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U.S. Securities and Exchange Commission

Washington, D.C. 20549



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Form 10-KSB/A

Amendment No. 1



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|x | ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------



For the fiscal year ended September 30, 2004



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------



For the transition period from  to



Commission file number 0-11480



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BIOVEST INTERNATIONAL, INC.

(Name of small business issuer in its charter)



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|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Delaware                                                       |  | 41-1412084                             
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)



8500 Evergreen
Blvd., Minneapolis, MN 55433

(Address of principal executive offices) (Zip Code)



Issuers telephone number: (813) 864-2562



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Securities registered under Section 12(b) of the Exchange Act: None



Securities registered under Section 12(g) of the Exchange Act: Common Stock, $.01 par value





(Title of class)



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Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 ̈



Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and
no disclosure will be 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. ̈



State issuers revenues for its most recent fiscal year: $5,706,000



The aggregate market value of voting common stock held by our non-affiliates as of September 30, 2004 could not be determined because our common stock was
not trading in any public market. The number of shares of common stock held by non-affiliates is 9,124,813.



The number of shares outstanding of each of the registrants classes of common stock, as of September 30, 2004 was: Common Stock, $.01 par value:
38,196,733 shares, and 8,021,886 shares of Preferred Stock.



Check whether the issuer has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a
court.    Yes  x    No ̈



Transitional Small Business Disclosure format (check
one)    Yes ̈No  x



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##### Table of Contents

PART I.



ITEM 1. DESCRIPTION OF BUSINESS



OVERVIEW



Our major focus has
become the development of our personalized therapeutic cancer vaccine for the treatment of low-grade Follicular Lymphoma (FL), which we have named Biovaxid ®. FL is a deadly cancer of the white blood cells. . This therapeutic vaccine is currently in a pivotal Phase III clinical trial. In September
2001, we entered into a Cooperative Research and Development Agreement (CRADA) with the NCI regarding the development of this therapeutic vaccine . In April, 2004, the Investigational New Drug application (IND) for Biovaxid® was transferred to us from the NCI.



We also produce mammalian and insect cells, monoclonal antibodies, recombinant and secreted
proteins and other cell culture products using our unique capability, expertise and proprietary advancements in the cell production process known as hollow fiber perfusion. In addition to our commercial contract production business, for more than
fourteen years we have been designated by the National Institutes of Health as the National Cell Culture Center. We also manufacture instruments and disposables used in the hollow fiber production of cell culture products. Our hollow fiber cell
culture products and instruments are used by biopharmaceutical and biotech companies, medical schools, universities, research facilities, hospitals and public and private laboratories.



HISTORICAL AND RECENT EVENTS.



We were incorporated in Minnesota in 1981, under the name Endotronics, Inc. and in 1993; our name was changed to Cellex Biosciences, Inc. In 1998, we entered a bankruptcy
preceding which in July 1999, was concluded with the confirmation of our Chapter 11 Plan of Reorganization. In May 2000, we acquired the assets of Unisyn Technologies, Inc., a competitor in hollow fiber perfusion, for a combination of shares of our
stock and our assumption of certain Unisyn debts and obligations. This acquisition provided us with additional expertise and proprietary advancements in the hollow fiber perfusion process and expanded our cell culture production capability. In 2001,
we changed our corporate name to Biovest International, Inc. and changed our state of incorporation from Minnesota to Delaware. In April 2003, we entered into an Investment Agreement with Accentia, Inc. (Accentia or our Parent
Corporation), a privately held, vertically integrated specialty biopharmaceutical company. As a result of this agreement, in June 2003, we became a subsidiary of Accentia through the sale of shares of our authorized but unissued common and
preferred stock representing approximately eighty-one percent of our equity outstanding after the investment. The aggregate investment commitment received from Accentia was twenty million dollars which consisted of cash and a combination of short
and long-term notes.



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OUR CURRENT BUSINESS



General.



Our business consists of four primary business segments: development of our therapeutic cancer vaccine, Biovaxid ® for FL; commercial production of cell culture products and services; operation of the National Cell Culture Center; and manufacture and sale of
instruments and consumables..



Cancer vaccine.



BiovaxidTM



Biovaxid is an injectable patient-specific vaccine that we are developing in conjunction with the National Cancer Institute to treat the follicular form
of non-Hodgkins lymphoma, or NHL. Biovaxid is a customized immunotherapy that is derived from a patients own cancer cells and is designed to utilize the power of each patients immune system to recognize and destroy cancerous
lymphoma cells while sparing normal cells. Biovaxid is currently undergoing a pivotal Phase III clinical trial with patients diagnosed with the indolent follicular form of NHL.



The Human Immune System



The immune system is the bodys natural defense mechanism for recognizing and combating viruses, bacteria, cancer
cells, and other disease-causing organisms. The primary disease fighting functions of the immune system are carried out by white blood cells. In response to the presence of disease, white blood cells can mediate two types of immune responses,
referred to as innate immunity and adaptive immunity. Innate immunity refers to a broad, first line of immune defense that occurs as a part of an individuals natural biological makeup. Adaptive immunity, on the other hand, is specifically
generated by a persons immune system throughout the persons lifetime as he or she is exposed to particular pathogens, which are agents such as bacteria or other microorganisms that cause disease. In contrast to the broad but unspecific
response of innate immunity, the adaptive immune response generates a highly specific, long-lasting, and powerful protection from repeated infection by the same pathogen. This adaptive immune response facilitates the use of preventative vaccines
that protect against viral and bacterial infections such as measles, polio, diphtheria, and tetanus.



Adaptive immunity is mediated by a subset of white blood cells called lymphocytes, which are divided into two types: B-cells and T-cells. In the
bloodstream, B-cells and T-cells recognize molecules known as antigens, which are proteins or other substances that are capable of triggering a response in the immune system. Antigens include toxins, bacteria, foreign blood cells, and the cells of
transplanted organs. When a B-cell recognizes a specific antigen, it secretes proteins, known as antibodies, which in turn bind to a target containing that antigen and tag it for destruction by other white blood cells. When a T-cell recognizes an
antigen, it either promotes the activation of other white blood cells or initiates destruction of the target cells directly. A persons B-cells and T-cells can collectively recognize a wide variety of antigens, but each individual B-cell or
T-cell will recognize only one specific antigen. Consequently, in each persons bloodstream, only a relatively few lymphocytes will recognize the same antigen.



In the case of cancer, cancer cells produce molecules known as tumor-associated antigens, which are present in normal cells
but may be over-produced in cancer cells. T-cells and B-cells have receptors on their surfaces that enable them to recognize the tumor associated antigens. While cancer cells may naturally trigger a T-cell-based immune response during the initial
appearance of the disease, the immune system response may not be sufficiently robust to eradicate the cancer. The human body has developed numerous immune suppression mechanisms to prevent the immune system from destroying the bodys normal
tissues, and because all cancer cells are originally normal tissue cells, they are often able to aberrantly active and exploit these mechanisms to suppress the bodys immune response, which would normally destroy them. Even with an activated
immune system, the number and size of tumors can overwhelm the immune system.



In the case of cancer and other diseases, immunotherapies are designed to utilize a persons immune system in an attempt to combat the disease. There are two forms of immunotherapy used to treat diseases: passive
and active. Passive immunotherapy is exemplified by the intravenous infusion into a patient of antibodies specific to the particular antigen, and while passive immunotherapies have shown clinical benefits in some cancers, they require repeated
infusions and can cause the destruction of normal cells in addition to cancer cells. An active immunotherapy, on the other hand, generates an adaptive immune response by introducing an antigen into a patient, often in combination with other
components that can enhance an immune response to the antigen. Although active immunotherapeutics have been successful in preventing many infectious diseases, their ability to combat cancers of various types has been limited by a variety of factors,
including the inability of tumor antigens to elicit an effective immune response, difficulty in identifying suitable target tumor antigens, inability to manufacture tumor antigens in sufficiently pure form, and inability to manufacture sufficient
quantities of tumor antigens. Nevertheless, there are many active immunotherapeutics for cancer in the late stages of clinical trials, and some are demonstrating encouraging results.



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There are two features of follicular NHL that make it a particularly attractive form of cancer for
treatment with an active immunotherapeutic approach. First, the malignant B-cell lymphocytes in follicular NHL have a single, identifiable tumor-specific antigen that is expressed on the surface of each and every cancerous B-cell in a particular
patient. This is in contrast to other solid cancer tumors, such as prostate, pancreatic, or lung carcinomas, which have a heterogeneous expression of different kinds of antigens on their cell surfaces and for which identification and inclusion of
all tumor-specific antigens is very challenging. Second, in cases of relapse after conventional treatment, the malignant B-cells in follicular NHL represent the original cancerous clone. Consequently, the cancer cells that survive treatment of NHL
seem to always represent tumor cells with the same antigen idiotype. An idiotype consists of the characteristics of an antigen that make it unique.



Non-Hodgkins Lymphoma



NHL is a cancer of the lymphatic system, which is a part of the immune system and serves as the bodys primary blood filtering and disease fighting
tissue. In NHL, cells in the lymphatic system become abnormal, divide and grow, and eventually gain the ability to evade the immune system, outlive their normal programmed lifespan, and spread through the body in an uncontrolled fashion. In NHL, the
immune system does not provide a sufficiently strong and active response to the activities of these abnormal cells.



NHL is the sixth most common cancer and the sixth leading cause of death among cancers in the U.S. There are approximately 56,000 new cases of NHL
diagnosed each year in the U.S. with a comparable number estimated in Europe. Currently in the U.S., there are over 300,000 patients diagnosed with NHL.



NHL is usually classified for clinical purposes as being either indolent or aggressive, depending on how quickly the cancer cells
are likely to grow and spread. The indolent, or slow-growing, form of NHL has a very slow growth rate and may need little or no treatment for months or possibly years. Aggressive, or fast-growing, NHL tends to grow and spread quickly and cause
severe symptoms. Indolent and aggressive NHL each constitute approximately half of all newly diagnosed B-cell NHL, and roughly half of the indolent B-cell NHL is follicular B-cell NHL. Follicular NHL is a form of NHL that is derived from a type of
cell known as a follicle center cell. Despite the slow progression of indolent B-cell NHL, the disease is almost invariably fatal. According to the American Cancer Society, the median survival time from diagnosis for patients with indolent B-cell
NHL having stage III or IV follicular B-cell NHL is between seven and ten years. Unlike indolent B-cell NHL, approximately 40% of aggressive B-cell NHL cases are cured by standard chemotherapy.



Chemotherapy is widely used as a first line of treatment for NHL. Although
chemotherapy can substantially reduce the tumor mass and in most cases achieve a clinical remission, the remissions are generally short-lived. Indolent B-cell NHL patients relapse within a few months or years of initial treatment, and the cancer
usually becomes increasingly resistant to further chemotherapy treatments. Eventually, the patients response to therapy is so brief and weak that further chemotherapy would offer no clinical benefit.



A number of passive immunotherapies, such as Rituxan, Bexar, and other
monoclonal antibodies, have demonstrated the ability to induce remission in patients with indolent B-cell NHL. A monoclonal antibody is a highly specific antibody produced in large quantity by the clones of a single hybrid cell formed in the
laboratory by the fusion of a B-cell with a tumor cell. To date, these therapies alone have generally failed to provide unlimited remissions for most patients, and their cost and side-effects are often significant. Rituxan is used in approximately
67% of all new cases of NHL per year with U.S. sales estimated to exceed a billion dollars annually.



Development of Patient-Specific Vaccine for NHL



During the late 1980s, physicians at Stanford University began development of an active immunotherapy for the treatment of indolent B-cell NHL, and the
work was thereafter continued by Dr. Larry Kwak and his colleagues at the National Cancer Institute, or NCI. In 1996, the NCI began a Phase II clinical trial and selected our Biovest subsidiary to produce the vaccine for the trial. In 2001, Biovest
entered into a cooperative research and development agreement, or CRADA, with the NCI under which we jointly conducted the Phase III clinical trial. The NCI filed the Investigational New Drug application, or IND, for Biovaxid in 1994, and in April
2004, sponsorship of the IND was formally transferred from the NCI to us.



Studies have shown that treatment with an active immunotherapy should allow a patients own immune system to produce both B-cells and T-cells that recognize numerous portions of the tumor antigen and generate
clinically significant immune responses. With respect to follicular NHL and other cancers, tumor cells remaining in the patient after completion of surgery, radiation, and chemotherapy are the cause of tumor relapse. These residual tumor cells
cannot be detected by imaging, but their destruction may be feasible by active immunotherapy. With a patient-specific active vaccine, patients receive their own tumor idiotype, as the vaccine is customized for the tumor target of the individual
patient. Repeated vaccination with such a tumor vaccine provides the patients immune system with an additional opportunity to be effectively activated by the tumor cell itself.



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Our research has focused on the indolent form of follicular NHL, which accounts for about 90% of newly
diagnosed cases of follicular NHL. In about 30% of the indolent cases, there is transformation of the indolent form to a more aggressive lymphoma, such as large-cell follicular NHL. This transformation is typically an early event in the course of
the disease, usually occurring before the sixth year after diagnosis, and it is mainly observed in patients with known adverse prognostic factors. It is the goal of Biovaxid to intervene in the transformation process by treating newly diagnosed
patients in their first clinical remission with the hope of inducing indefinitely prolonged remission and thereby eliminating the possibility of transformation to a more aggressive form of the disease.



Biovaxid Treatment and Production Process



Biovaxid is designed to utilize the power of each patients immune
system and cause it to recognize and destroy cancerous lymphoma cells while sparing normal B-cells. Typically, all of a patients cancerous B-cells are replicate clones of a single malignant B-cell, and, accordingly, all of a patients
cancerous B-cells express the same surface antigen idiotype that is not present on non-cancerous tissue. Biovaxid is designed to use the patients own antigen idiotype from the patients tumor cells to direct the patients immune
system to mount a targeted immune response against the tumor cells. In general, the therapy seeks to accomplish this result through the extraction of tumor cells from the patient, the culturing and growing of a cell culture that secrets proteins
bearing same antigen idiotype found in the patients tumor cells, the production and enhancement of a purified version of the cancer idiotype antigen, and the injection of the resulting vaccine into the patient. By introducing a
highly-concentrated purified version of the cancer antigen into the patients system, the vaccine is designed to trigger the immune system to mount a more robust response to the specific antigen, in contrast to the comparatively weak and
insufficient pre-vaccination response. Because the antigen is specific to the cancerous B-cells and not found on normal B-cells, the immune response should target the cancerous B-cells for destruction and not cause harm to the normal cells.



The following briefly summarizes the general steps in the
Biovaxid treatment and production process:



| |  |  | Step One. A sample of the patients tumor is extracted by a biopsy performed by the treating physician at the time of diagnosis, and the sample is shipped refrigerated
to our manufacturing facility in Worcester, Massachusetts.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Step Two. At our manufacturing facility, we identify the antigen idiotype that is expressed on surface of the patients tumor cells through laboratory analysis.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Step Three. The patients tumor cells are then fused with an exclusively licensed laboratory cell line from Stanford University to create a hybridoma. The hybridoma is a
hybrid cell resulting from the fusion of a patient tumor cell and a murine/human heterohybridoma myeloma cell, which is an antibody-secreting cell created from a fused mouse and human cell. The purpose of creating a hybridoma is to create a cell
that secretes antigens bearing the same idiotype as the patients tumor cells. The hybridoma cell can be used to produce the vaccine because the tumor-specific antigen expressed on the surface of the patients tumor cells is itself an
antibody.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Step Four. After the creation of the hybridoma, we use a special technique to determine which hybridoma cells display the same antigen idiotype as the patients tumor
cells, and those cells are selected to produce the vaccine.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Step Five. The selected hybridoma cells are then seeded into our hollow fiber bioreactors, where they are cultured and where they secrete an antigen bearing the same idiotype
as the patients tumor cells. The secreted antigens are then collected as they are forced out of the hollow fibers.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Step Six. After a sufficient amount of antigen is collected for the production of an appropriate amount of the vaccine, the patients antigen idiotype is purified using
an affinity chromatography column. Affinity chromatography is a technique used to separate and purify a biological molecule from a mixture by passing the mixture through a column containing a substance to which the biological molecule bindsStep
Seven. The resulting purified idiotype antigen is then conjugated with keyhole limpet hemocyanin, or KLH, to create the vaccine. KLH is a foreign carrier protein that is used to improve the immumogenicity of the tumor-specific antigen. The
vaccine is then frozen and shipped to the treating physician.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Step Eight. At the treating physicians office, the vaccine is thawed and injected into the patient as an antigen. We expect that the initial vaccination will typically
commence six months after the patient enters clinical remission following chemotherapy. The vaccine is administered in conjunction with GM-CSF, a natural immune system growth factor that is administered with an antigen to stimulate the immune system
and increase the response to the antigen. The patient is administered five monthly injections of the vaccine in the amount of 1⁄2 milligram of vaccine per injection, with the injections being given over a six-month period of time in which the
fifth month is skipped. Through this process, the patient-specific antigens are used to stimulate the patients immune system into targeting and destroying B-cells bearing the same antigen idiotype.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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To our knowledge, Biovaxid is the only NHL vaccine currently in development under an IND that is produced
through a hybridoma process. The hybridoma process is different from the recombinant process, which is the method being used by other companies that are currently developing an active idiotype immunotherapeutic for NHL. In the recombinant process,
the patients own tumor cells are not fused with lymphocytes, but instead the vaccine is produced by introducing genetic material bearing certain portions (known as the variable light and variable heavy chains) of the tumor-derived idiotype
protein into mammalian or insect cells. Whereas the hybridoma method will produce high-fidelity copies of the antigen that, through clonal reproduction, exactly replicates the original gene sequences of the tumor specific idiotype of the parent
tumor cell, the recombinant method gives rise to protein products that have combinations of gene sequences different from those of the patients tumor.



We use a method known as hollow-fiber perfusion to produce the cell cultures used in the manufacture of Biovaxid. Hollow-fiber perfusion, as
compared to other cell culture methods, seeks to grow cells to higher densities more closely approaching the density of cells naturally occurring in body tissue. The hollow-fiber perfusion method involves using hair-like plastic fibers with hollow
centers which are intended to simulate human capillaries. Thousands of these fibers are inserted in a cartridge, which we refer to as a bioreactor. The cells are grown on the outside of the hollow fibers while nutrient media used to support cell
growth is delivered through the hollow centers of the fibers. The fiber walls have small pores, allowing nutrients to pass from the hollow center to the cells. The fibers act as filters and yield concentrated secreted products. Because the cells are
immobilized in the bioreactor, the concentrated product can be harvested during the ongoing cell growth process. We believe that hollow-fiber technology permits harvests of cell culture products with generally higher purities than stirred-tank
fermentation, a common alternative cell culture method, thereby reducing the cost of purification as compared to stirred tank fermentation. Additionally, the technology associated with the hollow-fiber process generally minimizes the amount of
costly nutrient media required for cell growth as opposed to other cell culturing techniques.



We believe that our vaccines anti-tumor effect could exceed that of non-targeted traditional therapy, such as chemotherapy, as our therapy arises from the immune systems defense cells innate ability
to selectively target foreign antigens while not attacking the normal healthy B-cells. The immune response triggered by our vaccine against the cancerous tissue is a natural disease-fighting mechanism without causing the side-effects associated with
chemotherapy and radiation used to traditionally treat NHL. We also believe that our vaccines effectiveness could exceed that of passive immunotherapies, such as Rituxan, Bexar, and other monoclonal antibodies. Unlike Biovaxid, these therapies
do not target the unique antigen idiotype that is found on the surface of the patients tumor cells. Instead, they target an antigen that is common to all B-cells, known as the CD-20 antigen, which results in the undesirable destruction of
normal B-cells.



Manufacture of Biovaxid



We manufacture Biovaxid at Biovests own
manufacturing facility in Worcester, Massachusetts. We believe that our Worcester facility is sufficient to produce the vaccine required for the products clinical trials. If we receive FDA approval of the vaccine, we may continue to
manufacture the vaccine at our existing facility in Worcester, although we will likely need to develop additional facilities or utilize third-party contract manufacturers to fully support commercial production for the U.S. markets. To penetrate
markets outside of the U.S., we may enter into collaborations with well-established companies that have the capabilities to produce the product. To facilitate commercial production of the vaccine, we are developing proprietary manufacturing
equipment that integrates and automates various stages of vaccine production. We believe that such equipment will reduce the space and staff currently required for production of the vaccine.



Development Status



In April 2004, the NCI formally transferred sponsorship of the IND for
Biovaxid to us, which gives us the right to communicate and negotiate with the FDA relating to the approval of Biovaxid and to conduct the clinical trials for the vaccine. Biovaxid is in a pivotal phase III clinical trial which was started in
January 2000 by the NCI. There are currently 19 clinical sites and 174 patients enrolled in the clinical trial. In April 2004, we filed an application with the FDA to have Biovaxid designated an orphan drug based on the size of the population
diagnosed with indolent follicular NHL. We are currently pursuing this designation which, if granted, would potentially provide a seven year period of market exclusivity in the U.S. for the product if it is the first such vaccine approved for
indolent follicular NHL. The objective of our Phase III clinical study is to measure the efficacy of the active idiotype vaccination in regards to prolongation of the period of disease-free survival when compared to treatment with a control vaccine
consisting solely of KLH in patients with indolent follicular NHL. The patients being treated under this protocol have been diagnosed with previously untreated Stage 3-4 follicular NHL, Grades I-IIIa, which are the indolent slowly progressing forms
of the disease that historically have been incurable. This clinical trial commenced in early 2000 and is currently underway at 21 treatment centers in the U.S. This is a double-blind study, meaning that neither the subjects of the study nor the
researchers know the drug, dosage, or other critical aspects of the study in order to guard against bias and the effects of the control vaccination. Of the 375 patients planned to take part in the Biovaxid or control arm of the study, 250 patients
are scheduled to be randomly selected, or randomized, for the Biovaxid treatment



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arm, and 125 are schedule to be randomized to the control arm. Of the 250 patients who are scheduled to be randomized to the Biovaxid treatment arm, we
estimate that approximately one third have completed the series of vaccinations and are in the follow-up phase of the trial. The patients being treated with Biovaxid have received or are receiving a series of 5 vaccinations administered over a 6
month period. Each vaccination is accompanied by a series of 4 injections of GM-CSF. PACE chemotherapy (prednisone, doxorubicin, cytoxan and etoposide) is administered until patients achieve their best response, which is a minimum of 6 cycles over
6-8 months. Those patients achieving a complete remission are then randomized to receive vaccination with either Biovaxid or the KLH control in a 2:1 ratio respectively. After a 6 month waiting period while the patients immune system
reconstitutes, the patient initiates the vaccination series. The primary endpoint is a comparison between treatment groups of the median duration of disease free survival measured from the time of randomization to the point of confirmed relapse.
Data from the trial are reviewed periodically (at least annually) by an independent safety data monitoring board. It is planned that annual data reviews of both efficacy and safety will be conducted throughout the duration of the trial, and the next
assessment is scheduled to occur in July 2005. At such time that the interim analysis confirms a statistically significant difference between active and control groups, the data will be assembled for submission of a Biologics License Application
requesting FDAs approval for commercialization of Biovaxid.



The objective of the Phase II clinical investigation was to study the ability of an idiotype vaccine to elicit tumor-specific T-cell immunity in follicular B-cell NHL patients, as measured by the ability of the patients T cells to
specifically destroy their own tumor cells in vitro and to exert anti-tumor effects as measured by the elimination of cells from the peripheral blood of a uniform group of patients. In this study conducted by the NCI, 20 patients achieved
complete remission and received a series of 5 Biovaxid and GM-CSF injections over a 6 month period. Eight of these patients totally cleared all residual tumor cells post vaccination. The molecular remission was sustained for a median 18 months, with
a range of 8 to 32 months. T-cell responses specific for the patients NHL idiotype were also observed in 85% of patients. At the end of the study assessment, 18 of 20 patients remained in continuous complete remission for a median 42 months,
with a range of 28 to 52 months. After long term follow-up at 7 years post vaccination, as published by the NCI in 2003 in the proceedings of the American Society of Hematology, 18 of 20 patients survived, and 10 of 20 patients remained in complete
continuous remission. In the Phase II study, 95% of the patients treated with Biovaxid mounted an immune response specific to their individual tumor cells.



Proprietary Rights to Biovaxid



Our proprietary position in the Biovaxid vaccine and production process is based on a combination of patent protection, trade secret protection, our
development relationship with the NCI, and our ongoing innovation. Although the composition of matter of the Biovaxid vaccine is not patentable, we have filed provisional patent applications on the type of cell media that is used to grow cell
cultures in the production of our vaccine and also on an integrated production and purification system used to produce and purify the product in an automated closed system. We also hold a patent on the cycling technology that is used in the vaccine
production machinery, although this patent will expire in 2006. We believe that, without the availability of an automated production and purification system, the methods used to produce a patient-specific immunotherapy are time-consuming and
labor-intensive, resulting in a very expensive process that would be difficult to scale up and control in a regulated manner.



Our CRADA with the NCI provides that we will have exclusive ownership rights to any inventions that arise under the CRADA solely through the efforts of
our employees, and we will have a first option to exclusively license any other technology that may be developed under the CRADA by the parties jointly or by the NCI by itself. In light of the recent transfer of the Biovaxid IND to us, we believe
that any future developed patentable inventions under the CRADA will likely be developed solely by our own employees. The CRADA also provides for confidentiality obligations with respect to any new data, technology, or inventions that may be
patentable.



In October 2004, we entered into an agreement with
Stanford University giving us exclusive worldwide rights to two proprietary hybridoma cell lines that are used in the production of Biovaxid. These are the same fusion cell lines that have been used by researchers at Stanford and the NCI to perform
their studies of the hybridoma idiotype vaccine in NHL. This agreement, which extends through 2019, provides for up-front royalties and milestone payments payable to Stanford, as well a per-patient royalty based on the number of patients treated
with the therapy.



During the fiscal years ended September 30, 2004, and
September 30, 2003, we spent approximately $5,189,000 and $1,800,000, respectively for research, development, clinical trial and other expenses related to the vaccine. In addition to these expenses directly related to the development of the vaccine,
we spent approximately $351,000 and $761,000 on research and development relating to our hollow fiber production instruments, disposables and production processes in 2004 and 2003, respectively.



There are many risks and costs involved in clinical trials. There is no certainty that we
will successfully complete the Phase III clinical trial. Even if the clinical trial is successful, there is no certainty that the vaccine can be produced at a competitive or acceptable cost nor that the vaccine can become an accepted treatment for
FL.



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Cell Culture Products and Services.



We manufacture cell culture products such as mammalian and insect cells, recombinant and secreted proteins, and monoclonal antibodies.
Additionally, we provide related services as a contract resource to assist our customers in developing cell production process protocols, cell line optimization, cell culture production optimization, media evaluation and other related services. This
segment of our business represented approximately $2,100,000 (approximately 28% of our aggregate revenues) and approximately $2,200,000 (approximately 27% of our aggregate revenues) for the fiscal years ended September 30, 2004 and September 30,
2003, respectively.



Our customers include biopharmaceutical and biotech
companies, medical schools, universities, research facilities, hospitals and public and private laboratories. We generally produce cell culture products pursuant to contracts which specify the customers requirements for the cell culture
products to be produced or the services to be performed.



Currently, our
marketing is conducted by our chief marketing officer together with one employed salesmen. Our sales personnel market our cell culture production services as well as our line of instruments and disposables.



There are various processes commonly used to produce mammalian cells generally used in the
production of antibodies. These may include hollow fiber perfusion, stirred tank fermentation, roller bottle and other processes. We use hollow fiber technology to produce mammalian cells. This technology seeks to grow cells to high densities more
closely approaching the density of cells naturally occurring in body tissue. We have expertise with in vitro (outside the living body) environments for a wide variety of mammalian cells. Mammalian cells are complicated and dynamic, with constantly
changing needs. A primary component of hollow fiber technology is fibers made of plastic polymers. The fibers are hair-like with hollow centers which are intended to simulate human capillaries. Thousands of these fibers are inserted in a cartridge,
which we refer to as a bioreactor. The cells are grown on the outside of the hollow fibers while nutrient media used to support cell growth is delivered through the hollow centers of the fibers. The fiber walls have small pores, allowing nutrients
to pass from the hollow center to the cells. The fibers act as filters and yield concentrated secreted products. Because the cells are immobilized in the bioreactor, the concentrated product can be harvested during the on-going cell growth process.
Hollow fiber technology permits harvests of cell culture products with generally higher purities thereby reducing the cost of purification. This technology generally minimizes the amount of costly nutrient media required for cell growth.



The most generally used process for mammalian cell production is stirred tank
fermentation. Hollow fiber technology can be contrasted with the competitive stirred tank fermentation process which takes place in tanks of various sizes. Cell culture products grow inside the tanks in media fluid which is maintained under
controlled conditions and continuously stirred to stimulate growth. At the end of the growing process, as opposed to incrementally during the growth process, cell culture products are separated from the remaining media fluid. The size of the tanks
generally result in stirred tank fermentation facilities requiring significantly more start-up costs, space and infrastructure than comparable production facilities using hollow fiber technology. While stirred tank fermentation and hollow fiber
technology are both used for cell production of various quantities, we believe that the stirred tank fermentation process is currently more commonly used for larger scale commercial production requirements. We believe that hollow fiber technology
has advantages in scalability, start-up time and cost in the early development of antibody production.



In the expanding field of personalized medicine where patient specific drugs and therapeutics are frequently envisioned, such as the therapeutic vaccine which we are developing in collaboration with the NCI, we
believe that hollow fiber technology may be the appropriate cell culture production technology.



National Cell Culture Center.



In connection with a grant from the National Institutes of Health, which will expire according to its terms unless renewed in September, 2005, we serve as the National Cell Culture Center which we maintain at our Minneapolis, Minnesota
facility. We were first designated the National Cell Culture Center in 1990 and we have continuously served as the National Cell Culture Center for more than fourteen years. The National Cell Culture Center is a non-profit research resource facility
established and sponsored by the National Center of Resources for Research of the National Institutes of Health. The National Cell Culture Center provides customized cell culture services for basic research laboratories. As the National Cell Culture
Center we have had experience with the production of over 1500 unique or common cell lines. Through the National Cell Culture Center, the National Institutes of Health subsidizes cell culture services and product production to support research and
development primarily at universities. We receive revenues from the National Institutes of Health in the form of a grant and fees from customers which use the National Cell Culture Center services. For the fiscal years ended September 30, 2004, and
September 30, 2003, we received revenue of approximately $1,100,000 (approximately 19% of our aggregate revenue) and $1,300,000 (approximately 15% of our aggregate revenue), respectively from our business activities as the National Cell Culture
Center.



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Instruments and Disposables.



We are a leader in hollow fiber perfusion instruments used for the production of significant quantities of cell culture products. Our
product line includes:



Primer HF®



The Primer HF®is a low cost hollow fiber cell culture system capable of producing small quantities of monoclonal antibody. This system also provides a relatively inexpensive option to evaluate the efficacy of new
cell lines in perfusion technology.



The miniMax®provides the flexibility and technology needed to support optimization studies and research scale
production of mammalian cell secreted proteins. This automated cell culture system is a table-top unit complete with microprocessor controller, self-contained incubator, and pump panel. The miniMax® is an economical tool for researching scale-up processes and producing small quantities
of protein of up to 10 grams per month.



Maximizer®



The Maximizer® provides maximum flexibility to support optimization studies and pilot scale production of mammalian cell secreted proteins. This automated cell
culture system is a table-top unit complete with validated microprocessor controller, self-contained incubator, and pump panel. With production rates up to one gram a day, the Maximizer® is a tool for process development and production.



XCellerator®



The XCellerator® is a self-standing floor system containing an incubator and refrigerator section, control fixtures and pump panel. Each Xcellerator® supports two independent flowpaths, is controlled by a process control computer and has
the capability of remote monitoring. The combined features of the XCellerator® support production of 60-500 grams of protein per month, per XCellerator® unit.



In
addition to instruments sales, we have recurring revenue from the sale of hollow fiber bioreactors, culture ware, tubing sets and other disposable products and supplies for use with our instruments. Revenue from such disposable products represented
approximately 32% of our total revenue from this business segment for the fiscal year ended September 30, 2004.



Currently we assemble, validate and package the instruments and disposables which we sell. Customers for our instruments and disposables are the same potential customers
targeted for our contract production services which include biopharmaceutical and biotech companies, medical schools, universities, research facilities, hospitals and public and private laboratories.



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Instruments and Disposables (continued)



For the fiscal years ended September 30, 2004, and September 30, 2003, we received revenue of approximately $2,300,000 (approximately 41% of
our aggregate revenue) and $4,800,000 (approximately 58% of our aggregate revenue), respectively from this business segment.



COMPETITION



We compete with others that produce cell culture products using the hollow fiber process, such as BioInvent and Goodwin Labs. Additionally, we compete with others that use alternative cell culture production processes
such as stirred tank fermentation process to produce cell culture products. These competitors include Cambrex Biopharmaceuticals, Covance Inc., DSM Biologics, and Lonza Ltd. Our primary market focus has been contract production of small quantities
of cell culture products which we produce to the specification of the customer. Our customers are frequently engaged in research and development activities. We plan to increasingly seek larger scale commercial production contracts which will cause
us to compete more directly with larger competitors which primarily use stirred tank fermentation. In the manufacture and sale of our instruments and disposables, we have limited competition from other manufacturers of instruments used for hollow
fiber perfusion production. We do, however, compete with numerous manufacturers of instruments that are competitive with hollow fiber and with companies offering cell culture production services as an alternative to instrument purchase.



The biotechnology and biopharmaceutical industries are characterized by rapidly advancing
technologies, intense competition and a strong emphasis on proprietary products. We face competition from many different sources, including commercial pharmaceutical and biotechnology enterprises, academic institutions, government agencies and
private and public research institutions.



Research for new cancer therapies is
intense and new treatments are being developed by competitors. Many competitors have significantly greater financial resources and expertise in such matters as research and development, manufacturing, preclinical and clinical trials and regulatory
approvals. Competitors may have collaborative arrangements with large and established companies. Additionally, we may compete in recruiting and retaining qualified scientific and management personnel, establishing clinical trial sites and patient
enrollment.



Several companies, such as Corixa Corporation, IDEC
Pharmaceuticals Corporation and Immunomedics, Inc. are involved in the development of passive immunotherapies for the treatment of Non-Hodgkins Lymphoma. Various products are currently marketed for treatment of NHL. Rituxan, a monoclonal
antibody co-marketed by Genentech, Inc. and IDEC Pharmaceuticals Corporation, is approved for the treatment of relapsed or refractory, low grade B-cell NHL. In addition, IDEC has received FDA approval for marketing its passive radioimmunotherapy
product, Zevalin, and GlaxoSmithKline Plc and Corixa Corporation recently received FDA approval for marketing their version of passive radioimmunotherapy product, Bexxar, for the treatment of relapsed or refractory low grade, follicular, or
transformed B-cell NHL.



In addition, there are several companies focusing on
the development of active immunotherapies for the treatment of NHL, including Antigenics, Inc., Favrille, Inc. and Large Scale Biology Corporation. While these companies product candidates are in various stages of development, none are in
Phase III clinical trials for treatment of NHL



In the Phase III clinical
trial, our vaccine is administered following complete remission after chemotherapy. Our monoclonal antibody, which is produced from the patients own tumor, potentially makes our approach more effective than other approaches which are not
wholly patient-specific, as it stimulates the patients immune system to turn against and destroy the cancer cells.



Our vaccine, if approved, will compete with other cancer treatments. Currently used treatments for FL include chemotherapy, radioisotopes and monoclonal antibodies such
as Zevalin and Rituxan.



Additionally, we must also compete with companies
developing new drugs and treatments for FL. One such competitor is Genitope, which is conducting Phase III clinical trials. As discussed elsewhere, the vaccine produced in accordance with Genitopes technology is not considered totally
patient-specific which may potentially impact the relative effectiveness of such vaccines. We believe that the ability of our vaccine to compete with treatments in current use and those in development will depend, in large part, upon the efficacy
data derived from completion of our pivotal Phase III clinical trial, the time required to complete our clinical trial and obtain governmental approval, cost effectiveness, acceptance by insurance companies and other third party payers and
acceptance in the medical community.



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PATENTS, TRADEMARKS AND PROTECTION OF PROPRIETARY TECHNOLOGY



We own several patents covering various aspects of our hollow fiber perfusion process and
instruments and proprietary cell culturing methods. Our patents also cover aspects of our therapeutic vaccine production process. We plan to continue pursuing patent and other proprietary protection for our cancer vaccine technology and
instrumentation. Currently, we have fourteen (14) issued United States patents and several foreign counterparts. The expiration dates of our presently issued United States patents range from December 2006 to November 2017. A list of our active U.S
patents follows:



|                     |  |                                                                                                                                    |  |                              |  |                
|-------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------- |  | ---------------
|Patent No.           |  | Title and Inventor(s)                                                                                                              |  | Filing Date/ Issue Date      |  | Expiration Date
|4,889,812            |  | BIOREACTOR APPARATUS by Perry W. Guinn                                                                                             |  | May 12, 1986/Dec. 26, 1989   |  | Dec. 26, 2006  
|                     |  |                                                                                                                                    | 
|4,894,342            |  | BIOREACTOR SYSTEM by Perry W. Guinn                                                                                                |  | Sept. 22, 1986/Jan. 16, 1990 |  | Jan. 16, 2007  
|                     |  |                                                                                                                                    | 
|5,656,421            |  | MULTI-BIOREACTOR HOLLOW FIBER CELL PROPAGATION SYSTEM AND METHOD By Timothy C. Gebhard                                             |  | Feb. 12, 1991/Aug. 12, 1997  |  | Jan 30, 2009TD 
|                     |  |                                                                                                                                    | 
|5,998,184            |  | BASKET-TYPE BIOREACTOR by Yuan Shi                                                                                                 |  | Oct. 8, 1997/Dec. 7, 1999    |  | Oct. 8, 2017   
|                     |  |                                                                                                                                    | 
|5,416,022            |  | CELL CULTURE APPARATUS by Bruce P. Amiot                                                                                           |  | Oct. 29, 1993/May 16, 1995   |  | Jan 7, 2009TD  
|                     |  |                                                                                                                                    | 
|5,330,915            |  | PRESSURE CONTROL SYSTEM FOR A BIOREACTOR by John R. Wilson                                                                         |  | Oct. 18, 1991/Jul. 19, 1994  |  | Oct. 18, 2011  
|                     |  |                                                                                                                                    | 
|5,541,105            |  | METHOD OF CULTURING LEUKOCYTES by Georgiann B. Melink                                                                              |  | Apr. 26, 1994/Jul. 30, 1996  |  | July 30, 2013  
|                     |  |                                                                                                                                    | 
|5,631,006            |  | IMMUNOTHERAPY PROTOCOL OF CULTURING LEUKOCYTES IN THE PRESENCE OF INTERLEUKIN-2 IN A HOLLOW FIBER CARTRIDGE by Georgiann B. Melink |  | Jun. 7, 1995/May 20, 1997    |  | May 20, 2014   
|                     |  |                                                                                                                                    | 
|4,804,628(EP198032B) |  | HOLLOW FIBER CELL CULTURE DEVICE AND METHOD OF OPERATION by Ray F. Cracauer                                                        |  | Aug. 19, 1987/Feb. 14, 1989  |  | Feb. 14, 2006  
|                     |  |                                                                                                                                    | 
|4,629,686            |  | APPARATUS FOR DELIVERING A CONTROLLED DOSAGE OF A CHEMICAL SUBSTANCE by Michael L. Gruenberg                                       |  | Jun. 14, 1982/Dec 16, 1986   |  | Oct. 21, 2003TD
|                     |  |                                                                                                                                    | 
|4,650,766            |  | CULTURING APPARATUS by William H. Harm                                                                                             |  | Oct 9, 1984/Mar. 17, 1987    |  | Oct. 9, 2004   
|                     |  |                                                                                                                                    | 
|4,973,558            |  | METHOD OF CULTURING CELLS USING HIGHLY GAS SATURATED MEDIA by John R. Wilson                                                       |  | Apr. 28, 1988/Nov. 27, 1990  |  | April 28, 2008 
|                     |  |                                                                                                                                    | 
|5,202,254            |  | PROCESS FOR IMPROVING MASS TRANSFER IN A MEMBRANE BIOREACTOR AND PROVIDING A MORE HOMOGENOUS CULTURE ENVIRONMENT by Bruce P. Amiot |  | Apr. 13, 1993/Oct. 11, 1990  |  | Oct. 11, 2010  
|                     |  |                                                                                                                                    | 
|6,001,585            |  | MICRO HOLLOW FIBER BIOREACTOR by Michael J. Gramer                                                                                 |  | Nov. 14, 1997/Dec 14, 1999   |  | Nov. 14, 2017  
|                     |  |                                                                                                                                    | 
|5,622,857            |  | HIGH PERFORMANCE CELL CULTURE BIOREACTOR AND METHOD by Randal A. Goffe                                                             |  | Aug. 8, 1995/April 22, 1997  |  | Feb. 9, 2014   



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Additionally, we consider trademarks to be potentially important to our business. We have established trademarks covering
various aspects of our hollow fiber perfusion process, instruments and proprietary cell culturing methods. We have been issued the trademark Biovax®and have filed the trademark Biovaxid® in connection with our therapeutic cancer vaccine, and we plan to continue aggressively pursuing trademark and other proprietary
protection for our therapeutic vaccine technology and instrumentation.



GOVERNMENT REGULATIONS



The Food and Drug
Administration (FDA) has extensive regulatory authority over biopharmaceutical products (drugs and diagnostic products produced from biologic processes). The principal FDA regulations that pertain to our cell production activity include, but are not
limited to 21CFR Parts 600 and 610  General Biological Products and Standards; 21 CFR Parts 210 and 211  current Good Manufacturing Practices for Finished Pharmaceuticals; 21 CFR Part 820  Quality System Regulations (medical
devices); and 21 CFR Part 58  Good Laboratory Practice for Non-Clinical Laboratory Studies. FDAs guidelines include controls over procedures and systems related to the production of mammalian proteins and quality control testing of any
new biological drug or product intended for use in humans (including, to a somewhat lesser degree, in vivo biodiagnostic products). FDA guidelines are intended to assure that the biological drug or product meets the requirements through rigorous
testing with respect to safety, efficacy, and meet the purity characteristics for identity and strength. FDA approvals for the use of new biological drugs or products (that can never be assured) require several rounds of extensive preclinical
testing and clinical investigations conducted by the sponsoring pharmaceutical company prior to sale and use of the product. At each stage, the approvals granted by the FDA include the manufacturing process utilized to produce the product.
Accordingly, our cell culture systems used for the production of therapeutic or biotherapeutic products (biological drug or product) are subject to significant regulation by the FDA under the Federal Food, Drug and Cosmetic Act, as amended (the
FD&C Act).



Our cell culture systems used to produce cells for
diagnostic uses are regulated under the FD&C Act as Class I medical devices. Medical devices are classified by the FDA into three classes (Class I, Class II and Class III) based upon the potential risk to the consumer posed by the medical device
(Class I devices pose the least amount of risk, while Class III devices and new devices are presumed to inherently pose the greatest amount of risk). As Class I devices, our systems must be manufactured in accordance with Good
Manufacturing Practices guidelines. Sales of such systems to customers using them to manufacture materials for clinical studies and licensure do not require prior FDA approval.



The process of complying with FDA guidelines and obtaining approvals from the FDA of applications to market biopharmaceutical drugs and
products is costly, time consuming and subject to unanticipated delays. There is no assurance that our customers will be able to obtain FDA approval for biological drugs and products produced with our systems, and failure to receive such approvals
may adversely affect the demand for our services.



Under the FD&C Act, our
customers must establish and validate Standard Operating Procedures (SOPs) utilizing our cell culture technologies in their Drug Master Files. We provide assistance in operational, validation, calibration and preventive maintenance SOPs to
customers, as needed, to support their product development and commercialization processes. For example, we will typically provide existing and prospective customers who are utilizing our contract production services or constructing production
facilities based on our cell culture technologies with information to enable such customers to comply with the FDAs guidelines required for facility layout and design. This information may be provided either in a drug/biologic Master File that
we give permission to customers to cross reference in their submission to the FDA, or provided to customers to include in their FDA submissions.



As we currently do business in a significant number of countries, in addition to the requirements of the FDA, we are subject to the relations of other countries and
governmental agencies which apply to our goods and services when sold in their jurisdiction.



We are subject to various regulations regarding handling and disposal of potentially hazardous materials, wastes and chemicals such as cells and their secreted waste products, including those enforced by the
Environmental Protection Agency and various state and local agencies.



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INSURANCE



We may be exposed to potential product liability claims by users of our products. We presently maintain product liability insurance coverage in connection with our
systems and other products and services, in amounts which we believe to be adequate and on acceptable terms.



Although we believe that our current level of coverage is adequate to protect our business from foreseeable product liability claims, we may seek to increase our insurance coverage in the future in the event that we
significantly increase our level of contract production services. There can be no assurance, however, that we will be able to maintain our existing coverage or obtain additional coverage on acceptable terms, or that such insurance will provide
adequate coverage against all potential claims to which we may be exposed. A successful partially or completely uninsured claim against us could have a material adverse effect on our operations.



Our cell culture production services may expose us to potential risk of liability. We seek to
obtain agreements from contract production customers to mitigate such potential liability and to indemnify us under certain circumstances. There can be no assurance, however, that we will be successful in obtaining such agreements or that such
indemnification, if obtained, will adequately protect us against potential claims.



The terms and conditions of our sales and instruments include provisions which are intended to limit our liability for indirect, special, incidental or consequential damages.



EMPLOYEES



As of January 10, 2005, we had fifty-five full-time employees, including twenty-one in research and development, eight in manufacturing and quality control, fifteen in
contract production services, two in marketing and sales and nine in management, administrative and clerical positions. We supplement our staff with temporary employees and consultants as required. We believe that our relations with employees are
satisfactory.



Our ability to continue to develop and improve marketable
products and to establish and maintain our competitive position in light of technological developments will depend, in part, upon our ability to attract and retain qualified technical personnel.



CAUTIONARY STATEMENTS AND HIGHLIGHTED RISKS



You should carefully consider the cautionary statements and risks described below. The risks
and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or those we currently deem immaterial also may impair our business operations. If any of the following risks actually
occur, our business could be harmed. In such case, the business opportunity, value and or trading price, if any, of our common stock could decline, and you may lose all or part of your investment.



WE HAVE A HISTORY OF OPERATING LOSSES AND EXPECT TO INCUR FURTHER LOSSES



We have never been profitable and we have incurred significant losses and
cash flow deficits. For the fiscal years ended September 30, 2004 and September 30, 2003, we reported losses and negative cash flow of ($8,996,000) and ($6,055,000) and ($5,382,000) and ($3,205,000), respectively. Through September 30, 2004, we have
an aggregate accumulated deficit of $27,000,000. We anticipate that operations may continue to show losses and negative cash flow, particularly with the anticipated expenses associated with the CRADA. There is no assurance that the additional
required funds can be obtained on terms acceptable or favorable to us, if at all. The net losses incurred and the need for additional funding raise substantial doubt about our ability to continue as a going concern. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.





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WE WILL NEED ADDITIONAL FINANCING



During prior years, we met our cash requirements through the use of cash on hand, the sale of common stock, and short-term loans from
affiliates. In 2003, we entered into an Investment Agreement with Accentia. Under this agreement, we have received an aggregate investment of nine million dollars in cash and we have the expectation of receiving an additional eleven million dollars
as the promissory notes become due. Until the promissory notes are paid we will be subject to the risk of non-payment. Such risk includes matters beyond our control such as the financial condition and other matters that may affect the ability of
Accentia to timely pay principal or interest when due under the promissory notes. In August 2004, we entered into a Second Amendment to the Investment Agreement with our parent, Accentia, Inc. (the Amendment). This Amendment provides
that Accentia will use reasonable efforts (without altering the terms of Promissory Note executed as part of the Investment Agreement) to advance funds under a Line of Credit Promissory Note and General Security Agreement. Amounts advanced under the
Line of Credit Promissory Note will be credited against installments as they become due and payable under the outstanding Promissory Note. Accentia has made no firm commitment to make any advances, nor has it made any representation as to its
financial ability to make any such advances. In addition to the funds we anticipate receiving from these promissory notes; we anticipate that we may need additional funding to complete our obligations under the CRADA. Such additional financing could
be sought from a number of sources, including the sale of equity or debt securities, strategic collaborations or recognized research funding programs. No assurance can be given that we will be able to obtain such additional funds on terms acceptable
or favorable to us, or at all. Substantial delays in obtaining such financing would have an adverse effect on our ability to perform under the CRADA.



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THERE IS A HIGH RISK OF FAILURE BECAUSE WE ARE TRYING TO DEVELOP A NEW CANCER VACCINE



We are pursuing a novel and relatively unproven patient specific cancer therapy.
Commercialization requires successful completion of the ongoing clinical trial, governmental approval, establishment of cost effective production capability, distribution capability and market acceptance. Our vaccine is subject to all of the risks
of failure that are inherent in developing products based on new technologies and the risks associated with drug development generally. These risks include the possibility that:



| |  |  | our technology or the product based on our technology will be ineffective or toxic, or otherwise fail to receive necessary regulatory approvals;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | future products based on our technology will be difficult to manufacture on a large scale or at all or will prove to be uneconomical to produce or market;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | proprietary rights of third parties will prevent us or our collaborators from marketing products;
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | third parties will market superior or equivalent products; and
| | - |  | --------------------------------------------------------------



| |  |  | the products will not attain market acceptance.
| | - |  | -----------------------------------------------



Clinical trials required for governmental approval are expensive and have a high risk of failure. The results from later-stage clinical trials may not be consistent with
pre-clinical or earlier clinical results. Based on results at any stage of development, including later-stage clinical trials, and our inability to bear the related costs associated with clinical trials or product production or marketing, we may
decide to discontinue development or clinical trial at any time.



WE
MIGHT BE UNABLE TO MANUFACTURE OUR VACCINE ON A COMMERCIAL SCALE



Assuming approval of our vaccine, manufacturing, supply and quality control problems could arise as we, either alone or with subcontractors, attempt to scale-up manufacturing capabilities for products under development. We might be unable
to scale-up in a timely manner or at a commercially reasonable cost. Problems could lead to delays or pose a threat to the ultimate commercialization of our product and cause us to fail.



Our manufacturing facilities, and those of any future contract manufacturers, are or will be subject to periodic regulatory inspections by
the FDA and other federal and state regulatory agencies and these facilities are subject to Quality System Regulation, or QSR, requirements of the FDA. If we or our third-party manufacturers fail to maintain facilities in accordance with QSR
regulations, other international quality standards, or other regulatory requirements, then the manufacture process could be suspended or terminated, which would harm us.



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BECAUSE THE CLINICAL TRIAL FOR OUR PRODUCT WILL BE EXPENSIVE AND THEIR OUTCOME IS UNCERTAIN, WE MUST INCUR
SUBSTANTIAL EXPENSES THAT MIGHT NOT RESULT IN ANY VIABLE PRODUCT



Completing our ongoing Phase III clinical trial is a lengthy, time-consuming and expensive process. Before obtaining regulatory approvals for the commercial sale of our vaccine, we must demonstrate that our product is safe and effective for
use in humans. This is expected to result in substantial expense and require significant time.



Historically, the results from pre-clinical testing and early clinical trials often have not been predictive of results obtained in later clinical trials. A number of new drugs have shown promising results in clinical
trials, but subsequently failed to establish sufficient safety and efficacy data to obtain necessary regulatory approvals. Data obtained from pre-clinical and clinical activities are susceptible to varying interpretations, which could delay, limit
or prevent regulatory approval. In addition, regulatory delays or rejections could be encountered as a result of many factors, including changes in regulatory policy during the period of product development.



Clinical trials conducted by us or by third parties on our behalf might not demonstrate
sufficient safety and efficacy to obtain the requisite regulatory approval for our products. Regulatory authorities might not permit us to undertake any additional clinical trials for our product candidates.



Completion of clinical trials will take several years or more. The length of time generally
varies substantially according to the type, complexity, novelty and intended use of the product candidate. Our commencement and rate of completion of clinical trials could be delayed by many factors, including:



| |  |  | inability to manufacture sufficient quantities of materials for use in clinical trials;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | slower than expected rate of patient recruitment or variability in the number and types of patients in a study;
| | - |  | ---------------------------------------------------------------------------------------------------------------



| |  |  | inability to adequately follow patients after treatment;
| | - |  | --------------------------------------------------------



| |  |  | unforeseen safety issues or side effects;
| | - |  | -----------------------------------------



| |  |  | lack of efficacy during the clinical trials; or
| | - |  | -----------------------------------------------



| |  |  | government or regulatory delays.
| | - |  | --------------------------------



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BECAUSE WE HAVE LIMITED EXPERIENCE, WE MIGHT BE UNSUCCESSFUL IN OUR EFFORTS TO DEVELOP, OBTAIN APPROVAL FOR,
COMMERCIALLY PRODUCE OR SUCCESSFULLY MARKET OUR VACCINE



The extent to
which we develop and commercialize our vaccine will depend on our ability to:



| |  |  | complete required clinical trials;
| | - |  | ----------------------------------



| |  |  | obtain necessary regulatory approvals; establish, or contract for, required manufacturing capacity; and
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | establish, or contract for, sales and marketing resources.
| | - |  | ----------------------------------------------------------



Although we have started clinical trials with respect to our vaccine, we have limited experience with these activities and might not be successful in the trials, product
development or commercialization.



COMPETING TECHNOLOGIES MAY ADVERSELY
AFFECT US



Biotechnology has experienced, and is expected to continue
to experience, rapid and significant change. New developments in biotechnological processes are expected to continue at a rapid pace in both industry and academia, and these developments are likely to result in commercial applications competitive
with our proposed vaccine. We expect to encounter intense competition from a number of companies that offer products in our targeted application area. We anticipate that our competitors in these areas will consist of both well-established and
development-stage companies and will include:



| |  |  | health care companies;
| | - |  | ----------------------



| |  |  | chemical and biotechnology companies;
| | - |  | -------------------------------------



| |  |  | biopharmaceutical companies; and
| | - |  | --------------------------------



| |  |  | companies developing drug discovery technologies.
| | - |  | -------------------------------------------------



The cell culture production and technology business is also intensely competitive and is in many areas dominated by large service providers. In many instances, our
competitors have substantially greater financial, technical, research and other resources and larger, more established marketing, sales, distribution and service organizations than us. Moreover, these competitors may offer broader product lines and
have greater name recognition than us and may offer discounts as a competitive tactic.



Our competitors might succeed in developing, marketing, or obtaining FDA approval for technologies, products, or services that are more effective or commercially attractive than those we offer or are developing, or that render our products
or services obsolete. As these companies develop their technologies, they might develop proprietary positions, which might prevent us from successfully commercializing products. Also, we might not have the financial resources, technical expertise or
marketing, distribution or support capabilities to compete successfully in the future.



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THE UNCERTAINTY OF PATENT AND PROPRIETARY TECHNOLOGY PROTECTION AND OUR POTENTIAL INABILITY TO LICENSE TECHNOLOGY FROM
THIRD PARTIES MAY ADVERSELY AFFECT US



Our success will depend in part on
obtaining and maintaining meaningful patent protection on our inventions, technologies and discoveries. Our ability to compete effectively will depend on our ability to develop and maintain proprietary aspects of our technology, as well as to
operate without infringing, or, if necessary, to obtain rights to, the proprietary rights of others. Our pending patent applications might not result in the issuance of patents. Our patent applications might not have priority over others
applications and, even if issued, our patents might not offer protection against competitors with similar technologies. Any patents issued to us might be challenged, invalidated or circumvented and the rights created thereunder may not afford us a
competitive advantage.



Our commercial success also depends in part on our
neither infringing patents or proprietary rights of third parties nor breaching any licenses we have obtained from third parties permitting us to incorporate technology into our products. It is possible that we might infringe these patents or other
patents or proprietary rights of third parties. In the future we might receive notices claiming infringement from third parties. Any legal action against us or our collaborative partners claiming infringement and damages or seeking to enjoin
commercial activities relating to our products and processes may require us or our collaborative partners to obtain licenses in order to continue to manufacture or market the affected products and processes. In addition, these actions may subject us
to potential liability for damages. We or our collaborative partners might not prevail in an action, and any license required under a patent might not be made available on commercially acceptable terms, or at all.



There are many U.S. and foreign patents and patent applications held by third parties in our
areas of interest, and we believe that there may be significant litigation in the industry regarding patent and other intellectual property rights. Potential future litigation could result in substantial costs and the diversion of managements
efforts regardless of the merits or result of the litigation. Additionally, from time to time we may engage in the defense and prosecution of interference proceedings before the U.S. Patent and Trademark Office, or USPTO, and related administrative
proceedings that can result in our patent position being limited or in substantial expense to us and significant diversion of effort by our technical and management personnel. In addition, laws of some foreign countries do not protect intellectual
property to the same extent as do laws in the United States, which could subject us to additional difficulties in protecting our intellectual property in those countries.



We also rely on trade secrets, technical know-how and continuing inventions to develop and maintain our competitive position. Others might
independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets or disclose our technology, and we may not be able to protect our rights to our trade secrets. We seek to protect our
technology and patents, in part, by confidentiality agreements with our employees and contractors. Our employees might breach their existing proprietary information, inventions and dispute resolution agreements. Accordingly, these agreements may not
protect our intellectual property, and our employees breaches of those agreements could have a material adverse effect on us.



OUR OPERATING RESULTS MAY FLUCTUATE WIDELY BETWEEN REPORTING PERIODS



Our operating results may vary significantly from quarter to quarter or year to year, depending on factors such as timing of
biopharmaceutical development and commercialization of products by our customers, the timing of increased research and development and sales and marketing expenditures, the timing and size of contracts and whether we introduce to the market new
products or processes. Consequently, revenues, profits or losses may vary significantly from quarter-to-quarter or year-to- year, and revenue or profits in any period will not necessarily be indicative of results in subsequent periods. These
period-to-period fluctuations in financial results may have a significant impact on the market price, if any, of our securities.



OUR CONTRACT CELL PRODUCTION SERVICES ARE SUBJECT TO PRODUCT LIABILITY CLAIMS



The contract production services for therapeutic products that we offer expose us to a potential risk of liability as the proteins or other
substances manufactured by us, at the request and to the specifications of our customers, could potentially cause adverse effects. We generally obtain agreements from our contract production customers indemnifying and defending us from any potential
liability arising from such risk.



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There can be no assurance, however, that we will be successful in obtaining such agreements in the future or that such
indemnification agreements will adequately protect us against potential claims relating to such contract production services. We may also be exposed to potential product liability claims by users of our products. We may seek to increase our
insurance coverage in the future in the event of any significant increases in our level of contract production services. There can be no assurance that we will be able to maintain our existing coverage or obtain additional coverage on commercially
reasonable terms, or at all, or that such insurance will provide adequate coverage against all potential claims to which we might be exposed. A successful partially or completely uninsured claim against us would have a material adverse effect on our
operations.



OUR CONTRACT CELL PRODUCTION BUSINESS IS SUBJECT TO INTENSE
COMPETITION.



Customers can select other cell production facilities,
other cell production methods and other cell production instruments. We consider our business environment to be competitive. Many of our competitors are better established with greater capital resources. Historically, our cell production facilities,
method and equipment have been primarily used to produce relatively small batches, such as that used in research and development. While we are seeking broader acceptance of our cell production facilities, method and equipment for larger and
commercial scale production, we may not be successful in cost effectively perpetrating these larger markets.



We have been designated as the National Cell Culture Center by the National Institutes of Health since 1991. This designation is made every approximately five years by the National Institutes of Health. There is
competition for this designation and any future designation is uncertain.



IF WE LOSE OUR KEY PERSONNEL OR ARE UNABLE TO ATTRACT AND RETAIN ADDITIONAL PERSONNEL, OUR EFFORTS WOULD BE HINDERED AND WE MIGHT BE UNABLE TO DEVELOP OUR OWN PRODUCTS OR PURSUE COLLABORATIONS



Our success will depend on our ability to attract and retain key employees and scientific
advisors. Competition among biotechnology and biopharmaceutical companies, as well as among other organizations and companies, academic institutions and government entities, for highly skilled scientific and management personnel is intense. There is
no guarantee that we will be successful in retaining our existing personnel or advisors, or in attracting additional qualified employees. If we fail to acquire personnel or if we lose existing personnel, our business could be seriously interrupted.



WE DO NOT EXPECT TO PAY ANY DIVIDENDS



We have not declared or paid cash dividends since our inception. We currently intend to
retain all of our earnings to finance future growth and therefore do not expect to declare or pay cash dividends in the foreseeable future.



OUR TAX-LOSS CARRYFORWARDS ARE SUBJECT TO RESTRICTIONS



At September 30, 2004, we had substantial net operating loss carry-forwards (NOLS) for federal income tax purposes of approximately $15,500,000 (expiring
2020) which will be available to offset future taxable income. As a result of certain changes in ownership and pursuant to Section 382 of the Internal Revenue Code of 1986, as amended, utilization of NOLS is limited after an ownership change, as
defined in Section 392, to an annual amount equal to the value of the loss corporations outstanding stock immediately before the date of the ownership change multiplied by the federal long-term exempt tax rate. Due to the various changes in
our ownership, and as a result of our Chapter 11 bankruptcy proceeding, a significant portion of these carry-forwards are subject to significant restrictions with respect to our ability to use those amounts to offset future taxable income. Use of
our NOLS may be further limited as a result of future equity transactions.



OUR CERTIFICATE OF INCORPORATION AND BYLAWS CONTAIN PROVISIONS THAT COULD DISCOURAGE A TAKEOVER



The anti-takeover provisions in our certificate of incorporation and our bylaws could make it more difficult for a third party to acquire us without approval of our board
of directors. These provisions could delay, discourage or prevent a takeover attempt or third party acquisition that our stockholders consider to be in their best interests, including a takeover attempt that results in a premium over the market
price for the shares held by our stockholders.



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WE ARE SUBJECT TO VARIOUS GOVERNMENT REGULATION



The cell culture systems and services that we sell are subject to significant regulation by
the FDA under the FD&C Act. Our cell culture bioprocessing systems are regulated as Class I medical devices and must be manufactured in accordance with the FDAs QSR requirements. Our cell culture instruments must comply with a variety of
safety regulations to be sold in Europe, including, but not limited, to CE. Our customers who use these cell culture bioprocessing systems must also comply with more extensive and rigorous FDA regulation. The process of complying with FDA
regulations and obtaining approvals from the FDA is costly and time consuming. The process from investigational stage until approval to market can take a minimum of seven and up to as many as ten to twelve years currently and is subject to
unanticipated delays. Furthermore, there is no assurance that our customers will be able to obtain FDA approval for bioproducts produced with their systems.



WE USE HAZARDOUS MATERIALS IN OUR BUSINESS. ANY CLAIMS RELATING TO IMPROPER HANDLING, STORAGE OR DISPOSAL OF THESE MATERIALS COULD BE COSTLY AND TIME CONSUMING



Our manufacturing, clinical laboratory, and research and development
processes involve the storage, use and disposal of hazardous substances, including hazardous chemicals and biological hazardous materials. Because we handle biohazardous waste with respect to our contract production services, we are required to
conform our customers procedures and processes to the standards set by the EPA, as well as those of local environmental protection authorities. Accordingly, we are subject to federal, state and local regulations governing the use, manufacture,
storage, handling and disposal of materials and waste products. Although we believe that our safety and environmental management practices and procedures for handling and disposing of these hazardous materials are in accordance with good industry
practice and comply with applicable laws, permits, licenses and regulations, the risk of accidental environmental or human contamination or injury from the release or exposure of hazardous materials cannot be completely eliminated. In the event of
an accident, we could be held liable for any damages that result, including environmental clean-up or decontamination costs, and any such liability could exceed the limits of, or fall outside the coverage of, our insurance. We may not be able to
maintain insurance on acceptable terms, or at all. We could be required to incur significant costs to comply with current or future environmental and public and workplace safety and health laws and regulations.



NO PUBLIC MARKET FOR OUR COMMON STOCK



There is currently no public market for our common stock. We cannot be certain that an
active trading market will develop or, if developed, sustained. We also cannot be certain that purchasers of our common stock will be able to resell their common stock at prices equal to or greater than their purchase price. The development of a
public market having the desirable characteristics of depth, liquidity and orderliness depends upon the presence in the marketplace of a sufficient number of willing buyers and sellers at any given time. We do not have any control whether there will
be sufficient numbers of buyers and sellers. Accordingly, we cannot be certain that an established and liquid market for our common stock will develop or be maintained. The market price of the common stock could experience significant fluctuations
in response to our operating results and other factors. In addition, the stock market in recent years has experienced extreme price and volume fluctuations that often have been unrelated or disproportionate to the operating performance of individual
companies. These fluctuations, and general economic and market conditions, may hurt the market price of our common stock.



In addition, if our common stock is quoted on the OTC Bulletin Board as opposed to a larger or better accepted market, an investor might find it more difficult than it
would be on a national exchange to dispose of, or to obtain accurate quotations as to the market value of, our securities. We are also subject to a Securities and Exchange Commission rule that, if we fail to meet certain criteria set forth in such
rule, the rule imposes various sales practice requirements on broker-dealers who sell securities governed by the rule to persons other than established customers and accredited investors. For these types of transactions, the broker-dealer must make
a special suitability determination for the purchaser and have received the purchasers written consent to the transaction prior to sale. Consequently, the rule may have an adverse effect on the ability of broker-dealers to sell our securities
and may affect the ability of our stockholders to buy and sell our securities in the secondary market. The Commission has adopted rules that define a penny



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stock. In the event the common stock were subsequently to become characterized as a penny stock, broker-dealers
dealing in our securities would be subject to the disclosure rules for transactions involving penny stocks. The additional burdens imposed upon broker-dealers may discourage broker-dealers from effecting transactions in penny stocks, which could
reduce the liquidity of the common stock and have a material adverse effect on the trading market for our securities.



THE FUTURE MARKET PRICE OF OUR COMMON STOCK COULD BE AFFECTED BY SHARES ELIGIBLE FOR SALE AND SALES OF SHARES UNDERLYING OPTIONS AND WARRANTS.



As of September 30, 2004, we had approximately 38,196,000 shares of common stock
outstanding. Additionally, at September 30, 2004, we had options and warrants outstanding which entitle the holders to purchase up to 15,909,765 shares of our common stock at an average purchase price of approximately $ .93 (with a low price of $.25
and a high price of $5.00). Additionally, we have outstanding promissory notes which are convertible into approximately 13,304,000 shares of our common stock at an average price of approximately $ .40 (with a low price of $ .25 and high price of
$3.00). We do not know if any, or all, of the outstanding options or warrants will be exercised or if any or all of the outstanding notes will be converted to common stock. The exercise of outstanding options and warrants and the conversion of notes
will dilute the ownership of shares of common stock currently outstanding. This potential dilutive effect is significantly increased by the anti-dilutive rights which we granted to Accentia in the Investment Agreement. Such anti-dilution rights may
result in the issuance of that number of additional shares of our common stock which is required to maintain Accentias percentage of ownership at approximately eighty-one percent of the Company should any options or warrants be exercised or
should notes be converted or upon the issuance of additional shares of common stock under certain other circumstances. Upon such anti-dilution event, a substantial number of additional shares of our common stock will be issued without the receipt of
a proportionate purchase price. These anti-dilution rights were granted as part of and to attract the investment by Accentia in us but may have a significant long-term effect including future dilution to the ownership of our current stockholders,
impeding our access to future capital and diversely effect the future per share price of our common stock should the our common stock publicly trade.



THE PRICE OF OUR STOCK, IF EVER TRADED, MAY BE HIGHLY VOLATILE



The market price for our common stock, if it is ever publicly traded, is likely to fluctuate along with the highly volatile market prices of securities of biotechnology
companies. You may not be able to resell shares of our common stock following periods of volatility. In addition, you may not be able to resell shares at or above your purchase price.



Our stock price may be affected by many factors, many of which are outside of our control, which may include:



| |  |  | actual or anticipated variations in quarterly operating results;
| | - |  | ----------------------------------------------------------------



| |  |  | announcements of technological innovations or new products or services by us or our competitors;
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | changes in financial estimates by securities analysts;
| | - |  | ------------------------------------------------------



| |  |  | conditions or trends in the biotechnology industry;
| | - |  | ---------------------------------------------------



| |  |  | changes in the economic performance or market valuations of other biotechnology companies.
| | - |  | ------------------------------------------------------------------------------------------



ITEM 2. DESCRIPTION OF PROPERTY



We lease approximately 33,000 square feet in Minneapolis, Minnesota, which we use for offices, a laboratory, manufacturing, warehousing areas to support the production of
perfusion cell culture equipment and contract cell culture services. This facility also houses the National Cell Culture Center, which we operate under designation by the National Institutes of Health. For the years ended September 30, 2004 and
September 30, 2003, we paid rent of approximately $217,000 and $215,000 respectively.



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We lease approximately 14,000 square feet in Worcester, Massachusetts, which we use for contract cell production,
offices, storage and future expansion. For each of the years ended September 30, 2004 and 2003, we paid annual rent of approximately $420,000.



In July 2003, we began using a shared administrative and accounting resource which leases space at 5310 Cypress Center Drive #101, Tampa, FL 33609. These facilities are
discussed in Certain Transactions. During fiscal 2004 and 2003, these expenses were nominal.



ITEM 3. LEGAL PROCEEDINGS



As of the
date of this report, we are not a party to any legal proceedings other than routine litigation that is incidental to our business, which will not have a material adverse effect on our operations or financial condition.



ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS



No matter was submitted to a vote of security holders during the fourth quarter of the
fiscal year ended September 30, 2004.



PART II



ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS



Market for equity securities. Our stock is not currently traded on any
exchange. During the last two fiscal years, there was no public market in our stock and no reported bid or ask price. As of September 30, 2004, we had approximately 38,196,000 shares of common stock outstanding which were held by approximately 505
stockholders of record. Additionally, we have 8,021,886 shares of preferred stock outstanding which were held by one stockholder. On November 30, 2004, at the Annual Meeting of the Shareholders, an increase in the number of authorized shares to
300,000,000 was approved by the shareholders, and accordingly the preferred shares issued in connection with the Investment Agreement were now sufficient to effect the conversion of preferred to common.



Dividends. We have never declared or paid any cash dividends and do not
anticipate paying cash dividends in the foreseeable future. We currently anticipate that all future earnings will be retained for use in our business. Any determination to pay dividends in the future will be at the discretion of our board of
directors and will depend upon our financial condition, operating results and other factors.



Capital Stock. During the quarter ended June 30, 2003 we issued 473,333 shares of common stock to Peter J. Pappas Sr. in compensation for arranging loans in the aggregate amount of $710,000 made by Mr.
Pappas and Mr. Angelo Tsakopoulos to us during the period January-April, 2003. The shares were issued to Mr. Pappas were exempt from registration.



In June 2003, we issued 27,891,037 shares of common stock and 8,021,886 shares of preferred stock to Accentia, Inc. in consideration for aggregate consideration of twenty
million dollars payable in a combination of cash, short-term notes and long-term notes. The shares sold were restricted as to transfer and the sale was exempt from registration. The applicable exemption relied upon in all cases is found in Section
4(2) of the Securities Act of 1933, as amended.



In April 2003, we committed to
issue 36,000 shares of restricted common stock to George Constantin, who was at the time of the sale our CEO and Director, pursuant to a Termination Compensation Agreement. This issuance which took place effective October 1, 2003, is exempt from
registration.



On November 30, 2004, we amended our Certificate of
Incorporation and increased the authorized capital stock in the company from 60,000,000 shares (50,000,000 shares of common stock, $0.01 par value and 10,000,000 shares of preferred stock, $0.01 par value) to 350,000,000 shares (300,000,000 shares
of common stock, $0.01 par value and 50,000,000 shares of preferred stock, $0.01 par value).



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Options, Warrants and Convertible Notes.



In October, 2002, we issued the following Warrants to individuals in consideration of their extension of certain convertible notes for a
period of two years. All of the following warrants have a five year term and are currently exercisable. The exercise price on all of these warrants is $1.25 per share. The underlying shares were restricted as to transfer and the issuance of these
warrants was exempt from registration.



|                     |  |        
|-------------------- |  | -------
|David DeFouw         |  | 25,000 
|John Kordistos       |  | 25,000 
|Bob Evans            |  | 25,000 
|John & Mary Lignos   |  | 12,500 
|Fay Logan            |  | 12,500 
|Robert Dillon        |  | 87,500 
|Kit Ching Wong       |  | 12,500 
|Laury Pensa          |  | 81,250 
|Anaka Prakash        |  | 18,750 
|Peter J. Pappas, Sr. |  | 250,000



In January and February, 2003, we
issued 200,000 warrants and 160,000 warrants, respectively, to Peter J. Pappas Sr. in consideration for making loans to the company. These warrants had an original exercise price of $.50 per share, are currently exercisable and have a 5-year term.
The warrants and the underlying shares are restricted as to transfer and the issuance of these warrants was exempt from registration.



In March 2003, we issued 250,000 warrants to Angelo Tsakopoulos in consideration for making a loan to the company. These warrants had an original exercise price of $.50
per share, are currently exercisable and have a 5-year term. The warrants and the underlying shares are restricted as to transfer and the issuance of these warrants was exempt from registration.



In June 2003, we adjusted the exercise price of 200,000 of the 360,000 warrants previously
issued to Peter J. Pappas Sr. in January and February 2003 and 100,000 of the 250,000 warrants previously issued to Angelo Tsakopoulos in March 2003. The adjustment reduced the exercise price from $.50 per share to $.25 per share.



In June 2003, we issued the following warrants to resigning officers and directors in
exchange for cancellation of an equal number of options which would have expired due to termination of their employment and which had higher exercise prices. These warrants are currently exercisable and have a 5-year term. The warrants and the
underlying shares are restricted as to transfer and the issuance of these warrants was exempt from registration.



|                           |  |           |  |                                                                        
|-------------------------- |  | --------- |  | -----------------------------------------------------------------------
|Dr. Christopher Kyriakides |  | 2,600,000 |  | half exercisable at $.50 per share, half exercisable at $.25 per share;
|Othon Mourkakos            |  | 2,600,000 |  | half exercisable at $.50 per share, half exercisable at $.25 per share;
|Dr. David DeFouw           |  | 375,000   |  | exercisable at $.50 per share;                                         
|Thomas Belleau             |  | 100,000   |  | exercisable at $.50 per share.                                         



In October 2002 we issued two
convertible promissory notes, each in the principal amount of $25,000 to individual lenders. These notes had a term of two years, bore interest at a rate of 7.5%, and were payable in a single payment at maturity and were convertible at the rate of
$1.00 per share. The underlying shares were restricted as to transfer and the issuance of these warrants was exempt from registration.



In June 2003, all convertible note holders who had previously provided bridge financing were given the election of holding their existing notes or exchanging their notes
for secured notes maturing on June 16, 2006. Approximately twelve note holders have elected to convert two have elected to have their matured notes paid, and the exchange offer remains open for the remaining three note holders. The exchange notes
further provide as follows: (i) all principal and interest to be paid in one installment on June 16, 2006, (ii) earn interest at 7% per annum, (iii) convertible into shares of our Parent Corporation in accordance with the Investment Agreement or, in
the alternative, the convertible note may be converted into shares of our common stock at a conversion price of $.50 per share.



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In June 2003, a promissory note previously issued to Angelo Tsakopoulos in March 2003 in the principal amount of $250,000
was modified to a new Note in the same principal amount with the following terms: (i) all principal and interest to be paid in one installment on the third anniversary of Closing of the Investment Agreement, subject to prepayment by Biovest upon
thirty days written notice, (ii) interest at 7% per annum, (iii) convertible into shares of our Parent Corporation in accordance with the Investment Agreement or, in the alternative, the convertible note may be converted into shares of our common
stock at a conversion price of $0.25 per share.



Additionally,
in June 2003, the promissory notes to Peter J. Pappas Sr. dated January 13, 2003 and February 26, 2003 in the total principal amount of $460,000 were modified into a single Note in the amount of $460,000 dated June 16, 2003 with the following terms:
(i) all principal and interest to be paid in one installment on June 16, 2006, (ii) interest at 7% per annum, (iii) convertible into shares of our Parent Corporation in accordance with the Investment Agreement or, in the alternative, the convertible
note may be converted into shares of our common stock at a conversion price of $0.25 per share.



In June 2003, we issued the following secured convertible promissory notes. The convertible notes and the underlying shares were restricted as to transfer
and the issuance of these notes was exempt from registration.



We issued a promissory note to Othon Mourkakos in the principal amount of $655,000 dated June 16, 2003, in consideration of accrued executive compensation with the following terms: (i) all principal and interest to be paid in one
installment on June 16, 2007, (ii) interest at 7% per annum, (iii) convertible into shares of our Parent Corporation in accordance with the Investment Agreement or, in the alternative, the convertible note may be converted into shares of our common
stock at a conversion price of $.50 per share.



We issued a
promissory note to Dr. Christopher Kyriakides in the principal amount of $655,000 dated June 16, 2003 in consideration of accrued executive compensation with the following terms: (i) all principal and interest shall be paid in one installment on
June 16, 2007, (ii) interest at 7% per annum, (iii) convertible into shares of our Parent Corporation in accordance with the Investment Agreement or, in the alternative, the convertible note may be converted into shares of our common stock at a
conversion price of $.50 per share.



We issued a promissory note to Morrison,
Cohen, Singer & Weinstein, LLP, in the principal amount of $886,000 dated June 16, 2003 in consideration of legal services rendered to us, with the following terms: (i) all principal and interest shall be paid in the following manner:



$185,000 on June 16, 2003 without any
interest having accrued; (paid)



$150,000 on
September 10, 2003; (paid)



$ 50,000 on June
10, 2004;



$ 50,000 on June 10, 2005; and



$451,000 on June 10, 2006;



(ii) interest at 7% per annum, (iii) convertible into shares of our Parent
Corporation in accordance with the Investment Agreement or, in the alternative, the convertible note may be converted into shares of our common stock at a conversion price of $.25 per share.



Additionally, we granted the following options to employees:



On June 16, 2003, we granted options for the purchase of shares of our common shares as
follows:



(a) 100,000 options were granted to David Moser, our
Director of Legal Affairs, at an exercise price of $0.50 per share, exercisable in accordance with our 2000 Stock Option Plan;



(b) 500,000 options granted to Peter J. Pappas Sr., a director, at an exercise price of $0.50 per share, and an additional 500,000 shares were granted at
an exercise price of $0.25 per share. All options are exercisable in accordance with the Companys 2000 Stock Option Plan.



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ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (continued)



In connection with Employment Agreements executed with certain of our employees, we granted
options for the purchase of shares of our common shares as follows:



Options, Warrants and Convertible Notes (continued)



(a) Dr. Stephane Allard, our CEO, President and Director was granted 2,000,000 options at an exercise price of $ .50 per share, with 1,000,000 options exercisable as of June 16, 2003, with the balance exercisable over the next two years;
Dr. Allard resigned as our CEO & President on September 7, 2004. At the time of his resignation, a total of 1,125,000 options had vested.



(b) Julian Casciano, our Chief Marketing Officer, was granted 400,000 options at an exercise price of $.50 per share, exercisable in 4 equal installments
at six month intervals after June 16, 2003;



(c) James
McNulty, CPA, our CFO, was granted 500,000 options at an exercise price of $.50 per share, with 250,000 exercisable immediately and the balance exercisable over the next three years;



(d) Samuel Duffey, Esq., our General Counsel, was granted 500,000 options at an exercise price of $ .50 per share, with
250,000 exercisable immediately and the balance exercisable over the next three years;



(e) James Wachholz, our Chief Regulatory Officer, was granted 150,000 options at an exercise price of $ .50 per share, and exercisable over a three-year period.



On September 7, 2004, in connection with Employment Agreements executed with certain of our
employees, we granted options for the purchase of shares of our common shares as follows:



Dr. Steven Arikian, our Chief Executive Officer and President, was granted 200,000 options at an exercise price of $ .50 per share, exercisable immediately;



John Doyle, President of Analytica International, Inc., was granted 100,000
options at an exercise price of $ .50 per share, exercisable immediately.



Securities authorized for issuance under equity compensation plans.



|                                                               |  |                                                                                      |  |                                                                       |      |                                                           |        
|-------------------------------------------------------------- |  | ------------------------------------------------------------------------------------ |  | --------------------------------------------------------------------- | ---- | --------------------------------------------------------- | -------
|Plan category                                                  |  | Number ofsecurities to be issueduponexercise ofoutstandingoptions,warrants andrights |  | Weighted-averageexerciseprice
ofoutstandingoptions,warrantsand rights |      | Number ofsecuritiesremaining availablefor future issuance
|                                                               |  | (a)                                                                                  |  | (b)                                                                   |      | (c)                                                      
|Equity compensation plans approved by security holders         |  | 6,178,098                                                                            |  | $                                                                     | 0.92 |                                                           | 821,902
|Equity compensation plans not approved by security holders (*) |  | 9,731,667                                                                            |  | $                                                                     | 1.10 |                                                           |       
|                                                               |  |                                                                                      |  |                                                                       |      |                                                           |        
|Total                                                          |  | 15,909,765                                                                           |  |                                                                       |      |                                                           |        



ITEM 6. MANAGEMENTS
DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS



Overview:



On June 16, 2003, pursuant to an Investment Agreement dated April 9, 2003 with Accentia
Biopharmaceuticals,Inc, ( Accentia), we had a change of control. For a combination of cash and notes, we issued capital stock representing approximately 81% of our capital stock then outstanding; a majority of our Board of Directors and
our officers were replaced; our management team was reorganized; and a new Chief Executive Officer, Chief Financial Officer and Chief Marketing Officer were hired. In the three



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months which followed our change of control, we spent considerable time and effort revising the budget process, making
changes in departmental reporting responsibilities, drafting a marketing plan, and seeking ways to more efficiently operate the core business and conduct activities under the CRADA. During the year ended September 30, 2004, we continued with
advancing the CRADA agreement, the process of integration of systems with Accentia, our parent, as described below, the upgrade of computer equipment, including manufacturing software for instrumentation, and the transfer to us from the National
Cancer Institute of the IND for the vaccine development. We believe that many of our marketing opportunities may have been negatively affected by the Companys shortage of operating capital during the periods before the investment by Accentia.
Accordingly, through the first two quarters of fiscal 2004 we attempted to expand our market opportunities by seeking to improve our image and business relationships in the marketplace through expanding and enhancing our sales force, improving
purchase terms and endeavoring to resolve customer relationships. Our success in offsetting this perceived negative impact from our prior cash-constrained activities before the investment by Accentia remains unclear.



Prior to the change in control, our ability to continue our operations and meet our
obligations, including those under the CRADA, was uncertain and was dependent upon our ongoing efforts to obtain funding as required. For the three years prior to our Investment Agreement with Accentia, we largely depended on short-term loans from
shareholders to meet our cash needs. Following the Accentia investment, most of the shareholder loans were renegotiated and extended to long-term notes.



With the Accentia Investment Agreement, we covered our short-term cash needs through fiscal year 2003 and 2004, and put in place a long-term capital strategy which is
dependent on the collection of the note receivable from Accentia. Our management believes that the Accentia note, as amended and further described below, the balance of which is payable $5.0 million on the third and fourth anniversaries of the
agreement, will provide necessary funds to continue our basic operations for the foreseeable future.



In August 2004, we entered into a Second Amendment to the Investment Agreement with Accentia Biopharmaceuticals, Inc. (the Amendment). This Amendment provides that Accentia will use reasonable efforts
(without altering the terms of the Promissory Note executed as part of the Investment Agreement) to advance funds under a Line of Credit Promissory Note and General Security Agreement. Amounts advanced under the Line of Credit Promissory Note will
be credited against installments as they become due and payable under the outstanding Promissory Note. Accentia has made no firm commitment to make any advances, nor has it made any representation as to its financial ability to make any such
advances, although it is expected that Accentia will meet its obligations under the Investment Agreement, as evidenced by the advances received to date, as further described below.



In addition to the Accentia note receivable, we anticipate additional financing to fully fund our vaccine development activities, which we
anticipate will be funded by Accentia. Our CRADA and vaccine development activities are to a significant degree, research and development and we have significant discretionary control over the timing and extent of these activities.



Historical developments:



The following describes the Companys history before its acquisition by Accentia
Biopharmaceuticals, Inc.



On July 31, 1999, we emerged from Chapter 11
Bankruptcy Reorganization with new management, officers and directors.



As of
July 31, 1999, we adopted fresh start reporting in accordance with the American Institute of Certified Public Accountants Statement of Position 90-7 Financial Reporting by Entities in Reorganization under the Bankruptcy Code
(SOP 90-7). Fresh-start reporting resulted in material changes to our balance sheet, including valuation of assets at fair value in accordance with principles of the purchase method of accounting, valuation of liabilities pursuant to
provisions of the Plan and valuation of equity based on the reorganization value of the ongoing business.



In September 2001 we entered into the CRADA with the NCI for the development and ultimate commercialization of patient-specific vaccines for the treatment of non-Hodgkins low-grade follicular lymphoma. The terms
of the CRADA include, among other things, a requirement for us to pay $530,000 quarterly to the NCI for expenses incurred in connection with the ongoing Phase III clinical trials.



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Successful development of the vaccine, if approved by the FDA, from Phase III clinical trials through commercialization
will commit us to several years of significant expenditures before revenues will be realized, if ever.



On April 27, 2004, the Investigational New Drug Application (IND) regarding our vaccine was transferred to us from the NCI which gives us more direct control over the development of the vaccine and
potentially over the timing and amount of direct vaccine development expenses. Subsequent to this transfer, our payment obligations to the NCI under the CRADA were dramatically reduced to approximately $150,000 per year as a result of our assumption
of the direct responsibility for these development activities.



In August 2004
we entered into an agreement with Accentia which owns eighty one percent of our outstanding stock, whereby Accentia will be our exclusive commercialization partner for the vaccine we are currently developing and any other similar products developed
or acquired by us. We anticipate that having access to the internal capabilities and infrastructure of Accentia may positively impact the expenses related to the development and commercialization of our vaccine and provide us with access to needed
resources on a cost effective basis. For so long as Accentia owns fifty one per cent or more of our outstanding capital stock we will only be required to reimburse Accentia for direct and indirect expenses. Should Accentia own less than fifty one
per cent of our outstanding capital stock, the agreement requires that we pay scheduled compensation for these services.



Current developments



In the fiscal year ended September 30, 2004, we incurred significant negative cash flows and operating losses. We anticipate that for the fiscal year ended September 30, 2005, we will reduce losses from the operation
of our core businesses of cell culture production, the National Cell Culture Center and equipment sales. However, on a company wide basis we expect negative cash flow to continue through and potentially beyond fiscal year 2005, due to increasing
costs associated with our ongoing vaccine development activities and related research, development and clinical trial activities. We anticipate further losses in fiscal 2005, which we anticipate will be funded by collection of the Accentia
promissory note, additional potential borrowings from Accentia and potential debt or equity financing from others. While management is seeking to reduce losses from the core businesses and obtain needed financing to fund vaccine development
activities, there can be no assurances in that regard.



CRITICAL ACCOUNTING
POLICIES AND ESTIMATES



Our financial statements have been prepared in
accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues,
expenses and related disclosure of contingent assets and liabilities. We evaluate our estimates, including those related to bad debts, inventories, intangible assets, and contingencies on an ongoing basis. We base our estimates on historical
experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different assumptions or conditions.



We believe the following critical accounting policies, among others, involve the more significant judgments and estimates used in the preparation of our consolidated financial statements:



Revenues from contract cell production services are recognized using the
percentage-of-completion method, measured by the percentage of contract costs incurred to date to estimated total contract costs for each contract. Because of the inherent uncertainties in estimating costs, it is at least reasonably possible that
the estimates used will change in the near term.



We maintain allowances for
doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional
allowances may be required.



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Inventories are recorded at the lower of cost or market. Write-downs of inventories to market value are based upon
contractual provisions and obsolescence, as well as assumptions about future demand and market conditions. If assumptions about future demand change and/or actual market conditions are less favorable than those projected by management, additional
write-downs of inventories may be required.



In assessing the recoverability of
our amounts recorded as goodwill, significant assumptions regarding the estimated future cash flows and other factors to determine the fair value of the respective assets must be made, as well as the related estimated useful lives. If these
estimates or their related assumptions change in the future as a result of changes in strategy and/or market conditions, we may be required to record impairment charges for these assets.



INFORMATION RELATING TO FORWARD-LOOKING STATEMENTS



This report, including the documents incorporated by reference in this report, includes forward-looking statements. We have based these
forward-looking statements on our current expectations and projections about future events. Our actual results may differ materially from those discussed herein, or implied by these forward-looking statements. Forward-looking statements are
identified by words such as believe, anticipate, expect, intend, plan, will, may and other similar expressions. In addition, any statements that refer to
expectations, projections or other characterizations of future events or circumstances are forward-looking statements.



RESULTS OF OPERATIONS



REVENUES. Our total sales in the core business for the fiscal year ended September 30, 2004 were $5,706,000 or 31% lower than fiscal year 2003 total revenues of $8,256,000.



In fiscal year 2004, we had a slight decline in revenue from the year ended September 30,
2003 of $45,000 from our cell culture production business. While the revenues from cell culture production were approximately the same as the prior year, the lack of adequate working capital prior to the Accentia investment had, we believe, a
continuing negative impact on our overall business. We did earn $120,000 from a related party in 2004 for research and development services. Such services were not performed in 2003. These services are included in the cell culture products and
services segment. Revenues from our National Cell Culture Center business segment were approximately 12% less than then prior year. Instruments and disposables sales decreased to $2,334,000, from $4,809,000 or 52%, which we believe was significantly
impacted by our lack of marketing and customer support activities in prior periods. Following the investment by Accentia we began efforts to normalize our cell culture production, instrument and disposable sales activities. During the first half of
our fiscal year we sought to rebuild this business to its historical volume. However, due to continued lower sales volumes we reduced staffing by mid-year to reduce negative cash flow and better match staffing levels to actual and anticipated sales
volumes.



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RESULTS OF OPERATIONS (continued)



GROSS MARGIN. The overall gross margin for the fiscal year ended September 30, 2004 decreased to approximately 5% from 24%, due to a
combination of high fixed costs associated with our business, changes in product mix, and the inability to reach our historically predictable customer base with ongoing sales and new customer acquisition.



OPERATING EXPENSES. Research and vaccine development expenses for fiscal year 2004, compared
to fiscal year 2003 increased 114%, from $ 2,591,000 in 2003 to $5,541,000 in 2004, primarily due to increased activity and related spending for the CRADA, and the costs associated with the transfer of the IND to us in April, 2004. Research and
development expenses, associated primarily with the CRADA and vaccine development, are estimated to be approximately $11,000,000 in our budget for the fiscal year ended September 30, 2005. Marketing, general and administrative expenses during the
fiscal year ended September 30, 2004 decreased by $1,688,000 or 35% over fiscal year 2003 primarily due to reductions in sales staffing, and non-recurring stock-based compensation transactions in the year ended September 30, 2003, as well as the
reduced staffing that took effect in January 2003, and further reduced in mid-year fiscal 2004. In the current year, we have budgeted $1.8 million for marketing, general & administrative, exclusive of stock-based compensation, reflecting the
reductions noted above, the focus on our vaccine development activities, and reversion to a less-intensive marketing and sales plan. We incurred $985,000 in legal and professional fees in the current year related, compared to $613,000 in the fiscal
year ended September 30, 2003, the increase primarily a result of increased patent counsel fees and costs. These costs are included in general and administrative expenses in the accompanying financial statements.



We participated in a shared-resource concept for accounting, legal, regulatory affairs, human
resources (including employee benefits), and information systems with other Accentia -owned companies throughout 2004, which allows for greater efficiency in each of these areas critical to management of the Company. These costs are allocated based
on a specific identification or percentage of time devoted basis.



Stock-based
compensation expense decreased from $1,280,000 in 2003 to $5,000 in 2004. The prior year amounts were a result of significant issuances and re-pricings in anticipation of an acquisition of a significant portion of the Companys stock by
Accentia.



OTHER EXPENSE, NET. Other expense, net in 2004 was $15,000, compared
to $68,000 net other income, net in the year ended September 30, 20003 (which included $175,000 income from the sale of a trademark which was part of the LSL Biolafitte, Inc. sale in the prior year). Other income (net) in 2003 also included $75,000
in lawsuit settlement proceeds collected. Interest expense decreased 21% to $448,000 in 2004 principally due to $176,000 in non-recurring stock-based loan costs charged to interest expense in 2003, compared to $52,000 in 2004.



LIQUIDITY AND CAPITAL RESOURCES



We have incurred significant losses and cash flow deficits in previous years. Furthermore,
during fiscal year 2004 and 2003 we incurred losses of $8,996,000 and $6,055,000. During fiscal 2004 we met our cash requirements through the use of cash on hand, the sale of capital stock and collection of our note receivable from Accentia, and
short-term borrowings.



On September 30, 2004, we had a deficit in working
capital of $3,121,000 compared to a deficit in working capital of $239,000 at September 30, 2003. Following the investment by Accentia in 2003, we paid past-due payables, including deferred salaries resulting from the work-force reduction in January
2003. During the year ended September 30, 2004 we used $5,382,000 in cash in operating activities, due primarily to deferral of accrued expenses and obligations, cash used in operations, and cash used in research and vaccine development activities.



During the years ended September 30, 2004 and September 30, 2003, we utilized
$444,000 and $69,000 of cash for capital expenditures. Most of the current year expenditures were used to upgrade technology and equipment after the Accentia investment, as well as build-out of our Worcester facility in connection with the IND
transfer.



During fiscal year 2003 and through September 2004 we received
$9,013,000 from Accentia which included $7,500,000 under the Investment Agreement and $1,513,000 as loans from Accentia, which have been offset against stock subscriptions receivable as no repayment is contemplated. The funds were paid to us as
follows: (i) in June 2003 we received $2.5 million which we used to pay outstanding payables, deferred compensation, and other liabilities associated with expenses and obligations incurred prior to the acquisition; (ii) on September 16, 2003, we
received $600,000 ( and we agreed to a 30-day



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extension of the due date of a $2.5 million promissory note due from Accentia ) and (iii) on October 17, 2003, we
received $1.9 million. At September 30, 2004 our note receivable from Accentia was $12,500,000 under the Accentia Investment Agreement, evidenced by a promissory note, which is payable $2.5 million on the first and second anniversaries of the
agreement and $5.0 million on the third and fourth anniversaries of the agreement. From October 1, 2004 through January 11, 2005, we were loaned a total of $3,224,000 by Accentia in addition to required payments by Accentia pursuant to the note
issued under the Investment Agreement. The current outstanding balance of the note due from Accentia, net of loans which we owe Accentia is $7,763,000.



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LIQUIDITY AND CAPITAL RESOURCES (continued):



In 2001, we entered into a definitive Cooperative Research and Development Agreement (CRADA) with the National Cancer Institute
(NCI) for the development and ultimate commercialization of patient-specific vaccines for the treatment of non-Hodgkins low-grade follicular lymphoma. This agreement commits us to substantial future cash outflows as follows: The
terms of the CRADA, as amended, included, among other things, a requirement to pay $530,000 quarterly to NCI for expenses incurred in connection with the ongoing Phase III clinical trials. Since the transfer to us of the IND for development of this
vaccine, which occurred in April 2004, these payments to NCI have been reduced to a small fraction of this original obligation. We have funded the continuing development costs as described above, including the renovation of our Worcester facility to
meet FDA requirements. Successful development of the vaccine, if approved by the FDA, from Phase III clinical trials through commercialization will require us to fund significant and ongoing expenditures, perhaps for several years, before revenues
are realized, if ever. The CRADA expires in September 2009, but may be unilaterally terminated by either party by giving thirty days written notice. Certain termination costs, as defined in the CRADA, will be the Companys responsibility if the
CRADA is terminated. We do not expect any negative ramifications on the development of the vaccine, and our budget for the next several years anticipates costs that otherwise would have been funded partially by the CRADA agreement.



The CRADA granted us the exclusive contractual right to all commercial uses of this
therapeutic vaccine worldwide. In addition, the CRADA grants us the option to elect an exclusive or non-exclusive license to any inventions made in the course of development and commercialization of the vaccine; no such inventions as defined in the
CRADA have occurred as of this time. There can be no assurance that research under the CRADA will be successful or, if it is successful, that the Company will be able to negotiate a license on favorable terms. In addition, the Company may not be
able to derive any revenue from a license for a number of years.



In the fiscal
year ended September 30, 2004, we incurred significant negative cash flow from operating losses, which was increased by the payment of promissory notes and research and development activities largely in support of the CRADA and vaccine development.
Prior to the Accentia investment agreement, as amended in the fiscal year ended September 30, 2004, our ongoing negative cash flow impacted our ability to continue as a going concern. We anticipate that for the fiscal year ended September 30, 2005,
we will reduce losses from the operation of our core businesses of cell culture production, the National Cell Culture Center and equipment sales. However, on a company wide basis we expect negative cash flow to continue through and potentially
beyond fiscal year 2005, due to increasing costs associated with our ongoing vaccine development activities and related research, development and clinical trial activities. We anticipate further losses in through the next several years.



Our ability to continue our present operations and meet our obligations for vaccine
development under the CRADA, is dependent upon our ability to obtain significant funding, in addition to our receipt of timely funding required under the Accentia Investment Agreement. Additional sources of such funding other than from Accentia have
not been established; however, additional financing could be sought from a number of sources, including the sale of additional equity or debt securities, strategic collaborations or recognized research funding programs. Management is currently in
the process of exploring various financing alternatives. We are considering the potential of listing our common stock, which currently does not publicly trade, on a public market or exchange. Our agreement with Accentia required such a listing by
June 16, 2004, or in the absence of such trading activity calls for a tender offer to repurchase a percentage of outstanding stock held by minority stockholders on a pro rata basis at a fixed price of $2.00 per share. We are in the process of
formulating a plan with regard to this obligation which, in the event of a tender offer, may have an approximately $2,000,000 additional negative impact on our cash flow during the year.



There is no assurance that the additional funds, which are required, can be obtained on terms acceptable or favorable to us, if at all.
Substantial delays in obtaining such financing would have an adverse effect on our ability to develop the vaccine to the point of commercialization.



FLUCTUATIONS IN OPERATING RESULTS



Our operating results may vary significantly from quarter to quarter or year to year, depending on factors such as timing of biopharmaceutical development and
commercialization of products by our customers, the timing of increased research and development and sales and marketing expenditures, the timing and size of orders and the introduction of new products or processes by us. Consequently, revenues,
profits or losses may vary significantly from quarter to quarter or year to year, and revenue or profits or losses in any period will not necessarily be indicative of results in subsequent periods.





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IMPACT OF FOREIGN SALES



A significant amount of our operating revenue has historically been derived from export sales. Our export sales were 46% of total revenue for fiscal year ended
September 30, 2003, but was reduced to 36% in fiscal 2004. We do not expect a significant amount of foreign sales in fiscal 2005. While we invoice our customers in U.S. dollars, we will be subject to risks associated with foreign sales, including
the difficulty of maintaining cross-cultural distribution relationships, economic or political instability, shipping delays, fluctuations in foreign currency exchange ratios and foreign patent infringement claims, all of which could have a
significant impact on our ability to deliver products on a timely and competitive basis. In addition, future imposition of, or significant increases in, the level of customs duties, export quotas or other trade restrictions could have an adverse
effect on our business.



TAX LOSS CARRYFORWARDS



FAB 109 requires that a deferred tax amount be reduced by a valuation allowance if, based on
the weight of available evidence it is more likely than not (a likelihood of more than 50 percent) that some portion or all of the deferred tax assets will not be realized. The valuation allowance should be sufficient to reduce the deferred tax
asset to the amount that is more likely than not to be realized. As a result the Company recorded a valuation allowance with respect to all the Companys deferred tax assets.



For the tax periods 06/17/2003 through 09/20/2004, the Company is part of a consolidated federal income tax return that includes Accentia,
Inc. The Companys income tax provision is calculated on a separate return basis as if the Company was not part of the Accentia consolidated group.



The Company has a federal net operating loss of approximately $15.5 million as of September 30, 2004 (expiring 2020). Under Section 382 and 383 of the Internal Revenue
Code, if an ownership change occurs with respect to a loss corporation, as defined, there are annual limitations on the amount of the net operating loss and other deductions which are available to the company. The position of the
NOLs are incurred prior to 06/17/2003 ($3.4 million) are subject to these limitation. As such, these NOLs are limited to approximately $.2 million per year. NOLs incurred after 06/17/2003 may also subject to restriction.



At the time that the Company was acquired by Accentia, it had significant
net operating loss carryforwards. Due to severe limitations of these losses and the fact that a significant portion of these losses could never be utilized, the Company made and an election under IRB regulation 1.1502-22P32(b)(4) to waive most of
the losses. The Company waived approximately $29 million of losses while retaining $3.4 million.



Recent accounting pronouncements:



In
December 2003, the FASB issued FASB Interpretation No. 46R, Consolidation of Variable Interest Entities (amended).This interpretation clarifies rules relating to consolidation where entities are controlled by means other than a majority
voting interest and instances in which equity investors do not bear the residual economic risks. This interpretation was originally effective immediately for variable interest entities created after January 31, 2003 and for interim periods beginning
after June 15, 2003 for interests acquired prior to February 1, 2003. However, the FASB is reviewing certain provisions of the standard and has deferred the effective date of application to periods ending after December 15, 2003. The Company
currently has no ownership in variable interest entities and, therefore, adoption of this standard currently has no financial reporting implications.



In November 2004, the FASB issued SFAS No. 151, Inventory Costs. The statement amends Accounting Research Bulletin (ARB) No. 43, Inventory
Pricing, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material. ARB No. 43 previously stated that these costs must be so abnormal as to require treatment as current-period
charges. SFAS No. 151 requires that those items be recognized as current-period charges regardless of whether they meet the criterion of so abnormal. In addition, this statement requires that allocation of fixed production overhead
to the costs of conversion be based on the normal capacity of the production facilities. The statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005, with earlier application permitted for fiscal years
beginning after the issue date of the statement. The adoption of SFAS No. 151 is not expected to have any significant impact on the Companys current financial condition or results of operations.



In December 2004, the FASB issued SFAS No. 152, Accounting for Real Estate Time-Sharing
Transactions  An Amendment of FASB Statements No. 66 and 67, which states that the guidance for incidental operations and costs incurred to sell real estate projects does not apply to real estate time-sharing transactions. The adoption
of SFAS No. 152 is not expected to have any impact on the Companys current financial condition or results of operations.



In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets  An Amendment of APB Opinion No. 29. APB Opinion No. 29,
Accounting For Nonmonetary Transactions, is based on the opinion that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. SFAS No. 153 amends Opinion No. 29 to eliminate the exception for
nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets whose results are not expected to significantly change the future cash flows of the entity. The adoption of SFAS No. 153
is not expected to have any impact on the Companys current financial condition or results of operations.



In December 2004, the FASB revised its SFAS No. 123 (SFAS No. 123R), Accounting for Stock Based Compensation. The revision establishes standards for the accounting of transactions in which an
entity exchanges its equity instruments for goods or services, particularly transactions in which an entity obtains employee services in share-based payment transactions. The revised statement requires a public entity to measure the cost of employee
services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost is to be recognized over the period during which the employee is required to provide service in exchange for the award.
Changes in fair value during the requisite service period are to be recognized as compensation cost over that period. In addition, the revised statement amends SFAS No. 95, Statement of Cash Flows, to require that excess tax benefits be
reported as a financing cash flow rather than as a reduction of taxes paid. The provisions of the revised statement are effective for financial statements issued for the first interim or annual reporting period beginning after June 15, 2005, with
early adoption encouraged. The Company is currently evaluating the impact that this statement will have on its financial condition or results of operations.



CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS



Contractual obligations as of September 30, 2004 are as follows:



|                                   |  |                        |           |                 |   |           |  |           |           |              |   |   |  |   |  
|---------------------------------- |  | ---------------------- | --------- | --------------- | - | --------- |  | --------- | --------- | ------------ | - | - |  | - | -
|                                   |  | Payments Due by Period
|Contractual Obligations            |  | Total                  |           | Less than1 year |   | 1-3 years |  | 4-5 years |           | After5 years
|Long-term debt                     |  | $                      | 5,651,000 |                 | $ | 401,000   |  | $         | 5,250,000 |              | $ |  |  | $ | 
|Operating leases                   |  |                        | 419,000   |                 |   | 296,000   |  |           | 123,000   |              |   |  |  |   | 
|Total contractual cash obligations |  | $                      | 6,070,000 |                 | $ | 697,000   |  | $         | 5,373,000 |              | $ | 0 |  | $ | 



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ITEM 7. FINANCIAL STATEMENTS



Financial Statements: See Index to Financial Statements on Page F-1 immediately following the signature page of this report.



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ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE



NONE



ITEM 8A. CONTROLS AND PROCEDURES.



As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of our management, including our chief
executive officer and our chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Securities and Exchange Act of 1934. Based on that evaluation, our
management, including the chief executive officer and the chief financial officer, concluded that as of the date of the evaluation our disclosure controls and procedures were effective to provide reasonable assurance that information required to be
disclosed in the Companys periodic filings under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including those officers, to allow timely decisions regarding required disclosure. There have been no
significant changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting during the period covered by this report.



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PART III



ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT DIRECTORS AND EXECUTIVE OFFICERS



The following individuals are our current directors and executive
officers:



|                                |  |     |  |                                    
|------------------------------- |  | --- |  | -----------------------------------
|Name                            |  | Age |  | Position                           
|Steve Arikian, M.D.(1)          |  | 46  |  | CEO, President, Chairman & Director
|Francis E. ODonnell, Jr., M.D. |  | 54  |  | Vice-Chairman & Director           
|                                |  |    
|James A. McNulty,CPA(2)         |  | 54  |  | Chief Financial Officer, Secretary 
|Stephane Allard, M.D.           |  | 50  |  | Director                           
|Martin Baum                     |  | 38  |  | Director                           
|Raphael Mannino, Ph.D.          |  | 56  |  | Director                           
|Peter J. Pappas, Sr.            |  | 64  |  | Director                           
|Christopher Chapman, M.D.       |  | 50  |  | Director                           
|Nicholas J. Leb                 |  | 55  |  | Director                           
|Jeffrey A. Scott, M.D.          |  | 46  |  | Director                           
|Robert D. Weiss                 |  | 53  |  | Director                           

---

|1. | Dr. Arikian became CEO and President of the Company in September, 2004.
|-- | -----------------------------------------------------------------------

|2. | Mr. McNulty became CFO of the Company in June, 2003. He also serves as Secretary of the Company.
|-- | ------------------------------------------------------------------------------------------------



Set forth below is biographical information regarding our directors, officers, and key
employees:



Steven R. Arikian, M.D.,age 46, has been a Director of the
Company since June, 2003. Dr. Arikian became our CEO and President in September, 2004, as well as Chairman of the Board of Directors since March 2004. Dr. Arikian is a director of Accentia, Inc., our Parent Corporation. Further, since 1997 he has
served as the President and a director of The Analytica Group, Inc. which is a subsidiary of Accentia, Inc. He founded The Analytica Group, a global provider of research and communications services to the pharmaceutical and biotechnology industries
in 1997. Dr. Arikian began providing pharmaceutical clients with Clinical and Outcomes Research services in 1988. Having held positions of increasing responsibility, he served as President of The Center for Health Outcomes and Economics at Bristol
Myers Squibb for three years, where he supervised a staff of over 50 professionals responsible for development of global health outcomes research. He has designed and implemented research projects in the United States, Canada, Latin America and
Europe. Dr. Arikian holds a faculty appointment at the Columbia University Mailman School of Public Health. He has also held faculty appointments at the University of Toronto and the University of Kentucky. He is widely published in the
peer-reviewed literature and has been a frequent speaker at industry and trade group sponsored meetings on topics including Formulary Management, Pharmaceutical Pricing, Multi-National Health Economic Studies, and Pharmacoepidemiology. Today Dr.
Arikian devotes his time to overseeing Accentias pharma-services and development companies, including Biovest and The Analytica Group.



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ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE
ACT DIRECTORS AND EXECUTIVE OFFICERS (continued):



Francis E.
ODonnell, Jr., M.D., age 54, has been a Director of the Company since June, 2003. Dr. ODonnell is our Co Vice-Chairman (non-executive). Dr. ODonnell is the non-executive Chairman, Chief Executive Officer (CEO) and a director of
Accentia, Inc., our Parent Corporation since its inception in 2002. He is also the CEO, President, Chairman and a Director of BioDelivery Sciences International, Inc. Dr. ODonnell was the Founder and for more than the last five years has
served as managing director of The Hopkins Capital Group (HCG), an affiliation of limited liability companies which engage in business development and venture activities. Included in companies in which HCG entities are significant
stockholders include Accentia, Inc. and Biodelivery Sciences International, Inc. Dr. ODonnell served as Chairman of Laser Sight Inc. (LASE) a publicly traded manufacturer of advanced refractive laser systems until June, 2003. He is co-founder
of RetinaPharma Technologies, Inc. which includes Tatton Technologies, LLC and is a co-founder of Biotech Specialty Partners, LLC an alliance of specialty pharmacy and biotechnology companies...



Dr. ODonnell is a 1975, summa cum laude graduate of the Johns Hopkins School of
Medicine. He received his specialty training at the Wilmer Ophthalmological Institute, Johns Hopkins Hospital. He is the former Professor and Chairman, Department of Ophthalmology, St Louis University School of Medicine. Dr. ODonnell has
published over 30 peer-reviewed scientific articles and he has been awarded 34 US Patents. He is the recipient of the 2000 Jules Stein Award from Retinitis Pigmentosa International. He is a Trustee for St. Louis University and The Health Careers
Foundation.



Stephane Allard, M.D., age 50, has been a Director of the
Company since June, 2003. Dr. Allard is our former Chief Executive Officer and President, and is a current Director. Dr. Allard assumed the positions of CEO and President of the Company in June, 2003 and resigned as CEO and President on September 7,
2004 in order to accept the position of Director of Medical Affairs for Accentia, Inc., our parent corporation. For more than the prior four years, Dr. Allard was involved in various positions with Synthelabo. He was Vice President of Medical
Affairs with Sanofi-Synthelabo, a six billion dollar global pharmaceutical company manufacturing and marketing of products such as Plavix, Ambien, Avapro, Hyalgan and Primacor and was responsible for a staff of 120 people. Dr. Allard has served as
President of Synthelabo, Inc. and Director of Research and Development at Lorex Pharmaceuticals. At Synthelabo, Dr. Allard was responsible for the start up of Synthelabo, Inc. (USA). He was also key in establishing Phase I through IV clinical
activities for products such as Ambien, Kerlone and Alfuzosin, and managed and led the liaison with the FDA and other government agencies. Dr. Allard staffed and led the groups 11 person New Jersey operation and the 40 person (Clinical,
Biostatistics, and Data Management) Chicago office.



Dr. Allard served as
European Clinical Director of Clinical Research from 1990 to 1993 for six divisions in Synthelabo France (Paris), Director of Clinical Development from 1987 to 1990, and as Associate Director of Clinical Development from 1985 to 1987. From 1978 to
1985, Dr. Allard was Associate Medical Director and Medical Advisor at Wyeth, a division of American Home Products. Dr. Allard received his medical doctorate from Rouen Medical College and has been awarded a Diplomate of CESAM (Certificate of
Statistical Studies Applied to Medicine) Ph.D, as well as a Diplomate of Clinical Pharmacology and Pharmacokinetics (Pitie-Salpetriere Hosp.); Paris, France.



Martin G. Baum,age 38, has been a Director of the Company since June, 2003. Mr. Baum is also a director of Accentia, Inc., our Parent Corporation and has served
as President of Commercial Operations of Accentia since April 2003. He has been the President and Chief Executive Officer of TEAMM Pharmaceuticals, Inc., a subsidiary of Accentia, Inc., since August 2000. Mr. Baum founded TEAMM based on his most
recent success at DJ Pharmaceuticals, Inc., a specialty pharmaceutical company. At DJ Pharmaceuticals, where Mr. Baum held the position of Senior Vice President, Commercial Operations from December 1998 until July 2000, he was instrumental in
achieving net revenue in excess of $50 million as well as profitability within two years. The company was sold to Biovail Corporation in October 2000, for $212 million, enabling equity investors to realize annual IRRs in excess of 135%. Mr.
Baums prior experience includes branded, generic, delivery technology, international and specialty pharmaceutical markets with companies such as Marion Merrell Dow, Glaxo Wellcome and SkyePharma PLC.



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ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE
ACT DIRECTORS AND EXECUTIVE OFFICERS (continued):



Raphael Mannino,
PhD, age 56, has been a Director of the Company since June, 2003. Dr. Mannino has been the Executive Vice President and Chief Scientific Officer of BioDelivery Sciences International, Inc. since October 2000, and a director since October 2001.
Dr. Mannino previously served as President, CEO, Chief Scientific Officer, and a member of the Board of Directors of BioDelivery Sciences, predecessor to BDSI since its incorporation in 1995. Dr. Manninos previous experience includes positions
as Associate Professor, at the University of Medicine and Dentistry of New Jersey (1990 to present), Assistant, then Associate Professor, Albany Medical College (1980 to 1990), and Instructor then Assistant Professor, Rutgers Medical School (1977 to
1980). His postdoctoral training was from 1973 to 1977 at the Biocenter in Basel, Switzerland. Dr. Mannino received his Ph.D. in Biological Chemistry in 1973 from the Johns Hopkins University, School of Medicine.



Peter J. Pappas, Sr., age 64, has been a Director of the Company since March, 2003.
Mr. Pappas has for more than the last five years been the President and CEO of P.J. Mechanical Corp., a major air conditioning contractor in the New York City metropolitan area. In addition to his vast experience in construction for the past forty
years, Mr. Pappas is a prime real estate developer and investor around the country. He attended NYU as a business administration major. A noted philanthropist, Mr. Pappas is an Archon of the Greek Orthodox Church. He serves the Archdiocesan National
Council and as trustee of the privileged Leadership 100 Endowment trust. He is a board member of the Western Policy Center in Washington, D.C, a member of the Board of The Cyprus/American Chamber of Commerce, and the National Chairman of the Cyprus
Childrens Fund, a sponsorship program and scholarship award endowment. Mr. Pappas has been a Director of BioVest since February 2003.



Christopher Chapman, M.D.,age 50, has been a Director of the Company since March, 2004. Dr. Chapman has been the Executive Vice President of Medical and
Regulatory Affairs and Director of New Business Development (pharmaceuticals) for BioDelivery Sciences International, Inc. on a part time basis since October 2000. Dr. Chapman received his M.D. degree from Georgetown University in Washington, D.C.
in 1987 where he completed his internship in Internal Medicine. He completed a residency in Anesthesiology and a fellowship in Cardiovascular and Obstetric Anesthesiology at Georgetown University. Since 1995, Dr. Chapman has been a critical care
physician on the staff at Doctors Community Hospital, Lanham, Maryland. He was most recently President of Chapman Pharmaceutical Consulting. From 1995 to April 2000, Dr. Chapman was Executive Director, Medical Affairs, Quintiles Consulting and
a founding Co-Director of Quintiles BRI (QBRI) Medical Affairs, Drug Safety and Medical Writing Departments.



Nicholas J. Leb,age 55, has been a Director of the Company since March, 2004. Mr. Leb is the Director of Finance of Accentia, Inc., our Parent, and has been the Vice President and Chief Financial Officer of
TEAMM Pharmaceuticals, Inc. since August 2000. Prior to that, Mr. Leb was Vice President, Finance for 3TEX from March 1999 through August 2000. He is a proven financial executive with a diverse background that includes Big 5 public
accounting, pharmaceutical and medical equipment manufacturing, equipment leasing and common carrier transportation. Mr. Leb is proficient in financial reporting, budgeting, SEC reporting, treasury functions, taxes and systems management. He has
successfully performed his financial duties in senior management positions at such companies as Brightstone Pharma, Global Surgical Corporation and KV Pharmaceutical Co. Mr. Leb received his Bachelor of Science, Business Administration from
University of Missouri, Columbia and attended a post-graduate accounting program at the University of Missouri, St. Louis.



Jeffrey A. Scott, M.D., age 46, has been a Director of the Company since March, 2004. Dr. Scott, whose specialty is oncology, has served as the National Medical
Director and President of the International Oncology Network, a Network of 3500+ U.S. Private Practice Oncologists headquartered in Baltimore, MD, since 1998, and in that same role for the International Physician Network commencing this year. Dr.
Scott was a practicing physician, Partner and CFO of Georgia Cancer Specialists located in Atlanta, GA from 1995-2001, acting as CFO for a large practice with over $100 million in revenue and responsible for development of financial programs of
practice after merger and corporate buyout by Phymatrix. In this position, Dr. Scott also took responsibility for the development of an extensive Clinical Research program. From 1998-2000, he also served as Medical Chief of Staff at Atlantas
Emory Northlake Regional Medical Center. Dr. Scotts biotech experience includes his role as a Consultant to Nexstar Pharmaceuticals of Boulder, Colorado, assisting and educating the sales force in dealing with physician networks and consulting
with investment advisors regarding potential investments in other biotechnology companies.



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His educational background includes a B.S. in Microbiology from the University of Michigan, Ann Arbor, MI, and medical
education at Wayne State Univ., Detroit, MI and a fellowship in Oncology at University of Texas Health Sciences, San Antonio, TX. Dr. Scott has Board Certifications from the American Board of Internal Medicine, Internal Medicine, September 1987 and
the American Board of Internal Medicine, Medical Oncology, November 1989. He has extensive research and publication credits in the oncology field.



Robert D. Weiss,age 53, has been a Director of the Company since March, 2004. Mr. Weiss has an outstanding and diverse background in the fields of investment
banking, merchant banking, asset management, marketing and finance. His experience includes his current position since December, 2000 as a Principal in Athena Capital Partners, Inc., an investment banking group specializing in seed and A-round
investors, and for more than the past five years as President of Atlantic American Partners, a merchant banking group subsidiary of Atlantic American Holdings, as well as previous positions as Senior Vice President of Communications Equity
Associates, Senior Vice President at Paine Webber, Inc., and Executive Vice President/Chief Operating Officer at Zurich Investment Management, all involving leadership roles in merchant banking, private equity funding and asset management
operations. Mr. Weiss prior business experience gives him a strong background in marketing and general business management. His experience makes him well qualified for the role of Financial Expert to the Audit Committee which the Board of Directors
plans to establish immediately after this shareholders meeting. Mr. Weiss received his B.S. Degree from the United States Military Academy at West Point in 1971, with Concentrations in Math, Engineering, and Science, and obtained an MBA from Boston
University in 1975. He served in the United States Army from 1971-1978 as an Aide-de-Camp to a Major General, Hospital Comptroller, and Company Commander.



Committees of the Board. Prior to March 15, 2004 our Board of Directors did not have an Audit Committee or a Nominating and Compensation Committee. The
functions normally served by an Audit Committee, which reviews the engagement of the Companys independent accountants, reviews annual financial statements and considers matters relating to accounting policies and internal control and reviews
the scopes of audits, practices and procedures to ensure that the legal and fiduciary responsibilities of the Board are satisfied and the functions served by a Nominating and Compensation Committee, which considers nominees to serve on the
Companys Board and compensation for officers and directors, were provided by the entire Board which over the last year consisted of seven members. After a Board of Directors meeting in March, 2004, the Board created an Audit Committee and a
Nominating and Compensation Committee and appointed Jeffrey A. Scott, M.D., Robert D. Weiss, and Raphael Mannino, Ph.D. as the initial members of these Committees. The board of directors has determined that Robert Weiss is an audit committee
financial expert within the meaning of the Securities and Exchange Commission (SEC) regulations and that Robert Weiss, Jeffrey Scott, M.D. and Raphael Mannino, Ph.D. are independent as defined by applicable SEC rules and regulations and Rule
4200(a)(15) of the National Association of Securities Dealers listing standards. Following the 2004 annual meeting, our Board intends to continue this three member Audit Committee and three member Nominating and Compensation Committee.





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ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE
ACT DIRECTORS AND EXECUTIVE OFFICERS (continued):



Code of
Ethics. We have adopted written standards for our chief executive officer and chief financial officer referred to as the Code of Ethics. The Code of Ethics is intended to deter wrongdoing and to promote honest and ethical conduct, including
the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; full, fair, accurate, timely, and understandable disclosure in reports and documents that a small business issuer files with, or
submits to, the Commission and in other public communications made by the small business issuer; compliance with applicable governmental laws, rules and regulations; the prompt internal reporting of violations of the Code of Ethics to an appropriate
person or persons identified in the Code of Ethics; and accountability for adherence to the Code of Ethics.



Communications with Board of Directors. Stockholders may communicate with the full Board or individual directors, by submitting such communications in writing to Biovest International, Inc., Attention:
Board of Directors (or the individual director(s)), 8500 Evergreen Blvd. NW, Minneapolis, Minnesota 55433. Such communications will be delivered directly to the directors.



Directors Compensation and Indemnification.Directors receive the following compensation for serving as members of
the Board of Directors or as members or chairmen of various committees of the Board of Directors: (i) directors receive reimbursement of expenses, (ii) an annual grant of options to purchase shares of common stock at 100% of market value: 20,000
option shares for Board membership, 5,000 option shares for serving on a committee of the Board and 5,000 option shares for chairing any committee of the Board.



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ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE
ACT DIRECTORS AND EXECUTIVE OFFICERS (continued):



In March 2004, the
following common stock Options were issued to our directors. These options are only those issued in accordance with the Companys plan of compensation of directors, and do not include other options which may have been granted in connection with
other agreements:



Options to Directors (all at $0.50/share)



|                                                 |  |            
|------------------------------------------------ |  | -----------
|NAME                                             |  | # ofOptions
|Steven Arikian, M.D.(Chairman)                   |  | 25,000     
|Francis ODonnell, M.D.                          |  | 20,000     
|Christopher Kyriakides, M.D. (1)                 |  | 20,000     
|Stephane Allard, M.D.                            |  | 20,000     
|Martin Baum                                      |  | 20,000     
|Raphael Mannino, Ph.D. (Audit, Nominating Comm.) |  | 30,000     
|Peter Pappas                                     |  | 20,000     
|Chris Chapman, M.D.                              |  | 20,000     
|Nicholas Leb                                     |  | 20,000     
|Jeffrey Scott, M.D. (Audit, Nominating Comm.)    |  | 30,000     
|Robert Weiss (Audit Chairman, Nominating Comm.)  |  | 35,000     

---

|(1) | Dr. Kyriakides, former CEO of the Company and our director since 1999, resigned as Co-Vice Chairman and Director on November 30, 2004.
|--- | --------------------------------------------------------------------------------------------------------------------------------------



Other transactions involving Dr. Christopher Kyriakides and Mr. Peter Pappas are discussed in
the Certain Relationships and Related Party Transactions section below.



Our bylaws provide for us to indemnify our directors and officers to the extent permitted by law, with respect to actions taken by them on our behalf. We maintain a policy of directors and officers liability insurance for this
purpose.



Meetings of the Board of Directors: The Board of
Directors conducted six meetings during fiscal 2004, including meetings conducted via teleconference and by consent action. No director failed to attend or participate in at least 75% of the meetings conducted while they were a member of the Board
during the year.



KEY EMPLOYEES.



We have the following employees whom we believe are significant to our business:



Dr. Carl M. Cohen was hired as our Chief Operating Officer in November, 2004. Dr.
Cohen has more than 25 years of biomedical research and management expertise. Most recently he was Vice President, Research at Acumen Sciences LLC, a life sciences advisory company. There he was responsible for planning and implementation of
Acumens Discovery Research service offerings. Prior to joining Acumen he held senior management positions at biotechnology companies in the greater Boston area including Vice President for Research and Development at Creative BioMolecules.
Prior to joining Creative BioMolecules Dr. Cohen served as Chief of the Division of Cellular and Molecular Biology and Acting Chair of the Department of Biomedical Research at St. Elizabeths Medical Center of Boston. During that same period
Dr. Cohen also held the positions of Professor of Medicine and Professor of Anatomy and Cellular Biology at Tufts University School of Medicine.



Mark Hirschel, Ph.D.has headed-up our science and technology departments since September 2001. From August 1999 until September 2001, he was our Senior Vice
President. Dr. Hirschel has served as the Principal Investigator of the National Cell Culture Center and is a recognized leader in cell culture production. Dr.Hirschel has authored numerous scientific publications and has received several grants and
served on several NIH committees. Dr. Hirschel holds a BA in biology from Southwest State University (MN), an MS in Animal Physiology, and a Ph.D. in Reproductive Physiology from the University of Minnesota.



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KEY EMPLOYEES (continued):.



Julian Cascianohas led our sales and marketing efforts since June 16, 2003. Prior to joining us, Mr. Casciano Co-founded The
Analytica Group, a Manhattan based biopharmaceutical consultancy that was purchased by Accentia, Inc. in April, 2001. He most recently held the position of senior marketing officer at Analytica. In this capacity he led a team responsible for
business development, directed corporate sales and marketing efforts and working closely with key customers to develop core product solutions. Prior to co-founding Analytica, Mr. Casciano was in charge of global therapy economics at KPMG Peat
Marwick, now Bearing Point. Mr. Casciano has over 11 years of experience in the Biopharmaceutical industry, working with small to large biotechnology organizations and large pharmaceutical companies. He has extensive experience in providing core
marketing and sales solutions to biopharmaceutical customers. Mr. Casciano received a B.S., degree in economics and life sciences from Cornell University.



James A. Wachholz joined us on Dec. 1, 2003 as our Chief Regulatory Officer. He brings more than 20 years of pharmaceutical industry experience, most recently as
Executive Director Regulatory Affairs at Sepracor, Inc where he managed the regulatory strategy, NDA approval and commercialization of the companys first proprietary product, Xopenex. Prior to that he held general management positions in
regulatory affairs, compliance and quality assurance at a number of pharmaceutical companies including GD Searle, where he was Director Technical Operations and Compliance, the biopharmaceutical researcher Hybridon, and Baxter International. Mr.
Wachholz holds degrees in biochemistry and business management with concentrations in marketing and finance.



SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE



Section 16(a) of the Securities Exchange Act of 1934 requires our directors, executive officers and persons who own 10% or more of the Common Stock to file reports of ownership and changes in ownership concerning the
Common Stock with the SEC and to furnish us with copies of all Section 16(a) forms they file. We are required to identify any person subject to this requirement who failed to file any such report on a timely basis. Based upon our review of the
reports it has received, we believe all filings required to be made by executive officers, directors and 10% stockholders under Section 16(a) during fiscal year 2004 have been filed with the Securities and Exchange Commission, except for those of
Robert Weiss and Christopher Chapman, M.D., which are pending.



ITEM 10.
EXECUTIVE COMPENSATION



SUMMARY COMPENSATION TABLE*



|                                                                   |  |              |  |               |                       |           |   |                           |  |                                      |  |                  |    
|------------------------------------------------------------------ |  | ------------ |  | ------------- | --------------------- | --------- | - | ------------------------- |  | ------------------------------------ |  | ---------------- | ---
|Name and Principal
Position                                        |  | Fiscal Year  |  | Salary ($)(6) |                       | Bonus ($) |   | RestrictedStockAwards ($) |  | SecuritiesUnderlyingOptions/SARs (#) | 
|Stephane Allard, MD Chief Executive Officer & Director(1)          |  | 200420032002 |  | $             | 280,00081,667         |           | $ | 60,000                  |  |                                   |  | 20,0002,000,000 |    
|James McNulty Chief Financial Officer                              |  | 20042003     |  | $$            | 110,00032,083         |           |   | 00                        |  | 00                                   |  | 500,0000         |    
|George Constantin Former Chief Executive Officer(2)                |  | 200420032002 |  | $$            | 056,000              |           |   |                        |  |                                   |  |               |    
|Dr. Christopher Kyriakides Co-Vice Chairman & Director(3)          |  | 200420032002 |  | $             | 0220,385330,000       |           |   |                        |  |                                   |  | 1,000,000        | (5)
|Othon Mourkakos President, Secretary, & Chief Operating Officer(4) |  | 200420032002 |  | $             | 0220,385330,000       |           |   |                        |  |                                   |  | 1,000,000        | (5)
|Mark Hirschel, Ph. D Chief Scientific Officer(7)                   |  | 200420032002 |  | $             | 182,000175,000175,000 |           |   |                        |  |                                      |  | 50,000         |    

---

|(1) | Dr. Allard became Chief Executive Officer on June 16, 2003. He resigned from that position on
September 7, 2004 and assumed the position of Director of Medical Affairs with Accentia, Inc., our parent corporation. He remains a director.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|(2) | Mr. Constantin resigned as Chief Executive Officer on April 24, 2003. In connection with the change in control of Biovest, Mr. Constantin was awarded 36,000 shares
of the Companys common stock. As of the date of this filing, these shares have not been issued.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Dr. Kyriakides was appointed Chairman of the Board on July 31, 1999 and was appointed Chief Executive Officer of our company on September 20, 1999. He resigned as
CEO and Chairman with the change in control of Biovest on June 16, 2003. He resigned as a director on November 30, 2004.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | On September 20, 1999, Mr. Mourkakos was appointed as our President and Chief Operating
Officer. He resigned with the change in control on June 16, 2003.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | During the fiscal year ended on September 30, 2003, 2,600,000 options issued to Dr. Kyriakides and 2,600,000 issued to Mr. Mourkakos during 2000, 2001, and 2002 were
cancelled and converted to an equal number of warrants, which have a reduced price and term. As a result, at September 30, 2003, Dr. Kyriakides and Mr. Mourkakos each held an aggregate of 2,600,000 5-year warrants to purchase common stock, of which
50% are currently exercisable at $0.50 per share and 50% are currently exercisable at $0.25 per share.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | None of the salary reflected in the Table for Dr. Kyriakides and Mr. Mourkakos was paid in cash when earned. During the fiscal year ended September 30, 2003,
$200,000 of the accrued compensation from prior periods was paid to each of Dr. Kyriakides and Mr. Mourkakos, and the balance of the accrued compensation was converted to a four-year promissory note bearing interest at the rate of 7% per annum,
which may be converted into common stock of Biovest at anytime . The number of shares of Biovest common stock to be received by these executives upon conversion of such promissory note shall be determined by dividing the aggregate principal amount
of the note being converted plus accrued interest there by $0.50 per common share. See Certain Relationships and Related Party Transactions for additional details regarding these notes.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) | Dr. Hirschel became our Chief Scientific Officer during the fiscal year ended on September 30, 2002. Compensation from prior years is not reflected herein because
Dr. Hirschel was not an executive officer prior to 2002.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Directors receive the following compensation for serving as members of the Board of Directors or as members or chairmen of various committees of the Board of Directors: (i) reimbursement of expenses, (ii) an annual grant of options to
purchase shares of common stock at 100% of market value: 20,000 option shares for Board membership, 5,000 option shares for serving on a committee of the Board and 5,000 option shares for chairing any committee of the Board.



Option Grants During Year Ended on September 30, 2004



The following table sets forth information as to stock options and warrants
granted to all named executive officers during the fiscal year ended September 30, 2004. Except as otherwise indicated, these options and warrants were fully vested on the date of grant. Except as otherwise indicated, options were granted at an
exercise price equal to 100% of the fair market value of our common stock on the date of grant. The amounts under Potential Realizable Value at Assumed Annual Rate of Stock Appreciation for Option Term represent the hypothetical gains of
the options granted based on assumed annual compound stock appreciation rates of 5% and 10% over their exercise price for the full ten-year term of the options. The assumed rates of appreciation are mandated by the rules of the Securities and
Exchange Commission and do not represent our estimate or projection of future common stock prices.



|                           |  |                                                      |     |  |                              |    |                                          |     |                 |  |                                                                                             |      |  |            |  |     |  |    
|-------------------------- |  | ---------------------------------------------------- | --- |  | ---------------------------- | -- | ---------------------------------------- | --- | --------------- |  | ------------------------------------------------------------------------------------------- | ---- |  | ---------- |  | --- |  | ---
|Name                       |  | OptionsGranted                                       |     |  | Individual Grants            |    | Market Price ($/Sh) on date of grant (3) |     | Expiration Date |  | Potential RealizableValue at AssumedAnnual Rates of Stock PriceAppreciation for Option Term
|                           |  | % of TotalOptionsGranted to Employees in Fiscal Year |     |  | Exercise or BasePrice ($/Sh) |    |                                          |    
|                           |  |                                                      |     |  |                              | 5% |                                          | 10%
|(a)                        |  | (b)                                                  |     |  | (c)                          |    |                                          | (d) |                 |  |                                                                                             | (e)  |  | (f)        |  | (g)
|Stephane Allard            |  | 20,000                                               | (2) |  | .79                          | %  |                                          | $   | 0.50            |  | $                                                                                           | 0.27 |  | 3/13/2014  |  | N/A |  | N/A
|Christopher Kyriakides (1) |  | 20,000                                               |     |  | .79                          | %  |                                          | $   | 0.50            |  | $                                                                                           | 0.27 |  | 3/13/2014  |  | N/A |  | N/A
|Steve Arikian              |  | 400,000                                              |     |  | 15.89                        | %  |                                          | $   | 0.50            |  | $                                                                                           | 0.27 |  | 1/02/2014  |  | N/A |  | N/A
|Steve Arikian              |  | 25,000                                               |     |  | .99                          | %  |                                          | $   | 0.50            |  | $                                                                                           | 0.27 |  | 3/13/2014  |  | N/A |  | N/A
|James McNulty              |  | 500,000                                              |     |  | 19.86                        | %  |                                          | $   | 0.50            |  | $                                                                                           | 0.27 |  | 11/11/2013 |  | N/A |  | N/A

---

|(1) | During the fiscal year ended on September 30, 2003, 2,600,000 options issued to Dr. Kyriakides and 2,600,000 issued to Mr. Mourkakos during 2000, 2001, and 2002 were cancelled and
converted to an equal number of warrants, which had a reduced exercise price and term. Currently, Dr. Kyriakides and Mr. Mourkakos each hold an aggregate of 2,600,000 5-year warrants to purchase common stock, of which 50% are currently exercisable
at $0.50 per share and 50% are currently exercisable at $0.25 per share.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|(2) | Dr. Allard resigned as our CEO and President on September 7, 2004. He remains a director. As of that date, pursuant to his Employment Agreement a total of 1,145,000 options had
become vested.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | The Companys stock did not publicly trade at the time of grant. The market price was established based on assumptions by management using the Black-Scholes formula.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



AGGREGATED OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR AND
FY-END OPTION/SAR VALUES



None of our named executive
officers exercised stock options during fiscal 2004. Set forth below is certain information about the number and value of unexercised stock options held by such officers as of the end of fiscal 2004.



|                                                               |  |                                 |  |                   |  |                                                                                                          |  |                                                                                                               |          |  
|-------------------------------------------------------------- |  | ------------------------------- |  | ----------------- |  | -------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------- | -------- | -
|Name Principal Position                                        |  | SharesAcquired OnExercisable(#) |  | ValueRealized ($) |  | Number of SecuritiesUnderlyingUnexercised OptionsSARs at Fiscal Year-End (#) Excercisable/ Unexercisable |  | Value of UnexercisedUnexcercisable In-the-Money Options SARs at Fiscal Year-End ($) Exercisable/Unexercisable |         
|(a)                                                            |  | (b)                             |  | (c)               |  | (d)                                                                                                      |  | (e)                                                                                                           |         
|Christopher Kyriakides, Former Co-Vice Chairman & Director (1) |  |                                |  |                  |  | 2,600,000/0                                                                                              |  | $$                                                                                                            | 325,0000 | /
|Othon Mourkakos, Former Officer (1)                            |  |                                |  |                  |  | 2,600,000/0                                                                                              |  | $$                                                                                                            | 325,0000 | /
|Stephane Allard, Chief Executive Officer & Director            |  |                                |  |                  |  | 1,145,000/0                                                                                              |  | $$                                                                                                            | 00       | /
|Mark Hirschel, Chief Scientific Officer                        |  |                                |  |                  |  | 133,333/76,667                                                                                           |  | $$                                                                                                            | 00       | /
|Steve Arikian                                                  |  |                                |  |                  |  | 125,000/300,000                                                                                          |  | $$                                                                                                            | 00       | /
|James McNulty                                                  |  |                                |  |                  |  | 250,000/250,000                                                                                          |  | $$                                                                                                            | 00       | /

---

|(1) | These individuals were awarded stock options during the years 2000, 2001, and 2002. During the fiscal year ended on September 30, 2003, 2,600,000 options issued to Dr. Kyriakides
and 2,600,000 issued to Mr. Mourkakos during 2000, 2001, and 2002 were cancelled and converted to an equal number of warrants, which had a reduced exercise price and term. Currently, Dr. Kyriakides and Mr. Mourkakos each hold an aggregate of
2,600,000 5-year warrants to purchase common stock, of which 50% are exercisable at $0.50 per share and 50% are exercisable at $0.25 per share.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Reflects the difference between the fair market value of the underlying shares of common stock at the end of fiscal 2004 and the various applicable exercise prices of the
officers outstanding options and warrants. The dollar values do not reflect any options or warrants that had an exercise price in excess of the fair market value of the underlying shares at the end of fiscal 2004. The fair market value at the
end of fiscal 2004 was estimated at $0.27.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Ten-Year Option/SAR Repricings



In June 2003, we offered Christopher Kyriakides and Othon Mourkakos together with several other outgoing employees that are
not named executive officers, the opportunity to exchange all outstanding stock options granted to them, with an exercise price per share of $1.25 per share or more, under our 2000 Stock Option Plan, for replacement warrants to purchase shares of
our common stock at $0.25-0.50 per share. We made this exchange offer in an attempt to create an incentive for such persons to continue employment with the company through the consummation of the change in control transaction and longer, if
possible. The participating options were cancelled and are no longer valid as of June 16, 2003. On June 16, 2003, we granted the replacement warrants. The following table describes the participation in the exchange offer by the named executive
officers. There were no repricings of stock options held by our named executive officers prior to this exchange offer.



|                       |  |           |  |                                                       |  |                                                            |      |                                                  |   |                      |  |                                                                      |      |  |          
|---------------------- |  | --------- |  | ----------------------------------------------------- |  | ---------------------------------------------------------- | ---- | ------------------------------------------------ | - | -------------------- |  | -------------------------------------------------------------------- | ---- |  | ---------
|Name                   |  | Date      |  | SecuritiesUnderlyingOptions/SARRepriced orAmended (#) |  | Market Priceof Stock at Timeof Repricing
orAmendment($)(1) |      | ExercisePrice at Time ofRepricing orAmendment($) |   | NewExercisePrice ($) |  | Length ofOriginalOption TermRemainingat Date ofRepricing orAmendment
|Christopher Kyriakides |  | 6/16/2003 |  | 600,000                                               |  | $                                                          | 0.27 |                                                  | $ | 1.38                 |  | $                                                                    | 0.50 |  | 8 years  
|Christopher Kyriakides |  | 6/16/2003 |  | 700,000                                               |  | $                                                          | 0.27 |                                                  | $ | 1.50                 |  | $                                                                    | 0.50 |  | 3.3 years
|Christopher Kyriakides |  | 6/16/2003 |  | 300,000                                               |  | $                                                          | 0.27 |                                                  | $ | 1.50                 |  | $                                                                    | 0.25 |  | 3.3 years
|Christopher Kyriakides |  | 6/13/2003 |  | 1,000,000                                             |  | $                                                          | 0.27 |                                                  | $ | 1.50                 |  | $                                                                    | 0.25 |  | 2.1 years
|Othon Mourkakos        |  | 6/16/2003 |  | 600,000                                               |  | $                                                          | 0.27 |                                                  | $ | 1.38                 |  | $                                                                    | 0.50 |  | 8 years  
|Othon Mourkakos        |  | 6/16/2003 |  | 700,000                                               |  | $                                                          | 0.27 |                                                  | $ | 1.50                 |  | $                                                                    | 0.50 |  | 3.3 years
|Othon Mourkakos        |  | 6/16/2003 |  | 300,000                                               |  | $                                                          | 0.27 |                                                  | $ | 1.50                 |  | $                                                                    | 0.25 |  | 3.3 years
|Othon Mourkakos        |  | 6/16/2003 |  | 1,000,000                                             |  | $                                                          | 0.27 |                                                  | $ | 1.50                 |  | $                                                                    | 0.25 |  | 2.1 years

---

|(1) | The Companys stock did not publicly trade at the time of repricing. The market price was established based on assumptions by management adjusted using the Black-Scholes
formula.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Employment Agreements



All directors and officers have executed confidentiality and non-compete agreements with us.
We have entered into employment agreements with Dr. Stephane Allard, our Director, former CEO and President, and with James McNulty, CPA, our Chief Financial Officer and Secretary.



Dr. Allards Agreement, effective June 16, 2003, has a three-year term with a three-year renewal and provides for a base salary of
$280,000 annually, signing bonus of $60,000, annual bonus of up to fifty percent (50%) of his base salary at the discretion of the Board of Directors based upon achievement of defined goals, and the grant of options to purchase up to 2,000,000
shares of our common stock. Dr. Allard resigned as our CEO and President on September 7, 2004.



Mr. McNultys Agreement, effective November 1, 2003, has a three-year term and provides for an initial base salary of $110,000 annually, annual bonus of up to fifty percent (50%) of his base salary at the
discretion of the Board of Directors based upon achievement of defined goals, and the grant of options to purchase up to 500,000 shares of our common stock.



These employment agreements, along with those entered into with certain key employees, are attached as Exhibits hereto (by reference to previous filings).



43



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##### Table of Contents

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT



The following table sets forth the number and percentage of shares of common stock owned as
of September 30, 2004 by (i) each of our directors, (ii) all persons who, to our knowledge, are the beneficial owners of more than 5% of the outstanding shares of common stock, (iii) each of the executive officers, and (iv) all of our directors and
executive officers, as a group. Each person named in this table has sole investment power and sole vesting power with respect to the shares of common stock set forth opposite such persons name, except as otherwise indicated.



SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT



|                                                                               |  |                                                     |  |                                               |  |                                          |  
|------------------------------------------------------------------------------ |  | --------------------------------------------------- |  | --------------------------------------------- |  | ---------------------------------------- | -
|Name and Address of Beneficial Owner
(1)                                       |  | Reporting Structure                                 |  | AggregateNumber ofSharesBeneficiallyOwned (2) |  | Percentageof SharesBeneficiallyOwned (3) |  
|Steven Arikian (4) 151 Beach 147th Neponsit, NY
11694                          |  | CEO, President & Director                           |  | 125,000                                       |  | 0.27                                     | %
|                                                                               |  |                                                     | 
|Christopher Kyriakides 63 Suffolk Lane Tenafly, NJ 07670                       |  | FormerVice Chairman & Director (13), 5% Stockholder |  | 4,300,883                                     |  | 9.31                                     | %
|                                                                               |  |                                                     | 
|Peter J. Pappas, Sr. 135 W. 18thStreet Second Floor New York, NY 10011         |  | Director, 5% Stockholder                            |  | 6,739,999                                     |  | 14.58                                    | %
|                                                                               |  |                                                     | 
|Stephane Allard (5) 341 North Woodland Street
Englewood, NJ 07631              |  | Director                                            |  | 1,145,000                                     |  | 2.48                                     | %
|                                                                               |  |                                                     | 
|Othon Mourkakos 71 Essex Drive Tenafly, NJ 07670                               |  | 5% Owner, former officer                            |  | 4,029,999                                     |  | 8.72                                     | %
|                                                                               |  |                                                     | 
|Francis E. ODonnell, Jr. (6) 709 The Hamptons
Lane Town and Country, MO 63017 |  | Vice Chairman, Director, 5%Stockholder of Parent    |  | 20,000                                        |  | 0.04                                     | %
|                                                                               |  |                                                     | 
|James A. McNulty (7) 4419 West Sevilla Street
Tampa, FL 33629                  |  | Chief Financial Officer, Secretary                  |  | 250,000                                       |  | 0.54                                     | %
|                                                                               |  |                                                     | 
|Robert Weiss 86 Ladoga Avenue Tampa, FL 33606                                  |  | Director                                            |  | 35,000                                        |  | 0.08                                     | %
|                                                                               |  |                                                     | 
|Jeffrey Scott 2 Spring Forest Court Owings Mills, MD 21117                     |  | Director                                            |  | 30,000                                        |  | 0.06                                     | %
|                                                                               |  |                                                     | 
|Raphael Mannino 36 Meadowview Drive Annandale, NJ 08801                        |  | Director                                            |  | 30,000                                        |  | 0.06                                     | %



44



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##### Table of Contents

|                                                                                    |  |                          |  |                                               |      |  |                                          |     
|----------------------------------------------------------------------------------- |  | ------------------------ |  | --------------------------------------------- | ---- |  | ---------------------------------------- | ----
|Name and Address of Beneficial Owner
(1)                                            |  | Reporting Structure      |  | AggregateNumber ofSharesBeneficiallyOwned (2) |      |  | Percentageof SharesBeneficiallyOwned (3) |     
|Nicholas Leb (8) 205 Park York Lane Cary, NC 27519                                  |  | Director                 |  | 20,000                                        |      |  | 0.04                                     | %   
|                                                                                    |  |                          | 
|Christopher Chapman 800 Falls Lake Drive Mitchellville, MD 20721                    |  | Director                 |  | 40,000                                        |      |  | 0.09                                     | %   
|                                                                                    |  |                          | 
|Martin Baum (9) 6012 Farm Pond Road Apex, NC 27523                                  |  | Director                 |  | 20,000                                        |      |  | 0.04                                     | %   
|                                                                                    |  |                          | 
|Mark Hirschel (10)                                                                  |  | Chief Scientific Officer |  | 133,995                                       |      |  | 0.29                                     | %   
|                                                                                    |  |                          | 
|Accentia, Inc. (3) 5310 Cypress Center Drive
Suite 101 Tampa, FL 33609              |  | 5% Stockholder           |  | 35,912,923                                    |      |  | 77.70                                    | %   
|                                                                                    |  |                          | 
|Hopkins Capital Group, LLC (11) 5310 Cypress Center
Drive Suite 101 Tampa, FL 33609 |  | Affiliate of Parent      |  |                                               | (10) |  |                                          | (10)
|                                                                                    |  |                          | 
|MOAB Investments, LP (12) 2595 Red Springs
Drive Las Vegas, NV 89135                |  | Affiliate of Parent      |  |                                               | (10) |  |                                          | (10)
|                                                                                    |  |                          | 
|Dennis Ryll (12) 2595 Red Springs Drive Las Vegas, NV 89135                         |  | Affiliate of Parent      |  |                                               | (11) |  |                                          | (11)
|                                                                                    |  |                          | 
|All officers and directors as a group                                               |  |                          |  | 16,919,876                                    |      |  | 36.61                                    | %   

---

|(1) | Unless otherwise indicated, the address of each person listed is 5310 Cypress Center Drive, Suite 101, Tampa, FL 33609.
|--- | -----------------------------------------------------------------------------------------------------------------------

|(2) | A person is deemed to be a beneficial owner of securities that can be acquired by such person within 60 days from the date of this filing upon the exercise of warrants and options
and the conversion of convertible securities. Except as otherwise reflected, each beneficial owners percentage ownership is determined by assuming that options, warrants, and convertible securities held by such person (but not those held by
any other person) and which are exercisable or convertible within 60 days from the date of this filing have been exercised or converted. Unless otherwise noted, we believe that all persons named in the table have sole voting and investment power
with respect to all shares of common stock beneficially owned by them.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Calculated on the basis of 46,182,619 shares of stock outstanding as of October 6, 2004, which, consists of 38,160,733 shares of common stock and 8,021,886 shares of preferred
stock. Holders of greater than 10% of the outstanding stock of Accentia, Inc. are Hopkins Capital Group, LLC. And MOAB Investments LP.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | In addition to serving as a CEO, President and Chairman of the Company, Dr. Arikian also serves as a Director of Accentia, Inc, which is the record owner of 35,912,923 shares of the
Company. In the forgoing table, Dr. Arikian includes the following: (i) options to purchase 425,000 shares of the Companys common stock, of which 125,000 are currently exercisable.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Dr. Allard resigned as our CEO and Vice President on September 7, 2004. As of that date, pursuant to his Employment Agreement a total of 1,145,000 options had become vested.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | In addition to serving as Vice Chairman of the Board of Directors of the Company, Dr. ODonnell also serves as Chairman of the Board of Directors of Accentia, Inc., which is
the record owner of 35,912,923 shares of the Company. In the forgoing Table, ownership of Dr. ODonnell includes the following: (i) 20,000 options to purchase shares of the Companys common stock, all of which are currently exercisable.
Dr. ODonnell is the Manager of Hopkins Capital Group, LLC, which is a principal stockholder of Accentia, Inc.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) | In addition to serving as CFO and Secretary of the Company, Mr. McNulty also serves as a Director of Accentia, Inc. which is the record owner of 35,912,923 shares of the Company. In
the forgoing Table, ownership of Mr. McNulty includes the following: (i) 500,000 options to purchase shares of the Companys common stock, of which 250,000 are currently exercisable.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



45



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##### Table of Contents

|(8) | In addition to serving as a Director of the Company, Mr. Leb also serves as Director of Finance of Accentia, Inc., which is the record owner of 35,912,923 shares of the Company. In
the forgoing table, Mr. Leb includes the following: (i) options to purchase 20,000 shares of the Companys common stock.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(9) | In addition to serving as a Director of the Company, Mr. Baum also serves as a Director of Accentia, Inc., which is the record owner of 35,912,923 shares of the Company. In the
forgoing table, Mr. Baum includes the following: (i) options to purchase 20,000 shares of the Companys common stock.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10) | Dr. Hirschel owns 50,663 shares of common stock as well as options to purchase 150,000 shares of common stock, of which 133,333 are currently exercisable.
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|(11) | Hopkins Capital Group, LLC owns more than 10% of the outstanding stock of Accentia, Inc., which is the record owner of 35,912,923 shares of the Company. Hopkins Capital Group, LLC
is reflected as an indirect owner of the Company. Dr. Francis E. ODonnell, Jr. M.D. is the only individual who is beneficial owner of in excess of 10% of Hopkins Capital Group, LLC.
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(12) | Dr. Ryll serves as a Director of Accentia, Inc. and as Vice President of MOAB Management Co.,Inc., which is a general partner of MOAB Investments, LP, which is a principal
stockholder of Accentia, Inc. Accentia, Inc. is the record owner of 35,912,923 shares of the Company. MOAB Investments, LP, consists of Michael Newmark, General Partner, and Dennis Ryll, Diane Ryll,
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(13) | Dr. Kyriakides resigned as our Co-Vice Chairman and Director on November 30, 2004.
|---- | ----------------------------------------------------------------------------------



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##### Table of Contents

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS



CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS



In December 2002, as part of our search for investment financing, we cancelled all written
employment agreements and implemented a voluntary partial salary deferment. Following the Investment Agreement with Accentia in June 2003, salaries were reinstated and deferred salary paid.



In January 2003, we negotiated a financing arrangement with one of our directors who was also
a significant shareholder, Mr. Peter J. Pappas, Sr. Under this arrangement, we agreed to issue fully paid shares of our common stock to Mr. Pappas at the rate of 0.6667 shares for every dollar received by us in the form of loans arranged by Mr.
Pappas prior to April 1, 2003 to support our short-term financial requirements. Mr. Pappas facilitated $710,000 in loans under this arrangement and we issued 473,333 shares of our common stock to Mr. Pappas. $460,000 of the loans arranged by Mr.
Pappas were direct loans from Mr. Pappas to us for which he also received warrants to purchase 360,000 shares of our common stock at a purchase price of $0.50 per share and the right to convert such loans to additional shares of our common stock at
$0.50 per share, representing a potential to acquire an additional 920,000 shares of our common stock which was subject to increase by accrued interest. The remaining $250,000 in loans facilitated by Mr. Pappas under this arrangement were made by
Mr. Angelo Tsakopoulos, who was not one of our officers or directors. Mr. Tsakopoulos received the same loan terms as Mr. Pappas.



In June 2003, convertible loan arrangements entered into since 2001 including the loan arrangements with Mr. Pappas and Mr. Tsakopoulos, discussed above, were modified as
discussed below: (i) the maturity dates were extended to June 16, 2006, (ii) first security interests were granted in specified assets, (iii) interest was set at 7% per annum to accrue to maturity, (iv) at the discretion of the Holder, the notes
were granted conversion rights into shares of our Parent Corporation in accordance with a formula or, in the alternative, into shares of our common stock at a conversion price of $.50 per share.



Additionally, certain options and warrants, including those granted as part of loan
arrangements, were modified as follows: (a) 200,000 warrants previously issued to Peter J. Pappas Sr. were re-priced from $0.50 to $0.25 and (b) 100,000 warrants previously issued to Angelo Tsakopoulos were re-priced from $0.50 to $0.25, (c) 2.6
million options previously issued to Mr. Othon Mourkakos, a former officer/director who resigned on June 16, 2003, were converted to an equal number of warrants, with exercise price of 1.3 million warrants reduced to $0.25 and the balance reduced to
$0.50, (d) 2.6 million options previously issued to Dr. Christopher Kyriakides, who resigned as our CEO and Chairman on June 16, 2003, and who continues as our Co-Vice Chairman and a Director were converted to an equal number of warrants, with the
exercise price of 1.3 million warrants reduced to $0.25 and the balance reduced to $0.50, (e) 200,000 warrants previously issued to Andrews Alexander Wise & Co., an investment banking firm which assisted in obtaining bridge financing were
re-priced from $1.50 & $1.25 to $0.50 and $0.25, respectively, (f) 375,000 options previously issued to Dr. David DeFouw, a former director who resigned on June 16, 2003, were terminated and replaced with warrants to purchase an equal number of
shares at an exercise price of $0.50, and (g) 100,000 options previously issued to Mr. Thomas Belleau, a former officer who resigned on June 16, 2003 were terminated and replaced with an equal number of warrants with an exercise price of $0.50. All
of the aforementioned warrants are exercisable as of September 30, 2003 and have a term of 5 years.



In April 2003, we executed a Termination Compensation Agreement with George Constantin, our former CEO who resigned on April 24, 2003, pursuant to which Mr. Constantin is entitled to receive 36,000 shares of our
common stock along with salary payments of $39,000.



Additionally, on June 16,
2003, we granted certain options for the purchase of shares of our common shares as follows: (a) 100,000 options were granted to David Moser, our Director of Legal Affairs at an exercise price of $0.50 per share, exercisable in accordance with our
2000 Stock Option Plan, and (b) 500,000 options granted to Peter J. Pappas Sr., a director at an exercise price of $0.50 per share, and an additional 500,000 shares were granted at an exercise price of $0.25 per share. All options are exercisable in
accordance with the Companys 2000 Stock Option Plan.



In connection with
Employment Agreements executed with certain of our employees, we granted options for the purchase of shares of our common shares as follows:



(a) Dr. Stephane Allard, our former CEO and President and a current Director was granted 2,000,000 options at an exercise price of $.50 per share, with 1,000,000 options
exercisable as of June 16, 2003, with the balance exercisable over the next two years;



(b) Julian Casciano, our Chief Marketing Officer, was granted 400,000 options at an exercise price of $.50 per share, exercisable in 4 equal installments at six month intervals after June 16, 2003;



(c) James McNulty, CPA, our CFO, was granted 500,000 options at an exercise price of $.50 per
share, with 250,000 exercisable immediately and the balance exercisable over the next three years;



47



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##### Table of Contents

(d) Samuel Duffey, Esq., our General Counsel, was granted 500,000 options at an exercise price of $.50 per share, with
250,000 exercisable immediately and the balance exercisable over the next three years;



(e) James Wachholz, our Chief Regulatory Officer, was granted 150,000 options at an exercise price of $.50 per share, and exercisable over a three-year period;



In June 2003, we issued the following secured convertible promissory notes to related parties:



| | (a) | We issued a secured promissory note to Othon Mourkakos, who resigned as our President and COO on June 16, 2003, in the principal amount of $655,000 dated June 16, 2003, and
subsequent thereto have made two cash payments of $100,000 each. The issuance of the note and the cash payments were in payment of accrued executive compensation. The notes have the following terms: (i) all principal and interest to be paid in one
installment on June 16, 2007, (ii) interest at 7% per annum, (iii) convertible into shares of our Parent Corporation in accordance with the Investment Agreement or, in the alternative, the convertible note may be converted into shares of our common
stock at a conversion price of $.50 per share.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) | We issued a secured promissory note to Dr. Christopher Kyriakides, who resigned as our Chairman and CEO on June 16, 2003 and remains our co-Vice Chairman and Director, in the
principal amount of $655,000 dated June 16, 2003, and subsequent thereto have made two cash payments of $100,000 each. The issuance of the note and the cash payments were in payment of accrued executive compensation. The notes have the following
terms: (i) all principal and interest to be paid in one installment on June 16, 2007, (ii) interest at 7% per annum, (iii) convertible into shares of our Parent Corporation in accordance with the Investment Agreement or, in the alternative, the
convertible note may be converted into shares of our common stock at a conversion price of $.50 per share.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (c) | We issued a secured promissory note to Morrison, Cohen, Singer & Weinstein, LLP, our outside counsel, in the principal amount of $886,000 dated June 16, 2003 in consideration of
legal services rendered to us, with the following terms: (i) all principal and interest shall be paid in the following manner:
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | $185,000 on June 16, 2003 without any interest having accrued;
| | - |  | --------------------------------------------------------------



| |  |  | $150,000 on September 10, 2003;
| | - |  | -------------------------------



| |  |  | $50,000 on June 10, 2004;
| | - |  | -------------------------



| |  |  | $50,000 on June 10, 2005; and
| | - |  | -----------------------------



| |  |  | $451,000 on June 10, 2006
| | - |  | -------------------------



(ii) the convertible note shall earn interest at 7% per annum, (iii) convertible into shares of our Parent Corporation in accordance with the Investment Agreement or, in the alternative, the convertible note may be
converted into shares of Biovest common stock at a conversion price of $.25 per share.



On April 10, 2003 we entered into an Investment Agreement with Accentia (this agreement is reported in Item 1 of Form 8-K filed on April 29, 2003). The Investment Agreement closed on June 16, 2003 subject to an escrow agreement (details of
this closing are reported on Form 8-K filed on June 23, 2003). At closing, Accentia appointed five of the seven members of our board of directors. Additionally, on September 19, 2003, we entered into an Amended and Restated Amendment to Escrow
Agreement which extended Accentias payment obligation under the escrow agreement. All required payments were timely made as extended and the Amended and Restated Amendment to Escrow Agreement was satisfied and terminated. As a result, Accentia
owns approximately eighty-one per cent of our capital stock. Accentias required payment of $2.5 million dollars was made on or before June 16, 2004. Remaining scheduled note payments are as follows: 2.5 million dollars on June 16, 2005; five
million dollars on June 16, 2006 and five million dollars on June 16, 2007. As a result of advances made by Accentia, the current balance due on the promissory note is approximately $11,000,000.



We use administrative, human resource, and accounting facilities and personnel maintained by
our Parent Corporation principally at 5310 Cypress Center Drive #101, Tampa, FL 33609. For the year ended September 30, 2004, these costs were nominal.



We use other services provided by our Parent Corporation and its subsidiaries. We anticipate continuing to use these services at increasing levels as required. Over the
last fiscal year, these services have included nominal consulting services by The Analytica Group, Inc. with regard to product position, pricing and other matters regarding our cell culture production services and instruments and our vaccine.
Further, we received nominal consulting services from TEAMM Pharmaceuticals, Inc. regarding our vaccine. During the year ending September 30, 2004, accounting entries attributing portions of certain expenses and administrative costs incurred by our
Parent Corporation on our behalf were reflected as advances reducing the Note Payable balance due from Accentia.



48



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##### Table of Contents

On September 30, 2004 we entered into a Master Services Agreement and Project Addendum agreement with PPD
Development LP (hereinafter PPD). PPD, a Contract Research Organization, will perform a wide range of services in the conduct and data management of the ongoing Phase III clinical trial of Biovaxid®, our personalized therapeutic vaccine for indolent follicular non-Hodgkins
lymphoma. This pivotal Phase III clinical trial has been ongoing since 2000. The services to be performed by PPD include identification, recruitment and qualification of additional clinical trial sites to accelerate the pace of the patient
enrollment into the trial, facilitation of patient enrollment, coordination of data and information management services, and regulatory compliance functions, among others. The agreement with PPD may be terminated by us at any time upon 30 days
notice. PPD is a shareholder of Accentia, Inc., our Parent Corporation.



On
March 15, 2004, we organized Biovax, Inc., as a wholly-owned subsidiary under the laws of Florida, potentially to use this subsidiary to continue the development of our autologous (patient specific) therapeutic vaccine for follicular non-Hodgkins
lymphoma (Biovaxid®). This corporation is in the organizational stage.



In August 2004, we entered into a Second Amendment to the Investment Agreement
with our parent, Accentia, Inc. (the Amendment). This Amendment provides that Accentia will use reasonable efforts (without altering the terms of Promissory Note executed as part of the Investment Agreement) to advance funds under a Line
of Credit Promissory Note and General Security Agreement. Amounts advanced under the Line of Credit Promissory Note will be credited against installments as they become due and payable under the outstanding Promissory Note. Accentia has made no firm
commitment to make any advances, nor has it made any representation as to its financial ability to make any such advances. Advances made prior to the scheduled payment date under the original Promissory Note arising out of the Investment Agreement
between the Company and Accentia, Inc. will be treated as payments under the stock subscription receivable from Accentia, Inc.



In August 2004 we entered into a Biologic Products Commercialization Agreement with Accentia whereby we will utilize Accentia as our exclusive commercialization partner
for all biologics products, including without limitation our Therapeutic Cancer Vaccine for Non-Hodgkins Lymphoma. For so long as Accentia owns fifty one per cent or more of our outstanding capital stock we will only be required to reimburse
Accentia for direct and indirect expenses. Should Accentia own less than fifty one per cent of our outstanding capital stock, the agreement requires that we pay scheduled compensation for these services.



In November, 2004 we entered into an Exclusive License Agreement with Stanford University for
the use of certain cell lines in connection with our development of our cancer vaccine, and potentially in connection with other vaccine development projects which may take place in the future.



In December, 2004, we entered into a Supply Agreement with biosyn Arzneimittel GmbH for
supply of our requirements of keyhole lympet hemocyanin (KLH), a key ingredient in our cancer vaccine. This agreement has an initial term of three years and is renewable for indefinite additional terms of five years each at our discretion, so long
as we are not in default of our obligations pursuant to this agreement.



ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K



Exhibits



|              |  |                                                                                         
|------------- |  | ----------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                             
|3.1           |  | Amended Certificate of Incorporation of the Company (1)                                 
|              | 
|3.2           |  | Amended Bylaws of the Company (1)                                                       
|              | 
|10.1          |  | Asset Purchase Agreement between the Company and Unisyn Technologies, Inc. (2)          
|              | 
|10.2          |  | Settlement Agreement between the Company and Hambrecht & Quist Guaranty Finance, LLC (2)
|              | 
|10.3          |  | Settlement Agreement between the Company and Latham & Watkins (2)                       
|              | 
|10.4          |  | Agreement between the Company and Bridge Partners III, (3)                              
|              | 
|10.5          |  | Biovest International, Inc. 2000 Stock Option Plan. (4)                                 
|              | 
|10.6          |  | Press release dated April 15, 2003 (5)                                                  
|              | 
|10.7          |  | Investment Agreement dated April 10, 2003 (6)                                           
|              | 
|10.8          |  | Termination Compensation Agreement Dated April 24, 2003 with George Constantin (11)     



49



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##### Table of Contents

|      |  |                                                                                                                                                    
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------
|10.9  |  | Amendment to Investment Agreement dated June 16, 2003 (6)                                                                                          
|      | 
|10.10 |  | Escrow Agreement dated June 16, 2003 (6)                                                                                                           
|      | 
|10.11 |  | Promissory Note in principal amount of $2,500,000 payable to Biovest International, Inc. (6)                                                       
|      | 
|10.12 |  | Promissory Note in principal amount of $15,000,000 payable to Biovest International, Inc. (6)                                                      
|      | 
|10.13 |  | Promissory Note to Othon Mourkakos (6)                                                                                                             
|      | 
|10.14 |  | Promissory Note to Christopher Kyriakides (6)                                                                                                      
|      | 
|10.15 |  | Promissory Note to Peter Pappas (6)                                                                                                                
|      | 
|10.16 |  | Promissory Note to Angelo Tsakopoulos (6)                                                                                                          
|      | 
|10.17 |  | Agreement regarding first right of refusal (6)                                                                                                     
|      | 
|10.18 |  | Promissory Note in principal amount of $885,538.47 payable to Cohen, et al. (6)                                                                    
|      | 
|10.19 |  | Security Agreement (6)                                                                                                                             
|      | 
|10.20 |  | Resignation of directors                                                                                                                           
|      |  | Othon Mourkakos (6)                                                                                                                                
|      |  | David DeFouw, PhD (6)                                                                                                                              
|      |  | George Constantin (6)                                                                                                                              
|      | 
|10.21 |  | Letter from Lazar Levine & Felix LLP, former independent auditors, regarding its concurrence or disagreement with the statements in this report (7)
|      | 
|10.22 |  | Incentive Stock Option Agreement  P. Pappas ($0.25 / share) (8)                                                                                   
|      | 
|10.23 |  | Incentive Stock Option Agreement  P. Pappas ($0.50 / share) (8)                                                                                   
|      | 
|10.24 |  | Common Stock Purchase Warrant  P. Pappas (8)                                                                                                      
|      | 
|10.25 |  | Incentive Stock Option Agreement  D. Moser (8)                                                                                                    
|      | 
|10.26 |  | Common Stock Purchase Warrant  C. Kyriakides (8)                                                                                                  
|      | 
|10.27 |  | Common Stock Purchase Warrant  O. Mourkakos (8)                                                                                                   
|      | 
|10.28 |  | Common Stock Purchase Warrant  A. TsaKopoulos (8)                                                                                                 
|      | 
|10.29 |  | Common Stock Purchase Warrant  T. Belleau (8)                                                                                                     
|      | 
|10.30 |  | Common Stock Purchase Warrant  D. DeFouw (8)                                                                                                      
|      | 
|10.31 |  | Master Contract Services Agreement (8)                                                                                                             
|      | 
|10.32 |  | Amendment to Promissory Note in the principal amount of $2,500,000 dated June 16, 2003 (9)                                                         
|      | 
|10.33 |  | Amended and Restated Amendment to Promissory Note (9)                                                                                              
|      | 
|10.34 |  | Amended and Restated Amendment to Escrow Agreement (9)                                                                                             
|      | 
|10.35 |  | Amendment to Escrow Agreement (9)                                                                                                                  
|      | 
|10.36 |  | Code of Ethics (11)                                                                                                                                
|      | 
|10.37 |  | Employment Agreement with Dr. Stephane Allard (11)                                                                                                 
|      | 
|10.38 |  | Employment Agreement with James McNulty, CPA (11)                                                                                                  
|      | 
|10.39 |  | Employment Agreement with James Wachholz (11)                                                                                                      
|      | 
|10.40 |  | Employment Agreement with Richard Sakowicz (11)                                                                                                    
|      | 
|10.41 |  | Employment Agreement with Samuel Duffey, Esq. (11)                                                                                                 
|      | 
|10.42 |  | Employment Agreement with Julian Casciano (11)                                                                                                     
|      | 
|10.43 |  | Press release dated March 25, 2004 (12)                                                                                                            
|      | 
|10.44 |  | Certificate of Incorporation of Biovax, Inc.(12)                                                                                                   
|      | 
|10.45 |  | Bylaws of Biovax, Inc (12)                                                                                                                         
|      | 
|10.46 |  | Charter for Audit Committee (12)                                                                                                                   
|      | 
|10.47 |  | Insider Trading Policy (12)                                                                                                                        
|      | 
|10.48 |  | Delegation of Authority Policy (12)                                                                                                                
|      | 
|10.49 |  | Financial Consulting Agreement With Andreas Zigouras (12)                                                                                          
|      | 
|10.50 |  | Common Stock Warrant to Andreas Zigouras (12)                                                                                                      
|      | 
|10.51 |  | Release of Claim & Settlement Agreement (Warburton) (13)                                                                                           
|      | 
|10.52 |  | IND Transfer Letter Dated April 27, 2004 (14)                                                                                                      
|      | 
|10.53 |  | Second Amendment to Investment Agreement (15)                                                                                                      
|      | 
|10.54 |  | Biologic Products Commercialization Agreement (15)                                                                                                 
|      | 
|10.55 |  | Line of Credit Promissory Note (15)                                                                                                                
|      | 
|10.56 |  | General Security Agreement (15)                                                                                                                    
|      | 
|10.57 |  | Masters Service Agreement With PPDI (16)                                                                                                           
|      | 
|10.58 |  | Project Addendum PPDI (16)                                                                                                                         
|      | 
|10.59 |  | Confidentiality & Non-Compete Agreement with Carl Cohen, Ph.D. (1)                                                                                 



50



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##### Table of Contents

|     |  |                                                                                                                                                                     
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
|31.1 |  | Certification of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002 (10)                                                                 
|31.2 |  | Certification of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002 (10)                                                                 
|32.1 |  | Certification of the Companys Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (10)
|32.2 |  | Certification of the Companys Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (10)

---

|(1) | Incorporated by reference to the Companys Current Report on Form 8-K dated December 3, 2004
|--- | --------------------------------------------------------------------------------------------

|(2) | Incorporated by reference to the Companys Current Report on Form 8-K dated July 7, 2000.
|--- | -----------------------------------------------------------------------------------------

|(3) | Incorporated by reference to the Companys Annual Report on Form 10-KSB for the period ended September 30, 2000, which was filed on January 16, 2001.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Incorporated by reference to the Companys Quarterly Report on Form 10-QSB for the period ended March 31, 2001, which was filed on May 21, 2001.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Incorporated by reference to the Companys Current Report on Form 8-K dated April 29, 2003.
|--- | -------------------------------------------------------------------------------------------

|(6) | Incorporated by reference to the Companys Current Report on Form 8-K dated June 23, 2003.
|--- | ------------------------------------------------------------------------------------------

|(7) | Incorporated by reference to the Companys Current Report on Form 8-K dated July 7, 2003.
|--- | -----------------------------------------------------------------------------------------

|(8) | Incorporated by reference to the Companys Quarterly Report on Form 10- QSB for the period ended June 30, 2003, which was filed on August 19, 2003.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------

|(9) | Incorporated by reference to the Companys Current Report on Form 8-K dated September 22, 2003
|--- | ----------------------------------------------------------------------------------------------

|(10) | Filed herewith. A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(11) | Incorporated by reference to the Companys Form 10-K dated January 13, 2004.
|---- | ----------------------------------------------------------------------------

|(12) | Incorporated by reference to the Companys Current Report on Form 8-K dated March 29, 2004.
|---- | -------------------------------------------------------------------------------------------

|(13) | Incorporated by reference to the Companys Quarterly Report on Form 10-QSB for the period ended December 31, 2003, which was filed on February 19, 2004.
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------

|(14) | Incorporated by reference to the Companys Quarterly Report on Form 10-QSB for the period ended March 31, 2004, which was filed on May 24, 2004.
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------

|(15) | Incorporated by reference to the Companys Quarterly Report on Form 10-QSB for the period ended June 30, 2004, which was filed on August 23, 2004.
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------

|(16) | Incorporated by reference to the Companys Current Report on Form 8-K dated October 4, 2004.
|---- | --------------------------------------------------------------------------------------------



Reports on Form 8-K



Current Report on Form 8-K dated March 29, 2004

Current Report on Form 8-K dated September 9, 2004

Current Report on Form 8-K dated October 4, 2004

Current Report on Form 8-K dated December 3, 2004



Item 14.Principal Accountant Fees and Services



During 2004, annual fees for the year-end audit and interim reviews aggregated $68,500. In addition, during 2004, the auditors also charged audit related
fees of $18,900, which included the cost of an A133 audit associated with the Companys Federal Grant.



Tax fees for compliance aggregated $8,700.



The Audit Committee has established its pre-approval policies and procedures, pursuant to which the Audit Committee approved the foregoing audit services
provided by Aidman, Piser & Company, P.A. in 2004. Consistent with the Audit Committees responsibility for engaging the Companys independent auditors, all audit and permitted non-audit services require pre-approval by the Audit
Committee. The full Audit Committee approves proposed services and fee estimates for these services. The Audit Committee chairperson or their designee has been designated by the Audit Committee to approve any services arising during the year that
were not pre-approved by the Audit Committee. Services approved by the Audit Committee chairperson are communicated to the full Audit Committee at its next regular meeting and the Audit Committee reviews services and fees for the fiscal year at each
such meeting. Pursuant to these procedures, the Audit Committee approved the foregoing audit services provided by Aidman, Piser & Company, P.A. The audit committee pre-approved audit, audit-related and tax fees for 2004.



51



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##### Table of Contents

INDEX TO FINANCIAL STATEMENTS



BIOVEST
INTERNATIONAL, INC.



|                                                                                             |  |     
|-------------------------------------------------------------------------------------------- |  | ----
|                                                                                             |  | Page
|Report of Independent Certified Public Accountants                                           |  | F-1 
|                                                                                             | 
|Balance Sheet as of September 30, 2004                                                       |  | F-2 
|                                                                                             | 
|Statements of Operations for the years ended September 30, 2004 and 2003                     |  | F-3 
|                                                                                             | 
|Statements of Shareholders Equity (Deficit) for the years ended September 30, 2004 and 2003 |  | F-4 
|                                                                                             | 
|Statements of Cash Flows for the years ended September 30, 2004 and 2003                     |  | F-5 
|                                                                                             | 
|Notes to Financial Statements                                                                |  | F-6 



---

##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS



Board of Directors and Shareholders

BioVest International, Inc.



We have audited the accompanying balance sheet of BioVest International, Inc. (The Company) as of September 30, 2004 and the related
statements of operations, shareholders deficit, and cash flows for the two years then ended. 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 of America). 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 BioVest International, Inc. as of September
30, 2004 and its results of operations and its cash flows for each of the two years then ended in conformity with accounting principles generally accepted in the United States of America.



The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2
to the financial statements, the Company incurred significant losses and used cash in operating activities during the year ended September 30, 2004, and had a deficit in working capital at September 30, 2004. These factors, among others, as
discussed in Note 2 to the financial statements, raise substantial doubt about the Companys ability to continue as a going concern. Managements plans in regards to these matters are also described in Note 2. The financial statements do
not include any adjustments that might result from the outcome of this uncertainty.



/s/ AIDMAN, PISER & COMPANY, P.A.



Tampa, Florida

December 3, 2004



F-1



---

##### Table of Contents

BIOVEST INTERNATIONAL, INC.

BALANCE SHEET

SEPTEMBER 30, 2004



|                                                                                                     |  |   |             |  
|---------------------------------------------------------------------------------------------------- |  | - | ----------- | -
|ASSETS                                                                                               |  |   |             |  
|Current assets:                                                                                      |  |   |             |  
|Cash                                                                                                 |  | $ | 204,000     |  
|Accounts receivable, net of $19,000 allowance for doubtful accounts                                  |  |   | 102,000     |  
|Costs and estimated earnings in excess of billings on uncompleted contracts                          |  |   | 75,000      |  
|Inventories                                                                                          |  |   | 274,000     |  
|Prepaid expenses and other current assets                                                            |  |   | 141,000     |  
|                                                                                                     |  |   |             |  
|Total current assets                                                                                 |  |   | 796,000     |  
|Property and equipment, net                                                                          |  |   | 1,100,000   |  
|Other assets:                                                                                        |  |   |             |  
|Inventories                                                                                          |  |   | 289,000     |  
|Patents and trademarks, net                                                                          |  |   | 514,000     |  
|Reorganization value in excess of amounts allocated to identifiable assets                           |  |   | 2,131,000   |  
|                                                                                                     |  |   |             |  
|                                                                                                     |  | $ | 4,830,000   |  
|                                                                                                     |  |   |             |  
|LIABILITIES AND SHAREHOLDERS DEFICIT                                                                |  |   |             |  
|Current liabilities:                                                                                 |  |   |             |  
|Current maturities of long-term debt                                                                 |  | $ | 401,000     |  
|Accounts payable                                                                                     |  |   | 1,725,000   |  
|Customer deposits                                                                                    |  |   | 102,000     |  
|Accrued liabilities:                                                                                 |  |   |             |  
|Compensation and related taxes                                                                       |  |   | 595,000     |  
|Other                                                                                                |  |   | 988,000     |  
|Billings in excess of costs and estimated earnings on uncompleted contracts                          |  |   | 106,000     |  
|                                                                                                     |  |   |             |  
|Total current liabilities                                                                            |  |   | 3,917,000   |  
|Long-term debt, less current maturities:                                                             |  |   |             |  
|Related party                                                                                        |  |   | 1,310,000   |  
|Non-related party                                                                                    |  |   | 3,940,000   |  
|                                                                                                     |  |   |             |  
|Total liabilities                                                                                    |  |   | 9,167,000   |  
|                                                                                                     |  |   |             |  
|Commitments and contingencies (Note 10)                                                              |  |   |            |  
|Shareholders deficit:                                                                               |  |   |             |  
|Preferred stock, $.01 par value, 10,000,000 shares authorized; 8,021,886 issued and outstanding      |  |   | 80,000      |  
|Common stock, $.01 par value, 50,000,000 shares authorized; 38,196,733 shares issued and outstanding |  |   | 382,000     |  
|Additional paid-in capital                                                                           |  |   | 33,352,000  |  
|Accumulated deficit                                                                                  |  |   | (27,164,000 | )
|Stock subscription receivable                                                                        |  |   | (10,987,000 | )
|                                                                                                     |  |   |             |  
|Total shareholders deficit                                                                          |  |   | (4,337,000  | )
|                                                                                                     |  |   |             |  
|                                                                                                     |  | $ | 4,830,000   |  
|                                                                                                     |  |   |             |  



See notes to financial
statements.



F-2



---

##### Table of Contents

BIOVEST INTERNATIONAL, INC.

STATEMENTS OF OPERATIONS

YEARS ENDED SEPTEMBER 30, 2004 AND 2003



|                                                         |  |      |            |   |      |   |            |  
|-------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                                         |  | 2004 |            |   | 2003 |  
|Revenues:                                                |  |      |            |   |      |   |            |  
|Cell culture products and services                       |  | $    | 2,145,000  |   |      | $ | 2,192,000  |  
|National cell culture center                             |  |      | 1,107,000  |   |      |   | 1,255,000  |  
|Instruments and disposables                              |  |      | 2,334,000  |   |      |   | 4,809,000  |  
|Research and development services revenue, related party |  |      | 120,000    |   |      |   |           |  
|                                                         |  |      |            |   |      |   |            |  
|Total revenues                                           |  |      | 5,706,000  |   |      |   | 8,256,000  |  
|                                                         |  |      |            |   |      |   |            |  
|Operating costs and expenses:                            |  |      |            |   |      |   |            |  
|Cost of sales                                            |  |      | 5,447,000  |   |      |   | 6,283,000  |  
|Research and development                                 |  |      | 5,541,000  |   |      |   | 2,591,000  |  
|Marketing, general and administrative                    |  |      | 3,251,000  |   |      |   | 4,939,000  |  
|                                                         |  |      |            |   |      |   |            |  
|Total operating costs and expenses                       |  |      | 14,239,000 |   |      |   | 13,813,000 |  
|                                                         |  |      |            |   |      |   |            |  
|Loss from operations                                     |  |      | (8,533,000 | ) |      |   | (5,557,000 | )
|Other income (expense):                                  |  |      |            |   |      |   |            |  
|Interest expense                                         |  |      | (448,000   | ) |      |   | (566,000   | )
|Other income (expense), net                              |  |      | (15,000    | ) |      |   | 68,000     |  
|                                                         |  |      |            |   |      |   |            |  
|                                                         |  |      | (463,000   | ) |      |   | (498,000   | )
|                                                         |  |      |            |   |      |   |            |  
|Net loss                                                 |  | $    | (8,996,000 | ) |      | $ | (6,055,000 | )
|                                                         |  |      |            |   |      |   |            |  
|Net loss per common share:                               |  |      |            |   |      |   |            |  
|Basic                                                    |  | $    | (.24       | ) |      | $ | (0.33      | )
|                                                         |  |      |            |   |      |   |            |  
|Diluted                                                  |  | $    | (.24       | ) |      | $ | (0.33      | )
|                                                         |  |      |            |   |      |   |            |  
|Weighted average common shares outstanding:              |  |      |            |   |      |   |            |  
|Basic                                                    |  |      | 38,196,733 |   |      |   | 18,228,475 |  
|                                                         |  |      |            |   |      |   |            |  
|Diluted                                                  |  |      | 38,196,733 |   |      |   | 18,228,475 |  
|                                                         |  |      |            |   |      |   |            |  



See notes to financial
statements



F-3



---

##### Table of Contents

BIOVEST INTERNATIONAL, INC.

STATEMENTS OF SHAREHOLDERS EQUITY (DEFICIT)

YEARS ENDED SEPTEMBER 30, 2003 AND 2004



|                                                                    |  |                 |  |              |        |                          |            |   |                    |   |         |                             |   |            |                          |  |   |             |   |  |   |             |   |  |   |            |  
|------------------------------------------------------------------- |  | --------------- |  | ------------ | ------ | ------------------------ | ---------- | - | ------------------ | - | ------- | --------------------------- | - | ---------- | ------------------------ |  | - | ----------- | - |  | - | ----------- | - |  | - | ---------- | -
|                                                                    |  | Preferred stock |  | Common Stock |        | AdditionalPaid-inCapital |            |   | AccumulatedDeficit |   |         | StockSubscriptionReceivable |   |            | TotalShareholdersEquity | 
|                                                                    |  | Shares          |  | Amount       |        | Shares                   |            |   | Amount             |   |         |                             |  
|Balance at October 1, 2002                                          |  |                |  | $            |       |                          | 9,816,363  |   |                    | $ | 98,000  |                             | $ | 12,875,000 |                          |  | $ | (12,113,000 | ) |  | $ | (250,000    | ) |  | $ | 610,000    |  
|Proceeds from sale of stock in connection with investment agreement |  | 8,021,886       |  |              | 80,000 |                          | 27,891,037 |   |                    |   | 279,000 |                             |   | 19,641,000 |                          |  |   |            |   |  |   | (17,500,000 | ) |  |   | 2,500,000  |  
|Stock warrants issued in connection with investment agreement       |  |                |  |              |       |                          |           |   |                    |   |        |                             |   | 986,000    |                          |  |   |            |   |  |   |            |   |  |   | 986,000    |  
|Stock issuance costs                                                |  |                |  |              |       |                          |           |   |                    |   |        |                             |   | (358,000   | )                        |  |   |            |   |  |   |            |   |  |   | (358,000   | )
|Beneficial conversion feature                                       |  |                |  |              |       |                          |           |   |                    |   |        |                             |   | 148,000    |                          |  |   |            |   |  |   |            |   |  |   | 148,000    |  
|Stock warrants issued in connection with issuance of notes payable  |  |                |  |              |       |                          |           |   |                    |   |        |                             |   | 65,000     |                          |  |   |            |   |  |   |            |   |  |   | 65,000     |  
|Stock options issued for services rendered                          |  |                |  |              |       |                          |           |   |                    |   |        |                             |   | 160,000    |                          |  |   |            |   |  |   |            |   |  |   | 160,000    |  
|Stock issued for services rendered                                  |  |                |  |              |       |                          | 473,333    |   |                    |   | 5,000   |                             |   | 124,000    |                          |  |   |            |   |  |   |            |   |  |   | 129,000    |  
|Reversal of previous stock grant                                    |  |                |  |              |       |                          | (20,000    | ) |                    |   |        |                             |   | (60,000    | )                        |  |   |            |   |  |   |            |   |  |   | (60,000    | )
|Collection on stock subscription                                    |  |                |  |              |       |                          |           |   |                    |   |        |                             |   |           |                          |  |   |            |   |  |   | 600,000     |   |  |   | 600,000    |  
|                                                                    |  |                 |  |              |        |                          |            |  
|Net loss for the year                                               |  |                |  |              |       |                          |           |   |                    |   |        |                             |   |           |                          |  |   | (6,055,000  | ) |  |   |            |   |  |   | (6,055,000 | )
|                                                                    |  |                 |  |              |        |                          |            |   |                    |   |         |                             |   |            |                          |  |   |             |   |  |   |             |   |  |   |            |  
|Balances at September 30, 2003                                      |  | 8,021,886       |  | $            | 80,000 |                          | 38,160,733 |   |                    | $ | 382,000 |                             | $ | 33,581,000 |                          |  | $ | (18,168,000 | ) |  | $ | (17,150,000 | ) |  | $ | (1,275,000 | )
|                                                                    |  |                 |  |              |        |                          |            |  
|Net loss for the year                                               |  |                |  |              |       |                          |           |   |                    |   |        |                             |   |           |                          |  |   | (8,996,000  | ) |  |   |            |   |  |   | (8,996,000 | )
|Conversion of debt to equity                                        |  |                |  |              |       |                          | 36,000     |   |                    |   |        |                             |   | 16,000     |                          |  |   |            |   |  |   |            |   |  |   | 16,000     |  
|Settlement of dispute regarding stock subscription receivable       |  |                |  |              |       |                          |           |   |                    |   |        |                             |   | (250,000   | )                        |  |   |            |   |  |   | 250,000     |   |  |   | 0          |  
|Collection of stock subscription receivable                         |  |                 |  |              |        |                          |            |   |                    |   |         |                             |   |            |                          |  |   |             |   |  |   | 5,913,000   |   |  |   | 5,913,000  |  
|Stock-based compensation                                            |  |                |  |              |       |                          |           |   |                    |   |        |                             |   | 5,000      |                          |  |   |            |   |  |   |            |   |  |   | 5,000      |  
|                                                                    |  |                 |  |              |        |                          |            |   |                    |   |         |                             |   |            |                          |  |   |             |   |  |   |             |   |  |   |            |  
|                                                                    |  | 8,021,886       |  | $            | 80,000 |                          | 38,196,733 |   |                    | $ | 382,000 |                             | $ | 33,352,000 |                          |  |   | (27,164,000 | ) |  | $ | (10,987,000 | ) |  | $ | (4,337,000 | )
|                                                                    |  |                 |  |              |        |                          |            |   |                    |   |         |                             |   |            |                          |  |   |             |   |  |   |             |   |  |   |            |  



See notes to financial
statements



F-4



---

##### Table of Contents

BIOVEST INTERNATIONAL, INC.

STATEMENTS OF CASH FLOWS

YEARS ENDED SEPTEMBER 30, 2004 AND 2003



|                                                                               |  |      |            |   |      |   |            |  
|------------------------------------------------------------------------------ |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                                                               |  | 2004 |            |   | 2003 |  
|Cash flows from operating activities:                                          |  |      |            |   |      |   |            |  
|Net loss                                                                       |  | $    | (8,996,000 | ) |      | $ | (6,055,000 | )
|Adjustments to reconcile net loss to net cash flows from operating activities: |  |      |            |   |      |   |            |  
|Depreciation                                                                   |  |      | 304,000    |   |      |   | 236,000    |  
|Amortization                                                                   |  |      | 122,000    |   |      |   | 121,000    |  
|Issuance of common stock, options and warrants for services                    |  |      | 5,000      |   |      |   | 1,280,000  |  
|Amortization of debt discounts                                                 |  |      | 52,000     |   |      |   | 54,000     |  
|Loss on disposal of property and equipment                                     |  |      |           |   |      |   | 29,000     |  
|Change in cash resulting from changes in:                                      |  |      |            |   |      |   |            |  
|Accounts receivable                                                            |  |      | 877,000    |   |      |   | 312,000    |  
|Costs and estimated earnings in excess of billings on uncompleted contracts    |  |      | (52,000    | ) |      |   | 4,000      |  
|Inventories                                                                    |  |      | 237,000    |   |      |   | 541,000    |  
|Other                                                                          |  |      | 150,000    |   |      |   | 15,000     |  
|Accounts payable and accrued liabilities                                       |  |      | 1,986,000  |   |      |   | 447,000    |  
|Customer deposits                                                              |  |      | 7,000      |   |      |   | (82,000    | )
|Billings in excess of costs and estimated earnings on uncompleted contracts    |  |      | (74,000    | ) |      |   | (107,000   | )
|                                                                               |  |      |            |   |      |   |            |  
|Net cash flows from operating activities                                       |  |      | (5,382,000 | ) |      |   | (3,205,000 | )
|                                                                               |  |      |            |   |      |   |            |  
|Cash flows from investing activities:                                          |  |      |            |   |      |   |            |  
|Proceeds from disposal of equipment                                            |  |      |           |   |      |   | 14,000     |  
|Purchases of property and equipment                                            |  |      | (444,000   | ) |      |   | (83,000    | )
|                                                                               |  |      |            |   |      |   |            |  
|Net cash flows from investing activities                                       |  |      | (444,000   | ) |      |   | (69,000    | )
|                                                                               |  |      |            |   |      |   |            |  
|Cash flows from financing activities:                                          |  |      |            |   |      |   |            |  
|Repayment of notes payable and long-term debt                                  |  |      | (421,000   | ) |      |   | (184,000   | )
|Proceeds from notes payable and long-term debt                                 |  |      |           |   |      |   | 760,000    |  
|Net proceeds from sale of common stock and warrants                            |  |      |           |   |      |   | 3,100,000  |  
|Proceeds from stock subscription receivable                                    |  |      | 5,913,000  |   |      |   |           |  
|Stock issuance costs                                                           |  |      |           |   |      |   | (358,000   | )
|                                                                               |  |      |            |   |      |   |            |  
|Net cash flows from financing activities                                       |  |      | 5,492,000  |   |      |   | 3,318,000  |  
|                                                                               |  |      |            |   |      |   |            |  
|Net change in cash                                                             |  |      | (334,000   | ) |      |   | 44,000     |  
|Cash at beginning of year                                                      |  |      | 538,000    |   |      |   | 494,000    |  
|                                                                               |  |      |            |   |      |   |            |  
|Cash at end of year                                                            |  | $    | 204,000    |   |      | $ | 538,000    |  
|                                                                               |  |      |            |   |      |   |            |  
|Supplemental cash flow information:                                            |  |      |            |   |      |   |            |  
|                                                                               |  |     
|Cash paid for interest during the year                                         |  | $    | 36,000     |   |      | $ | 45,000     |  
|                                                                               |  |      |            |   |      |   |            |  
|Cash paid during the year for income taxes                                     |  | $    |           |   |      | $ |           |  
|                                                                               |  |      |            |   |      |   |            |  



Non
cash financing activity:



During 2004, debt in the amount of $16,000 was
converted to equity.



See notes to financial statements



F-5



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##### Table of Contents

BIOVEST INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED SEPTEMBER 30, 2004 AND 2003



|1. | Nature of business and summary of significant accounting policies:
|-- | ------------------------------------------------------------------



Nature of business:



BioVest International, Inc. (the Company or BioVest) is a biotechnology company focused on production and contract manufacturing
of biologic drugs and products from small through commercial scale. It has historically developed, manufactured and marketed patented cell culture systems and equipment to pharmaceutical, diagnostic and biotechnology companies, as well as leading
research institutions worldwide, and has provided contract cell production services to those institutions. While continuing this business, management has chosen to re-orient the Companys focus, assets and operations to increase contract cell
production and biologic drug development and ownership. The Companys first drug product, a personalized vaccine for the most common and fastest-growing form of hematologic cancer, known as B-cell Non-Hodgkins lymphoma, is currently in a
Phase III FDA-approved pivotal licensing trial.



During the
year the Company has incorporated a wholly-owned subsidiary, Biovax, Inc., a Florida corporation, however that subsidiary had not commenced operations as of September 30, 2004.



The Company is an 81% owned subsidiary of Accentia BioPharmaceuticals, Inc.



Summary of significant accounting policies:



Inventories:



Inventories are recorded at the lower of cost or market with cost determined
using the first-in, first-out (FIFO) method.



Property and equipment:



Property and
equipment are recorded at cost. Depreciation for property and equipment is computed using the straight-line method over the estimated useful lives of three to seven years.



Reorganization value in excess of amounts allocated to identifiable assets and intangible assets:



Intangible assets include patents and trademarks as well as reorganization
value in excess of amounts allocated to identifiable assets, which are accounted for based on Financial Accounting Standard Statement No. 142 Goodwill and Other Intangible Assets (FAS 142).In that regard, intangible assets that
have indefinite useful lives are not amortized but are tested at least annually for impairment, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The Company has designated reorganization value in
excess of amounts allocated to identifiable assets as intangible assets with indefinite lives and, therefore, these assets are not amortized.



Patents and trademarks:



Costs incurred in relation to patent applications are capitalized as deferred patent costs. If and when a patent is issued, the related patent application
costs are transferred to the patent account and amortized over the estimated useful life of the patent. If it is determined that a patent will not be issued, the related patent application costs are charged to expense at the time such determination
is made.



Patent and trademark costs are recorded at historical
cost. Patent and trademark costs are being amortized using the straight-line method over their estimated useful lives of six years for patents and twenty years for trademarks. Accumulated amortization was $628,000 at September 30, 2004.



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##### Table of Contents

BIOVEST INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED SEPTEMBER 30, 2004 AND 2003



|1. | Nature of business and summary of significant accounting policies (continued):
|-- | ------------------------------------------------------------------------------



Patents and trademarks (continued):



Estimated future amortization of patent and trademark costs is as follows:



|                          |  |   |        
|------------------------- |  | - | -------
|Year ending September 30, |  |  
|2005                      |  | $ | 106,000
|2006                      |  |   | 30,000 
|2007                      |  |   | 30,000 
|2008                      |  |   | 30,000 
|2009                      |  |   | 30,000 
|thereafter                |  |   | 288,000
|                          |  |   |        
|                          |  | $ | 514,000
|                          |  |   |        



Carrying value of
long-lived assets:



The carrying values of the
Companys other long-lived assets are evaluated whenever events or changes in circumstances indicate that the carrying amount might not be recoverable. This assessment may be based upon managements experience in the industry, historical
and projected sales, current backlog and expectations of undiscounted future cash flows, and, as in the case for the current year, might include an external valuation. The Company reviews the valuation and amortization of those long-lived assets to
determine possible impairment by comparing the carrying value to projected undiscounted future cash flows of the related assets.



Financial instruments:



Financial instruments consist of cash, accounts receivable, accounts payable, notes payable and convertible debentures. As of September 30, 2004, the fair
values of these instruments, except as to the convertible debentures, approximated their respective carrying values. The carrying value of the Companys long-term debt, including convertible debentures of $5,651,000 as of September 30, 2004
reflect discounts associated with beneficial conversion features, more fully discussed in Note 6. The fair value of the long-term debt is estimated by management to be $5,733,000 (their face value) in consideration of the terms and interest rates
applicable to the indebtedness.



Revenue recognition:



Instruments and disposables sales are recognized in the
period in which the applicable products are delivered. The Company does not provide its customers with a right of return; however, deposits made by customers must be returned to customers in the event of non-performance by the Company.



Revenues from contract cell production services are recognized using the
percentage-of-completion method, measured by the percentage of contract costs incurred to date to estimated total contract costs for each contract. Contract costs include all direct material, subcontract and labor costs and those indirect costs
related to contract performance, such as indirect labor, insurance, supplies and tools. General and administrative costs are charged to operations as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which
such losses are determined. Changes in job performance, job conditions, estimated profitability and final contract settlements may result in revisions to revenues, costs and profits and are recognized in the period such revisions are determined.
Because of the inherent uncertainties in estimating costs, it is at least reasonably possible that the estimates used will change in the near term.



F-7



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##### Table of Contents

BIOVEST INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED SEPTEMBER 30, 2004 AND 2003



|1. | Nature of business and summary of significant accounting policies (continued):
|-- | ------------------------------------------------------------------------------



Revenue recognition (continued):



The asset costs and estimated earnings in excess of billings on uncompleted contracts represents revenues
recognized in excess of amounts billed. Such revenues are expected to be billed and collected within one year on uncompleted contracts. The liability billings in excess of costs and estimated earnings on uncompleted contracts represents
billings in excess of revenue recognized.



Research and
development expenses:



The Company expenses research and
development expenditures as incurred. In the fiscal years ended September 30, 2004 and 2003 the Company incurred total research and development expenses of $5,541,000 and $2,591,000, respectively. Expenses for the CRADA (See Note 12) amounted to
$5,189,000 and $1,830,000, respectively.



Shipping and
handling costs:



Shipping and handling costs are included
as a component of cost of sales in the accompanying statements of operations.



Advertising:



The
Company expenses the costs of advertising as they are incurred. Advertising expense was approximately $66,000 and $62,000 for the years ended September 30, 2004 and 2003, respectively.



Use of estimates in the preparation of financial statements



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 disclosures about 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.



Stock-based compensation:



The Company follows Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation (SFAS 123) for non-employee stock
based compensation, which establishes a fair value based method of accounting for such stock-based compensation. However, the Company has elected to account for its employee stock compensation plans using the intrinsic value method under Accounting
Principles Board Opinion No. 25 whereby compensation expense is only recorded to the extent that the fair value of the underlying stock exceeds the stock option price at the date of grant.



F-8



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##### Table of Contents

BIOVEST INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED SEPTEMBER 30, 2004 AND 2003



|1. | Nature of business and summary of significant accounting policies (continued):
|-- | ------------------------------------------------------------------------------



Stock-based compensation (continued):



The following table reflects supplemental financial information related to stock-based employee compensation, as required by
SFAS No. 148, accounting for stock-based compensation  transition and disclosure.



|                                                     |  |      |            |   |      |   |            |  
|---------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                                     |  | 2004 |            |   | 2003 |  
|Net loss, as reported                                |  | $    | (8,996,000 | ) |      | $ | (6,055,000 | )
|Stock-based compensation, as reported                |  | $    | 5,000      |   |      | $ | 1,280,000  |  
|Stock-based compensation under fair value method     |  | $    | 269,000    |   |      | $ | 1,650,000  |  
|Pro-forma net loss under fair value method           |  | $    | (9,260,000 | ) |      | $ | (6,425,000 | )
|Basic net loss per share, as reported                |  | $    | (.24       | ) |      | $ | (0.33      | )
|Pro-forma net loss per share under fair value method |  | $    | (.24       | ) |      | $ | (0.35      | )



Recent accounting
pronouncements:



In December 2003, the FASB
issued FASB Interpretation No. 46R, Consolidation of Variable Interest Entities (amended). This interpretation clarifies rules relating to consolidation where entities are controlled by means other than a majority voting interest and
instances in which equity investors do not bear the residual economic risks. This interpretation was originally effective immediately for variable interest entities created after January 31, 2003 and for interim periods beginning after June 15, 2003
for interests acquired prior to February 1, 2003. However, the FASB is reviewing certain provisions of the standard and has deferred the effective date of application to periods ending after December 15, 2003. The Company currently has no ownership
in variable interest entities and, therefore, adoption of this standard currently has no financial reporting implications.



In November 2004, the FASB issued SFAS No. 151, Inventory Costs. The statement amends Accounting Research Bulletin (ARB) No. 43,
Inventory Pricing, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material. ARB No. 43 previously stated that these costs must be so abnormal as to require treatment as
current-period charges. SFAS No. 151 requires that those items be recognized as current-period charges regardless of whether they meet the criterion of so abnormal. In addition, this statement requires that allocation of fixed
production overhead to the costs of conversion be based on the normal capacity of the production facilities. The statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005, with earlier application
permitted for fiscal years beginning after the issue date of the statement. The adoption of SFAS No. 151 is not expected to have any significant impact on the Companys current financial condition or results of operations.



In December 2004, the FASB issued SFAS No. 152, Accounting for Real
Estate Time-Sharing Transactions  An Amendment of FASB Statements No. 66 and 67, which states that the guidance for incidental operations and costs incurred to sell real estate projects does not apply to real estate time-sharing
transactions. The adoption of SFAS No. 152 is not expected to have any impact on the Companys current financial condition or results of operations.



In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets  An Amendment of APB Opinion No. 29. APB Opinion No. 29,
Accounting For Nonmonetary Transactions, is based on the opinion that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. SFAS No. 153 amends Opinion No. 29 to eliminate the exception for
nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets whose results are not expected to significantly change the future cash flows of the entity. The adoption of SFAS No. 153
is not expected to have any impact on the Companys current financial condition or results of operations.



F-9



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##### Table of Contents

BIOVEST INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED SEPTEMBER 30, 2004 AND 2003



|1. | Nature of business and summary of significant accounting policies (continued):
|-- | ------------------------------------------------------------------------------



Recent accounting pronouncements (continued):



In December 2004, the FASB revised its SFAS No. 123 (SFAS No.
123R), Accounting for Stock Based Compensation. The revision establishes standards for the accounting of transactions in which an entity exchanges its equity instruments for goods or services, particularly transactions in which an
entity obtains employee services in share-based payment transactions. The revised statement requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value
of the award. That cost is to be recognized over the period during which the employee is required to provide service in exchange for the award. Changes in fair value during the requisite service period are to be recognized as compensation cost over
that period. In addition, the revised statement amends SFAS No. 95, Statement of Cash Flows, to require that excess tax benefits be reported as a financing cash flow rather than as a reduction of taxes paid. The provisions of the revised
statement are effective for financial statements issued for the first interim or annual reporting period beginning after June 15, 2005, with early adoption encouraged. The Company is currently evaluating the impact that this statement will have on
its financial condition or results of operations.



Net loss
per common share



The Company had net losses for all
periods presented. Diluted loss per share assumes conversion of all potentially dilutive outstanding common stock options and warrants. Potential common shares outstanding are excluded from the calculation of diluted loss per share if their effect
is anti-dilutive. Dilutive loss per share is the same as basic loss per share for all periods presented as the effect of all options outstanding is anti-dilutive.



|2. | Liquidity and managements plans:
|-- | ---------------------------------



The accompanying financial statements have been prepared on a going-concern basis, which assumes that Biovest will realize its assets and discharge its
liabilities in the normal course of business. As reflected in the accompanying financial statements, Biovest incurred net losses of $8,996,000 and $6,055,000 and negative cash flows from operations of $5,382,000 and $3,205,000 in 2004 and 2003,
respectively. Furthermore, the Company has a working capital deficit of $3,121,000 at September 30, 2004. In addition, Biovests projected cash flows from operations for fiscal 2005 are currently projected to be insufficient to finance
projected operations without funding from other sources.



In
September 2001, the Company entered into a definitive Cooperative Research and Development Agreement (CRADA) with the National Cancer Institute (NCI) for the development and ultimate commercialization of patient-specific
vaccines for the treatment of non-Hodgkins lymphoma. Successful development of the vaccine, if approved by the FDA, from Phase III clinical trials, which are in process, through commercialization, will commit the Company to several years of
significant expenditures before revenues will be realized, if ever.



In June 2003, the Company sold shares of common and preferred stock, representing approximately 81% of the Company, to Accentia, Inc. (Accentia) for $20,000,000. Biovest has collected $9,013,000 of the $20,000,000 and, while
only $987,000 is scheduled to be collected in 2005, in accordance with the original loan terms, management believes that Accentia will fund the remaining amounts prior to their scheduled maturity dates.



In the period following the change in control, management has spent
considerable time and effort in revising the budget process, drafting a marketing plan and seeking ways to more efficiently operate the core business and conduct its research and development activities. Management anticipates that for fiscal 2005,
they will further reduce expenditures, but anticipate losses in total due to research and development expenditures and lower sales volume. Managements plans to sustain operations and fund the losses involve collection of the stock subscription
receivable from Accentia and additional borrowings from Accentia as needed. Biovest anticipates that stabilized commercialization of the aforementioned vaccine will occur in late 2008, at which time the Company should commence profitable operations.



F-10



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##### Table of Contents

BIOVEST INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED SEPTEMBER 30, 2004 AND 2003



|2. | Liquidity and managements plans (continued):
|-- | ---------------------------------------------



While management is confident that they will obtain the necessary funding, reduce the level of historical losses and achieve successful commercialization
of the vaccine, there can be no assurances in that regard. The financial statements do not include any adjustments that may arise as a result of this uncertainty.



|3. | Details to balance sheet:
|-- | -------------------------



Inventories:



Inventories consist of the following at September 30, 2004:



|                                                       |  |   |        
|------------------------------------------------------ |  | - | -------
|Finished goods                                         |  | $ | 52,000 
|Work-in-process                                        |  |   | 61,000 
|Raw materials                                          |  |   | 450,000
|                                                       |  |   |        
|                                                       |  |   | 563,000
|Less inventory not expected to be sold within one year |  |   | 289,000
|                                                       |  |   |        
|                                                       |  | $ | 274,000
|                                                       |  |   |        



During 2003, the
Company recorded a $300,000 provision for obsolete inventory, which is included in cost of sales in the accompanying 2003 statement of operations.



Property and equipment:



Property and equipment consist of the following at September 30, 2004:



|                                               |  |   |          
|---------------------------------------------- |  | - | ---------
|Furniture and fixtures                         |  | $ | 68,000   
|Leasehold improvements                         |  |   | 405,000  
|Machinery and equipment                        |  |   | 1,532,000
|                                               |  |   |          
|                                               |  |   | 2,005,000
|Less accumulated depreciation and amortization |  |   | 905,000  
|                                               |  |   |          
|                                               |  | $ | 1,100,000
|                                               |  |   |          



F-11



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##### Table of Contents

BIOVEST INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED SEPTEMBER 30, 2004 AND 2003



|3. | Details to balance sheet (continued):
|-- | -------------------------------------



Costs and estimated earnings on uncompleted contracts:



Costs and estimated earnings on uncompleted contracts consists of the following as of September 30, 2004:



|                                        |  |   |          |  
|--------------------------------------- |  | - | -------- | -
|Costs incurred on uncompleted contracts |  | $ | 117,000  |  
|Estimated earnings                      |  |   | 97,000   |  
|                                        |  |   |          |  
|                                        |  |   | 214,000  |  
|Less billings to date                   |  |   | (245,000 | )
|                                        |  |   |          |  
|                                        |  | $ | (31,000  | )
|                                        |  |   |          |  



These amounts are
included in the accompanying 2004 balance sheet under the following captions:



|                                                                            |  |   |          |  
|--------------------------------------------------------------------------- |  | - | -------- | -
|Costs and estimated earnings in excess of billings on uncompleted contracts |  | $ | 75,000   |  
|Billings in excess of costs and estimated earnings on uncompleted contracts |  |   | (106,000 | )
|                                                                            |  |   |          |  
|                                                                            |  | $ | (31,000  | )
|                                                                            |  |   |          |  



|4. | Concentration of credit risk and major customer information:
|-- | ------------------------------------------------------------



Financial instruments that subject the Company to concentrations of credit risk include cash and accounts receivable. The Company places its cash in
several high-quality financial institutions. Such amounts are insured by the FDIC up to $100,000 per institution.



Accounts receivable are customer obligations due under normal trade terms for products sold to distributors and retail customers. The Company performs
ongoing credit evaluations of customers financial condition, but does not require collateral.



Management reviews accounts receivable on a monthly basis to determine if any receivables will potentially be uncollectible. The allowance for doubtful
accounts contains a specific accrual for accounts receivable balances that are considered potential bad debts and a general accrual for remaining possible bad debts. Any accounts receivable balances that are determined to be uncollectible are
written off to bad debt expense. Based on the information available, management believes that the allowance for doubtful accounts as of September 30, 2004 is adequate. However, actual write-offs might exceed the recorded allowance.



Three customers respectively accounted for 14%, 11% and 10% of the
Companys trade accounts receivable balance at September 30, 2004. One customer accounted for 27% of revenues for the fiscal year ended September 30, 2003.



A significant amount of the Companys revenue has been derived from export sales. The Companys export sales, principally to European
customers, were 36% and 46% of total revenues, respectively in the fiscal years ended September 30, 2004 and 2003. For the fiscal year ended September 30, 2003, one foreign country accounted for 29% of total revenues.



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##### Table of Contents

BIOVEST INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED SEPTEMBER 30, 2004 AND 2003



|5. | Long-term debt:
|-- | ---------------



Long-term debt consists of the following at September 30, 2004



|                                                                                                                                                                                                                                                                                                                                                     |  |   |           |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | - | --------- | -
|Notes payable, former management (current stockholder); principal and interest at 7% both due upon maturity in June 2007. Collateralized by
certain assets; convertible at the option of the holder to BioVest common stock (at $.25 per share) or Accentia common stock (at either the IPO offering price, if any, or based on an appraised value). |  | $ | 1,310,000 |  
|                                                                                                                                                                                                                                                                                                                                                     | 
|Convertible working capital notes payable; principal and interest at 7%, both due upon maturity in June 2006. Collateralized by certain
assets; convertible at the option of the holder. Less: unaccreted value of beneficial conversion feature of $37,000 (i)                                                                                      |  |   | 673,000   |  
|                                                                                                                                                                                                                                                                                                                                                     | 
|Notes payable, bridge financing; principal and interest at 7% both due upon maturity in June 2006. Collateralized by certain assets;
convertible at the option of the holder to BioVest common stock (at $.50 per share) or Accentia common stock (at either the IPO offering price, if any, or based on an appraised value).                        |  |   | 2,050,000 |  
|                                                                                                                                                                                                                                                                                                                                                     | 
|Convertible note payable, former legal counsel; principal due in installments through June 2006; interest at 7% due upon maturity.
Collateralized by certain assets; Less: unaccreted value of beneficial conversion feature of $45,000 (i)                                                                                                          |  |   | 505,000   |  
|                                                                                                                                                                                                                                                                                                                                                     | 
|Notes payable, 2001 bridge financing, interest at 7.5%; due in 2004; convertible into common stock at $1.00 per share.                                                                                                                                                                                                                               |  |   | 100,000   |  
|                                                                                                                                                                                                                                                                                                                                                     | 
|Notes payable, 2000 bridge financing, interest at 10%; $100,000 due September 2003 and $200,000 due September 2004; convertible into common
stock at $1.00 per share.                                                                                                                                                                                |  |   | 300,000   |  
|                                                                                                                                                                                                                                                                                                                                                     | 
|Other                                                                                                                                                                                                                                                                                                                                                |  |   | 87,000    |  
|Long-term accrued interest                                                                                                                                                                                                                                                                                                                           |  |   | 626,000   |  
|                                                                                                                                                                                                                                                                                                                                                     |  |   |           |  
|                                                                                                                                                                                                                                                                                                                                                     |  |   | 5,651,000 |  
|Less current maturities                                                                                                                                                                                                                                                                                                                              |  |   | (401,000  | )
|                                                                                                                                                                                                                                                                                                                                                     |  |   |           |  
|Long-term portion of notes payable                                                                                                                                                                                                                                                                                                                   |  | $ | 5,250,000 |  
|                                                                                                                                                                                                                                                                                                                                                     |  |   |           |  



Future maturities of
long-term debt is as follows at September 30, 2004



|                          |  |   |          
|------------------------- |  | - | ---------
|Year ending September 30, |  |  
|2005                      |  | $ | 401,000  
|2006                      |  |   | 3,853,000
|2007                      |  |   | 1,310,000
|2008                      |  |   | 87,000   
|                          |  |   |          
|Total maturities          |  | $ | 5,651,000
|                          |  |   |          



(i) During fiscal
2003, the Company issued various convertible debentures, three of which contained beneficial conversion features. The notes are convertible, solely at the Holders option, into shares of Accentia common stock with the value per Accentia share
being adjusted by a twenty percent (20%) discount from defined Accentia share value or, in the alternative; the convertible notes may be converted into shares of Biovest common stock at a conversion price of $0.25 per share.



F-13



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##### Table of Contents

BIOVEST INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED SEPTEMBER 30, 2004 AND 2003



|6. | Shareholders equity:
|-- | ---------------------



Preferred stock:



The Company has authorized 10,000,000 shares of preferred stock. The holders of outstanding shares of preferred stock have the right to convert each one
(1) share of preferred stock to two (2) shares of fully paid assessable common stock of the Company.



|7. | Stock-based compensation:
|-- | -------------------------



Issuances of stock for services, stock options and stock warrants in 2004 and 2003 are as follows:



|                                                |  |                   |  |                              |  |               |  |      |      |  |   |           |  |         
|----------------------------------------------- |  | ----------------- |  | ---------------------------- |  | ------------- |  | ---- | ---- |  | - | --------- |  | --------
|                                                |  | Equity Instrument |  | Fair valueat date ofissuance |  | ExercisePrice |  | Term
|                                                |  | Stock             |  | Options                      |  | Warrants      |  |      |     
|Total outstanding in 2002                       |  | 30,000            |  | 2,379,000                    |  | 825,000       |  |      |      |  |   |           |  |         
|                                                |  |                   |  |                              |  |               |  |      |      |  |   |           |  |         
|New issuances in 2003:                          |  |                   |  |                              |  |               |  |      |      |  |   |           |  |         
|In connection with financing                    |  | 473,333           |  |                              |  |               |  | $    | 0.27 |  |   |           |  |         
|In connection with financing                    |  |                   |  |                              |  | 1,162,000     |  |      |      |  | $ | .25-$1.25 |  | 5 years 
|Employee and non-employee director compensation |  |                   |  | 3,500,000                    |  |               |  |      |      |  | $ | .25-$2.75 |  | 10 years
|                                                |  |                   |  |                              |  |               |  |      |      |  |   |           |  |         
|Total issued in 2003                            |  | 473,333           |  | 3,500,000                    |  | 1,162,000     |  |      |      |  |   |           |  |         
|                                                |  |                   |  |                              |  |               |  |      |      |  |   |           |  |         
|New Issuances in 2004:                          |  |                   |  |                              |  |               |  |      |      |  |   |           |  |         
|Consulting services                             |  |                   |  |                              |  | 200,000       |  | $    | 0.27 |  | $ | 1.00      |  | 3 years 
|Employee and non-employee director compensation |  |                   |  | 2,518,000                    |  |               |  | $    | 0.27 |  | $ | .50       |  | 10 years
|Former CEO per employment contract              |  | 36,000            |  |                              |  |               |  | $    | 0.27 |  |   |           |  |         
|                                                |  |                   |  |                              |  |               |  |      |      |  |   |           |  |         
|Total issued in 2004                            |  | 36,000            |  | 2,518,000                    |  | 200,000       |  |      |      |  |   |           |  |         
|                                                |  |                   |  |                              |  |               |  |      |      |  |   |           |  |         



Effective September 30, 2003, certain
officers of the Company were granted an aggregate of 1,150,000 options, 500,000 exercisable immediately, with the balance vesting over three years. These options were granted at an exercise price of $.50 per share.



In addition, in 2003, the Company modified certain options and warrants for the purchase of
its common shares as follows:



| |  |  | An aggregate of 300,000 warrants were repriced from $.50 to $.25.
| | - |  | -----------------------------------------------------------------



| |  |  | 5,675,000 options were converted to warrants. 3,075,000 were repriced at $.50, 2,600,000 were repriced at $.25; both exercisable after 6 months, with a term of 5 years.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 200,000 warrants were repriced from $1.50 and $1.25 to $.50 and $.25, respectively.
| | - |  | -----------------------------------------------------------------------------------



F-14



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##### Table of Contents

BIOVEST INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED SEPTEMBER 30, 2004 AND 2003



|7. | Stock-based compensation (continued):
|-- | -------------------------------------



As a result of these modifications, the Company is now required to treat these options as variable stock options, which requires a charge to operations
for adjustments in subsequent periods changes in the underlying market value of the stock. There have been no changes in the underlying market values in 2004.



The Company recognized $1,280,000 of stock-based compensation expense during 2003, related to the aforementioned option and warrant modifications and
issuances.



The Company uses the Black-Scholes option pricing
model to determine the fair value of each option grant as of the date of grant for consulting expense incurred and for the purpose of the pro forma presentation in Note 1. The following assumptions were used for grants in 2004 and 2003,
respectively.



No dividend yield, expected volatility of
78.97%, risk-free interest rates of 2.62% and 2.56%,; and expected lives 5 years. The share price on the date of grant for the 2004 and 2003 grants was $0.27, and the exercise price of the grants ranges between $0.25 and $0.50.



Stock option activity for the years ended September 30, 2004 and 2003 is as
follows:



|                              |  |                          |   |      |                              |      |                 |            |   |                              |   |     
|----------------------------- |  | ------------------------ | - | ---- | ---------------------------- | ---- | --------------- | ---------- | - | ---------------------------- | - | ----
|                              |  | Years ended September 30
|                              |  | 2004                     |   | 2003
|                              |  | Number ofShares          |   |      | WeightedAverageExercisePrice |      | Number ofShares |            |   | WeightedAverageExercisePrice
|Outstanding-beginning of year |  | 4,750,933                |   |      | $                            | 0.74 |                 | 7,105,000  |   |                              | $ | 1.45
|Granted                       |  | 2,518,000                |   |      |                              | 0.27 |                 | 3,500,000  |   |                              |   | 0.46
|Exercised                     |  | 0                        |   |      |                              | 0    |                 |           |   |                              |   |    
|Converted to warrants         |  | 0                        |   |      |                              | 0    |                 | (5,675,000 | ) |                              |   | 1.47
|Cancelled                     |  | (1,090,835               | ) |      |                              |     |                 | (179,067   | ) |                              |   |    
|                              |  |                          |   |      |                              |      |                 |            |   |                              |   |     
|Outstanding-end of year       |  | 6,178,098                |   |      | $                            | 0.65 |                 | 4,750,933  |   |                              |   | 0.74
|                              |  |                          |   |      |                              |      |                 |            |   |                              |   |     
|Exercisable-end of year       |  | 3,734,592                |   |      | $                            | 0.75 |                 | 2,090,341  |   |                              |   | 0.87



Stock options
outstanding at September 30, 2004 are summarized as follows:



|                         |  |                   |  |                                         |  |                              |     
|------------------------ |  | ----------------- |  | --------------------------------------- |  | ---------------------------- | ----
|Options Outstanding     
|                         |  |                   | 
|                         |  | NumberOutstanding |  | WeightedAverageRemainingContractualLife |  | WeightedAverageExercisePrice
|Range of Exercise Prices |  |                   | 
|$0.01-1.00               |  | 4,960,000         |  | 8.07                                    |  | $                            | 0.47
|1.01-2.00                |  | 1,125,766         |  | 6.69                                    |  |                              | 1.27
|2.01-3.00                |  | 92,332            |  | 7.48                                    |  |                              | 2.40
|                         |  |                   |  |                                         |  |                              |     
|                         |  | 6,178,098         |  |                                         |  |                              |     
|                         |  |                   |  |                                         |  |                              |     



F-15



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##### Table of Contents

BIOVEST INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED SEPTEMBER 30, 2004 AND 2003



|7. | Stock-based compensation (continued):
|-- | -------------------------------------



|                         |  |                   |  |                                         |  |                              |     
|------------------------ |  | ----------------- |  | --------------------------------------- |  | ---------------------------- | ----
|Options Exercisable     
|                         |  |                   | 
|Range of Exercise Prices |  | NumberOutstanding |  | WeightedAverageRemainingContractualLife |  | WeightedAverageExercisePrice
|$0.01-1.00               |  | 2,551,665         |  | 8.07                                    |  | $                            | 0.48
|1.01-2.00                |  | 1,104,931         |  | 6.69                                    |  |                              | 1.26
|2.01-3.00                |  | 77,996            |  | 7.48                                    |  |                              | 2.43
|                         |  |                   |  |                                         |  |                              |     
|                         |  | 3,734,592         |  |                                         |  |                              |     
|                         |  |                   |  |                                         |  |                              |     



Stock Warrants:



Stock warrants outstanding at September 30, 2004 are
summarized as follows:



|                         |  |                   |  |                                         |  |                              |     
|------------------------ |  | ----------------- |  | --------------------------------------- |  | ---------------------------- | ----
|Warrants Outstanding    
|                         |  |                   | 
|Range of Exercise Prices |  | NumberOutstanding |  | WeightedAverageRemainingContractualLife |  | WeightedAverageExercisePrice
|$0.01-1.00               |  | 6,685,000         |  | 3.59                                    |  | $                            | 0.40
|1.01-2.00                |  | 1,600,000         |  | 1.90                                    |  |                              | 1.41
|2.01-3.00                |  | 601,667           |  | 1.98                                    |  |                              | 2.65
|3.01-4.00                |  | 6,000             |  | 2.70                                    |  |                              | 4.00
|4.01-5.00                |  | 839,000           |  | 1.71                                    |  |                              | 5.00
|                         |  |                   |  |                                         |  |                              |     
|                         |  | 9,731,667         |  |                                         |  |                              |     
|                         |  |                   |  |                                         |  |                              |     



|                         |  |                   |  |                                         |  |                              |     
|------------------------ |  | ----------------- |  | --------------------------------------- |  | ---------------------------- | ----
|Warrants Exercisable    
|                         |  |                   | 
|Range of Exercise Prices |  | NumberOutstanding |  | WeightedAverageRemainingContractualLife |  | WeightedAverageExercisePrice
|$0.01-1.00               |  | 6,685,000         |  | 3.59                                    |  | $                            | 0.40
|1.01-2.00                |  | 1,600,000         |  | 1.90                                    |  |                              | 1.41
|2.01-3.00                |  | 601,667           |  | 1.98                                    |  |                              | 2.65
|3.01-4.00                |  | 6,000             |  | 2.70                                    |  |                              | 4.00
|4.01-5.00                |  | 839,000           |  | 1.71                                    |  |                              | 5.00
|                         |  |                   |  |                                         |  |                              |     
|                         |  | 9,731,667         |  |                                         |  |                              |     
|                         |  |                   |  |                                         |  |                              |     



F-16



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##### Table of Contents

BIOVEST INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED SEPTEMBER 30, 2004 AND 2003



|8. | Income taxes:
|-- | -------------



The significant income components of the Companys net deferred total assets as of September 30, 2004 are as follows:



|                             |  |            |  
|---------------------------- |  | ---------- | -
|Accrued Compensation         |  | 63,000     |  
|Other                        |  | 27,000     |  
|Accrued Vacation             |  | 50,000     |  
|Inventory Reserves           |  | 114,000    |  
|Net operating loss carryover |  | 5,900,000  |  
|Valuation Allowance          |  | (6,100,000 | )
|                             |  |            |  
|Total Deferred Tax Asset     |  | 54,000     |  
|                             |  |            |  
|Intangibles                  |  | (54,000    | )
|Total Deferred Tax Liability |  | (54,000    | )
|                             |  |            |  
|Net Deferred Tax Asset       |  | 0          |  
|                             |  |            |  



The components of the
provision (benefit) for income taxes consists of the following:



|                                           |  |            |  
|------------------------------------------ |  | ---------- | -
|Current Tax                                |  |            |  
|Federal                                    |  |           |  
|State                                      |  |           |  
|                                           |  |            |  
|Total Current                              |  |           |  
|                                           |  |            |  
|Deferred Tax                               |  |            |  
|Deferred                                   |  | (3,412,000 | )
|Increase in Valuation allowance            |  | 3,412,000  |  
|                                           |  |            |  
|Total Deferred                             |  |           |  
|                                           |  |            |  
|Total provision (benefit) for income taxes |  |           |  
|                                           |  |            |  



FAB 109 requires that
a deferred tax amount be reduced by a valuation allowance if, based on the weight of available evidence it is more likely than not (a likelihood of more than 50 percent) that some portion or all of the deferred tax assets will not be realized. The
valuation allowance should be sufficient to reduce the deferred tax asset to the amount that is more likely than not to be realized. As a result the Company recorded a valuation allowance with respect to all the Companys deferred tax assets.



For the tax periods 06/17/2003 through 09/20/2004, the Company
is part of a consolidated federal income tax return that includes Accentia Biopharmaceuticals, Inc (Accentia). The Companys income tax provision is calculated on a separate return basis as if the Company was not part of the
Accentia consolidated group.



The Company has a federal net
operating loss of approximately $15.5 million as of September 30, 2004 (expiring 2020). Under Section 382 and 383 of the Internal Revenue Code, if an ownership occurred charge occurs with respect to a loss corporation, as defined, there
are annual limitations on the amount of the net operating loss (NOL) and other deductions which are available to the company. The portion of the NOLs incurred prior to 06/17/2003 ($3.4 million) are subject to these limitation. As
such, these NOLs are limited to approximately $.2 million per year. NOLs incurred after 06/17/2003 may also subject to restriction.



At the time that the Company was acquired by Accentia, it had significant NOLs. Due to severe limitations of these NOLs and the fact that a significant
portion of NOLs could never be utilized, the Company made and an election under IRS regulation 1.1502-22P32(b)(4) to waive most of the losses. The Company waived approximately $29 million of NOLs while retaining $3.4 million.



A reconciliation of the U.S. Federal statutory rate to the effective rate is
as follows:



|                              |  |                         |    |  |      |   
|----------------------------- |  | ----------------------- | -- |  | ---- | --
|                              |  | Year endedSeptember 30, |   
|                              |  | 2004                    |    |  | 2003 |   
|Federal statutory rate        |  | (34                     | )% |  | (34  | )%
|State taxes                   |  | (4                      | )% |  | (2   | )%
|Effect of valuation allowance |  | 38                      |    |  | 36   |   
|                              |  |                         |    |  |      |   
|Net actual effective rate     |  |                        | %  |  |     | % 
|                              |  |                         |    |  |      |   



|9. | Retirement plans:
|-- | -----------------



The Company has a retirement savings plan covering all employees eligible to participate in the plan. Employees of the Company scheduled to provide at
least 1,000 hours of service during their first year of employment are eligible as of a date no later than six months after employment and employees scheduled to provide less than 1,000 hours of service become eligible after completing a year of
service. Eligible employees may make annual earnings reduction contributions of up to the maximum percentage allowable by the Internal Revenue Code. The Company may also make discretionary contributions to this plan, subject to approval by the Board
of Directors. The Company has made no discretionary contributions pursuant to the plan.



|10. | Commitments and contingencies:
|--- | ------------------------------



Employment agreements:



The Company has employment agreements with certain employees, which extend from 24 to 36 months. These agreements provide for base levels of compensation
and separation benefits. Future minimum payments under these employment agreements for the years ended September 30, 2005 and 2006 are $878,167 and $514,167 respectively. The Company incurred $413,000 and $6,000 related to these agreements during
fiscal 2004 and 2003, respectively.



F-17



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##### Table of Contents

BIOVEST INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED SEPTEMBER 30, 2004 AND 2003



|10. | Commitments and contingencies (continued):
|--- | ------------------------------------------



Leases:



The Company leases office and manufacturing space pursuant to several non-cancelable operating leases. Rent expense pertaining to these leases was
$640,000 and $683,000, for years ended September 30, 2004 and 2003, respectively. At September 30, 2004, the following is a schedule of future minimum rental payments required pursuant to these leases is as follows:



|                           |  |   |        
|-------------------------- |  | - | -------
|Years ending September
30, |  |  
|2005                       |  | $ | 370,000
|2006                       |  |   | 154,000
|                           |  |   |        
|                           |  | $ | 524,000
|                           |  |   |        



Cooperative Research and Development Agreement:



In September 2001 BioVest entered into a definitive Cooperative Research and Development Agreement (CRADA) with the National Cancer Institute (NCI) for the development and ultimate
commercialization of patient-specific vaccines for the treatment of non-Hodgkins low-grade follicular lymphoma. The terms of the CRADA, as amended, included, among other things, a requirement to pay $530,000 quarterly to NCI for expenses
incurred in connection with the ongoing Phase III clinical trials. Since the transfer to BioVest of the IND for development of this vaccine, which occurred in April 2004, these payments to NCI have been reduced to a small fraction of this original
obligation (approximately $160,000 per year). Failure to remit these reduced payments will constitute the Companys unilateral termination of the CRADA and BioVest will lose the rights to commercialize the results of its collaborative research.
We have funded the continuing development costs as described above, including the renovation of our Worcester facility to meet FDA requirements. Successful development of the vaccine, if approved by the FDA, from Phase III clinical trials through
commercialization will commit BioVest to several years of significant expenditures before revenues will be realized, if ever. The agreement expires in September 2009, but may be unilaterally terminated by either party by giving thirty days written
notice. Certain termination costs, as defined in the CRADA, will be the Companys responsibility if the CRADA is terminated.



The terms of the CRADA provide for the Company to be granted an exclusive option to negotiate with the NCI for a license to commercialize certain
intellectual property resulting from the research conducted pursuant to the CRADA. There can be no assurance that research under the CRADA will be successful or, if it is successful, that the Company will be able to negotiate a license on favorable
terms. In addition, the Company may not be able to derive any revenue from a license for a number of years.



Food and Drug Administration:



The FDA has extensive regulatory authority over biopharmaceutical products (drugs and biological products), manufacturing protocols and procedures and the
facilities in which mammalian proteins will be manufactured. Any new bioproduct intended for use in humans (including, to a somewhat lesser degree, in vivo biodiagnostic products), is subject to rigorous testing requirements imposed by the FDA with
respect to product efficacy and safety, possible toxicity and side effects. FDA approval for the use of new bioproducts (which can never be assured) requires several rounds of extensive preclinical testing and clinical investigations conducted by
the sponsoring pharmaceutical company prior to sale and use of the product. At each stage, the approvals granted by the FDA include the manufacturing process utilized to produce the product. Accordingly, our cell culture systems used for the
production of therapeutic or biotherapeutic products are subject to significant regulation by the FDA under the Federal Food, Drug and Cosmetic Act, as amended (the FD&C Act).



F-18



---

##### Table of Contents

BIOVEST INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED SEPTEMBER 30, 2004 AND 2003



|10. | Commitments and contingencies (continued):
|--- | ------------------------------------------



Product liability:



The contract production services for therapeutic products offered exposes an inherent risk of liability as the proteins or other substances manufactured,
at the request and to the specifications of customers, could foreseeably cause adverse effects. The Company obtains agreements from contract production customers indemnifying and defending the Company from any potential liability arising from such
risk. There can be no assurance, however, that the Company will be successful in obtaining such agreements in the future or that such indemnification agreements will adequately protect the Company against potential claims relating to such contract
production services. The Company may also be exposed to potential product liability claims by users of its products. A successful partial or completely uninsured claim against the Company could have a material adverse effect on the Companys
operations.



Legal proceedings:



From time to time the Company is subject to various legal proceedings in the
normal course of business. Management believes that these proceedings will not have a material adverse effect on the financial statements.



Tender offer:



The Investment Agreement with Accentia contemplated that within one year of its closing our common stock would either begin to trade publicly or, in the
alternative, we would make a tender offer to purchase a portion of the stock held by our stockholders before the closing (the minority shareholders). We have determined not to encourage public trading in our stock at this time but rather
to continue to monitor the merits of public trading. Accordingly, we are considering various approaches to make a tender offer that satisfies both the Agreement and serves the best interests of the Company and its shareholders. To satisfy the
agreement, such an offer would be to purchase up to 980,000 shares at $2.00 per share. Additional tender offers may be contemplated in the absence of public trading in our stock at the second, third, and fourth anniversaries of the closing of the
agreement.



|11. | Segment information:
|--- | --------------------



The Company operates in four identifiable industry segments. The Companys Cell Culture products and services and National Cell Culture Center
segments are engaged in the production and contract manufacturing of biologic drugs and cell production for research institutions worldwide. The National Cell Culture Center segment performs the same services; however in connection with the NIH
grant. The Instruments and Disposables segment is engaged in the development, manufacture and marketing of patented cell culture systems, equipment and consumable parts to pharmaceutical, diagnostic and biotechnology companies, as well as leading
research institutions worldwide and the Therapeutic Vaccine segment, which has no revenues generated to date, is focused on developing a therapeutic vaccine pursuant to the CRADA agreement.



The Companys facilities and other assets as well as gross margins and
expenses are not distinguished among the identifiable segments. Revenue information about the Companys segments is as follows:



|            |  |                                  |           |                            |   |                           |  |       |           |  |   |          
|----------- |  | -------------------------------- | --------- | -------------------------- | - | ------------------------- |  | ----- | --------- |  | - | ---------
|            |  | September 30, 2004              
|            |  | Cell CultureProductsand Services |           | NationalCell CultureCenter |   | InstrumentsandDisposables |  | Total
|Net revenue |  | $                                | 2,265,000 |                            | $ | 1,107,000                 |  | $     | 2,334,000 |  | $ | 5,706,000
|            |  |                                  |           |                            |   |                           |  |       |           |  |   |          
|            | 
|            |  | September 30, 2003              
|Net revenue |  | $                                | 2,192,000 |                            | $ | 1,255,000                 |  | $     | 4,809,000 |  | $ | 8,256,000
|            |  |                                  |           |                            |   |                           |  |       |           |  |   |          



F-19



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##### Table of Contents

BIOVEST INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED SEPTEMBER 30, 2004 AND 2003



|12. | Related party transactions:
|--- | ---------------------------



In connection with a Biovest contract for an unrelated institutional party, Accentia reimbursed Biovest $120,000 for services rendered, which is included
in the cell culture products and services segment.



The
Company has granted Accentia the right to be the Companys exclusive commercialization partner and to provide all distribution services worldwide for therapeutic products including all biopharmaceutical products, monoclonal antibodies,
peptides, infectious disease and cancer vaccines, autologous cancer vaccines such as for non-Hodgkins lymphoma and renal cell carcinoma, cell-based therapies, stem cells, cytokines, and viruses produced by mammalian cell culture techniques. This
agreement covers products currently owned, licensed or being developing and products which may be subsequently acquired or developed during the Agreement. Accentia is required to facilitate the development, regulatory approval, sale, marketing and
delivery of products, including but not limited to the patient, end consumer, health care professional, and pharmacy following any required governmental approval. For so long as Accentia owns more than fifty one percent (51%) of our outstanding
capital stock, the Company is only obligated to reimburse Accentia for its costs incurred in connection with providing these services. Should Accentias ownership drop below fifty one percent (51%) of our outstanding capital stock, the Company
has agreed to pay Accentia forty nine percent (49%) of the Net Profit from covered products calculated separately. Net Profit takes into account all revenue from the sale, license, sub-license, joint venture or other receipts from covered products
whether collected by Accentia or us. Net Profit is calculated by deducting from revenue all out of pocket costs and expenses incurred by Accentia and us in providing services including, but not limited to, the costs of products and materials,
marketing, packaging and shipping, and payments to service providers.



|13. | Subsequent events
|--- | -----------------



Subsequent to September 30, 2004, the Company increased its authorized shares to 350,000,000, 300,000,000 of which are common and 50,000,000 of which are
preferred.



F-20



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##### Table of Contents

SIGNATURES



Pursuant to the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.



|                       |  |  |  |                             |  |                                          
|---------------------- |  |  |  | --------------------------- |  | -----------------------------------------
|                       |  |  |  | BIOVEST INTERNATIONAL, INC.
|Date: February 2, 2005 |  |  |  |                             |  |                                          
|                       |  |  |  | By:                         |  | /s/ Steven Arikian                       
|                       |  |  |  |                             |  | Steven Arikian, President, Chairman and  
|                       |  |  |  |                             |  | Chief Executive Officer                  
|                       |  |  |  |                             |  | (Principal Executive Officer)            
|Date: February 2, 2005 |  |  |  |                             |  |                                          
|                       |  |  |  | By:                         |  | /s/ James A. McNulty                     
|                       |  |  |  |                             |  | James A. McNulty, Chief Financial Officer
|                       |  |  |  |                             |  | (Principal Financial Officer)            



S-1