Summary of GENEREX BIOTECHNOLOGY CORP

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis by management provides information with respect to our financial condition and results of operations for the fiscal years ended July 31, 2006, 2007 and 2008. This discussion should be read in conjunction with the information in the consolidated financial statements and the notes pertaining thereto contained in Item 8 - Financial Statements and Supplementary Data of this Annual Report on Form 10-K for the year ended July 31, 2008 and the information discussed in Part I, Item 1A - Risk Factors.

Overview of Business

We are engaged primarily in the research, development and commercialization of drug delivery systems and technologies. Our primary focus at the present time is our proprietary technology for the administration of formulations of large molecule drugs to the oral (buccal) cavity using a hand-held aerosol applicator. Through our wholly-owned subsidiary, Antigen, we have expanded our focus to include immunomedicines incorporating proprietary vaccine formulations.

We believe that our buccal delivery technology is a platform technology that has application to many large molecule drugs and provides a convenient, non-invasive, accurate and cost-effective way to administer such drugs. We have identified several large molecule drugs as possible candidates for development, including estrogen, heparin, monoclonal antibodies, human growth hormone and fertility hormone, but to date have focused our development efforts primarily on one pharmaceutical product, Generex Oral-lyn™, an insulin formulation administered as a fine spray into the oral cavity using our proprietary hand-held aerosol spray applicator known as RapidMist™. To date, we have received regulatory approval in Ecuador and India for the commercial marketing and sale of Generex Oral-lyn™. In March 2008, we initiated Phase III clinical trials for this product in the U.S. with the first patient screening for such trials at a clinical study site in Texas. The patient screening at other participating clinical sites in the U.S. and Canada is ongoing. Currently over 200 patients have been enrolled in 74 clinical sites around the world, including sites in the United States, Canada, Bulgaria, Poland, Romania, Russia and Ukraine.

We received Special Access Program (SAP) authorization from Health Canada for a patient-specific, physician-supervised treatment of Type-1 diabetes with Generex Oral-lyn™ in April 2008. SAP provides access to non-marketed drugs for practitioners treating patients with serious or life-threatening conditions when conventional therapies have failed, are not available or unsuitable. We received similar authorization from health authorities in Netherlands in September 2008. We will continue to expand our SAP participation in additional countries around the world.

Using our buccal delivery technology, we also have launched a line of over-the-counter glucose and energy sprays , including Glucose RapidSpray™, GlucoBreak™, and BaBOOM!™ Energy Spray. We believe these products will complement Generex Oral-lyn™ and may provide us with an additional revenue stream prior to the commercialization of Generex Oral-lyn™.

Our subsidiary, Antigen, concentrates on developing proprietary vaccine formulations that work by stimulating the immune system to either attack offending agents (i.e., cancer cells, bacteria, and viruses) or to stop attacking benign elements (i.e., self proteins and allergens). Our immunomedicine products are based on two platform technologies and are in the early stages of development. We continue clinical development of Antigen's synthetic peptide vaccines designed to stimulate a potent and specific immune response against tumors expressing the HER-2/neu oncogene for patients with HER-2/neu positive breast cancer in a Phase II clinical trial and patients with prostate cancer and against avian influenza in two Phase I trials. Development efforts also are underway for seasonal influenza virus, HIV, HPV, melanoma, ovarian cancer, allergy and Type I diabetes mellitus. We have established collaborations with clinical investigators at academic centers to advance these technologies.

We face competition from other providers of alternate forms of insulin. Some of our most significant competitors, Pfizer, Eli Lilly, and Novo Nordisk, recently announced that they will discontinue development and/or sale of their inhalable forms of insulin. Generex Oral-lyn™ is not an inhaled insulin; rather, it is a buccally absorbed formulation with no residual pulmonary deposition. We believe that our buccal delivery technology offers several advantages over inhaled insulin, including the avoidance of pulmonary inhalation, which requires frequent physician monitoring, ease of use and portability.

We are a development stage company. From inception through the end of the year ended July 31, 2008, we have received only limited revenues from operations. In the fiscal years ended July 31, 2008 and 2007, we received approximately $128,039 and $182,429, respectively, in revenues from sales of Glucose RapidSpray™ . These numbers do not reflect deferred sales to the customers during the respective period with the right of return.

We operate in only one segment: the research, development and commercialization of drug delivery systems and technologies for metabolic and immunological diseases.

Accounting for Research and Development Projects

Our major research and development projects are the refinement of our platform buccal delivery technology, our buccal insulin project (Generex Oral-lyn™), our buccal morphine product and Antigen's peptide immunotherapeutic vaccines.

During the fiscal year ended July 31, 2008, we expended resources on the clinical testing and commercialization, of our buccal insulin product, Generex Oral-lyn™. In July 2007, we received no objection from the FDA to proceed with our long-term multi-center Phase III study protocol for Generex Oral-lyn™. Late-stage trials involve testing our product with a large number of patients over a significant period of time. The completion of late-stage trials in Canada and eventually the United States may require significantly greater funds than we currently have on hand.

Generex Oral-lyn™ was approved for commercial sale by drug regulatory authorities in Ecuador in May 2005. PharmaBrand handled the commercial launch of Generex Oral-lyn™ in Ecuador in June 2006. While we anticipate generating revenue from sales of Generex Oral-lyn™ in Ecuador, we do not expect that such revenues will be sufficient to sustain our research and development and regulatory activities.

Generex Oral-lyn™ was approved for importation and commercial sale in India in November 2007. We have entered into a licensing and distribution agreement with Shreya Life Sciences Pvt. Ltd. and are working with Shreya to prepare for the commercial launch of the product in India. We received no revenues from the sale of Generex Oral-lyn™ in India in the 2008 fiscal year.

Although we initiated regulatory approval process for our morphine and fentanyl buccal products, we did not expend resources to further this product during our last fiscal year.

During the fiscal year ended July 31, 2008, we expended resources on research and development relating to Antigen's peptide immunotherapeutic vaccines and related technologies. One Antigen vaccine is currently in Phase II clinical trials in the United States involving patients with HER-2/neu positive breast cancer, and an Antigen vaccine for H5N1 avian influenza is in Phase I clinical trials conducted at the Lebanese-Canadian Hospital in Beirut. Antigen's prostate cancer vaccine based on AE37 is currently in Phase I clinical trials in Greece. Preliminary pre-clinical work has commenced with respect to the experimental vaccine for patients with acute myeloid leukemia at Beijing Daopei Hospital in China.

Because of various uncertainties, we cannot predict the timing of completion and commercialization of our buccal insulin or buccal morphine products or Antigen's peptide immunotherapeutic vaccines or related technologies. These uncertainties include the success of current studies, our ability to obtain the required financing and the time required to obtain regulatory approval even if our research and development efforts are completed and successful, our ability to enter into collaborative marketing and distribution agreements with third-parties, and the success of such marketing and distribution arrangements. For the same reasons, we cannot predict when any products may begin to produce net cash inflows.

Most of our buccal delivery research and development activities to date have involved developing our platform technology for use with insulin. Insubstantial amounts have been expended on projects with other drugs, including morphine and fentanyl, and those projects involved a substantial amount of platform technology development. As a result, we have not made significant distinctions in the accounting for research and development expenses among products, as a significant portion of all research has involved improvements to the platform technology in connection with insulin, which may benefit all of our potential buccal products. During the fiscal year ended July 31, 2008, approximately 84.6% of our $16,359,030 in research expenses was attributable to insulin and platform technology development, and we did not have any research expenses related to morphine, fentanyl or other buccal projects. During the fiscal year ended July 31, 2007, approximately 73% of our $11,983,626 in research expenses was attributable to insulin and platform technology development, and we did not have any research expenses related to morphine or other buccal projects.

Approximately 15.4% or $2,517,552 of our research and development expenses for the fiscal year ended July 31, 2008 was related to Antigen's immunomedicine products compared to approximately 27% or $3,181,927 of our research and development expenses for the fiscal year ended July 31, 2007. Because these products are in initial phases of clinical trials or early, pre-clinical stage of development (with the exception of the Phase II clinical trials of Antigen HER-2/neu positive breast cancer vaccine that are underway), all of the expenses were accounted for as basic research and no distinctions were made as to particular products. Due to the early stage of development, we cannot predict the timing of completion of any products arising from this technology, or when products from this technology might begin producing revenues.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements which have been prepared in conformity with accounting principles generally accepted in the United States of America. It requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at 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.

We consider certain accounting policies related to impairment of long-lived assets, intangible assets and accrued liabilities to be critical to our business operations and the understanding of our results of operations:

Revenue Recognition. Net sales of Glucose RapidSpray™, BaBOOM!™ Energy Spray and GlucoBreak™ are generally recognized in the period in which the products are delivered. Delivery of the products generally completes the criteria for revenue recognition for the Company. In the event where the customers have the right of return, sales are deferred until the right of return lapses or the product is resold.

Inventory. Inventories are stated at the lower of cost or market with cost determined using the first-in first-out method. Management considers such factors as the amount of inventory on hand and in the distribution channel, estimated time to sell such inventory, inventories shelf life and current market conditions when determining whether the lower cost or market is used. As appropriate, a provision is recorded to reduce inventories to their net realizable value. Inventory also includes the cost of products sold to the customers with the rights of return.

Impairment of Long-Lived Assets. Management reviews for impairment whenever events or changes in circumstances indicate that the carrying amount of property and equipment may not be recoverable under the provisions of Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." If it is determined that an impairment loss has occurred based upon expected future cash flows, the loss is recognized in the Statement of Operations.

Intangible Assets. We have intangible assets related to patents. The determination of the related estimated useful lives and whether or not these assets are impaired involves significant judgments. In assessing the recoverability of these intangible assets, we use an estimate of undiscounted operating income and related cash flows over the remaining useful life, market conditions and other factors to determine the recoverability of the asset. If these estimates or their related assumptions change in the future, we may be required to record impairment charges against these assets.

Estimating accrued liabilities, specifically litigation accruals. Management's current estimated range of liabilities related to pending litigation is based on management's best estimate of future costs. While the final resolution of the litigation could result in amounts different than current accruals, and therefore have an impact on our consolidated financial results in a future reporting period, management believes the ultimate outcome will not have a significant effect on our consolidated results of operations, financial position or cash flows.

Share-based compensation Management determines value of stock-based compensation in accordance with Statement of Financial Accounting Standards No. 123(R) "Share-Based Payment" which revises SFAS No. 123 "Accounting for Stock-Based Compensation" for stock and options grants to employees. We also follow the guidance of Emerging Issues Task Force 96-18 "Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services" for equity instruments issued to consultants.

Results of Operations
Year Ended July 31, 2008 Compared to Year Ended July 31, 2007

Our net loss for the fiscal year ended July 31, 2008 (fiscal 2008) was $36,228,991 versus $23,504,958 in the fiscal year ended July 31, 2007 (fiscal 2007). The increase in net loss in fiscal 2008 versus fiscal 2007 is primarily due to the increase in research and development expenses in connection with preparations for global Phase III clinical trials of Generex Oral-lyn™ at sites in the United States, Canada, and Europe and the increase in general and administrative expenses. Our operating loss for fiscal 2008 increased to $33,445,470 compared to $24,876,102 in fiscal 2007. The increase resulted from an increase in research and development expenses (to $16,359,030 from $11,983,626), an increase in selling expense (to $1,562,258 from $693,309) and increases in general and administrative expenses (to $15,597,048 from $12,317,742). Our net revenues decreased to $124,891 in fiscal 2008 from $180,198 in fiscal 2007. The decrease in net revenue is attributable to a reduction in sales of Glucose RapidSpray™ in fiscal 2008 compared to stocking sales in fiscal 2007.

The increase in research and development expenses in fiscal 2008 reflects an increased level of research and development of our oral insulin product and platform technology and additional clinical trials and increased research and development efforts of Antigen. The increase in general and administrative expenses reflects the increase in legal, financial, consulting expenses, an increase in executive and director's compensation due to cash and non-cash bonuses and one time impairment change relating to patents write-off. The increase was offset by the reduction in advertising and travel expenses. The selling expenses are associated with the commercial sales of Glucose RapidSpray™ and BaBOOM Energy Spray that began in fiscal 2007.

Our interest expense in fiscal 2008 increased to $4,280,558 compared to interest expense of $849,548 in fiscal 2007 due to interest paid on the secured convertible notes issued in March 2008 in connection with a private placement. In fiscal 2008, we did not incur loss on extinguishment of debt reflecting monthly amortization payments due on the secured convertible notes. In fiscal 2007, our loss on extinguishment of debt was $237,162. Our interest income decreased to $1,166,439 in fiscal 2008 compared to $2,180,380 in the last fiscal year primarily due to substantially lower market interest rates. We received higher income from rental operations (net of expense) of $330,533 in fiscal 2008 compared to $277,474 in fiscal 2007.

Results of Operations
Year Ended July 31, 2007 Compared to Year Ended July 31, 2006

We had a net loss of $23,504,958 for the year ended July 31, 2007 (fiscal 2007) compared to a net loss of $67,967,204 for the year ended July 31, 2006 (fiscal 2006). The decrease in net loss for fiscal 2007 is attributable to the fact that in fiscal 2007 we did not have interest expense and loss on extinguishment of debt similar to that which we incurred during fiscal 2006 fiscal year in connection with the issuance of convertible debentures. Our operation loss for fiscal 2007 increased to $24,876,102 compared to $18,705,983 in operating loss for fiscal 2006. The increase in our fiscal 2007 operating loss resulted from a significant increase in research and development expenses (to $11,983,626 from $6,554,393), an increase in our selling and marketing expenses (to $693,309 from $56,028) and a slight increase in general and administrative expenses (to $12, 317,742 from $12,270,562). Our revenue, excluding the deferred revenue, increased slightly from $175,000 in fiscal 2006 to $180,198 in fiscal 2007 and is attributable to the sales of our over-the-counter products.

The increase in general and administrative expenses for fiscal 2007 is due primarily to the increase of non cash compensation to financial consultants in fiscal 2007 compared to compensation paid in 2006, an increase in legal, litigation and accounting expenses and an increase in travel. The increase was offset by the reduction in executive and director compensation and the decrease in office and general expenses.

The increase in research and development expenses for fiscal 2007 reflects increased levels of research and development activities in connection with commencement of Phase III clinical trials in Canada and higher level of clinical activities of Antigen.

Our interest expense in fiscal 2007 decreased to $849,548, compared to interest expense of $37,715,275 in fiscal 2006 relating to interest paid in connection with convertible debentures entered into during the last fiscal year. Our interest and miscellaneous income increased to $2,180,380 in fiscal 2007, compared to $768,098 in fiscal 2006, primarily due to substantially higher cash and short term investment balances during fiscal 2007. Our loss on extinguishment of debt, also incurred in connection with convertible debentures, was $237,162 in fiscal 2007, compared to $12,550,565 in fiscal 2006. We received a slightly higher income from rental operations (net of expense) of $277,474 in fiscal 2007, compared to $236,521 in fiscal 2006.

Financial Condition, Liquidity and Resources

Sources of Liquidity

To date we have financed our development stage activities primarily through private placements of our common stock and securities convertible into our common stock.

At July 31, 2008, we had cash and short-term investments of approximately $26 million, a decrease of $9 million from the balance as of the end of the prior fiscal year. All of our short-term investments represent investment in high-grade auction rate securities. The continued negative conditions in the global credit markets have prevented some investors from liquidating their holdings of auction rate securities because the amount of securities submitted for sale has exceeded the amount of purchase orders for such securities. In the event we need or desire to access these funds, we will not be able to do so until a future auction on these investments is successful or a buyer is found outside the auction process. The relative buying and selling interest of market participants in our auction rate securities and in the auction rate securities market as a whole will vary over time, and such variations may be affected by, among other things, news relating to the issuer, the attractiveness of alternative investments, the perceived risk of owning the security (whether related to credit, liquidity or any other risk), the accounting or tax treatment accorded the instruments, reactions to regulatory actions or press reports, financial reporting cycles and market sentiment generally. Shifts of demand in response to any one or simultaneous particular events cannot be predicted and may be short-lived or exist for longer periods.

It is possible that the potential lack of liquidity in our auction rate security investments could adversely affect our liquidity and our ability to fund our operations. We cannot predict whether future auctions related to auction rate securities will be successful. We are currently seeking alternatives for reducing exposure to the auction rate market, but may not be able to identify any such alternative. If we are not able to monetize some or all of our auction rate securities, we could suffer a loss and such loss could have a material adverse effect on our ability to finance our future ongoing operations. On August 15, 2008, the SEC announced that it had reached a preliminary settlement in principle with the financial institution through which we hold our auction rate securities, which included a plan to restore liquidity to the financial institution's customers who invested in auction rate securities. Under the settlement, the financial institution is required to offer to purchase the auction rate securities of its customers (other than individual investors, small businesses, and charitable organizations) in a buy back that will begin no later than June 10, 2009 and conclude by June 30, 2009. In addition, the financial institution is required by the settlement to offer no net loans that will remain outstanding until the auction rate securities are repurchased. The preliminary settlement is subject to finalization and SEC approval. To date, we have not received confirmation from the financial institution of the settlement terms.

We believe that the commencement of Phase III clinical trial trials for Oral-lyn™ in the United States and Canada is a significant milestone event. We also anticipate that the commercial launch of Oral-lyn™ in India, which is expected in before the end of calendar 2008, will provide us with revenue in fiscal 2009. We believe that the successful commercial launch of Oral-lyn™ in India, will enhance our ability to access additional sources of funding. For instance, in August 2008, we entered into a product licensing and distribution agreement with Dong Sung Pharm Co. Ltd. for the importation, marketing, distribution and sale of Generex Oral-lyn™ in South Korea. Under this agreement, we will receive an upfront non-refundable license fee of $500,000 and a non-refundable license fee of $500,000 at such time as we obtain governmental approval for the importation, marketing, distribution and sale of the product in South Korea is obtained. When it places its first order of Oral-lyn™, Dong-Sung also will make a $500,000 pre-payment against which product purchases will be applied.

Further we anticipate that our principal payment obligations under the convertible notes issued in the March 2008 private placement will be largely satisfied without cash payments through conversion of principal into shares of our common stock as permitted by the notes. In addition, we may receive additional proceeds from the exercise of warrants issued in the March 2008 private placement. As of October 1, 2008, all of the warrants issued in March 2008 became exercisable.

As of July 31, 2008, we believed that our anticipated cash position was sufficient to meet our working capital needs for the next twelve months based on the pace of our planned activities. Beyond that, we may require additional funds to support our working capital requirements or for other purposes.

We will continue to require substantial funds to continue research and development, including preclinical studies and clinical trials of our product candidates, and to commence sales and marketing efforts if the FDA or other regulatory approvals are obtained. Management may seek to meet all or some of our operating cash flow requirements through financing activities, such as private placement of our common stock, preferred stock offerings and offerings of debt and convertible debt instruments. We filed a shelf registration statement with the Securities and Exchange Commission ("SEC") to register an indeterminate number of shares of common stock and preferred stock and an indeterminate number of warrants and units, the aggregate initial offering price of which is not to exceed $150,000,000, but we have not offered any shares pursuant to this registration statement to date. Management is actively pursuing industry collaboration activities, including product licensing and specific project financing. We are also examining options for the procurement of a reliable long-term insulin supply for our future commercial needs.

While we have generally been able to raise equity capital as required, our cash balances were very low during portions of fiscal 2005 and unforeseen problems with our clinical program, manufacturing and commercialization plans in Ecuador and India or materially negative developments in general economic conditions could interfere with our ability to raise additional equity capital as needed, or materially adversely affect the terms upon which such capital is available. If we are unable to raise additional capital as needed, we could be required to "scale back" or otherwise revise our business plan. Any significant scale back of operations or modification of our business plan due to a lack of funding could be expected to affect our prospects materially and adversely.

Financing - 8% Secured Convertible Notes and Warrants

On March 31, 2008, we entered into a Securities Purchase Agreement and related documents with existing institutional investors relating to a private placement of 8% secured convertible notes (the "Notes") and warrants (the "Warrants") for aggregate gross proceeds to us of $20,650,000. In connection with the financing, we entered into a Registration Rights Agreement that required us to file a registration statement with the SEC by April 30, 2008 covering the resale of the shares of our common stock issuable pursuant to the Notes and Warrants.

Also in connection with the financing, we and our subsidiaries entered into a Security Agreement and related documents pledging and granting security interests to the investors in all of the non-real estate assets of Generex and our subsidiaries to secure all of our obligations to the investors, including our obligations pursuant to the Securities Purchase Agreement and the Notes and Warrants issued thereunder. With limited exceptions, the Security Agreement prohibits us from incurring future debt until the Notes are paid or converted. An "Event of Default" under the Notes constitutes an "Event of Default" under the Security Agreement.

The Notes have an 18-month maturity and amortize over fifteen months in fifteen . . .