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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-Q







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

For the quarterly period ended June 30, 2010

OR



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

Commission file number 0-11480





BIOVEST
INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)







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

324 S. Hyde Park Ave, Suite 350, Tampa, FL 33606

(Address of principal executive offices) (Zip Code)

(813) 864-2554

(Registrants telephone number, including area code)





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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files).    Yes   ̈    No   ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):



|                        |  |   |  |                           |  |  
|----------------------- |  | - |  | ------------------------- |  | -
|Large accelerated filer |  |  ̈ |  | Accelerated filer         |  |  ̈
|                        |  |   | 
|Non-accelerated filer   |  |  ̈ |  | Smaller reporting company |  | x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).    Yes   ̈    No  x

As of August 16, 2010, there were 97,549,783 shares of the registrants Common Stock outstanding.









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Forward-Looking Statements

Statements in this Quarterly Report on Form 10-Q that are not strictly historical in nature are forward-looking statements. These statements may include,
but are not limited to, statements about: the timing of the commencement, enrollment, and completion of our clinical trials for our product candidates; the progress or success of our product development programs; the status of regulatory approvals
for our product candidates; the timing of product launches; our ability to protect our intellectual property and operate our business without infringing upon the intellectual property rights of others; and our estimates for future performance,
anticipated operating losses, future revenues, capital requirements, and our needs for additional financing. In some cases, you can identify forward-looking statements by terms such as anticipates, believes,
could, estimates, expects, intends, may, plans, potential, predicts, projects, should, will, would,
goal, or other variations of these terms (including their use in the negative) or by discussions of strategies, plans or intentions. These statements are only predictions based on current information and expectations and involve a number
of risks and uncertainties. The underlying information and expectations are likely to change over time. Actual events or results may differ materially from those projected in the forward-looking statements due to various factors, including, but not
limited to, those set forth under the caption ITEM 1A. RISK FACTORS of our Form 10-K for the fiscal year ended September 30, 2009 and those set forth in our other filings with the Securities and Exchange Commission. Except as
required by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.



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INDEX

BIOVEST INTERNATIONAL, INC.

(DEBTOR-IN-POSSESSION)



|                              |  |                                                                                                                        |  |     
|----------------------------- |  | ---------------------------------------------------------------------------------------------------------------------- |  | ----
|                              |  |                                                                                                                        |  | Page
|PART I. FINANCIAL INFORMATION |  |                                                                                                                       
|ITEM 1.                       |  | Financial Statements                                                                                                   |  |     
|                              |  | Condensed Consolidated Balance Sheets as of June 30, 2010 (unaudited) and September 30, 2009                           |  | 2   
|                              |  | Condensed Consolidated Statements of Operations for the Three and Nine Months Ended June 30, 2010 and 2009 (unaudited) |  | 3   
|                              |  | Condensed Consolidated Statement of Stockholders Deficit for the Nine Months Ended June 30, 2010 (unaudited)          |  | 4   
|                              |  | Condensed Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2010 and 2009 (unaudited)           |  | 5   
|                              |  | Notes to Condensed Consolidated Financial Statements                                                                   |  | 6   
|ITEM 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                  |  | 34  
|ITEM 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                                                             |  | 44  
|ITEM 4.                       |  | Controls and Procedures                                                                                                |  | 44  
|                              | 
|PART II. OTHER INFORMATION    |  |                                                                                                                       
|ITEM 1.                       |  | Legal Proceedings                                                                                                      |  | 45  
|ITEM 1A.                      |  | Risk Factors                                                                                                           |  | 45  
|ITEM 2.                       |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                            |  | 45  
|ITEM 3.                       |  | Defaults Upon Senior Securities                                                                                        |  | 45  
|ITEM 4.                       |  | (Removed and Reserved)                                                                                                 |  | 45  
|ITEM 5.                       |  | Other Information                                                                                                      |  | 46  
|ITEM 6.                       |  | Exhibits                                                                                                               |  | 46  
|Signatures                    |  | 47                                                                                                                    



1



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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

BIOVEST INTERNATIONAL, INC. AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

CONDENSED CONSOLIDATED BALANCE SHEETS



|                                                                                                                                       |  |                          |              |   |                   |   |              |  
|-------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | ------------ | - | ----------------- | - | ------------ | -
|                                                                                                                                       |  | June 30, 2010(Unaudited) |              |   | September 30,2009 |  
|                                                                                                                                       |  |                         
|ASSETS                                                                                                                                 |  |                          |              |   |                   |   |              |  
|Current assets:                                                                                                                        |  |                          |              |   |                   |   |              |  
|Cash                                                                                                                                   |  | $                        | 131,000      |   |                   | $ | 226,000      |  
|Accounts receivable, net of $8,000 allowance for doubtful accounts at June 30, 2010 and September 30,
2009                             |  |                          | 396,000      |   |                   |   | 207,000      |  
|Costs and estimated earnings in excess of billings on uncompleted contracts                                                            |  |                          | 159,000      |   |                   |   | 251,000      |  
|Inventories                                                                                                                            |  |                          | 470,000      |   |                   |   | 509,000      |  
|Prepaid expenses and other current assets                                                                                              |  |                          | 147,000      |   |                   |   | 138,000      |  
|                                                                                                                                       |  |                          |              |   |                   |   |              |  
|                                                                                                                                       |  |                         
|Total current assets                                                                                                                   |  |                          | 1,303,000    |   |                   |   | 1,331,000    |  
|                                                                                                                                       |  |                         
|Property and equipment, net                                                                                                            |  |                          | 59,000       |   |                   |   | 81,000       |  
|Patents and trademarks, net                                                                                                            |  |                          | 268,000      |   |                   |   | 290,000      |  
|Reorganization value in excess of amounts allocated to identifiable assets                                                             |  |                          | 2,131,000    |   |                   |   | 2,131,000    |  
|Other assets                                                                                                                           |  |                          | 185,000      |   |                   |   | 240,000      |  
|                                                                                                                                       |  |                          |              |   |                   |   |              |  
|                                                                                                                                       |  |                         
|Total assets                                                                                                                           |  | $                        | 3,946,000    |   |                   | $ | 4,073,000    |  
|                                                                                                                                       |  |                          |              |   |                   |   |              |  
|                                                                                                                                       |  |                         
|LIABILITIES AND STOCKHOLDERS DEFICIT                                                                                                  |  |                          |              |   |                   |   |              |  
|Liabilities not subject to compromise:                                                                                                 |  |                          |              |   |                   |   |              |  
|Current liabilities:                                                                                                                   |  |                          |              |   |                   |   |              |  
|Accounts payable                                                                                                                       |  |                          | 567,000      |   |                   |   | 446,000      |  
|Customer deposits                                                                                                                      |  |                          | 77,000       |   |                   |   | 159,000      |  
|Accrued liabilities                                                                                                                    |  |                          | 621,000      |   |                   |   | 311,000      |  
|Notes payable, related party                                                                                                           |  |                          | 1,974,000    |   |                   |   | 1,664,000    |  
|                                                                                                                                       |  |                          |              |   |                   |   |              |  
|                                                                                                                                       |  |                         
|Total liabilities not subject to compromise                                                                                            |  |                          | 3,239,000    |   |                   |   | 2,580,000    |  
|                                                                                                                                       |  |                         
|Liabilities subject to compromise (Note 8)                                                                                             |  |                          | 81,732,000   |   |                   |   | 53,980,000   |  
|                                                                                                                                       |  |                          |              |   |                   |   |              |  
|                                                                                                                                       |  |                         
|Total liabilities                                                                                                                      |  |                          | 84,971,000   |   |                   |   | 56,560,000   |  
|                                                                                                                                       |  |                         
|Commitments and contingencies (Note 14)                                                                                                |  |                          |             |   |                   |   |             |  
|                                                                                                                                       |  |                         
|Stockholders deficit:                                                                                                                 |  |                          |              |   |                   |   |              |  
|Preferred stock, $.01 par value, 50,000,000 shares authorized; no shares issued and outstanding                                        |  |                          |             |   |                   |   |             |  
|Common stock, $.01 par value, 300,000,000 shares authorized; 97,549,783 issued and outstanding at June 30, 2010 and
September 30, 2009 |  |                          | 975,000      |   |                   |   | 975,000      |  
|Additional paid-in capital                                                                                                             |  |                          | 67,538,000   |   |                   |   | 74,483,000   |  
|Accumulated deficit                                                                                                                    |  |                          | (153,221,000 | ) |                   |   | (131,922,000 | )
|                                                                                                                                       |  |                          |              |   |                   |   |              |  
|                                                                                                                                       |  |                         
|Total stockholders deficit attributable to Biovest International, Inc.                                                                |  |                          | (84,708,000  | ) |                   |   | (56,464,000  | )
|                                                                                                                                       |  |                         
|Non-controlling interests (Notes 12 and 13)                                                                                            |  |                          | 3,683,000    |   |                   |   | 3,977,000    |  
|                                                                                                                                       |  |                          |              |   |                   |   |              |  
|                                                                                                                                       |  |                         
|Total stockholders deficit                                                                                                            |  |                          | (81,025,000  | ) |                   |   | (52,487,000  | )
|                                                                                                                                       |  |                         
|Total liabilities and stockholders deficit                                                                                            |  | $                        | 3,946,000    |   |                   | $ | 4,073,000    |  
|                                                                                                                                       |  |                          |              |   |                   |   |              |  

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



2



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BIOVEST INTERNATIONAL, INC. AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



|                                                                                                                      |  |                            |            |   |                           |   |            |      |  |   |             |   |  |   |             |  
|--------------------------------------------------------------------------------------------------------------------- |  | -------------------------- | ---------- | - | ------------------------- | - | ---------- | ---- |  | - | ----------- | - |  | - | ----------- | -
|                                                                                                                      |  | Three Months EndedJune
30, |            |   | Nine Months EndedJune 30, |  
|                                                                                                                      |  | 2010                       |            |   | 2009                      |   |            | 2010 |  |   | 2009        |  
|Revenue:                                                                                                              |  |                            |            |   |                           |   |            |      |  |   |             |   |  |   |             |  
|Products                                                                                                              |  | $                          | 1,274,000  |   |                           | $ | 451,000    |      |  | $ | 3,231,000   |   |  | $ | 1,557,000   |  
|Services                                                                                                              |  |                            | 292,000    |   |                           |   | 417,000    |      |  |   | 1,013,000   |   |  |   | 956,000     |  
|                                                                                                                      |  |                            |            |   |                           |   |            |      |  |   |             |   |  |   |             |  
|                                                                                                                      |  |                            |            |  
|Total revenue                                                                                                         |  |                            | 1,566,000  |   |                           |   | 868,000    |      |  |   | 4,244,000   |   |  |   | 2,513,000   |  
|                                                                                                                      |  |                            |            |  
|Operating costs and expenses:                                                                                         |  |                            |            |   |                           |   |            |      |  |   |             |   |  |   |             |  
|Cost of revenue:                                                                                                      |  |                            |            |   |                           |   |            |      |  |   |             |   |  |   |             |  
|Products                                                                                                              |  |                            | 608,000    |   |                           |   | 328,000    |      |  |   | 1,476,000   |   |  |   | 1,079,000   |  
|Services                                                                                                              |  |                            | 224,000    |   |                           |   | 247,000    |      |  |   | 723,000     |   |  |   | 771,000     |  
|Research and development expense                                                                                      |  |                            | 194,000    |   |                           |   | 150,000    |      |  |   | 585,000     |   |  |   | 775,000     |  
|General and administrative expense                                                                                    |  |                            | 641,000    |   |                           |   | 647,000    |      |  |   | 1,738,000   |   |  |   | 2,228,000   |  
|                                                                                                                      |  |                            |            |   |                           |   |            |      |  |   |             |   |  |   |             |  
|                                                                                                                      |  |                            |            |  
|Total operating costs and expenses                                                                                    |  |                            | 1,667,000  |   |                           |   | 1,372,000  |      |  |   | 4,522,000   |   |  |   | 4,853,000   |  
|                                                                                                                      |  |                            |            |   |                           |   |            |      |  |   |             |   |  |   |             |  
|                                                                                                                      |  |                            |            |  
|Loss from operations                                                                                                  |  |                            | (101,000   | ) |                           |   | (504,000   | )    |  |   | (278,000    | ) |  |   | (2,340,000  | )
|                                                                                                                      |  |                            |            |   |                           |   |            |      |  |   |             |   |  |   |             |  
|                                                                                                                      |  |                            |            |  
|Other (expense) income:                                                                                               |  |                            |            |   |                           |   |            |      |  |   |             |   |  |   |             |  
|Interest expense, net (Note 3)                                                                                        |  |                            | (1,740,000 | ) |                           |   | (2,000,000 | )    |  |   | (5,600,000  | ) |  |   | (4,966,000  | )
|Gain (Loss) on derivative liabilities                                                                                 |  |                            | 10,956,000 |   |                           |   | (1,865,000 | )    |  |   | (8,322,000  | ) |  |   | (1,224,000  | )
|Other income/(expense), net                                                                                           |  |                            | 1,000      |   |                           |   |           |      |  |   | 205,000     |   |  |   | (124,000    | )
|                                                                                                                      |  |                            |            |   |                           |   |            |      |  |   |             |   |  |   |             |  
|                                                                                                                      |  |                            |            |  
|Total other income (expense)                                                                                          |  |                            | 9,217,000  |   |                           |   | (3,865,000 | )    |  |   | (13,717,000 | ) |  |   | (6,314,000  | )
|                                                                                                                      |  |                            |            |  
|Loss before reorganization items, non-controlling interest in losses from variable interest entities and income
taxes |  |                            | 9,116,000  |   |                           |   | (4,369,000 | )    |  |   | (13,995,000 | ) |  |   | (8,654,000  | )
|                                                                                                                      |  |                            |            |   |                           |   |            |      |  |   |             |   |  |   |             |  
|                                                                                                                      |  |                            |            |  
|Reorganization items:                                                                                                 |  |                            |            |   |                           |   |            |      |  |   |             |   |  |   |             |  
|Professional fees                                                                                                     |  |                            | (103,000   | ) |                           |   | (60,000    | )    |  |   | (339,000    | ) |  |   | (278,000    | )
|Provision for rejection of lease                                                                                      |  |                            |           |   |                           |   |           |      |  |   |            |   |  |   | (600,000    | )
|Provision for indemnity agreements                                                                                    |  |                            |           |   |                           |   | (2,978,000 | )    |  |   | 2,062,000   |   |  |   | (3,895,000  | )
|                                                                                                                      |  |                            |            |   |                           |   |            |      |  |   |             |   |  |   |             |  
|                                                                                                                      |  |                            | (103,000   | ) |                           |   | (3,038,000 | )    |  |   | 1,723,000   |   |  |   | (4,773,000  | )
|                                                                                                                      |  |                            |            |  
|Loss before non-controlling interest in losses from variable interest entities and income taxes                       |  |                            | 9,013,000  |   |                           |   | (7,407,000 | )    |  |   | (12,272,000 | ) |  |   | (13,427,000 | )
|                                                                                                                      |  |                            |            |  
|Non-controlling interest in losses from variable interest entities                                                    |  |                            | 98,000     |   |                           |   | 98,000     |      |  |   | 294,000     |   |  |   | 294,000     |  
|                                                                                                                      |  |                            |            |   |                           |   |            |      |  |   |             |   |  |   |             |  
|                                                                                                                      |  |                            |            |  
|Net income (loss)                                                                                                     |  | $                          | 9,111,000  |   |                           | $ | (7,309,000 | )    |  | $ | (11,978,000 | ) |  | $ | (13,133,000 | )
|                                                                                                                      |  |                            |            |   |                           |   |            |      |  |   |             |   |  |   |             |  
|                                                                                                                      |  |                            |            |  
|Income (Loss) per common share:                                                                                       |  |                            |            |   |                           |   |            |      |  |   |             |   |  |   |             |  
|Basic                                                                                                                 |  | $                          | 0.09       |   |                           | $ | (0.07      | )    |  | $ | (0.12       | ) |  | $ | (0.13       | )
|                                                                                                                      |  |                            |            |  
|Diluted                                                                                                               |  | $                          | (0.01      | ) |                           | $ | (0.07      | )    |  | $ | (0.12       | ) |  | $ | (0.13       | )

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



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BIOVEST INTERNATIONAL, INC. AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS DEFICIT

NINE MONTHS ENDED JUNE 30, 2010

(Unaudited)



|                                                    |  |              |  |                           |         |  |                    |            |   |                          |   |              |       |  |   |           |   |  |   |             |  
|--------------------------------------------------- |  | ------------ |  | ------------------------- | ------- |  | ------------------ | ---------- | - | ------------------------ | - | ------------ | ----- |  | - | --------- | - |  | - | ----------- | -
|                                                    |  | Common Stock |  | AdditionalPaid-in Capital |         |  | AccumulatedDeficit |            |   | Non-ControllingInterests |   |              | Total | 
|                                                    |  | Shares       |  | Amount                    |         |  |                    |           
|Balances October 1, 2009                            |  | 97,549,783   |  | $                         | 975,000 |  | $                  | 74,483,000 |   |                          | $ | (131,922,000 | )     |  | $ | 3,977,000 |   |  | $ | (52,487,000 | )
|Cumulative effect of change in accounting principle |  |             |  |                           |        |  |                    | (7,008,000 | ) |                          |   | (9,321,000   | )     |  |   |          |   |  |   | (16,329,000 | )
|Employee share-based compensation                   |  |             |  |                           |        |  |                    | 63,000     |   |                          |   |             |       |  |   |          |   |  |   | 63,000      |  
|Net Loss                                            |  |             |  |                           |        |  |                    |           |   |                          |   | (11,978,000  | )     |  |   | (294,000  | ) |  |   | (12,272,000 | )
|                                                    |  |              |  |                           |         |  |                    |            |   |                          |   |              |       |  |   |           |   |  |   |             |  
|                                                    |  |              |  |                           |         | 
|Balances June 30, 2010                              |  | 97,549,783   |  | $                         | 975,000 |  | $                  | 67,538,000 |   |                          | $ | (153,221,000 | )     |  | $ | 3,683,000 |   |  | $ | (81,025,000 | )
|                                                    |  |              |  |                           |         |  |                    |            |   |                          |   |              |       |  |   |           |   |  |   |             |  

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



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BIOVEST INTERNATIONAL, INC. AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



|                                                                                                           |  |                            |             |   |      |   |             |  
|---------------------------------------------------------------------------------------------------------- |  | -------------------------- | ----------- | - | ---- | - | ----------- | -
|                                                                                                           |  | Nine Months Ended June 30, |            
|                                                                                                           |  | 2010                       |             |   | 2009 |  
|Cash flows from operating activities:                                                                      |  |                            |             |   |      |   |             |  
|Net loss before non-controlling interest in loss of variable interest entities                             |  | $                          | (12,272,000 | ) |      | $ | (13,427,000 | )
|Adjustments to reconcile net loss to net cash flows from operating activities before reorganization items: |  |                            |             |   |      |   |             |  
|Depreciation                                                                                               |  |                            | 42,000      |   |      |   | 129,000     |  
|Amortization                                                                                               |  |                            | 22,000      |   |      |   | 16,000      |  
|Employee share-based compensation                                                                          |  |                            | 63,000      |   |      |   | 110,000     |  
|Amortization of discount on notes payable                                                                  |  |                            | 1,060,000   |   |      |   | 918,000     |  
|Amortization of deferred loan costs                                                                        |  |                            | 48,000      |   |      |   | 28,000      |  
|Loss on disposal of property and equipment                                                                 |  |                            |            |   |      |   | 335,000     |  
|Gain on shares issued for interest on outstanding debt                                                     |  |                            |            |   |      |   | (63,000     | )
|Loss on derivative liability                                                                               |  |                            | 8,322,000   |   |      |   | 1,224,000   |  
|Changes in cash resulting from changes in:                                                                 |  |                            |             |   |      |   |             |  
|Operating assets                                                                                           |  |                            | (53,000     | ) |      |   | 33,000      |  
|Operating liabilities                                                                                      |  |                            | 4,506,000   |   |      |   | 4,358,000   |  
|                                                                                                           |  |                            |             |   |      |   |             |  
|                                                                                                           |  |                           
|Net cash flows from operating activities before reorganization items                                       |  |                            | 1,738,000   |   |      |   | (6,339,000  | )
|                                                                                                           |  |                            |             |   |      |   |             |  
|                                                                                                           |  |                           
|Reorganization items:                                                                                      |  |                            |             |   |      |   |             |  
|Increase in accrued professional fees                                                                      |  |                            | 16,000      |   |      |   | 100,000     |  
|Increase in provision for rejected lease                                                                   |  |                            |            |   |      |   | 600,000     |  
|(Increase) Decrease in provision for indemnity agreements                                                  |  |                            | (2,062,000  | ) |      |   | 3,895,000   |  
|                                                                                                           |  |                            |             |   |      |   |             |  
|                                                                                                           |  |                           
|Net change in cash flows from reorganization items                                                         |  |                            | (2,046,000  | ) |      |   | 4,595,000   |  
|                                                                                                           |  |                            |             |   |      |   |             |  
|                                                                                                           |  |                           
|Net cash flows from operating activities                                                                   |  |                            | (308,000    | ) |      |   | (1,744,000  | )
|                                                                                                           |  |                            |             |   |      |   |             |  
|                                                                                                           |  |                           
|Cash flows from investing activities:                                                                      |  |                            |             |   |      |   |             |  
|Purchase of property and equipment                                                                         |  |                            | (19,000     | ) |      |   |            |  
|                                                                                                           |  |                            |             |   |      |   |             |  
|                                                                                                           |  |                           
|Net cash flows from investing activities                                                                   |  |                            | (19,000     | ) |      |   |            |  
|                                                                                                           |  |                            |             |   |      |   |             |  
|                                                                                                           |  |                           
|Cash flows from financing activities:                                                                      |  |                            |             |   |      |   |             |  
|Repayment of notes payable and long-term debt                                                              |  |                            | (39,000     | ) |      |   | (89,000     | )
|Advances from related party                                                                                |  |                            | 311,000     |   |      |   | 1,413,000   |  
|Payment of deferred financing costs                                                                        |  |                            | (40,000     | ) |      |   | (65,000     | )
|                                                                                                           |  |                            |             |   |      |   |             |  
|                                                                                                           |  |                           
|Net cash flows from financing activities                                                                   |  |                            | 232,000     |   |      |   | 1,259,000   |  
|                                                                                                           |  |                            |             |   |      |   |             |  
|                                                                                                           |  |                           
|Net change in cash                                                                                         |  |                            | (95,000     | ) |      |   | (485,000    | )
|Cash at beginning of period                                                                                |  |                            | 226,000     |   |      |   | 539,000     |  
|                                                                                                           |  |                            |             |   |      |   |             |  
|                                                                                                           |  |                           
|Cash at end of period                                                                                      |  | $                          | 131,000     |   |      | $ | 54,000      |  
|                                                                                                           |  |                            |             |   |      |   |             |  
|                                                                                                           |  |                           
|Supplemental disclosure of cash flow information:                                                          |  |                            |             |   |      |   |             |  
|Non-cash financing and investing transactions:                                                             |  |                            |             |   |      |   |             |  
|Issuance of warrants                                                                                       |  | $                          |            |   |      | $ | 62,000      |  
|Stock issued for payment of accrued expenses and interest                                                  |  |                            |            |   |      |   | 240,000     |  
|Stock issued for modification of debt                                                                      |  |                            |            |   |      |   | 25,000      |  
|Cumulative effect of change in accounting principle                                                        |  |                            | 16,329,000  |   |      |   |            |  
|Cash paid for interest during period                                                                       |  | $                          | 130,000     |   |      | $ | 163,000     |  

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



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(DEBTOR-IN-POSSESSION)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JUNE 30, 2010 AND 2009

1. Description of the company:

As a result of Biovest International, Inc.s (the Company or Biovest) collaboration with the National Cancer
Institute (NCI), Biovest is developing BiovaxID® as a personalized therapeutic cancer vaccine for
the treatment of non-Hodgkins lymphoma, specifically follicular lymphoma (FL), mantle cell lymphoma (MCL), and potentially other B-cell blood cancers. Both FL and MCL are generally considered to be incurable with
currently approved therapies. These generally fatal diseases arise from the lymphoid tissue and are characterized by an uncontrolled proliferation and spread throughout the body of mature B-cells, which are a type of white blood cell.

Three clinical trials conducted under Biovests Investigational New Drug Application (IND) have studied BiovaxID in non-Hodgkins
lymphoma. These studies include a Phase 2 clinical trial and a Phase 3 clinical trial in patients with FL, as well as a Phase 2 clinical trial in MCL patients. The Company believes that these clinical trials have demonstrated that BiovaxID, which is
personalized and autologous (derived from a patients own tumor cells), has an excellent safety profile and is effective in the treatment of these lethal diseases. Biovest is currently preparing for discussions with the U.S. Food and Drug
Administration (FDA) and international agencies regarding regulatory approvals of BiovaxID for FL and MCL based on these clinical trials. Biovest expects that BiovaxID may also have applications in other forms of B-cell lymphomas.

To support Biovests planned commercialization of BiovaxID, Biovest has developed an automated cell culture instrument called
AutovaxID. The Company believes that AutovaxID has significant potential application in the production of a broad range of patient-specific medicines, such as BiovaxID and other monoclonal antibodies. Biovest is under contract with the U.S.
Department of Defense to further develop AutovaxID and to explore potential production of additional vaccines including vaccines for viral indications such as influenza. AutovaxID is automated and computer controlled to improve cell production
reliability and to maximize cell production. AutovaxID uses a disposable production unit which minimizes the need for FDA-required clean rooms in the production process and provides for robust and dependable manufacturing while complying
with the industry cGMP standards. AutovaxID has a small footprint and supports scalable production.

Biovest also manufactures instruments and
disposables used in the hollow fiber production of cell culture products. The Companys 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. Biovest also produces 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.

Biovests business consists of three primary business
segments: development of BiovaxID and potentially other B-cell blood cancer vaccines; the manufacture and sale of AutovaxID and other instruments and consumables; and commercial production of cell culture products and services.

As of June 30, 2010, the Company is a 75% owned subsidiary of Accentia Biopharmaceuticals, Inc. (Accentia).

2. Chapter 11 reorganization:

On November 10, 2008, Biovest, along with its subsidiaries, Biovax, Inc., AutovaxID, Inc., Biolender, LLC and Biolender II, LLC
(collectively, the Debtors) filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code (Chapter 11) in the U.S. Bankruptcy Court for the Middle District of Florida, Tampa Division
(the Bankruptcy Court). During the pendency of the Chapter 11 proceedings, the Debtors will operate their business as a debtor-in-possession in accordance with the provisions of Chapter 11, and will be subject to the jurisdiction of
the Bankruptcy Court. With existing cash flow and the potential for relatively near-term significant business development opportunities for
BiovaxID® and AutovaxID, the Chapter 11 proceedings are intended to provide an opportunity for the Company
to restore shareholder value and to pay all secured and unsecured creditors. Under protection of the Bankruptcy Court, Biovest plans to implement a series of initiatives designed to significantly decrease operating expenses and financing costs, and
focus cash and resources on its priority programs that will allow the Company to attract key funding/partnering opportunities. The accompanying unaudited condensed consolidated financial statements have been prepared assuming the Company will
continue as a going concern once it emerges from Chapter 11. The Companys ability to continue as a going concern is dependent upon, among other things, its ability to successfully restructure its indebtedness and to emerge from bankruptcy with
a viable plan for reorganization and with adequate liquidity. The Company believes the Chapter 11 reorganization will achieve these objectives but the Company can provide no assurances. During this reorganization process, Biovest expects to continue
operations without interruption, while striving to maximize long-term shareholder value.



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JUNE 30, 2010 AND 2009



2. Chapter 11 reorganization (continued):



Under section 362 of the Bankruptcy Code, actions to collect most of the Debtors prepetition
liabilities, including payments owing to vendors in respect of goods furnished and services provided prior to the petition date, are automatically stayed and other contractual obligations of the Debtors generally may not be enforced. Shortly after
the petition date, the Debtors began notifying all known actual or potential creditors of the Debtors for the purpose of identifying all prepetition claims against the Debtors. The Chapter 11 filings triggered defaults on substantially all debt
obligations of the Debtors. The stay provisions of section 362 of the Bankruptcy Code, however, also apply to actions to collect prepetition indebtedness or to exercise control over the property of the Debtors estate in respect of such
defaults. The rights of and ultimate payments by the Debtors under prepetition obligations will be addressed in any plan of reorganization and may be substantially altered by the plan of reorganization. For additional information, refer to Note 8,
Liabilities Subject to Compromise.

3. Significant accounting policies:

Basis of presentation:

The accompanying
unaudited condensed consolidated 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 interim 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 interim financial statements.

Operating results for the three and nine months ended June 30, 2010 are not necessarily indicative of the results that may be expected for the
entire fiscal year. For further information, refer to the consolidated financial statements and footnotes thereto included in the Companys Annual Report on Form 10-K for the fiscal year ended September 30, 2009.

Principles of Consolidation:

The
condensed consolidated financial statements represent the consolidation of wholly-owned companies and interests in variable interest entities where the Company has a controlling financial interest or has been determined to be the primary beneficiary
under Accounting Standards Codification (ASC) Topic 810  Consolidation.

The condensed consolidated financial statements
include Biovest International, Inc., its wholly owned subsidiaries, Biovax, Inc., and AutovaxID, Inc.; and certain variable interest entities of the Company, Biolender LLC, Biolender II LLC, Biovax Investment LLC, Telesis CDE Two LLC, AutovaxID
Investment LLC, and St. Louis New Markets Tax Credit Fund II LLC (Notes 12 and 13).

All significant inter-company balances and transactions
have been eliminated.

Voluntary Petition for Bankruptcy:

On November 10, 2008, Biovest, and its subsidiaries, Biovax, Inc., AutovaxID, Inc., Biolender, LLC and Biolender II, LLC (collectively, the
Debtors) filed voluntary petitions for relief under Chapter 11. The Debtors will continue to operate their business as debtors-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with the
applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.

ASC Topic 852, which is applicable to companies in
Chapter 11, generally does not change the manner in which financial statements are prepared. However, it does require that the financial statements for periods subsequent to the filing of the Chapter 11 petition distinguish transactions
and events that are directly associated with the reorganization from the ongoing operations of the business. Revenues, expenses, realized gains and losses, and provisions for losses that can be directly associated with the reorganization and
restructuring of the business must be reported separately as reorganization items in the statements of operations beginning in the quarter ending December 31, 2008. The balance sheet must distinguish prepetition liabilities subject to
compromise from both those prepetition liabilities that are not subject to compromise and from post-petition liabilities. Liabilities that may be affected by a plan of reorganization must be reported at the amounts expected to be allowed, even if
they may be settled for lesser amounts. In addition, cash provided by reorganization items must be disclosed separately in the statement of cash flows. The Company adopted ASC Topic 852 effective on November 10, 2008 and will segregate those
items as outlined above for all reporting periods subsequent to such date.



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JUNE 30, 2010 AND 2009



3. Significant accounting policies (continued):



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. Leasehold improvements are amortized over the shorter of their economic lives
or the lease term.

Reorganization value in excess of amounts allocated to identifiable assets:

Reorganization value in excess of amounts allocated to identifiable assets relates to our cell culture and instrument manufacturing segments located in
Minneapolis, MN, which continue to be profitable segments of the Company. Reorganization value is tested for impairment annually or whenever there is an impairment indication. The Company has not recorded any impairment losses as a result of these
evaluations.

Contractual Interest Expense:

Contractual interest expense represents amounts due under the contractual terms of outstanding debt, including debt subject to compromise for which
interest expense may not recognized in accordance with the provisions of ASC Topic 852. The Companys voluntary petition for bankruptcy on November 10, 2008 triggered default provisions on certain of the Companys pre-petition debt,
which allow for the accrual of additional interest and fees above the contractual rate. The Company recorded interest expense at the default rate on all of its pre-petition debt for periods after November 10, 2008 due to the uncertain nature of
the provisions of the plan of reorganization to be filed with the Court at a future date.

Financial instruments:

Financial instruments, as defined in ASC Topic 825, consist of cash, evidence of ownership in an entity and contracts that both (i) impose on one
entity a contractual obligation to deliver cash or another financial instrument to a second entity, or to exchange other financial instruments on potentially unfavorable terms with the second entity and (ii) conveys to that second entity a
contractual right (a) to receive cash or another financial instrument from the first entity or (b) to exchange other financial instruments on potentially favorable terms with the first entity. Accordingly, the Companys financial
instruments consist of cash, accounts receivable, accounts payable, accrued liabilities, notes payable, long-term debt, royalty liabilities, and derivative financial instruments.

The Company carries cash, accounts receivable, accounts payable, and accrued liabilities at historical costs of which their respective the estimated fair
values of these assets and liabilities approximate carrying values due to their current nature. The Company also carries notes payable and long-term debt at historical cost less discounts from warrants issued as loan financing costs; however, fair
values of these debt instruments are estimated for disclosure purposes based upon the present value of the estimated cash flows at market interest rates applicable to similar instruments.

Derivative instruments:

The Company
generally does not use derivative financial instruments to hedge exposures to cash-flow, market or foreign-currency risks. However, the Company and its consolidated subsidiaries have entered into certain other financial instruments and contracts,
such as debt financing arrangements and freestanding warrants with features that are either (i) not afforded equity classification, (ii) embody risks not clearly and closely related to host contracts, or (iii) may be net-cash settled
by the counterparty. These instruments are required to be carried as derivative liabilities, at fair value.



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JUNE 30, 2010 AND 2009



3. Significant accounting policies (continued):



The Company estimates fair values of derivative financial instruments using various techniques (and
combinations thereof) that are considered to be consistent with the objective measuring of fair values. In selecting the appropriate technique(s), management considers, among other factors, the nature of the instrument, the market risks that it
embodies and the expected means of settlement. For less complex derivative instruments, such as free-standing warrants, the Company generally uses the Black-Scholes-Merton option valuation technique because it embodies all of the requisite
assumptions (including trading volatility, estimated terms and risk free rates) necessary to fair value these instruments. For forward contracts that contingently require net-cash settlement as the principal means of settlement, management projects
and discounts future cash flows applying probability-weightage to multiple possible outcomes. Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to,
change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques are highly volatile and sensitive to changes in the Companys trading market price which has
high-historical volatility. Since derivative financial instruments classified as liabilities are initially and subsequently carried at fair values, the Companys income will reflect the volatility in these estimate and assumption changes.

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 and, as such, are not recognized until product delivery.

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 the 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. 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. 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. Such costs include payroll and related costs, facility costs, consulting and professional fees, equipment rental and maintenance, lab supplies, and certain other indirect cost
allocations that are directly related to research and development activities.

Shipping and handling costs:

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

Recent accounting pronouncements:

In
December 2007, the FASB issued new guidance requiring non-controlling interests to be treated as a separate component of equity, not as a liability or other item outside of permanent equity. This new guidance is applicable to the accounting for
non-controlling interests and transactions with non-controlling interest holders in consolidated financial statements and is effective for fiscal years beginning on or after December 15, 2008. Accordingly, we have adopted this new pronouncement
as of October 1, 2009 resulting in a change in stockholders equity on our opening fiscal year 2010 consolidated statement of financial condition; however, we do not expect the adoption of this pronouncement to have a material effect on
our results of operations or cash flows.



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(DEBTOR-IN-POSSESSION)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JUNE 30, 2010 AND 2009



3. Significant accounting policies (continued):



In June 2008, the FASB issued new guidance for determining whether an equity-linked financial instrument
(or embedded feature) is indexed to an entitys own stock. The Company adopted this new guidance effective October 1, 2009. Certain of the Companys outstanding warrants and convertible debt contain features which fall under the scope
of this guidance resulting in a decrease of $7.0 million and $9.3 million to the October 1, 2009 balances of additional paid-in capital and accumulated deficit respectively. These adjustments are recorded on the line item cumulative
effect of change in accounting principle on the Companys condensed consolidated statement of stockholders deficit for the nine months ended June 30, 2010 and are discussed in more detail in Notes 7 and 8 below.

In June 2009, the FASB issued new guidance amending the existing pronouncement related to the consolidation of variable interest entities. This new
guidance requires the reporting entities to evaluate former Qualifying Special Purpose Entity for consolidation, changes the approach to determine a variable interest entitys primary beneficiary from a quantitative assessment to a qualitative
assessment designed to identify a controlling financial interest, and increases the frequency of required assessments to determine whether we are the primary beneficiary of any variable interest entities which we are a party to. This new guidance is
not effective for us until October 1, 2010 and earlier adoption is prohibited. We are currently evaluating the impact the adoption of this new guidance will have on our consolidated financial statements.

Effective during the quarter ended June 30, 2010, the Financial Accounting Standards Board (the FASB) issued Accounting Standards Update
(ASU) 2010-09 Subsequent Events amending Accounting Standards Codification (ASC) 855 Subsequent Events to state that an entity that is a SEC filer is required to evaluate subsequent events through the
date that the financial statements are issued but it is not required to disclose the date. The amendment is effective commencing with the quarter ended June 30, 2010. The adoption of ASU 2010-09 did not have a significant impact on our
financial statements.

4. Liquidity and management plans:

During the nine months ended June 30, 2010, the Company incurred a net loss of $12.0 million. On June 30, 2010, the Company had an accumulated
deficit of approximately $153 million and working capital deficit of approximately $84 million which includes liabilities subject to compromise through the Companys Chapter 11 proceedings. The Companys independent auditors issued a
going concern uncertainty on the financial statements for the year ended September 30, 2009, citing significant losses and working capital deficits at that date, which raised substantial doubt about the Companys ability to
continue as a going concern.

Regulatory strategy and commercialization expenditures:

The Company completed its Phase 3 clinical trial of BiovaxID for the indication of FL. Under the Companys current regulatory
strategy, the Company is performing in-depth analyses of the available clinical trial data in preparation for submission of the data to the FDA and EMEA. Based upon a recommendation from the independent Data Monitoring Committee (DMC)
which monitors the safety and efficacy profile of the clinical trial and the Companys analysis of the available clinical trial data, the Company plans to seek accelerated and conditional approval of
BiovaxID® with the FDA, EMEA, and other international agencies, for the indication of FL. Pending the outcome of
these anticipated applications for accelerated and conditional approval, the Company has ceased enrolling new patients in its Phase 3 clinical trial and has discontinued most clinical trial activities which had the effect of decreasing clinical
trial expenses compared to those recorded for prior periods. Accelerated or conditional approval would require the Company to perform additional clinical studies as a condition to continued marketing of BiovaxID. Accordingly, should the Company
receive accelerated and/or conditional approval, clinical trial activities and related expenses may return to the levels experienced in periods prior to the application for conditional approval until any such clinical trial activity is
completed. There can be no assurances the Company will receive accelerated or conditional approval. The Companys ability to timely access required financing will continue to be essential to support the ongoing commercialization
efforts. The Companys inability to obtain required funds or any substantial delay in obtaining required funds will have a material adverse effect on the ongoing commercialization efforts.



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JUNE 30, 2010 AND 2009



4. Liquidity and management plans (continued):



Advances to the Company by Accentia:

As of June 30, 2010, the Company has borrowed approximately $13.0 million from Accentia. The advances by Accentia consist of cash loans, payments
directly to third parties on the Companys behalf, allocated inter-company expenses, accrued interest of $2.3 million, and amounts owed in connection with the conversion of notes outstanding at the time of Accentias initial investment in
June 2003. The balance of the inter-company loans is evidenced by three secured promissory demand notes which accrue interest at the prime rate and are due on demand. On February 5, 2008, the terms of these notes were modified to allow Accentia
the option (the Conversion Option) to convert part or all of the principal and interest due into shares of the Companys common stock at a conversion price of $1.10 per share (the Conversion Price) subject to adjustment
in the event of certain recapitalizations or in the event that the Company offer its stock at prices below the Conversion Price. In September 2008, as provided for under the adjustment provisions of the Conversion Option, the conversion price was
modified to allow Accentia to convert part or all of the principal and interest due into shares of the Companys common stock at a conversion price of $0.32 per share. The Company granted piggyback and demand registration rights to Accentia for
the shares underlying this Conversion Option. As a result of the November 10, 2008 Chapter 11 filings by the Company and its subsidiaries, any attempts to collect pre-petition amounts due on these notes (approximately $12.6 million including
accrued interest) and all actions to enforce or otherwise effect our obligations and payments under any debt facility were automatically stayed pursuant to provisions of federal bankruptcy law.

Debtor-in-Possession Financing:

On December 22, 2008, the Company completed the closing of a debtor in possession financing transaction (the DIP
Transaction) with Corps Real, LLC, a Illinois limited liability company, the principal owners of which are directors of or affiliated with directors of the Company (the DIP Lender). Pursuant to the transaction, the DIP Lender
provided to the Company a secured line of credit in an amount of up to $3.0 million in accordance with an order entered by the Bankruptcy Court. As of June 30, 2010, the DIP Lender has advanced $1.39 million to the
Company1.

Additional expected financing activity:

Management intends to attempt to meet its cash requirements through proceeds from its cell culture and instrument manufacturing activities, the use of
cash on hand, trade vendor credit, restructuring of our outstanding debt obligations through the Chapter 11 reorganization proceedings, short-term borrowings, debt and equity financings, and strategic transactions such as collaborations and
licensing. The Companys ability to continue present operations, pay its liabilities as they become due, and meet its obligations for vaccine development is dependent upon the Companys ability to obtain significant external funding in the
very short term. Additional sources of funding have not been established; however, additional financing is currently being sought by the Company from a number of sources, including the sale of equity or debt securities, strategic collaborations,
recognized research funding programs, as well as domestic and/or foreign licensing of the BiovaxID. Management is currently in the process of exploring these various financing alternatives. There can be no assurance that the Company will be
successful in securing such financing at commercially acceptable terms, if at all. Accordingly, the Companys ability to continue present operations, pay the Companys existing liabilities as they become due, and continue the
Companys ongoing research and product development is dependent upon its ability to successfully complete the Chapter 11 reorganization process and to obtain significant external funding from sources other than Accentia in the very near term,
which raises substantial doubt about the Companys ability to continue as a going concern. If adequate funds are not available from the foregoing sources in the near term, or if the Company determines it to otherwise be in the Companys
best interest, the Company may consider additional strategic financing options, including sales of assets, or the Company may be required to delay, reduce the scope of, or eliminate one or more of its research or development programs or curtail some
or all of its commercialization efforts.



|1 | Subsequent to the period of this report and as of August 16, 2010, the DIP Lender has advanced an aggregate total of $1.64 million to the Company pursuant to
the terms of the DIP Transaction.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JUNE 30, 2010 AND 2009



5. Concentrations of credit risk and major customer information

The Company has granted 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 credit evaluations of its customers on an ongoing basis. Four customers accounted for 79% of revenues for the three months ended June 30, 2010 while three customers accounted for 54% of revenues for the nine
months ended June 30, 2010. Two customers accounted for 63% of trade accounts receivable as of June 30, 2010. Two customers accounted for 33% of revenues for the three months ended June 30, 2009, while one customer accounted for 16%
of revenues for the nine months ended June 30, 2009.

A significant amount of the Companys revenue has been derived from export
sales. The Companys export sales were 25% of revenues for the three months ended June 30, 2010, compared to 24% for the three months ended June 30, 2009. Export sales were 26% and 28% of revenues for the nine months ended
June 30, 2010 and 2009, respectively. For the three and nine months ended June 30, 2010, sales to customers in the United Kingdom accounted for 20% of total revenue, while sales to the United Kingdom accounted for 19% and 16% of total
revenue for the three and nine months ended June 30, 2009 respectively.

6. Inventories:

Inventories consist of the following:



|                |  |                          |         |                    |   |        
|--------------- |  | ------------------------ | ------- | ------------------ | - | -------
|                |  | June 30, 2010(Unaudited) |         | September 
30,2009
|Finished goods  |  | $                        | 100,000 |                    | $ | 147,000
|Work-in-process |  |                          | 43,000  |                    |   | 8,000  
|Raw materials   |  |                          | 327,000 |                    |   | 354,000
|                |  |                          |         |                    |   |        
|                |  |                         
|                |  | $                        | 470,000 |                    | $ | 509,000
|                |  |                          |         |                    |   |        

7. Related party transactions:

Notes payable, related party consists of the following:



|                                              |  |                          |           |                    |   |          
|--------------------------------------------- |  | ------------------------ | --------- | ------------------ | - | ---------
|                                              |  | June 30, 2010(Unaudited) |           | September 
30,2009
|Accentia promissory demand notes  prime rate |  | $                        | 464,000   |                    | $ | 332,000  
|Debtor-in-possession note  16%               |  |                          | 1,390,000 |                    |   | 1,250,000
|Accrued interest                              |  |                          | 120,000   |                    |   | 82,000   
|                                              |  |                          |           |                    |   |          
|                                              |  |                         
|                                              |  | $                        | 1,974,000 |                    | $ | 1,664,000
|                                              |  |                          |           |                    |   |          

Accentia promissory demand notes:

Notes payable, related parties includes amounts advanced under three secured promissory demand notes issued to Accentia, bearing interest at the prime
rate. On February 5, 2008, the terms of these notes were modified to allow Accentia the option to convert part or all of the principal and interest due into shares of the Companys common stock at a conversion price of $1.10 per share
subject to adjustment in the event of certain recapitalizations or in the event that the Company offers its stock at prices below the conversion price. On September 22, 2008, as provided for under the adjustment provisions of the conversion
option, the conversion price was modified to allow Accentia to convert part or all of the principal and interest due into shares of the Companys common stock at a conversion price of $0.32 per share. The Company granted piggyback and demand
registration rights to Accentia for the shares underlying this Conversion Option.



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JUNE 30, 2010 AND 2009



7. Related party transactions (continued):



In June 2008, the FASB issued new guidance for determining whether embedded features, such as the
conversion option existing under the Accentia notes, are indexed to an entitys own stock. As a result of adopting this new guidance effective October 1, 2009, the Company was required to separately report both the notes payable and the
fair value of the conversion option granted to Accentia on the Companys balance sheet as of June 30, 2010. As the conversion option was granted to Accentia prior to the Companys Chapter 11 petition, the fair value of this liability
is included in liabilities subject to compromise on the Companys balance sheet as of June 30, 2010. Furthermore, the balance due under these notes was $12.0 million, including accrued interest, as of the date of the Companys
Chapter 11 petition, and this balance has also been recorded as a liability subject to compromise on the Companys balance sheet as of June 30, 2010 and September 30, 2009 (Note 8). Since the Companys Chapter 11 petition, it has
continued to draw on this line of credit through payments made by Accentia directly to third parties on the Companys behalf, as well as through the allocation of inter-company expenses for shared resources and these amounts are included in
notes payable, related party. The Company has continued to accrue interest at the prime rate on the outstanding principal due under the notes.

The new guidance issued by the FASB required the Company to make an adjustment to the opening balance of equity on the Companys balance sheet on
October 1, 2009 which was determined based on the amounts that would have been recognized if the guidance had been applied from the issuance date of the conversion option. As a result, the Company recorded a cumulative effect of change in
accounting principle which decreased the opening balances of additional paid-in capital by $4.9 million and accumulated deficit by $8.6 million on the Companys condensed consolidated statement of stockholders deficit for the nine months
ended June 30, 2010.

Debtor-in-possession note:

On December 22, 2008, the Company completed the closing of the DIP Transaction with the DIP Lender. Pursuant to the transaction,
the DIP Lender provided to the Company a secured line of credit in an amount of up to $3.0 million in accordance with an order entered by the Bankruptcy Court. As of June 30, 2010, the DIP Lender had advanced $1.39 million to the Company2.

The DIP Transaction was memorialized by a Secured Promissory Note (the
DIP Note) and Security Agreement dated December 22, 2008. The following describes certain material terms of the DIP Transaction:



| |  |  | Principal Amount- Up to $3.0 million
| | - |  | ------------------------------------



| |  |  | Priority and Security- The Facility is a secured super-priority loan to a Debtor-in-Possession and is secured by all assets of the Company that
is senior to all prior and existing liens of Biovest.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Advances under the Facility- For all amounts in excess of $1.0 million, Lender and the Company shall within 30 days of the entry of the Initial
Order agree on a list of milestone events to be achieved by the Company through use of these Advances, and the Company shall be required to make a written request(s) detailing the amount and use and Lender shall in its reasonable
discretion approve or reject the written request based upon whether the Company demonstrates reasonable progress in achieving the agreed milestones.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Term- All loans outstanding under the Facility (the Loans)shall become due and payable on the earlier of:
(i) December 31, 2010; (ii) dismissal of the Chapter 11 Proceeding; (iii) conversion of the Chapter 11 Proceeding to a Chapter 7 Proceeding; or (iv) confirmation of the Companys Plan of Reorganization.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Interest- Loans will bear interest at 16% per annum computed on a daily basis based on the principal amount outstanding. Interest shall be
paid as follows: (i) 10% interest shall be paid monthly and (ii) 6% interest shall accrue and be paid at maturity.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|2 | Subsequent to the period of this report and as of August 16, 2010, the DIP Lender has advanced a total of $1.64 million to the Company pursuant to the terms of the DIP
Transaction.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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BIOVEST INTERNATIONAL, INC AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JUNE 30, 2010 AND 2009



7. Related party transactions (continued):



| |  |  | Points- At the Closing, the Company paid in cash 4% of the initial $1.0 million of the Facility ($40,000). In the quarter ended
December 31, 2009, the Company borrowed in excess of $1.0 million, resulting in the payment of an additional $40,000. Should the Company borrow in excess of $2.0 million, the Company will be required to pay in cash 4% of the third $1.0 million
of the Facility ($40,000).
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Expenses- The Company issued payment of $25,000 in costs at the Closing.
| | - |  | ------------------------------------------------------------------------



| |  |  | Prepayment- Loans may be prepaid at any time in an amount of $50,000 or multiples of $50,000 in excess thereof, provided, however, that the
Companys senior secured lender (Laurus and the Valens Funds) provides its consent to each prepayment via written notification to the Company and Lender.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

8. Liabilities subject to compromise:

As a result of the Companys Chapter 11 filings, the payment of prepetition indebtedness may be subject to compromise or other treatment under
the Debtors Plan of Reorganization. Although actions to enforce or otherwise effect payment of prepetition liabilities are stayed, at hearings held in November 2008, the Bankruptcy Court granted approval of the Debtors administrative
motions, generally designed to stabilize the Debtors operations and covering, among other things, human capital obligations, business operations, tax matters, cash management, utilities, case management and retention of professionals.

The Debtors have been paying and intend to continue to pay undisputed post-petition claims in the ordinary course of business. In addition,
the Debtors may reject prepetition executory contracts and unexpired leases with respect to the Debtors operations, with the approval of the Bankruptcy Court. Damages resulting from rejection of executory contracts and unexpired leases are
treated as general unsecured claims and will be classified as liabilities subject to compromise.

On April 8, 2009, the Bankruptcy Court
entered an order establishing June 1, 2009 as the claims bar date. The claims bar date is the date by which claims against the Debtors arising prior to the Debtors Chapter 11 filings must be filed if the claimants wish to receive any
distribution under a confirmed Plan of Reorganization in the Chapter 11 process. On April 8, 2009, the Debtors commenced notification, including publication, to all known actual and potential creditors informing them of the claims bar date
and the required procedures with respect to the filing of proofs of claim. As part of the reorganization case, claims timely filed by the bar date will ultimately be reconciled against the amounts listed by the Debtors in their Schedules of Assets
and Liabilities (as amended). To the extent that the Debtors object to any filed claims, the Bankruptcy Court will make the final determination as to the amount, nature, and validity of such claims. Moreover, the treatment of allowed claims against
the Debtors will be determined pursuant to the terms of a Chapter 11 Plan of Reorganization approved by the Bankruptcy Court. Accordingly, the ultimate amount and treatment of such liabilities has not yet been determined.

On May 14, 2010, the Company filed its Joint Plan of Reorganization. Subsequent to the period of this report, on July 2, 2010, the Company
filed its Joint Disclosure Statement with the Bankruptcy Court. On August 9, 2010, the Bankruptcy Court held a hearing on the Joint Disclosure Statement and scheduled a confirmation hearing on the Joint Plan of Reorganization for
September 22, 2010.

ASC Topic 852 requires prepetition liabilities that are subject to compromise to be reported at the amounts expected
to be allowed, even if they may be settled for lesser amounts. The amounts currently classified as liabilities subject to compromise may be subject to future adjustments depending on Bankruptcy Court actions, further developments with respect to
disputed claims, determinations of the secured status of certain claims, the values of any collateral securing such claims, or other events.



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##### Table of Contents

BIOVEST INTERNATIONAL, INC AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JUNE 30, 2010 AND 2009



8. Liabilities subject to compromise (continued):



Liabilities subject to compromise consist of the following:



|                                                                        |  |              |            |   |                   |   |            |  
|----------------------------------------------------------------------- |  | ------------ | ---------- | - | ----------------- | - | ---------- | -
|                                                                        |  | June 30,2010 |            |   | September 30,2009 |  
|Secured promissory notes payable to Laurus and affiliates               |  | $            | 14,681,000 |   |                   | $ | 14,681,000 |  
|Secured promissory demand notes payable to Accentia (Note 7)            |  |              | 10,279,000 |   |                   |   | 10,279,000 |  
|Secured convertible debentures  15%                                    |  |              | 1,450,000  |   |                   |   | 1,450,000  |  
|Unsecured promissory notes payable to Pulaski Bank                      |  |              | 1,000,000  |   |                   |   | 1,000,000  |  
|Unsecured promissory note payable to Southwest Bank                     |  |              | 200,000    |   |                   |   | 200,000    |  
|Unsecured convertible promissory note  10%                             |  |              | 1,000,000  |   |                   |   | 1,000,000  |  
|Minimum royalty due to Laurus on net sales of AutovaxID instrumentation |  |              | 7,500,000  |   |                   |   | 7,500,000  |  
|Accounts payable                                                        |  |              | 3,595,000  |   |                   |   | 3,817,000  |  
|Derivative liabilities                                                  |  |              | 24,112,000 |   |                   |   | 2,080,000  |  
|Provision for indemnity agreements                                      |  |              | 1,833,000  |   |                   |   | 3,895,000  |  
|Other                                                                   |  |              | 1,120,000  |   |                   |   | 1,120,000  |  
|Accrued interest and fees                                               |  |              | 16,304,000 |   |                   |   | 11,978,000 |  
|                                                                        |  |              |            |   |                   |   |            |  
|                                                                        |  |              | 83,074,000 |   |                   |   | 59,000,000 |  
|Less: unamortized discounts                                             |  |              | (1,342,000 | ) |                   |   | (5,020,000 | )
|                                                                        |  |              |            |   |                   |   |            |  
|                                                                        |  | $            | 81,732,000 |   |                   | $ | 53,980,000 |  
|                                                                        |  |              |            |   |                   |   |            |  

Secured notes payable to Laurus and affiliates:

The notes issued to Laurus Master Fund, Ltd (Laurus) and affiliates consist of a $7.799 million note payable to Laurus (originated March
2006), a $0.250 million note payable to Valens Offshore SPV II, Corp (originated October 2007), a $0.245 million note payable to Valens U.S. SPV I, LLC (originated October 2007), a $3.6 million note payable to Valens Offshore SPV II, Corp
(originated December 2007), and a $4.9 million note payable to Valens U.S. SPV I, LLC (originated December 2007). All notes are secured by all assets of the Company and are subordinate only to the DIP Lender debtor-in-possession financing discussed
in Note 7 above. Through a series of modifications, all notes had a maturity date of July 31, 2009 and accrued interest at 30% per year. The Company has continued to accrue interest at this contractual rate while in Chapter 11.
Additionally, in July 2008, a loan modification fee of $4.4 million was added to the amounts due under the notes, and has been included in line item accrued interest and fees in the table above.

As a result of the November 10, 2008 Chapter 11 filings by the Company and its subsidiaries, all actions to enforce or otherwise effect our
obligations and payments under any debt facility were automatically stayed pursuant to provisions of federal bankruptcy law.

Secured
convertible debentures:

On September 22, 2008 and September 26, 2008, the Company entered into definitive agreements with three
investors, all of whom are affiliates, related to a private placement of its 15% Secured Convertible Debentures (the Debentures). The definitive documents permit Biovest to place up to $5.0 million in principal amount of its Debentures
(the Private Placement). The Company sold $1.150 million in principal amount of its Debentures (the Initial Tranche) and sold an additional $0.3 million in principal amount of its Debentures to another individual
investor effective as of October 15, 2008 (the Second Tranche). The Debentures are convertible into the Companys common stock at $0.32 per share (the Conversion Price) and, provided certain conditions are
satisfied, the Company may, at its option, redeem the Debentures for an amount equal to 110% of the then outstanding principal. Each purchaser of Debentures in the Private Placement has the right to elect to be repaid in one of the following
methods: a) on March 22, 2009, the Debentures amortized through twelve equal monthly payments or b) a single lump-sum payment of all remaining outstanding principal and accrued interest shall be made on June 30, 2010. All principal
amortization payments and monthly interest payments would be made in cash or the Company may elect to make the payments in shares of its common stock.



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BIOVEST INTERNATIONAL, INC AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JUNE 30, 2010 AND 2009



8. Liabilities subject to compromise (continued):



The Companys ability to pay interest with shares of Companys common stock will be subject to
specified conditions, including the existence of an effective registration statement covering the resale of the shares issued in payment of redemption amount unless the shares may be resold pursuant to Rule 144 without volume or manner-of-sale
restrictions or current public information requirements. Any common stock delivered in satisfaction of an amortization payment will be valued at the lesser of (i) the conversion price in effect at the time of the amortization payment or
(ii) 90% of the average of the daily volume weighted average price of the shares for the 20 trading days prior to the amortization payment date. The Company has the ability to make payment of interest with shares of the Companys common
stock if the conditions stated herein are not met, upon the consent of the holder of the Debenture, and in that event the common stock delivered in satisfaction of an amortization payment will be valued at the lesser of (i) the conversion price
in effect at the time of the amortization payment or (ii) 80% of the average of the daily volume weighted average price of the shares for the 20 trading days prior to the amortization payment date.

In the event that the Company issues or grants in the future any rights to purchase any of the Companys common stock, or other securities
convertible into the Companys common stock, for an effective per share price less than the Conversion Price or in the instance of warrants the Exercise Price then in effect, the conversion price of all unconverted Debentures and the Exercise
Price of all unexercised Warrants will be decreased to equal such lower price. The above-described adjustments to the Conversion Price and Exercise Price for future stock issuances by the Company will not apply to certain exempt issuances, including
stock issuances pursuant to employee stock option plans and strategic transactions.

As a result of the November 10, 2008 Chapter 11
filings by the Company and its subsidiaries, all actions to enforce or otherwise effect our obligations and payments under any debt facility were automatically stayed pursuant to provisions of federal bankruptcy law.

Management concluded that the conversion features associated with the debentures were derivative financial instruments and required bifurcation under
applicable accounting standards. Proceeds from the debenture were allocated to debt and derivative liabilities based on the relative fair values of the debt and derivatives. The resulting discount on the debt will be amortized to interest expense
over the term of the debentures using the effective interest method.

Pulaski Bank:

In January and March 2007, the Company issued two unsecured promissory notes to Pulaski Bank and Trust Company of St. Louis, MO (Pulaski
Bank) in the aggregate amount of $1.75 million. Through a series of modifications the notes were amended to mature on March 31, 2009. The Company has accrued interest at the default rate of prime plus 5% while in Chapter 11. On
December 29, 2008, Pulaski Bank called the guarantees resulting in an aggregate payment of $1.0 million by the guarantors of the notes. As a result of the November 10, 2008 Chapter 11 filings by the Company and its subsidiaries, all
actions to enforce or otherwise effect our obligations and payments under any debt facility were automatically stayed pursuant to provisions of federal bankruptcy law.

Southwest Bank:

On June 26, 2007,
the Company issued an unsecured promissory note to Southwest Bank Creve Coeur Financial Center of St. Louis, MO (Southwest Bank) in the amount of $0.2 million. On December 26, 2008, the note matured. The Company has accrued
interest at the default rate of prime plus 4% while in Chapter 11. In January 2009, Southwest Bank called the guarantee resulting in an aggregate payment of $0.2 million by the guarantor of the note. As a result of the November 10, 2008
Chapter 11 filings by the Company and its subsidiaries, all actions to enforce or otherwise effect our obligations and payments under any debt facility were automatically stayed pursuant to provisions of federal bankruptcy law.



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BIOVEST INTERNATIONAL, INC AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JUNE 30, 2010 AND 2009



8. Liabilities subject to compromise (continued):



Unsecured convertible promissory note:

On May 9, 2008, the Company entered into a financing transaction with one of the Companys directors, whereby the Company issued a convertible
promissory note in the amount of $1.0 million, bearing interest at 10% and with a maturity date of the earlier to occur of one year from the date of issuance, or, at the election of the lender, upon closing of a financing transaction resulting in
net proceeds to the Company of at least $15.0 million. Interest only is payable monthly and may be paid by issuance of the Companys restricted common stock, calculated at a price of $0.50 per share. At any time after issuance of the note the
lender may elect to convert all or any portion of the outstanding principal and accrued interest on the note into common stock of the Company, at a conversion price equal to $0.50 per share. As part of this transaction the Company issued to the
lender a warrant to purchase up to 2.0 million shares of the Companys common stock at an exercise price of $0.50 per share, with cashless exercise provisions and a 7-year term. In addition, the Company entered into an option agreement
with the lender whereby the lender may elect, at any time before the earlier to occur of i) notice of a signed term sheet for a financing of specified magnitude or ii) maturity of the note as defined therein, to increase his loan by an amount of up
to the full original loan amount ($1.0 million) upon the same terms as contained in the original note, including issuance of additional warrants with the same term, exercise price, and cashless exercise provisions. As a result of the
November 10, 2008 Chapter 11 filings by the Company and its subsidiaries, all actions to enforce or otherwise effect our obligations and payments under any debt facility were automatically stayed pursuant to provisions of federal
bankruptcy law.

Under applicable accounting guidance the Company was required to value the warrants and beneficial conversion feature granted
with this debt (BCF) separately from the note. The value assigned to the warrants ($0.25 million), the BCF ($0.36 million) and the option agreement ($0.39 million) was initially recorded as a discount to the face value of the note and an
offsetting increase to additional paid-in capital. The debt discount ($1.0 million aggregate) was amortized to interest expense over the life of the note using the effective interest method. The Company has continued to accrue interest at the
contractual rate of 10% while in Chapter 11.

Royalty due on AutovaxID instrumentation:

On April 17, 2007, the Company executed an amendment agreement with its senior lender, Laurus, to defer payments of principal on its $7.799 million
loan. As consideration for the forbearance the Company granted to Laurus a non-cancelable royalty equal to three percent of world-wide net sales of AutovaxID instruments for a period of five years commencing on May 31, 2007. Under the
terms of the royalty agreement the Companys royalty payments to Laurus are required to aggregate to a minimum of $8.0 million, and are required to be paid quarterly. On December 31, 2007, a payment of $0.5 million was made on the royalty
due, leaving a remaining balance of $7.5 million due on May 31, 2012. The Company recorded the royalty liability based on the present value of the minimum payments (discounted at an annual rate of 11%) due under the agreement. As a result of
the November 10, 2008 Chapter 11 filings by the Company and its subsidiaries, all actions to enforce or otherwise effect our obligations and payments under any debt facility were automatically stayed pursuant to provisions of federal
bankruptcy law.

Accounts Payable:

Accounts payable subject to compromise decreased by approximately $0.2 million from September 30, 2009 to June 30, 2010, as the Company reached
an agreement with its principal auditors for the cancellation of fees incurred prior to the Companys voluntary petition of reorganization on November 10, 2008.



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##### Table of Contents

BIOVEST INTERNATIONAL, INC AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JUNE 30, 2010 AND 2009



8. Liabilities subject to compromise (continued):



Derivative liabilities:

The Company does not use derivative financial instruments to hedge exposures to cash-flow, market or foreign-currency risks. However, the Company and its
consolidated subsidiaries have entered into certain other financial instruments and contracts, such as debt financing arrangements and freestanding warrants with features that are either (i) not afforded equity classification, (ii) embody
risks not clearly and closely related to host contracts, or (iii) may be net-cash settled by the counterparty. These instruments are required to be carried as derivative liabilities, at fair value.

The following table discloses the fair value of the Companys derivative liabilities and their location in the consolidated balance sheets as of
June 30, 2010 and September 30, 2009. The Company held no asset derivatives at either reporting date.



|                                                                     |  |                                  |  |                    |            |                        |                                  |           |   |          
|-------------------------------------------------------------------- |  | -------------------------------- |  | ------------------ | ---------- | ---------------------- | -------------------------------- | --------- | - | ---------
|                                                                     |  | Liability Derivatives           
|                                                                     |  | June 30, 2010                    |  | September 30, 2009
|                                                                     |  | Balance Sheet Location           |  | FairValue          |            | Balance Sheet Location |                                  | FairValue
|                                                                     |  |                                  |  |                   
|Derivatives designated as hedging instruments                        |  | none                             |  | $                  |           |                        | none                             |           | $ |         
|                                                                     |  |                                  |  |                   
|Derivatives not designated as hedging instruments                    |  |                                  |  |                    |            |                        |                                  |           |   |          
|                                                                     |  |                                  |  |                   
|Biovax Investment, LLC investor put option (Note 12)                 |  | Liabilities subject tocompromise |  |                    | 132,000    |                        | Liabilities subject tocompromise |           |   | 122,000  
|                                                                     |  |                                  |  |                   
|AutovaxID Investment, LLC investor put option (Note12)               |  | Liabilities subject tocompromise |  |                    | 82,000     |                        | Liabilities subject tocompromise |           |   | 75,000   
|                                                                     |  |                                  |  |                   
|Derivatives resulting from issuance of Secured Convertible Debenture |  | Liabilities subject tocompromise |  |                    | 2,665,000  |                        | Liabilities subject tocompromise |           |   | 1,833,000
|                                                                     |  |                                  |  |                   
|Outstanding warrants with contingent exercise provisions             |  | Liabilities subject tocompromise |  |                    | 9,187,000  |                        | Liabilities subject tocompromise |           |   | 50,000   
|                                                                     |  |                                  |  |                   
|Accentia conversion option                                           |  | Liabilities subject tocompromise |  |                    | 12,046,000 |                        | N/A                              |           |   |         
|                                                                     |  |                                  |  |                    |            |                        |                                  |           |   |          
|                                                                     |  |                                  |  |                   
|Total derivatives not designated as hedging instruments              |  |                                  |  |                    | 24,112,000 |                        |                                  |           |   | 2,080,000
|                                                                     |  |                                  |  |                    |            |                        |                                  |           |   |          
|                                                                     |  |                                  |  |                   
|Total derivatives                                                    |  |                                  |  | $                  | 24,112,000 |                        |                                  |           | $ | 2,080,000
|                                                                     |  |                                  |  |                    |            |                        |                                  |           |   |          

In June 2008, the FASB issued new guidance for determining whether an
equity-linked financial instrument or embedded features within financial instruments are indexed to an entitys own stock. As a result of this guidance, the Company was required to record conversion features associated with the notes
outstanding to Accentia, as well as certain of the Companys outstanding warrants containing contingent exercise provisions, as liabilities. The Company adopted this new guidance effective October 1, 2009.



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BIOVEST INTERNATIONAL, INC AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JUNE 30, 2010 AND 2009



8. Liabilities subject to compromise (continued):



Provision for indemnity agreements:

The notes issued to Pulaski and Southwest Banks are guaranteed by individuals affiliated with the Company or Accentia. The Company agreed to indemnify and
hold harmless each guarantor should their guarantees be called by the lenders. In addition, in the event of default by the Company resulting in a payment to the lender by the guarantors, the Company agreed to compensate each affected guarantor by
issuance of that number of shares of the Companys restricted common stock determined by dividing 700% of the amount guaranteed by $1.10. On December 29, 2008, Pulaski Bank called the guarantees resulting in an aggregate payment of $1.0 million
by the guarantors. In January 2009, Southwest Bank called its guarantee resulting in an aggregate payment of $0.2 million by the guarantor. As a result of their indemnification agreements, the Company originally recorded a provision for
approximately 7.6 million shares of the Companys common stock valued using the trading price of the Companys stock at each reporting date. For the quarter ended March 31, 2010, the Company reached an agreement with the guarantors
whereby the indemnities will be valued using a price of $0.24 per share, which represents the closing price of the Companys stock on November 9, 2008, the day prior to the Companys petition for reorganization, and represents the amount
that will be allowed as an unsecured claim of the guarantors in the Companys reorganization proceedings (approximately $1.8 million).

9. Stock based compensation:

The fair
value of each option award is estimated on the date of grant using the Black-Scholes-Merton valuation model that uses assumptions for expected volatility, expected dividends, expected term, and the risk-free interest rate. Expected volatilities are
based on historical volatility of peer company stock due to the limited trading history of the Companys common shares as well as other factors estimated over the expected term of the options. The expected term of options granted is derived
using the simplified method which computes expected term as the average of the sum of the vesting term plus the contract term. This method is used because the Company does not currently have adequate historical option exercise or
forfeiture information as a basis to determine expected term. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the period of the expected term.

Common stock options outstanding and exercisable as of June 30, 2010 are as follows:



|                               |  |            |   |  |                           |      |                                  |      |                          |   |           
|------------------------------ |  | ---------- | - |  | ------------------------- | ---- | -------------------------------- | ---- | ------------------------ | - | ----------
|                               |  | Shares     |   |  | WeightedAve.ExercisePrice |      | WeightedAveContractualLife
(yrs) |      | AggregateIntrinsic Value
|Outstanding at October 1, 2009 |  | 12,937,557 |   |  | $                         | 0.42 |                                  | 6.86 |                          | $ | 2,853,000 
|Granted                        |  | 14,030,000 |   |  |                           | 0.70 |                                  |      |                          |   |           
|Exercised                      |  |           |   |  |                           |     |                                  |      |                          |   |           
|Cancelled                      |  | (35,071    | ) |  |                           | 0.44 |                                  |      |                          |   |           
|Outstanding at June 30, 2010   |  | 26,932,486 |   |  |                           | 0.56 |                                  | 7.90 |                          |   | 23,324,426
|                               |  |            |   | 
|Exercisable at June 30, 2010   |  | 6,609,153  |   |  | $                         | 0.76 |                                  | 4.68 |                          | $ | 4,452,526 

On February 22, 2010, the
Companys Board of Directors (the Board) authorized the issuance of incentive stock options under the Companys 2007 Equity Incentive Plan to the Companys employees, as well as the issuance of non-qualified stock options
to the members of the Board. Options were granted to purchase approximately 14.0 million shares of the Companys common stock, which vest upon the confirmation of the Companys plan for reorganization and the first to occur of
the following: (i) six months following the closing of a capital raise of a minimum of $5.0 million by the Company or; (ii) six months following effective date of the Companys plan for reorganization. Due to the conditional
vesting provisions of this grant, no expense related to this grant will be recognized in the Companys financial statements until these conditions have been met.



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BIOVEST INTERNATIONAL, INC AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JUNE 30, 2010 AND 2009



9. Stock based compensation (continued):



Non-vested employee stock options:



|                              |  |            |   |  |                                  |     
|----------------------------- |  | ---------- | - |  | -------------------------------- | ----
|                              |  | Shares     |   |  | Weighted AveGrant-DateFair Value
|Non-vested at October 1, 2009 |  | 6,326,667  |   |  | $                                | 0.04
|Granted                       |  | 14,030,000 |   |  |                                  | 0.47
|Vested                        |  | (23,334    | ) |  |                                  | 0.23
|Cancelled                     |  | (10,000    | ) |  |                                  | 0.04
|Non-vested at June 30, 2010   |  | 20,323,333 |   |  | $                                | 0.34

Common stock warrants outstanding and
exercisable as of June 30, 2010 are as follows:



|                               |  |            |  |                               |     
|------------------------------ |  | ---------- |  | ----------------------------- | ----
|                               |  | Shares     |  | WeightedAverage ExercisePrice
|Outstanding at October 1, 2009 |  | 32,064,155 |  | $                             | 0.35
|Issued                         |  |           |  |                               |    
|Exercised                      |  |           |  |                               |    
|Cancelled                      |  |           |  |                               |    
|                               |  |           
|Outstanding at June 30, 2010   |  | 32,064,155 |  |                               | 0.35
|                               |  |           
|Exercisable at June 30, 2010   |  | 31,164,155 |  | $                             | 0.32

10. Income (Loss) per share:

The following table reconciles the numerator and denominator of the basic and diluted income (loss) per share computation:



|                                                      |  |                             |             |   |                            |    |            |      |  |    |             |   |  |    |             |  
|----------------------------------------------------- |  | --------------------------- | ----------- | - | -------------------------- | -- | ---------- | ---- |  | -- | ----------- | - |  | -- | ----------- | -
|                                                      |  | Three Months EndedJune 
30, |             |   | Nine Months EndedJune 
30, |   
|                                                      |  | 2010                        |             |   | 2009                       |    |            | 2010 |  |    | 2009        |  
|Basic:                                                |  |                             |             |   |                            |    |            |      |  |    |             |   |  |    |             |  
|Net income (loss) attributable to common stockholders |  | $                           | 9,111,000   |   |                            | $  | (7,309,000 | )    |  | $  | (11,978,000 | ) |  | $  | (13,133,000 | )
|Weighted average common shares outstanding            |  |                             | 97,549,783  |   |                            |    | 97,549,783 |      |  |    | 97,549,783  |   |  |    | 97,487,085  |  
|                                                      |  |                             |             |   |                            |    |            |      |  |    |             |   |  |    |             |  
|                                                      |  |                             |             |  
|Basic earnings per common share                       |  | $                           | 0.09        |   |                            | ($ | 0.07       | )    |  | ($ | 0.12        | ) |  | ($ | 0.13        | )
|                                                      |  |                             |             |   |                            |    |            |      |  |    |             |   |  |    |             |  
|                                                      |  |                             |             |  
|Diluted:                                              |  |                             |             |   |                            |    |            |      |  |    |             |   |  |    |             |  
|Net income (loss) attributable to common stockholders |  | $                           | 9,111,000   |   |                            | $  | (7,309,000 | )    |  | $  | (11,978,000 | ) |  | $  | (13,133,000 | )
|Effect of conversion                                  |  |                             | (10,588,000 | ) |                            |    |           |      |  |    |            |   |  |    |            |  
|Total                                                 |  |                             | (1,477,000  | ) |                            |    | (7,309,000 | )    |  |    | (11,978,000 | ) |  |    | (13,133,000 | )
|Weighted average common shares outstanding            |  |                             | 97,549,783  |   |                            |    | 97,549,783 |      |  |    | 97,549,783  |   |  |    | 97,487,085  |  
|Effect of dilutive securities:                        |  |                             |             |   |                            |    |            |      |  |    |             |   |  |    |             |  
|Stock options and warrants                            |  |                             | 92,553,555  |   |                            |    |           |      |  |    |            |   |  |    |            |  
|Diluted weighted average common shares outstanding    |  |                             | 190,103,338 |   |                            |    | 97,549,783 |      |  |    | 97,549,783  |   |  |    | 97,487,085  |  
|                                                      |  |                             |             |   |                            |    |            |      |  |    |             |   |  |    |             |  
|                                                      |  |                             |             |  
|Diluted earnings per common share                     |  | $                           | (0.01       | ) |                            | ($ | 0.07       | )    |  | ($ | 0.12        | ) |  | ($ | 0.13        | )
|                                                      |  |                             |             |   |                            |    |            |      |  |    |             |   |  |    |             |  



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BIOVEST INTERNATIONAL, INC AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JUNE 30, 2010 AND 2009



11. Segment information:

The Company operates in three identifiable industry segments. The Companys cell culture products and services segment is engaged
in the production and contract manufacturing of biologic drugs and cell production for research institutions worldwide. 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. The therapeutic vaccine segment, which has generated no revenues to date and is focused on
developing BiovaxID®, as described earlier.

The Companys facilities expenses and other assets are not distinguished among the identifiable segments. Revenue and cost of sales information
about the Companys segments are as follows:



|                            |  |                             |           |   |                            |   |         |      |  |   |           |   |  |   |           |  
|--------------------------- |  | --------------------------- | --------- | - | -------------------------- | - | ------- | ---- |  | - | --------- | - |  | - | --------- | -
|                            |  | Three Months ended June 30, |           |   | Nine Months ended June 30, |  
|                            |  | 2010                        |           |   | 2009                       |   |         | 2010 |  |   | 2009      |  
|                            |  |                             |           |  
|Revenues                    |  |                             |           |   |                            |   |         |      |  |   |           |   |  |   |           |  
|                            |  |                             |           |  
|Instruments and Disposables |  | $                           | 1,274,000 |   |                            | $ | 451,000 |      |  | $ | 3,231,000 |   |  | $ | 1,557,000 |  
|Cell Culture Services       |  |                             | 292,000   |   |                            |   | 417,000 |      |  |   | 1,013,000 |   |  |   | 956,000   |  
|                            |  |                             |           |   |                            |   |         |      |  |   |           |   |  |   |           |  
|                            |  |                             |           |  
|Total Revenues              |  |                             | 1,566,000 |   |                            |   | 868,000 |      |  |   | 4,244,000 |   |  |   | 2,513,000 |  
|                            |  |                             |           |  
|Cost of Sales               |  |                             |           |   |                            |   |         |      |  |   |           |   |  |   |           |  
|Instruments and Disposables |  |                             | 608,000   |   |                            |   | 328,000 |      |  |   | 1,476,000 |   |  |   | 1,079,000 |  
|Cell Culture Services       |  |                             | 224,000   |   |                            |   | 247,000 |      |  |   | 723,000   |   |  |   | 771,000   |  
|                            |  |                             |           |   |                            |   |         |      |  |   |           |   |  |   |           |  
|                            |  |                             |           |  
|Total Cost of Sales         |  |                             | 832,000   |   |                            |   | 575,000 |      |  |   | 2,199,000 |   |  |   | 1,850,000 |  
|                            |  |                             |           |  
|Gross Margin ($)            |  | $                           | 734,000   |   |                            | $ | 293,000 |      |  | $ | 2,045,000 |   |  | $ | 663,000   |  
|Gross Margin (%)            |  |                             | 47        | % |                            |   | 34      | %    |  |   | 48        | % |  |   | 26        | %

12. New Market Tax Credit Transactions:

April 2006 NMTC
Transaction3

On April 25, 2006, the Companys wholly owned subsidiary, Biovax, Inc. (Biovax) closed a financing transaction (Transaction
I) that was structured in an effort to obtain certain perceived advantages and enhancements from the New Markets Tax Credit (NMTC) regulations adopted under the auspices of the United States Department of the Treasury in 2002 to
provide incentive for investing in businesses located in qualifying census tracts, or areas with a median income below the poverty line. The NMTC was provided for in the Community Renewal Relief Act of 2000 (the Act) and
permits taxpayers (whether companies or individuals) to claim credits against their Federal income taxes for up to 39% of qualified investments in the equity of Community Development Entities (CDE). CDE are privately managed investment
institutions that are certified to make Qualified Low-Income Community Investments (QLICI). The following parties were involved in Transaction I: Accentia, Biovests majority shareholder, Biolender, LLC (Biolender),
Biovax Investment Corp., Biovax Investment, LLC (Fund), U.S. Bancorp Community Investment Corporation (U.S. Bancorp), Telesis CDE Two, LLC (CDE), Telesis CDE Corporation, Biovax, and Laurus. Biovax is a qualified,
active low-income business and is eligible to receive investment capital under the NMTC regulations.



|3 | In July 2010, the Company and certain of its affiliates entered into an agreement (the Worcester Restructuring Agreement) with Telesis CDE Corporation and
Telesis CDE Two, LLC (collectively, Telesis), contingent upon submission to and approval by the Bankruptcy Court. The Worcester Restructuring Agreement effectively terminates all agreements and obligations of all parties pursuant to
Transaction I in consideration of retention by Telesis of an unsecured claim in the Companys Chapter 11 proceeding in the amount of $0.3 million along with a settlement payment in the amount of $85,000 to defray certain legal and
administrative expenses incurred by Telesis. Upon approval by the Bankruptcy Court, the Companys Guaranty, the Guaranty by the Companys parent, Accentia, all of the Companys subsidiary Guaranties from affiliates and third parties
and all other obligations to all parties to Transaction I will be terminated.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JUNE 30, 2010 AND 2009



12. New Market Tax Credit Transactions (continued):



On March 31, 2006, in contemplation of Transaction I, the Company closed a financing transaction
with Laurus pursuant to which Laurus purchased from Biovest a secured promissory note in the principal amount of $7.799 million (the Laurus Note). Accentia originally guaranteed 64% of any amounts outstanding under the Laurus Note. On
May 30, 2008, this guaranty was modified to reflect a fixed principal amount of $5.0 million. Under the terms of the Laurus Note, $7.5 million of the principal amount was deposited into a restricted bank account of Biovest pursuant to a
restricted account agreement between Biovest and Laurus. Accentia, Analytica International, Inc. and Laurus also entered into an Amended and Restated Stock Pledge Agreement pledging Accentias shares of TEAMM Pharmaceuticals, Inc., Analytica
International, Inc., Biovest, and Biolender, which was added as obligor by way of joinder, to secure the obligations owed to Laurus as a result of the Laurus Note.

In contemplation of Transaction I, Biovest and Accentia formed Biolender as a Delaware limited liability company. On April 21, 2006,
$2.5 million was released from the restricted account created under the Laurus Note. The release of these funds was contingent upon their use in Transaction I. These proceeds were used to purchase a 29.5% equity investment in Biolender for $2.5
million. Accentia used the proceeds of a $6.0 million intraday loan from First Bank to purchase the remaining 70.5% equity interest in Biolender. The $6.0 million loan from First Bank was fully guaranteed by two directors of Accentia. On
April 27, 2006, the Company redeemed 10 million shares of its common stock owned of record by Accentia for a $6.0 million cash payment which equaled the market price of $0.60 per share. Accentia used the proceeds of the stock redemption to
repay its intraday loan due First Bank. Subsequently, on October 31, 2006, the Company entered into a Purchase Agreement with Accentia whereby the Company purchased Accentias 70.5% ownership interest in Biolender. In consideration of the
sale of this interest in Biolender, the Company issued to Accentia ten million shares of common stock, representing the negotiated value of the purchased interest.

In contemplation of Transaction I, Biovax Investment, LLC (the Fund) was established. U.S. Bancorp invested $3.6 million for a 99.99% equity
interest in the Fund. Biovax Investment Corp., the Fund manager, invested an additional $100 for the remaining 0.01% equity interest. On April 25, 2006, Biolender loaned the Fund $8.5 million pursuant to a 5.18%, annual rate, secured,
convertible note receivable, due October 27, 2013. Interest on the note is payable as follows: (i) 0.64% interest per annum, non-compounding, shall be payable on the first day of each calendar month until October 27, 2013; and
(ii) any remaining accrued and unpaid interest shall be payable in one installment on October 27, 2013. The note is convertible at the option of the Fund into shares of the Companys common stock near the maturity date.

The proceeds received by the Fund from the aforementioned financing transactions were used to make a contemporaneous 99.99% equity investment in Telesis
CDE II, LLC ($12.0 million) as well as to make payment for associated management, legal and accounting fees ($0.1 million). The $12.0 million investment by the Fund to the CDE constituted a qualified equity investment (QEI) under the New
Markets Tax Credit Program authorized by Section 45D of the Internal Revenue Code of 1986, as amended (the Code), resulting in $4.7 million in tax credits.



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JUNE 30, 2010 AND 2009



12. New Market Tax Credit Transactions (continued):



The CDE is a Community Development Entity that is certified through the U.S. Treasury Department to make
QLICI, and is managed and partially owned (0.01%) by Telesis CDE Corporation, a private financial institution. Telesis CDE Corporation paid $1,200 in consideration for its 0.01% interest in Telesis. The CDE, upon receipt of its equity funding,
contemporaneously issued $11.5 million to Biovax for a 1.0% convertible promissory note payable, due October 27, 2013. The convertible promissory note is convertible into common stock at the option of the CDE within 5 days of the maturity date
at a conversion price equaling the then trading market price of the common stock. The overall arrangement provides that in the event the CDE converts the note payable, the aforementioned note receivable is subject to immediate conversion at the same
conversion price. The Company also issued to Telesis CDE Corporation warrants to purchase 1.2 million shares of the Companys common stock over a period of nine-years at a fixed price of $1.30 per share. These warrants were reflected as an
equity financing cost in stockholders equity at a fair value of $0.517 million computed using the Black-Scholes option pricing model. Accentia also issued warrants to Telesis CDE Corporation to purchase 0.2 million shares of
Accentias common stock over a period of seven years at a fixed price of $9.00 per share.

Biovax used the proceeds of the $11.5 million
convertible promissory note as follows: $6.0 million was paid to Biovest pursuant to an Asset Purchase and Sale Agreement dated April 18, 2006 and as described further below, $1.6 million was issued as a dividend to Biovest and $1.3 million was
paid to Biovest for BiovaxID anti-cancer vaccines in various stages of production. The remaining $2.6 million was used to cover ongoing operational expenses.

The transaction was structured so that, upon maturity, Biovax will have paid approximately $12.4 million in principal and interest payments to the CDE.
The operating agreement of the CDE stipulates that in the event the QLICI is repaid in the combination of stock and cash, the stock received shall be distributed to the Fund. Furthermore, any distributable cash received by Telesis CDE II, LLC shall
be distributed to the Fund in proportion to the Funds respective percentage interest in the CDE in an amount sufficient to fully pay the Funds note payable to Biolender. Upon maturity, the Fund will have paid approximately $11.9 million
in principal and interest payments to Biolender. At maturity, total equity of the Fund is approximated to be $0.1 million resulting from the difference of $12.4 million in principal and interest payments received less $11.9 million in principal and
interest paid less approximately $0.4 million in estimated operating costs of the Fund over the 7.5 year term of the notes. Biolender and U.S. Bancorp entered into a put option wherein U.S. Bancorp will have the right to put its investment in
the Fund to the Company near the maturity of the instruments at a price of $0.18 million. Management has concluded that the fair value of U.S. Bancorps investment in the Fund at maturity of both notes (approximately $0.1 million) would be
less than the $0.18 million U.S. Bancorp would receive upon exercise of the put option and thus it is managements expectation that this option will be exercised. Thus, prior to maturity of both notes, it is anticipated that the Fund will be
99.99% owned by Biolender. The Company accounted for this option as a derivative liability that requires recognition at fair value. The Company utilized a probability-based, discounted cash flow approach to value the put. Accordingly, the valuation
technique provided for the recognition of the full put amount ($0.18 million) at the present value of its cash flows, using market interest rates that would likely be considered by market participants trading similar instruments.



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JUNE 30, 2010 AND 2009



12. New Market Tax Credit Transactions (continued):



Salient terms and conditions of Transaction I are as follows:



| |  |  | Under an Asset Purchase and Sale Agreement dated as of April 18, 2006 (the Asset Purchase Agreement), Biovest transferred all or
substantially all of the assets of its vaccine manufacturing business situated at 377 Plantation Street, Worcester, Massachusetts (the Plant and the assets hereinafter the Equipment) and its rights under that certain lease
agreement for the Plant and that certain letter of intent with the landlord to potentially lease additional space adjacent to the Plant (collectively the Leasehold) to Biovax. As full purchase price for the Equipment, Biovax paid Biovest
$1.5 million. In addition, Biovax advanced rental payments for the Leasehold in the amount of $4.5 million. Under the Asset Purchase Agreement, Biovest is required to treat the advance as unrestricted and non-segregated funds provided that
Biovest uses the funds to make all required lease payments. Finally, Biovax also hired all of Biovests employees related to the vaccine manufacturing business and assumed responsibility for all accrued vacation time and the maintenance of
existing health and other benefits.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The tax credits arising from the transaction were fully assigned to U.S. Bancorp. Biovax entered into an indemnification agreement directly with U.S.
Bancorp that provides for indemnification in the event of tax credit recapture from events caused by Biovax. Biovax is contractually required to maintain the following covenants to avoid tax credit recapture: (i) Biovax shall maintain its
status as a qualified active low-income business; (ii) At least fifty percent of the use of the tangible property of Biovax (whether owned or leased) will be within the low-income community as defined by Section 45D(e) of the Code;
(iii) At least fifty percent of the services performed for Biovax by its employees will be within low-income community as defined by Section 45D(e) of the Code; (iv) Less than five percent of the average of the unadjusted bases of the
property of Biovax will be attributable to collectibles (as defined in Section 408(m)(2) of the Code, and which includes any work of art; any rug or antique; any metal or gem; any stamp or coin; and any alcoholic beverage) other than
collectibles that are held primarily for sale to customers in the ordinary course of business; (v) Less than five percent of the average of the unadjusted bases of the property of Biovax will be attributable to nonqualified financial property
(as defined in Section 1397C(e) of the Code and in Section 1.45D-1(d)(4)(i)(E) of the Regulations, and which includes debt, stock, partnership interests, options, futures contracts, forward contracts, warrants, notional principal
contracts, annuities and other similar property); (vi) No part of the business activities of Biovax will consist of the operation of any private or commercial golf course, country club, massage parlor, hot tub facility, or suntan facility, race
track or other facility used for gambling, or store the principal business of which is the sale of alcoholic beverages for consumption off premises; (vii) No part of Biovaxs business activities will include the rental to others of
residential rental property (the term residential rental property is defined in Section 168(e)(2)(A) of the Code as meaning any building or structure if eighty percent or more of the gross rental income from such building or
structure for the taxable year is rental income from dwelling units); (viii) The predominant trade or business of Biovax will not include the development or holding of intangibles for sale or license, as provided under
Section 1.45D-1(d)(5)(iii) of the Regulations; (ix) Farming (within the meaning of Section 2032A(e)(5)(A) or (B) of the Code) will not be an activity of Biovax; (x) Biovax will generate revenues by the date of April 25,
2009; (xi) Biovax shall not discontinue conducting business, shall not materially change the nature of its business, and shall not materially change the manner in which its business activities are conducted, other than changes in the nature of
its business or the manner in which it conducts its business that do not cause the making of the loan by the lender to cease to constitute a qualified low-income community investment as such term is used in Section 45D of the Code
(as determined by the lender in its good faith judgment and based upon the advice of counsel); (xii) Biovax will not be a bank, credit union or other financial institution; (xiii) Biovax will not maintain a qualified low-income
building under Section 42 of the Code; (xiv) Biovax will not become a single-member entity treated as disregarded as separate from its owner for federal income tax purposes, nor be liquidated or merged into another entity without the
written consent of Telesis CDE II, LLC; and (xv) Biovax and Biovest will operate consistently with the Asset Purchase Agreement between Biovax and the Company, and will not amend such agreement without prior written consent of Telesis CDE II,
LLC. An example of an event that would not cause a recapture is changes in the Internal Revenue Code that results in such recapture. The total indemnification amount could be $4.7 million (representing 39% of the $12.0 million qualified investment).
However, in accordance with Financial Interpretation 45 Guarantors Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of the Indebtedness of Others, the conditions and events that could result in recapture are
within the control of Biovax. Therefore, this potential liability is not reflected in the consolidated financial statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JUNE 30, 2010 AND 2009



12. New Market Tax Credit Transactions (continued):



| |  |  | The Company, Accentia and certain members of both our Board of Directors entered into a guarantee arrangement with the CDE for the debt service of
Biovax. The Company has guaranteed 100% of the debt service while the directors of the Company and Accentia have guaranteed up to $6.0 million of the debt service. In addition, Accentia has partially guaranteed debt service with limitations
established at no greater than $60,000 each year the instrument is outstanding. The Company issued warrants to purchase 1.0 million shares of common stock to the officers and directors as compensation for their guarantees. The guarantees were
treated in a manner similar to contributed service and their fair value of $0.46 million was charged to expense upon issuance. The Company also indemnified the guarantors from any claims of any kind to the extent that the guarantors are called upon
to pledge funds, assets or collateral in connection with the guarantee being executed.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Various legal and accounting fees of $0.108 million paid directly by Biovax and involved in structuring this transaction were recorded as a reduction
to additional paid-in capital. Various legal and accounting fees of $0.17 million paid by entities in which the Company has a variable interest and involved in structuring this transaction (the Fund and the CDE) were recorded as a reduction to
non-controlling interests in variable interest entities on the Companys consolidated balance sheet. Professional fees of $0.36 million involved in the continuing management of this transaction were recorded as a prepaid expense and will be
amortized over a period of seven and one half years, representing the duration of both convertible notes issued by the Fund and Biovax.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As a result of the Companys Chapter 11 filing on November 10, 2008, Biovax discontinued interest payments due on the QLICI promissory note.

December 2006 NMTC
Transaction4

On
December 8, 2006, the Companys wholly owned subsidiary, AutovaxID, Inc. (AutovaxID) closed a second NMTC financing transaction (Transaction II). The following parties were involved in Transaction II: AutovaxID,
Accentia, Biolender II, LLC (Biolender II), St. Louis New Market Tax Credit Fund II, LLC (CDE II), St. Louis Development Corp., AutovaxID Investment LLC (Fund II), U.S. Bancorp, and Laurus.

On December 8, 2006, Accentia loaned the Company $3.1 million pursuant to a Secured Promissory Note (the Accentia Note). Under the terms
of the Accentia Note, interest accrues at a rate equal to prime rate, and is convertible, at Accentias option, to shares of the Companys common stock at a conversion price of $0.32 per share. Upon the closing of Transaction II, the
Company repaid Accentia $1.1 million. The remaining $2.0 million of principal and all accrued and unpaid interest is included in notes payable, related parties in the accompanying September 30, 2009 consolidated balance sheet, as the result of
the Companys Chapter 11 filing on November 10, 2008.

In contemplation of Transaction II, Biovest formed Biolender II as a Delaware
limited liability company. On December 8, 2006, $2.5 million was released from the restricted account created under the Laurus Note. The release of these funds was contingent upon their use in Transaction II. These funds, together with the
amount loaned to Biovest under the Accentia Note funded the purchase of a 100% equity interest in Biolender II for the benefit of the Company. The Companys entire equity interest of $5.6 million in Biolender II has been pledged to Laurus as
collateral to secure the Laurus Note.



|4 | In July 2010, the Company and certain of its affiliates entered into an agreement (the St. Louis Restructuring Agreement) with St. Louis Development
Corporation and Saint Louis New Markets Tax Credit Fund II, LLC (collectively SLDC), contingent upon submission to and approval by the Bankruptcy Court. The St. Louis Restructuring Agreement effectively terminates all agreements and
obligations of all parties pursuant to Transaction II in consideration of retention by SLDC of an unsecured claim in the Companys Chapter 11 proceeding in the amount of $160,000 along with a settlement payment in the amount of $62,000 to
defray certain legal and administrative expenses incurred by SLDC. Upon approval by the Bankruptcy Court, its Guaranty, the Guaranty by its parent, Accentia, all of its subsidiary Guaranties from affiliates and third parties and all other
obligations to all parties to Transaction II will be terminated.
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(DEBTOR-IN-POSSESSION)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JUNE 30, 2010 AND 2009



12. New Market Tax Credit Transactions (continued):



In contemplation of Transaction II, Fund II was established. U.S. Bancorp invested
$2.4 million for a 100% equity interest in Fund II. Additionally, Biolender II and Fund II entered into a Loan and Security Agreement pursuant to which Biolender II made a loan to Fund II in the principal amount of $5.6 million (the Leverage
Loan), evidenced by a promissory note dated December 8, 2006 payable from Fund II to Biolender II (the Leverage Note). The Leverage Note becomes due on June 9, 2014, and bears an interest rate of 8%, non-compounding.
Payment of interest is due annually on the first calendar day of each year through maturity. The outstanding principal amount on the Leverage Loan and any unpaid interest is due on maturity in cash.

The proceeds received by Fund II from U.S. Bancorp and Biolender II were used to make a contemporaneous 99.99% equity investment in CDE II. The $8.0
million investment by Fund II to CDE II constituted a qualified equity investment (QEI) under the New Markets Tax Credit Program authorized by Section 45D of the Internal Revenue Code of 1986, as amended, resulting in $3.12 million
in tax credits which were allocated to U.S. Bancorp. All of Fund IIs interest in CDE II has been pledged to Biolender II as collateral for the Leverage Loan.

CDE II is a Community Development Entity that is certified through the U.S. Treasury Department to make QLICI, and is managed and partially owned (0.01%)
by St. Louis Development Corporation, a not-for-profit corporation organized in Missouri. St. Louis Development Corporation paid $1,000 in consideration for its 0.01% interest in CDE II. CDE II, upon receipt of its equity funding, contemporaneously
issued a QLICI to AutovaxID, evidenced by a $7.7 million subordinated promissory note dated as of December 8, 2006 which matures on December 8, 2036 (the CDE II Loan). Pursuant to a call right, for a period of six months
starting on December 8, 2013, the CDE will have the right to call for the repayment of the CDE II Loan in the amount of $5.7 million, in full satisfaction of the principal on the CDE II Loan. Interest on the outstanding principal amount of the
CDE II Loan accrues at the rate of 5.82% per annum, non-compounding and is payable in arrears on an annual basis having commenced on January 2, 2007 and continuing until maturity. The CDE II Loan is guaranteed in full by the Company and is
also guaranteed up to an amount of $4.5 million by officers and directors of Accentia. The Company issued warrants to purchase 2.6 million shares of common stock to these officers and directors as compensation for their guarantees. The
guarantees were treated in a manner similar to contributed service and their fair value of $1.4 million was charged to expense upon issuance. The Company also indemnified the guarantors from any claims of any kind to the extent that the guarantors
are called upon to pledge funds, assets or collateral in connection with the guarantee being executed.

AutovaxID used the proceeds from the
$7.7 million promissory note to pay the Company $6.1 million pursuant to an Asset Purchase and License Agreement dated December 8, 2006 and described further below. The remaining $1.6 million was used to cover ongoing operational expenses of
AutovaxID.

The transaction was structured so that, on June 9, 2014, AutovaxID will have paid approximately $9.1 million in principal and
interest payments to CDE II. The operating agreement of CDE II stipulates that any distributable cash received shall be distributed to Fund II in proportion to the respective percentage interest Fund II has in CDE II in an amount sufficient to fully
pay the Fund II note payable to Biolender II. On June 9, 2014, Fund II will have paid approximately $9.0 million in principal and interest payments to Biolender II (assuming CDE II exercises its right to call the CDE II loan for $5.7 million on
June 9, 2014). At maturity then, total equity of the Fund is approximated to be $0.1 million, resulting from the difference of $9.1 million in principal and interest payments received less $9.0 million in principal and interest paid over
the 7.5 year term of the notes.



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JUNE 30, 2010 AND 2009



12. New Market Tax Credit Transactions (continued):



Biolender II and U.S. Bancorp entered into a put option wherein U.S. Bancorp will have the right to put
its investment in Fund II to the Company near the maturity of the instruments at a price of $0.12 million. Management has concluded that the fair value of U.S. Bancorps investment in Fund II at maturity of both notes (approximately $0.1
million) would be less than the $0.12 million U.S. Bancorp would receive upon exercise of the put option and thus it is managements expectation that this option will be exercised. Thus, prior to maturity of both notes, it is anticipated that
the Fund will be 100% owned by Biolender II. The Company accounted for this option as a derivative liability that requires recognition at fair value. The Company utilized a probability-based, discounted cash flow approach to value the put.
Accordingly, the valuation technique provided for the recognition of the full put amount ($0.12 million) at the present value of its cash flows, using market interest rates that would likely be considered by market participants trading similar
instruments.

Salient terms and conditions of Transaction II are as follows:



| |  |  | Under a License and Asset Purchase Agreement dated as of December 8, 2006, Biovest granted a non-exclusive license to the intellectual property
enabling AutovaxID to manufacture and sell automated cell culture instruments in the United States, Canada and Mexico (the License), which license became exclusive upon the occupancy by AutovaxID of a space located at 1031 Macklind
Avenue, St. Louis, Missouri (the New Plant) in June 2007. As full purchase price for the License and related business opportunity, AutovaxID paid Biovest $5.6 million. Biovest also agreed to sell AutovaxID certain equipment upon the
occupancy by AutovaxID of the New Plant for the fair market value of $0.5 million.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The CDE II Loan is secured by second lien on all assets of AutovaxID for the benefit of CDE II pursuant to a Second-Lien Security Agreement between
AutovaxID and CDE II dated as of December 8, 2006. Laurus has a senior lien on the assets of AutovaxID through the security agreement from the Company to Laurus, which AutovaxID joined by way of a Joinder Agreement.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | AutovaxID does not have the right to prepay the CDE II Loan prior to June 8, 2014. AutovaxID does have the right to prepay the CDE II Loan after
this date, provided that (i) it prepays the entire CDE II Loan amount, (ii) CDE II consents to such prepayment and U.S. Bancorp and the managing member of the CDE agree on the reinvestment of such proceeds in an alternative investment that
would qualify as a QLICI and (iii) AutovaxID or certain individuals who provided guaranties under the Tax Credit and Reimbursement and Indemnity Agreement pay to U.S. Bancorp the recapture amount so specified is such agreement.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | All indebtedness owed by AutovaxID and its subsidiaries to CDE II, including its right to receive payments of principal and interest under the CDE II
Loan, is expressly subordinate to the extent set forth under the Telesis Subordination Agreement dated as of December 8, 2006 entered into by Laurus, CDE II, U.S. Bancorp, AutovaxID and the Company.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The tax credits arising from this transaction were fully assigned to U.S. Bancorp. AutovaxID has entered into an indemnification agreement directly
with U.S. Bancorp that provides for indemnification in the event of tax credit recapture from events caused by AutovaxID. AutovaxID is contractually required to maintain the following covenants to avoid tax credit recapture: (i) AutovaxID shall
maintain its status as a qualified active low-income business; (ii) At least fifty percent of the use of the tangible property of AutovaxID (whether owned or leased) will be within the low-income community as defined by Section 45D(e) of
the U.S. Tax Code; (iii) At least fifty percent of the services performed for AutovaxID by its employees will be within low-income community as defined by Section 45D(e) of the U.S. Tax Code; (iv) Less than five percent of the
average of the unadjusted bases of the property of AutovaxID will be attributable to collectibles (as defined in Section 408(m)(2) of the Code, and which includes any work of art; any rug or antique; any metal or gem; any stamp or coin; and any
alcoholic beverage) other than collectibles that are held primarily for sale to customers in the ordinary course of business; (v) Less than five percent of the average of the unadjusted bases of the property of AutovaxID will be
attributable to nonqualified financial property (as defined in Section 1397C(e) of the Code and in Section 1.45D-1(d)(4)(i)(E) of the Regulations, and which includes debt, stock, partnership interests, options, futures contracts, forward
contracts, warrants, notional principal contracts, annuities and other similar property); (vi) No part of the business activities of AutovaxID will consist of the operation of any private or commercial golf course, country club, massage parlor,
hot tub facility, or suntan facility, race track or other facility used for gambling, or store the principal business of which is the sale of alcoholic beverages for consumption off premises; (vii) No part of
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JUNE 30, 2010 AND 2009



12. New Market Tax Credit Transactions (continued):



| | AutovaxIDs business activities will include the rental to others of residential rental property (the term residential rental property is defined in Section 168(e)(2)(A) of
the Code as meaning any building or structure if eighty percent or more of the gross rental income from such building or structure for the taxable year is rental income from dwelling units); (viii) The predominant trade or business of AutovaxID
will not include the development or holding of intangibles for sale or license, as provided under Section 1.45D-1(d)(5)(iii) of the Regulations; (ix) Farming (within the meaning of Section 2032A(e)(5)(A) or (B) of the Code) will
not be an activity of AutovaxID; (x) AutovaxID will generate revenues by the date of December 8, 2009; (xi)AutovaxID shall not discontinue conducting business, shall not materially change the nature of its business, and shall not
materially change the manner in which its business activities are conducted, other than changes in the nature of its business or the manner in which it conducts its business that do not cause the making of the Loan by the Lender to cease to
constitute a qualified low-income community investment as such term is used in Section 45D of the Code (as determined by the Lender in its good faith judgment and based upon the advice of counsel); (xii) AutovaxID will not be a
bank, credit union or other financial institution; (xiii) AutovaxID will not maintain a qualified low-income building under Section 42 of the Code; (xiv) AutovaxID will not become a single-member entity treated as disregarded as
separate from its owner for federal income tax purposes, nor be liquidated or merged into another entity without the written consent of CDE II; and (xv) AutovaxID and Biovest will operate consistently with the License between AutovaxID and
Biovest, and will not amend such agreement without prior written consent of CDE II. An example of an event that would not cause a recapture is changes in the Internal Revenue Code that results in such recapture. The total indemnification amount
could be $3.12 million (representing 39% of the $8.0 million qualified investment). However, in accordance with Financial Interpretation 45 Guarantors Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of the
Indebtedness of Others, the conditions and events that could result in recapture are within AutovaxIDs control. Therefore, this potential liability is not reflected in the consolidated financial statements.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Under a Reimbursement Agreement dated as of December 8, 2006, Biovest agreed to reimburse St. Louis Development Corp (the 0.01% owner and managing
member of CDE II) up to $32,000 annually for expenses incurred by St. Louis Development Corp in connection with its management of CDE II.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Various legal, accounting, and professional fees of $433,000 paid directly by the Company and AutovaxID and involved in structuring this transaction
were recorded as a reduction to additional paid-in capital. Various legal and accounting fees of $180,000 paid by entities in which the Company has a variable interest (CDE II and Fund II) and involved in structuring this transaction were recorded
as a reduction to non-controlling interests in variable interest entities on the Companys consolidated balance sheet. Professional fees of $115,000 involved in the continuing management of this transaction were recorded as a prepaid expense
and will be amortized over a period of seven and one half years, representing the duration of the note issued by Fund II and payable to Biolender II.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As a result of the Companys Chapter 11 filing on November 10, 2008, AutovaxID discontinued interest payments due on the QLICI promissory note.



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(DEBTOR-IN-POSSESSION)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JUNE 30, 2010 AND 2009



13. Variable Interest Entities:

Accounting for the NMTC financing arrangement:

The Company evaluated the structure of the NMTC financing arrangements and entities involved under the context of ASC Topic 810-Consolidation. This
guidance provides a framework for determining whether certain entities should be consolidated (irrespective of equity ownership) based upon a variable interests model. This model determines the control and consolidation based upon potential
variability in gains and losses of the entity being evaluated for consolidation. Generally, a variable interest holder that absorbs a majority of the entitys expected losses, if they occur, receives a majority of the entitys expected
residual return, if they occur, or both, is identified as the primary beneficiary for consolidation purposes.

The Company concluded that
Biolender, Biovax Investment, LLC, Telesis CDE Two, LLC, Biolender II, Autovax Investment, LLC and St. Louis New Market Tax Credit Fund II, LLC met the definition of variable interest entity. However, for the Company to be required to apply the
provisions of ASC Topic 810-Consolidation, it must have a variable interest in the entity. Variable interests in a variable interest entity are contractual, ownership or other monetary interests in an entity that change with changes in the value of
the net assets of the entity. The following tables illustrate the variable interests have been identified in each of the entities considered by the Company and the related holder:

New Market Tax Credit Transaction I:



|                                      |  |                                     |  |                                             |  |                                              
|------------------------------------- |  | ----------------------------------- |  | ------------------------------------------- |  | ---------------------------------------------
|Variable Interest Holder              |  | Variable Interests Biolender, LLC   |  | Variable Interests Biovax
Investment, LLC   |  | Variable Interests Telesis CDE Two,LLC       
|Biovest and its Related Parties       |  | Controlling interest                |  | Senior beneficial interest                  |  | Senior beneficial interest                   
|                                      |  | Primary beneficiary                 |  | Guaranty agreement                          |  | Guarantee agreement                          
|                                      |  |                                     |  | Indemnification agreement                   |  |                                              
|                                      |  |                                     |  | Put (VIE Equity)                            |  |                                              
|                                      |  |                                     |  | Call (VIE Equity)                           |  |                                              
|                                      |  |                                     | 
|Biovax Investment, LLC                |  |                                     |  |                                             |  | VIE Equity (99.9%)                           
|                                      |  |                                     | 
|U.S. Bancorp                          |  |                                     |  | VIE Equity (99.9%)                          |  | Tax Credit Rights                            
|                                      |  |                                     | 
|Biovax Investment Corp.               |  |                                     |  | VIE Equity (0.01%)                          |  |                                              
|                                      |  |                                     | 
|Telesis CDE, Corp                     |  |                                     |  |                                             |  | VIE Equity (0.01%)                           
|                                      |  |                                    
|New Market Tax Credit Transaction II: |  |                                     |  |                                            
|                                      |  |                                     | 
|Variable Interest Holder              |  | Variable Interest Biolender II, LLC |  | Variable Interests AutovaxIDInvestment,
LLC |  | Variable Interests St. Louis NMTCFund II, LLC
|Biovest and its Related Parties       |  | Controlling interest                |  | Senior beneficial interest                  |  | Senior beneficial interest                   
|                                      |  | Primary beneficiary                 |  | Guaranty Agreement                          |  | Guarantee Agreement                          
|                                      |  |                                     |  | Indemnification Agreement                   |  |                                              
|                                      |  |                                     |  | Put (VIE Equity)                            |  |                                              
|                                      |  |                                     |  | Call (VIE Equity)                           |  |                                              
|                                      |  |                                     | 
|AutovaxID Investment, LLC             |  |                                     |  |                                             |  | VIE Equity (99.9%)                           
|                                      |  |                                     | 
|U.S. Bancorp                          |  |                                     |  | VIE Equity (100%)                           |  | Tax Credit Rights                            
|                                      |  |                                     | 
|St. Louis Development Corporation     |  |                                     |  |                                             |  | VIE Equity (0.01%)                           

The above table illustrates the weight of
the variable interests that are held by the Company. In addition, in performing quantitative valuation, the Company afforded significant weight to the guarantee agreements, indemnifications and put features, the preponderance of which limit the
equity investors risk of loss on the venture. In evaluating both qualitative and quantitative considerations, the Company concluded that its variable interests in the entity absorb most of the variable interest entities losses and
should, therefore, consolidate the entities.



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(DEBTOR-IN-POSSESSION)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JUNE 30, 2010 AND 2009



13. Variable Interest Entities (continued):



Assets of $21.4 million and liabilities of $17.7 million of the variable interest entities identified
above are limited to the instruments pertaining to the NMTC financing arrangements. In accordance with consolidation principles, these assets and liabilities are eliminated in consolidation leaving the non-controlling interests of Biolender, Telesis
CDE Two, LLC, Biovax Investment, LLC, Biolender II, AutovaxID Investment, LLC, and St. Louis NMTC Fund II, LLC, reflected on the Companys June 30, 2010 consolidated balance sheet as non-controlling interests.

The Companys $294,000 non-controlling interest in (income)/losses from variable interest entities on it consolidated statement of operations for
the nine months ended June 30, 2010 consists of the following:



|                            |  |   |          |  
|--------------------------- |  | - | -------- | -
|Variable Interest Entity    |  |   |         
|Biovax Investment LLC       |  | $ | 334,000  |  
|Telesis CDE Two, LLC        |  |   | (51,000  | )
|AutovaxID Investment, LLC   |  |   | 335,000  |  
|St. Louis NMTC Fund II, LLC |  |   | (324,000 | )
|                            |  |   |          |  
|                            |  | $ | 294,000  |  
|                            |  |   |          |  

14. Commitments and contingencies:

Legal proceedings:

Clinstar
litigation:

On August 4, 2008, the Company was served with a summons and complaint filed in California Superior Court on behalf of
Clinstar LLC for breach of contract for non-payment of certain fees for clinical trial studies and pass-through expenses in the amount of $385,000. The Company intends to seek to dismiss this litigation and plans to defend these claims vigorously.
Upon the filing of the Companys Chapter 11 petition on November 10, 2008, this litigation was automatically stayed pursuant to provisions of federal bankruptcy law.

Bankruptcy proceedings:

On
November 10, 2008, the Company and all of its subsidiaries filed a voluntary petition for reorganization under Chapter 11 in the Bankruptcy Court (as defined in Note 2 to the Condensed Consolidated Financial Statements). During the pendency of
the Chapter 11 proceedings, the Company will operate its business as a debtor-in-possession in accordance with the provisions of Chapter 11, and will be subject to the jurisdiction of the Bankruptcy Court.

On May 14, 2010, the Company filed its Joint Plan of Reorganization. Subsequent to the period of this report, on July 2, 2010, the Company
filed its Joint Disclosure Statement with the Bankruptcy Court. On August 9, 2010, the Bankruptcy Court held a hearing on the Joint Disclosure Statement and scheduled a confirmation hearing on the Joint Plan of Reorganization for
September 22, 2010.

Other proceedings:

Except for the foregoing, the Company is not party to any material legal proceedings, and management is not aware of any threatened legal proceedings that
could cause a material adverse impact on the Companys business, assets, or results of operations.

Further, from time to time the
Company is subject to various legal proceedings in the normal course of business, some of which are covered by insurance.



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JUNE 30, 2010 AND 2009



14. Commitments and contingencies (continued):



Facility leases:

The Company leases approximately 35,000 square feet in Minneapolis, Minnesota, which it uses for offices, a laboratory, manufacturing, warehousing areas
to support the production of perfusion cell culture equipment, and contract cell culture services. This facility lease agreement has expired and the Company continues to occupy this facility on a month-to-month basis with a long-term lease currently
being negotiated which is expected to include improvements to the facility to provide a dedicated laboratory space for production of BiovaxID and potential future expansion to the facility to permit additional BiovaxID production capacity when
required.

Cooperative Research and Development Agreement:

In September 2001, the Company entered into a definitive Cooperative Research and Development Agreement (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, as amended, included, among other things, a requirement to pay $0.5 million
quarterly to NCI for expenses incurred in connection with the ongoing Phase 3 clinical trials. Since the transfer to Biovest of the investigational new drug application 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 $0.2 million per year). On September 25, 2006, the Company provided written notice to the NCI in accordance with the terms of the CRADA to terminate the
CRADA at the end of the sixty day notice period. Under the terms of the CRADA, the Company is obligated to continue to provide vaccine to the NCI at no charge for purposes of the NCIs studies that are within the scope of the CRADA if the
Company were to abandon work on the vaccine. As the Company is actively developing the vaccine for commercialization and intends to do so to its completion, no estimated costs have been accrued to date.

Guarantee Indemnifications:

Under the
terms of the Pulaski Bank and Southwest Bank notes, several board members, executives and other affiliates issued personal guarantees. The Company agreed to indemnify and hold harmless each guarantor should their guarantees be called by the Pulaski
Bank and Southwest Bank by agreeing to compensate each affected guarantor by an issuance of restricted common stock equal to 700% of the amount of their guarantee. The stock will be issued using a pre-determined value of $1.10 per share. On
December 29, 2008, Pulaski Bank called its guaranty resulting in an aggregate payment of $1.0 million by the guarantors. As a result of their indemnification agreements, the Pulaski Bank guarantors are allowed an unsecured claim for
approximately $1.5 million as of June 30, 2010. In January 2009, Southwest Bank called its guaranty resulting in an aggregate payment of $0.2 million by the guarantor. As a result of this indemnification agreement, the Southwest Bank guarantor
is allowed an unsecured claim for approximately $0.3 million as of June 30, 2010.

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, the Companys 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).



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JUNE 30, 2010 AND 2009



14. Commitments and contingencies (continued):



Product liability:

The contract production services the Company offers for therapeutic products 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.

Royalty agreements:

Pursuant to the royalty agreement dated October 31, 2006, as amended, the Company is required to pay to Accentia a 15.5% royalty on net sales from
biologics products.

On April 17, 2007, the Company executed an amendment agreement (the Amendment) with its senior lender,
Laurus, to defer payments of principal on its $7.8 million loan. As consideration for the forbearance, the Company granted to Laurus a non-cancelable royalty equal to three percent of world-wide net sales of AutovaxID instruments for a period
of five years commencing on May 31, 2007. Under the terms of the royalty agreement the Companys royalty payments to Laurus are required to aggregate to a minimum of $8.0 million with $0.5 million of the minimum royalty having been paid on
December 10, 2007 and the balance, less actual royalties paid, being due on May 31, 2012.

On October 30, 2007,
December 10, 2007, and again on May 30, 2008, the Company completed and/or modified financing transactions with the Valens Funds, both of which are affiliates of Laurus. Pursuant to these transactions, the Valens Funds were granted an
aggregate 19.5% royalty interest in the worldwide net commercial sales of the Companys biologic products.

Stanford University
agreement:

In September 2004, the Company entered into an agreement with Stanford University (Stanford) allowing worldwide
rights to use two proprietary hybridoma cell lines that are used in the production of BiovaxID. Under the agreement with Stanford, the Company is obligated to pay a yearly maintenance fee of $10,000 per year. Following BiovaxID regulatory approval,
the Company is required to pay Stanford a running royalty of the higher of $50.00 per patient or 0.05% of revenues received by the Company for each BiovaxID patient treated using this cell line. This running royalty will be creditable against the
yearly maintenance fee. Our agreement with Stanford obligates us to diligently develop, manufacture, market, and sell BiovaxID and to provide progress reports to Stanford regarding these activities. We can terminate this agreement at any time upon
30 days prior written notice, and Stanford can terminate the agreement upon a breach of the agreement by us that remains uncured for 30 days after written notice of the breach from Stanford.

Sublicense agreement with related party:

On January 16, 2008, the Company entered into a sublicense agreement (the Sublicense Agreement) with Revimmune, LLC
under which the Company was granted the exclusive worldwide rights to Revimmune. The Sublicense Agreement
allows the Company to develop and market a patent-pending pharmaceutical treatment in late-stage development for the treatment of and prevention of transplant rejection including rejection following a bone marrow transplant.

The terms and conditions of the Sublicense Agreement are as follows:



| |  |  | The Company is obligated to pay to Revimmune, LLC a royalty of 6% on net sales of
Revimmune, and in the event of a sublicense by the Company, to pay 20% of sublicense consideration received.
The Company did not pay an upfront fee in connection with the Sublicense but upon the approval of the sublicensed treatment in the U.S. for each sublicensed indication, the Company is required to issue to Revimmune, LLC vested warrants to purchase
2.0 million shares of the Companys common stock. Each such warrant which will be granted at the approval of each successive sublicensed product will have an exercise price of $1.10 per share or, at the discretion of Company, at a price
equal to the fair market value of the Companys common stock on the date of the grant of such warrant.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JUNE 30, 2010 AND 2009



14. Commitments and contingencies (continued):



| |  |  | The Company assumed certain obligations under Revimmune, LLCs license with Johns Hopkins University (JHU) related to the sublicensed
technology, including the payment of all royalty obligations due JHU for the sublicensed products which includes a 4% royalty on licensed products and services and a 20% royalty on sublicense consideration.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Company will be responsible, at its sole cost and expense, for the development, clinical trial(s), promotion, marketing, sales and
commercialization of the sublicensed products.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Revimmune, LLC is affiliated with a director of the Company.
| | - |  | ------------------------------------------------------------

15. Subsequent Events:

NMTC I and II
Compromises:

In July 2010, the Company and certain affiliates entered into an agreement (the Worcester Restructuring
Agreement) with Telesis CDE Corporation and Telesis CDE Two, LLC (collectively, Telesis), contingent upon submission to and approval by the Bankruptcy Court. The Worcester Restructuring Agreement effectively terminates all
agreements and obligations of all parties pursuant to Transaction I, (see Item 11 for further discussion of this transaction) in consideration of retention by Telesis of an unsecured claim in the Companys Chapter 11 proceeding in the
amount of $300,000 along with a settlement payment in the amount of $85,000 to defray certain legal and administrative expenses incurred by Telesis. Upon approval by the Bankruptcy Court, the Guaranty of the Company, the Guaranty by the
Companys parent, Accentia, and all subsidiary Guaranties from affiliates and third parties and all other obligations of the Company to all parties to Transaction I will be terminated.

In July 2010, the Company and certain affiliates entered into an agreement (the St. Louis Restructuring Agreement) with St. Louis Development
Corporation and Saint Louis New Markets Tax Credit Fund II, LLC (collectively, SLDC), contingent upon submission to and approval by the Bankruptcy Court. The St. Louis Restructuring Agreement effectively terminates all agreements and
obligations of all parties pursuant to Transaction II, (see Item 11 for further discussion of this transaction) in consideration of retention by SLDC of an unsecured claim in the Companys Chapter 11 proceeding in the amount of $160,000
along with a settlement payment in the amount of $62,000 to defray certain legal and administrative expenses incurred by SLDC. Upon approval by the Bankruptcy Court, the Guaranty of the Company, the Guaranty by the Companys parent, Accentia,
and all subsidiary Guaranties from affiliates and third parties and all other obligations of the Company to all parties to Transaction II will be terminated.

Grant of Orphan Drug Designation for
BiovaxID® :

On July 9, 2010, the FDA granted Orphan Drug designation to BiovaxID for the treatment of mantle cell lymphoma. With FDA Orphan Drug designation, we
have a seven-year period of market exclusivity for BiovaxID upon approval, thereby offering competitive protection from similar drugs of the same class. Orphan Drug designation also provides us with eligibility to receive potential tax credit
benefits, potential grant funding for research and development and significantly reduced filing fees for marketing applications.

Bankruptcy Proceedings:

On July 2,
2010, the Company filed its Joint Disclosure Statement with the Bankruptcy Court. On August 9, 2010, the Bankruptcy Court held a hearing on the Joint Disclosure Statement and scheduled a confirmation hearing on the Joint Plan of Reorganization
for September 22, 2010.



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|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

When you read this section of this Quarterly Report on Form 10-Q, it is important that you also read the financial statements and related notes
included elsewhere in this Form 10-Q. This section of this Quarterly Report contains forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations, and intentions. We use words such as
anticipate, estimate, plan, project, continuing, ongoing, expect, believe, intend, may, will, should,
could, and similar expressions to identify forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including the matters discussed under the
caption Item 1A. Risk Factors in our Annual Report on Form 10-K for the fiscal year ended September 30, 2009 and other risks and uncertainties discussed in our other filings with the Securities and Exchange Commission.

Overview

As a result of our collaboration with the National Cancer Institute (NCI), we are developing
BiovaxID® as a personalized therapeutic cancer vaccine for the treatment of non-Hodgkins lymphoma,
specifically follicular lymphoma (FL), mantle cell lymphoma (MCL), and potentially other B-cell blood cancers. Both FL and MCL are generally considered to be incurable with currently approved therapies. These generally fatal
diseases arise from the lymphoid tissue and are characterized by an uncontrolled proliferation and spread throughout the body of mature B-cells, which are a type of white blood cell.

Three clinical trials conducted under our Investigational New Drug Application (IND) have studied BiovaxID in non-Hodgkins lymphoma.
These studies include a Phase 2 clinical trial and a Phase 3 clinical trial in patients with FL, as well as a Phase 2 clinical trial in MCL patients. We believe that these clinical trials have demonstrated that BiovaxID, which is personalized and
autologous (derived from a patients own tumor cells), has an excellent safety profile and is effective in the treatment of these lethal diseases. We are currently preparing for discussions with the U.S. Food and Drug Administration
(FDA) and international agencies regarding regulatory approvals of BiovaxID for FL and MCL based on these clinical trials. We expect that BiovaxID may also have application in other forms of B-cell lymphoma.

To support our planned commercialization of BiovaxID, we developed an automated cell culture instrument called
AutovaxID. We believe that AutovaxID has significant potential application for the production of a broad range
of patient-specific medicines, such as BiovaxID and other monoclonal antibodies. We are under contract with the U.S. Department of Defense to further develop AutovaxID and to explore potential production of additional vaccines including vaccines for
viral indications such as influenza. AutovaxID is automated and computer controlled to improve cell production reliability and to maximize cell production. AutovaxID uses a disposable production unit which minimizes the need for FDA required
clean rooms in the production process and provides for robust and dependable manufacturing while complying with the industry cGMP standards. AutovaxID has a small footprint and supports scalable production.

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. 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.

Our business consists of three primary business segments: development of BiovaxID and potentially other B-cell blood cancer vaccines; the manufacture and
sale of AutovaxID and other instruments and consumables; and commercial production of cell culture products and services.

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, and expenses and related disclosure of contingent assets
and liabilities. We evaluate our estimates, including those related to bad debts, inventories, intangible assets, contingencies and litigation 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.



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On November 10, 2008, we, including our wholly-owned subsidiaries, Biovax, Inc., AutovaxID, Inc.,
Biolender, LLC and Biolender II, LLC, filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code (the Bankruptcy Code) in the United States Bankruptcy Court for the Middle District of Florida
(the Bankruptcy Court). We will continue to operate our business as debtors-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of
the Bankruptcy Court.

Accounting principles generally accepted in the United States generally do not change the manner in which financial
statements are prepared while a company is in Chapter 11. However, it does require that the financial statements for periods subsequent to the filing of the Chapter 11 petition distinguish transactions and events that are directly associated
with the reorganization from the ongoing operations of the business. Revenues, expenses, realized gains and losses, and provisions for losses that can be directly associated with the reorganization and restructuring of the business must be reported
separately as reorganization items in the statement of operations for periods subsequent to November 10, 2008. The balance sheet must distinguish prepetition liabilities subject to compromise from both those prepetition liabilities that are not
subject to compromise and from post-petition liabilities. Liabilities that may be affected by a plan of reorganization must be reported at the amounts expected to be allowed, even if they may be settled for lesser amounts. In addition, cash provided
by reorganization items must be disclosed separately in the statement of cash flows. We have segregated those items as outlined above for all reporting periods subsequent to November 10, 2008.

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

Contract costs related to cell culture production include all direct material, subcontract and labor costs and those indirect costs
related to contract performance, such as indirect labor, insurance, supplies and tools. We believe that actual costs incurred in contract cell production services is the best indicator of the performance of the contractual obligations, because the
costs relate primarily to the amount of labor incurred to perform such services. The deliverables inherent in each of our cell culture production contracts are not output driven, but rather are driven by a pre-determined production run. The duration
of our cell culture production contracts range typically from 2 to 14 months.

We maintain provisions for estimated losses resulting from the
inability of our 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.

In assessing the recoverability of our amounts recorded as intangible 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, we may be required to record impairment charges.

We account for stock-based compensation based
on Accounting Standards Codification (ASC) Topic 718  Stock Compensation, which requires expensing of stock options and other share-based payments based on the fair value of each option awarded. The fair value of each option is
estimated on the date of grant using the Black-Scholes valuation model. This model requires management to estimate the expected volatility, expected dividends, and expected term as inputs to the valuation model.

The consolidated financial statements represent the consolidation of wholly-owned companies and interests in joint ventures where the Company has a
controlling financial interest or has been determined to be the primary beneficiary under ASC Topic 810 - Consolidation. All significant inter-company balances and transactions have been eliminated.



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We do not use derivative financial instruments to hedge exposures to cash-flow, market or foreign-currency
risks. However, the Company and our consolidated subsidiaries have entered into certain other financial instruments and contracts, such as debt financing arrangements and freestanding warrants with features that are either (i) not afforded
equity classification, (ii) embody risks not clearly and closely related to host contracts, or (iii) may be net-cash settled by the counterparty. These instruments are required to be carried as derivative liabilities, at fair value.

In selecting the appropriate technique(s) to measure the fair values of our derivative financial instruments, management considers, among
other factors, the nature of the instrument, the market risks that it embodies and the expected means of settlement. For less complex derivative instruments, such as free-standing warrants, we generally use the Black-Scholes-Merton option valuation
technique because it embodies all of the requisite assumptions (including trading volatility, estimated terms and risk free rates) necessary to fair value these instruments. For forward contracts that contingently require net-cash settlement as the
principal means of settlement, management projects and discounts future cash flows applying probability-weightage to multiple possible outcomes. Estimating fair values of derivative financial instruments requires the development of significant and
subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques are highly volatile and sensitive to changes in our
trading market price which has high-historical volatility. Since derivative financial instruments classified as liabilities are initially and subsequently carried at fair value, our income will reflect the volatility in these estimate and assumption
changes.

Results of Operations

Revenues. Total revenues for the nine months ended June 30, 2010 were $4.2 million, compared to revenues of
$2.5 million for the nine months ended June 30, 2009. Total revenues for the three months ended June 30, 2010 increased by $0.7 million when compared to the three months ended June 30, 2009. In September 2009, we entered into a $1.5
million contract with the U.S. Department of Defense Naval Health Research Center (NHRC) to supply
AutovaxID bioreactors and to evaluate the instruments suitability to produce cell-culture based
anti-viral vaccines. As a result of this contract, we have recorded $0.9 million in revenue in the current fiscal year, with no comparable revenue in the prior year.

Gross Margin. The overall gross margin as a percentage of sales for the nine months ended June 30, 2010 increased from 26% to
48% when compared to the nine months ended June 30, 2009. While revenues have increased year over year, as discussed above, there was not a corresponding increase in cost of sales as a relatively high percentage of costs are of a fixed nature.

Operating Expenses. Research and development expenses decreased by $0.2 million or 25% for the nine months ended June 30,
2010, when compared to the same period in fiscal 2009. As we are conducting detailed analyses of the available trial data and plan to seek accelerated and/or conditional approval with the FDA and EMEA as discussed herein, coupled with the limited
financing available to us, we have been reducing our R&D expenses from that of historical levels. This has resulted in both R&D staffing levels as well as the number of sites participating in our clinical trials to have declined
considerably. Furthermore, through our voluntary petition for reorganization, we were able to reject the operating lease on our research and development facility in Worcester, Massachusetts on December 8, 2008.

General and administrative expenses decreased from $2.2 million to $1.7 million year over year, due, in large to a decrease in compensation expense and
professional fees.

Other Income (Expense). Other expense for the nine months ended June 30, 2010 includes contractual
interest charges and amortization of discounts regarding the Laurus and the Valens Funds financings, interest on our debtor-in-possession loan from Corps Real, interest on our demand notes to Accentia, interest on our unsecured promissory notes to
Pulaski Bank and Southwest Bank, interest on other long-term debt, as well as interest on short-term loans from affiliates. Total interest expense for the nine months ended June 30, 2010 and 2009 was $5.6 million and $5.0 million, respectively.
We have continued to accrue interest on all our outstanding obligations while in Chapter 11. Furthermore, our voluntary petition for bankruptcy on November 10, 2008, triggered default provisions on certain of our pre-petition debt, which allow
for the accrual of additional interest and fees above the contractual rate. We have accrued interest at the applicable default rates while in Chapter 11 proceedings due to the uncertain nature of the provisions of the plan of reorganization to be
filed with the Bankruptcy Court at a future date.



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Other expense for the first nine months of fiscal 2010 and 2009 also includes a loss of $8.3 million and
$1.2 million, respectively, on derivative liabilities. Some of our outstanding debt as well as some of our outstanding warrants contain contingent conversion and exercise provisions which we are required to record as liabilities, at fair value. The
values of these liabilities vary directly with the trading price of our outstanding common stock. The trading price of our common shares increased by approximately 180% for the nine months ended June 30, 2010 resulting in a corresponding
increase in the value of these liabilities. The warrants and conversion rights granted arise from our pre-petition obligations and are thus subject to compromise through our reorganization proceedings.

Reorganization Items.

Professional Fees:$339,000 and $278,000 were incurred for the nine months ending June 30, 2010 and 2009, respectively, for legal and other
professional fees as a result of our Chapter 11 proceedings.

Provision for rejected lease:In an effort to decrease operating
expenses, we rejected and terminated our lease in Worcester, Massachusetts, effective on December 8, 2008, through our reorganization proceedings. We initially recorded a net provision of $0.6 million to allow for damages resulting from the
rejection of this unexpired lease, which are treated by the Bankruptcy Code as general unsecured claims and are limited to either 15 percent of the balance of the rent reserved in the lease or the rent reserved for one year from the filing date or
the date the premises were surrendered, whichever is earlier. This claim was settled on July 17, 2009, through an approved order by the Bankruptcy Court, for a one-time payment of $14,000 issued on September 15, 2009.

Provision for indemnity agreements:The unsecured promissory notes we issued to Pulaski Bank and Trust Company (Pulaski Bank) and
Southwest Bank of St. Louis (Southwest Bank) are guaranteed by individuals affiliated with us or our parent company, Accentia. We agreed to indemnify and hold harmless each guarantor should their guarantees be called by the lenders. In
addition, in the event we default, resulting in a payment to the lenders by the guarantors, we agreed to compensate each affected guarantor by issuing a number of shares of our restricted common stock determined by dividing 700% of the amount
guaranteed by $1.10. On December 29, 2008, Pulaski Bank called the guarantees resulting in an aggregate payment of $1.0 million by the guarantors. In January 2009, Southwest Bank called its guarantee resulting in an aggregate payment of $0.2
million by the guarantor. As a result of their indemnification agreements, the guarantors are allowed an unsecured claim for approximately $1.8 million in our Chapter 11 proceedings. We have recorded this amount as a provision in liabilities subject
to compromise on the accompanying balance sheet as of June 30, 2010.

Non-Controlling interest in earnings from variable interest
entities.Our statement of operations also includes a $294,000 non-controlling interest in the losses of the variable interest entities resulting from the consolidation of a number of variable interests formed as a result of the New Market
Tax Credit transactions discussed below.

Liquidity and Capital Resources

At June 30, 2010, we had an accumulated deficit of approximately $153 million and a working capital deficit of approximately $84 million, including
those liabilities subject to compromise through our Chapter 11 proceedings. We intend to attempt to meet our cash requirements through proceeds from our debtor-in-possession line of credit, cell culture and instrument manufacturing activities, the
use of cash on hand, trade-vendor credit, restructuring of our outstanding debt obligations through the Chapter 11 proceedings, and short-term borrowings, debt and equity financings, and strategic transactions such as collaborations and licensing.
Our ability to continue present operations, pay our liabilities as they become due, and meet our obligations for vaccine development is dependent upon our ability to obtain significant external funding in the very short term.

Additional sources of funding have not been established; however, additional financing is currently being sought from a number of sources, including
through the sale of equity or debt securities, strategic collaborations, recognized research funding programs, as well as domestic and/or foreign licensing of our vaccine. We are currently in the process of exploring these various financing
alternatives. There can be no assurance that we will be successful in securing such financing at commercially acceptable terms, if at all. Accordingly, our ability to continue present operations, pay our existing liabilities as they become due, and
continue our product development efforts is dependent upon our ability to successfully complete the Chapter 11 reorganization process and to obtain significant external funding in the very near term, which raises substantial doubt about our ability
to continue as a going concern. If adequate funds are not available from the foregoing sources in the near term, or if we determines it to otherwise be in our best interest, we may consider additional strategic financing options, including sales of
assets, or we may be required to delay, reduce the scope of, or eliminate one or more of our research or development programs or curtail some or all of our commercialization efforts.



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New Market Tax Credit Transactions

April 2006 NMTC
Transaction5:

On April 25, 2006, our wholly owned subsidiary, Biovax, Inc. (Biovax) closed a financing transaction (Transaction I) that was
structured in an effort to obtain certain perceived advantages and enhancements from the New Markets Tax Credit (NMTC) regulations adopted under the auspices of the United States Department of the Treasury in 2002 to provide incentive
for investing in businesses located in qualifying census tracts, or areas with a median income below the poverty line. The NMTC was provided for in the Community Renewal Relief Act of 2000 (the Act) and permits taxpayers
(whether companies or individuals) to claim credits against their Federal income taxes for up to 39% of qualified investments in the equity of Community Development Entities (CDE). CDE are privately managed investment institutions that
are certified to make Qualified Low-Income Community Investments (QLICI). The following parties were involved in Transaction I: Accentia, our majority shareholder, Biolender, LLC (Biolender), Biovax Investment Corp., Biovax
Investment, LLC (Fund), U.S. Bancorp Community Investment Corporation (U.S. Bancorp), Telesis CDE Two, LLC (CDE), Telesis CDE Corporation, Biovax, and Laurus. Biovax is a qualified, active low-income business and
is eligible to receive investment capital under the NMTC regulations.

On March 31, 2006, in contemplation of Transaction I, we closed a
financing transaction with Laurus pursuant to which Laurus purchased from us a secured promissory note in the principal amount of $7.799 million (the Laurus Note). Accentia originally guaranteed 64% of any amounts outstanding under the
Laurus Note. On May 30, 2008, this guaranty was modified to reflect a fixed principal amount of $5.0 million. Under the terms of the Laurus Note, $7.5 million of the principal amount was deposited into our restricted bank account (the
Restricted Account) pursuant to a restricted account agreement between ourselves and Laurus. Accentia, Analytica International, Inc. and Laurus also entered into an Amended and Restated Stock Pledge Agreement pledging Accentias
shares of TEAMM Pharmaceuticals, Inc. and Analytica International, Inc., as well as the Companys and Accentias membership interests in Biolender, which was added as obligor by way of joinder, to secure the obligations owed to Laurus as a
result of the Laurus Note.

In contemplation of Transaction I, we formed, along with Accentia Biolender, as a Delaware limited liability
company. On April 21, 2006, $2.5 million was released from the Restricted Account created under the Laurus Note. The release of these funds was contingent upon their use in Transaction I. These proceeds were used to purchase a 29.5% equity
investment in Biolender for $2.5 million. Accentia used the proceeds of a $6.0 million intraday loan from First Bank to purchase the remaining 70.5% equity interest in Biolender. The $6.0 million loan from First Bank was fully guaranteed by two
directors of Accentia. On April 27, 2006, we redeemed 10 million shares of common stock owned of record by Accentia for a $6.0 million cash payment which equaled the market price of $0.60 per share. Accentia used the proceeds of the stock
redemption to repay its intraday loan due First Bank. Subsequently, on October 31, 2006, we entered into a Purchase Agreement with Accentia whereby we purchased Accentias 70.5% ownership interest in Biolender. In consideration of the sale
of this interest in Biolender, we issued to Accentia ten million shares of common stock, representing the negotiated value of the purchased interest.

In contemplation of Transaction I, Biovax Investment, LLC (the Fund) was established. U.S. Bancorp invested $3.6 million for a 99.99% equity
interest in the Fund. Biovax Investment Corp., the Fund manager, invested an additional $100 for the remaining 0.01% equity interest. On April 25, 2006, Biolender loaned the Fund $8.5 million pursuant to a 5.18%, annual rate, senior secured,
convertible note receivable, due October 27, 2013. Interest on the note is payable as follows: (i) 0.64% interest per annum, non-compounding, shall be payable on the first day of each calendar month until October 27, 2013; and
(ii) any remaining accrued and unpaid interest shall be payable in one installment on October 27, 2013. The note is convertible at the option of the Fund into shares of our common stock near the maturity date.



|5 | In July 2010, we and certain of our affiliates entered into an agreement (the Worcester Restructuring Agreement) with Telesis CDE
Corporation and Telesis CDE Two, LLC (collectively, Telesis), contingent upon submission to and approval by the Bankruptcy Court. The Worcester Restructuring Agreement effectively terminates all agreements and obligations of all parties
pursuant to Transaction I in consideration of retention by Telesis of an unsecured claim in our Chapter 11 proceeding in the amount of $0.3 million along with a settlement payment in the amount of $85,000 to defray certain legal and administrative
expenses incurred by Telesis. Upon approval by the Bankruptcy Court, our Guaranty, the Guaranty by our parent, Accentia, all of our subsidiary Guaranties from affiliates and third parties and all other obligations to all parties to Transaction I
will be terminated.
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The proceeds received by the Fund from the aforementioned financing transactions were used to make a
contemporaneous 99.99% equity investment in Telesis CDE II, LLC ($12 million) as well as to make payment for associated management, legal and accounting fees ($0.1 million). The $12 million investment by the Fund to the CDE constituted a qualified
equity investment (QEI) under the New Markets Tax Credit Program authorized by Section 45D of the Internal Revenue Code of 1986, as amended (the Code), resulting in $4.7 million in tax credits.

The CDE is a Community Development Entity that is certified through the U.S. Treasury Department to make QLICI, and is managed and partially owned
(0.01%) by Telesis CDE Corporation, a private financial institution. Telesis CDE Corporation paid $1,200 in consideration for its 0.01% interest in Telesis. The CDE, upon receipt of its equity funding, contemporaneously issued $11.5 million to
Biovax for a 1.0% convertible promissory note payable, due October 27, 2013 (the Loan). The convertible promissory note is convertible into common stock at the option of the CDE within 5 days of the maturity date at a conversion
price equaling the then trading market price of the common stock. The overall arrangement provides that in the event the CDE converts the note payable, the aforementioned note receivable is subject to immediate conversion at the same conversion
price. We also issued to Telesis CDE Corporation warrants to purchase 1.2 million shares of our common stock over a period of nine-years at a fixed price of $1.30 per share. These warrants are reflected as an equity financing cost in
stockholders equity at a fair value of $517,000 computed using the Black-Scholes option pricing model. Accentia also issued warrants to Telesis CDE Corporation to purchase 0.2 million shares of Accentias common stock over a period
of seven years at a fixed price of $9.00 per share.

Biovax used the proceeds of the $11.5 million convertible promissory note as follows:
$6.0 million was paid to Biovest pursuant to an Asset Purchase and Sale Agreement dated April 18, 2006 and as described further below, $1.6 million was issued as a dividend to Biovest and $1.3 million was paid to Biovest for the BiovaxID
anti-cancer vaccines in various stages of production. The remaining $2.6 million was used to cover ongoing operational expenses.

The
transaction was structured so that, upon maturity, Biovax will have paid approximately $12.4 million in principal and interest payments to the CDE. The operating agreement of the CDE stipulates that in the event the QLICI is repaid in the
combination of stock and cash, the stock received shall be distributed to the Fund. Furthermore, any distributable cash received by Telesis CDE II, LLC shall be distributed to the Fund in proportion to the Funds respective percentage interest
in the CDE in an amount sufficient to fully pay the Funds note payable to Biolender. Upon maturity, the Fund will have paid approximately $11.9 million in principal and interest payments to Biolender. At maturity, total equity of the Fund is
approximated to be $0.1 million resulting from the difference of $12.4 million in principal and interest payments received less $11.9 million in principal and interest paid less approximately $0.4 million in estimated operating costs of the Fund
over the 7.5 year term of the notes. Biolender and U.S. Bancorp entered into a put option wherein U.S. Bancorp will have the right to put its investment in the Fund to us near the maturity of the instruments at a price of $0.18 million. Management
has concluded that the fair value of U.S. Bancorps investment in the Fund at maturity of both notes (approximately $0.1 million) would be less than the $0.18 million U.S. Bancorp would receive upon exercise of the put option and thus it is
managements expectation that this option will be exercised. Thus, prior to maturity of both notes, it is anticipated that the Fund will be 99.99% owned by Biolender. We accounted for this option as a derivative liability that requires
recognition at fair value. We utilized a probability-based, discounted cash flow approach to value the put. Accordingly, the valuation technique provided for the recognition of the full put amount ($0.18 million) at the present value of its cash
flows, using market interest rates that would likely be considered by market participants trading similar instruments.



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Salient terms and conditions of Transaction I are as follows:



| |  |  | Under an Asset Purchase and Sale Agreement dated as of April 18, 2006 (the Asset Purchase Agreement), we transferred all or
substantially all of the assets of our vaccine manufacturing business situated at 377 Plantation Street, Worcester, Massachusetts (the Plant and the assets hereinafter the Equipment) and our rights under that certain lease
agreement for the Plant and that certain letter of intent with the landlord to potentially lease additional space adjacent to the Plant (collectively the Leasehold) to Biovax. As full purchase price for the Equipment, Biovax paid Biovest
$1.5 million. In addition, Biovax advanced rental payments for the Leasehold in the amount of $4.5 million. Under the Asset Purchase Agreement, we were required to treat the advance as unrestricted and non-segregated funds provided that we use the
funds to make all required lease payments. Finally, Biovax also hired all of our employees that are related to the vaccine manufacturing business and assumed responsibility for all accrued vacation time and the maintenance of existing health and
other benefits.
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| |  |  | The tax credits arising from this transaction were fully assigned to U.S. Bancorp. Biovax entered into an indemnification agreement directly with U.S.
Bancorp that provides for indemnification in the event of tax credit recapture from events caused by Biovax. Biovax is contractually required to maintain the following covenants to avoid tax credit recapture: (i) Biovax shall maintain its
status as a qualified active low-income business; (ii) At least fifty percent of the use of the tangible property of Biovax (whether owned or leased) will be within the low-income community as defined by Section 45D(e) of the Code;
(iii) At least fifty percent of the services performed for Biovax by its employees will be within low-income community as defined by Section 45D(e) of the Code; (iv) Less than five percent of the average of the unadjusted bases of the
property of Biovax will be attributable to collectibles (as defined in Section 408(m)(2) of the Code, and which includes any work of art; any rug or antique; any metal or gem; any stamp or coin; and any alcoholic beverage) other than
collectibles that are held primarily for sale to customers in the ordinary course of business; (v) Less than five percent of the average of the unadjusted bases of the property of Biovax will be attributable to nonqualified financial property
(as defined in Section 1397C(e) of the Code and in Section 1.45D-1(d)(4)(i)(E) of the regulations promulgated thereunder (the Regulations), and which includes debt, stock, partnership interests, options, futures contracts,
forward contracts, warrants, notional principal contracts, annuities and other similar property); (vi) No part of the business activities of Biovax will consist of the operation of any private or commercial golf course, country club, massage
parlor, hot tub facility, or suntan facility, race track or other facility used for gambling, or store the principal business of which is the sale of alcoholic beverages for consumption off premises; (vii) No part of Biovaxs business
activities will include the rental to others of residential rental property (the term residential rental property is defined in Section 168(e)(2)(A) of the Code as meaning any building or structure if eighty percent or more of the
gross rental income from such building or structure for the taxable year is rental income from dwelling units); (viii) The predominant trade or business of Biovax will not include the development or holding of intangibles for sale or license,
as provided under Section 1.45D-1(d)(5)(iii) of the Regulations; (ix) Farming (within the meaning of Section 2032A(e)(5)(A) or (B) of the Code) will not be an activity of Biovax; (x) Biovax will generate revenues by the date
of April 25, 2009; (xi) Biovax shall not discontinue conducting business, shall not materially change the nature of its business, and shall not materially change the manner in which its business activities are conducted, other than changes
in the nature of its business or the manner in which it conducts its business that do not cause the making of the loan by the lender to cease to constitute a qualified low-income community investment as such term is used in
Section 45D of the Code (as determined by the lender in its good faith judgment and based upon the advice of counsel); (xii) Biovax will not be a bank, credit union or other financial institution; (xiii) Biovax will not maintain
a qualified low-income building under Section 42 of the Code; (xiv) Biovax will not become a single-member entity treated as disregarded as separate from its owner for federal income tax purposes, nor be liquidated or merged into another
entity without the written consent of Telesis CDE II, LLC; and (xv) we, along with Biovax will operate consistently with the Asset Purchase Agreement between us and Biovax, and will not amend such agreement without prior written consent of
Telesis CDE II, LLC. An example of an event that would not cause a recapture is changes in the Code that results in such recapture. The total indemnification amount could be $4.7 million (representing 39% of the $12.0 million qualified investment).
However, in accordance with Financial Interpretation 45 Guarantors Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of the Indebtedness of Others, the conditions and events that could result in recapture are
within the control of Biovax. Therefore, this potential liability is not reflected in the consolidated financial statements.
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| |  |  | We, along with Accentia and certain members of both of our board of directors entered into a guarantee arrangement with the CDE for the debt service of
Biovax. We have guaranteed 100% of the debt service while our directors and Accentias directors have guaranteed up to $6.0 million of the debt service. In addition, Accentia has partially guaranteed debt service with limitations established at
no greater than $60,000 each year the instrument is outstanding. We issued warrants to purchase 1.0 million shares of common stock to the officers and directors as compensation for their guarantees. The guarantees were treated in a manner
similar to contributed service and their fair value of $460,000 was charged to expense upon issuance. We also indemnified the guarantors from any claims of any kind to the extent that the guarantors are called upon to pledge funds, assets or
collateral in connection with the guarantee being executed.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Various legal and accounting fees of $108,000 paid directly by Biovax and involved in structuring this transaction were recorded as a reduction to
additional paid-in capital. Various legal and accounting fees of $170,000 paid by entities in which we have a variable interest and involved in structuring this transaction (the Fund and the CDE) were recorded as a reduction to non-controlling
interests in variable interest entities on our consolidated balance sheet. Professional fees of $360,000 involved in the continuing management of this transaction were recorded as a prepaid expense and will be amortized over a period of seven and
one half years, representing the duration of both convertible notes issued by the Fund and Biovax.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As a result of our
Chapter 11 filing on November 10, 2008, Biovax discontinued interest payments due on its QLICI promissory note.

December 2006 NMTC
Transaction6:

On December 8, 2006, our wholly owned subsidiary, AutovaxID, Inc. (AutovaxID) closed a second New Market Tax Credit financing transaction
(Transaction II). The following parties were involved in Transaction II: AutovaxID, Accentia, Biolender II, LLC (Biolender II), St. Louis New Market Tax Credit Fund II, LLC (CDE II), St. Louis Development Corp.,
AutovaxID Investment LLC (Fund II), U.S. Bancorp, and Laurus.

On December 8, 2006, Accentia loaned us $3.1 million pursuant
to a Secured Promissory Note (the Accentia Note). Under the terms of the Accentia Note, interest accrues at a rate equal to prime rate, and is convertible, at Accentias option, into shares of our common stock at a conversion price
of $0.32 per share. Upon the closing of Transaction II, we repaid Accentia $1.1 million. The remaining $2.0 million of principal and all the accrued and unpaid interest is included in liabilities subject to compromise in the accompanying
June 30, 2009 consolidated balance sheet as the result of our voluntary petition for relief under Chapter 11 of the Bankruptcy Code, filed on November 10, 2008.

In contemplation of Transaction II, we formed Biolender II. On December 8, 2006, $2.5 million was released from the Restricted Account created under
the Laurus Note. The release of these funds was contingent upon their use in Transaction II. These funds, together with the amount loaned to us under the Accentia Note, funded the purchase of a 100% equity interest in Biolender II for our benefit.
Our entire equity interest of $5.6 million in Biolender II has been pledged to Laurus as collateral to secure the Laurus Note.

In
contemplation of Transaction II, Fund II was established. U.S. Bancorp invested $2.4 million for a 100% equity interest in Fund II. Additionally, Biolender II and Fund II entered into a Loan and Security Agreement pursuant to which Biolender II made
a loan to Fund II in the principal amount of $5.6 million (the Leverage Loan), evidenced by a promissory note dated December 8, 2006 payable from Fund II to Biolender II (the Leverage Note). The Leverage Note becomes due
on June 9, 2014, and bears an interest rate of 8%, non-compounding. Payment of interest is due annually on the first calendar day of each year through maturity. The outstanding principal amount on the Leverage Loan and any unpaid interest is
due on maturity in cash.



|6 | In July 2010, we and certain of our affiliates entered into an agreement (the St. Louis Restructuring Agreement) with St. Louis
Development Corporation and Saint Louis New Markets Tax Credit Fund II, LLC (collectively SLDC), contingent upon submission to and approval by the Bankruptcy Court. The St. Louis Restructuring Agreement effectively terminates all
agreements and obligations of all parties pursuant to Transaction II in consideration of retention by SLDC of an unsecured claim in our Chapter 11 proceeding in the amount of $160,000 along with a settlement payment in the amount of $62,000 to
defray certain legal and administrative expenses incurred by SLDC. Upon approval by the Bankruptcy Court, our Guaranty, the Guaranty by our parent, Accentia, all of our subsidiary Guaranties from affiliates and third parties and all other
obligations to all parties to Transaction II will be terminated.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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The proceeds received by Fund II from U.S. Bancorp and Biolender II were used to make a contemporaneous
99.99% equity investment in CDE II. The $8.0 million investment by Fund II to CDE II constituted a qualified equity investment (QEI) under the New Markets Tax Credit Program authorized by Section 45D of the Code, resulting in
$3.12 million in tax credits which were allocated to U.S. Bancorp. All of Fund IIs interest in CDE II has been pledged to Biolender II as collateral for the Leverage Loan.

CDE II is a Community Development Entity (CDE) that is certified through the U.S. Treasury Department to make QLICI, and is managed and
partially owned (0.01%) by St. Louis Development Corporation, a not-for-profit corporation organized in Missouri. St. Louis Development Corporation paid $1,000 consideration for its 0.01% interest in CDE II. CDE II, upon receipt of its equity
funding, contemporaneously issued a QLICI to AutovaxID, evidenced by a $7.7 million subordinated promissory note dated as of December 8, 2006 which matures on December 8, 2036 (the CDE II Loan). Pursuant to a call right,
for a period of six months starting on December 8, 2013, the CDE will have the right to call for the repayment of the CDE II Loan in the amount of $5.7 million, in full satisfaction of the principal on the CDE II Loan. Interest on the
outstanding principal amount of the CDE II Loan accrues at the rate of 5.82% per annum, non-compounding and is payable in arrears on an annual basis having commenced on January 2, 2007 and continuing until maturity. The CDE II Loan is
guaranteed in full by us and is also guaranteed up to an amount of $4.5 million by officers and directors of Accentia. We issued warrants to purchase 2.6 million shares of common stock to these officers and directors as compensation for their
guarantees. The guarantees were treated in a manner similar to contributed service and their fair value of $1.4 million was charged to expense upon issuance. We also indemnified the guarantors from any claims of any kind to the extent that the
guarantors are called upon to pledge funds, assets or collateral in connection with the guarantee being executed.

AutovaxID used the proceeds
from the $7.7 million promissory note to pay Biovest $6.1 million pursuant to a License and Asset Purchase Agreement dated December 8, 2006 and described further below. The remaining $1.6 million was used to cover ongoing operational expenses
of AutovaxID.

Transaction II was structured so that, on June 9, 2014, AutovaxID will have paid approximately $9.1 million in principal
and interest payments to CDE II. The operating agreement of CDE II stipulates that any distributable cash received shall be distributed to Fund II in proportion to the respective percentage interest Fund II has in CDE II in an amount sufficient to
fully pay the Fund II note payable to Biolender II. On June 9, 2014, Fund II will have paid approximately $9.0 million in principal and interest payments to Biolender II (assuming CDE II exercises its right to call the CDE II Loan for $5.7
million on June 9, 2014). At maturity then, total equity of the Fund is approximated to be $100,000, resulting from the difference of $9.1 million in principal and interest payments received less $9.0 million in principal and interest paid
over the 7.5 year term of the notes.

Biolender II and U.S. Bancorp entered into a put option wherein U.S. Bancorp will have the right to put
its investment in Fund II to us near the maturity of the instruments at a price of $120,000. Management has concluded that the fair value of U.S. Bancorps investment in Fund II at maturity of both notes (approximately $100,000) would
be less than the $120,000 U.S. Bancorp would receive upon exercise of the put option and thus it is managements expectation that this option will be exercised. Thus, prior to maturity of both notes, it is anticipated that the Fund will be
100% owned by Biolender II. We accounted for this option as a derivative liability that requires recognition at fair value. We utilized a probability-based, discounted cash flow approach to value the put. Accordingly, the valuation technique
provided for the recognition of the full put amount ($120,000) at the present value of its cash flows, using market interest rates that would likely be considered by market participants trading similar instruments.

Salient terms and conditions of Transaction II are as follows:



| |  |  | Under a License and Asset Purchase Agreement dated as of December 8, 2006, we granted a nonexclusive license to the intellectual property enabling
AutovaxID to manufacture and sell automated cell culture instruments in the United States, Canada and Mexico (the License), which license became exclusive upon the occupancy by AutovaxID of a space located at 1031 Macklind Avenue, St.
Louis, Missouri (the New Plant) in June 2007. As full purchase price for the License and related business opportunity, AutovaxID paid Biovest $5.6 million. We also agreed to sell AutovaxID certain equipment upon the occupancy by
AutovaxID of the New Plant for the fair market value of $0.5 million.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The CDE II Loan is secured by second lien on all assets of AutovaxID for the benefit of CDE II pursuant to a Second-Lien Security Agreement between
AutovaxID and CDE II dated as of December 8, 2006. Laurus has a senior lien on the assets of AutovaxID through our security agreement with Laurus, which AutovaxID joined by way of a Joinder Agreement.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | AutovaxID does not have the right to prepay the CDE II Loan prior to June 8, 2014. AutovaxID does have the right to prepay the CDE II Loan after
this date, provided that (i) it prepays the entire CDE II Loan amount, (ii) CDE II consents to such prepayment and U.S. Bancorp and the managing member of CDE II agree on the reinvestment of such proceeds in an alternative investment that
would qualify as a QLICI and (iii) AutovaxID or certain individuals who provided guaranties in Transaction II (the Individual Guarantors) under the Tax Credit and Reimbursement and Indemnity Agreement pay to U.S. Bancorp the
recapture amount so specified in such agreement.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | All indebtedness owed by AutovaxID and its subsidiaries to CDE II, including its right to receive payments of principal and interest under the CDE II
Loan, is expressly subordinate to the extent set forth under the Telesis Subordination Agreement dated as of December 8, 2006 entered into by Laurus, CDE II, U.S. Bancorp, AutovaxID and us.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The tax credits arising from this transaction were fully assigned to U.S. Bancorp. AutovaxID has entered into an indemnification agreement directly
with U.S. Bancorp that provides for indemnification in the event of tax credit recapture from events caused by AutovaxID. AutovaxID is contractually required to maintain the following covenants to avoid tax credit recapture: (i) AutovaxID shall
maintain its status as a qualified active low-income business; (ii) At least fifty percent of the use of the tangible property of AutovaxID (whether owned or leased) will be within the low-income community as defined by Section 45D(e) of
the Code; (iii) At least fifty percent of the services performed for AutovaxID by its employees will be within low-income community as defined by Section 45D(e) of the Code; (iv) Less than five percent of the average of the
unadjusted bases of the property of AutovaxID will be attributable to collectibles (as defined in Section 408(m)(2) of the Code, and which includes any work of art; any rug or antique; any metal or gem; any stamp or coin; and any alcoholic
beverage) other than collectibles that are held primarily for sale to customers in the ordinary course of business; (v) Less than five percent of the average of the unadjusted bases of the property of AutovaxID will be attributable to
nonqualified financial property (as defined in Section 1397C(e) of the Code and in Section 1.45D-1(d)(4)(i)(E) of the Regulations, and which includes debt, stock, partnership interests, options, futures contracts, forward contracts,
warrants, notional principal contracts, annuities and other similar property); (vi) No part of the business activities of AutovaxID will consist of the operation of any private or commercial golf course, country club, massage parlor, hot tub
facility, or suntan facility, race track or other facility used for gambling, or store the principal business of which is the sale of alcoholic beverages for consumption off premises; (vii) No part of AutovaxIDs business activities will
include the rental to others of residential rental property (the term residential rental property is defined in Section 168(e)(2)(A) of the Code as meaning any building or structure if eighty percent or more of the gross rental
income from such building or structure for the taxable year is rental income from dwelling units); (viii) The predominant trade or business of AutovaxID will not include the development or holding of intangibles for sale or license, as provided
under Section 1.45D-1(d)(5)(iii) of the Regulations; (ix) Farming (within the meaning of Section 2032A(e)(5)(A) or (B) of the Code) will not be an activity of AutovaxID; (x) AutovaxID will generate revenues by the date of
December 8, 2009; (xi)AutovaxID shall not discontinue conducting business, shall not materially change the nature of its business, and shall not materially change the manner in which its business activities are conducted, other than changes in
the nature of its business or the manner in which it conducts its business that do not cause the making of the loan by the lender to cease to constitute a qualified low-income community investment as such term is used in Section 45D
of the Code (as determined by the lender in its good faith judgment and based upon the advice of counsel); (xii) AutovaxID will not be a bank, credit union or other financial institution; (xiii) AutovaxID will not maintain a qualified
low-income building under Section 42 of the Code; (xiv) AutovaxID will not become a single-member entity treated as disregarded as separate from its owner for federal income tax purposes, nor be liquidated or merged into another entity
without the written consent of CDE II; and (xv) AutovaxID and Biovest will operate consistently with the License between AutovaxID and Biovest, and will not amend such agreement without prior written consent of CDE II. An example of an event
that would not cause a recapture is changes in the Code that results in such recapture. The total indemnification amount could be $3.12 million (representing 39% of the $8.0 million qualified investment). However, in accordance with Financial
Interpretation 45 Guarantors Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of the Indebtedness of Others, the conditions and events that could result in recapture are within AutovaxIDs control.
Therefore, this potential liability is not reflected in the consolidated financial statements.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Under a Reimbursement Agreement dated as of December 8, 2006, we agreed to reimburse St. Louis Development Corp (the 0.01% owner and managing
member of CDE II) up to $32,000 annually for expenses incurred by St. Louis Development Corp in connection with its management of CDE II.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Various legal, accounting, and professional fees of $433,000 paid directly by Biovest and AutovaxID and involved in structuring this transaction were
recorded as a reduction to additional paid-in capital. Various legal and accounting fees of $180,000 paid by entities in which we have a variable interest (CDE II and Fund II) and involved in structuring this transaction were recorded as a reduction
to non-controlling interests in variable interest entities on our consolidated balance sheet. Professional fees of $115,000 involved in the continuing management of this transaction were recorded as a prepaid expense and will be amortized over a
period of seven and one half years, representing the duration of the note issued by Fund II and payable to Biolender II.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As
a result of our Chapter 11 filing on November 10, 2008, AutovaxID discontinued interest payments due on the QLICI promissory note.

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 in any period will not necessarily be indicative of results in subsequent periods.

Potential Dilutive Effect of
Outstanding Stock Options, Warrants and Convertible Debt:

We have outstanding options, warrants and convertible debt pursuant to which we
may be required to issue additional shares of our common stock. These dilutive securities are described in footnotes to our Consolidated Financial Statements for the fiscal year ended September 30, 2009, which were filed as part of our Annual
Report on Form 10-K.



|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- | ----------------------------------------------------------

Not Applicable.



|ITEM 4. | CONTROLS AND PROCEDURES
|------- | -----------------------

Under the
supervision and with the participation of our management, including our chief executive officer (principal executive officer) and chief financial officer (principal financial officer), we conducted an evaluation of our disclosure controls
and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act). Based on this evaluation, our chief executive officer and chief financial
officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q to ensure that information required to be disclosed in the reports that we file or
submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SECs rules and forms. These disclosure controls and procedures include controls and procedures designed to ensure that
information required to be disclosed by us in the reports we file or submit is accumulated and communicated to management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding
required disclosure.

There have been no changes in our internal controls over financial reporting identified in connection with this
evaluation that occurred during the quarter ended June 30, 2010 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.



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PART II. OTHER INFORMATION



|ITEM 1. | LEGAL PROCEEDINGS
|------- | -----------------

Clinstar
litigation:

On August 4, 2008, we were served with a summons and complaint filed in California Superior Court on behalf of Clinstar
LLC for breach of contract for non-payment of certain fees for clinical trial studies and pass-through expenses in the amount of $385,000. We intend to seek to dismiss this litigation and plan to defend these claims vigorously. Upon the filing of
our Chapter 11 petition on November 10, 2008, this litigation was automatically stayed pursuant to provisions of federal bankruptcy law.

Bankruptcy proceedings:

On
November 10, 2008, we filed a voluntary petition for reorganization under Chapter 11 in the United States Bankruptcy Court for the Middle District of Florida, Tampa Division (the Bankruptcy Court). During the pendency of the
Chapter 11 proceedings, we will operate our business as a debtor-in-possession in accordance with the provisions of Chapter 11, and will be subject to the jurisdiction of the Bankruptcy Court. All pending or threatened litigation or claims
involving us were automatically stayed as a result of this Chapter 11 filing, and all such claims may be subject to compromise or modification through the terms of any Plan of Reorganization filed by us in the Chapter 11 proceedings.

On May 14, 2010, the Company filed its Joint Plan of Reorganization. Subsequent to the period of this report, on July 2, 2010, the Company
filed its Joint Disclosure Statement with the Bankruptcy Court. On August 9, 2010, the Bankruptcy Court held a hearing on the Joint Disclosure Statement and scheduled a confirmation hearing on the Joint Plan of Reorganization for
September 22, 2010.

Other proceedings:

Except for the foregoing, we are not party to any material legal proceedings, and management is not aware of any threatened legal proceedings that could
cause a material adverse impact on our business, assets, or results of operations.

Further, from time to time we are subject to various legal
proceedings in the normal course of business, some of which are covered by insurance.



|ITEM 1A. | RISK FACTORS
|-------- | ------------

There have been no material
changes from the risk factors disclosed in Item 1A of Part I of our Form 10-K for the year ended September 30, 2009.



|ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|------- | -----------------------------------------------------------

None.



|ITEM 3. | DEFAULTS UPON SENIOR SECURITIES
|------- | -------------------------------

None.



|ITEM 4. | (Removed and Reserved.)
|------- | -----------------------



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|ITEM 5. | OTHER INFORMATION
|------- | -----------------

NMTC Transactions I
and II Compromises:

In July 2010, we and certain affiliates entered into an agreement (the Worcester Restructuring Agreement)
with Telesis CDE Corporation and Telesis CDE Two, LLC (collectively, Telesis), contingent upon submission to and approval by the Bankruptcy Court. The Worcester Restructuring Agreement effectively terminates all agreements and
obligations of all parties pursuant to Transaction I (see Item 2 of Part I of this Quarterly Report for further discussion of this transaction) in consideration of retention by Telesis of an unsecured claim in our Chapter 11 proceeding in the
amount of $0.3 million along with a settlement payment in the amount of $85,000 to defray certain legal and administrative expenses incurred by Telesis. Upon approval by the Bankruptcy Court, our Guaranty, the Guaranty by our parent, Accentia, all
subsidiary Guaranties from affiliates and third parties and all our other obligations to all parties to Transaction I will be terminated.

In
July 2010, we and certain affiliates entered into an agreement (the St. Louis Restructuring Agreement) with St. Louis Development Corporation and Saint Louis New Markets Tax Credit Fund II, LLC (collectively, SLDC),
contingent upon submission to and approval by the Bankruptcy Court. The St. Louis Restructuring Agreement effectively terminates all agreements and obligations of all parties pursuant to Transaction II (see Item 2 of Part I of this Quarterly
Report for further discussion of this transaction) in consideration of retention by SLDC of an unsecured claim in our Chapter 11 proceeding in the amount of $0.16 million along with a settlement payment in the amount of $62,000 to defray certain
legal and administrative expenses incurred by SLDC. Upon approval by the Bankruptcy Court, our Guaranty, the Guaranty by our parent, Accentia, all subsidiary Guaranties from affiliates and third parties and all our other obligations to all parties
to Transaction II will be terminated.

Grant of Orphan Drug Designation for
BiovaxID®:

On July 9, 2010, the FDA granted Orphan Drug designation to BiovaxID for treatment of mantle cell lymphoma (MCL). With FDA Orphan Drug
designation, we have a seven-year period of market exclusivity for BiovaxID upon approval, thereby offering competitive protection from similar drugs of the same class. Orphan Drug designation also provides us with eligibility to receive potential
tax credit benefits, potential grant funding for research and development and significantly reduced filing fees for marketing applications.

Bankruptcy Proceeding:

On July 2,
2010, we filed our Disclosure Statement with the Bankruptcy Court. On August 9, 2010, the Bankruptcy Court held a hearing on the Joint Disclosure Statement and scheduled a confirmation hearing on the Joint Plan of Reorganization for
September 22, 2010.



|ITEM 6. | EXHIBITS
|------- | --------

The following exhibits are
filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q:



|               |  |                                                                    
|-------------- |  | -------------------------------------------------------------------
|Exhibit
Number |  | Description                                                        
|               | 
|31.1           |  | Rule 13a-14(a)/15d-14(a) Certifications of Chief Executive Officer.
|               | 
|31.2           |  | Rule 13a-14(a)/15d-14(a) Certifications of Chief Financial Officer.
|               | 
|32.1           |  | 18 U.S.C. Section 1350 Certifications of Chief Executive Officer.  
|               | 
|32.2           |  | 18 U.S.C. Section 1350 Certifications of Chief Financial Officer.  



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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.



|                      |  |                                                               
|--------------------- |  | --------------------------------------------------------------
|                      |  | BIOVEST INTERNATIONAL, INC.                                   
|                      |  | (Registrant)                                                  
|                      | 
|Date: August 16, 2010 |  | /s/ Francis E. ODonnell, Jr.                                 
|                      |  | Francis E. ODonnell, Jr., M.D.                               
|                      |  | Chairman of the Board; Chief Executive Officer; Director      
|                      |  | (Principal Executive Officer)                                 
|                      | 
|Date: August 16, 2010 |  | /s/ Alan M. Pearce                                            
|                      |  | Alan M. Pearce                                                
|                      |  | Chief Financial Officer                                       
|                      |  | (Principal Financial Officer and Principal Accounting Officer)



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