lifetime of the optionee, only by such optionee. Any options granted
to an employee terminate 90 days after his ceasing to be an employee, except in
limited circumstances, including death of the employee, and where the Committee
deems it to be in the Companys best interests not to terminate the
options.

37



---

The
exercise price of all incentive stock options granted under the Qualified Plan
must be equal to the fair market value of such shares on the date of grant as
determined by the Committee, based on guidelines set forth in the Qualified
Plan. The exercise price may be paid in cash or (if the Qualified Plan shall
meet the requirements of rules adopted under the Exchange Act) in Common Stock
or a combination of cash and Common Stock. The term of each option and the
manner in which it may be exercised will be determined by the Committee, subject
to the requirement that no option may be exercisable more than 10 years after
the date of grant. With respect to an incentive stock option granted to a
participant who owns more than 10% of the voting rights of the Companys
outstanding capital stock on the date of grant, the exercise price of the option
must be at least equal to 110% of the fair market value on the date of grant and
the option may not be exercisable more than five years after the date of grant.

The
Stock Option Plans were approved by our shareholders at a special shareholders
meeting held on November 8, 1996. At the annual meeting of shareholders held on
December 12, 2002, shareholders approved the following amendments to the
Qualified Plan and the Non-Qualified Plan: (i) the Committee was given the power
to amend and alter the Qualified Plan and the Non-Qualified Plan so long as the
amendments do not affect any outstanding options; (ii) provide that any shares
cancelled, terminated, or expired pursuant to the Qualified Plan and the
Non-Qualified Plan be made available for purposes of the Qualified Plan and the
Non-Qualified Plan; (iii) provide that the cashless exercise provision of the
Qualified Plan and the Non-Qualified Plan be in the sole discretion of the
Committee; and (iv) extended the expiration date of the Qualified Plan and the
Non-Qualified Plan until December 12, 2012.

As
of July 31, 2006, 599,000 options had been granted pursuant to the Qualified
Plan with 12,500 of these options exercised, 179,000 options that expired,
leaving 280,000 available for grant and 300,000 options had been granted
pursuant to the Non-Qualified Plan with 75,000 of these options exercised,
50,000 options that expired and 50,000 available for grant.

2004 Omnibus
Stock Option Plan

On
December 14, 2004, the shareholders approved the Companys 2004 Omnibus
Stock Option Plan (the Omnibus Plan). The Omnibus Plan authorizes
the issuance of up to five hundred thousand (500,000) shares of the
Companys Common Stock. The purpose of the Omnibus Plan is to promote the
growth of the Company by permitting the Company to grant options
(Options) to purchase shares of its Common Stock, to attract and
retain the best available personnel for positions of substantial responsibility
and to provide certain key employees, independent contractors, consultants,
technical advisors and directors of the Company with a more direct stake in the
future of the Company and provide an additional incentive to contribute to the
success of the Company.

The
Omnibus Plan is administered by the Compensation Committee of the Board or any
committee of the Board performing similar functions, as appointed from time to
time by the Board (the Omnibus Committee). Pursuant to the terms of
the Omnibus Plan, the Omnibus Committee may grant either incentive stock
options within the meaning of Section 422 of the Internal Revenue Code of
1986 (the Code) or nonqualified stock options, provided that
incentive stock options may not be granted to independent contractors and
consultants. The exercise price of all incentive stock options granted under the
Omnibus Plan must be equal to the fair market value of such shares on the date
of grant as determined by the Omnibus Committee, based on guidelines set forth
in the Omnibus Plan. The exercise price of nonqualified stock options granted
under the Omnibus Plan shall be not less than 50% of the fair market value of a
share on the date of grant of such Option. The Omnibus Committee may grant on
behalf of the Company, Options to purchase shares of the Companys Common
Stock to any key employee, independent contractor, consultant, technical advisor
or director.

As
of July 31, 2006, 377,500 options had been granted pursuant to the Omnibus Plan
with none of these options exercised and 15,000 expired leaving 137,500
available for grant.

38



---

Item 11.     
Security Ownership of Certain Beneficial Owners and Management

The
following table sets forth certain information regarding beneficial ownership of
our Common Stock as of October 15, 2006 by (i) each person who is known by the
Company to own beneficially more than 5% of the Companys outstanding
Common Stock; (ii) each of the Companys executive officers and directors;
and (iii) all executive officers and directors as a group. The calculation
excludes 1,129,110 shares which are held by the Rabbi Trust for the benefit of
Thomas V. Geimer. Further, Mr. Geimer does not have voting power over the shares
that are held in the Rabbi Trust. Common Stock not outstanding but deemed
beneficially owned by virtue of the right of an individual to acquire shares is
treated as outstanding only when determining the amount and percentage of Common
Stock owned by such individual. Except as noted, each person or entity has sole
voting and sole dispositve power with respect to the shares shown.

|Name and Address of Beneficial Owner | Shares Beneficially Owned |          
|------------------------------------ | ------------------------- | ---------
|
|Thomas V. Geimer (1)                 |                           | 348,700  
|7000 North Broadway, Building 3-307  |                           |          
|Denver, Colorado 80221               |                           |          
|                                     |                           |          
|A. Alexander Arnold III(2)           |                           | 868,000  
|845 Third Ave., 6th Floor            |                           |          
|New York, NY 10021                   |                           |          
|                                     |                           |          
|Charles E. Gerretson(3)              |                           | 128,150  
|7000 North Broadway, Building 3-307  |                           |          
|Denver, Colorado 80221               |                           |          
|                                     |                           |          
|David Howson(4)                      |                           | 300,000  
|7000 North Broadway, Building 3-307  |                           |          
|Denver, Colorado 80221               |                           |          
|                                     |                           |          
|Executive Officers and Directors     |                           | 1,644,850
|as a Group (4 persons)               |                           |          
|                                     |                           |          

|(1) |  | Does not include 1,129,110 shares, which were purchased by Mr. Geimer upon
exercise of warrants and options. Mr. Geimer exercised these options and
warrants on October 14, 1997, and simultaneously contributed the shares acquired
to a Rabbi Trust. See Note 9 to Financial Statements for further information.
Includes 300,000 shares, which may be purchased by Mr. Geimer upon exercise of
options. Includes 400 shares held in brokerage accounts for Mr. Geimers
children, in which Mr. Geimer has the power and authority to dispose of the
shares held by these accounts.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Includes 730,000 shares held by four trusts. Mr. Arnold merely serves as trustee
for each of those trusts, but is not a beneficiary of and has no pecuniary
interest in any of those trusts. Also includes 63,000 shares held in investment
advisory accounts for which Mr. Arnold serves as the investment advisor. Also
includes 75,000 shares, which may be purchased by Mr. Arnold upon exercise of
options.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Includes: (i) 103,250 shares owned directly by Mr. Gerretson and (ii) 10,000
shares, which may be purchased by Mr. Gerretson upon exercise of options which
options expire on March 15, 2015. Also includes 14,900 shares held in brokerage
and retirement accounts of individuals in which Mr. Gerretson has the power and
authority to dispose of the shares held by these accounts. Mr. Gerretson
disclaims any beneficial ownership with respect to such shares.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Includes 300,000 shares, which may be purchased by Mr. Howson upon exercise of
options which options expire on March 15, 2015, of which 75,000 stock options
shall vest if and only if prior to the expiration date of the Options, the
Company closes on a transfer for the sale of the Company assets or the
acquisition of the Company in which the Companys shareholders receive
aggregate consideration at closing equal to or greater than $250,000,000.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

39



---

Item 12.     
Certain Relationships and Related Transactions

During
fiscal year 1996, we established a deferred compensation plan for our employees.
We may make discretionary contributions to the plan based on recommendations
from the Board of Directors. As of July 31, 2005, the Board of Directors had
authorized deferred compensation totaling $825,000 since fiscal year 1996 to Mr.
Geimer of which $750,000 had been funded. The $75,000 representing the
difference between the authorized deferred compensation and the funded deferred
compensation was funded on October 12, 2006.

There
were no other transactions or series of transactions for the fiscal year ended
July 31, 2006, nor are there any currently proposed transactions, or series of
the same to which we are a party, in which the amount involved exceeds $60,000
and in which, to the knowledge of the Company, any director, executive officer,
nominee, 5% shareholder or any member of the immediate family of the foregoing
persons, have or will have a direct or indirect material interest.

Item 13.     
Exhibits and Reports on Form 8-K

(a)    Exhibits

|14.1 |  | Code
of Ethics for Accelr8s principal executive officer and senior financial officers
|---- |  | --------------------------------------------------------------------------------------

|14.2 |  | Code
of Ethics and Standards of Conduct
|---- |  | ---------------------------------------

|31.1 |  | Certification
of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002.
|---- |  | --------------------------------------------------------------------------------------------------------

|31.2 |  | Certification
of Principal Financial Officer pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.
|---- |  | --------------------------------------------------------------------------------------------------------

|32.1 |  | Certification
of Principal Executive Officer and Chief Financial Officer  pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------

(b)     
Financial Statements

The
following financial statements of the Company are included in Item 7:

Report
of Independent Registered Public Accounting Firm Comiskey & Company,  P.C.     Balance Sheets as of July 31, 2006 and 2005     Statements of Operations for  the years ended
July 31, 2006 and 2005     Statements of Stockholders Equity  for the years ended July
31, 2006 and 2005     Statements of Cash Flows for the  years ended July 31, 2006 and 2005
Notes to Financial Statements

Item 14.     
Principal Accountant Fees and Services

The
aggregate fees billed by Comiskey & Company, P.C. for professional services
rendered for the audit of the Companys annual consolidated financial
statements for the years ended July 31, 2006 and 2005, including the reviews of
the unaudited interim financial statements of the Companys Form 10-QSBs
was approximately $37,000 and $32,000, respectively.

40



---

Tax Fees

The
aggregate fees billed by Comiskey & Company, P.C. for professional services
rendered for the tax compliance, tax advice and tax planning for the fiscal
years ended July 31, 2006 and 2005 (Tax Fees) was $0 and $0,
respectively.

All other
Fees

Comiskey
& Company,  P.C. did not perform any  professional  services other than those set forth
above for  the fiscal years ended July 31, 2006 and 2005.

Audit
Committee Pre-Approval Policies

The
Audit Committee shall pre-approve all auditing services and permitted non-audit
services (including the fees and terms thereof) to be performed for the Company
by its independent auditor, subject to any de minimus exceptions that may be set
for non-audit services described in Section 10A(i)(l)(B) of the Exchange Act
which are approved by the Committee prior to the completion of the audit.

None
of the hours expended on the principal accountants engagement to audit the
Companys financial statements for the most recent fiscal year were
attributed to work performed by persons other than the principal
accountants full-time permanent employees.

41



---

SIGNATURES

Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.

| | ACCELR8
TECHNOLOGY CORPORATION
| | ------------------------------

Date: October
30, 2006

| | By:      /s/ David C. HowsonDavid C. Howson, President
| | ------------------------------------------------------

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.

Date: October
30, 2006

| | By:/s/ Thomas V. Geimer
Thomas V. Geimer, Chairman, Secretary,Chief Executive Officer andChief Financial
Officer
| | ----------------------------------------------------------------------------------------------------------------

Date: October
30, 2006

| | By:     /s/ David Loftus
David Loftus, Principal Accounting Officer
| | -------------------------------------------------------------------

Date: October
30, 2006

| | By:     /s/ A. Alexander Arnold III
A. Alexander Arnold III, Director
| | ---------------------------------------------------------------------

Date: October
30, 2006

| | By:     /s/ Charles E. Gerretson
Charles E. Gerretson, Director
| | ---------------------------------------------------------------

42



---

ACCELR8
TECHNOLOGY CORPORATION

FINANCIAL
STATEMENTS

JULY
31,  2006 and 2005



---

ACCELR8
TECHNOLOGY CORPORATION

TABLE
OF CONTENTS

|                                                        | PAGE
|------------------------------------------------------- | ----
|REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM |     
|                                                        |     
|BALANCE SHEETS                                          |     
|                                                        |     
|STATEMENTS OF OPERATIONS                                |     
|                                                        |     
|STATEMENTS OF SHAREHOLDERS' EQUITY                      |     
|                                                        |     
|STATEMENTS OF CASH FLOWS                                |     
|                                                        |     
|NOTES TO FINANCIAL STATEMENTS                           |     



---

Report of
Independent Registered Public Accounting Firm

Board of
DirectorsAccelr8 Technology CorporationDenver, Colorado

We
have audited the accompanying balance sheets of Accelr8 Technology Corporation
(a Colorado corporation) as of July 31, 2006 and 2005, and the related
statements of operations, shareholders equity and cash flows for the years
ended July 31, 2006 and 2005. These financial statements are the responsibility
of the Companys management. Our responsibility is to express an opinion on
these financial statements based on our audits.

We
conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Accelr8 Technology Corporation as
of July 31, 2006 and 2005, and the results of its operations and changes in its
cash flows for the years ended July 31, 2006 and 2005, in conformity with U.S.
generally accepted accounting principles.

Denver,
ColoradoSeptember 22, 2006

| | /s/
COMISKEY & COMPANYPROFESSIONAL CORPORATION
| | ----------------------------------------------

F-1



---

ACCELR8
TECHNOLOGY CORPORATIONBALANCE SHEETSJULY 31, 2006 and 2005ASSETS

|                                                            | 2006 | 2005      
|----------------------------------------------------------- | ---- | ----------
|Current assets:                                             |      |           
|Cash and cash equivalents                                   |      | 3,004,336 
|Trade accounts receivable                                   |      | 10,852    
|Inventory (Note 3)                                          |      | 25,887    
|Prepaid expenses and other current assets (Note 4)          |      | 43,100    
|Note receivable (Notes 11)                                  |      |          
|                                                            |      |           
|                                                            |      |           
|Total current assets                                        |      | 3,084,175 
|                                                            |      |           
|Property and equipment, net (Note 5)                        |      | 180,347   
|Investments, net (Note 12)                                  |      | 871,415   
|Intellectual property, net (Note 6)                         |      | 3,712,286 
|                                                            |      |           
|                                                            |      |           
|Total assets                                                |      | 7,848,223 
|                                                            |      |           
|                                                            |      |           
|                                                            |      |           
|LIABILITIES AND SHAREHOLDERS' EQUITY                        |      |           
|                                                            |      |           
|Current liabilities:                                        |      |           
|Accounts payable                                            |      | 71,570    
|Accrued compensation and other liabilities                  |      | 31,389    
|Deferred revenue (Note 13)                                  |      | 59,529    
|                                                            |      |           
|Total current liabilities                                   |      | 162,488   
|                                                            |      |           
|Long-term liabilities:                                      |      |           
|Deferred compensation                                       |      | 946,415   
|                                                            |      |           
|Total liabilities                                           |      | 1,108,903 
|                                                            |      |           
|                                                            |      |           
|Shareholders' equity (Notes 8):                             |      |           
|Common stock, no par value; 12,000,000(2006) and            |      |           
|11,000,000(2005) shares, respectively, authorized;          |      |           
|9,971,210(2006) and 9,961,210(2005) shares issued and       |      |           
|Outstanding                                                 |      | 12,878,020
|Contributed capital                                         |      | 570,150   
|Accumulated (deficit)                                       |      | (6,435,250
|Shares held for employee benefit (1,129,110 shares at cost) |      | (273,600  
|                                                            |      |           
|Total shareholders' equity                                  |      | 6,739,320 
|                                                            |      |           
|                                                            |      |           
|Total liabilities and shareholders' equity                  |      | 7,848,223 
|                                                            |      |           
|                                                            |      |           
|                                                            |      |           

See
accompanying notes to financial statements.

F-2



---

ACCELR8
TECHNOLOGY CORPORATIONSTATEMENTS OF OPERATIONSFOR THE YEARS ENDED JULY 31, 2006 and
2005

|                                                       | 2006 | 2005      
|------------------------------------------------------ | ---- | ----------
|Revenues (Note 7 and 10):                              |      |           
|OptiChem revenue                                      |      | 155,701   
|Consulting Fees                                        |      | 57,000    
|License Fees                                           |      |          
|Option Fees                                            |      |          
|                                                       |      |           
|Total revenues                                         |      | 212,701   
|                                                       |      |           
|Cost of sales                                          |      | 41,604    
|                                                       |      |           
|                                                       |      |           
|Gross profit                                           |      | 171,097   
|                                                       |      |           
|                                                       |      |           
|Costs and expenses:                                    |      |           
|Research and development                               |      | 2,155,988 
|General and administrative                             |      | 828,745   
|Amortization (Note 6)                                  |      | 236,683   
|Depreciation                                           |      | 79,295    
|Marketing and sales                                    |      | 74,909    
|                                                       |      |           
|                                                       |      |           
|Total costs and expenses                               |      | 3,375,620 
|                                                       |      |           
|                                                       |      |           
|(Loss) from operations                                 |      | (3,204,523
|                                                       |      |           
|                                                       |      |           
|Other (expense) income:                                |      |           
|Interest and dividend income                           |      | 181,243   
|Unrealized holding gain (loss) on investments (Note 2) |      | (15,671   
|Miscellaneous                                          |      | 8,330     
|                                                       |      |           
|Total other income                                     |      | 173,902   
|                                                       |      |           
|                                                       |      |           
|                                                       |      |           
|Net (loss)                                             |      | (3,030,621
|                                                       |      |           
|                                                       |      |           
|Net loss per share:                                    |      |           
|                                                       |      |           
|Basic and diluted net (loss) per share                 |      | (0.30     
|                                                       |      |           
|                                                       |      |           
|Weighted average shares outstanding                    |      | 9,967,034 
|                                                       |      |           
|                                                       |      |           
|                                                       |      |           

See
accompanying notes to financial statements.

F-3



---

ACCELR8
TECHNOLOGY CORPORATIONSTATEMENTS OF SHAREHOLDERS EQUITY

|                                           | Common Stock |           |  |            |  |   | 
|------------------------------------------ | ------------ | --------- |  | ---------- |  | - | 
|
|Balances, July 31, 2004                    |              | 9,961,210 |  | 12,863,020 |  |  | 
|                                           |              |           |  |            |  |   | 
|                                           |              |           |  |            |  |   | 
|Extension of Stock Option Expiration Dates |              |           |  |            |  |   | 
|                                           |              |           |  |            |  |   | 
|                                           |              |           |  |            |  |   | 
|Net loss                                   |              |          |  |           |  |  | 
|                                           |              |           |  |            |  |   | 
|                                           |              |           |  |            |  |   | 
|                                           |              |           |  |            |  |   | 
|Balances, July 31, 2005                    |              | 9,961,210 |  | 12,863,020 |  |  | 
|                                           |              |           |  |            |  |   | 
|                                           |              |           |  |            |  |   | 
|                                           |              |           |  |            |  |   | 
|Exercise of options                        |              | 10,000    |  | 15,000     |  |   | 
|Extension of Stock Option Expiration Dates |              |           |  |            |  |   | 
|                                           |              |           |  |            |  |   | 
|Stock option expense under SFAS 123R       |              |           |  |            |  |   | 
|                                           |              |           |  |            |  |   | 
|                                           |              |           |  |            |  |   | 
|Net loss                                   |              |          |  |           |  |  | 
|                                           |              |           |  |            |  |   | 
|                                           |              |           |  |            |  |   | 
|                                           |              |           |  |            |  |   | 
|Balances, July 31, 2006                    |              | 9,971,210 |  | 12,878,020 |  |   | 
|                                           |              |           |  |            |  |   | 
|                                           |              |           |  |            |  |   | 

F-4



---

ACCELR8
TECHNOLOGY CORPORATIONSTATEMENTS OF CASH FLOWSFOR THE YEARS ENDED JULY 31, 2006 and
2005

|                                                          | 2006 | 2005      
|--------------------------------------------------------- | ---- | ----------
|Cash flows from operating activities                      |      |           
|Net loss                                                  |      | (3,030,621
|Adjustments to reconcile net (loss) to net cash           |      |           
|(used in) operating activities:                           |      |           
|Depreciation                                              |      | 79,295    
|Amortization                                              |      | 236,683   
|Fair value of stock options                               |      |           
|granted for services                                      |      | 86,601    
|Unrealized (gain) loss on investments                     |      | 15,671    
|Realized (gain) loss on sale of investments, interest and |      |           
|dividends reinvested                                      |      | (17,608   
|(Increase) decrease in assets:                            |      |           
|Accounts receivable                                       |      | 33,495    
|Other accounts receivable                                 |      |          
|Inventory                                                 |      | 1,357     
|Prepaid expense and other                                 |      | 184,997   
|                                                          |      |           
|Increase (decrease) in liabilities:                       |      |           
|Accounts payable                                          |      | (81,840   
|Accrued liabilities                                       |      | (247,293  
|Deferred revenue                                          |      | (5,471    
|Deferred compensation                                     |      | 103,778   
|                                                          |      |           
|                                                          |      |           
|Net cash (used in) operating activities                   |      | (2,640,956
|                                                          |      |           
|                                                          |      |           
|Cash flows from investing activities:                     |      |           
|Purchase of laboratory equipment                          |      | (28,794   
|Cost of obtaining patents and trademarks                  |      | (70,000   
|Contribution to deferred compensation trust               |      | (101,840  
|Issuance of common stock                                  |      | 15,000    
|Receipt of note payment                                   |      | 266,667   
|                                                          |      |           
|                                                          |      |           
|Net cash provided by (used in) investing activities       |      | 81,033    
|                                                          |      |           
|                                                          |      |           
|Cash provided (used) by discontinued operations           |      |          
|                                                          |      |           
|                                                          |      |           
|Increase (decrease) in cash and cash equivalents          |      | (2,559,923
|                                                          |      |           
|Beginning balance:                                        |      | 5,564,259 
|                                                          |      |           
|                                                          |      |           
|Ending balance:                                           |      | 3,004,336 
|                                                          |      |           
|                                                          |      |           

See
accompanying notes to financial statements.

F-5



---

ACCELR8
TECHNOLOGY CORPORATION

NOTES  TO
FINANCIAL STATEMENTS

NOTE 1
ORGANIZATION AND NATURE OF BUSINESS

We
were incorporated on May 26, 1982, under the laws of the State of Colorado.
Prior to the acquisition of the OpTest suite of technologies
(OpTest), which occurred in January of 2001, Accelr8 Technology
Corporation (Accelr8 or the Company) was primarily a
provider of software tools and consulting services. We provided software tools
and consulting services for system modernization solutions for Digital Equipment
Corporation (DEC), VMS legacy systems. We sold the assets related to the
software business on July 30, 2004 to Transoft Group Ltd. See Notes 11 and 15.

On
January 18, 2001, the Company acquired the OpTest suite of technologies from
DDx, Inc. (DDx). The purchase of the assets of DDx provided the
Company with a proprietary surface chemistry and quantitative instruments. The
Company expects that its proprietary surface chemistry and quantitative
instruments will support real-time analysis of medical diagnostic markers,
pathogens, and bio-warfare agents.

Since
the acquisition of the assets, we have focused primarily upon research and
development relating to the technologies acquired, and the development of
revenue producing products related to that technology. We have manufactured and
marketed OptiChem® coated microarraying slides (OptiChem) for a
variety of custom applications for specific customers. In November of 2004 we
licensed the use of OptiChem (See Note 7).

During
most of the fiscal year ended July 31, 2006, our primary focus shifted to
development of a program to integrate our OptiChem® surface chemistry
(OptiChem), QuanDx light-scattering quantitative assay
instrumentation (QuanDx), and YoDx assay acceleration process
(YoDx) into a novel system for rapid bacterial identification and
antibiotic resistance testing, the BACcelr8r (BACcelr8r). We
intend to customize our technologies to the specific requirements of large
licensees as well as develop new rapid pathogen detection assays.

NOTE 2
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of estimatesThe
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

F-6



---

Concentration
of credit riskFinancial  instruments that potentially subject the Company to
concentrations of credit  risk consist primarily of cash equivalents, accounts
receivable, and notes  receivable, including receivables from major customers. See Note
10.

The Company
places its cash equivalents with a high credit quality financial institution.  The
Company periodically maintains cash balances at a commercial bank in excess  of the
Federal Deposit Insurance Corporation insurance limit of $100,000. At  July 31, 2006, the
Companys uninsured cash balance was approximately  $2,904,336, however, this amount
is invested under a repurchase agreement with  the bank and is collateralized by
securities of the United States Federal  agencies with approximate market value of 102%
of the investment.

The
Company grants credit to domestic and international clients in various
industries. Exposure to losses on accounts receivable is principally dependent
on each clients financial position. The Company performs ongoing credit
evaluations of its clients financial condition.

Estimated
Fair Value of Financial InstrumentsThe
carrying amounts of cash and cash equivalents, investments and other long-term
liabilities approximates fair value at July 31, 2006 and 2005.

The
carrying value of all other financial instruments potentially subject to
valuation risk, principally consisting of accounts receivable and accounts
payable, also approximate fair value.

The
following methods and assumptions were used to estimate the fair value of
financial instruments:

Cash
and Cash Equivalents  The carrying amount approximates fair value.
Investments  The carrying amount is based on quoted market prices plus
cash. Other Long-Term Liabilities  The carrying amount approximates fair
value. Cash and cash equivalents All highly liquid investments with an original
maturity of three months or less at time of purchase are considered to be cash
equivalents.

InvestmentsThe
Company accounts for its investments in accordance FAS 115. All investments are
recorded as trading and reported at fair value with unrealized gains and losses
are reported with current earnings.

InventoryInventory
is maintained by specific identification. Amounts of any particular inventory
item are small and are used depending on particular characteristics.

F-7



---

Property and
equipmentProperty
and equipment are recorded at cost. Maintenance and repairs are charged to
expense as incurred and expenditures for major improvements are capitalized.
Gains and losses from retirement or replacement are included in costs and
expenses. Depreciation of property and equipment is computed using the
straight-line method over the estimated useful life of the assets, ranging from
five to seven years.

Research and
developmentResearch
and development costs charged to operations for the years ended July 31, 2006
and 2005 were $2,155,988 and $1,304,888, respectively.

Intellectual
propertyIntellectual
properties are amortized over the period the asset is expected to contribute
directly or indirectly to the Companys future cash flows. The Company
evaluates the remaining useful life of each intellectual property that is being
amortized each reporting period to determine whether events and circumstances
warrant a revision to the remaining period of amortization. Included in
intellectual property are patents, trademarks and technology. Intellectual
properties are amortized over their estimated useful lives of 20 years.

Long-lived
assetsLong-lived
assets and certain identifiable intangibles to be held and used by the Company
are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The Company
continuously evaluates the recoverability of its long-lived assets based on
estimated future cash flows from and the estimated fair value of such long-lived
assets, and provides for impairment if such undiscounted cash flows or the
estimated fair value are insufficient to recover the carrying amount of the
long-lived asset.

Revenue
recognition

Consulting services:Consulting
revenue is recognized at the completion of the contract.

OptiChem
Slides:Revenue is recognized when the Company ships the product.

Sales returns and allowances:Allowances
on accounts receivable and notes receivable are recorded when circumstances
indicate collection is doubtful for particular accounts receivable. Receivables
are written off if reasonable collection efforts prove unsuccessful. The Company
provides for sales returns and allowances on a specific account basis.

F-8



---

Deferred revenue:Deferred
revenue represents amounts billed but not yet earned under existing agreements.

Income taxes:The
Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109, Accounting for Income
Taxes, which requires an asset and liability approach to financial
accounting and reporting for income taxes. Deferred income tax assets and
liabilities are computed annually for differences between the financial
statement basis and the income tax basis of assets and liabilities that will
result in taxable or deductible amounts in the future. Such deferred income tax
computations are based on enacted tax laws and rates applicable to the years in
which the differences are expected to affect taxable income. A valuation
allowance is established when necessary to reduce deferred income tax assets to
the amounts expected to be realized.

Earnings per share:The
Company follows SFAS No. 128, Earnings Per Share, which requires
companies to present basic earnings per share and diluted earnings per share.
Basic earnings (loss) per share includes no dilution and is computed by dividing
income (loss) available to common shareholders by the weighted average number of
common shares outstanding for the period. Diluted earnings per share reflect the
potential dilution of securities that could share in the earnings of an entity.

The
Companys net losses for the periods presented cause the inclusion of
potential common stock instruments outstanding to be antidilutive. During the
years ended July 31, 2006 and 2005, common stock options exercisable for 945,000
and 878,750 shares of common stock were not included in diluted loss per share
as the effect was antidilutive due to the Company recording losses in each of
those years. In addition, at July 31, 2006 and July 31, 2005, 200,000
contingently issuable options were not included in loss per share. See Note 8.

Stock based compensation:For
the year ended July 31, 2005, the Company accounted for stock based compensation
to employees and directors using the intrinsic value method in accordance with
Accounting Principles Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations. The Company
accounted for stock based compensation to non-employees in accordance with SFAS
No. 123, Accounting for Stock Based Compensation, as amended by SFAS
No. 148, Accounting for Stock-Based Compensation  Transition and
Disclosure  an amendment to FASB No. 123.

The  fair value
of options granted under the stock option agreements and stock-based  compensation plans
discussed above is estimated on the date of grant using the  Black-Scholes option pricing
model with the following weighted-average  assumptions used for grants for  the year
ended July 31, 2005: no dividend yield; risk free interest rate of 5.0%;  expected  life
of 4 years; and expected volatility of 59%. The weighted average fair value  of options
granted in fiscal 2004 was $2.59. The weighted average remaining  contractual life of
options outstanding at July 31, 2005 was 5.7 years.

F-9



---

As of
February 1, 2006, the Company applies SFAS No. 123R in valuing all options
granted using the Black-Scholes option-pricing model. (See Note 8) The fair
value is recorded as consulting expense as the vesting period lapses. Options
granted for which vesting is contingent based on future performance are measured
at their then current fair value at each period end, until vested. See
Recent Accounting Pronouncements for additional discussion.

The  following
weighted-average assumptions were used for grants for the year ended  July 31, 2006: no
dividend yield; risk free interest rate between 3.27 and 5.0%;  expected life between 2
and 4 years; and expected volatility between 47 and 59%  The weighted average fair value
of options granted in fiscal 2005 was $3.06. The  weighted average remaining contractual
life of options outstanding at July 31,  2006 was 5.0 years. The expected forfeiture rate
used was 37%.

The
following table illustrates the effect on net loss if the Company had applied
the fair value recognition provisions of SFAS 123:

|                                        | Year EndedJuly 31, 2006 | Year EndedJuly 31, 2005      
|--------------------------------------- | ----------------------- | -----------------------------
|Net loss - as reported                  |                         | $             (3,030,621     
|Deduct:  Total stock-based compensation |                         |                              
|expense determined under fair           |                         |                              
|value based method for all awards       |                         | (0                           
|                                        |                         |                              
|                                        |                         |                              
|Pro forma net loss                      |                         | $             (3,030,621     
|                                        |                         |                              
|Earnings per share:                     |                         |                              
|Basic and diluted - as reported         |                         | $                        (.30
|                                        |                         |                              
|Basic and diluted - pro forma           |                         | $                        (.30
|                                        |                         |                              
|                                        |                         |                              

Comprehensive income (loss):The
Company follows SFAS No. 130, Reporting Comprehensive Income, which
establishes standards for reporting and displaying comprehensive income (loss)
and its components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. The Company has no other items that would
be included in comprehensive income (loss).

F-10



---

Recent accounting pronouncements:In
December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment (SFAS
123R), which replaces SFAS 123 and supercedes APB Opinion No. 25. SFAS 123R requires all
share-based payments to employees, including grants of employee stock options, to be
recognized in the financial statements based on their fair values. The proforma
disclosures previously permitted under SFAS 123 no longer will be an alternative to
financial statement recognition. For the Company, SFAS 123R is effective for periods
beginning after December 15, 2005. Early application of SFAS 123R was encouraged, but not
required. We adopted SFAS 123R on February 1, 2006 using the modified prospective
application method described in the statement. Under the modified prospective application
method, we will apply the standard to new awards, and to awards modified, repurchased, or
cancelled after the required effective date. Additionally, compensation cost for the
unvested portion of awards outstanding as of the required effected date will be
recognized as compensation expense as the requisite service is rendered after the
required effective date.

The
Company has elected to use the modified prospective transition method for
adopting SFAS No. 123R, which requires the recognition of stock-based
compensation cost on a prospective basis; therefore, prior period financial
statements have not been restated. Under this method, the provisions of SFAS No.
123R are applied to all awards granted after the adoption date and to awards not
yet vested with unrecognized expense at the adoption date based on the estimated
fair value at grant date as determined under the original provisions of SFAS No.
123. The impact of forfeitures that may occur prior to vesting is also estimated
and considered in the amount recognized. Pursuant to the requirements of SFAS
No. 123R, the Company will continue to present the pro forma information for
periods prior to the adoption date.

The Company has historically used
the Black-Scholes option pricing model to determine the fair value of stock options on
the date of grant. This model derives the fair value of stock options based on certain
assumptions related to expected stock price volatility, expected option life, risk-free
interest rate and dividend yield. The Companys expected volatility is based on the
historical volatility of the Companys stock price over the most recent period
commensurate with the expected term of the stock option award. The estimated expected
option life is based primarily on historical employee exercise patterns. The Company has
not paid dividends in the past and does not have any plans to pay any dividends in the
future.

F-11



---

As of
July 31, 2006, total unrecognized share-based compensation cost related to
unvested stock options was approximately $25,896. For the year ended July 31,
2006, the Company recognized $18,765 in stock based compensation costs related
to the issuance of options to employees under SFAS 123R. For the year ended July
31, 2006, the total recognized stock based compensation costs related to the
extension of currently existing, fully vested options was $67,836. This cost was
calculated in accordance with SFAS No. 123R and is reflected in operating
expenses.

In
August 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections. SFAS 154 changes the requirements for the accounting for and
reporting of a change in accounting principle, requiring, in general,
retrospective application to prior periods financial statements of changes
in accounting principle. The Company has adopted the provisions of SFAS No. 154
which are effective for accounting changes and corrections of errors beginning
after December 15, 2005. The adoption did not have a material effect on the
results of operations of the Company.

In
February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid
Financial Instruments  an Amendment to FASB Statement Nos. 133 and
140 (SFAS 155). This issuance is effective for fiscal year ends beginning
after September 16, 2006. The Company does not expect the issuance to effect
current reporting.

In
March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of
Financial Assets  and Amendment to FASB Stmt No. 140" (SFAS 156).
This issuance is effective for fiscal year ends beginning after September 16,
2006. The Company does not expect the issuance to effect current reporting.

In September 2006, the FASB issued
SFAS No. 157, Fair Value Measurements (SFAS 157). The changes to current
practice resulting from the application of this Statement relate to the definition of
fair value, the methods used to measure fair value, and the expanded disclosures about
fair value measurements. This issuance is effective for fiscal year ends beginning after
November 15, 2007. The Company does not expect the issuance to effect current reporting.

NOTE 3
INVENTORY

The Company purchases raw materials
(custom chemicals and glass substrates) for producing OptiChem coated slides. Raw
material on hand at the end of each reporting period is priced at cost based on the
first-in first-out method. There was no work-in-process or finished goods inventory as of
July 31, 2006 and July 31, 2005 as slides currently are made for specific orders and
shipped as produced.

NOTE 4
PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid
expenses and other current assets for the year ended July 31, 2006 were $43,100
as compared to $228,097 for the year ended July 31, 2005. The major difference
was a deposit in the amount of $200,000 for an engineering services contract
signed on July 8, 2005. For the year ended July 31, 2006, $20,504 of the
$200,000 deposit remained and was included in prepaid expenses and other current
assets.

F-12



NOTE 5
PROPERTY AND EQUIPMENT

|Property and equipment are recorded at costand consisted of the following at July 31: | 2006 | 2005            
|------------------------------------------------------------------------------------- | ---- | ----------------
|                                                                                      |      |                 
|Computer equipment                                                                    |      | $         21,102
|Laboratory and scientific equipment                                                   |      | 394,175         
|Furniture and fixtures                                                                |      | 16,601          
|                                                                                      |      |                 
|Total property and equipment                                                          |      | 431,878         
|Accumulated depreciation                                                              |      | (251,531        
|                                                                                      |      |                 
|Net property and equipment                                                            |      | $       180,347 
|                                                                                      |      |                 

Depreciation
expense for the years ended July 31, 2006 and 2005 was $79,295 and $70,075,
respectively.

NOTE 6
INTELLECTUAL PROPERTY

|Intellectual property consisted ofthe following at July 31: | 2006 | 2005       
|----------------------------------------------------------- | ---- | -----------
|                                                            |      |            
|OptiChem technologies                                       |      | $ 4,454,538
|Patents                                                     |      | 293,991    
|Trademarks                                                  |      | 49,019     
|                                                            |      |            
|                                                            |      | 4,797,548  
|Accumulated amortization                                    |      | (1,085,262 
|                                                            |      |            
|                                                            |      | $ 3,712,286
|                                                            |      |            
|                                                            |      |            

F-13



---

Future
amortization expense for the intangible assets is estimated as follows:

|Years Ending July 31,     | 
|------------------------- | 
|                          | 
|2007                      | 
|2008                      | 
|2009                      | 
|2010                      | 
|Thereafter                | 
|                          | 
|Total future amortization | 
|                          | 

Intellectual
properties are recorded at cost and are being amortized on a straight-line basis
over their estimated useful lives of 20 years, the patent and patent application
life of the OptiChem Technologies. Amortization expense was $236,683 and
$235,608, respectively, for the years ended July 31, 2006 and 2005. The Company
routinely evaluates the recoverability of its long-lived assets based upon
estimated future cash flows from and estimated fair value of such long-lived
assets. If in managements judgment, the anticipated undiscounted cash
flows or estimated fair value are insufficient to recover the carrying amount of
the long-lived asset, the Company will determine the amount of the impairment
and the value of the asset will be written down. As of July 31, 2006 and 2005,
management believes there was no impairment of the Companys long-lived
assets.

NOTE 7.
LICENSE AND SUPPLY AGREEMENTS

On
November 24, 2004, the Company entered into a worldwide exclusive manufacturing
and marketing license agreement (the License Agreement) with SCHOTT
Jenaer Glas GmbH (SCHOTT). The Company also entered into a supply
agreement (the Supply Agreement) with SCHOTT for OptiChem coated
amine-reactive slides manufactured by the Company.

Pursuant
to the License Agreement SCHOTT paid the Company a non-refundable fee of
$100,000, of which $50,000 was credited against future royalties. An additional
$15,000 in deferred revenue was recorded for training supplied to SCHOTT. During
the 2-year term of the License Agreement SCHOTT agreed to pay the Company a
royalty payment equal to 6% of net sales of products licensed under the License
Agreement. If the total net sales during the initial 2-year term equal or exceed
$1,125,000, then the total royalty payable by SCHOTT for the initial term shall
be a flat fee of $90,000. An optional 1-year non-exclusive license extension to
market and manufacture Slide H was exercised by SCHOTT on 9/27/06.

F-14



---

The
Second Supply Agreement for Slide HS with SCHOTT expired on December 31, 2005.
The Company also granted an option for SCHOTT to receive a non-exclusive right
to manufacture and sell, up to 12,500 glass slides, from January 1, 2006 to
December 31, 2006. SCHOTT exercised this right and paid the Company $15,000 for
training on manufacturing of Slide HS. In addition, for this right, SCHOTT
provided 7,500 glass substrates to the Company at no charge. The slides were
valued at $12,750 and that amount was recorded as option fees.

The
Company also granted SCHOTT the right to negotiate an exclusive right for the
manufacturing and worldwide sales of Slide HS coatings on microarraying slides.
Schott formally initiated negotiations on October 1, 2005 and did not reach an
agreement by July 31, 2006.

Deferred
revenues of $50,000 in prepaid royalties and $15,000 for training were paid, but
not realized at July 31, 2005. For the year ended July 31, 2006, $22,475 of
royalties and $30,000 for training and consulting was realized from the license
and supply agreements with SCHOTT.

NOTE 8
SHAREHOLDERS EQUITY

Authorized
Shares of Common StockOn
December 14, 2004 the Shareholders adopted an amendment to the Companys
Articles of Incorporation, as amended, to increase the number of authorized
shares of the Companys no par value common stock from 11,000,000 to
12,000,000.

Stock option
plansThe
Company has option agreements with key executives and two stock-based
compensation plans, which are discussed below:

Option and warrant agreement with key executiveIn
fiscal 1998, options for the purchase of 1,129,110 shares held by the Chief
Executive Officer (Executive Options and Warrants) were exercised
and placed into a Rabbi Trust as discussed in Note 12. Such shares
are issuable upon the occurrence of retirement, death or termination of the
Chairmans employment over a ten-year period after such occurrence, unless
the Board of Directors determines otherwise.

In
accordance with generally accepted accounting principles, the Company has
included the assets and liabilities of the Rabbi Trust in its
financial statements, and the shares of the Companys common stock held by
the Rabbi Trust have been treated as treasury stock for financial
reporting purposes and have no voting rights. (See Note 14)

F-15



---

Qualified stock option planThe
Company has reserved 700,000 shares of its authorized but unissued common stock
for stock options to be granted to officers and employees of the Company under
its Incentive Stock Option Plan (the Incentive Plan). The exercise
price of each option, which has a maximum ten-year life, is established by the
Companys compensation committee on the date of grant. For the year ended
July 31, 2005, $15,000 was charged to compensation expense for the extension of
certain option expiration dates. For the year ended July 31, 2006, no stock
option expense was charged to employee benefits according to SAFS123.

As of
July 31, 2006, 599,000 options had been granted pursuant to the Qualified Plan.
Of these options, 12,500 were exercised and 179,000 were expired leaving 280,000
available for grant.

Non-qualified stock option planThe
Company has reserved 300,000 shares of its authorized but unissued common stock
for stock options to be granted to independent contractors, technical advisors
and directors of the Company under its Non-Qualified Stock Option Plan (the
Non-Qualified Plan). The exercise price of each option, which has a
maximum ten-year life, is established by the Companys compensation
committee on the date of grant. On May 7, 2002, the Company issued options to
purchase 100,000 shares of its common stock to consultants for services to be
provided at exercise prices of $2.25 per share. The consultant options vest 50%
after one year and 50% after two years and renew two years after vesting
provided the consultant is still retained. The fair value of these options is
measured each reporting period until vested. There was $7,500 charged for
compensation expense in the year ended July 31, 2005 for certain options related
to the extension of expiration dates. During fiscal year ended July 31, 2006, $0
was expensed to employee benefits/compensation expense for stock options granted
during the year.

As of
July 31, 2006, 300,000 options had been granted pursuant to the Non-Qualified
Plan with 75,000 of these options exercised and 50,000 expired leaving 50,000
available for grant.

Omnibus
Stock Option PlanOn
December 14, 2004 the Shareholders approved an Omnibus Stock Option Plan and
reserved 500,000 shares of its authorized but unissued common stock for stock
options to be granted to employees, independent contractors, technical advisors
and directors of the Company.

As of
July 31, 2006, 377,500 options had been granted pursuant to the Omnibus Plan
with none of these options exercised and 15,000 expired, leaving 137,500
available for grant.

F-16



---

Contingent
optionsIn connection with the purchase of the YoDx technology discussed above, the
Company agreed  to issue an additional 200,000 stock options with the same terms upon the
earlier of (a) the Company achieving certain accumulated revenue levels  associated with
the YoDx(TM) technology, as defined in the agreement, or (b) a  change in control of the
Company prior to the expiration date of the options. As  of July 31, 2006, the contingent
provisions have not been met and the options  have not been granted. The Company has
reserved a sufficient number of shares  for such options.

Accounting for employee based option plansFor
the year ended July 31, 2005, the Company accounted for stock based compensation
to employees and directors using the intrinsic value method in accordance with
Accounting Principles Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations. The Company
accounted for stock based compensation to non-employees in accordance with SFAS
No. 123, Accounting for Stock Based Compensation, as amended by SFAS
No. 148, Accounting for Stock-Based Compensation  Transition and
Disclosure  an amendment to FASB No. 123.

The
fair value of options granted under the stock option agreements and stock-based
compensation plans discussed above is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants for the year ended July 31, 2005: no dividend yield;
risk free interest rate of 5.0%; expected life of 4 years; and expected
volatility of 59%. The weighted average fair value of options granted in fiscal
2004 was $2.59. The weighted average remaining contractual life of options
outstanding at July 31, 2005 was 5.7 years.

As of
February 1, 2006, the Company applies SFAS No. 123R in valuing all options
granted using the Black-Scholes option-pricing model. (See Note 8) The fair
value is recorded as consulting expense as the vesting period lapses. Options
granted for which vesting is contingent based on future performance are measured
at their then current fair value at each period end, until vested. See
Recent Accounting Pronouncements for additional discussion.

The
following weighted-average assumptions were used for grants for the year ended
July 31, 2006: no dividend yield; risk free interest rate between 3.27 and 5.0%;
expected life between 2 and 4 years; and expected volatility between 47 and 59%
The weighted average fair value of options granted in fiscal 2005 was $3.06. The
weighted average remaining contractual life of options outstanding at July 31,
2006 was 5.0 years.

The
following table summarizes information on stock option activity for the
Executive Options, the Omnibus Plan, the Qualified Plan and the Non-Qualified
Plan, excluding the 225,000 contingent options.

F-17



---

|                                   | Number ofShares | Exercise PricePer Share | Weighted AverageExercise PricePer Share
|---------------------------------- | --------------- | ----------------------- | ---------------------------------------
|Options outstanding, July 31, 2004 |                 | 712,500                 |                                        
|                                   |                 |                         |                                        
|Options granted                    |                 | 322,500                 |                                        
|                                   |                 |                         |                                        
|Options exercised                  |                 | -0-                     |                                        
|                                   |                 |                         |                                        
|Options expired or cancelled       |                 | (65,000                 | )                                      
|                                   |                 |                         |                                        
|                                   |                 |                         |                                        
|                                   |                 |                         |                                        
|Options outstanding, July 31, 2005 |                 | 970,000                 |                                        
|                                   |                 |                         |                                        
|Options granted                    |                 | 57,500                  |                                        
|                                   |                 |                         |                                        
|Options exercised                  |                 | (10,000                 | )                                      
|                                   |                 |                         |                                        
|Options expired or cancelled       |                 | (72,500                 | )                                      
|                                   |                 |                         |                                        
|                                   |                 |                         |                                        
|                                   |                 |                         |                                        
|Options outstanding, July 31, 2006 |                 | 945,000                 |                                        
|                                   |                 |                         |                                        

As of July 31,
2006 and 2005, 821,250 and 878,750 options outstanding  were currently exercisable and
carried weighted average exercise  prices of $2.00 and $2.00 respectively. The following
table summarizes  information about stock options outstanding and exercisable at July
31, 2006:

|              |  | Outstanding |  |   |    | Exercisable
|------------- |  | ----------- |  | - | -- | -----------
|
|              |  |             |  |   |    |            
|$1.45 - $1.50 |  | 375,000     |  | 4 | .4 | $     1    
|              |  |             |  |   |    |            
|$2.10 - $2.25 |  | 202,500     |  | 1 | .4 | $     2    
|              |  |             |  |   |    |            
|              |  |             |  |   |    |            
|              |  |             |  |   |    |            
|$2.57 - $2.90 |  | 350,000     |  | 7 | .9 | $     2    
|              |  |             |  |   |    |            
|$3.00 - $3.20 |  | 17,500      |  | 3 | .0 | $     3    
|              |  |             |  |   |    |            
|              |  |             |  |   |    |            
|              |  |             |  |   |    |            
|$1.45 - $3.20 |  | 945,000     |  | 5 | .0 | $     2    
|              |  |             |  |   |    |            

F-18



---

NOTE 9
INCOME TAXES

The
following items comprise the Companys net deferred tax assets
(liabilities) as of July 31:

|                                    | 2006 | 2005                 
|----------------------------------- | ---- | ---------------------
|Deferred tax assets:                |      |                      
|Net operating loss                  |      | $       2,830,000    
|Deferred revenue                    |      | 0                    
|Depreciation and amortization       |      | (75,000              
|Stock options issued to consultants |      | 45,000               
|General business credit             |      | 220,000              
|Contribution carryforward           |      | 4,000                
|                                    |      |                      
|Total                               |      | 3,024,000            
|Less valuation allowance            |      | (3,024,000           
|                                    |      |                      
|Net deferred tax asset              |      | $                   
|                                    |      |                      

As of July 31,
2006, a valuation allowance increase of $1,008,000 has been recorded for the deferred tax asset,
as management has determined  that it is more likely than not that the deferred tax asset
will not be realized.

| | Total
income tax expense (benefit) differed from the amounts computed  by applying the U.S.
Federal statutory tax rates to pre-tax loss for  the years ended July 31, 2006 and 2005
as follows:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                               | 2006 | 2005  
|---------------------------------------------- | ---- | ------
|Total expense (benefit) computed by:           |      |       
|Applying the U.S. Federal statutory rate       |      | (34.0)
|State income taxes, net of Federal tax benefit |      | (3.0) 
|General business credits and other             |      | (3.8) 
|Valuation allowance                            |      | 40.8  
|                                               |      |       
|Effective tax rate (benefit)                   |      | - %   
|                                               |      |       

The
Company has unused net operating loss carry forward of approximately $7,600,000
and general business credits of approximately $220,000 that are available to
offset future income taxes. The net operating loss will expire beginning in 2013
and the general business tax credits expire from 2007 through 2024.

F-19



---

NOTE 10
MAJOR CUSTOMERS AND FOREIGN REVENUE

For
the years ending July 31, 2006 and 2005, OptiChem revenues were $212,701 and
$336,610 respectively. Of those amounts, revenues from one customer were
$121,353 (57.1%) in the year ended July 31, 2006 and $318,545 (94.6%) for the
year ended July 31, 2005. In fiscal 2006 the consulting revenues of $30,000 were
all from one customer.

Foreign
Revenues were as follows:

|Foreign Revenues  | 2006 | 2005          
|----------------- | ---- | --------------
|OptiChem Revenues |      | $      212,701
|                  |      |               
|License Fees      |      | -0-           
|                  |      |               
|Option Fees       |      | -0-           
|                  |      |               
|                  |      |               
|Total             |      | $      212,701
|                  |      |               
|                  |      |               
|                  |      |               

NOTE 11 SALE
OF SOFTWARE MIGRATION TOOLS

On
July 30, 2004, the Company entered into an asset sale agreement and closed the
transaction selling substantially all of the business assets of the software
business for an aggregate purchase price of $500,000; payable $100,000, at the
time of closing and a promissory note with principal payable in three equal
annual installments of $133,333 beginning July 15, 2005. During fiscal year end
July 31, 2006, the final note payment in the amount of $266,666 was paid on
August 31, 2005.

NOTE 12
COMMITMENTS

Investments and deferred compensation arrangementIn
January 1996, the Company established a deferred compensation plan for key
employees. Contributions to the plan are provided for under the employment
agreement with Thomas V. Geimer, which is detailed at the end of this note. For
each of the fiscal years ended July 31, 2006 and 2005, the Company contributed
$75,000 to the plan which was accrued but unpaid by the Company at year end. On
October 12, 2006, $75,000 was paid to the deferred compensation plan.

The
following information is provided related to the trust assets, which consist of
cash and equity securities as of July 31, 2006 and 2005. These assets, which
based upon the Companys intended use of the investments, have been
classified as trading securities. Unrealized holding gains or loss on trading
securities are included in other income (expense).

F-20



---

---

|                               | 2006 | 2005           
|------------------------------ | ---- | ---------------
|                               |      |                
|Cost basis                     |      | $       879,994
|Unrealized holding gain (loss) |      | (8,579         
|                               |      |                
|Aggregate fair value           |      | $       871,415
|                               |      |                

Deferred
compensation related to the Rabbi Trust was $946,415 and $842,637 as of July 31,
2006 and 2005, respectively. The difference between the aggregate fair value and
the deferred compensation amounts represents the award of $75,000 for each of
the years ended July 31, 2006 and 2005 which was accrued but unpaid by the
Company at year end. On October 12, 2006, $75,000 was paid to the deferred
compensation plan.

Operating leasesThe
Company has renegotiated a three-year lease for its office and laboratory space
with a term of October 1, 2004 through September 30, 2007. Total rent expense
was approximately $57,791 and $57,862 in fiscal 2006 and 2005, respectively.
Future minimum lease payments on the office and laboratory lease are as follows:

|Year EndingJuly 31, | PremisesRent
|------------------- | ------------
|2007                |             
|2008                |             
|                    |             
|                    |             
|                    |             
|                    |             

Employment
agreement

Effective
December 1, 2002, a new employment agreement with Thomas V. Geimer, CEO and CFO,  was
negotiated and approved by the Compensation Committee. The new agreement  provides for an
annual base salary of $165,000 with annual deferred compensation  of  $75,000. The new
agreement expires on December 31, 2007. In the event of termination by mutual agreement,
termination "with cause," as defined in the agreement, death or permanent
incapacity or voluntary termination, Mr. Geimer or his estate would be entitled to  the
sum of the base salary and unreimbursed expenses accrued to the date of termination and
any other amounts due under the  agreement. In the event of termination "without
cause," as defined in the agreement, Mr. Geimer would be entitled to the sum of  the
base salary and unreimbursed  expenses  accrued to the date of termination and any other
amounts due under the agreement  and an amount equal to the greater of Mr. Geimers
annual base salary (12  months of salary) or any other amounts remaining due to Mr.
Geimer under the  agreement, which as of July 31, 2006 would be $340,000. Additionally,
in the  event of a change in control, any unpaid amounts due under the initial term of
the agreement for both base salary and deferred compensation would be payable  plus five
times the sum of the base salary and deferred compensation.

F-21



---

NOTE 13
DEFERRED REVENUE

Deferred
revenue was $59,529 at year end July 31, 2006. Deferred revenue consists of
prepaid royalty fees from SCHOTT in the amount of $29,332, prepaid technology
license fees of $22,000 and 385 prepaid slides in the amount of $8,197.

NOTE 14
SUBSEQUENT EVENTS

All
services and material requirements for the Feasibility Testing Agreement with
Promega have been completed as of September 12, 2006, and no further work on the
part of Accelr8 is required. Therefore, deferred revenue of $22,000 for prepaid
technology license fees will be recognized in the first quarter of fiscal year
2007.

F-22