U.S. Securities and Exchange Commission

Washington, D.C. 20549

Form 10-QSB



(Mark One)



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



For the quarterly period ended June 30, 2003



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



For the transition period from
 to



Commission file number 0-11480



BIOVEST INTERNATIONAL, INC.

(Exact name of
small business issuer as specified in its charter)



|Delaware                                                       |  | 41-1412084                          
|-------------------------------------------------------------- |  | ------------------------------------
|(State or other jurisdiction of incorporation or organization) |  | (IRS Employer Identification Number)



8500 Evergreen Blvd.
NW, Minneapolis, Minnesota 55433

(Address of principal executive offices)



Issuers telephone number: 763-786-0302



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 ̈



At August 19, 2003, there were 38,160,733 shares of the registrants Common Stock, $0.01 par value, issued and outstanding.



Transitional Small Business Disclosure Format

(check one) Yes ̈No x



---

INDEX

BIOVEST
INTERNATIONAL, INC.



|                                                                                                |  | Page
|----------------------------------------------------------------------------------------------- |  | ----
|PART I.    FINANCIAL INFORMATION                                                                |  |     
|                                                                                                | 
|ITEM 1.Financial Statements                                                                     |  |     
|                                                                                                | 
|Balance Sheet as of June 30, 2003 (unaudited)                                                   |  | 3   
|                                                                                                | 
|Statements of Operations for the Three and Nine Months ended June 30, 2003 and 2002 (unaudited) |  | 4   
|                                                                                                | 
|Statement of Stockholders Equity (Deficit) for the Nine Months Ended June 30, 2003 (unaudited) |  | 5   
|                                                                                                | 
|Statements of Cash Flows for the Nine Months ended June 30, 2003 and 2002 (unaudited)           |  | 6   
|                                                                                                | 
|Notes to Financial Statements                                                                   |  | 7   
|                                                                                                | 
|ITEM 2. Managements Discussion and Analysis or Plan of Operations                              |  | 16  
|                                                                                                | 
|ITEM 3. Controls and Procedures                                                                 |  | 21  
|                                                                                                | 
|PART II.    OTHER INFORMATION                                                                   |  |     
|                                                                                                | 
|ITEM 1. Legal Proceedings                                                                       |  | 22  
|                                                                                                | 
|ITEM 2. Changes in Securities                                                                   |  | 22  
|                                                                                                | 
|ITEM 6. Exhibits and Reports on Form 8-K                                                        |  | 24  
|                                                                                                | 
|Signatures                                                                                      |  | 25  



2



---

BIOVEST INTERNATIONAL, INC.

BALANCE SHEET

JUNE 30, 2003

(unaudited)



|ASSETS                                                                                               |  |   |             |  
|---------------------------------------------------------------------------------------------------- |  | - | ----------- | -
|Current assets:                                                                                      |  |   |             |  
|Cash                                                                                                 |  | $ | 1,129,000   |  
|Accounts receivable, net of $500,000 allowance for doubtful accounts                                 |  |   | 1,609,000   |  
|Costs and estimated earnings in excess of billings on uncompleted contracts                          |  |   | 83,000      |  
|Inventories                                                                                          |  |   | 1,013,000   |  
|Other                                                                                                |  |   | 102,000     |  
|                                                                                                     |  |   |             |  
|Total current assets                                                                                 |  |   | 3,936,000   |  
|Property, plant and equipment, net                                                                   |  |   | 956,000     |  
|Other assets:                                                                                        |  |   |             |  
|Inventories                                                                                          |  |   | 120,000     |  
|Patents and trademarks, net                                                                          |  |   | 666,000     |  
|Reorganization value in excess of amounts allocable to identifiable assets                           |  |   | 2,131,000   |  
|                                                                                                     |  |   |             |  
|                                                                                                     |  | $ | 7,809,000   |  
|                                                                                                     |  |   |             |  
|LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)                                                       |  |   |             |  
|Current liabilities:                                                                                 |  |   |             |  
|Short term borrowings-affiliate                                                                      |  | $ | 200,000     |  
|Current portion of notes payable                                                                     |  |   | 683,000     |  
|Current portion of long-term debt                                                                    |  |   | 29,000      |  
|Accounts payable                                                                                     |  |   | 415,000     |  
|Customer deposits                                                                                    |  |   | 381,000     |  
|Accrued liabilities:                                                                                 |  |   |             |  
|Compensation and related taxes                                                                       |  |   | 568,000     |  
|Other                                                                                                |  |   | 815,000     |  
|Due to parent                                                                                        |  |   | 74,000      |  
|Billings in excess of costs and estimated earnings on uncompleted contracts                          |  |   | 432,000     |  
|                                                                                                     |  |   |             |  
|Total current liabilities                                                                            |  |   | 3,597,000   |  
|Long-term notes payable                                                                              |  |   | 4,492,000   |  
|Long-term debt, less current portion                                                                 |  |   | 102,000     |  
|Commitments and contingencies                                                                        |  |   |            |  
|Shareholders equity:                                                                                |  |   |             |  
|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; 38,160,733 shares issued and outstanding |  |   | 382,000     |  
|Additional paid-in capital                                                                           |  |   | 34,799,000  |  
|Accumulated deficit                                                                                  |  |   | (17,893,000 | )
|Stock subscription receivable                                                                        |  |   | (17,750,000 | )
|                                                                                                     |  |   |             |  
|Total shareholders equity                                                                           |  |   | (382,000    | )
|                                                                                                     |  |   |             |  
|                                                                                                     |  | $ | 7,809,000   |  
|                                                                                                     |  |   |             |  



The accompanying
footnotes are an integral part of these financial statements.



3



---

BIOVEST INTERNATIONAL, INC.

STATEMENT OF OPERATIONS

FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2003 AND 2002

(unaudited)



|                                      |  | Three MonthsEnded June 30, 2003 |            |   | Three MonthsEnded June 30, 2002 |   |            | Nine MonthsEnded June 30, 2003 |  |   | Nine MonthsEnded June 30, 2002 |  
|------------------------------------- |  | ------------------------------- | ---------- | - | ------------------------------- | - | ---------- | ------------------------------ |  | - | ------------------------------ | -
|Revenue:                              |  |                                 |            |   |                                 |   |            |                                |  |   |                                |  
|Contract production services          |  | $                               | 528,000    |   |                                 | $ | 2,335,000  |                                |  | $ | 2,400,000                      |  
|Consumable sales                      |  |                                 | 391,000    |   |                                 |   | 775,000    |                                |  |   | 1,269,000                      |  
|System sales                          |  |                                 | 1,594,000  |   |                                 |   | 317,000    |                                |  |   | 1,962,000                      |  
|Other                                 |  |                                 | 55,000     |   |                                 |   | 93,000     |                                |  |   | 276,000                        |  
|                                      |  |                                 |            |   |                                 |   |            |                                |  |   |                                |  
|Total revenues                        |  |                                 | 2,568,000  |   |                                 |   | 3,520,000  |                                |  |   | 5,907,000                      |  
|                                      |  |                                 |            |   |                                 |   |            |                                |  |   |                                |  
|Operating costs and expenses:         |  |                                 |            |   |                                 |   |            |                                |  |   |                                |  
|Cost of sales                         |  |                                 | 1,572,000  |   |                                 |   | 2,423,000  |                                |  |   | 4,396,000                      |  
|Research and development              |  |                                 | 890,000    |   |                                 |   | 557,000    |                                |  |   | 1,812,000                      |  
|Marketing, general and administrative |  |                                 | 2,953,000  |   |                                 |   | 1,638,000  |                                |  |   | 4,702,000                      |  
|                                      |  |                                 |            |   |                                 |   |            |                                |  |   |                                |  
|Total operating costs and expenses    |  |                                 | 5,415,000  |   |                                 |   | 4,618,000  |                                |  |   | 10,910,000                     |  
|                                      |  |                                 |            |   |                                 |   |            |                                |  |   |                                |  
|Loss from operations                  |  |                                 | (2,847,000 | ) |                                 |   | (1,098,000 | )                              |  |   | (5,003,000                     | )
|Other income (expense):               |  |                                 |            |   |                                 |   |            |                                |  |   |                                |  
|Interest expense, net                 |  |                                 | (237,000   | ) |                                 |   | (122,000   | )                              |  |   | (536,000                       | )
|Financing expense                     |  |                                 |           |   |                                 |   |           |                                |  |   | (287,000                       | )
|Other income                          |  |                                 | 25,000     |   |                                 |   | 175,000    |                                |  |   | 75,000                         |  
|Loss on disposal of assets            |  |                                 |           |   |                                 |   |           |                                |  |   | (29,000                        | )
|                                      |  |                                 |            |   |                                 |   |            |                                |  |   |                                |  
|Net loss                              |  | $                               | (3,059,000 | ) |                                 | $ | (1,045,000 | )                              |  | $ | (5,780,000                     | )
|                                      |  |                                 |            |   |                                 |   |            |                                |  |   |                                |  
|Net loss per common share:            |  |                                 |            |   |                                 |   |            |                                |  |   |                                |  
|Basic                                 |  | $                               | (.21       | ) |                                 | $ | (.11       | )                              |  | $ | (.50                           | )
|                                      |  |                                 |            |   |                                 |   |            |                                |  |   |                                |  
|Diluted                               |  | $                               | (.17       | ) |                                 | $ | (.11       | )                              |  | $ | (.44                           | )
|                                      |  |                                 |            |   |                                 |   |            |                                |  |   |                                |  
|Weighted average shares outstanding:  |  |                                 |            |   |                                 |   |            |                                |  |   |                                |  
|Basic                                 |  |                                 | 14,881,478 |   |                                 |   | 9,663,469  |                                |  |   | 11,511,377                     |  
|                                      |  |                                 |            |   |                                 |   |            |                                |  |   |                                |  
|Diluted                               |  |                                 | 18,057,835 |   |                                 |   | 9,663,469  |                                |  |   | 13,086,892                     |  
|                                      |  |                                 |            |   |                                 |   |            |                                |  |   |                                |  



The accompanying
footnotes are an integral part of these financial statements.



4



---

BIOVEST INTERNATIONAL, INC.

STOCKHOLDERS EQUITY (DEFICIT)

FOR THE NINE MONTHS ENDED JUNE 30, 2003

(unaudited)



|                                                                    |  | Preferred Stock |  | Common Stock |        | Additional Paid In Capital |            |   | Accumulated Deficit |   |         | StockSubscription Receivable |   |            | Total Stockholders Equity | 
|------------------------------------------------------------------- |  | --------------- |  | ------------ | ------ | -------------------------- | ---------- | - | ------------------- | - | ------- | ---------------------------- | - | ---------- | -------------------------- | 
|                                                                    |  | Shares          |  | Amount       |        | Shares                     |            |   | Amount              |   |         |                              |  
|Balance at September 30, 2002                                       |  |                |  | $            |       |                            | 9,816,363  |   |                     | $ | 98,000  |                              | $ | 12,875,000 |                            | 
|Proceeds from sale of stock in connection with investment agreement |  | 8,021,886       |  |              | 80,000 |                            | 27,891,037 |   |                     |   | 279,000 |                              |   | 19,641,000 |                            | 
|Stock warrants issued in connection with stock purchase agreement   |  |                |  |              |       |                            |           |   |                     |   |        |                              |   | 1,884,000  |                            | 
|Financing costs                                                     |  |                |  |              |       |                            |           |   |                     |   |        |                              |   | (326,000   | )                          | 
|Stock warrants issued in connection with issuance of notes payable  |  |                |  |              |       |                            |           |   |                     |   |        |                              |   | 503,000    |                            | 
|Stock issued for services rendered                                  |  |                |  |              |       |                            | 473,333    |   |                     |   | 5,000   |                              |   | 282,000    |                            | 
|Reversal of previous stock grant                                    |  |                |  |              |       |                            | (20,000    | ) |                     |   |        |                              |   | (60,000    | )                          | 
|Net loss                                                            |  |                |  |              |       |                            |           |   |                     |   |        |                              |   |           |                            | 
|                                                                    |  |                 |  |              |        |                            |            |   |                     |   |         |                              |   |            |                            | 
|Balance at June 30, 2003                                            |  | 8,021,886       |  | $            | 80,000 |                            | 38,160,733 |   |                     | $ | 382,000 |                              | $ | 34,799,000 |                            | 
|                                                                    |  |                 |  |              |        |                            |            |   |                     |   |         |                              |   |            |                            | 



The accompanying
footnotes are an integral part of these financial statements.





5



---

BIOVEST INTERNATIONAL, INC.

STATEMENT OF CASH FLOWS

FOR THE NINE MONTHS ENDED JUNE 30, 2003 AND 2002

(unaudited)



|                                                                               |  | Nine MonthsEndedJune 30, 2003 |            |   | Nine MonthsEnded June 30, 2002 |   
|------------------------------------------------------------------------------ |  | ----------------------------- | ---------- | - | ------------------------------ | --
|Cash flows from operating activities:                                          |  |                               |            |   |                                |   
|Net loss                                                                       |  | ($                            | 5,780,000  | ) |                                | ($
|Adjustments to reconcile net loss to net cash flows from operating activities: |  |                               |            |   |                                |   
|Depreciation                                                                   |  |                               | 180,000    |   |                                |   
|Amortization                                                                   |  |                               | 91,000     |   |                                |   
|Issuance of common stock, options and warrants for services                    |  |                               | 227,000    |   |                                |   
|Loss on asset disposal                                                         |  |                               | 29,000     |   |                                |   
|Gain on sale of subsidiary assets                                              |  |                               |           |   |                                |   
|Amortization of warrants related to debt                                       |  |                               | 2,124,000  |   |                                |   
|Changes in operating items:                                                    |  |                               |            |   |                                |   
|Accounts receivable                                                            |  |                               | (317,000   | ) |                                |   
|Costs and estimated earnings in excess of billings on uncompleted contracts    |  |                               | (55,000    | ) |                                |   
|Inventories                                                                    |  |                               | 181,000    |   |                                |   
|Other assets                                                                   |  |                               | 134,000    |   |                                |   
|Accounts payable and accrued liabilities                                       |  |                               | (1,174,000 | ) |                                |   
|Customer deposits                                                              |  |                               | 204,000    |   |                                |   
|Billings in excess of costs and estimated earnings on uncompleted contracts    |  |                               | 145,000    |   |                                |   
|                                                                               |  |                               |            |   |                                |   
|Net cash flows from operating activities                                       |  |                               | (4,011,000 | ) |                                |   
|Cash flows from investing activities:                                          |  |                               |            |   |                                |   
|Capital expenditures                                                           |  |                               | (32,000    | ) |                                |   
|Proceeds from the disposal of assets                                           |  |                               | 14,000     |   |                                |   
|                                                                               |  |                               |            |   |                                |   
|Net cash flows from investing activities                                       |  |                               | (18,000    | ) |                                |   
|Cash flows from financing activities:                                          |  |                               |            |   |                                |   
|Proceeds from short and long-term borrowings                                   |  |                               | 2,517,000  |   |                                |   
|Repayment of short-term borrowings                                             |  |                               |           |   |                                |   
|Proceeds from sale of common stock                                             |  |                               | 2,500,000  |   |                                |   
|Principal payments on long-term debt                                           |  |                               | (27,000    | ) |                                |   
|Financing costs                                                                |  |                               | (326,000   | ) |                                |   
|Stock subscription                                                             |  |                               |           |   |                                |   
|                                                                               |  |                               |            |   |                                |   
|Net cash flows from financing activities                                       |  |                               | 4,664,000  |   |                                |   
|                                                                               |  |                               |            |   |                                |   
|Net change in cash                                                             |  |                               | 635,000    |   |                                |   
|Cash at beginning of period                                                    |  |                               | 494,000    |   |                                |   
|                                                                               |  |                               |            |   |                                |   
|Cash at end of period                                                          |  | $                             | 1,129,000  |   |                                | $ 
|                                                                               |  |                               |            |   |                                |   





6



---

BIOVEST INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS

(unaudited)



|1. |  | Description of the company:
|-- |  | ---------------------------



The Company is a biotechnology company focused on contract production of cell culture products generally used in the research and development stage.
Additionally, we are designated as the National Cell Culture Center by the National Institutes of Health. We also manufacture and sell proprietary instruments and disposables used in the production of cell culture products. Our customers include
pharmaceutical, diagnostic and biotechnology companies, universities and other research institutions. Additionally, we are developing a therapeutic vaccine to potentially treat non-Hodgkins lymphoma pursuant to a Cooperative Research and
Development Agreement with the National Cancer Institute. This personalized vaccine for the most common and fastest-growing form of hematologic cancer is currently in a Phase III FDA-approved pivotal licensing trial.



|2. |  | Significant accounting policies:
|-- |  | --------------------------------



Basis of presentation:



The accompanying unaudited condensed financial statements have been derived from unaudited interim financial information prepared in accordance with the
rules and regulations of the Securities and Exchange Commission for quarterly financial statements. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information presented not misleading. The financial
statements of the Company, in the opinion of management, include all normal and recurring adjustments necessary for a fair presentation of results as of the dates and for the periods covered by the financial statements.



Operating results for the three and nine months ended June 30, 2003 are not
necessarily indicative of the results that may be expected for the entire fiscal year. For further information, refer to the financial statements and footnotes thereto included in the Companys Annual Report on Form 10-KSB for the fiscal year
ended September 30, 2002.



Fresh-start reporting in 1999
resulted in material changes to the Companys 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 Companys
Modified First Amended Plan of Reorganization (Plan) and valuation of equity based on the reorganization value of the ongoing business.



As of the first fiscal quarter, the Company adopted SFAS 142 under which amortization of goodwill is no longer permitted. Intangible assets such as
goodwill are to be tested for impairment annually and whenever there is an impairment indicator. No impairment losses resulted from initial testing in the first nine months of this fiscal year. During the comparable quarters last year, the Company
recognized $32,000 and $95,000 in the three months and nine months ended June 30, 2002 as amortization and reported in general and administrative expense. For the nine months ended June 30, 2002 this amounted to $0.01 loss per share.





7



---

BIOVEST INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS

(unaudited)



|2. |  | Significant accounting policies (continued):
|-- |  | --------------------------------------------



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 reported period. Actual results could differ from those estimates.



Net income (loss) per common share:



Basic net income (loss) per share of common stock is computed by dividing net income (loss) by the weighted average number of outstanding common shares.
Diluted net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of outstanding common shares and common share equivalents relating to stock options and warrants, when dilutive.



Stock based compensation:



The Company follows Statement of Financial Accounting Standards (SFAS) No.
123, Accounting for Stock-Based Compensation (SFAS 123), which establishes a fair value based method of accounting for stock-based non-employee compensation plans; 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 with pro forma disclosures of net earnings and earnings per share, as if the fair value based method of accounting defined in SFAS 123 had been applied.



The following table reflects supplemental financial information related to
stock-based employee compensation, as required by Statement of Financial Accounting Standards No. 148, ACCOUNTING FOR STOCK-BASED COMPENSATION  TRANSITION AND DISCLOSURE.



|                                                     |  | June 30, 2003 |            |   | June 30, 2002 |  
|---------------------------------------------------- |  | ------------- | ---------- | - | ------------- | -
|Net loss, as reported                                |  | $             | (5,780,000 | ) |               | $
|                                                     |  |               |            |   |               |  
|Stock-based compensation, as reported                |  | $             | 2,674,000  |   |               |  
|                                                     |  |               |            |   |               |  
|Stock-based compensation under fair value method     |  | $             | 2,738,000  |   |               |  
|                                                     |  |               |            |   |               |  
|Pro-forma net loss under fair value method           |  | $             | (5,844,000 | ) |               | $
|                                                     |  |               |            |   |               |  
|Basic net loss per share, as reported                |  | $             | (0.50      | ) |               | $
|                                                     |  |               |            |   |               |  
|Pro-forma net loss per share under fair value method |  | $             | (0.51      | ) |               | $
|                                                     |  |               |            |   |               |  



8



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BIOVEST INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS

(unaudited)



|2. |  | Significant accounting policies (continued):
|-- |  | --------------------------------------------



Recent accounting pronouncements:



In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. The statement amends and
clarifies accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities. This statement is designed to improve financial reporting such that contracts with
comparable characteristics are accounted for similarly. The statement, which is generally effective for contracts entered into or modified after June 30, 2003, is not anticipated to have a significant effect on the Companys financial position
or results of operations.



In May 2003, the FASB issued SFAS
No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of
both liabilities and equity. This statement is effective for financial instruments entered into or modified after May 31, 2003, and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. The Company
currently has no such financial instruments outstanding or under consideration and therefore adoption of this standard currently has no financial reporting implications.



In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of Valuable Interest Entities. 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 is 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. The Company currently has no ownership in variable interest entities
and therefore adoption of this standard currently has no financial reporting implications.



|3. |  | Stock subscription receivable:
|-- |  | ------------------------------



On June 16, 2003, pursuant to an Investment Agreement (the Agreement), the Company sold 27,891,037 shares of common stock and 8,021,886 shares
of preferred stock (each share of preferred stock is convertible into common stock on a one for two share basis). The purchase price for the shares, which represents 81% of our capital stock, was $20,000,000 in cash and notes, payable as follows:



| | (i) |  | $2,500,000 was paid on June 16, 2003 which included an offset for the repayment of a $530,000 loan previously received by the Company from the purchaser;
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------

| | (ii) |  | $2,500,000 due on September 16, 2003; and
| | ---- |  | -----------------------------------------

| | (iii) |  | $2,500,000 due on September 16, 2004
| | ----- |  | ------------------------------------

| | (iv) |  | $2,500,000 due on September 16, 2005
| | ---- |  | ------------------------------------

| | (v) |  | $5,000,000 due on September 16, 2006
| | --- |  | ------------------------------------

| | (vi) |  | $5,000,000 due on September 16, 2007
| | ---- |  | ------------------------------------



9



---

BIOVEST INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS

(unaudited)



|3. |  | Stock subscription receivable (continued):
|-- |  | ------------------------------------------



All of the promissory notes and shares of capital stock issued under this agreement, except blank shares of common stock delivered to Accentia, Inc., are
held in escrow pending the payment of the promissory note due on September 16, 2003. The purchaser, Accentia, Inc. is a strategic investor. Accentia is a privately-held biopharmaceutical company which provides commercialization services for its own
portfolio of pharmaceuticals and in partnerships with biotech companies.



|4. |  | Liquidity and management plans:
|-- |  | -------------------------------



During the nine months ended June 30, 2003 the Company incurred a net loss of $5,780,000. At June 30, 2003 the Company had an accumulated deficit of
$17,893,000 and working capital of approximately $339,000. The Company has been meeting its cash requirements through the use of cash on hand and short-term borrowings, primarily from affiliates. The Company expects to fund operating deficits in the
near term through collection of its stock subscription receivable and additional loans, if needed, from Accentia, Inc.; however there can be no assurances that the Company will be successful in that regard.



As previously described in Note 3, on June 16, 2003, the Company sold
approximately 81% of its capital stock for $20,000,000 in cash and notes. At closing, the Company received $2,500,000 in cash and a promissory note with a principal balance of $2,500,000 due on September 16, 2003, and the remaining principal balance
of $15,000,000 in promissory notes due in various installments through June 16, 2007.



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 through commercialization will commit the Company to
several years of significant expenditures before revenues will be realized, if ever.



|5. |  | Concentrations of credit risk:
|-- |  | ------------------------------



The Company grants credit to customers in the normal course of business, but generally does not require collateral or any other security to support
amounts due. Management performs on-going credit valuations of its customers. One customer accounted for 28% of revenues for the nine months ended June 30, 2003. The same customer accounted for approximately 74% of the Companys trade accounts
receivable balance at June 30, 2003. One customer accounted for 14% of revenues for the nine months ended June 30, 2002. Two different customers accounted for 31% and 19% of the Companys trade accounts receivable balance at June 30,
2002.



A significant amount of the Companys
revenue has been derived from export sales. The Companys export sales were 44% and 46% for the nine months ended June 30, 2003 and 2002, respectively. For the nine months ended June 30, 2003, one foreign country accounted for 31% of total
revenues. For the nine months ended June 30, 2002, two foreign countries accounted for 10% and 11% of total revenues, respectively.



10



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BIOVEST INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS

(unaudited)



6.    Inventories:



Inventories consist of the following:



|                         |  | June 30, 2003 |          
|------------------------ |  | ------------- | ---------
|Finished goods           |  | $             | 211,000  
|Work-in-process          |  |               | 110,000  
|Raw materials            |  |               | 812,000  
|                         |  |               |          
|                         |  |               | 1,133,000
|Less non-current portion |  |               | (120,000 
|                         |  |               |          
|                         |  | $             | 1,013,000
|                         |  |               |          



The Company has
inventory quantities in excess of anticipated sales requirements for the twelve months subsequent to June 30, 2003. Accordingly, a portion of the Companys inventory balance is classified as a non-current asset as of that date.



7.    Notes payable:



In March 2003, the Company borrowed $250,000 from an individual at 7%
interest for two years. The loan is convertible into shares of the Companys common stock at $0.50 per share at the holders option and includes warrants to purchase up to 250,000 shares of common stock at a purchase price of $0.50 per
share exercisable over the next five years. The aggregate value of the warrants using the Black-Scholes pricing model, assuming zero dividend yield; a risk-free rate of 2.56%; expected volatility of 78.97%; and term of approximately four years and
four months, was estimated to be $61,000 and is being amortized over the life of the loan which results in a higher effective interest rate.



In January and in February 2003, a stockholder in the Company loaned the Company $300,000 and $160,000, respectively. The January loan was advanced in
three equal weekly traunches and is fully secured by a receivable due to Biovest in the amount of $500,000 from the National Institutes of Health. This loan includes an interest rate of 1% simple interest for two months and is convertible into the
Companys common stock at $0.50 per share. In addition, the Company issued warrants to purchase 200,000 shares of common stock at $0.50 per share.



The February loan for $160,000 is for a term of two years and accrues interest at 7% per year. The loan is convertible into shares of the Companys
common stock at $0.50 per share at the holders option and includes warrants to purchase up to 160,000 shares of common stock at a purchase price of $0.50 per share exercisable over the next five years. The aggregate value of the warrants using
the Black-Scholes pricing model, assuming zero dividend yield; a risk-free rate of 2.75%; expected volatility of 79.97%; and term of approximately four years and four months, was estimated to be $39,000 and is being amortized over the life of the
loans which results in a higher effective interest rate.





11



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BIOVEST INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS

(unaudited)



7.    Notes payable (continued):



In January 2003, the investor who made loans to the Company in January and
February 2003 negotiated a financing agreement with the Company whereby he would receive compensation in the form of fully paid shares of the Companys stock at the rate of 0.6667 shares for every dollar raised through his efforts until April
1, 2003. As a result of raising the $710,000 during the quarter ended June 30, 2003, the Company issued 473,333 shares of stock, valued at $0.50 per share and adding $237,000 to paid-in capital.



In connection with the closing of the Agreement on June 16, 2003, the Company
modified certain promissory notes as follows:



| |  |  | The promissory notes to a certain shareholder 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 shall 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) the convertible notes shall earn interest at 7% per annum, (iii) the convertible notes, shall at the discretion of the Holder, be convertible into shares of Accentia common stock in accordance with Section 1.01 of the Investment
Agreement with the value per Accentia share being adjusted by a twenty percent (20%) discount from Accentia share value as established in accordance with Section 1.01 of the Agreement 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.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A promissory note to a certain investor dated March 7, 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 shall 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) the convertible notes shall earn interest at 7% per
annum, (iii) the convertible notes, shall at the discretion of the Holder, be convertible into shares of Accentia common stock in accordance with Section 1.01 of the Investment Agreement with the value per Accentia share being adjusted by a twenty
percent (20%) discount from Accentia share value as established in accordance with Section 1.01 of the Agreement 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.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The convertible note holders who provided the bridge financing in 2001 were given the election to hold their existing notes or accept extended terms in exchange for secured note
status. As of the date of this report, some of these note holders have accepted extended terms and accordingly, their respective notes have been classified as non-current liabilities on the accompanying balance sheet.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





12



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BIOVEST INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS

(unaudited)



8.    Stock-based compensation:



The Company accounts for compensation costs associated with stock options
issued to employees under the provisions of Accounting Principles Board Opinion No. 25 (APB 25) whereby compensation is recognized to the extent the market price of the underlying stock at the date of grant exceeds the exercise price of
the option granted. Stock-based compensation to non-employees is accounted for using the fair-value based method prescribed by Financial Accounting Standard No. 123 (FAS 123).



As a result of raising the $710,000 during the nine months ended June 30, 2003, the Company issued 473,333 shares of stock
to a stockholder for assistance in raising the funds. The Company recognized $287,000 of expense during 2003 related to this issuance.



During the nine months ended June 30, 2003, the Company granted 550,000 warrants to existing creditors to the Company as part of their incentive to extend
their existing loans for two years. The warrants have an exercise price of $1.25 per share and a five-year term. The Company recognized $291,500 of expense during 2003 related to this issuance.



In connection with the closing of the Agreement on June 16, 2003, the Company
modified certain options and warrants for the purchase of its common shares as follows:



| |  |  | 200,000 warrants previously issued to a non-employee director were repriced from $0.50 to $0.25.
| | - |  | ------------------------------------------------------------------------------------------------

| |  |  | 100,000 warrants previously issued to an investor were repriced from $0.50 to $0.25.
| | - |  | ------------------------------------------------------------------------------------

| |  |  | 2.6 million options previously issued to a former officer/director who resigned in connection with the Agreement were converted to warrants, with half priced at $0.25 and the other
half priced at $0.50. These warrants are exercisable within 6 months and have a term of 5 years.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | 2.6 million options previously issued to a non-employee director were converted to warrants, with half priced at $0.25 and the other half priced at $0.50. These warrants are
exercisable within 6 months and have a term of 5 years.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | 200,000 warrants previously issued to a third party who assisted in obtaining bridge financing were repriced from $1.50 & $1.25 to $0.50 and $0.25, respectively.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | 375,000 options previously issued to a former officer/director who resigned in connection with the Agreement were converted to warrants, priced at $0.50. These warrants are
exercisable within 6 months and have a term of 5 years.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | 100,000 options previously issued to a former officer who resigned in connection with the Agreement were converted to warrants, priced at $0.50. These warrants are exercisable
within 6 months and have a term of 5 years.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



13



---

BIOVEST INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS

(unaudited)



8.    Stock-based compensation (continued):



Additionally, in connection with the closing of the Agreement on June 16,
2003, the Company granted certain options and warrants for the purchase of its common shares as follows:



| |  |  | 100,000 options were granted to an employee at an exercise price of $0.50 per share, exercisable in accordance with the Companys 2000 Stock Option Plan.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | 500,000 options granted to a non-employee director of the Company at an exercise price of $0.50 per share; 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.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Company recognized $1,884,000 of expense during 2003 related to the aforementioned option and warrant modifications and issuances in connection with
the closing of the Agreement on June 16, 2003.



The Company
used the Black-Scholes options-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 2. The following assumptions were used
for grants in 2003: No dividend yield, expected volatility of 78.97%; risk-free interest rates of 2.56% and expected lives between 4.3 and 5 years. The share price on the date of grant for the 2003 grants was $0.46, and the exercise price of the
grants ranges between $0.25 and $0.50.



The Company has elected
to account for its employee stock compensation plans using the intrinsic value method under Accounting Principles Board Opinion No. 25 with pro forma disclosures of net earnings and earnings per share, as if the fair value based method of accounting
defined in SFAS 123 had been applied.



The Company used the Black Scholes model
and the following assumptions to compute the proforma expense related to employee stock options: zero dividend yield; expected volatility of 78.97% and 92.92% for 2003 and 2002 respectively; expected lives of 5 and 4 years for 2003 and 2002
respectively; and risk-free interest rates of 2.56% and 3.18% for 2003 and 2002 respectively.







14



---

BIOVEST INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS

(unaudited)



9.    Income taxes:



No provision for income taxes has been recorded for the three and nine months ended June 30, 2003 and 2002 due to the losses
incurred during the periods. At June 30, 2003, the Company has net operating loss carryforwards of approximately $50,000,000 (expiring through 2020) and a capital loss carryforward of approximately $14,000,000 (expiring in 2003). Due to various
changes in ownership of the Company, virtually all of these carryforwards are subject to significant restrictions with respect to the ability of the Company to use these amounts to offset future taxable income. Use of the Companys net
operating loss carryfowards may be further limited as a result of future equity transactions.



10.    Legal proceedings:



During fiscal 2001 the Company entered into a settlement agreement in connection with a legal matter. The terms of the settlement agreement provide for the Company and another plaintiff to be jointly paid an aggregate
principal amount of $1,000,000 plus interest at prime. The principal amount is to be paid in increments of $50,000, $100,000 and $200,000 payable on various dates beginning July 2001 and ending June 2004, when all interest accrued on the principal
shall be due and payable. In accordance with this agreement, the Company is currently owed $150,000 of payments in arrears and $250,000 that is due in future periods.



The Company and the defendant also entered into a royalty agreement whereby the defendant is to pay a royalty to the Company
of three percent of its product sales up to an aggregate of $3,000,000 in total royalty payments. There have been no product sales and no accrual for royalties has been recorded



The Company is uncertain about future collections and is not able to assess the defendants ability to perform under
the settlement agreement. As a result, the Company will record additional payments as income when received. In the first and third quarters of 2003, the Company reported as other income for payments of $50,000 and $25,000, respectively, received
under the agreement.



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.





15



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ITEM 2.    MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS



Overview



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.



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 addition, our capital structure was recast in conformity with the Plan.



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 the Company to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses
and related disclosure of contingent assets and liabilities. The Company evaluates its estimates, including those related to bad debts, inventories, intangible assets, contingencies and litigation on an ongoing basis. The Company bases its 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.



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



The
Company maintains 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.



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.





16



---

In assessing the recoverability of the Companys amounts recorded as reorganization value in excess
of amounts allocable to identifiable assets, 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, the Company may be required to record impairment charges for these assets.



Information Relating to Forward-Looking Statements



This report includes forward-looking statements that are subject to
certain risks and uncertainties which could cause actual results or facts to differ materially from such statements for a variety of reasons, including, but not limited to: industry conditions, changes in product supply, pricing and consumer demand,
competition, other uncertainties in the markets for biotechnology products and changes in relationships with key suppliers. Shareholders and other readers are cautioned not to place undue reliance on these forward-looking statements, which speak
only as of the date on which they are made. The Company undertakes no obligation to update publicly or revise any forward-looking statements.



Results of Operations



Revenues.    Revenues for the three and nine months ended June 30, 2003 of $2,568,000 and $5,907,000 decreased 27% and
35% from $3,520,000 and $9,031,000 for the three and nine months ended June 30, 2002. Contract cell culture production services for the three and nine months ended June 30, 2003 decreased 77% and 55% from $2,335,000 and $5,384,000 to $528,000 and
$2,400,000. The decreases are primarily due to a reduction in volume of the number and size of orders booked. Sales of both consumables and systems for the three and nine months ended June 30, 2003 were also lower than the comparable periods for
last year. Consumable sales for the three and nine months ended June 30, 2003 decreased 50% and 40% from $775,000 and $2,107,000 to $391,000 and $1,269,000, respectively. Instrument sales for the three and nine months ended June 30, 2003 increased
400% and 55% from $317,000 and $1,267,000 to $1,594,000 and $1,962,000, respectively.



Gross Margin.    The overall gross margin for the third quarter of fiscal year 2003 increased versus the comparable quarter last year from 31% to 39%. The increase is due to the
reduction in fixed costs associated with the consolidation of facilities in early January 2003. The overall gross margin for the nine months of fiscal year 2003 decreased versus the comparable period last year from 27% to 26%. The decrease is
primarily the result of the relatively low volumes in 2003 as compared to 2002.



17



---

Operating Expenses.    Research and development expenses for the three
months ended June 30, 2003 increased $333,000, but decreased $246,000 for the nine months ended June 30, 2003 versus the comparable period last year. CRADA expenses for the three and nine months ended June 30, 2003 were approximately $699,000 and
$1,170,000, respectively. These expenses are associated primarily with designing equipment for vaccine production. Last year, these expenses were approximately $598,000 for the nine months, of which $530,000 were in the first fiscal quarter.
Marketing, general and administrative expenses increased $1,315,000 and $963,000 in the three and nine months ended June 30, 2003 versus the same period in fiscal 2002. The increase is attributed to the recognition of $1,763,000 of stock
compensation expense related to termination packages of former officers and directors. Excluding this one-time expense, the decrease in marketing, general and administrative expenses is attributed largely to decreased corporate expenses and expenses
related to the Companys financing activities and litigation proceedings.



Other Expense.    Interest expense, net consists of interest expense on the Companys long-term and short-term loans from affiliates. Interest expense for the three and
nine month periods ended June 30, 2003 was $237,000 and $536,000 versus $122,000 and $354,000 for the same period last year. Financing expense was $287,000 for the nine month period ended June 30, 2003.



Liquidity and Capital Resources



During the nine months ended June 30, 2003 the Company incurred a net loss
of $5,780,000, which included a non-cash expense of $1.7 million associated with repricing of options, in connection with the acquisition by Accentia, Inc. At June 30, 2003 the Company had an accumulated deficit of $17,893,000 and working capital of
approximately $339,000. During the nine months ended June 30, 2003 we incurred a loss of $5,780,000 and used $4,011,000 of cash flow for operations. Additionally, we have incurred significant losses and cash flow deficits in previous years. During
fiscal year 2002 and 2001 we incurred losses of $4,200,000 and $5,832,000. During fiscal year 2002 and 2001, we used $297,000 and $2,070,000 of cash flow for operations. The Company has been meeting its cash requirements through the use of cash on
hand, short-term borrowings (primarily from affiliates), and the sale of capital stock (See Note 3 to the Condensed financial statements). The Company expects to fund operating deficits in the near-term through collection of its stock subscription
receivable and additional loans, if needed, from Accentia, Inc.; however, there can be no assurances that the Company will be successful in that regard.



On June 30, 2003 the Company had working capital of $339,000 compared to a working capital deficit of $1,055,000 at September 30, 2002.



During the nine months ended June 30, 2003 and 2002, we utilized $31,000 and
$350,000 of cash for capital expenditures.



18



---

In September 2001 the Company successfully 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 included, among other things, a requirement for us to pay $530,000 quarterly to NCI for expenses incurred in connection with the ongoing Phase III clinical trials. In May, 2002 the Company and the NCI executed an amendment to the CRADA,
which required a single payment of $350,000, due on September 30, 2002, in lieu of the quarterly payments of the original agreement. Under the amendment, quarterly payments of $530,000 were to resume on October 1, 2002. On October 15, 2002 a new
amendment to the CRADA was executed under which the Company was not required to make the $350,000 payment due to the NCI on September 30, 2002 nor the $530,000 payment due on October 1, 2002. The next payment of $530,000 due on March 31, 2003, was
paid by Accentia, Inc. as an advance prior to the closing the investment agreement.



Continued development activities related to this vaccine, including the Phase III clinical trials, are expected to result in substantial expenditures over the next several years before any revenues from this product
development materialize. Assuming FDA approval of the vaccine, we plan to make significant investment in production capacity as part of commercialization. The Company plans to fund its ongoing operational and development costs through equity and
debt financing transactions, including anticipated receipt of its subscription receivables (See Note 3 to the Condensed financial statements).



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 perform under the CRADA.



During the six months ended December 31, 2002 the Company obtained $50,000 in additional loans and extended approximately $2,400,000 of the existing loans
for two years. The new loans bear interest at 7.0%, are due in November 2004 and are also convertible into shares of the Companys common stock at $1.00 per share, at the holders option, if the Company wishes to pay amounts under the
loans before maturity. The Company also issued to the holders of each of these new loans 25,000 additional warrants with an exercise price of $1.25 per share and a term of five years. All extended loans were renewed at the same interest rate,
conversion was reduced to $1.00 per share and 500,000 additional five-year warrants, exercisable at $1.25 per share, were issued.



During the quarter ended June 30, 2003, the Company obtained three loans totaling $710,000 from two investors. The new loans bear interest at 7.0%, mature
in two years and are also convertible into shares of the Companys common stock at $1.00 per share, at the holders option, if the Company wishes to pay amounts under the loans before maturity. The Company also issued to the holders of
each of these new loans 25,000 additional warrants with an exercise price of $1.25 per share and a term of five years.





19



---

In January and in February 2003, a stockholder and member of the Board of Directors loaned the Company
$300,000 and $160,000, respectively. The January loan was advanced in three equal weekly traunches and is fully secured by a receivable due to Biovest in the amount of $500,000 from the National Institutes of Health. This loan includes an interest
rate of 1% simple interest for two months and is convertible into the Companys common stock at $0.50 per share. In addition, the Company issued warrants to purchase 200,000 shares of common stock at $0.50 per share. This note was subsequently
extended until the earlier of July 1, 2003 or the closing of the investment agreement with Accentia. (See Note 9  Subsequent Events).



The February loan for $160,000 is for a term of two years and accrues interest at 7% per year. The loan is convertible into shares of the Companys
common stock at $0.50 per share at the holders option and includes warrants to purchase up to 160,000 shares of common stock at a purchase price of $0.50 per share exercisable over the next five years.



In March 2003, the Company borrowed $250,000 from an individual at 7%
interest for two years. The loan is convertible into shares of the Companys common stock at $0.50 per share at the holders option and includes warrants to purchase up to 250,000 shares of common stock at a purchase price of $0.50 per
share exercisable over the next five years.



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 perform under the CRADA.



Fluctuations in Operating Results



The Companys 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 the Companys 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 the Company. 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.





20



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Recent Accounting Pronouncements



In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities. The statement amends and clarifies accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities. This statement is designed to improve financial
reporting such that contracts with comparable characteristics are accounted for similarly. The statement, which is generally effective for contracts entered into or modified after June 30, 2003, is not anticipated to have a significant effect on the
Companys financial position or results of operations.



In
May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. This statement establishes standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. This statement is effective for financial instruments entered into or modified after May 31, 2003, and is otherwise effective at the beginning of the first interim period beginning
after June 15, 2003. The Company currently has no such financial instruments outstanding or under consideration and therefore adoption of this standard currently has no financial reporting implications.



In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation
of Valuable Interest Entities. 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 is 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. The Company currently has no
ownership in variable interest entities and therefore adoption of this standard currently has no financial reporting implications.



ITEM 3.    CONTROLS AND PROCEDURES



An evaluation was performed under the supervision and with the participation of our management, including the chief executive officer, or CEO, and chief financial officer, or CFO, of the effectiveness of the design
and operation of our disclosure procedures. Based on that evaluation, our management, including the CEO and CFO, concluded that our disclosure controls and procedures were effective as of June 30, 2003. There have been no significant changes in our
internal control over financial reporting in the third quarter of 2003 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.





21



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PART II.    OTHER INFORMATION



ITEM 1.    LEGAL PROCEEDINGS



The Company may, from time to time, be involved in actual or potential legal proceedings that the Company considers to be in the normal course of business. The Company does not believe that any of these proceedings
will have a material adverse effect on its business.



ITEM 2.    CHANGES IN SECURITIES



The Company issued the following shares of capital stock during the period of this Report.



On June 16, 2003, we sold 35,912,923 shares of our authorized but unissued capital stock to Accentia, Inc., a Florida corporation. The shares of capital
stock sold consisted of 27,891,031 shares of common stock and 8,021,886 shares of preferred stock. Each share of preferred stock is convertible into common stock on a one-share-preferred-for-two-shares-of-common basis. The preferred stock has no
additional preferences. The purchase price paid for these shares of our capital stock was $20,000,000. This purchase price is to be paid as set forth elsewhere herein. The issuance of these shares was pursuant to a private placement exemption under
Section 4(2) of the Securities Act of 1933 (Act).



Additionally, during the period of this report, we agreed to issue 36,000 fully paid shares of our authorized but unissued common stock to Mr. George Constantin. This stock is being issued as part of Mr. Constantins severance as an
employee, officer and director. A copy of the Severance Agreement is attached as an Exhibit to this report. The issuance of said shares was pursuant to a private placement exemption under Section 4(2) of the Act.



During the period of this Report, the Company granted the following options:



The Company granted an option on June 16, 2003 to David Moser, the
Companys Director of Legal Affairs. The option has the following terms: 100,000 shares at an exercise price of $0.50 per share, exercisable in accordance with the Companys 2000 Stock Option Plan. The option was granted pursuant to a
private transaction exempt under Section 4(2) of the Act.



The
Company granted options on June 16, 2003 to Peter J. Pappas, Sr., a Director of the Company. These options have the following terms: 500,000 shares at an exercise price of $0.50 per share; 500,000 shares at an exercise price of $0.25 per share, all
exercisable in accordance with the Companys 2000 Stock Option Plan. The options were granted pursuant to a private transaction exempt under Section 4(2) of the Act.





22



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During the period of this report, the Company modified the following Promissory Notes:



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 shall 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) |  | the convertible notes shall earn interest at 7% per annum,
| | ---- |  | ----------------------------------------------------------



| | (iii) |  | the convertible notes, shall at the discretion of the Holder, be convertible into shares of Accentia common stock in
| | ----- |  | --------------------------------------------------------------------------------------------------------------------

accordance with Section 1.01 of the Investment Agreement with the value per Accentia share being adjusted by a twenty percent (20%) discount from Accentia
share value as established in accordance with Section 1.01 of the Agreement 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.



A Promissory Note to Angelo Tsakopoulos dated March 7, 2003 in the principal
amount of $250,000 was modified to a new Note in the same principal amount with the following terms:



Section 1.01 of the Investment Agreement with the value per Accentia discount from Accentia share value as established in accordance with Section 1.01 of
the Agreement 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.



These Notes were modified as part of the closing of the Investment Agreement between the Company and Accentia, Inc. discussed above.



During the period of this Report, the Company modified the terms of the following options and
warrants:



2.6 million Options, which were issued on various
dates to Dr. Christopher Kyriakides, the Companys former CEO and current vice-Chairman of the Board, were cancelled. These Options were replaced by 2.6 million Warrants dated June 16, 2003, 1.3 million having an exercise price of $0.50 and 1.3
million having an exercise price of $0.25, all with terms of five years;



2.6 million Options, which were issued on various dates to Othon Mourkakos, the Companys former President and Director, were cancelled. These Options were replaced by 2.6 million Warrants dated June 16, 2003,
1.3 million having an exercise price of $0.50 and 1.3 million having an exercise price of $0.25, all with terms of five years;



375,000 Options issued on various dates to Dr. David DeFouw, former Director of the Company, were cancelled. These Options were replaced by 375,000
Warrants having an exercise price of $0.50 and a term of five years;



100,000 Options issued on June 6, 2001 to Thomas F. Belleau, the Companys former CFO, were cancelled. These Options were replaced by 100,000 Warrants dated June 16, 2003, having an exercise price of $0.50 and a term of five years.



200,000 Warrants issued on January 13, 2003 and February 26,
2003 to Peter Pappas, Sr., a Director of the Company, were re-priced at $0.25 per share from their former price of $0.50 per share;



100,000 Warrants issued on March 7, 2003 to Angelo Tsakopoulos were re-priced at $0.25 per share from their former price of $0.50 per share.



These modifications were made as part of the closing of the Investment Agreement between
the Company and Accentia, Inc. discussed above.



23



---

ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K



(a) Exhibits



|       | 
|------ | 
|3.2.1  | 
|       | 
|3.2.2  | 
|       | 
|3.2.3  | 
|       | 
|3.2.4  | 
|       | 
|3.2.5  | 
|       | 
|3.2.6  | 
|       | 
|3.2.7  | 
|       | 
|3.2.8  | 
|       | 
|3.2.9  | 
|       | 
|3.2.10 | 
|       | 
|31.1   | 
|       | 
|31.2   | 
|       | 
|32.1   | 
|       | 
|32.2   | 



(b) Reports on Form
8-K.



On July 8, 2003, as amended, the Company filed a report
on Form 8-K regarding a change in the Companys certifying accountants.



On June 24, 2003, the Company announced that, on June 16, 2003, it closed on the investment agreement previously entered into on April 10, 2003 with Accentia, Inc.





24



---

SIGNATURES



In accordance with the requirements of
the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereto duly authorized.



|                         |  | BIOVEST INTERNATIONAL, INC. (Registrant)                 
|------------------------ |  | ---------------------------------------------------------
|                         |  |                                                          
|                         | 
|Date:    August 19, 2003 |  | /s/    DR. STEPHANE ALLARD                               
|                         |  | Dr. Stephane Allard President and Chief
Executive Officer
|                         | 
|                         |  |                                                          
|Date:    August 18, 2003 |  | /s/    JAMES A. MCNULTY                                  
|                         |  | James A. McNulty Chief Financial
Officer                 



25