##### Table of Contents

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U.S. Securities and Exchange Commission

Washington, D.C. 20549



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Form 10-QSB



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(Mark One)

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



For the quarterly period ended December 31, 2005



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



For the transition period from  to



Commissions file number 0-11480



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BIOVEST INTERNATIONAL, INC.

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



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



377 Plantation
Street, Worcester MA 01605

(Address of principal executive offices) (Zip Code)



Issuers telephone number: (813) 864-2554



---



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



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



At December 31, 2005, there were 80,390,663 shares of the registrants Common Stock, $0.01 par value (BVTI:OB), issued and outstanding.



Transitional Small Business Disclosure Format



(Check one)    Yes ̈No  x



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##### Table of Contents

INDEX



BIOVEST INTERNATIONAL, INC.



|                                                                                                      |  |     
|----------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                      |  | Page
|PART I. FINANCIAL INFORMATION                                                                         |  |     
|ITEM 1. Financial Statements                                                                          |  |     
|Condensed Balance Sheets as of December 31, 2005 (unaudited) and September 30, 2005 (audited)         |  | 3   
|Condensed Statements of Operations for the Three Months Ended December 31, 2005 and 2004 (unaudited)  |  | 5   
|Condensed Statement of Stockholders Deficit for the Three Months Ended December 31, 2005 (unaudited) |  | 6   
|Condensed Statements of Cash Flows for the Three Months Ended December 31, 2005 and 2004 (unaudited)  |  | 7   
|Notes to Condensed Financial Statements                                                               |  | 8   
|ITEM 2. Managements Discussion and Analysis or Plan of Operations                                    |  | 14  
|ITEM 3. Controls and Procedures                                                                       |  | 16  
|                                                                                                      | 
|PART II. OTHER INFORMATION                                                                            |  |     
|ITEM 1. Legal Proceedings                                                                             |  | 17  
|ITEM 2. Unregistered Sales of Equity Securities                                                       |  | 17  
|ITEM 6. Exhibits and Reports on Form 8-K                                                              |  | 18  
|Signatures                                                                                            |  | 19  



2



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##### Table of Contents

BIOVEST INTERNATIONAL, INC.



CONDENSED
BALANCE SHEETS



|                                                                                                                |  |                             |           |                            |   |          
|--------------------------------------------------------------------------------------------------------------- |  | --------------------------- | --------- | -------------------------- | - | ---------
|                                                                                                                |  | December 31,2005(Unaudited) |           | September 30,2005(Audited)
|ASSETS                                                                                                          |  |                             |           |                            |   |          
|Current assets:                                                                                                 |  |                             |           |                            |   |          
|Cash                                                                                                            |  | $                           | 195,000   |                            | $ | 32,000   
|Accounts receivable, net of $30,000 allowance for doubtful accounts at December 31, 2005 and September 30, 2005 |  |                             | 632,000   |                            |   | 531,000  
|Costs and estimated earnings in excess of billings on uncompleted contracts                                     |  |                             | 30,000    |                            |   | 21,000   
|Inventories                                                                                                     |  |                             | 293,000   |                            |   | 113,000  
|Prepaid expenses and other current assets                                                                       |  |                             | 81,000    |                            |   | 54,000   
|                                                                                                                |  |                             |           |                            |   |          
|Total current assets                                                                                            |  |                             | 1,231,000 |                            |   | 751,000  
|Property, plant and equipment, net                                                                              |  |                             | 950,000   |                            |   | 874,000  
|Other assets:                                                                                                   |  |                             |           |                            |   |          
|Patents and trademarks, net                                                                                     |  |                             | 401,000   |                            |   | 408,000  
|Goodwill                                                                                                        |  |                             | 2,131,000 |                            |   | 2,131,000
|                                                                                                                |  |                             |           |                            |   |          
|                                                                                                                |  | $                           | 4,713,000 |                            | $ | 4,164,000
|                                                                                                                |  |                             |           |                            |   |          



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##### Table of Contents

|                                                                                                                                                                        |  |                             |             |   |                             |   |             |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ----------- | - | --------------------------- | - | ----------- | -
|                                                                                                                                                                        |  | December 31,2005(Unaudited) |             |   | September 30,2005 (Audited) |  
|LIABILITIES AND STOCKHOLDERS DEFICIT                                                                                                                                   |  |                             |             |   |                             |   |             |  
|Current liabilities:                                                                                                                                                    |  |                             |             |   |                             |   |             |  
|Current maturities of long-term debt                                                                                                                                    |  |                             |             |   |                             |   |             |  
|Related Party                                                                                                                                                           |  | $                           |            |   |                             | $ | 1,310,000   |  
|Other                                                                                                                                                                   |  |                             | 701,000     |   |                             |   | 3,088,000   |  
|Accounts payable (including $293,000 and $285,000 due to affiliate at December 31, 2005, and September 30, 2005
respectively)                                           |  |                             | 1,749,000   |   |                             |   | 1,636,000   |  
|Customer deposits                                                                                                                                                       |  |                             | 28,000      |   |                             |   | 112,000     |  
|Accrued liabilities:                                                                                                                                                    |  |                             |             |   |                             |   |             |  
|Compensation and related taxes                                                                                                                                          |  |                             | 838,000     |   |                             |   | 1,146,000   |  
|Accrued interest, related party                                                                                                                                         |  |                             | 31,000      |   |                             |   |            |  
|Other                                                                                                                                                                   |  |                             | 761,000     |   |                             |   | 628,000     |  
|Billings in excess of costs and estimated earnings on uncompleted contracts                                                                                             |  |                             | 146,000     |   |                             |   | 48,000      |  
|Due to Related Party                                                                                                                                                    |  |                             | 6,174,000   |   |                             |   |            |  
|                                                                                                                                                                        |  |                             |             |   |                             |   |             |  
|Total current liabilities                                                                                                                                               |  |                             | 10,428,000  |   |                             |   | 7,968,000   |  
|                                                                                                                                                                        |  |                             |             |   |                             |   |             |  
|Long term debt, less current maturities                                                                                                                                 |  |                             | 87,000      |   |                             |   | 1,358,000   |  
|                                                                                                                                                                        |  |                             |             |   |                             |   |             |  
|Total Liabilities                                                                                                                                                       |  |                             | 10,515,000  |   |                             |   | 9,326,000   |  
|                                                                                                                                                                        |  |                             |             |   |                             |   |             |  
|Commitments and contingencies                                                                                                                                           |  |                             |            |   |                             |   |            |  
|                                                                                                                                                                        |  |                            
|Stockholders deficit:                                                                                                                                                  |  |                             |             |   |                             |   |             |  
|Preferred stock, $.01 par value, 50,000,000 shares authorized; 0 issued and outstanding                                                                                 |  |                             |            |   |                             |   |            |  
|Common stock, $.01 par value, 300,000,000 shares authorized; 80,390,663 and 77,920,763 issued and outstanding at December 31, 2005 and
September 30, 2005; respectively |  |                             | 804,000     |   |                             |   | 779,000     |  
|Additional paid-in capital                                                                                                                                              |  |                             | 35,051,000  |   |                             |   | 33,384,000  |  
|Accumulated deficit                                                                                                                                                     |  |                             | (41,657,000 | ) |                             |   | (38,643,000 | )
|Stock subscription receivable                                                                                                                                           |  |                             |            |   |                             |   | (682,000    | )
|                                                                                                                                                                        |  |                             |             |   |                             |   |             |  
|Total stockholders deficit                                                                                                                                             |  |                             | (5,802,000  | ) |                             |   | (5,162,000  | )
|                                                                                                                                                                        |  |                             |             |   |                             |   |             |  
|                                                                                                                                                                        |  | $                           | 4,713,000   |   |                             | $ | 4,164,000   |  
|                                                                                                                                                                        |  |                             |             |   |                             |   |             |  



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



4



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##### Table of Contents

BIOVEST INTERNATIONAL, INC.

CONDENSED STATEMENTS OF OPERATIONS

(unaudited)



|                                                                                                                                                     |  |                                        |            |   |      |   |            |  
|---------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------- | ---------- | - | ---- | - | ---------- | -
|                                                                                                                                                     |  | For the three months endedDecember 31, |           
|                                                                                                                                                     |  | 2005                                   |            |   | 2004 |  
|Revenues:                                                                                                                                            |  |                                        |            |   |      |   |            |  
|Cell culture products and services                                                                                                                   |  | $                                      | 418,000    |   |      | $ | 313,000    |  
|National cell culture center                                                                                                                         |  |                                        | 215,000    |   |      |   | 248,000    |  
|Instrument and disposables                                                                                                                           |  |                                        | 452,000    |   |      |   | 512,000    |  
|                                                                                                                                                     |  |                                        |            |   |      |   |            |  
|Total revenues                                                                                                                                       |  |                                        | 1,085,000  |   |      |   | 1,073,000  |  
|                                                                                                                                                     |  |                                        |            |   |      |   |            |  
|Operating costs and expenses:                                                                                                                        |  |                                        |            |   |      |   |            |  
|Cost of sales                                                                                                                                        |  |                                        | 603,000    |   |      |   | 919,000    |  
|Inventory write-down                                                                                                                                 |  |                                        |           |   |      |   | 319,000    |  
|Research and development (including related party costs of $222,000 and $824,000 for the three months ended December 31, 2005 and 2004
respectively) |  |                                        | 2,771,000  |   |      |   | 1,923,000  |  
|Marketing, general and administrative                                                                                                                |  |                                        | 616,000    |   |      |   | 562,000    |  
|                                                                                                                                                     |  |                                        |            |   |      |   |            |  
|Total operating costs and expenses                                                                                                                   |  |                                        | 3,990,000  |   |      |   | 3,723,000  |  
|                                                                                                                                                     |  |                                        |            |   |      |   |            |  
|Loss from operations                                                                                                                                 |  |                                        | (2,905,000 | ) |      |   | (2,650,000 | )
|                                                                                                                                                     |  |                                        |            |   |      |   |            |  
|Other income (expense):                                                                                                                              |  |                                        |            |   |      |   |            |  
|Interest expense, net                                                                                                                                |  |                                        | (109,000   | ) |      |   | (104,000   | )
|                                                                                                                                                     |  |                                        |            |   |      |   |            |  
|Net loss                                                                                                                                             |  | $                                      | (3,014,000 | ) |      | $ | (2,754,000 | )
|                                                                                                                                                     |  |                                        |            |   |      |   |            |  
|Net loss per common share:                                                                                                                           |  |                                        |            |   |      |   |            |  
|Basic and diluted                                                                                                                                    |  | $                                      | (.04       | ) |      | $ | (.07       | )
|Weighted average shares outstanding:                                                                                                                 |  |                                        |            |   |      |   |            |  
|Basic and diluted                                                                                                                                    |  |                                        | 78,673,991 |   |      |   | 38,196,733 |  



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



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##### Table of Contents

BIOVEST INTERNATIONAL, INC.

CONDENSED STATEMENTS OF STOCKHOLDERS DEFICIT

FOR THE THREE MONTHS ENDED
DECEMBER 31, 2005

(unaudited)



|                                            |  |              |  |                          |         |                    |   |            |                             |   |             |       |  |   |          |   |  |   |            |  
|------------------------------------------- |  | ------------ |  | ------------------------ | ------- | ------------------ | - | ---------- | --------------------------- | - | ----------- | ----- |  | - | -------- | - |  | - | ---------- | -
|                                            |  | Common Stock |  | AdditionalPaid-inCapital |         | AccumulatedDeficit |   |            | StockSubscriptionReceivable |   |             | Total | 
|Balances at September 30, 2005              |  | 77,920,763   |  | $                        | 779,000 |                    | $ | 33,384,000 |                             | $ | (38,643,000 | )     |  | $ | (682,000 | ) |  | $ | (5,162,000 | )
|                                            |  |              |  |                          |         |                    |   |            |                             |   |             |       |  |   |          |   |  |   |            |  
|Collection on Stock Subscription Receivable |  |             |  |                          |        |                    |   |           |                             |   |            |       |  |   | 682,000  |   |  |   | 682,000    |  
|Stock-based compensation                    |  |             |  |                          |        |                    |   | 2,000      |                             |   |            |       |  |   |         |   |  |   | 2,000      |  
|Conversion of accrued expense to equity     |  | 800,000      |  |                          | 8,000   |                    |   | 400,000    |                             |   |            |       |  |   |         |   |  |   | 408,000    |  
|Conversion of long-term debt to equity      |  | 1,669,900    |  |                          | 17,000  |                    |   | 1,265,000  |                             |   |            |       |  |   |         |   |  |   | 1,282,000  |  
|Net loss                                    |  |             |  |                          |        |                    |   |           |                             |   | (3,014,000  | )     |  |   |         |   |  |   | (3,014,000 | )
|                                            |  |              |  |                          |         |                    |   |            |                             |   |             |       |  |   |          |   |  |   |            |  
|Balances at December 31, 2005               |  | 80,390,663   |  | $                        | 804,000 |                    | $ | 35,051,000 |                             | $ | (41,657,000 | )     |  | $ |         |   |  | $ | (5,802,000 | )
|                                            |  |              |  |                          |         |                    |   |            |                             |   |             |       |  |   |          |   |  |   |            |  



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



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BIOVEST INTERNATIONAL, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(unaudited)



|                                                                               |  |                                    |            |   |                                    |   |            |  
|------------------------------------------------------------------------------ |  | ---------------------------------- | ---------- | - | ---------------------------------- | - | ---------- | -
|                                                                               |  | Three MonthsEndedDecember 31, 2005 |            |   | Three MonthsEndedDecember 31, 2004 |  
|Cash flows from operating activities:                                          |  |                                    |            |   |                                    |   |            |  
|Net loss                                                                       |  | $                                  | (3,014,000 | ) |                                    | $ | (2,754,000 | )
|Adjustments to reconcile net loss to net cash flows from operating activities: |  |                                    |            |   |                                    |   |            |  
|Depreciation                                                                   |  |                                    | 111,000    |   |                                    |   | 103,000    |  
|Amortization                                                                   |  |                                    | 7,000      |   |                                    |   | 30,000     |  
|Write-down of inventory                                                        |  |                                    |           |   |                                    |   | 319,000    |  
|Stock-based compensation                                                       |  |                                    | 2,000      |   |                                    |   | 2,000      |  
|Amortization of discounts related to debt                                      |  |                                    | 22,000     |   |                                    |   | 12,000     |  
|Changes in cash resulting from changes in:                                     |  |                                    |            |   |                                    |   |            |  
|Accounts receivable                                                            |  |                                    | (101,000   | ) |                                    |   | (436,000   | )
|Costs and estimated earnings in excess of billings on uncompleted contracts    |  |                                    | (9,000     | ) |                                    |   | (7,000     | )
|Inventories                                                                    |  |                                    | (179,000   | ) |                                    |   | (67,000    | )
|Other assets                                                                   |  |                                    | (27,000    | ) |                                    |   | 48,000     |  
|Accounts payable and accrued liabilities                                       |  |                                    | 293,000    |   |                                    |   | (605,000   | )
|Customer deposits                                                              |  |                                    | (85,000    | ) |                                    |   | (4,000     | )
|Billings in excess of costs and estimated earnings on uncompleted contracts    |  |                                    | 97,000     |   |                                    |   | (37,000    | )
|                                                                               |  |                                    |            |   |                                    |   |            |  
|Net cash flows used in operating activities                                    |  |                                    | (2,883,000 | ) |                                    |   | (3,396,000 | )
|                                                                               |  |                                    |            |   |                                    |   |            |  
|Cash flows from investing activities:                                          |  |                                    |            |   |                                    |   |            |  
|Purchase of property and equipment                                             |  |                                    | (48,000    | ) |                                    |   | (14,000    | )
|                                                                               |  |                                    |            |   |                                    |   |            |  
|Net cash flows used in investing activities                                    |  |                                    | (48,000    | ) |                                    |   | (14,000    | )
|                                                                               |  |                                    |            |   |                                    |   |            |  
|Cash flows from financing activities:                                          |  |                                    |            |   |                                    |   |            |  
|Repayment of notes payable and long-term debt                                  |  |                                    | (21,000    | ) |                                    |   | (44,000    | )
|Proceeds from stock subscription receivable                                    |  |                                    | 682,000    |   |                                    |   | 3,323,000  |  
|Advances from Accentia                                                         |  |                                    | 2,433,000  |   |                                    |   |           |  
|                                                                               |  |                                    |            |   |                                    |   |            |  
|Net cash flows from financing activities                                       |  |                                    | 3,094,000  |   |                                    |   | 3,279,000  |  
|                                                                               |  |                                    |            |   |                                    |   |            |  
|Net change in cash                                                             |  |                                    | 163,000    |   |                                    |   | (131,000   | )
|                                                                               |  |                                    |            |   |                                    |   |            |  
|Cash at beginning of period                                                    |  |                                    | 32,000     |   |                                    |   | 204,000    |  
|                                                                               |  |                                    |            |   |                                    |   |            |  
|Cash at end of period                                                          |  | $                                  | 195,000    |   |                                    | $ | 73,000     |  
|                                                                               |  |                                    |            |   |                                    |   |            |  
|Supplemental disclosure of cash flow information:                              |  |                                    |            |   |                                    |   |            |  
|                                                                               |  |                                   
|Non-cash financing activites:                                                  |  |                                    |            |   |                                    |   |            |  
|Conversion of notes payable and accrued interest to equity(1)                  |  | $                                  | (5,023,000 | ) |                                    | $ |           |  
|Issuance of Common Stock to retire convertible debt(1)                         |  |                                    | 1,282,000  |   |                                    |   |           |  
|Advances from Accentia to retire convertible debt into Accentia stock(1)       |  |                                    | 3,741,000  |   |                                    |   |           |  
|Issuance of stock to satisfy accrued expense                                   |  |                                    | 408,000    |   |                                    |   |            |  
|Cash paid for interest during period                                           |  | $                                  | 1,000      |   |                                    | $ | 65,000     |  

---

|(1) | See Note 7.
|--- | -----------



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



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##### Table of Contents

BIOVEST INTERNATIONAL, INC.



NOTES TO
CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)



1. Description of the company:



Biovest International, Inc. (the Company or Biovest) is a biotechnology company focused on the development of personalized therapeutic anti-cancer
vaccine for the treatment of low-grade Follicular Lymphoma (FL), which is named BiovaxID. FL is a deadly cancer of the white blood cells. This therapeutic vaccine is currently in a pivotal Phase 3 clinical trial. In September 2001, the Company
entered into a Cooperative Research and Development Agreement (CRADA) with the NCI regarding the development of this therapeutic vaccine. In April, 2004, the Investigational New Drug application (IND) for BiovaxIDwas transferred to the Company from the NCI.



The Company is also developing an automated cell culture instrument, called AutovaxID, to reduce the manpower and production space
requirements and costs associated with the production of BiovaxID vaccine. The Company believes that this instrument will facilitate commercial production of BiovaxID following approval, if and when it is obtained. Further, the Company anticipates
commercially marketing the automated instrument.



The Company manufactures
instruments and disposables used in the hollow fiber production of cell culture products. 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. The Company produces mammalian and insect cells, monoclonal antibodies, recombinant and secreted proteins and other cell culture products using the unique capability, expertise and proprietary
advancements in cell production process known as hollow fiber perfusion.



2.
Significant accounting policies:



Basis of presentation:



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



Operating results for the
three months ended December 31, 2005 are not necessarily indicative of the results that may be expected for the entire fiscal year. For further information, refer to the financial statements and footnotes thereto included in the Companys
Annual Report on Form 10-KSB for the fiscal year ended September 30, 2005.



Goodwill:



Goodwill is tested for impairment annually or
whenever there is an impairment indicator. The Company has not recorded any impairment losses as a result of these evaluations.



Use of estimates in the preparation of financial statements:



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



Net income (loss) per
common share:



Basic net income (loss) per share of common stock is
computed by dividing net income (loss) by the weighted average number of outstanding common shares. Diluted net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of outstanding common shares and
common share equivalents relating to stock options and warrants, when dilutive. (See Note 9 for additional information.)



8



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##### Table of Contents

New accounting pronouncements:



In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123
(Revised 2004), Share-Based Payment (SFAS 123R). This standard requires expensing of stock options and other share-based payments and supersedes SFAS No. 123, Accounting for Stock-Based Compensation and Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance that had allowed companies to choose between expensing stock options or showing pro forma disclosure only.
This standard, together with a new rule adopted by the Securities and Exchange Commission in April 2005, is effective for the Company as of October 1, 2006 and will apply to all awards granted, modified, cancelled or repurchased after that
date. The ultimate amount of increased compensation expense will be dependent on the number of option shares granted, their timing and vesting period, and the method used to calculate the fair value of the awards, among other factors. The Company
does not anticipate that adoption of this standard will have a significant impact on its results from operations and cash flows in the future.



Stock-based compensation:



The Company follows Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation (SFAS 123) for non-employee stock based
compensation, which establishes a fair value based method of accounting for such stock-based compensation. However, the Company has elected to account for its employee stock compensation plans using the intrinsic value method under Accounting
Principles Board Opinion No. 25 whereby compensation expense is only recorded to the extent that the fair value of the underlying stock exceeds the stock option price at the date of grant. The following table reflects supplemental financial
information related to stock-based employee compensation, as required by Statement of Financial Accounting Standards No. 148, ACCOUNTING FOR STOCK-BASED COMPENSATION  TRANSITION AND DISCLOSURE.



|                                                          |  |                                |            |   |      |   |            |  
|--------------------------------------------------------- |  | ------------------------------ | ---------- | - | ---- | - | ---------- | -
|                                                          |  | Three months endedDecember 31, |           
|                                                          |  | 2005                           |            |   | 2004 |  
|Net loss, as reported                                     |  | $                              | (3,014,000 | ) |      | $ | (2,754,000 | )
|Employee Stock-based compensation, as reported            |  | $                              | 2,000      |   |      | $ | 2,000      |  
|Employee Stock-based compensation under fair value method |  | $                              | (39,000    | ) |      | $ | (54,000    | )
|                                                          |  |                                |            |   |      |   |            |  
|Pro-forma net loss under fair value method                |  | $                              | (3,051,000 | ) |      | $ | (2,806,000 | )
|                                                          |  |                                |            |   |      |   |            |  
|Basic net loss per share, as reported                     |  | $                              | (0.04      | ) |      | $ | (0.07      | )
|                                                          |  |                                |            |   |      |   |            |  
|Pro-forma net loss per share under fair value method      |  | $                              | (0.04      | ) |      | $ | (0.07      | )
|                                                          |  |                                |            |   |      |   |            |  



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.



Cell culture contract revenues are recognized based upon the percentage of completion method,
whereby revenues are recorded based upon the percentage of actual costs incurred to date of total estimated contract costs. 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 driven by a pre-determined production run. The duration
of our cell culture production contracts range typically from 2 to 14 months.



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3. Liquidity and management plans:



During the three months ended December 31, 2005 the Company incurred a net loss of approximately $3 million. At December 31, 2005
the Company had an accumulated deficit of approximately $42.0 million and working capital deficit of approximately $9.2 million. The Company has been meeting its cash requirements through the use of cash on hand, short-term borrowings (primarily
from affiliates), the collection of and advances on the Accentia Biopharmaceuticals, Inc. (Accentia) stock subscription receivable, and by managing its accounts payable. The Companys auditors issued a going concern
opinion on the financial statements for the year ending September 30, 2005, 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.



During the three months ended December 31, 2005, the Company received advances
of $2.5 million from Accentia, which included the balance of Accentias obligation pursuant to the stock subscription receivable, and which fulfilled the total amount required to be paid in connection with the Accentia Investment Agreement. The
advances in this quarter increased the aggregate amount advanced by Accentia against subsequently required payments under the Investment Agreement to $10 million which is represented by a Secured Line of Credit Promissory Note. The Companys
total advances in excess of the $20 million investment agreement is $6.2 million, consisting of cash loans, payments directly to third parties and allocated inter-company expenses, and amounts owed in connection with the conversion of notes
outstanding at the time of Accentias initial investment in June 2003, as described below. The $6.2 million is evidenced by inter-company demand promissory notes.



During the three months ended December 31, 2005, the holders of $1.0 million of convertible debentures issued by the Company prior to June,
2003 converted $1.0 million in principal and $0.3 million in accrued interest due under the convertible debentures in 2006 and 2007, into 1,669,900 shares of the Companys common stock. In addition, $3.0 million of other convertible debentures
issued by the Company prior to June, 2003 together with $0.7 million in accrued interest were converted in accordance with their terms into 494,030 shares of Accentia common stock. As a result, the Company owes Accentia $3.7 million which is
evidenced by an inter-company demand promissory note, and is included in the total of $6.2 million.



Continued development activities related to our vaccine, including the Phase 3 clinical trials, are expected to result in substantial, and potentially increasing, expenditures over the next several years before any
revenues from this product development materialize. While we pursue FDA approval of the vaccine, we plan to make significant investment in laboratory equipment, including the development of our automated cell production instrument, and potentially
space and related capability necessary to support commercial vaccine production requirements anticipated upon FDA approval of the vaccine. Accordingly, we anticipate that our expenditures related to vaccine and equipment development and
commercialization will increase significantly over that experienced in the past. Our inability to obtain required funds or any substantial delay in obtaining required funds would have an adverse effect on our ability to continue to develop our
vaccine and prepare for its planned commercialization.



Management expects to
continue to meet its cash requirements through the use of cash on hand, short-term borrowings (primarily from affiliates), debt and equity financings and by managing its accounts payable. While Accentia may make additional advances in the exercise
of its discretion, Accentia has advised the Company that it expects the Company to seek and rely upon third party debt and equity financing to support its ongoing financial requirements. Accentia has advanced all payments required under its
investment agreement obligation of $20 million. Additionally Accentia has loaned the Company an additional $6.2 million through December 31, 2005, including the inter-company demand loans discussed above. Our ability to continue present
operations and meet obligations for vaccine development under the CRADA agreement is dependent upon the Companys ability to obtain significant external funding. Additional sources of funding have not been established; however, additional
financing is currently being sought by the Company from a number of sources other than Accentia, including the sale of equity or debt securities, strategic collaborations, recognized research funding programs, as well as domestic and/or foreign
licensing of our vaccine. Management is currently in the process of exploring various financing alternatives, and has hired an investment banking firm to assist in these efforts. There can be no assurance that we will be successful in securing such
financing at acceptable terms, if at all.



4. Concentrations of credit risk:



The Company grants credit to customers in the normal course of business,
but generally does not require collateral or any other security to support amounts due. Management performs ongoing credit evaluations of its customers. One customer accounted for 11% of revenues for the three months ended December 31, 2005.
Two additional customers accounted for approximately 14% and 15% of the Companys trade accounts receivable balance at December 31, 2005, respectively.



A significant amount of the Companys revenue has been derived from export sales. The Companys export sales were 21% of revenues
for the three months ended December 31, 2005, compared to 36% for the same period in 2004. For the three months ended December 31, 2005, no single countrys sales exceeded 10% of revenues, compared to the same period in fiscal 2004
whereby two countries sales accounted for 16% and 11% of total revenues, respectively.



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5. Inventories:



Inventories consist of the following at December 31, 2005 and September 30, 2005:



|                |  |                  |         |                   |   |        
|--------------- |  | ---------------- | ------- | ----------------- | - | -------
|                |  | December 31,2005 |         | September 30,2005
|Finished goods  |  | $                | 199,000 |                   | $ | 36,000 
|Work-in-process |  |                  | 34,000  |                   |   | 36,000 
|Raw materials   |  |                  | 60,000  |                   |   | 41,000 
|                |  |                  |         |                   |   |        
|                |  | $                | 293,000 |                   | $ | 113,000
|                |  |                  |         |                   |   |        



6. Property and Equipment:



At December 31, 2005 and
September 30, 2005, property and equipment consisted of the following:



|                                               |  |                  |            |   |                   |   |            |  
|---------------------------------------------- |  | ---------------- | ---------- | - | ----------------- | - | ---------- | -
|                                               |  | December 31,2005 |            |   | September 30,2005 |  
|Furniture and fixtures                         |  | $                | 75,000     |   |                   | $ | 69,000     |  
|Leasehold improvements                         |  |                  | 643,000    |   |                   |   | 491,000    |  
|Machinery and equipment                        |  |                  | 1,605,000  |   |                   |   | 1,574,000  |  
|                                               |  |                 
|Less accumulated depreciation and amortization |  |                  | (1,373,000 | ) |                   |   | (1,260,000 | )
|                                               |  |                  |            |   |                   |   |            |  
|                                               |  | $                | 950,000    |   |                   | $ | 874,000    |  
|                                               |  |                  |            |   |                   |   |            |  



7. Long-term debt:



Long-term debt consists of the following at
December 31, 2005:



|                                                                                                                                                                                                                               |  |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | - | -------- | -
|Convertible note payable, former legal counsel; principal due in installments through June 2006; interest at 7% due upon maturity.
Collateralized by certain assets; net of unaccreted value of beneficial conversion feature. |  |   | 438,000  |  
|Notes payable, 2001 bridge financing, interest at 7.5%; due in 2006; convertible into common stock at $1.00 per share.                                                                                                         |  |   | 32,000   |  
|Notes payable, 2000 bridge financing, interest at 10%; due in 2006; convertible into common stock at $1.00 per share.                                                                                                          |  |   | 175,000  |  
|Other                                                                                                                                                                                                                          |  |   | 88,000   |  
|Long-term accrued interest                                                                                                                                                                                                     |  |   | 55,000   |  
|                                                                                                                                                                                                                               |  |   |          |  
|                                                                                                                                                                                                                               |  |   | 788,000  |  
|Less current maturities                                                                                                                                                                                                        |  |   | (701,000 | )
|                                                                                                                                                                                                                               |  |   |          |  
|Long-term portion of notes payable                                                                                                                                                                                             |  | $ | 87,000   |  
|                                                                                                                                                                                                                               |  |   |          |  



Future maturities of long-term debt is as follows at December 31, 2005:



|                             |  |   |        
|---------------------------- |  | - | -------
|12 months ended December 31, |  |   |        
|2006                         |  | $ | 701,000
|2011                         |  |   | 87,000 
|                             |  |   |        
|Total maturities             |  | $ | 788,000
|                             |  |   |        



Convertible Debt:



As of December 1, 2005, nine holders caused $1.0 million in principal and $0.3
million in accrued interest under convertible debentures into 1,669,900 shares of the Companys common stock, and five note holders elected to convert $3.0 million in principal and $0.7 million in accrued interest under convertible debentures
to be converted into 494,031 shares of Accentia common stock. As a result of the conversion into shares of the Companys common stock, $1.3 million was credited to stockholders equity. As a result of the conversion to Accentia common stock, the
Company has incurred a liability of $3.7 million which is reflected in Due to Related Party in the accompanying December, 2005 Balance Sheet.



8. Income taxes:



No provision for income taxes has been recorded for the three months ended December 31, 2005 and 2004 due to the losses incurred during the periods. At December 31, 2005, the Company has net operating loss
carryforwards of approximately $29.9 million available to offset future taxable income, which will begin to expire in 2020.



Deferred tax assets are reduced by a valuation allowance if, based on the weight of the available evidence, it is more likely than not (a likelihood of more than 50%)
that some portion or all of the deferred tax assets will not be realized. The Company has recorded a deferred tax asset valuation allowance of $11.6 million, which fully offsets all deferred tax assets.



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##### Table of Contents

9. Net loss per common share:



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



The following table sets forth the calculations of basic and diluted net loss per share:



|                                                    |  |                                |            |   |      |   |            |  
|--------------------------------------------------- |  | ------------------------------ | ---------- | - | ---- | - | ---------- | -
|                                                    |  | Three months endedDecember 31, |           
|                                                    |  | 2005                           |            |   | 2004 |  
|Numerator:                                          |  |                                |            |   |      |   |            |  
|Net loss                                            |  | $                              | (3,014,000 | ) |      | $ | (2,754,000 | )
|                                                    |  |                               
|Denominator:                                        |  |                                |            |   |      |   |            |  
|For basic loss per share  weighted average shares  |  |                                | 78,673,991 |   |      |   | 38,196,733 |  
|Effect of dilutive securities                       |  |                                |           |   |      |   |           |  
|                                                    |  |                               
|Weighted average shares for dilutive loss per share |  |                                | 78,673,991 |   |      |   | 38,196,733 |  
|                                                    |  |                               
|Net loss per share, basic and dilutive              |  | $                              | (0.04      | ) |      | $ | (0.07      | )



The effect of common stock equivalents
are not considered in the calculation of diluted loss per share because the effect would be anti-dilutive. They are as follows at December 31, 2005:



|                                              |  |          
|--------------------------------------------- |  | ---------
|Options and warrants to purchase common stock |  | 4,811,100
|Shares issuable for convertible debt          |  | 2,090,236



10. Due to Related Party:



Due to Related Party are two secured promissory demand notes issued to
Accentia Biopharmaceuticals, Inc., bearing interest at prime as defined. As of December 31, 2005, net Due to Related Party consisted of the following:



|                                                                  |  |   |          
|----------------------------------------------------------------- |  | - | ---------
|Working capital cash advances and allocated inter-company charges |  | $ | 2,433,000
|Amounts due from notes payable converted into Accentia stock      |  |   | 3,741,000
|                                                                  |  |   |          
|                                                                  |  | $ | 6,174,000
|                                                                  |  |   |          



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11. Segment information:



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



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



|                                   |  |                                |           |      |   |          
|---------------------------------- |  | ------------------------------ | --------- | ---- | - | ---------
|                                   |  | Three months endedDecember 31,
|                                   |  | 2005                           |           | 2004
|Cell Culture Products and Services |  | $                              | 418,000   |      | $ | 313,000  
|National Cell Culture Center       |  |                                | 215,000   |      |   | 248,000  
|Instruments and Disposables        |  |                                | 452,000   |      |   | 512,000  
|                                   |  |                                |           |      |   |          
|Total revenues                     |  | $                              | 1,085,000 |      | $ | 1,073,000
|                                   |  |                                |           |      |   |          



12. Commitments and contingencies:



Settlement in connection with termination of employment:



In December, 2005 the Company settled all matters relating to the
termination of employment of its former Chief Executive Officer and director by issuing 800,000 shares of the Companys unregistered common stock. This stock issuance was in consideration of the surrender of approximately 2.0 million
options issued in connection with his employment agreement dated June 17, 2003, of which 1.5 million options had vested. In addition, the Company agreed to pay this former officer and director $0.2 million in bi-weekly installments at the same
rate as his 2005 compensation. The Company accrued all costs of the settlement as of September 30, 2005 as compensation expense.



Legal proceedings:



There was a pending matter of litigation at December 31, 2005, which was settled in February 2006 as further described below. Other than the foregoing, the Company is not a 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. However, from time to time the Company is subject to various
legal proceedings in the normal course of business, some of which is covered by insurance. Management believes that these proceedings will not have a material adverse effect on the financial statements.



13. Subsequent event:



In February 2006, the Company entered into a settlement agreement of all claims arising from the litigation filed by Dr. Robert
Pfeffer, which had been pending in the United States District Court for the Southern District of New York. The Company has agreed to pay Dr. Pfeffer a total of $0.2 million, payable by Promissory Note in 16 equal monthly installments commencing
on March 1, 2006, in full satisfaction of any and all claims to compensation made by Dr. Pfeffer, and the parties have exchanged mutual general Releases. The settlement amount coincides with the amount that the Company had previously
recorded.



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##### Table of Contents

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



Overview



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



We
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 are developing an automated cell production instrument, AutovaxID, which we plan to use in the production of BiovaxID vaccines and to market on a commercial basis.



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. For more than fourteen years we have been designated by the National
Institutes of Health as the National Cell Culture Center (NCCC); although this grant expired without renewal in September, 2005, we have resubmitted our renewal grant application and NIH has approved interim funding of the NCCC
activities at a reduced level through June 30, 2006 while the renewal decision is pending.



Critical Accounting Policies and Estimates



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



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



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



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 driven by a pre-determined production run. The duration of our cell culture production contracts
range typically from 2 to 14 months.



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



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



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



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



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##### Table of Contents

Information Relating to Forward-Looking Statements



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



Results of Operations



Revenues. Total revenues
of $1.1 million for the three months ended December 31, 2005 were comparable to the same period in 2004. Revenues from contract cell culture production and services increased by $0.1 million or 34% to $0.4 million from $0.3 million for the
three months ended December 31, 2005 compared to the same periods in 2004. This modest increase is attributable to typical quarterly business fluctuations. Revenue from the National Cell Culture Center (NCCC) and instrument-related
revenues changed insignificantly from the first three months of fiscal 2005 compared to the first three months of fiscal 2004. The lack of adequate working capital in Biovest prior to Accentias investment had a negative impact on Biovest sales
and Biovest continues to be significantly impacted by the lack of marketing and customer activities in prior periods, and the Companys focus on the BiovaxID project has continued to require resources that would have been utilized in the core
business had the focus not changed.



Gross Margin. The overall
gross margin increased for the first quarter of fiscal year 2005 from (15%) to 44% compared to the same period in fiscal 2004. The increases in margin are primarily the result of more optimal product mix, improved production results, and an
inventory write-down in fiscal 2004 of $0.3 million.



Operating Expenses.Research and development expenses for the three months ended December 31, 2005 related to the vaccine increased 44% or $0.8 million compared the first three months ended December 31, 2004. These costs relate to vaccine production
supporting the on-going clinical trial and design engineering expense associated with designing a potentially more efficient and commercially scaleable prototype bioreactor for vaccine production. Marketing, general and administrative expenses
increased $0.1 million for the first three months of fiscal 2005 compared to the same period in fiscal 2004. The increase is attributed primarily to the timing of billed professional fees.



Interest Expense.Other expense consists of interest expense on the
Companys long-term debt, and short-term loans from affiliates. Interest income is nominal in both periods.



Liquidity and Capital Resources



During the three months ended December 31, 2005 the Company incurred a net loss of approximately $3 million. At December 31, 2005 the Company had an accumulated
deficit of approximately $42.0 million and working capital deficit of approximately $9.2 million. The Company has been meeting its cash requirements through the use of cash on hand, short-term borrowings (primarily from affiliates), the collection
of and advances on the Accentia Biopharmaceuticals, Inc. (Accentia) stock subscription receivable, and by managing its accounts payable. The Companys auditors issued a going concern opinion on the financial statements
for the year ending September 30, 2005 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.



During the three months ended December 31, 2005, the Company received advances of $2.5
million from Accentia, which included the balance of Accentias obligation pursuant to the stock subscription receivable, and which fulfilled the total amount required to be paid in connection with the Accentia Investment Agreement. The
advances in this quarter increased the aggregate amount advanced by Accentia against subsequently required payments under the Investment Agreement to $10 million which is represented by a Secured Line of Credit Promissory Note. The Companys
total advances in excess of the $20 million investment agreement is $6.2 million, consisting of cash loans, payments directly to third parties and allocated inter-company expenses, and amounts owed in connection with the conversion of notes
outstanding at the time of Accentias initial investment in June 2003, as described below. The $6.2 million is evidenced by inter-company demand promissory notes.



During the three months ended December 31, 2005, the holders of $1.0 million of convertible debentures previously issued by the Company
converted $1.0 million in principal and $0.3 million in accrued interest due under the convertible debentures in 2006 and 2007, into 1,669,900 shares of the Companys common stock. In addition, $3.0 million of other convertible debentures
issued by the Company together with $0.7 million in accrued interest were converted in accordance with their terms into 494,030 shares of Accentia common stock. As a result, the Company owes Accentia $3.7 million which is evidenced by an
inter-company demand promissory note, and is included in the total of $6.2 million.



Continued development activities related to our vaccine, including the Phase 3 clinical trials, are expected to result in substantial, and potentially increasing, expenditures over the next several years before any revenues from this
product development materialize. While we pursue FDA approval of the vaccine, we plan to make significant investment in the development of equipment, including the development of our automated cell production instrument, and potentially space and
related capability necessary to support commercial vaccine production requirements anticipated upon approval. Accordingly, we anticipate that our expenditures related to vaccine and equipment development and commercialization will increase
significantly over that experienced in the past. Our inability to obtain required funds or any substantial delay in obtaining required funds would have an adverse effect on our ability to continue to develop our vaccine and prepare for its planned
commercialization.



Our ability to continue our present operations and meet our
obligations for vaccine development under the CRADA agreement is dependent upon our ability to obtain significant external funding. Accentia has advanced all payments required under its investment agreement obligation of $20 million. Additionally
Accentia has loaned the Company an additional $6.2 million through December 31, 2005, including the inter-company demand loans discussed above. Additional sources of funding have not been established; however, additional financing is currently
being sought by the Company from a number of sources other than Accentia, including the sale of equity or debt securities, strategic collaborations, recognized research funding programs, as well as domestic and/or foreign licensing of our vaccine.
Management is currently in the process of exploring various financing alternatives, and has hired an investment banking firm to assist in these efforts. There can be no assurance that we will be successful in securing such financing at acceptable
terms, if at all.



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##### Table of Contents

Fluctuations in Operating Results



The Companys operating results may vary significantly from quarter to quarter or year to year, depending on factors such as timing of
biopharmaceutical development and commercialization of products by the Companys customers, the timing of increased research and development and sales and marketing expenditures, the timing and size of orders and the introduction of new
products or processes by the Company. Consequently, revenues, profits or losses may vary significantly from quarter to quarter or year to year, and revenue or profits in any period will not necessarily be indicative of results in subsequent periods.
Further, because our focus is now highly concentrated on the development of BiovaxID, including the designing of a commercially scaleable prototype of our AutovaxID, we expect our revenues in our core business of cell culture manufacturing and
services to continue to decline.



Potential Dilutive Effect of Outstanding
Stock Rights



We have outstanding options, warrants and convertible debt
(Stock Rights) pursuant to which we may be required to issue additional shares of our Common Stock. These Stock Rights are described in footnote 5 and footnote 7 to our Financial Statements for the fiscal year ended September 30,
2005, which were filed as part of our 10-KSB. Additionally, as part of our Investment Agreement with Accentia, we granted Accentia the right to maintain its then 81% ownership of our Common Stock in the event of the exercise of such Stock Rights
(the Accentia First Right of Refusal Agreement). The Accentia First Right of Refusal entitles Accentia to purchase that number of shares of our Common Stock necessary to maintain its then 81% ownership after the exercise of any such
Stock Rights at an aggregate purchase price equal to the total amount paid in the exercise of such Stock Rights. Accentia declined to exercise its First Right of Refusal regarding all shares of stock issued from October 1, 2005 through
December 31, 2005, and as such, its percentage of ownership has declined to approximately 79% as of December 31, 2005. Before giving effect to Accentias First Right of Refusal option, the fully-diluted capital structure is summarized
as follows:



|                                                   |  |           
|-------------------------------------------------- |  | ----------
|Shares Issued and Outstanding at December 31, 2005 |  | 80,390,663
|Options                                            |  | 3,816,100 
|Warrants                                           |  | 995,000   
|Convertible Notes                                  |  | 2,090,236 
|                                                   |  |           
|Total                                              |  | 87,291,999
|                                                   |  |           



ITEM 3. CONTROLS AND PROCEDURES



An
evaluation was performed under the supervision and with the participation of our management, including the Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, of the effectiveness of the design and operation of our disclosure
procedures. Based on that evaluation, our management, including the CEO and CFO, concluded that our disclosure controls and procedures were effective as of December 31, 2005. There have been no significant changes in our internal control over
financial reporting in the first three months of fiscal 2006 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



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##### Table of Contents

PART II. OTHER INFORMATION



ITEM 1. LEGAL PROCEEDINGS



There was a
pending matter of litigation at December 31, 2005 involving Dr. Robert Pfeffer. In February 2006, we entered into a settlement agreement of all claims arising from the litigation filed by Dr. Pfeffer, which had been pending in the
United States District Court for the Southern District of New York. We have agreed to pay Dr. Pfeffer a total of $0.2 million, payable by Promissory Note in 16 equal monthly installments commencing on March 1, 2006, in full satisfaction of
any and all claims to compensation made by Dr. Pfeffer, and the parties have exchanged mutual general Releases.



From time to time we are subject to various legal proceedings in the normal course of business, some of which are covered by insurance. Management believes that these
proceedings will not have a material adverse effect on our business or on the financial statements.



ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES



During the three months ended December 31, 2005, we issued the following securities that were not registered under the Securities Act of 1933, as amended (the Securities Act):



1.On September 30, 2005, we entered into agreements with fourteen holders of
outstanding Secured Convertible Promissory Notes (the Notes) providing for the modification of the terms of their respective Notes. These fourteen holders collectively represent $5.0 million of the total $5.7 million in aggregate
principal and accrued but unpaid interest under the Notes outstanding as of September 30, 2005. Under the modifications to the Notes, the fourteen note holders agreed that their Notes, including interest thereunder, would automatically convert
into our common stock on the earlier of (i) December 1, 2005 or (ii) 30-days after an initial public offering by Accentia Biopharmaceuticals, Inc., which holds approximately 78% of the outstanding common stock of our company. However,
this automatic conversion was conditioned on the continued quotation of our common stock on the OTC Bulletin Board as of the date of conversion and on the failure of the note holder to convert his or her respective Note into Accentia common stock
prior to the automatic conversion date. The Notes held by these fourteen note holders were convertible into either our common stock or Accentia common stock, at the option of the holder. As of December 1, 2005, 9 of these note holders allowed
their notes to be converted into our common stock, and 5 note holders elected to convert their note balances into Accentia common stock. As a result, on December 1, 2005, in connection with the foregoing agreements we issued 1,669,900 shares of
common stock to these note holders.



2. On December 8, 2005, we issued
800,000 shares of common stock to our former CEO and Director, as part of a termination compensation agreement, partially in consideration of the cancellation of all outstanding vested options previously issued to him.



3. We claimed exemption from registration under the Securities Act for the sales and
issuances of securities in the transactions described in paragraphs 1-2 above by virtue of Section 4(2) of the Securities Act in that such sales and issuances did not involve a public offering.



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ITEM 5. OTHER EVENTS



The National Institutes of Health (NIH) grant in the approximate amount of $1.0 million, which has funded a substantial part of
the budget for our National Cell Culture Center (NCCC) located in our Minneapolis location was not renewed after September 1, 2005. We resubmitted an application to the NIH in October 2005, however no assurance can be given as to
the outcome of this submission. Pending the outcome of the submission, NIH has approved reduced grant-related payments to the Company, and we have reduced our staffing level and other costs associated with the NCCC.



Pursuant to the settlement agreement with our former CEO and Chairman, Dr. Stephane
Allard, Dr. Allard tendered his resignation as our director in December 2005, effective as of September 23, 2005.



ITEM 6. EXHIBITS AND REPORTS



|(a) | Exhibits
|--- | --------



|      |  |                                                                                                         
|----- |  | --------------------------------------------------------------------------------------------------------
|10.1  |  | Termination Compensation Agreement between registrant and Dr. Stephane Allard                           
|      | 
|10.2  |  | Employment Agreement between registrant and Carl Cohen, Ph.D.                                           
|      | 
|10.3  |  | Engagement Agreement dated January 7, 2006 between registrant and Investor Relations Group, Inc.        
|      | 
|10.4  |  | Warrant dated January 7, 2006 from registrant to Investor Relations Group, Inc.                         
|      | 
|10.5  |  | Settlement Agreement dated February 13, 2006 between registrant and Dr. Robert Pfeffer                  
|      | 
|10.6  |  | Promissory Note dated February 13, 2006 between registrant and Dr. Robert Pfeffer                       
|      | 
|10.7  |  | Release from Dr. Robert Pfeffer to registrant                                                           
|      | 
|10.8  |  | Release from registrant to Dr. Robert Pfeffer                                                           
|      | 
|10.9  |  | Incentive Stock Option Grant dated February 10, 2006 from registrant to Carl Cohen, Ph.D.               
|      | 
|10.10 |  | Incentive Stock Option Grant dated February 10, 2006 from registrant to James McNulty, CPA              
|      | 
|10.11 |  | Incentive Stock Option Grant dated February 10, 2006 from registrant to Samuel Duffey, Esq.             
|      | 
|10.12 |  | Incentive Stock Option Grant dated February 10, 2006 from registrant to Steven Arikian, M.D.            
|      | 
|10.13 |  | Incentive Stock Option Grant dated February 10, 2006 from registrant to David Moser                     
|      | 
|10.14 |  | Incentive Stock Option Grant dated February 10, 2006 from registrant to Robert Weiss                    
|      | 
|10.15 |  | Incentive Stock Option Grant dated February 10, 2006 from registrant to Angelos Stergiou M.D            
|      | 
|10.16 |  | Secured Promissory Note Dated December 1, 2005 from the registrant to Accentia Biopharmaceuticals, Inc. 
|      | 
|10.17 |  | Secured Promissory Note Dated December 31, 2005 from the registrant to Accentia Biopharmaceuticals, Inc.
|      | 
|31.1  |  | Certification by Chief Executive Officer pursuant to 18 U.S. C. Section 1350                            
|      | 
|31.2  |  | Certification by Chief Financial Officer pursuant to 18 U.S. C. Section 1350                            
|      | 
|32.1  |  | Certification by Chief Executive Officer pursuant to Sarbanes -Oxley Section 302.                       
|      | 
|32.2  |  | Certification by Chief Financial Officer pursuant to Sarbanes -Oxley Section 302.                       



|(b) | Reports on Form 8-K.
|--- | --------------------



Current Report on Form 8-K dated October 6, 2005



Current Report on Form 8-K dated December 1, 2005



Current Report on Form 8-K dated December 9, 2005



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SIGNATURES



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



|                        |  |                                     
|----------------------- |  | ------------------------------------
|                        |  | BIOVEST INTERNATIONAL, INC.         
|                        |  | (Registrant)                        
|                        | 
|Date: February 21, 2006 |  | /s/ Dr. Steven Arikian              
|                        |  | Dr. Steven Arikian                  
|                        |  | Chairman and Chief Executive Officer
|                        | 
|Date: February 21, 2006 |  | /s/ James A. McNulty                
|                        |  | James A. McNulty                    
|                        |  | Chief Financial Officer             



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