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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q/A

[Amendment No. 1]



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

For the quarter ended December 31, 2005

OR



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

For the transition period from to
.

Commission File Number 000-51383



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ACCENTIA BIOPHARMACEUTICALS,
INC.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Florida                                                        |  | 04-3639490                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|324 South Hyde Park Ave., Suite 350 Tampa, Florida             |  | 33606                               
|(Address of principal executive offices)                       |  | (Zip Code)                          

(813) 864-2554

Registrants telephone number, including area code



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Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $0.001 per share

(Title of class)



---

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this Form 10-Q or any amendment to this Form 10-Q. ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of
accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act (check one): Large Accelerated Filer ̈Accelerated Filer ̈Non-accelerated filer  x

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

As of October 28, 2005, the aggregate market value of the voting stock held by nonaffiliates of the registrant, computed by reference to the last sale price of such stock as of such date on the Nasdaq
National Market, was approximately $88,223,080. The registrant has elected to use October 28, 2005 as the calculation date because on March 31, 2005 (the last business date of the registrants second fiscal quarter), the registrant
was a privately held corporation. October 28, 2005 was the first date on which the registrants common stock was listed on the Nasdaq National Market.

As of January 31, 2006, there were 29,121,950 shares of the registrants Common Stock outstanding.



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Purpose of Amendment

The purpose of this Amendment No. 1 to the Quarterly Report on Form 10-Q/A is to restate the Companys consolidated condensed financial statements for the three and six months ended December 31, 2005 (the Financial
Statements) and to modify the related disclosures. Please see Note 16 to the Financial Statements included in the amended Form 10-Q/A. The restatement arose from the Companys determination that it had not accounted for the derivative
financial instruments associated with the Convertible Secured Note entered into in April, 2005 as derivatives, although the Company believes that it had accounted for these financial instruments in accordance with generally accepted accounting
principles and industry standards at that time. The Company has determined that the fair value of the derivatives should have been initially recorded as a liability, with any changes in the fair value of the derivatives between reporting dates as a
derivative loss or gain, as appropriate. In addition, certain debt extinguishment losses have been recognized which result, in part, from derivative financial instruments. This Amendment No. 1 reflects this accounting.

This amended Form 10-Q/A does not attempt to modify or update any other disclosures set forth in the original Form 10-Q, except as required to reflect the effects of the
restatement as described in Note 16 to the Financial Statements included in the amended Form 10-Q/A. Additionally, this amended Form 10-Q/A, except for the restatement information, speaks as of the filing date of the original Form 10-Q and does not
update or discuss any other Company developments after the date of the original filing. All information contained in this amended Form 10-Q/A and the original Form 10-Q is subject to updating and supplementing as provided in the periodic reports
that the Company has filed and will file after the original filing date with the Securities and Exchange Commission.



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Forward-Looking Statements

Statements in this quarterly report on Form 10-Q that are not strictly historical in nature are forward-looking statements. These statements may include, but are not limited to, statements about: the timing of the commencement, enrollment,
and completion of our clinical trials for our product candidates; the progress or success of our product development programs; the status of regulatory approvals for our product candidates; the timing of product launches; our ability to protect our
intellectual property and operate our business without infringing upon the intellectual property rights of others; and our estimates for future performance, anticipated operating losses, future revenues, capital requirements, and our needs for
additional financing. In some cases, you can identify forward-looking statements by terms such as anticipates, believes, could, estimates, expects, intends, may,
plans, potential, predicts, projects, should, will, would, goal, and similar expressions intended to identify forward-looking statements. These
statements are only predictions based on current information and expectations and involve a number of risks and uncertainties. The underlying information and expectations are likely to change over time. Actual events or results may differ materially
from those projected in the forward-looking statements due to various factors, including, but not limited to, those set forth under the caption Risk Factors in ITEM 1. BUSINESS of our Form 10-K for the fiscal year ended
September 30, 2006 and those set forth in our other filings with the Securities and Exchange Commission. Except as required by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.



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PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

Accentia Biopharmaceuticals, Inc.

INDEX TO FINANCIAL STATEMENTS



|                                                                                                             |  |   
|------------------------------------------------------------------------------------------------------------ |  | --
|Accentia Biopharmaceuticals, Inc. and Subsidiaries Consolidated Financial Statements                         |  |   
|Consolidated Balance Sheets as of December 31, 2005 and September 30, 2005                                   |  | 3 
|Consolidated Statements of Operations for the three months ended December 31, 2005 and 2004                  |  | 6 
|Consolidated Statements of Stockholders Deficit for the period from September 30, 2005 to December 31, 2005 |  | 7 
|Consolidated Statements of Cash Flows for the three months ended December 31, 2005 and 2004                  |  | 9 
|Notes to Consolidated Financial Statements                                                                   |  | 10



2



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ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



|                                                                                                                                 |  |                              |            |   |                             |   |            |  
|-------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------- | ---------- | - | --------------------------- | - | ---------- | -
|                                                                                                                                 |  | Restated                     |            |   | Restated                    |  
|                                                                                                                                 |  | December 31, 2005(Unaudited) |            |   | September 30, 2005(Audited) |  
|ASSETS                                                                                                                           |  |                              |            |   |                             |   |            |  
|Current assets:                                                                                                                  |  |                              |            |   |                             |   |            |  
|Cash and cash equivalents                                                                                                        |  | $                            | 5,496,137  |   |                             | $ | 2,763,452  |  
|Accounts receivable:                                                                                                             |  |                              |            |   |                             |   |            |  
|Trade, net of allowance for doubtful accounts of $345,458 and $150,000 at December 31, 2005 and September 30, 2005,
respectively |  |                              | 4,271,850  |   |                             |   | 3,715,488  |  
|Stockholder                                                                                                                      |  |                              | 806,539    |   |                             |   | 676,752    |  
|Inventories                                                                                                                      |  |                              | 1,391,035  |   |                             |   | 1,013,896  |  
|Inventory deposits                                                                                                               |  |                              | 585,000    |   |                             |   | 844,740    |  
|Unbilled receivables                                                                                                             |  |                              | 740,644    |   |                             |   | 690,886    |  
|Prepaid expenses and other current assets                                                                                        |  |                              | 615,502    |   |                             |   | 385,241    |  
|                                                                                                                                 |  |                              |            |   |                             |   |            |  
|Total current assets                                                                                                             |  |                              | 13,906,707 |   |                             |   | 10,090,455 |  
|                                                                                                                                 |  |                             
|Goodwill                                                                                                                         |  |                              | 1,193,437  |   |                             |   | 1,193,437  |  
|                                                                                                                                 |  |                             
|Other intangible assets:                                                                                                         |  |                              |            |   |                             |   |            |  
|Product rights                                                                                                                   |  |                              | 21,781,334 |   |                             |   | 21,216,334 |  
|Non-compete agreements                                                                                                           |  |                              | 2,104,000  |   |                             |   | 2,104,000  |  
|Trademarks                                                                                                                       |  |                              | 1,634,313  |   |                             |   | 1,631,474  |  
|Purchased customer relationships                                                                                                 |  |                              | 1,268,950  |   |                             |   | 1,268,950  |  
|Other intangible assets                                                                                                          |  |                              | 648,288    |   |                             |   | 648,040    |  
|Accumulated amortization                                                                                                         |  |                              | (6,233,587 | ) |                             |   | (5,631,122 | )
|                                                                                                                                 |  |                              |            |   |                             |   |            |  
|Total other intangible assets                                                                                                    |  |                              | 21,203,298 |   |                             |   | 21,237,676 |  
|                                                                                                                                 |  |                             
|Furniture, equipment and leasehold improvements, net                                                                             |  |                              | 1,815,664  |   |                             |   | 1,775,819  |  
|Deferred offering costs                                                                                                          |  |                              |           |   |                             |   | 821,573    |  
|Other assets                                                                                                                     |  |                              | 1,618,535  |   |                             |   | 1,561,633  |  
|                                                                                                                                 |  |                              |            |   |                             |   |            |  
|                                                                                                                                 |  | $                            | 39,737,641 |   |                             | $ | 36,680,593 |  
|                                                                                                                                 |  |                              |            |   |                             |   |            |  

(Continued)



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ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(CONTINUED)



|                                                                                                                                             |  |                              |            |                             |   |           
|-------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------- | ---------- | --------------------------- | - | ----------
|                                                                                                                                             |  | Restated                     |            | Restated                   
|                                                                                                                                             |  | December 31, 2005(Unaudited) |            | September 30, 2005(Audited)
|LIABILITIES AND STOCKHOLDERS DEFICIT                                                                                                        |  |                              |            |                             |   |           
|Current liabilities:                                                                                                                         |  |                              |            |                             |   |           
|Current maturities of long-term debt:                                                                                                        |  |                              |            |                             |   |           
|Related party                                                                                                                                |  | $                            | 1,293,516  |                             | $ | 7,414,742 
|Other                                                                                                                                        |  |                              | 6,191,417  |                             |   | 8,888,847 
|Lines of credit                                                                                                                              |  |                              | 5,360,625  |                             |   | 5,052,604 
|Accounts payable (including related party of $303,020 at December 31, 2005 and $346,423 at September 30, 2005
respectively)                  |  |                              | 4,364,249  |                             |   | 5,519,626 
|Accrued expenses (including related party accrued interest of $74,850 at December 31, 2005 and $147,983 at September 30, 2005,
respectively) |  |                              | 8,169,101  |                             |   | 6,917,721 
|Unearned revenues                                                                                                                            |  |                              | 1,589,818  |                             |   | 863,096   
|Product development obligations (including $200,000 due to related party at September 30, 2005)                                              |  |                              |           |                             |   | 500,000   
|Dividends payable                                                                                                                            |  |                              | 616,186    |                             |   | 575,447   
|Stockholder note                                                                                                                             |  |                              | 350,000    |                             |   | 350,000   
|Customer deposits                                                                                                                            |  |                              | 729,793    |                             |   | 828,050   
|Deposits, related party                                                                                                                      |  |                              | 3,000,000  |                             |   | 3,000,000 
|Derivative liability                                                                                                                         |  |                              | 4,570,168  |                             |   | 10,802,825
|                                                                                                                                             |  |                              |            |                             |   |           
|Total current liabilities                                                                                                                    |  |                              | 36,234,873 |                             |   | 50,712,958
|                                                                                                                                             |  |                             
|Long-term debt, net of current maturities:                                                                                                   |  |                              |            |                             |   |           
|Related party                                                                                                                                |  |                              |           |                             |   | 3,661,917 
|Other                                                                                                                                        |  |                              | 4,973,373  |                             |   | 4,902,666 
|Lines of credit, related party                                                                                                               |  |                              | 7,180,000  |                             |   | 4,180,000 
|Other liabilities, related party                                                                                                             |  |                              | 2,421,318  |                             |   | 2,574,865 
|                                                                                                                                             |  |                              |            |                             |   |           
|Total liabilities                                                                                                                            |  |                              | 50,809,564 |                             |   | 66,032,406
|                                                                                                                                             |  |                              |            |                             |   |           

(Continued)



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ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(CONTINUED)



|                                                                                                                                                                                      |  |                              |              |   |                             |   |              |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------- | ------------ | - | --------------------------- | - | ------------ | -
|                                                                                                                                                                                      |  | Restated                     |              |   | Restated                    |  
|                                                                                                                                                                                      |  | December 31,2005 (Unaudited) |              |   | September 30,2005 (Audited) |  
|Commitments and contingencies                                                                                                                                                         |  |                              |              |   |                             |   |             |  
|Stockholders deficit:                                                                                                                                                                |  |                              |              |   |                             |   |              |  
|Common stock, $0.001 par value; 300,000,000 shares authorized; 29,121,951 and 5,170,421 shares issued and outstanding at December 31,
2005 and September 30, 2005, respectively.      |  |                              | 29,122       |   |                             |   | 5,170        |  
|Preferred stock, Series A, $1.00 par value; 10,000,000 shares authorized; -0- and 2,937,013 shares issued and outstanding at December 31,
2005 and September 30, 2005, respectively.  |  |                              |             |   |                             |   | 6,183,000    |  
|Preferred stock, Series B, $1.00 par value; 30,000,000 shares authorized; -0- and 3,895,888 shares issued and outstanding at December 31,
2005 and September 30, 2005, respectively.  |  |                              |             |   |                             |   | 239,919      |  
|Preferred stock, Series C, $1.00 par value; 10,000,000 shares authorized; -0- and 3,562,607 shares issued and outstanding at December 31,
2005 and September 30, 2005, respectively.  |  |                              |             |   |                             |   | 7,500,000    |  
|Preferred stock, Series D, $1.00 par value; 15,000,000 shares authorized; -0- and 4,672,482 shares issued and outstanding at December 31,
2005 and September 30, 2005, respectively.  |  |                              |             |   |                             |   | 219,769      |  
|Preferred stock, Series E, $1.00 par value; 60,000,000 shares authorized; -0- and 20,506,178 shares issued and outstanding at
December 31, 2005 and September 30, 2005, respectively. |  |                              |             |   |                             |   | 49,789,554   |  
|Additional paid-in capital                                                                                                                                                            |  |                              | 107,397,816  |   |                             |   | 24,851,870   |  
|Accumulated deficit                                                                                                                                                                   |  |                              | (118,498,861 | ) |                             |   | (118,141,095 | )
|                                                                                                                                                                                      |  |                              |              |   |                             |   |              |  
|Total stockholders deficit                                                                                                                                                           |  |                              | (11,071,923  | ) |                             |   | (29,351,813  | )
|                                                                                                                                                                                      |  |                             
|                                                                                                                                                                                      |  | $                            | 39,737,641   |   |                             | $ | 36,680,593   |  
|                                                                                                                                                                                      |  |                              |              |   |                             |   |              |  

See notes to consolidated financial statements.



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ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



|                                                                           |  |                                         |            |   |      |   |             |  
|-------------------------------------------------------------------------- |  | --------------------------------------- | ---------- | - | ---- | - | ----------- | -
|                                                                           |  | For the Three Months EndingDecember 31, |           
|                                                                           |  | Restated 2005                           |            |   | 2004 |  
|Net Sales:                                                                 |  |                                         |            |   |      |   |             |  
|Products                                                                   |  | $                                       | 2,146,678  |   |      | $ | 1,640,221   |  
|Services                                                                   |  |                                         | 3,043,463  |   |      |   | 2,457,281   |  
|Related party, products                                                    |  |                                         | 1,627,825  |   |      |   | 419,617     |  
|                                                                           |  |                                         |            |   |      |   |             |  
|Total net sales                                                            |  |                                         | 6,817,966  |   |      |   | 4,517,119   |  
|                                                                           |  |                                        
|Cost of sales:                                                             |  |                                         |            |   |      |   |             |  
|Products                                                                   |  |                                         | 928,561    |   |      |   | 1,058,603   |  
|Services                                                                   |  |                                         | 947,212    |   |      |   | 1,155,728   |  
|                                                                           |  |                                         |            |   |      |   |             |  
|Total cost of sales (exclusive of amortization of acquired product rights) |  |                                         | 1,875,773  |   |      |   | 2,214,331   |  
|                                                                           |  |                                         |            |   |      |   |             |  
|Gross margin                                                               |  |                                         | 4,942,193  |   |      |   | 2,302,788   |  
|                                                                           |  |                                        
|Operating expenses:                                                        |  |                                         |            |   |      |   |             |  
|Research and development                                                   |  |                                         | 3,065,890  |   |      |   | 1,366,390   |  
|Research and development, related party                                    |  |                                         | 93,982     |   |      |   | 492,164     |  
|Sales and marketing                                                        |  |                                         | 3,259,948  |   |      |   | 3,850,607   |  
|General and administrative                                                 |  |                                         | 5,319,290  |   |      |   | 4,535,204   |  
|Royalties                                                                  |  |                                         | 564,392    |   |      |   | 101,207     |  
|Stock-based compensation, general and administrative                       |  |                                         | 46,433     |   |      |   | 207,260     |  
|                                                                           |  |                                         |            |   |      |   |             |  
|Total operating expenses                                                   |  |                                         | 12,349,935 |   |      |   | 10,552,832  |  
|                                                                           |  |                                         |            |   |      |   |             |  
|Operating loss                                                             |  |                                         | (7,407,742 | ) |      |   | (8,250,044  | )
|Other income (expense):                                                    |  |                                         |            |   |      |   |             |  
|Interest expense, net                                                      |  |                                         | (905,146   | ) |      |   | (236,977    | )
|Interest expense, net, related party                                       |  |                                         | (100,834   | ) |      |   | (340,828    | )
|Loss on extinguishment of debt, related party                              |  |                                         |           |   |      |   | (2,361,894  | )
|Other income (expense)                                                     |  |                                         | 43,419     |   |      |   | (3,107      | )
|Derivative gain                                                            |  |                                         | 6,363,477  |   |      |   |             |  
|                                                                           |  |                                         |            |   |      |   |             |  
|Loss from continuing operations before income taxes                        |  |                                         | (2,006,826 | ) |      |   | (11,192,850 | )
|Income tax benefit                                                         |  |                                         |           |   |      |   |            |  
|                                                                           |  |                                         |            |   |      |   |             |  
|Net loss from continuing operations                                        |  |                                         | (2,006,826 | ) |      |   | (11,192,850 | )
|Absorption of prior losses against minority interest                       |  |                                         | 1,689,800  |   |      |   |            |  
|                                                                           |  |                                         |            |   |      |   |             |  
|Net loss                                                                   |  |                                         | (317,026   | ) |      |   | (11,192,850 | )
|                                                                           |  |                                         |            |   |      |   |             |  
|Constructive preferred stock dividend                                      |  |                                         |           |   |      |   | (4,902,174  | )
|Preferred stock dividends, other                                           |  |                                         | (40,739    | ) |      |   | (118,067    | )
|                                                                           |  |                                        
|Loss attributable to common stockholders                                   |  | $                                       | (357,765   | ) |      | $ | (16,213,091 | )
|                                                                           |  |                                         |            |   |      |   |             |  
|Weighted average shares outstanding, basic and diluted                     |  |                                         |            |   |      |   |             |  
|Per share amounts, basic and diluted:                                      |  |                                         | 20,695,219 |   |      |   | 5,094,731   |  
|Loss attributable to common stockholders per common share                  |  | $                                       | (0.02      | ) |      | $ | (3.18       | )
|                                                                           |  |                                         |            |   |      |   |             |  
|Net loss:                                                                  |  |                                         |            |   |      |   |             |  
|Loss attributable to common stockholders                                   |  | $                                       | (0.02      | ) |      | $ | (3.18       | )
|                                                                           |  |                                         |            |   |      |   |             |  

See notes to consolidated financial statements.



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ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS DEFICIT
(Unaudited)

FOR THE PERIOD FROM SEPTEMBER 30, 2005 TO DECEMBER 31, 2005



|                                                     |  |              |  |                 |        |        |                           |   |                     |   |             |       |  |   |             |  |   |              |   |  |   |             |  
|---------------------------------------------------- |  | ------------ |  | --------------- | ------ | ------ | ------------------------- | - | ------------------- | - | ----------- | ----- |  | - | ----------- |  | - | ------------ | - |  | - | ----------- | -
|                                                     |  | Common Stock |  | Preferred Stock |        |        | AdditionalPaid-In Capital |   | Accumulated Deficit |   |             | Total | 
|                                                     |  | Shares       |  | Amount          |        | Shares |                           |   | Amount              |   |             |       |  |   |             |  |   |             
|Balances, September 30, 2005 (As restated)           |  | 5,170,421    |  | $               | 5,170  |        | 35,574,168                |   |                     | $ | 63,932,242  |       |  | $ | 24,851,870  |  | $ | (118,141,095 | ) |  | $ | (29,351,813 | )
|Conversion of preferred shares to common stock       |  | 20,910,908   |  |                 | 20,911 |        | (35,574,168               | ) |                     |   | (63,932,242 | )     |  |   | 63,911,331  |  |   |             |   |  |   |            |  
|Issuance of common stock for cash at IPO             |  | 2,400,000    |  |                 | 2,400  |        |                          |   |                     |   |            |       |  |   | 14,738,962  |  |   |             |   |  |   | 14,741,362  |  
|Biovest notes converted to Accentia common stock     |  | 493,842      |  |                 | 494    |        |                          |   |                     |   |            |       |  |   | 3,740,303   |  |   |             |   |  |   | 3,740,797   |  
|Issuance of common stock for cash  options exercise |  | 4,165        |  |                 | 4      |        |                          |   |                     |   |            |       |  |   | 8,065       |  |   |             |   |  |   | 8,069       |  
|Issuance of common stock cashless exercise           |  | 142,615      |  |                 | 143    |        |                          |   |                     |   |            |       |  |   |            |  |   |             |   |  |   | 143         |  
|Stock-based compensation                             |  |             |  |                 |       |        |                          |   |                     |   |            |       |  |   | 48,285      |  |   |             |   |  |   | 48,285      |  
|Reclassification of derivative liability to equity   |  |             |  |                 |       |        |                          |   |                     |   |            |       |  |   | 99,000      |  |   |             |   |  |   | 99,000      |  
|Preferred stock dividends                            |  |             |  |                 |       |        |                          |   |                     |   |            |       |  |   |            |  |   | (40,739      | ) |  |   | (40,739     | )
|Net loss for the period                              |  |             |  |                 |       |        |                          |   |                     |   |            |       |  |   |             |  |   | (317,026     | ) |  |   | (7,086,832  | )
|                                                     |  |              |  |                 |        |        |                           |   |                     |   |             |       |  |   |             |  |   |              |   |  |   |             |  
|Balances, December 31, 2005                          |  | 29,121,951   |  | $               | 29,122 |        |                          |   |                     | $ |            |       |  | $ | 107,397,816 |  | $ | (118,498,861 | ) |  | $ | (11,071,923 | )
|                                                     |  |              |  |                 |        |        |                           |   |                     |   |             |       |  |   |             |  |   |              |   |  |   |             |  

(Continued)



7



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##### Table of Contents

ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS DEFICIT

FOR THE PERIOD FROM SEPTEMBER 30, 2005 TO DECEMBER 31, 2005

(continued)



|                                               |  |                 |   |  |          |            |   |          |            |   |          |   |          |          |  |            |        |  |   |            |   |  |            |   |  |        |          |   |        |             |   |  |   |             |   |  |   |             |  
|---------------------------------------------- |  | --------------- | - |  | -------- | ---------- | - | -------- | ---------- | - | -------- | - | -------- | -------- |  | ---------- | ------ |  | - | ---------- | - |  | ---------- | - |  | ------ | -------- | - | ------ | ----------- | - |  | - | ----------- | - |  | - | ----------- | -
|                                               |  | Preferred Stock |   |  | Total    |           
|                                               |  | Series A        |   |  | Series B |            |   | Series C |            |   | Series D |   |          | Series E |  |            |        | 
|                                               |  | Shares          |   |  | Amount   |            |   | Shares   |            |   | Amount   |   |          | Shares   |  |            | Amount |  |   | Shares     |   |  | Amount     |   |  | Shares |          |   | Amount |             |   |  |  
|Balances,September 30, 2005                    |  | 2,937,013       |   |  | $        | 6,183,000  |   |          | 3,895,888  |   |          | $ | 239,919  |          |  | 3,562,607  |        |  | $ | 7,500,000  |   |  | 4,672,482  |   |  | $      | 219,769  |   |        | 20,506,178  |   |  | $ | 49,789,554  |   |  | $ | 63,932,242  |  
|Conversion of preferred shares to common stock |  | (2,937,013      | ) |  |          | (6,183,000 | ) |          | (3,895,888 | ) |          |   | (239,919 | )        |  | (3,562,607 | )      |  |   | (7,500,000 | ) |  | (4,672,482 | ) |  |        | (219,769 | ) |        | (20,506,178 | ) |  |   | (49,789,554 | ) |  |   | (63,932,242 | )
|                                               |  |                 |   |  |          |            |   |          |            |   |          |   |          |          |  |            |        |  |   |            |   |  |            |   |  |        |          |   |        |             |   |  |   |             |   |  |   |             |  
|Balances,December 31, 2005                     |  |                |   |  | $        |           |   |          |           |   |          | $ |         |          |  |           |        |  | $ |           |   |  |           |   |  | $      |         |   |        |            |   |  | $ |            |   |  | $ |            |  
|                                               |  |                 |   |  |          |            |   |          |            |   |          |   |          |          |  |            |        |  |   |            |   |  |            |   |  |        |          |   |        |             |   |  |   |             |   |  |   |             |  

See notes to consolidated financial statements.



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ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



|                                                                               |  |                                         |            |   |      |   |             |  
|------------------------------------------------------------------------------ |  | --------------------------------------- | ---------- | - | ---- | - | ----------- | -
|                                                                               |  | For the Three Months EndingDecember 31, |           
|                                                                               |  | Restated 2005                           |            |   | 2004 |  
|Cash flows from operating activities:                                          |  |                                         |            |   |      |   |             |  
|Net loss                                                                       |  | $                                       | (317,026   | ) |      | $ | (11,192,850 | )
|Adjustments to reconcile net loss to net cash flows from operating activities: |  |                                         |            |   |      |   |             |  
|Depreciation                                                                   |  |                                         | 186,643    |   |      |   | 160,730     |  
|Amortization                                                                   |  |                                         | 581,803    |   |      |   | 730,176     |  
|Stock-based compensation                                                       |  |                                         | 48,286     |   |      |   | 409,076     |  
|Accretion of debt discounts                                                    |  |                                         | 285,904    |   |      |   |            |  
|Derivative gain                                                                |  |                                         | (6,363,477 | ) |      |   |            |  
|Loss on conversion of shareholder debt to preferred stock                      |  |                                         |           |   |      |   | 2,516,494   |  
|Other non-cash charges                                                         |  |                                         | 143        |   |      |   | 127,210     |  
|Increase (decrease) in cash resulting from changes in:                         |  |                                         |            |   |      |   |             |  
|Accounts receivable                                                            |  |                                         | (686,157   | ) |      |   | 272,490     |  
|Inventories                                                                    |  |                                         | (377,138   | ) |      |   | (64,621     | )
|Inventory deposits                                                             |  |                                         | 259,740    |   |      |   |            |  
|Deferred offering costs                                                        |  |                                         | 821,573    |   |      |   |            |  
|Unbilled receivables                                                           |  |                                         | (44,403    | ) |      |   | (118,681    | )
|Prepaid expenses and other current assets                                      |  |                                         | (164,835   | ) |      |   | 125,914     |  
|Other assets                                                                   |  |                                         | (20,543    | ) |      |   | (41,040     | )
|Accounts payable                                                               |  |                                         | (1,379,715 | ) |      |   | (1,979,122  | )
|Accrued expenses                                                               |  |                                         | 1,823,869  |   |      |   | (243,020    | )
|Unearned revenues                                                              |  |                                         | 721,367    |   |      |   | 440,456     |  
|Customer deposits                                                              |  |                                         | (98,257    | ) |      |   | 184,313     |  
|                                                                               |  |                                         |            |   |      |   |             |  
|Net cash flows from operating activities                                       |  |                                         | (4,722,223 | ) |      |   | (8,672,475  | )
|                                                                               |  |                                        
|Cash flows from investing activities:                                          |  |                                         |            |   |      |   |             |  
|Acquisition of furniture, equipment, and leasehold improvements                |  |                                         | (226,488   | ) |      |   | (104,414    | )
|Cash paid for acquisition of product rights and other intangibles              |  |                                         | (1,068,087 | ) |      |   | (3,171,290  | )
|                                                                               |  |                                         |            |   |      |   |             |  
|Net cash flows from investing activities                                       |  |                                         | (1,294,575 | ) |      |   | (3,275,704  | )
|                                                                               |  |                                        
|Cash flows from financing activities:                                          |  |                                         |            |   |      |   |             |  
|Payments on notes payable and long-term debt                                   |  |                                         | (7,564,044 | ) |      |   | (397,910    | )
|Proceeds from issuance of common stock                                         |  |                                         | 14,741,362 |   |      |   | 600,000     |  
|Proceeds from issuance of preferred stock                                      |  |                                         |           |   |      |   | 12,795,824  |  
|Proceeds from the exercise of stock options                                    |  |                                         | 8,069      |   |      |   |            |  
|Due from related party                                                         |  |                                         | (11,668    | ) |      |   |            |  
|Payment of preferred stock dividends                                           |  |                                         |           |   |      |   | (288,663    | )
|Proceeds from line of credit                                                   |  |                                         | 3,265,565  |   |      |   |            |  
|Payments to line of credit                                                     |  |                                         |           |   |      |   | (250,000    | )
|Proceeds from investment minority interest investment                          |  |                                         | (1,689,800 | ) |      |   |            |  
|                                                                               |  |                                         |            |   |      |   |             |  
|Net cash flows from financing activities                                       |  |                                         | 8,749,484  |   |      |   | 12,459,251  |  
|                                                                               |  |                                        
|Net change in cash and cash equivalents                                        |  |                                         | 2,732,686  |   |      |   | 511,072     |  
|                                                                               |  |                                         |            |   |      |   |             |  
|Cash and cash equivalents at beginning of period                               |  |                                         | 2,763,451  |   |      |   | 1,904,938   |  
|                                                                               |  |                                        
|Cash and cash equivalents at end of period                                     |  | $                                       | 5,496,137  |   |      | $ | 2,416,010   |  
|                                                                               |  |                                         |            |   |      |   |             |  
|Supplemental cash flow information:                                            |  |                                         |            |   |      |   |             |  
|Cash paid for:                                                                 |  |                                         |            |   |      |   |             |  
|Interest                                                                       |  | $                                       | 663,992    |   |      | $ | 233,750     |  
|Income taxes                                                                   |  |                                         |           |   |      |   |            |  
|Issuance of stock to satisfy accrued expense                                   |  | $                                       | 408,000    |   |      |   |            |  

The Company reclassed derivative liabilities of $99,000 from debt to equity as a result of payments on notes
payable to which the derivative liability related.



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##### Table of Contents

ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED DECEMBER 30, 2005 AND 2004

1. Description of the company

Accentia Biopharmaceuticals, Inc. and its subsidiaries, Analytica International, Inc.
(Analytica), TEAMM Pharmaceuticals, Inc. (TEAMM), AccentRx, Inc. (AccentRx), Biovest International, Inc. (Biovest), and Accentia Specialty Pharmacy (ASP) (collectively referred to as the
Company or Accentia) is a vertically integrated specialty biopharmaceutical company. The Company is a biopharmaceutical company focused on the development and commercialization of late-stage clinical products in the
therapeutic areas of respiratory disease and oncology. The Company has two product candidates entering or in Phase 3 clinical trials. The first product candidate, SinuNase, has been developed as a novel application and formulation of a known therapeutic to treat chronic rhinosinusitis. The second product candidate,
BiovaxID, is a patient-specific cancer vaccine focusing on the treatment of follicular non-Hodgkins
lymphoma. BiovaxID is currently in a pivotal Phase 3 clinical trial. In addition to these product candidates, the Company has a growing specialty pharmaceutical business with a portfolio of ten currently marketed products, two new products that have
been approved and are pending commercial launch, and a pipeline of additional products under development by third parties.

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 statement 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 for the periods covered by the financial statements.

Operation 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-K for the fiscal year ended September 30, 2005.

Principles of consolidation

The accompanying consolidated financial statements include the accounts of Accentia and its three wholly-owned subsidiaries, and its majority owned subsidiary. All
intercompany accounts and transactions have been eliminated. The Company does not currently recognize a minority interest in its majority owned subsidiary pursuant to Accounting Research Bulletin 51, Consolidated Financial Statements. Where losses
applicable to the minority interest in a subsidiary exceed the minority interest in the equity capital of the subsidiary, such excess and any further losses applicable to the minority interest shall be charged against the majority interest, as there
is no obligation of the minority interest to make good such losses. However, if future minority equity or earnings do materialize, the majority interest will and have been credited to the extent of such losses previously absorbed.

Use of estimates

The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of America requires management to make judgments, assumptions and estimates that affect the amounts reported in the financial statements and accompanying notes. Actual
results could differ materially from those estimates.

Cash and cash equivalents

The Company considers all highly-liquid investments purchased with an original maturity of three months or less to be cash equivalents.



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Inventories

Inventories consist primarily of trade pharmaceutical products, supplies/parts used in instrumentation assembly and related materials. Inventories are stated at the lower of cost or market with cost determined using the first-in first-out
(FIFO) method. In evaluating whether inventory is stated at the lower of cost or market, management considers such factors as the amount of inventory on hand and in the distribution channel, estimated time required to sell such
inventory, remaining shelf life and current and expected market conditions, including levels of competition. As appropriate, a provision is recorded to reduce inventories to their net realizable value.

Furniture, equipment and leasehold improvements

Furniture, equipment
and leasehold improvements are stated at cost, less accumulated depreciation. Depreciation is determined using straight-line and accelerated methods over the estimated useful lives of three to seven years for furniture and equipment. Amortization of
leasehold improvements is over the shorter of the improvements estimated economic lives or the related lease terms.

Goodwill and intangible
assets

Intangible assets include trademarks, product rights, noncompete agreements, purchased customer data relationships and patents, and are
accounted for based on Financial Accounting Standard Statement No. 142 Goodwill and Other Intangible Assets(FAS 142). In that regard, goodwill and intangible assets that have indefinite useful lives are not amortized but are
tested at least annually for impairment, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The Company has identified certain trademarks, product rights and technology rights as intangible assets
with indefinite lives and, therefore, these assets are not amortized. The Company did not recognize any impairment during the three months ended December 31, 2005 or 2004.

Intangible assets with finite useful lives are amortized over the estimated useful lives from the date of acquisition as follows:



| |  |                        |  |  |  |                        |  | 
| |  | ---------------------- |  |  |  | ---------------------- |  | 
| |  |                        |  |  |  | Estimated
Useful Lives |  | 
| |  | Noncompete agreements  |  |  |  | 2 to 4 years           |  | 
| |  | Customer relationships |  |  |  | 10 years               |  | 
| |  | Software               |  |  |  | 3 years                |  | 
| |  | Patents                |  |  |  | 3 years                |  | 
| |  | Product rights         |  |  |  | 4.5 to 20.5 years      |  | 

Valuation of Derivative Instruments

These financial statements have been prepared in accordance with accounting principles generally accepted in the United States and, accordingly, require management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the financial statements and the reported amounts during the reporting periods. Specifically, FAS 133, Accounting for Derivative Instruments and Hedging Activities requires
bifurcation of embedded derivative instruments and measurement of fair value for accounting purposes. In determining the appropriate fair value, the Company uses a variety of valuation techniques including Black Scholes Option Pricing model and
Monte Carlo simulation models. Derivative liabilities are adjusted to reflect fair value at each period end, with any increase or decrease in the fair value being recorded in results of operations as Adjustments to Fair Value of Derivatives.

Income taxes

Deferred income tax assets and
liabilities are computed annually for differences between the financial statements and income tax bases of assets and liabilities that will result in taxable or deductible amounts in the future, based on enacted tax laws and rates applicable to the
periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.



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Net loss per common share

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

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



|                                                                         |  |                            |            |   |                   |   |             |  
|------------------------------------------------------------------------ |  | -------------------------- | ---------- | - | ----------------- | - | ----------- | -
|                                                                         |  | For the Three Months Ended |           
|                                                                         |  | Restated December 31, 2005 |            |   | December 31, 2004 |  
|Numerator:                                                               |  |                            |            |   |                   |   |             |  
|Net loss applicable to common stockholders                               |  | $                          | (357,765   | ) |                   | $ | (16,213,091 | )
|Denominator:                                                             |  |                            |            |   |                   |   |             |  
|For basic loss per shareweighted average shares                         |  |                            | 20,695,219 |   |                   |   | 5,094,731   |  
|Effect of dilutive securities                                            |  |                            |           |   |                   |   |            |  
|Weighted average shares for dilutive loss per share                      |  |                            | 20,695,219 |   |                   |   | 5,094,731   |  
|Net loss per share applicable to common stockholders, basic and dilutive |  | $                          | (0.02      | ) |                   | $ | (3.18       | )
|EPS effect of preferred dividends                                        |  | $                          |           |   |                   | $ | (0.99       | )

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:



|                                                                                                  |  |                            |  |                  
|------------------------------------------------------------------------------------------------- |  | -------------------------- |  | -----------------
|                                                                                                  |  | For the Three Months Ended
|                                                                                                  |  | December 31, 2005          |  | December 31, 2004
|Options and warrants to purchase common stock                                                     |  | 3,034,105                  |  | 1,814,523        
|                                                                                                  |  |                           
|Preferred stock convertible to common stock                                                       |  |                           |  | 30,182,439       
|Preferred stock options and warrants convertible to preferred which is then convertible to common |  |                           |  | 13,082,142       

Stock based compensation

In December 2004, the Financial Accounting Standards Board issued Statement No. 123R (FAS 123R), which revised FAS 123, Accounting for Stock-Based Compensation, by requiring the expensing of
share-based compensation based on the grant-date value of the award. FAS 123 had provided companies the option of expensing such awards or merely disclosing the pro forma effects of such expensing in the notes to financial statements. As of
October 1, 2002, the Company began expensing employee stock options in accordance with FAS 123 and its related amendments. During the quarter ended December 31, 2005, the Company adopted FAS 123R. There are currently no significant
differences between FAS 123 and FAS 123R; however FAS 123R also requires that an additional caption in the financial section of the Statements of Consolidated Cash Flows to present separately the excess tax benefits related to share based-payments.
The adoption of FAS 123R during the December 2005 quarter did not have a material effect on the Companys financial position, results of operations or cash flows.

Severance Claim:

In December, 2005 the Company settled any and all severance claims from its former Chief Executive
Officer and former director by issuing 800,000 shares of restricted common stock. In addition, the Company will pay this former officer and director $200,000 cash to be paid in bi-weekly installments at the same rate as his 2005 compensation. The
Company accrued all costs of the settlement as of December 31, 2005 as compensation expense.



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##### Table of Contents

Reclassification:

Certain amounts in the 2004 financial statements have been reclassified to conform to the 2005 presentation.

3. Liquidity and
managements plans

The Company anticipates that operating cash flow deficits for the early part of fiscal 2006 will be offset by net cash inflows
from financing activities, such as debt or equity placements, accessing existing or new credit facilities, receipt of repayment of inter-company demand loans and from proceeds from the Companys IPO completed in the first quarter of fiscal
2006. At December 31, 2005, the Company had $ 5.5 million in cash on hand, $4.3 million in accounts receivable and $0.7 million of earned but unbilled receivables, $3.3 million in availability under existing lines of credit, and $6.2
million in demand notes receivable from Biovest. Upon Biovest obtaining additional financing, which it is seeking to consumate in calendar 2006 and equity offerings, debt financings, corporate collaborations, or licensing transaction, it is
anticipated that Biovest may repay some or all of the outstanding demand notes and Biovest will commence the funding of its ongoing operations without additional intercompany loans from Accentia.

Based on current operating plans, the Company anticipates that its existing capital resources and cash flow from operations, together with borrowing availability under
its lines of credit and receipt of repayment of demand inter-company debt will be sufficient to fund its operations and development activities into the fourth quarter of fiscal year 2006. The Company is currently engaged in an effort to restructure
certain of its existing indebtedness in order to increase available funds on a near-term basis, and the Company also intends to seek additional financing through one or more private equity offerings, additional debt financings, corporate
collaborations or licensing transactions. The Company cannot be certain that additional funding will be available on acceptable terms, or at all. If adequate funds are not available from the foregoing sources, or if the Company determines it to
otherwise be in the Companys best interest, the Company may consider additional strategic financing options, including sales of assets or business units (such as specialty pharmaceuticals, market services or cell culture equipment) that are
non-essential to the ongoing development or future commercialization of SinuNase, or the Company may be required to delay, reduce the scope of, or eliminate one or more of its research or development programs or curtail some of our commercialization
efforts.

There are currently no commitments in place for any debt or equity financing being sought by the Company or by Biovest, nor can assurances be
given that such financing will be available. While the Company is confident that it will raise the capital necessary to fund operations and achieve successful commercialization of the products under development, there can be no assurances in that
regard. The financial statements do not include any adjustments that may arise as a result of this uncertainty.

4. Inventories

Inventories consist of the following:



|                                                                      |  |                   |           |                    |   |          
|--------------------------------------------------------------------- |  | ----------------- | --------- | ------------------ | - | ---------
|                                                                      |  | December 31, 2005 |           | September 30, 2005
|Pharmaceutical products held for sale                                 |  | $                 | 1,074,650 |                    | $ | 814,862  
|Finished goods, other, net of $0.3 million allowance for obsolescence |  |                   | 198,818   |                    |   | 35,787   
|Work-in-process                                                       |  |                   | 57,471    |                    |   | 120,977  
|Raw materials                                                         |  |                   | 60,096    |                    |   | 42,270   
|                                                                      |  |                   |           |                    |   |          
|                                                                      |  | $                 | 1,391,035 |                    | $ | 1,013,896



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##### Table of Contents

5. Unbilled receivables and unearned revenues

Unbilled receivables and unearned revenues are as follows:



|                                                |  |                   |             |   |                    |   |             |  
|----------------------------------------------- |  | ----------------- | ----------- | - | ------------------ | - | ----------- | -
|                                                |  | December 31, 2005 |             |   | September 30, 2005 |  
|Costs incurred on uncompleted service contracts |  | $                 | 7,071,432   |   |                    | $ | 7,020,113   |  
|Estimated earnings                              |  |                   | 7,277,789   |   |                    |   | 7,286,296   |  
|                                                |  |                   |             |   |                    |   |             |  
|                                                |  |                   | 14,349,221  |   |                    |   | 14,306,409  |  
|Less billings to date                           |  |                   | (15,198,395 | ) |                    |   | (14,478,619 | )
|                                                |  |                   |             |   |                    |   |             |  
|                                                |  | $                 | (849,174    | ) |                    | $ | (172,210    | )
|                                                |  |                   |             |   |                    |   |             |  

These amounts are presented in the accompanying balance sheets under the following captions:



|                     |  |                   |            |   |                    |   |          |  
|-------------------- |  | ----------------- | ---------- | - | ------------------ | - | -------- | -
|                     |  | December 31, 2005 |            |   | September 30, 2005 |  
|Unbilled receivables |  | $                 | 740,644    |   |                    | $ | 690,886  |  
|Unearned revenues    |  |                   | (1,589,818 | ) |                    |   | (863,096 | )
|                     |  |                   |            |   |                    |   |          |  
|                     |  | $                 | (849,174   | ) |                    | $ | (172,210 | )
|                     |  |                   |            |   |                    |   |          |  

6. Other intangible assets

The companys Product Rights increased by $0.6 million during the quarter ended December 31, 2005. This increase represents a payment of $0.5 million for the acquisition of AllerNase, a newly acquired
product under development by Collegium, and a payment of $0.1 million to Mayo for SinuNase.

7. Furniture, equipment and leasehold improvements

Furniture, equipment and leasehold improvements consist of the following:



|                                                |  |                   |            |   |                    |   |            |  
|----------------------------------------------- |  | ----------------- | ---------- | - | ------------------ | - | ---------- | -
|                                                |  | December 31, 2005 |            |   | September 30, 2005 |  
|Furniture                                       |  | $                 | 259,273    |   |                    | $ | 253,130    |  
|Office and laboratory equipment                 |  |                   | 2,784,043  |   |                    |   | 2,737,291  |  
|Leasehold improvements                          |  |                   | 960,340    |   |                    |   | 791,687    |  
|                                                |  |                   |            |   |                    |   |            |  
|                                                |  |                   | 4,003,656  |   |                    |   | 3,782,108  |  
|Less: accumulated depreciation and amortization |  |                   | (2,187,992 | ) |                    |   | (2,006,289 | )
|                                                |  |                   |            |   |                    |   |            |  
|                                                |  | $                 | 1,815,664  |   |                    | $ | 1,775,819  |  
|                                                |  |                   |            |   |                    |   |            |  



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##### Table of Contents

8. Lines of credit

Lines of credit consists of the following:



|                                                                                                                                                                                                                                                                              |  |                  |            |                   |   |          
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ---------- | ----------------- | - | ---------
|                                                                                                                                                                                                                                                                              |  | December 31,2005 |            | September 30,2005
|Secured revolving note of which $2.5 million is convertible due to Laurus Master Fund, Ltd., interest at prime plus 2% (9.25% at
December 30, 2005); matures April 2008; principal and accrued interest convertible at fixed conversion price of $6.80 per share (See Note 9) |  | $                | 5,360,625  |                   | $ | 3,767,221
|Bridge note, interest at 4.25%, unsecured, matures August 2007 or upon completion of a debt or equity financing resulting in more than $35.0
million in net proceeds (a)                                                                                                      |  |                  | 4,180,000  |                   |   | 4,180,000
|Revolving credit agreement, interest at prime (7.25% at December 31, 2005); maturity in 2007; secured by Companys accounts
receivable and guarantee of major stockholder                                                                                                     |  |                  | 3,000,000  |                   |   |         
|                                                                                                                                                                                                                                                                              |  |                  |            |                   |   |          
|                                                                                                                                                                                                                                                                              |  |                  | 12,540,625 |                   |   | 7,947,221
|Less current maturities                                                                                                                                                                                                                                                       |  |                  | 5,360,625  |                   |   | 3,767,221
|                                                                                                                                                                                                                                                                              |  |                  |            |                   |   |          
|                                                                                                                                                                                                                                                                              |  | $                | 7,180,000  |                   | $ | 4,180,000
|                                                                                                                                                                                                                                                                              |  |                  |            |                   |   |          

---

|(a) | On August 16, 2005, the Company entered into a new bridge loan agreement with Hopkins II that provides for aggregate borrowing availability of up to $7.5 million in principal
amount. In connection with this agreement, the $4.2 million advanced under the previous Hopkins II bridge loan was converted into an obligation under the new bridge loan agreement. The new bridge loan (including all accrued but unpaid interest) will
become due upon the earlier of August 16, 2007 or the completion by the Company of a debt or equity financing that results in proceeds of more than $35.0 million (net of underwriting discounts, commissions, or placement agent fees). The Company
may prepay the bridge loan at any time without penalty or premium. Notwithstanding the foregoing, on the date on which the bridge loan becomes due or on which the Company desires to prepay the loan, the Company must not be in default under its
credit facility with Laurus Master Fund, Ltd., and the remaining balance under the Laurus credit facility at such time must be $2.5 million or less. If both of these conditions are not satisfied, then the bridge loan will not become due and cannot
be paid until the first day on which both of these conditions are satisfied.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Under the August 2005 bridge loan agreement with
Hopkins II, the Company has the unconditional right to borrow up to $5.0 million in the aggregate upon ten days prior written notice to Hopkins II, provided that the Companys right to borrow any amounts in excess of $5.0 million is
conditioned upon the Company either being in default under its credit facility with Laurus or having less than $5.0 million cash on hand at the time of the advance. As of December 31, 2005, a total of $4.2 million had been borrowed under this
bridge loan. The loan is unsecured and bears interest at a rate equal to 4.25% per annum, simple interest. No payments of principal or interest are due until the maturity date of the loan.

Weighted average interest on all short-term borrowings aggregated 6.89% and 6.42% at December 31, 2005 and September 30, 2005 respectively. At
December 31, 2005, the Company has an aggregate of $3.3 million available under its lines of credit.

9. Long-term debt

Long-term debt consists of the following:



|                                                                                                                                                                                                                    |  |                  |            |   |                  |   |            |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ---------- | - | ---------------- | - | ---------- | -
|                                                                                                                                                                                                                    |  | December 31,2005 |            |   | September 302005 |  
|Related party:                                                                                                                                                                                                      |  |                  |            |   |                  |   |            |  
|Term loan due to McKesson, a holder of shares of common stock and major supplier, payable at 10% contract rate; (a)                                                                                                 |  | $                |           |   |                  | $ | 3,900,000  |  
|Note due to McKesson, interest payable monthly at 10% (b)                                                                                                                                                           |  |                  | 800,000    |   |                  |   | 2,095,414  |  
|Notes payable, former Biovest management, interest at 7%; due in June 2006; working capital loans due in fiscal 2006; bridge financing due in
fiscal year 2006; and other notes due in installments through 2006(c) |  |                  | 438,645    |   |                  |   | 4,439,328  |  
|Accrued interest (c)                                                                                                                                                                                                |  |                  | 54,871     |   |                  |   | 641,917    |  
|                                                                                                                                                                                                                    |  |                  |            |   |                  |   |            |  
|                                                                                                                                                                                                                    |  |                  | 1,293,516  |   |                  |   | 11,076,659 |  
|Less current maturities                                                                                                                                                                                             |  |                  | (1,293,516 | ) |                  |   | (7,414,742 | )
|                                                                                                                                                                                                                    |  |                  |            |   |                  |   |            |  
|                                                                                                                                                                                                                    |  | $                |           |   |                  | $ | 3,661,917  |  
|                                                                                                                                                                                                                    |  |                  |            |   |                  |   |            |  
|Other:                                                                                                                                                                                                              |  |                  |            |   |                  |   |            |  
|Convertible amortizing term note due to Laurus Master Fund, LTD., interest payable monthly at prime rate plus 4%; due April
2008(d)(g)                                                                              |  | $                | 6,139,704  |   |                  | $ | 8,193,238  |  
|Note payable, Harbinger Mezzanine Partners, LP, net of discount; secured by assets of TEAMM; interest payable monthly at 13.5%;
$5.0 million principal balance matures June 2006. (b)(e)                            |  |                  | 4,705,409  |   |                  |   | 6,589,854  |  
|Convertible notes payable, Biovest bridge financing, due in 2006                                                                                                                                                    |  |                  | 31,677     |   |                  |   | 100,000    |  
|Convertible notes payable, Biovest 2000 bridge financing, interest at 10%, due in 2006(f)                                                                                                                           |  |                  | 175,469    |   |                  |   | 175,469    |  
|Other                                                                                                                                                                                                               |  |                  | 112,531    |   |                  |   | 119,050    |  
|Long term accrued interest(c)                                                                                                                                                                                       |  |                  |           |   |                  |   | 311,013    |  
|                                                                                                                                                                                                                    |  |                  |            |   |                  |   |            |  
|                                                                                                                                                                                                                    |  |                  | 11,164,790 |   |                  |   | 15,488,624 |  
|Less current maturities                                                                                                                                                                                             |  |                  | 6,191,417  |   |                  |   | (9,998,372 | )
|                                                                                                                                                                                                                    |  |                  |            |   |                  |   |            |  
|                                                                                                                                                                                                                    |  | $                | 4,973,373  |   |                  | $ | 5,490,252  |  
|                                                                                                                                                                                                                    |  |                  |            |   |                  |   |            |  



15



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##### Table of Contents

Footnotes to long-term debt

---

|(a) | Note paid in full on November 2, 2005
|--- | -------------------------------------

|(b) | McKesson note was paid down to $0.8 million during October and November of 2005, balance is due July 2006.
|--- | ----------------------------------------------------------------------------------------------------------

|(c) | Note as of December 31, 2005 matures in 2006, accruing interest at 7.5% and paid monthly. Collateralized by certain assets of Biovest; convertible at the option of the holder
into Biovest common stock (at $0.25 per share) or Accentia common stock (at a discount of $1.60 off the $8.00 IPO offering price). $5.0 million of notes as of September 30, 2005, due in 2007, were converted to equity during the three months
ended December 31, 2005.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(d) | Note is convertible into shares of common stock at $6.80 per share, exercisable through April 2008
|--- | --------------------------------------------------------------------------------------------------

|(e) | Note was paid down to $4.7 million (net of discount) as of December 31, 2005, balance is due June 30, 2006
|--- | ----------------------------------------------------------------------------------------------------------

|(f) | Notes are convertible into shares of Biovest common stock at $1.00 per share and include warrants to purchase 50,000 shares of Biovest common stock at an exercise price of $1.25 per
share, exercisable through September 2007.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(g) | Discounts on long-term debt include the value of warrants issued in conjunction with long-term debt and are accreted over the life of the related debt.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------

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



|                            |  |   |            |  
|--------------------------- |  | - | ---------- | -
|Years ending December 31,   |  |   |            |  
|2006                        |  | $ | 7,255,169  |  
|2007                        |  |   | 3,870,984  |  
|2008                        |  |   | 3,548,360  |  
|                            |  |   |            |  
|                            |  |   | 14,674,513 |  
|Less unamortizated discount |  |   | (3,509,723 | )
|                            |  |   |            |  
|Total                       |  | $ | 11,164,790 |  
|                            |  |   |            |  



16



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##### Table of Contents

The Laurus long term note is shown on the balance sheet under the following accounts:



|                                                                                                   |  |   |             |  
|-------------------------------------------------------------------------------------------------- |  | - | ----------- | -
|Principal balance of notes                                                                         |  | $ | 15,000,000  |  
|Less reduction for:                                                                                |  |   |             |  
|Fair value of beneficial conversion of options                                                     |  |   | (4,413,514  | )
|Fair value of warrants                                                                             |  |   | (3,989,610  | )
|                                                                                                   |  |   |             |  
|Recorded at closing                                                                                |  |   | 6,596,876   |  
|Accretion of discount (interest expense) through December 31, 2005 using effective interest method |  |   | 740,552     |  
|Loss on extinguishment of debt                                                                     |  |   | 4,808,782   |  
|Debt payments                                                                                      |  |   | (645,881    | )
|                                                                                                   |  |   |             |  
|Carrying value at December 31, 2005                                                                |  | $ | 11,500,329  |  
|                                                                                                   |  |   |             |  
|As presented on balance sheet:                                                                     |  |   |             |  
|Current maturities of long term debt - other                                                       |  | $ | 1,267,747   |  
|Lines of credit - current                                                                          |  |   | 5,360,625   |  
|Long-term debt, net of current maturities - other                                                  |  |   | 4,871,957   |  
|                                                                                                   |  |   |             |  
|                                                                                                   |  |   | $11,500,329 |  
|                                                                                                   |  |   |             |  

10. Related party transactions

Accounts receivable, stockholder

Accounts receivable stockholder at December 31, 2005 and September 31,
2005 consist of amounts due from McKesson, a holder of common stock. These amounts are due in accordance with customary trade terms in the Specialty Pharmaceuticals segment.



17



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##### Table of Contents

Stockholder Note

The
Stockholder Note at December 31, 2005 is an unsecured 6% note in the amount of $0.4 million, and is currently due in 2006.

11. Income taxes


The Companys deferred tax assets and liabilities consist of the following:



|                                      |  |                   |             |   |                    |   |             |  
|------------------------------------- |  | ----------------- | ----------- | - | ------------------ | - | ----------- | -
|                                      |  | December 31, 2005 |             |   | September 30, 2005 |  
|Deferred tax assets:                  |  |                   |             |   |                    |   |             |  
|Accrued expenses deductible in future |  | $                 | 3,248,000   |   |                    | $ | 2,991,000   |  
|Allowance for doubtful accounts       |  |                   | 45,000      |   |                    |   | 45,000      |  
|Basis difference in assets            |  |                   | 505,000     |   |                    |   | 359,000     |  
|Inventory valuation allowance         |  |                   | 310,000     |   |                    |   | 318,000     |  
|Stock based compensation              |  |                   | 755,000     |   |                    |   | 755,000     |  
|Intangibles                           |  |                   | 1,628,000   |   |                    |   | 1,628,000   |  
|Net operating loss carryforward       |  |                   | 34,002,000  |   |                    |   | 31,849,000  |  
|Valuation allowance                   |  |                   | (38,355,000 | ) |                    |   | (35,668,000 | )
|                                      |  |                   |             |   |                    |   |             |  
|                                      |  |                   | 2,138,000   |   |                    |   | 2,277,000   |  
|Deferred tax liabilities:             |  |                   |             |   |                    |   |             |  
|Intangibles                           |  |                   | (2,138,000  | ) |                    |   | (2,277,000  | )
|                                      |  |                   |             |   |                    |   |             |  
|                                      |  | $                 |            |   |                    | $ |            |  



18



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##### Table of Contents

The expected income tax benefit at the statutory tax rate differed from income taxes in the accompanying statements of
operations as follows:



|                                                           |  |      |   |  |      |   |  |      |  
|---------------------------------------------------------- |  | ---- | - |  | ---- | - |  | ---- | -
|                                                           |  | 2005 |   |  | 2004 |   |  | 2003 |  
|Statutory tax rate                                         |  | 34   | % |  | 34   | % |  | 34   | %
|                                                           |  |      |  
|State taxes                                                |  | 4    | % |  | 4    | % |  | 4    | %
|                                                           |  |      |  
|Acquisition adjustments                                    |  |     |   |  |     |   |  | (136 | )
|Other                                                      |  |     |   |  |     |   |  |     |  
|Change in valuation allowance                              |  | (38  | ) |  | (38  | ) |  | 98   |  
|                                                           |  |      |  
|Effective tax rate in accompanying statement of operations |  | 0    | % |  | 0    | % |  | 0    | %

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

Under Section 382
and 383 of the Internal Revenue Code, if an ownership change occurs with respect to a loss corporation, as defined, there are annual limitations on the amount of the net operating loss and other deductions, which are available to the
Company. Due to the acquisition transactions in which the Company has engaged in recent years, the Company believes that the use of these net operating losses will be significantly limited. As a consequence of the initial public offering, the
Company may experience another such ownership change. Accordingly, our net operating loss carryforward arising before such ownership changes may be also limited to offset future federal taxable income.

The Company has a federal net operating loss carryover of approximately $83.9 million as of December 31, 2005, which expires through 2025, and of which $30.0 million is
subject to various Section 382 limitations.

12. Stockholders equity

During the quarter ended December 31, 2005, the following shares were converted to common stock at the initial public offering date (November 2, 2005):



|                                                              |  |           
|------------------------------------------------------------- |  | ----------
|Shares of Series A preferred stock for cash                   |  | 2,937,013 
|Shares of Series B preferred stock for cash                   |  | 1,990,797 
|Shares of Series C preferred stock for cash                   |  | 1,478,482 
|Shares of Series D preferred stock for cash                   |  | 2,214,746 
|Shares of Series E preferred stock for cash                   |  | 12,289,870
|Total common shares issued upon conversion of preferred stock |  | 20,910,907

13. Operational results for Biovest



|                                                                  |  |                                             |   |  |                            |  
|----------------------------------------------------------------- |  | ------------------------------------------- | - |  | -------------------------- | -
|                                                                  |  | For the three months endedDecember 31, 2005 |  
|                                                                  |  | Biovest                                     |   |  | ConsolidatedwithoutBiovest |  
|Net sales                                                         |  | 1,084,975                                   |   |  | 5,732,991                  |  
|Cost of sales                                                     |  | 602,903                                     |   |  | 1,272,870                  |  
|                                                                  |  |                                             |   |  |                            |  
|Gross margin                                                      |  | 482,072                                     |   |  | 4,460,121                  |  
|Operating expenses                                                |  | 3,424,946                                   |   |  | 8,924,989                  |  
|                                                                  |  |                                             |   |  |                            |  
|Loss from operations                                              |  | (2,942,874                                  | ) |  | (4,464,868                 | )
|Interest expense                                                  |  | (108,590                                    | ) |  | (897,390                   | )
|Other income                                                      |  | 37,500                                      |   |  | 5,919                      |  
|Derivative gain                                                   |  |                                            |   |  | 6,363,477                  |  
|Absorption of prior losses against minority interest              |  |                                            |   |  | 1,689,800                  |  
|                                                                  |  |                                             |   |  |                            |  
|Net income (loss)                                                 |  | (3,013,964                                  | ) |  | 2,696,938                  |  
|Dividends                                                         |  |                                            |   |  | (40,739                    | )
|                                                                  |  |                                             |   |  |                            |  
|Income (loss) attributable to common shareholders                 |  | (3,013,964                                  | ) |  | 2,656,199                  |  
|                                                                  |  |                                             |   |  |                            |  
|Weighted average shares outstanding, basic and diluted            |  | 20,695,219                                  |   |  | 20,695,219                 |  
|Income (loss) attributable to common stockholder per common share |  | ($0.15                                      | ) |  | $0.13                      |  
|                                                                  | 
|                                                                  |  | For the three months endedDecember 31, 2004 |  
|                                                                  |  | Biovest                                     |   |  | ConsolidatedwithoutBiovest |  
|Net sales                                                         |  | 1,072,798                                   |   |  | 3,444,321                  |  
|Cost of sales                                                     |  | 1,202,979                                   |   |  | 1,011,352                  |  
|                                                                  |  |                                             |   |  |                            |  
|Gross margin                                                      |  | (130,181                                    | ) |  | 2,432,969                  |  
|Operating expenses                                                |  | 1,289,868                                   |   |  | 9,262,964                  |  
|                                                                  |  |                                             |   |  |                            |  
|Loss from operations                                              |  | (1,420,049                                  | ) |  | (6,829,995                 | )
|Interest expense                                                  |  | (104,423                                    | ) |  | (473,382                   | )
|Other expense                                                     |  |                                            |   |  | (2,365,001                 | )
|Absorption of prior losses against minority interest              |  |                                            |   |  |                           |  
|                                                                  |  |                                             |   |  |                            |  
|Net loss                                                          |  | (1,524,472                                  | ) |  | (9,668,378                 | )
|Dividends                                                         |  |                                            |   |  | (5,020,241                 | )
|                                                                  |  |                                             |   |  |                            |  
|Loss attributable to common shareholders                          |  | (1,524,472                                  | ) |  | (14,688,619                | )
|                                                                  |  |                                             |   |  |                            |  
|Weighted average shares outstanding, basic and diluted            |  | 5,094,731                                   |   |  | 5,094,731                  |  
|Loss attributable to common stockholder per common share          |  | ($0.30                                      | ) |  | ($2.88                     | )



19



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##### Table of Contents

14. Segment information

We define our segment operating results as earnings (loss) before general and administrative costs, interest expense, interest income, other income, discontinued operations and income taxes. Inter-segment sales of $0.1 million and $0.2
million for the three months ended December 31, 2005 and 2004 respectively, representing the sale of services from the Biopharmaceutical Products and Services segment to the Specialty Pharmaceuticals segment have been eliminated from segment
sales.

Segment information for the three months ended December 31, 2005 is as follows:



|                         |  |                                       |            |                          |   |            |  |   |           
|------------------------ |  | ------------------------------------- | ---------- | ------------------------ | - | ---------- |  | - | ----------
|                         |  | BiopharmaceuticalProductsand Services |            | SpecialtyPharmaceuticals |   | Total     
|Net sales:               |  |                                       |            |                          |   |            |  |   |           
|Products                 |  | $                                     | 871,460    |                          | $ | 2,903,043  |  | $ | 3,774,503 
|Services                 |  |                                       | 3,043,463  |                          |   |           |  |   | 3,043,463 
|                         |  |                                       |            |                          |   |            |  |   |           
|Total net sales          |  |                                       | 3,914,923  |                          |   | 2,903,043  |  |   | 6,817,966 
|                         |  |                                       |           
|Cost of sales:           |  |                                       |            |                          |   |            |  |   |           
|Products                 |  |                                       | 381,345    |                          |   | 547,216    |  |   | 928,561   
|Services                 |  |                                       | 947,212    |                          |   |           |  |   | 947,212   
|                         |  |                                       |            |                          |   |            |  |   |           
|Total cost of sales      |  |                                       | 1,328,557  |                          |   | 547,216    |  |   | 1,875,773 
|                         |  |                                       |            |                          |   |            |  |   |           
|Gross margin             |  |                                       | 2,586,366  |                          |   | 2,355,827  |  |   | 4,942,193 
|                         |  |                                       |           
|Sales and marketing      |  |                                       | 363,022    |                          |   | 2,896,926  |  |   | 3,259,948 
|Research and development |  |                                       | 3,159,872  |                          |   |           |  |   | 3,159,872 
|Total assets             |  |                                       | 27,314,685 |                          |   | 12,422,956 |  |   | 39,737,641
|Goodwill                 |  |                                       | 1,193,437  |                          |   |           |  |   | 1,193,437 

Segment information for the three months ended December 31, 2004 is as follows:



|                         |  |                                       |            |                          |   |            |  |   |           
|------------------------ |  | ------------------------------------- | ---------- | ------------------------ | - | ---------- |  | - | ----------
|                         |  | BiopharmaceuticalProductsand Services |            | SpecialtyPharmaceuticals |   | Total     
|Net sales:               |  |                                       |            |                          |   |            |  |   |           
|Products                 |  | $                                     | 636,523    |                          | $ | 1,423,316  |  | $ | 2,059,839 
|Services                 |  |                                       | 2,457,280  |                          |   |           |  |   | 2,457,280 
|                         |  |                                       |            |                          |   |            |  |   |           
|Total net sales          |  |                                       | 3,093,803  |                          |   | 1,423,316  |  |   | 4,517,119 
|                         |  |                                       |           
|Cost of sales:           |  |                                       |            |                          |   |            |  |   |           
|Products                 |  |                                       | 633,776    |                          |   | 443,276    |  |   | 1,077,052 
|Services                 |  |                                       | 1,137,279  |                          |   |           |  |   | 1,137,279 
|                         |  |                                       |            |                          |   |            |  |   |           
|Total cost of sales      |  |                                       | 1,771,055  |                          |   | 443,276    |  |   | 2,214,331 
|                         |  |                                       |           
|Gross margin             |  |                                       | 1,322,748  |                          |   | 980,040    |  |   | 2,302,788 
|                         |  |                                       |           
|Sales and marketing      |  |                                       | 718,216    |                          |   | 3,132,391  |  |   | 3,850,607 
|Research and development |  |                                       | 1,858,554  |                          |   |           |  |   | 1,858,554 
|Total assets             |  |                                       | 24,919,163 |                          |   | 10,129,910 |  |   | 35,049,073
|Goodwill                 |  |                                       | 1,193,437  |                          |   |           |  |   | 1,193,437 



20



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##### Table of Contents

Domestic and foreign operations

Total assets and net losses of the Companys foreign subsidiary were insignificant; however, total revenues aggregated approximately 15% of total revenues of the Company in the three months ended
December 31, 2005 This sunsidiary, which is based in Germany, operates in the Biopharmaceutical Products and Services Segment and its general segment data is included therein. Segment information on a geographic basis for the three months ended
December 31, 2005 is as follows:



|             |  |          |            |   |                       |   |           |       |  |   |            |  
|------------ |  | -------- | ---------- | - | --------------------- | - | --------- | ----- |  | - | ---------- | -
|             |  | Domestic |            |   | International(Europe) |   |           | Total | 
|Net sales    |  | $        | 5,793,012  |   |                       | $ | 1,024,954 |       |  | $ | 6,817,966  |  
|Net loss     |  |          | (242,312   | ) |                       |   | (74,714   | )     |  |   | (317,026   | )
|Total Assets |  |          | 37,361,650 |   |                       |   | 2,375,991 |       |  |   | 39,737,641 |  
|Goodwill     |  |          | 893,000    |   |                       |   | 300,437   |       |  |   | 1,193,437  |  

Segment information on a geographic basis for the three months ended December 31, 2004 is as follows:



|             |  |          |             |   |                       |   |           |  |   |             |  
|------------ |  | -------- | ----------- | - | --------------------- | - | --------- |  | - | ----------- | -
|             |  | Domestic |             |   | International(Europe) |   | Total     | 
|Net sales    |  | $        | 3,447,036   |   |                       | $ | 1,070,083 |  | $ | 4,517,119   |  
|Net loss     |  |          | (11,296,815 | ) |                       |   | 103,965   |  |   | (11,192,850 | )
|Total Assets |  |          | 32,670,630  |   |                       |   | 2,378,443 |  |   | 35,049,073  |  
|Goodwill     |  |          | 893,000     |   |                       |   | 300,437   |  |   | 1,193,437   |  

15. Commitments and contingencies

a) Operating leases

The Company has operating leases for various facilities, automobiles, machinery, and equipment,
which expire at various times through 2009. The annual aggregate rental commitments under non-cancelable leases are as follows:



|                         |  |   |          
|------------------------ |  | - | ---------
|Year ending December 31,
|2006                     |  | $ | 2,665,064
|2007                     |  |   | 1,903,330
|2008                     |  |   | 1,444,900
|2009                     |  |   | 1,400,770
|2010                     |  |   | 624,235  
|Thereafter               |  |   | 333,241  
|                         |  |   |          
|                         |  | $ | 8,371,540

Rent expense for all operating leases was approximately $0.9 million, and $0.8 million, for the three months ended
December 31, 2005 and December 31, 2004, respectively. Rental income from subleases aggregated $35,000 and $0.1 million in the three months ended December 31, 2005 and December 31, 2004, respectively, and has been included in
loss from discontinued operations in the accompanying statements of operations.



21



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##### Table of Contents

b) Litigation

In
October 2002, the Companys subsidiary, AccentRx, Inc, acquired the assets and certain liabilities of American Prescription Providers, Inc. and American Prescription Providers of New York, Inc., collectively referred to as APP, which at the
time of purchase operated a mail-order specialty pharmacy focused on filling prescriptions for AIDS patients and organ transplants. Commencing in late 1998, Dr. Francis E. ODonnell (the Companys Chairman and Chief Executive
Officer) was the Chairman of the Board of APP, Dr. Dennis L. Ryll (a director of the Company) was a director of APP, and McKesson Corporation was APPs principal lender. Also beginning in late 1998, The Hopkins Capital Group, LLC, an
entity in which Dr. ODonnell is the manager, and MOAB Investments, LP, an entity in which Dr. Ryll is a limited partner, were principal stockholders of APP. Following the purchase of APPs assets, AccentRx operated the
mail-order business until it sold the assets of this business in December 2003 to a third-party in an arms length transaction. All of the sale proceeds from the disposition of this business were used to pay debts of AccentRx, including to
reduce the outstanding balance of the McKesson loan. After the sale of the APP assets, AccentRx ceased to engage in business, and AccentRx currently has nominal assets.

APP learned in May 2002 that the U.S. Department of Justice was conducting an industry-wide investigation under anti-kickback laws and other laws and regulations relating to purchases and sales of Serostim, an
AIDS-wasting drug manufactured by Serono, Inc., from 1997 through 2000. As part of this investigation, in May 2002, APP received a subpoena from the U.S. Attorneys Office for the District of Massachusetts, and in March 2004, it received a
federal grand jury subpoena seeking records related to Serostim prescriptions dispensed by APP, reimbursement claims submitted to Medicaid for Serostim, and APPs relationships with Serono. The Company is not aware of any investigation into the
acts of AccentRx or the Company with regard to the conduct of the mail-order pharmacy business following AccentRxs purchase of APPs assets. While the Company is uncertain as to the amount or measure of damages, if any, that may be sought
from APP, based on information currently available to it, the Company estimates that, from the commencement of business by APP on December 1, 1998 through 2000, Serono paid APP approximately $500,000 under a program for data collection, and
during this same period, Medicaid reimbursed APP approximately $6,000,000 for Serostim prescriptions filled by APP. The Company estimates that the majority of these payments from Serono and reimbursements from Medicaid were not attributable to
APPs mail-order business, but rather were attributable to APPs retail pharmacies, which APP sold to a third party in February 2001 and were therefore not acquired by AccentRx as a part of the 2002 acquisition of APPs assets. In May
2005, the U.S. Attorneys Office notified APP that it believes that APP has significant potential liability as a result of allegedly unlawful rebates and discounts paid to them by Serono between 1997 and 2000. In August 2005, the U.S.
Attorneys Office orally and informally indicated to the Companys legal counsel that, as a result of these allegedly unlawful rebates and discounts, it was considering instituting a civil action against AccentRx, the Company, APP (which
has since dissolved and been liquidated), and shareholders of APP who received APP assets as a part of the liquidation of APP. However, it is not possible to predict the outcome of this investigation and whether the government will formally commence
any action challenging any of APPs prior programs and practices or APPs liability or exposure as a result thereof. The Company is uncertain if any such action would be under the False Claims Act or other civil or criminal causes of
action. In the event of litigation, the Company believes that APP will have defenses that will be vigorously asserted.

The Company cannot predict whether
AccentRx or the Company could be held liable for the prior acts of APP as a result of AccentRxs purchase of APPs assets or whether the government will commence any actions against AccentRx. However, the Company believes that it is
unlikely that the Company, which has always been operated as a distinct legal entity from AccentRx, will have material financial exposure in the event that AccentRx or APP incurs a material penalty in connection with this matter. Similarly, the
Company does not believe that any adverse legal or regulatory determinations regarding APP, the Company, or AccentRx or any persons associated with APP, the Company, or AccentRx would have any material effect on the ability of the Company and its
subsidiaries to conduct their current or expected business operations. On October 17, 2005, the U.S. Department of Justice announced a settlement of criminal and civil allegations against Serono. According to the terms of the settlement,
Serono, together with its U.S. subsidiaries and related entities, agreed to pay $704 million in connection with illegal schemes to promote, market, and sell its drug Serostim. The Company cannot predict the impact, if any, that this settlement will
have on the governments investigation relating to APPs purchases and sales of Serostim.

Except for the foregoing, the Company 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 its business, assets, or results of operations.



22



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##### Table of Contents

Further, 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.

16.
Restatements of previously reported financial information:

During the third quarter of 2006, the Company reevaluated its accounting for the convertible
note financing transactions discussed in Note 9. During the year ended September 30, 2005 and the quarter ended December 31, 2005, the Company accounted for the freestanding warrants and embedded beneficial conversion option associated with the
convertible notes as equity. During the third quarter of 2006, management determined that these derivatives should be recorded as liabilities at fair value and thereafter adjusted to fair value at each subsequent reporting period until certain
conditions are met, at which time such derivative liabilities are reclassified as equity. As such, the unaudited quarter-end financial information as previously reported has been restated as follows:

[footnote continues on next page]



|                                                                                                                                 |  |                        |            |   |                 |           |               |            |  
|-------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | ---------- | - | --------------- | --------- | ------------- | ---------- | -
|                                                                                                                                 |  | December 31, 2005      |           
|                                                                                                                                 |  | PreviouslyReported (1) |            |   | Restatement (2) |           | RestatedTotal |           
|ASSETS                                                                                                                           |  |                        |            |   |                 |           |               |            |  
|Current assets:                                                                                                                  |  |                        |            |   |                 |           |               |            |  
|Cash and cash equivalents                                                                                                        |  | $                      | 5,496,137  |   |                 |           |               | 5,496,137  |  
|Accounts receivable:                                                                                                             |  |                        |            |   |                 |           |               |            |  
|Trade, net of allowance for doubtful accounts of $345,458 and $150,000 at December 31, 2005 and September 30, 2005,
respectively |  |                        | 4,271,850  |   |                 |           |               | 4,271,850  |  
|Stockholder                                                                                                                      |  |                        | 806,539    |   |                 |           |               | 806,539    |  
|Inventories                                                                                                                      |  |                        | 1,391,035  |   |                 |           |               | 1,391,035  |  
|Inventory deposits                                                                                                               |  |                        | 585,000    |   |                 |           |               | 585,000    |  
|Unbilled receivables                                                                                                             |  |                        | 740,644    |   |                 |           |               | 740,644    |  
|Prepaid expenses and other current assets                                                                                        |  |                        | 615,502    |   |                 |           |               | 615,502    |  
|                                                                                                                                 |  |                        |            |   |                 |           |               |            |  
|Total current assets                                                                                                             |  |                        | 13,906,707 |   |                 |          |               | 13,906,707 |  
|                                                                                                                                 |  |                        |           
|Goodwill                                                                                                                         |  |                        | 1,193,437  |   |                 |           |               | 1,193,437  |  
|Other intangible assets:                                                                                                         |  |                        |            |   |                 |           |               |            |  
|Product rights                                                                                                                   |  |                        | 21,781,334 |   |                 |           |               | 21,781,334 |  
|Non-compete agreements                                                                                                           |  |                        | 2,104,000  |   |                 |           |               | 2,104,000  |  
|Trademarks                                                                                                                       |  |                        | 1,634,313  |   |                 |           |               | 1,634,313  |  
|Purchased customer relationships                                                                                                 |  |                        | 1,268,950  |   |                 |           |               | 1,268,950  |  
|Other intangible assets                                                                                                          |  |                        | 648,288    |   |                 |           |               | 648,288    |  
|Accumulated amortization                                                                                                         |  |                        | (6,233,587 | ) |                 |           |               | (6,233,587 | )
|                                                                                                                                 |  |                        |            |   |                 |           |               |            |  
|Total other intangible assets                                                                                                    |  |                        | 21,203,298 |   |                 |          |               | 21,203,298 |  
|                                                                                                                                 |  |                        |           
|Furniture, equipment and leasehold improvements, net                                                                             |  |                        | 1,815,664  |   |                 |           |               | 1,815,664  |  
|Deferred offering costs                                                                                                          |  |                        |           |   |                 |           |               |           |  
|Other assets                                                                                                                     |  |                        | 390,439    |   |                 | 1,228,096 |               | 1,618,535  |  
|                                                                                                                                 |  |                        |            |   |                 |           |               |            |  
|                                                                                                                                 |  | $                      | 38,509,545 |   |                 | 1,228,096 |               | 39,737,641 |  
|                                                                                                                                 |  |                        |            |   |                 |           |               |            |  



|(1) | Source - Financial statements included in Form 10Q.
|--- | ---------------------------------------------------



|(2) | Adjustment to recognize fair value of derivative financial instrauments as liabilities (common stock warrants and beneficial conversion options previously accounted for as equity)
and the subsequent adjustment of the fair value of such derivative liabilities to market at each subsequent reporting period.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



23



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|                                                                                                                                                                                                                                    |  |                        |              |   |                 |            |   |                |              |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | ------------ | - | --------------- | ---------- | - | -------------- | ------------ | -
|                                                                                                                                                                                                                                    |  | December 31, 2005      |             
|                                                                                                                                                                                                                                    |  | PreviouslyReported (1) |              |   | Restatement (2) |            |   | Restated Total |             
|LIABILITIES AND STOCKHOLDERS DEFICIT                                                                                                                                                                                               |  |                        |              |   |                 |            |   |                |              |  
|Current liabilities:                                                                                                                                                                                                                |  |                        |              |   |                 |            |   |                |              |  
|Current maturities of long-term debt:                                                                                                                                                                                               |  |                        |              |   |                 |            |   |                |              |  
|Related party                                                                                                                                                                                                                       |  | $                      | 1,293,516    |   |                 |            |   |                | 1,293,516    |  
|Other                                                                                                                                                                                                                               |  |                        | 8,820,341    |   |                 | (2,628,924 | ) |                | 6,191,417    |  
|Lines of credit                                                                                                                                                                                                                     |  |                        | 4,226,083    |   |                 | 1,134,542  |   |                | 5,360,625    |  
|Accounts payable (including related party of $303,020 at December 31, 2005, and $346,423 at September 30, 2005)                                                                                                                     |  |                        | 4,364,249    |   |                 |            |   |                | 4,364,249    |  
|Accrued expenses (including related party accrued interest of $74,850 at December 31, 2005, and $147,983 at September 30, 2005,
respectively)                                                                                       |  |                        | 8,169,101    |   |                 |            |   |                | 8,169,101    |  
|Unearned revenues                                                                                                                                                                                                                   |  |                        | 1,589,818    |   |                 |            |   |                | 1,589,818    |  
|Product development obligations (including $200,000 due to related party at September 30, 2005)                                                                                                                                     |  |                        |             |   |                 |            |   |                |             |  
|Dividends payable                                                                                                                                                                                                                   |  |                        | 616,186      |   |                 |            |   |                | 616,186      |  
|Stockholder note                                                                                                                                                                                                                    |  |                        | 350,000      |   |                 |            |   |                | 350,000      |  
|Customer deposits                                                                                                                                                                                                                   |  |                        | 729,793      |   |                 |            |   |                | 729,793      |  
|Deposits, related party                                                                                                                                                                                                             |  |                        | 3,000,000    |   |                 |            |   |                | 3,000,000    |  
|Derivative liability                                                                                                                                                                                                                |  |                        |             |   |                 | 4,570,168  |   |                | 4,570,168    |  
|                                                                                                                                                                                                                                    |  |                        |              |   |                 |            |   |                |              |  
|Total current liabilities                                                                                                                                                                                                           |  |                        | 33,159,087   |   |                 | 3,075,786  |   |                | 36,234,873   |  
|Long-term debt, net of current maturities:                                                                                                                                                                                          |  |                        |              |   |                 |            |   |                |              |  
|Related party                                                                                                                                                                                                                       |  |                        |             |   |                 |            |   |                |             |  
|Other                                                                                                                                                                                                                               |  |                        | 4,436,760    |   |                 | 536,613    |   |                | 4,973,373    |  
|Line of credit, related party                                                                                                                                                                                                       |  |                        | 7,180,000    |   |                 |            |   |                | 7,180,000    |  
|Other liabilities, related party                                                                                                                                                                                                    |  |                        | 2,421,318    |   |                 |            |   |                | 2,421,318    |  
|                                                                                                                                                                                                                                    |  |                        |              |   |                 |            |   |                |              |  
|Total liabilities                                                                                                                                                                                                                   |  |                        | 47,197,165   |   |                 | 3,612,399  |   |                | 50,809,564   |  
|                                                                                                                                                                                                                                    |  |                        |             
|Stockholders deficit:                                                                                                                                                                                                              |  |                        |              |   |                 |            |   |                |              |  
|Common stock, $0.001 par value; 300,000,000 shares authorized;5,170,421 and 4,876,328 shares issued and outstanding at September 30, 2005,
and 2004, respectively. 28,481,329 Pro Forma outstanding shares at September 30, 2005    |  |                        | 29,122       |   |                 |            |   |                | 29,122       |  
|                                                                                                                                                                                                                                    |  |                        |             
|Preferred stock, Series A, $1.00 par value;10,000,000 shares authorized; 2,937,013 and 1,939,483 shares issued and outstanding at
September 30, 2005, and 2004, respectively. No Pro Forma outstanding shares at September 30, 2005 |  |                        |             |   |                 |            |   |                |             |  
|                                                                                                                                                                                                                                    |  |                        |             
|Preferred stock, Series B, $1.00 par value;30,000,000 shares authorized; 3,895,888 and 3,835,390 shares issued and outstanding at
September 30, 2005, and 2004, respectively. No Pro Forma outstanding shares at September 30, 2005 |  |                        |             |   |                 |            |   |                |             |  
|                                                                                                                                                                                                                                    |  |                        |             
|Preferred stock, Series C, $1.00 par value;10,000,000 shares authorized; 3,562,607 shares issued and outstanding at September 30, 2005,
and 2004, respectively. No Pro Forma outstanding shares at September 30, 2005               |  |                        |             |   |                 |            |   |                |             |  
|                                                                                                                                                                                                                                    |  |                        |             
|Preferred stock, Series D, $1.00 par value;15,000,000 shares authorized; 4,672,482 and 4,616,451 shares issued and outstanding at
September 30, 2005 and 2004, respectively. No Pro Forma outstanding shares at September 30, 2005  |  |                        |             |   |                 |            |   |                |             |  
|                                                                                                                                                                                                                                    |  |                        |             
|Preferred stock, Series E, $1.00 par value;60,000,000 shares authorized; 20,506,178 and 6,858,731 shares issued and outstanding at
September 30, 2005 and 2004, respectively. No Pro Forma outstanding shares at September 30, 2005 |  |                        |             |   |                 |            |   |                |             |  
|                                                                                                                                                                                                                                    |  |                        |             
|Additional paid-in capital                                                                                                                                                                                                          |  |                        | 111,191,779  |   |                 | (3,793,963 | ) |                | 107,397,816  |  
|Accumulated deficit                                                                                                                                                                                                                 |  |                        | (119,908,521 | ) |                 | 1,409,660  |   |                | (118,498,861 | )
|                                                                                                                                                                                                                                    |  |                        |              |   |                 |            |   |                |              |  
|Total stockholders deficit                                                                                                                                                                                                          |  |                        | (8,687,620   | ) |                 | (2,384,303 | ) |                | (11,071,923  | )
|                                                                                                                                                                                                                                    |  |                        |              |   |                 |            |   |                |              |  
|                                                                                                                                                                                                                                    |  | $                      | 38,509,545   |   |                 | 1,228,096  |   |                | 39,737,641   |  
|                                                                                                                                                                                                                                    |  |                        |              |   |                 |            |   |                |              |  



|(1) | Source - Financial statements included in Form 10Q.
|--- | ---------------------------------------------------



|(2) | Adjustment to recognize fair value of derivative financial instrauments as liabilities (common stock warrants and beneficial conversion options previously accounted for as equity)
and the subsequent adjustment of the fair value of such derivative liabilities to market at each subsequent reporting period.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



24



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|                                                                           |  |                             |            |   |                 |           |               |            |  
|-------------------------------------------------------------------------- |  | --------------------------- | ---------- | - | --------------- | --------- | ------------- | ---------- | -
|                                                                           |  | Quarter Ending December 31, |           
|                                                                           |  | 2005PreviouslyReported (1)  |            |   | Restatement (2) |           | RestatedTotal |           
|Net Sales                                                                  |  |                             |            |   |                 |           |               |            |  
|Products                                                                   |  | $                           | 2,146,678  |   |                 |           |               | 2,146,678  |  
|Services                                                                   |  |                             | 3,043,463  |   |                 |           |               | 3,043,463  |  
|Related party, products                                                    |  |                             | 1,627,825  |   |                 |           |               | 1,627,825  |  
|                                                                           |  |                             |            |   |                 |           |               |            |  
|Total net sales                                                            |  |                             | 6,817,966  |   |                 |           |               | 6,817,966  |  
|                                                                           |  |                             |           
|Cost of sales:                                                             |  |                             |            |   |                 |           |               |            |  
|Products                                                                   |  |                             | 928,561    |   |                 |           |               | 928,561    |  
|Services                                                                   |  |                             | 947,212    |   |                 |           |               | 947,212    |  
|                                                                           |  |                             |            |   |                 |           |               |            |  
|Total cost of sales (exclusive of amortization of acquired product rights) |  |                             | 1,875,773  |   |                 |           |               | 1,875,773  |  
|                                                                           |  |                             |            |   |                 |           |               |            |  
|                                                                           |  |                             |           
|Gross margin                                                               |  |                             | 4,942,193  |   |                 |           |               | 4,942,193  |  
|                                                                           |  |                             |            |   |                 |           |               |            |  
|                                                                           |  |                             |           
|Operating expenses:                                                        |  |                             |            |   |                 |           |               |            |  
|Research and development                                                   |  |                             | 3,065,890  |   |                 |           |               | 3,065,890  |  
|Research and development, related party                                    |  |                             | 93,982     |   |                 |           |               | 93,982     |  
|Sales and marketing                                                        |  |                             | 3,259,948  |   |                 |           |               | 3,259,948  |  
|General and administrative                                                 |  |                             | 5,319,290  |   |                 |           |               | 5,319,290  |  
|Royalties                                                                  |  |                             | 564,392    |   |                 |           |               | 564,392    |  
|Stock-based compensation, general and administrative                       |  |                             | 46,433     |   |                 |           |               | 46,433     |  
|                                                                           |  |                             |            |   |                 |           |               |            |  
|Total operating expenses                                                   |  |                             | 12,349,935 |   |                 |           |               | 12,349,935 |  
|                                                                           |  |                             |           
|Operating loss                                                             |  |                             | (7,407,742 | ) |                 |           |               | (7,407,742 | )
|Other income (expense):                                                    |  |                             |            |   |                 |           |               |            |  
|Interest expense, net                                                      |  |                             | (1,311,475 | ) |                 | 406,329   |               | (905,146   | )
|Interest expense, net, related party                                       |  |                             | (100,834   | ) |                 |           |               | (100,834   | )
|Loss on extinguishment of debt, related party                              |  |                             |           |   |                 |           |               |           |  
|Other income                                                               |  |                             | 43,419     |   |                 |           |               | 43,419     |  
|Derivative gain                                                            |  |                             | 0          |   |                 | 6,363,477 |               | 6,363,477  |  
|                                                                           |  |                             |            |   |                 |           |               |            |  
|Loss from continuing operations before income taxes                        |  |                             | (8,776,632 | ) |                 | 6,769,806 |               | (2,006,826 | )
|                                                                           |  |                             |           
|Income tax benefit                                                         |  |                             | 0          |   |                 |           |               | 0          |  
|                                                                           |  |                             |            |   |                 |           |               |            |  
|Net loss from continuing operations                                        |  |                             | (8,776,632 | ) |                 | 6,769,806 |               | (2,006,826 | )
|                                                                           |  |                             |           
|Absorption of prior losses against minority interest                       |  |                             | 1,689,800  |   |                 |           |               | 1,689,800  |  
|                                                                           |  |                             |            |   |                 |           |               |            |  
|Net loss                                                                   |  |                             | (7,086,832 | ) |                 | 6,769,806 |               | (317,026   | )
|                                                                           |  |                             |           
|Constructive preferred stock dividend                                      |  |                             | 0          |   |                 |           |               |           |  
|Preferred stock dividends, other                                           |  |                             | (40,739    | ) |                 |           |               | (40,739    | )
|                                                                           |  |                             |            |   |                 |           |               |            |  
|Loss attributable to common stockholders                                   |  | $                           | (7,127,571 | ) |                 | 6,769,806 |               | (357,765   | )
|                                                                           |  |                             |            |   |                 |           |               |            |  
|Weighted average shares outstanding, basic and diluted                     |  |                             | 20,695,219 |   |                 |           |               | 20,695,219 |  
|                                                                           |  |                             |           
|Per share amounts, basic and diluted:                                      |  |                             |            |   |                 |           |               |            |  
|Loss attributable to common stockholders per common share for:             |  |                             |            |   |                 |           |               |            |  
|Continuing operations and minority interest                                |  | $                           | (0.34      | ) |                 |           |               | (0.02      | )
|Discontinued operations                                                    |  |                             | 0.00       |   |                 |           |               | 0.00       |  
|Loss attributable to common stockholders                                   |  | $                           | (0.34      | ) |                 |           |               | (0.02      | )



|(1) | Source - Financial statements included in Form 10Q.
|--- | ---------------------------------------------------



|(2) | Adjustment to recognize fair value of derivative financial instrauments as liabilities (common stock warrants and beneficial conversion options previously accounted for as equity)
and the subsequent adjustment of the fair value of such derivative liabilities to market at each subsequent reporting period.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



25



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Subsequent Events

Subsequent to December 31, 2005 the Company executed retroactively to dates of inception modifications to its senior credit agreements with Laurus Master Funds to expressly permit the existence of the $3.0 million junior subordinate
loan with Missouri State Bank executed on December 30, 2005, to modify restrictive loan covenants with respect to intra-company advances to Biovest International, Inc., to defer principal payments under the convertible term note, to eliminate
the convertibility of $2.5 million of the Companys $5.0 million revolver with Laurus via the automatic transfer of balances from the revolver to the convertible minimum borrowing note, to fix the conversion rate of the convertible term note at
85% of the IPO price ($6.80 per share), and to extend the dates of filing and declarations of effectiveness for registration of shares available to Laurus upon conversion of the convertible notes. The effects of these modifications were as follows:

1) The $3.0 million junior subordinate Missouri State Bank revolving line of credit is now expressly permitted;

2) Permitted intra-company advances to Biovest are increased from $20.0 million to $23.75 million through June 30, 2006, by which time the Company
anticipates Biovest will be able to raise its own funds independent of Accentia;

3) Principal payments under the $10.0 million convertible
term note, consisting of $0.3 million per month initially commencing in January 2006 have been deferred through June 2006 with one-half of the deferred payments due in July 2006 and one-half due in January 2007;

4) $2.5 million of the $5.0 million of balance under the revolver are no longer subject to potential conversion to equity;

5) The conversion price for the $2.5 million convertible minimum borrowing note and $10.0 million convertible term note are now fixed at $6.80 per share
irrespective of potential future equity or equity-linked transactions that may be below this price per share;

6) Extension of the date of
filing for registration of Laurus convertible shares from January 25, 2006 to February 28, 2006 and the extension of the date that such registration shall be declared effective by the SEC to April 28, 2006.

Consideration paid to Laurus for these modifications to the loan agreements included the issuance of 62,000 warrants at $0.01 per share and the agreement to include all
outstanding warrants in a registration filing.

Subsequent to December 31, 2005, the manufacturer of one of the formulations of the
Companys Histex product line, HistexI/E, issued a Class II product recall which resulted in the Company temporarily discontinuing the sale of that product. This discontinued product represented approximately $0.7 million and $0.3
million in sales during the three months ended December 2005 and 2004 respectively. The Company has not determined whether the decision to discontinue the sale of this product is temporary or permanent. The manufacturer has advised the FDA that the
product poses no material health risk and the Company believes that the potential impact of the manufacturers product recall will be limited to the cost of product returns not otherwise recovered by the Company from the manufacturer and the
loss of revenue from this discontinued product.

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

When you read this section of this Quarterly Report on Form 10Q, it is important that you also read the financial statements and related notes
included elsewhere in this Form 10Q. This section of this quarterly report contains forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations, and intentions. We use words such as
anticipate, estimate, plan, project, continuing, ongoing, expect, believe, intend, may, will, should,
could, and similar expressions to identify forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including the matters discussed under the
caption Risk Factors in Item 1. BUSINESS in our annual report on Form 10-K for the fiscal year ended September 30, 2005 and other risks and uncertainties discussed in filings made with the Securities and Exchange Commission.

Overview

We are a biopharmaceutical company
focused on the development and commercialization of late-stage clinical products in the therapeutic areas of respiratory disease and oncology. We have two product candidates entering or in Phase 3 clinical trials. One of



26



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##### Table of Contents

these product candidates, SinuNase, has been developed at Mayo Clinic as a novel application and formulation of a known
therapeutic to treat chronic rhinosinusitis, a long-term inflammatory condition of the paranasal sinuses for which there is currently no FDA approved therapy. We submitted an Investigational New Drug Application, or IND, with the FDA for SinuNase in
April 2005, and the IND was accepted by the FDA in May 2005. We expect to initiate our Phase 3 trial for the product in 2006. Our other late-stage product candidate, BiovaxID,is a patient-specific anti-cancer vaccine focusing on the treatment of follicular non-Hodgkins lymphoma. BiovaxID was developed at the National
Cancer Institute and is currently in a pivotal Phase 3 clinical trial. In addition to these product candidates, we have a growing specialty pharmaceutical business with a portfolio of currently marketed pharmaceutical products and a pipeline of
additional products under development by third parties. In addition to our late-stage product candidates and our specialty pharmaceutical business, we have a broad range of in-house capabilities and resources that we market to third parties and use
to develop and commercialize our own products. These capabilities include analytical and consulting services relating to the biopharmaceuticals industry, such as pricing and market assessment, reimbursement strategies, clinical trial services, and
outcomes research. We also produce custom biologics and cell culture systems for biopharmaceutical and biotechnology companies, medical schools, universities, hospitals, and research institutions.

Critical Accounting Policies and Estimates

Our managements
discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The
preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as
well as the reported net sales and expenses during the reporting periods.

The accounting policies discussed below are considered by our management to be
critical to an understanding of our financial statements because their application depends on managements judgment, with financial reporting results relying on estimates and assumptions about the effect of matters that are inherently
uncertain. On an ongoing basis, we evaluate our estimates and assumptions. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. For all of these policies, management cautions that future events rarely develop exactly as forecast and that best estimates
routinely require adjustment. Accordingly, actual results may differ from our estimates under different assumptions or conditions and could materially impact our financial condition or results of operations.

While our significant accounting policies are more fully described in Note 2 to our consolidated financial statements appearing at the end of this filing, we believe
that the following accounting policies are the most critical to aid you in fully understanding and evaluating our reported financial results.

Revenue recognition

Biopharmaceutical Products and Services

We recognize revenue in our Biopharmaceutical Products and Services segment as follows:

Products.Net sales
of cell culture instruments and disposables are recognized in the period in which the applicable products are delivered. We do not provide our customers with a right of return; however, deposits made by customers must be returned to customers in the
event of non-performance by us.

Services.Service revenue in our Biopharmaceutical Products and Services segment is generated primarily by
fixed-price contracts for cell culture production and consulting services. Such revenue is recognized over the contract term in accordance with the percentage-of-completion method based on the percentage of service cost incurred during the period
compared to the total estimated service cost to be incurred over the entire contract. The nature and scope of our contracts often require us to make judgments and estimates in recognizing revenues.

Estimates of total contract revenues and costs are continuously monitored during the term of the contract, and recorded revenues and costs are subject to revision as
each contract progresses. Such revisions may result in increases or decreases to revenues and income and are reflected in the consolidated financial statements in the periods in which they are first identified. Each month we accumulate costs on each
contract and compare them to the total current estimated costs to determine the percentage of completion. We then apply this percentage to the total contract value to determine the amount of revenue that can be recognized. Each month we review the
total current estimated costs on each contract to determine if these estimates are still accurate and, if necessary, we adjust the total estimated costs for each contract. As the work progresses, we might decide that original estimates were
incorrect due to, among other things, revisions in the scope of work, and a contract modification might be negotiated with the customer to cover additional costs. If a contract modification is not agreed to, we could bear the risk of cost overruns.
Losses on contracts are recognized during the period in which the loss first becomes probable and reasonably estimable. Reimbursements of contract-related costs are included in revenues. An equivalent amount of these reimbursable costs is included
in cost of sales. Because of the inherent uncertainties in estimating costs, it is at least reasonably possible that the estimates used will change within the near term.

Service costs related to cell culture production include all direct materials and subcontract and labor costs and those indirect costs related to contract performance, such as indirect labor, insurance, supplies, and
tools. We believe that actual cost 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.

Service costs relating to our consulting services consists primarily of internal labor expended in the fulfillment of our consulting projects and, to a
lesser extent, outsourced research services. Service costs on a specific project may also consist of a combination of both internal labor and outsourced research service. Our consulting projects are priced and performed in phases, and the projects
are managed by phase. As part of the contract bidding process, we develop an estimate of the total number of hours of internal labor required to generate each phase of the customer deliverable (for example, a manuscript or database), and the labor
cost is then computed by multiplying the hours dedicated to each phase by a standard hourly labor rate. We also determine whether we need services from an outside research or data collection firm and include those estimated outsourced costs in our
total contract cost for the phase. At the end of each month, we collect the cumulative total hours worked on each contract and apply a standard labor cost rate to arrive at the total labor cost incurred to date. This amount is divided by the total
estimated contract cost to arrive at the percentage of completion, which is then applied to the total estimated contract revenues to determine the revenue to be recognized through the end of the month. Accordingly, as hours are accumulated against a
project and the related service costs are incurred, we concurrently fulfill our contract obligations. The duration of our consulting service contracts range typically from 1 to 12 months. Certain other professional service revenues, such as revenues
from maintenance services on cell culture equipment, are recognized as the services are performed.

In our financial statements, unbilled receivables
represents revenue that is recognizable under the percentage-of-completion method due to the performance of services for which billings have not been generated as of the balance sheet date. In general, amounts become billable pursuant to contractual
milestones or in accordance with predetermined payment schedules. Under our consulting services contracts, the customer is required to pay for contract hours worked by us (based on the standard hourly rate used to calculate the contract price) even
if the customer cancels the contract and elects not to proceed to completion of the project. Unearned revenues represent customer payments in excess of revenue earned under the percentage-of-completion method. Such payments are made in accordance
with predetermined payment schedules set forth in the contract.

Specialty Pharmaceuticals

Revenue in our Specialty Pharmaceuticals segment is generated from the sale of pharmaceutical products. Revenue from product sales is recognized when all of the following
occur: a purchase order is received from a customer; title and risk of loss pass to our customer upon the receipt of the shipment of the merchandise under the terms of FOB destination; prices and estimated sales provisions for product returns, sales
rebates, payment discounts, chargebacks, and other promotional allowances are reasonably determinable; and the customers payment ability has been reasonably assured. An estimate of three business days from the time the product is shipped via
common carrier until it reaches the customer is used for purposes of determining FOB destination. Revenues in connection with co-promotion agreements are recognized based on the terms of the agreements.

We make periodic adjustments to our monthly net sales for estimated chargebacks, rebates, and potential product returns we anticipate might ultimately be required. These
adjustments are based on inventory quantity reports provided by our largest wholesale customers, sales activity reports generated by group purchasing organizations with which we have rebate contracts, and sales activity data provided by a
third-party provider of such data. Our net sales will typically reflect an adjustment of 8% of gross sales for charge-backs/rebates and 10% for product returns that we record in the form of a reserve.

Actual product returns, chargebacks, and other sales allowances incurred are dependent upon future events and may be different than our estimates. We continually monitor
the factors that influence sales allowance estimates and make adjustments to these provisions when management believes that actual product returns, chargebacks, and other sales allowances may differ from established allowances.

Inventories

Inventories are recorded at the lower of cost or
market. We periodically review inventory quantities of raw materials, instrumentation components and disposables on hand, and completed pharmaceutical products in our third-party distribution center, and we record write-downs of inventories to
market value 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.

Inventory in our Biopharmaceutical Products and Services segment includes raw materials
and component parts used in the assembly of instruments and cultureware for our Biovest subsidiary. Estimates for obsolete and unsaleable inventory are determined by management and updated quarterly.

Specialty Pharmaceuticals inventory consists primarily of trade products and samples. These inventories are warehoused at a third-party distribution center located in
Memphis, Tennessee. All distribution, inventory control, and regulatory reporting are outsourced to this third party. Inventories are written-off if the product dating has expired or the inventory has no market value.

Valuation of Goodwill and Intangible Assets

Our
intangible assets include goodwill, trademarks, product rights, non-compete agreements, technology rights, purchased customer relationships, and patents, all of which are accounted for based on Financial Accounting Standard Statement No. 142
Goodwill and Other Intangible Assets(FAS 142). As described below, goodwill and intangible assets that have indefinite useful lives are not amortized but are tested at least annually for impairment or more frequently if events or
changes in circumstances indicate that the asset might be impaired. Intangible assets with limited useful lives are amortized using the straight-line method over their estimated period of benefit, ranging from two to eighteen and one-half years. We
obtain a valuation of all intangibles purchased in any acquisition and undertake an annual impairment analysis. Goodwill is tested for impairment by comparing the carrying amount to the estimated fair value, in accordance with SFAS 142. Impairment
exists if the carrying amount is less than its estimated fair value, resulting in a write-down equal to the difference between the carrying amount and the estimated fair value. We have made no impairment adjustments to recorded goodwill. Our
carrying value of goodwill at September 30, 2005 and 2004 was $1.2 million. The values recorded for goodwill and other intangible assets represent fair values calculated by accepted valuation methods. Such valuations require critical estimates and
assumptions derived from and which include, but are not limited to: (i) information included in our business plan, (ii) estimated cash flows, (iii) discount rates, (iv) patent expiration information, (vi) terms of license agreements, and (vii)
expected timelines and costs to complete any in-process research and development projects to commercialize our products under development.

We capitalized
goodwill in the amount of $0.9 million in connection with our acquisition of Analytica in April 2002. In connection with the IMOR acquisition in December 2003, we initially capitalized goodwill in the amount of $0.6 million based on the fair value
of the acquired assets net of assumed liabilities. Following this acquisition, we discovered that the assumed liabilities were $0.3 million in excess of the amount represented to us in the acquisition agreement. We recorded an impairment to goodwill
in the amount of $0.3 million in the fiscal quarter in which the acquisition occurred.

Our major intangible assets with limited useful lives include
product rights acquired in connection with our April 2003 acquisition of TEAMM and our June 2003 acquisition of Biovest, as well as a variety of patents, non-competition rights, and purchased customer relationships. We amortize intangibles based on
their expected useful lives and look to a number of factors for such estimations, including the longevity of our license agreements and the remaining life of patents on products currently being marketed. We have identified several trademarks,
product rights and technology rights as intangible assets with indefinite lives.

Impairment Testing

Our impairment testing is calculated at the reporting unit level. Our annual impairment test has two steps. The first identifies potential impairments by comparing the
fair value of the reporting unit with its carrying value. If the fair value exceeds the carrying amount, intangible assets are not impaired and the second step is not necessary. If the carrying value exceeds the fair value, the second step
calculates the possible impairment loss by comparing the implied fair value of intangible assets with the carrying amount. If the implied fair value of intangible assets is less than the carrying amount, a write-down is recorded. Impairment would
result in a write-down of the intangible asset to its estimated fair value based on the discounted future cash flows. The impairment test for the intangible assets is performed by comparing the carrying amount of the intangible assets to the sum of
the undiscounted expected future cash flows.

In accordance with SFAS 144, which relates to impairment of long-lived assets, impairment exists if the sum
of the future undiscounted cash flows is less than the carrying amount of the intangible asset or to its related group of assets. Goodwill is tested for impairment by comparing the carrying amount of the reporting unit to which it was assigned to
the estimated fair value of the reporting unit. In accordance with SFAS 142, which relates to impairment of goodwill, impairment exists if the carrying amount of the reporting unit is less than its estimated fair value. Impairment would result in a
write-down equal to the difference between the carrying amount and the estimated fair value of the reporting unit. Fair values can be determined using income, market or cost approaches.

We predominately use a discounted cash flow model derived from internal budgets in assessing fair values for our goodwill impairment testing. Factors that could change the result of our goodwill impairment test
include, but are not limited to, different assumptions used to forecast future net sales, expenses, capital expenditures, and working capital requirements used in our cash flow models. In addition, selection of a risk-adjusted discount rate on the
estimated undiscounted cash flows is susceptible to future changes in market conditions, and when unfavorable, can adversely affect our original estimates of fair values. In the event that our management determines that the value of intangible
assets have become impaired using this approach, we will record an accounting charge for the amount of the impairment.

Purchased In-Process
Research and Development

We account for purchased in-process research and development, or IPR&D, in accordance with pronouncements as
follows:



| |  |  | FASB Statement of Financial Accounting Standards No. 2, Accounting for Research and Development;
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | FASB Interpretation No. 4, Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------



| |  |  | FASB Statement of Financial Accounting Standards No. 86, Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------

Generally, purchased in-process research and development is distinguished from developed technology based upon whether the IPR&D projects are measurable, have
substance, and are incomplete. IPR&D represents the portion of a purchase price of an acquisition related to research and development activities that have not demonstrated technological feasibility and do not have alternative future uses.
IPR&D projects that have not been granted FDA approval are classified as being incomplete, and as such the associated costs are expensed as incurred. In connection with the acquisition of our Biovest subsidiary in June 2003, we incurred an
immediate writedown of $5.0 million for acquired assets which were classified as purchased in-process research and development.

Stock-Based
Compensation

We account for stock-based awards to employees and non-employees using the accounting provisions of Statement of Financial
Accounting Standards (SFAS) No. 123 accounting for Stock-Based Compensation,which provides for the use of the fair value based method to determine compensation for all arrangements where shares of stock or equity
instruments are issued for compensation. Shares of common and preferred stock issued in connection with acquisitions are also recorded at their estimated fair values. Fair values of equity securities issued are determined by management based upon
independent valuations obtained by management.

In December 2004, the FASB revised its SFAS No. 123 (SFAS No. 123R). The revision establishes
standards for the accounting of transactions in which an entity exchanges its equity instruments for goods or services, particularly transactions in which an entity obtains employee services in share-based payment transactions. The revised statement
requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost is recognized over the period during which the employee is required
to provide service in exchange for the award. The provisions of the revised statement are effective for financial statements issued for the first interim or annual reporting period beginning after June 15, 2005, with early adoption encouraged. We
already account for options issued to employees under SFAS No. 123, so adoption of this revision is not expected to have a significant impact on our current financial position or results of operation.

We use the Black-Scholes options-pricing model to determine the fair value of each option grant as of the date of grant for expense incurred. In applying the
Black-Scholes options-pricing model, we assumed no dividend yield, risk-free interest rates ranging from 1.62% to 4.65%, expected option terms ranging from 0.5 to 5 years, volatility factors ranging from 0% to 50%, share prices ranging from $0.02 to
$5.83, and option exercise prices ranging from $1.05 to $7.62.

In all periods, stock-based compensation is classified in various categories in the
financial statements including interest expense and stock-based compensation.

Fair value determination of
privately-held equity securities

The fair values of the common and preferred stock as well as the common and preferred stock underlying
options and warrants granted as part of acquisition purchase prices, financing transactions, or as compensation, issued during the period from April 2002 through September 2004 were originally estimated by our board of directors, with input from
management. We did not obtain contemporaneous valuations until September 30, 2004. Subsequently, we reassessed the valuations of these securities during the respective periods by obtaining a valuation.

Determining the fair value of stock requires making complex and subjective judgments. We use the income and market approaches to estimate the value of the enterprise at
each date on which securities are issued or granted. The income approach involves applying appropriate discount rates to estimated cash flows that are based on forecasts of revenue and costs. These forecasts are based on managements estimates
of expected annual growth rates. There is inherent uncertainty in these estimates. However, the assumptions underlying the estimates are consistent with our business plan. The risks associated with achieving the forecasts were assessed in selecting
the appropriate discount rates, which ranged from 15% to 45%. If different discount rates had been used, the valuations would have been different.

The
enterprise value was then allocated to preferred and common shares taking into account the enterprise value available to all stockholders and allocating that value among the various classes of stock based on the rights, privileges and preferences of
the respective classes.

The range of values is wide and somewhat varied by class of stock due to different distribution and liquidation preferences of
such classes of stock.

The most significant changes in values from 2003 to 2004 relate to the issuance of the new Series E preferred stock, which has
significant anti-dilution provisions and other preferences. While our overall enterprise value increased, the creation of this class of stock and issuance of these shares resulted in a decline in the value of our common stock at September 30, 2004.

Income Taxes

We incurred net
operating losses for the three months ended December 31, 2005 and 2004, and consequently did not or will not be required to pay federal or foreign income taxes, but we did pay nominal state taxes in several states where we have operations. We have a
federal net operating loss carryover of approximately $83.9 million as of December 31, 2005, which expires through 2025 and of which $30.0 million is subject to various Section 382 limitations.

Under Section 382 and 383 of the Internal Revenue Code, if an ownership change occurs with respect to a loss corporation as defined, there are annual
limitations on the amount of the net operating loss and other deductions which are available to us. Due to the acquisition transactions in which we have engaged in recent years, we believe that the use of these net operating losses will be
significantly limited.

In addition, the utilization of our net operating loss carryforwards may be further limited if we experience a change in ownership
of more than 50% subsequent to last change in ownership of September 30, 2003. Accordingly, our net operating loss carryforward available to offset future federal taxable income arising before such ownership changes may be further limited.

Our ability to realize our deferred tax assets depends on our future taxable income as well as the limitations on usage discussed above. For financial
reporting purposes, a deferred tax asset must be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized prior to its expiration. Because we believe the realization of
our deferred tax assets is uncertain, we have recorded a valuation allowance to fully offset them.

Results of Operations

Three Months Ended December 31, 2005 Compared to the Three Months Ended December 31, 2004

Consolidated Results of Operations

Net Sales.Our net
sales for the three months ended December 31, 2005 were $6.8 million, an increase of $2.3 million, or 51%, from the three months ended December 31, 2004. The increase in our consolidated net sales for the three months ended
December 31, 2005 reflected an increase of $0.8 million in net sales in our Biopharmaceutical Products and Services segment, primarily resulting from an increase in net sales of our Analytica International subsidiary. The increase in our
consolidated net sales for the three months ended December 31, 2005 also reflected a $1.5 million increase in net sales in our Specialty Pharmaceuticals segment. This increase was primarily attributable to an increase in sales of our Respi-TANN
product line of approximately $0.8 million resulting partially from the launch during this quarter of Respi-TANN PD; and an increase of Xodol sales of approximately $0.5 million resulting from increased focus on targeted physician prescribers; an
increase of co-promotion revenue of $0.1 million and a decrease in Histex sales of approximately $0.2 million. Subsequent to the end of the quarter we have discontinued marketing one of the current formulations of Histex, HistexI/E, which
formulation represented approximately 18% and 11% of our revenue in the quarters ended December 31, 2005 and 2004, respectively. Also contributing to this increase in net sales was an approximate $0.3 million decrease in accruals for returns,
chargebacks and other discounts deducted from gross sales for the quarter ending December 31, 2005.

Cost of Sales.Our cost of sales
for the three months ended December 31, 2005 was $1.9 million, or 28% of net sales, compared to $2.2 million, or 49% of net sales, during the three months ended December 31, 2004. This represented a decrease of $0.3 million, or 15%, over
the three months ended December 31, 2004. The decrease in cost of sales as a percentage of net sales was attributable to a decrease in the percentage of chargebacks and rebates as a percentage of gross sales that were deducted to arrive at the
net sales recorded.

Research and Development Expenses.Our research and development costs were $3.2 million for the three months ended
December 31, 2005, an increase of $1.3 million, or 70%, over the three months ended December 31, 2004. This increase included $0.5 million in SinuNase development expenses compared to no SinuNase development expenses for the same
period last year. Biovest research and development expense increased from $1.8 million in the three months ended December 31, 2004 to $2.6 million in the three months ended December 31, 2005.

Sales and Marketing expenses.Our sales and marketing expenses were $3.3 million for the three months ended December 31, 2005; a decrease of $0.6
million, or 15%, over the three months ended December 31, 2004. This decrease was due in part to a planned reduction of ten sales personnel in our Specialty Pharmaceuticals segment, which resulted in $0.2 million of decreased costs compared to
the prior years first quarter. It was also due in part to $0.4 million of decreased costs in our Biopharmaceutical Products and Services segment resulting from our decreasing emphasis in that segment away from cell culture products and
services and more toward the development of BiovaxID.

General and Administrative Expenses.Our general and administrative expenses were $5.3
million for the three months ended December 31, 2005, an increase of $0.2 million, or 5%, over the three months ended December 31, 2004. This increase was a result of the growth of our corporate infrastructure to support an anticipated
increase in our business activities. We expect that our general and administrative expenses will continue to increase as we hire new personnel and build up our corporate infrastructure necessary for the management of our business as a public
company.



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Interest Expense, net.In the three months ended December 31, 2005, our net interest expense was $1.0
million, an increase of $0.4 million, over the three months ended December 31, 2004. The increase was due primarily to interest on our Laurus term note, Laurus revolver, and Hopkins II line of credit. Interest income in both years was nominal.

Derivative gain. Derivative gain was $6.4 million for the three months ended December 31, 2005 as compared to no derivative gain for the three
months ended December 31, 2004. This increase was due to the Laurus financing arrangement that commenced in the quarter ended June 30, 2005.

Preferred Stock Dividends. In the three months ended December 31, 2005, we incurred dividend costs of $41,000, compared to $0.1 million in the three months ended December 31, 2004. The dividend cost in the three
months ended December 31, 2005 and December 31, 2004 consisted of dividends accrued on our Series E preferred stock.

Segment Operating
Results

|                                              |  |           |  |                      |      |  |           |   |  |                      |  
|--------------------------------------------- |  | --------- |  | -------------------- | ---- |  | --------- | - |  | -------------------- | -
|                                              |  | 2005      |  |                      | 2004 | 
|                                              |  | Amount    |  | % ofSegmentNet Sales |      |  | Amount    |   |  | % ofSegmentNet Sales |  
|Net sales:                                    |  |           |  |                      |      |  |           |   |  |                      |  
|Biopharmaceutical Products and Services -     |  |           |  |                      |      |  |           |   |  |                      |  
|Biovest                                       |  | 1,084,975 |  |                      |      |  | 1,072,798 |   |  |                      |  
|All other business units                      |  | 2,829,948 |  |                      |      |  | 2,021,005 |   |  |                      |  
|                                              |  |           |  |                      |      |  |           |   |  |                      |  
|Total Biopharmaceutical Products and Services |  | 3,914,923 |  |                      |      |  | 3,093,803 |   |  |                      |  
|Specialty Pharmaceuticals                     |  | 2,903,043 |  |                      |      |  | 1,423,316 |   |  |                      |  
|                                              |  |           |  |                      |      |  |           |   |  |                      |  
|Total net sales                               |  | 6,817,966 |  |                      |      |  | 4,517,119 |   |  |                      |  
|                                              |  |           |  |                      |      |  |           |   |  |                      |  
|Cost of sales                                 |  |           |  |                      |      |  |           |   |  |                      |  
|Biopharmaceutical Products and Services -     |  |           |  |                      |      |  |           |   |  |                      |  
|Biovest                                       |  | 602,903   |  |                      |      |  | 1,202,979 |   |  |                      |  
|All other business units                      |  | 725,654   |  |                      |      |  | 568,076   |   |  |                      |  
|                                              |  |           |  |                      |      |  |           |   |  |                      |  
|Total Biopharmaceutical Products and Services |  | 1,328,557 |  | 34                   | %    |  | 1,771,055 |   |  | 57                   | %
|Specialty Pharmaceuticals                     |  | 547,216   |  | 19                   | %    |  | 443,276   |   |  | 31                   | %
|                                              |  |           |  |                      |      |  |           |   |  |                      |  
|Total cost of sales                           |  | 1,875,773 |  |                      |      |  | 2,214,331 |   |  |                      |  
|                                              |  |           |  |                      |      |  |           |   |  |                      |  
|Gross margin:                                 |  |           |  |                      |      |  |           |   |  |                      |  
|Biopharmaceutical Products and Services -     |  |           |  |                      |      |  |           |   |  |                      |  
|Biovest                                       |  | 482,072   |  |                      |      |  | (130,181  | ) |  |                      |  
|All other business units                      |  | 2,104,294 |  |                      |      |  | 1,452,929 |   |  |                      |  
|                                              |  |           |  |                      |      |  |           |   |  |                      |  
|Total Biopharmaceutical Products and Services |  | 2,586,366 |  | 66                   | %    |  | 1,322,748 |   |  | 43                   | %
|Specialty Pharmaceuticals                     |  | 2,355,827 |  | 81                   | %    |  | 980,040   |   |  | 69                   | %
|                                              |  |           |  |                      |      |  |           |   |  |                      |  
|Total gross margin                            |  | 4,942,193 |  |                      |      |  | 2,302,788 |   |  |                      |  
|                                              |  |           |  |                      |      |  |           |   |  |                      |  
|                                              |  |           |  |                      |      |  |           |   |  |                      |  
|Research and Development:                     |  |           |  |                      |      |  |           |   |  |                      |  
|Biopharmaceutical Products and Services -     |  |           |  |                      |      |  |           |   |  |                      |  
|Biovest                                       |  | 2,270,556 |  |                      |      |  | 1,858,554 |   |  |                      |  
|All other business units                      |  | 889,316   |  |                      |      |  |          |   |  |                      |  
|                                              |  |           |  |                      |      |  |           |   |  |                      |  
|Total Biopharmaceutical Products and Services |  | 3,159,872 |  | 81                   | %    |  | 1,858,554 |   |  | 60                   | %
|Specialty Pharmaceuticals                     |  |          |  | 0                    | %    |  |          |   |  | 0                    | %
|                                              |  |           |  |                      |      |  |           |   |  |                      |  
|Total research and development                |  | 3,159,872 |  |                      |      |  | 1,858,554 |   |  |                      |  
|                                              |  |           |  |                      |      |  |           |   |  |                      |  
|                                              |  |           |  |                      |      |  |           |   |  |                      |  
|Sales and Marketing:                          |  |           |  |                      |      |  |           |   |  |                      |  
|Biopharmaceutical Products and Services -     |  |           |  |                      |      |  |           |   |  |                      |  
|Biovest                                       |  | 42,076    |  |                      |      |  | 95,794    |   |  |                      |  
|All other business units                      |  | 320,946   |  |                      |      |  | 622,422   |   |  |                      |  
|                                              |  |           |  |                      |      |  |           |   |  |                      |  
|Total Biopharmaceutical Products and Services |  | 363,022   |  | 9                    | %    |  | 718,216   |   |  | 23                   | %
|Specialty Pharmaceuticals                     |  | 2,896,926 |  | 100                  | %    |  | 3,132,391 |   |  | 220                  | %
|                                              |  |           |  |                      |      |  |           |   |  |                      |  
|Total sales and marketing expense             |  | 3,259,948 |  |                      |      |  | 3,850,607 |   |  |                      |  
|                                              |  |           |  |                      |      |  |           |   |  |                      |  

Biopharmaceutical Products and Services

Net Sales.Net sales in our Biopharmaceutical Products and Services segment for the three months ended December 31, 2005, including net sales to
related parties, were $3.9 million, an increase of $0.8 million, or 27%, from the three months ended December 31, 2004. This increase was attributable primarily to an increase in sales of our Analytica International subsidiary.

Cost of Sales.Our cost of sales in the Biopharmaceutical Products and Services segment for the three months ended December 31,



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2005 was $1.3 million, or 34% of segment net sales, compared to $1.8 million, or 57% of segment net sales, during the
three months ended December 31, 2004. This decrease was primarily due to a $0.3 million write-off of inventory in the prior year consisting of cell production instruments and disposables.

Research and Development Expenses.Our research and development costs in the Biopharmaceutical Products and Services segment were $3.2 million for the
three months ended December 31, 2005, an increase of $1.3 million, or 70%, over the three months ended December 31, 2004. This increase was primarily a result of additional expenses relating to our BiovaxID and AutovaxID projects.

Sales and Marketing Expenses.Our sales and marketing expenses in the Biopharmaceutical Products and Services segment were $0.4 million in
the three ended December 31, 2005, a decrease of $0.4 million, or 49%, over the three months ended December 31, 2004. This increase was attributable to our reduced emphasis on cell culture products and services and more toward the
development of BiovaxID.

Specialty Pharmaceuticals

Net Sales.Net sales in the Specialty Pharmaceuticals segment for the three months ended December 31, 2005, including net sales to related parties, were $2.9 million, an increase of $1.5 million, or 104%, from the three
months ended December 31, 2004. This increase was primarily attributable to an increase in sales of our Respi-TANN product line of approximately $0.8 million resulting partially from the launch during this quarter of Respi-TANN PD; an increase
of Xodol sales of approximately $0.5 million resulting from increased focus on targeted physician prescribers; and an increase of co-promotion revenue of $0.1 million and a decrease in Histex sales of approximately $0.2 million. Also contributing to
this increase in net sales was approximately a $0.3 million decrease in accruals for returns, chargebacks and other discounts deducted from gross sales for the quarter ending December 31, 2005 compared to the quarter ended December 31,
2004. Subsequent to the end of the quarter we have discontinued marketing one of the current formulations of Histex, HistexI/E, which formulation represented approximately 18% and 11% of our revenue in the quarters ended
December 31, 2005 and 2004, respectively,

Cost of Sales.Our cost of sales in the Specialty Pharmaceuticals segment for the three
months ended December 31, 2005 was $0.5 million, or 19% of net sales, compared to $0.4 million, or 31% of net sales, during the three months ended December 31, 2004. The decrease in cost of sales as a percentage of net sales was
attributable to a decrease in the percentage of chargebacks and rebates as a percentage of gross sales that were deducted to arrive at the net sales recorded.

Research and Development Expenses.There were no research and development expenses in our Specialty Pharmaceuticals segment in either of the three month periods ended December 31, 2005 or 2004.

Sales and Marketing Expenses.Our sales and marketing expenses in the Specialty Pharmaceuticals segment were $2.9 million in the three months ended
December 31, 2005; a decrease of $0.2 million, or 8%, over the three months ended December 31, 2004. This decrease was primarily due a planned reduction of ten sales personnel compared to the prior years quarter during the quarter
ending December 31, 2005.

Liquidity and Capital Resources

Sources of Liquidity

We are anticipating that operating cash flow deficits for the early part of fiscal 2006 will be offset by net cash
inflows from financing activities, such as debt or equity placements, accessing existing or new credit facilities, receipt of repayment of inter-company demand loans and from proceeds from our IPO completed in the first quarter of fiscal 2006. At
December 31, 2005, we had $ 5.5 million in cash on hand, $4.3 million in accounts receivable and $0.7 million of earned but unbilled receivables, $3.3 million in availability under existing lines of credit, and $6.2 million in demand notes
receivable from Biovest. Upon Biovest obtaining additional financing which it is seeking to consumate through equity offerings, debt financings by the end of calendar 2006 corporate collaborations, or licensing transaction, it is anticipated that
Biovest may repay some or all of the outstanding demand notes and Biovest will commence the funding of its ongoing operations without additional intercompany loans from us.

Based on our current operating plans, we expect that our existing capital resources and cash flow from operations, together with borrowing availability under our existing lines of credit and receipt of repayment of
demand inter-company debt will be sufficient to fund our operations and development activities into the forth quarter of fiscal year 2006. We are currently engaged in efforts to restructure



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certain of our existing indebtedness in order to increase available funds on a near-term basis, and we also intend to
seek additional financing through one or more public or private equity offerings, additional debt financings, corporate collaborations or licensing transactions. We cannot be certain that additional funding will be available on acceptable terms, or
at all. If adequate funds are not available from the foregoing sources, or if we determine it to otherwise be in the Companys best interest, we may consider additional strategic financing options, including sales of assets or business units
(such as specialty pharmaceuticals, market services or cell culture equipment) that are non-essential to the ongoing development or future commercialization of SinuNase, or we may be required to delay, reduce the scope of, or eliminate one or more
of our research or development programs or curtail some of our commercialization efforts. There are currently no commitments in place for any debt or equity financing being sought by us or by Biovest, nor can assurances be given that such financing
will be available. While we are confident that we will raise the capital necessary to fund operations and achieve successful commercialization of the products under development, there can be no assurances in that regard.

Debt Financing

As of December 31, 2005, our long-term debt,
including accrued but unpaid interest, current maturities of long-term debt, and lines of credit, not including discount was $28.8 million. We currently have credit facilities with various lenders, including the following:

Credit Facility with Laurus Master Fund, Ltd. Under a credit facility with Laurus Master Fund, Ltd., or Laurus, we have total borrowing availability of up to
$15.0 million. We entered into this credit facility in April 2005, and it has been amended in August 2005, December 2005, and February 2006. A total of $14.7 million in principal and $0.2 million in accrued but unpaid interest was outstanding under
this credit facility as of December 31, 2005. The Laurus credit facility consists of two components: a term loan in the principal amount of $10.0 million, under which $9.7 million in principal and $0.1 million in accrued but unpaid interest were
outstanding as of December 31, 2005, and a revolving loan of up to $5.0 million, under which $5.0 million in principal and $0.02 million in accrued but unpaid interest were outstanding as of December 31, 2005. Under the revolving loan portion of the
credit facility, we have the right to borrow up to the sum of 85% of all of eligible accounts receivable and 50% of eligible inventory and other assets pledged to secure the loan (with the eligibility criteria being set forth in the loan
agreements). The Laurus credit facility is secured by a first priority security interest in all of the tangible and intangible assets of Accentia Biopharmaceuticals, Inc. and our Analytica subsidiary (including the stock of their respective
subsidiaries). This security interest does not extend to any assets of our TEAMM, Biovest, or IMOR subsidiaries. The notes are also secured by certain publicly traded securities owned by the Francis E. ODonnell Jr. Irrevocable Trust #1. The
principal and accrued but unpaid interest under the Laurus credit facility is convertible by Laurus into shares of our common stock at a fixed conversion price of $6.80 per share, provided that there are certain limitations on when and how much of
the loan can be converted at any one period of time, and further provided that no more than $2.5 million of the revolving loan can be converted into shares of our common stock.

The term loan portion of the Laurus credit facility accrues interest at a rate of the greater of 10% per annum or prime rate plus 4%. The revolving loan portion of the credit facility accrues interest at a rate equal
to the greater of 7.75% per year or prime rate plus 2%. The term loan under the Laurus credit facility is payable through April 29, 2008 in equal monthly payments of principal and interest of $0.3 million. The revolving loan is due on April 29,
2008, with all accrued but unpaid interest payable monthly, provided that up to $2.5 million of the revolving loan may become due in June 2006 under an agreement with Laurus which permits us to borrow up to $2.5 million in excess of the otherwise
maximum permissible borrowing availability under the revolving loan. We have the right to redeem the Laurus notes at any time at a redemption price equal to 130% of the principal amount plus all accrued but unpaid interest, subject to the right of
Laurus to convert the notes prior to a redemption, provided that any portion of the revolving loan that exceeds $2.5 million can be prepaid at any time without penalty. Under the terms specified in our agreements with Laurus and subject to certain
volume limitations, Laurus will be required to convert certain amounts under credit facility into shares of our common stock if there is an effective current registration statement in place covering the resale of shares issuable to Laurus under the
credit facility and if the market price of our common stock reaches $10.00 per share. Also in connection with the Laurus credit facility, as amended, we issued to Laurus warrants to purchase up to 1 million shares of our common stock at an exercise
price of $8.00 per share, 277,778 shares of our common stock at an exercise price of $.001 per share, and 113,000 shares of our common stock at an exercise price of $.01 per share.

Credit Facility with Missouri State Bank. In addition to the Laurus credit facility, in December 2005, we secured a $3.0 million subordinated revolving credit agreement with Missouri State Bank and Trust
Company. This loan bears interest at prime per annum and has a January 2007 maturity date. The agreement is secured by the accounts receivable and inventory of our TEAMM subsidiary. Additionally, the agreement is secured by assets and personal
guarantees of the Francis E. ODonnell Jr. Irrevocable Trust #1, Steven Stogel and Dennis Ryll (directors and/or principal shareholders of our company). As of December 31, 2005, the entire $3.0 million credit facility had been drawn and was
outstanding.

Credit Facility with Hopkins II. We are also a party to a bridge loan credit facility from The Hopkins Capital Group II, LLC,
otherwise referred to as Hopkins II. Dr. Francis E. ODonnell, our Chief Executive Officer and Chairman, is the sole manager of Hopkins II, and several irrevocable trusts established by Dr. ODonnell collectively constitute the largest
equity owners of Hopkins II. In August 2005, we entered into a bridge loan agreement with Hopkins II that provides for aggregate borrowing availability of up to $7.5 million in principal amount at an interest rate of 4.25% per annum simple interest.
This loan (including all accrued interest) will become due upon the earlier of August 16, 2007 or the completion by our company of a debt or equity financing that results in proceeds of more than $35.0 million (net of underwriting discounts,
commissions, or placement agent fees). We may prepay the bridge loan at any time without penalty or premium. Notwithstanding the foregoing, on the date on which the bridge loan becomes due or on which we desire to prepay the loan, we must not be in
default under our credit facility with Laurus, and the remaining balance under the Laurus credit facility at such time must be $2.5 million or less. If both of these conditions are not satisfied, then the bridge loan will not become due and cannot
be paid until the first day on which both of these conditions are satisfied. Under the bridge loan agreement with Hopkins II, we have the unconditional right to borrow up to $5.0 million in the aggregate upon ten days prior written notice to
Hopkins II, provided that our right to borrow any amounts in excess of $5.0 million is conditioned upon us either being in default under our credit facility with Laurus or having less than $5.0 million cash on hand at the time of the advance. As of
December 31, 2005, a total of $4.2 million in principal had been borrowed under this facility and $0.1 million in accrued but unpaid interest was outstanding. No payments of principal or interest are due until the maturity date of the loan. The
Hopkins II bridge loan is subordinate to the Laurus credit facility, provided that we may repay the bridge loan prior to the full satisfaction of our obligations to Laurus so long as the above-described conditions are satisfied.

Loan from McKesson Corporation.In October 2002, we entered into a credit facility with McKesson Corporation in the initial amount of approximately $10
million. As of September 30, 2005, prior to our initial public offering, approximately $6.0 million in principal and interest had been outstanding under this credit facility. During the three months ended December 31, 2005, we reduced this
indebtedness by $5.5 million, such that as of December 31, 2005, $0.8 million in principal and $0.07 million accrued but unpaid interest remained outstanding under this loan. The remaining balance of this loan will become due July, 2006. This loan
bears interest at a rate of 10% per year and is secured all of the assets of Accentia Biopharmaceuticals, Inc., including its stock in each of its subsidiaries, as well as certain publicly traded securities owned by two irrevocable trusts
established by Dr. ODonnell.

Loan from Harbinger Mezzanine Partners, L.P. As of December 31, 2005, we had a loan outstanding from Harbinger
Mezzanine Partners, L.P. in the principal amount $5.0 million plus no in accrued or unpaid interest. The outstanding balance as of December 31, 2005 takes into account a $2.0 million pay down of this loan during the three months ended December 31,
2005. This loan bears interest at a rate of 13.5% per annum and will become due in June 2006, with interest payable monthly. The loan is secured by receivables, inventories, and intangible assets of our TEAMM subsidiary.

Other Financing Arrangements

In February 2004, we entered into a
Biologics Distribution Agreement with McKesson Corporation that gives McKesson exclusive distribution rights for all of our biologic products (including Biovest biologic products) in the U.S., Mexico, and Canada. These distribution rights were
granted to McKesson in exchange for a $3.0 million refundable deposit paid by McKesson to us. The agreement can be terminated by McKesson upon 180 days prior written notice, upon mutual written agreement, or upon our repurchase of
McKessons distribution rights prior to FDA approval of our first biologic product. In order to repurchase the distribution rights, we must pay McKesson a cash payment equal to the greater of two times the amount of the $3.0 million refundable
deposit, or $6.0 million, or 3% of the value of the shareholders equity at the time of termination. If the agreement is otherwise terminated, then we will be required to return the $3.0 million deposit to McKesson.

In September 2004, we sold an interest in our future royalties from SinuNase to PPD for a $2.5 million cash payment. Under this agreement, we are obligated to pay PPD
cumulative minimum payments equal to at least $2.5 million by the end of calendar year 2009. In the event PPD terminates the agreement for breach, including for our failure to make the minimum payments, PPD has the right to require us to repurchase
the royalty interest for a purchase price equal to $2.5 million, less all royalty payments made by us to PPD. For accounting purposes, this has been accounted for as a deposit on our balance sheet at September 30, 2005 and September 30, 2004, and
will be amortized into revenues as corresponding royalties are earned by PPD, at which time our corresponding deposit

Financing Relationship with
Biovest

In June 2003, we purchased 81% of the outstanding capital stock of Biovest International, Inc. for $20.0 million pursuant to an Investment
Agreement with Biovest. Under the Investment Agreement, as amended, we paid $2.5 million in cash at closing, $2.5 million by a 90-day note, and the balance of $15.0 million by a non-interest-bearing promissory note. As of December 31, 2005, this
note had been satisfied in full, and during the three months ended December 31, 2005, we advanced an additional $2.5 million to Biovest in the form of an inter-company demand loan that does not bear interest. This loan does not appear in our
consolidated financial statements because it is eliminated upon consolidation. Biovest is actively pursuing one of more financing transactions in the form of a debt financing, equity financing, or collaboration or licensing transaction. We
anticipate that we will demand payment of the inter-company demand loan when Biovest completes an adequate financing transaction, although there is no assurance as to when and if Biovest will be able to complete such a financing.

Cash Flows for the Three Months Ended December 31, 2005

For the three months ended December 31, 2005, we used $4.7 million in cash to fund our operating activities. This consisted primarily of a net loss of $0.3 million non-cash gain on derivative of $6.4 million, reduced by non-cash
charges of approximately $0.2 million of depreciation, $0.6 million in amortization of intangibles, and $0.5 million of stock-based compensation. We also had non-cash charges of $0.3 million in accretion of debt discounts.

We used net cash in investing activities of $1.3 million for the three months ended December 31, 2005, primarily consisting of payments for product rights of $1.1
million, and improvements to our Worcester laboratory facility of $0.2 million.

We had net cash flows from financing activities of $8.7 million for the
three months ended December 31, 2005, consisting primarily of $14.7 million in proceeds from the issuance common stock, and funding from lines of credit of $3.3 million. We reduced debt by $7.6 million, and received proceeds from a
minority interest investments in our Subsidiary of $1.7 million.

Our net working capital deficit at December 31, 2005 decreased from
September 30, 2005 by $18.3 million to $22.3 million, which was attributed largely to the proceeds from our initial public offering and proceeds from the conversion of preferred stock to common stock. This was offset by a fiscal quarter 2005
loss that was funded through debt and equity proceeds and refinancing of certain short-term debt to long-term.

The amount of our net working capital,
which had a deficit of $22.3 million at December 31, 2005, will continue to be affected by our accounts receivable, and we expect that our accounts receivable will grow in connection with an anticipated growth in revenues from sales of products
in our Specialty Pharmaceuticals segment. At December 31, 2005, our net accounts receivable, and earned but unbilled receivables was $5.0 million, a decrease of $0.1 million from September 30, 2005.



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Cash Flows for the Three Months Ended December 31, 2004

For the three months ended December 30, 2004, we used $8.7 million in cash to fund our operating activities. This consisted primarily of a net loss of $11.2 million,
reduced by non-cash charges approximately $0.2 million in depreciation, $0.7 million in amortization of intangibles, $0.4 million in stock-based compensation, and $2.5 million loss on conversion of shareholder debt to preferred stock.

We used net cash in investing activities of $3.3 million for the three months ended December 31, 2004, primarily consisting of payments for product rights of $3.2
million, and computer equipment of $0.1 million.

We had net cash flows from investing activities of $12.5 million, consisting primarily of the proceeds
from the issuance of preferred stock of $12.8 million, proceeds from the issuance of common stock of $0.6 million. We reduced debt by $0.4 million, reduced lines of credit by $0.2 million, and paid $0.3 million in dividends.

Our net working capital deficit at December 31, 2004 increased from September 30, 2004 by $1.8 million to $29.6 million, which was attributed largely to the
proceeds from the sale of preferred stock to common stock.

Contractual Obligations and Off-Balance Sheet Arrangements

The following chart summarizes our contractual payment obligations as of December 31, 2005. The long- and short-term debt, fixed milestone obligations and license
fees are reflected as liabilities on our balance sheet as of December 31, 2005. Operating leases are accrued and paid on a monthly basis.

The amounts
listed for product distribution and license agreements represent our fixed obligations payable to distribution partners for licensed products. The amounts listed for minimum royalty payments do not include those royalties on net sales of our
products that may be in excess or not subject to minimum royalty obligations.

The other contractual obligations reflected in the table include obligations
to purchase product candidate materials contingent on the delivery of the materials and to fund various clinical trials contingent on the performance of services. These obligations also include long-term obligations, including milestone payments
that may arise under agreements that we may terminate prior to the milestone payments being due. The table excludes contingent royalty payments that we may be obligated to pay in the future.



|                                               |  |                        |        |                 |   |                    |  |                 |       |       |   |   |  |   |       
|---------------------------------------------- |  | ---------------------- | ------ | --------------- | - | ------------------ |  | --------------- | ----- | ----- | - | - |  | - | ------
|                                               |  | Payments Due by Period
|                                               |  | Less thanOne Year      |        | One toTwo Years |   | Three toFive Years |  | AfterFive Years |       | Total
|                                               |  | (in thousands)        
|Long-term debt (a)                             |  | $                      | 10,430 |                 | $ | 8,269              |  | $               |      |       | $ |  |  | $ | 18,699
|Product distribution agreements                |  |                        | 52     |                 |   |                   |  |                 |      |       |   |  |  |   | 52    
|Minimum royalty payments                       |  |                        | 900    |                 |   | 700                |  |                 |      |       |   |  |  |   | 1,600 
|Minimum Purchase requirements (b)              |  |                        | 5,450  |                 |   | 14,267             |  |                 |      |       |   |  |  |   | 19,717
|Product manufacturing and supply agreements    |  |                        | 269    |                 |   | 375                |  |                 |      |       |   |  |  |   | 644   
|Cooperative research and development agreement |  |                        | 580    |                 |   | 145                |  |                 |      |       |   |  |  |   | 725   
|Employment agreements                          |  |                        | 2,926  |                 |   | 5,556              |  |                 | 1,621 |       |   |  |  |   | 10,103
|Operating lease obligations                    |  |                        | 2,665  |                 |   | 3,348              |  |                 | 2,358 |       |   |  |  |   | 8,371 
|                                               |  |                        |        |                 |   |                    |  |                 |       |       |   |   |  |   |       
|                                               |  | $                      | 23,272 |                 | $ | 32,660             |  | $               | 3,974 |       | $ |  |  | $ | 59,911
|                                               |  |                        |        |                 |   |                    |  |                 |       |       |   |   |  |   |       

---

|(a) | Includes interest on long-term debt.
|--- | ------------------------------------

|(b) | Minimum purchase requirements- Commencing in December 2005, we have an obligation to purchase a minimum number of units of our MD Turbo product. The table above reflects under
Minimum purchase requirements based on current projected product pricing. The Company believes that its purchases will exceed its Minimum purchase requirements.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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The above table does not include any additional amounts that we may be required to pay under license or distribution
agreements upon the achievement of scientific, regulatory, and commercial milestones that may become payable depending on the progress of scientific development and regulatory approvals, including milestones such as the submission of drug approval
applications to the FDA and approval of such applications. While we cannot predict when and if such events will occur, depending on the successful achievement of such scientific, regulatory and commercial milestones, we may owe up to $4.2 million,
$8.8 million, and $5.0 million in twelve months ended December 31, 2006, 2007 and 2008, respectively.

Under the Biologics Distribution Agreement that we
entered into with McKesson Corporation in February 2004, as described above, we granted McKesson exclusive distribution rights to our biologics products in exchange for a $3.0 million refundable deposit. McKesson has the right to terminate this
agreement at any time upon 180 days prior written notice, and upon such termination, we will be required to refund the $3.0 million deposit to McKesson.

Under the September 2004 Royalty Stream Purchase Agreement with PPD, as described above, if PPD does not receive at least $2.5 million in royalties from SinuNase under this agreement by 2009, then PPD has the right to terminate the
agreement. In the event of such a termination, we will be required to refund up to the $2.5 million which PPD paid to us upon the execution of the agreement in consideration of the future royalty rights, offset by any amounts paid to the date of
termination. As of December 31, 2005, we had paid $0.1 million to PPD.

Under the promissory note that we issued to Biovest in connection with our
June 2003 investment agreement with Biovest, a total of $15.0 million became payable to Biovest on various dates through June 2007. In August 2004, we entered into an amendment of the investment agreement under which we agreed to use reasonable
efforts to make advances to Biovest under the note prior to the due date of the payments thereunder. We completed funding of our commitment under the note by December 31, 2005, and have advanced approximately $2.4 million in additional funds
subsequent to completing the funding of that note.

We do not maintain any off-balance sheet financing arrangements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

We are exposed to various market risks as a part of our operations, and we anticipate that this exposure will increase as a result of our planned growth. In an effort to mitigate losses associated with these risks, we
may at times enter into derivative financial instruments, although we have not historically done so. These may take the form of forward sales contracts, option contracts, foreign currency exchange contracts, and interest rate swaps. We do not, and
do not intend to, engage in the practice of trading derivative securities for profit.

Interest Rates

Some of our funds may be invested in short-term, interest-bearing, investment grade securities. The value of these securities will be subject to interest rate risk and
could fall in value if interest rates rise. Due to the fact that we hold our excess funds in cash equivalents, a 1% change in interest rates would not have a significant effect on the value of our cash equivalents.

Foreign Exchange Rates

While we have operations in Germany,
these operations are not significant to our overall financial results. Therefore, we do not believe fluctuations in exchange rates would have a material impact on our financial results.

ITEM 4. CONTROLS AND PROCEDURES

(a)Evaluation of Disclosure Controls and Procedures. Our
management, with the participation of our principal executive officer and principal financial officer, have evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this quarterly report (the Evaluation Date). Based on such evaluation, our principal financial officer and principal
executive officer have concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective and designed to ensure that the information relating to our company (including our consolidated subsidiaries) required to be
disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the requisite time periods.

(b)Changes in Internal Controls. There was no change in our internal control over financial reporting (as defined in Rules 13a15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter covered by this
report that has materially affected, or is reasonably likely to materially affect, such controls.



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PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Except for the following, we are 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 our business, assets, or results of operations:

In October 2002, our subsidiary, AccentRx, Inc, acquired the assets and certain liabilities of American Prescription Providers, Inc. and American Prescription Providers of New York, Inc., collectively referred to as APP, which at the time
of purchase operated a mail-order specialty pharmacy focused on filling prescriptions for AIDS patients and organ transplants. Commencing in late 1998, Dr. Francis E. ODonnell (our Chairman and Chief Executive Officer) was the
Chairman of the Board of APP, Dr. Dennis L. Ryll (a director of our company) was a director of APP, and McKesson Corporation was APPs principal lender. Also beginning in late 1998, The Hopkins Capital Group, LLC, an entity in which
Dr. ODonnell is the manager, and MOAB Investments, LP, an entity in which Dr. Ryll is a limited partner, were principal stockholders of APP. Following the purchase of APPs assets, AccentRx operated the mail-order business until
it sold the assets of this business in December 2003 to a third-party in an arms length transaction. All of the sale proceeds from the disposition of this business were used to pay debts of AccentRx, including to reduce the outstanding balance
of the McKesson loan. After the sale of the APP assets, AccentRx ceased to engage in business, and AccentRx currently has nominal assets.

APP learned in
May 2002 that the U.S. Department of Justice was conducting an industry-wide investigation under anti-kickback laws and other laws and regulations relating to purchases and sales of Serostim, an AIDS-wasting drug manufactured by Serono, Inc., from
1997 through 2000. As part of this investigation, in May 2002, APP received a subpoena from the U.S. Attorneys Office for the District of Massachusetts, and in March 2004, it received a federal grand jury subpoena seeking records related to
Serostim prescriptions dispensed by APP, reimbursement claims submitted to Medicaid for Serostim, and APPs relationships with Serono. We are not aware of any investigation into the acts of AccentRx or our company with regard to the conduct of
the mail-order pharmacy business following AccentRxs purchase of APPs assets. While we are uncertain as to the amount or measure of damages, if any, that may be sought from APP, based on information currently available to us, we estimate
that, from the commencement of business by APP on December 1, 1998 through 2000, Serono paid APP approximately $500,000 under a program for data collection, and during this same period, Medicaid reimbursed APP approximately $6,000,000 for
Serostim prescriptions filled by APP. We estimate that the majority of these payments from Serono and reimbursements from Medicaid were not attributable to APPs mail-order business, but rather were attributable to APPs retail pharmacies,
which APP sold to a third party in February 2001 and were therefore not acquired by AccentRx as a part of the 2002 acquisition of APPs assets. In May 2005, the U.S. Attorneys Office notified APP that it believes that APP has significant
potential liability as a result of allegedly unlawful rebates and discounts paid to them by Serono between 1997 and 2000. In August 2005, the U.S. Attorneys Office orally and informally indicated to our legal counsel that, as a result of these
allegedly unlawful rebates and discounts, it was considering instituting a civil action against AccentRx, our company, APP (which has since dissolved and been liquidated), and shareholders of APP who received APP assets as a part of the liquidation
of APP. However, it is not possible to predict the outcome of this investigation and whether the government will formally commence any action challenging any of APPs prior programs and practices or APPs liability or exposure as a result
thereof. We are uncertain if any such action would be under the False Claims Act or other civil or criminal causes of action. In the event of litigation, we believe that APP will have defenses that will be vigorously asserted.

We cannot predict whether AccentRx or our company could be held liable for the prior acts of APP as a result of AccentRxs purchase of APPs assets or whether
the government will commence any actions against AccentRx. However, we believe that it is unlikely that our company, which has always been operated as a distinct legal entity from AccentRx, will have material financial exposure in the event that
AccentRx or APP incurs a material penalty in connection with this matter. Similarly, we do not believe that any adverse legal or regulatory determinations regarding APP, our company, or AccentRx or any persons associated with APP, our company, or
AccentRx would have any material effect on the ability of our company and its subsidiaries to conduct their current or expected business operations. On October 17, 2005, the U.S. Department of Justice announced a settlement of criminal and
civil allegations against Serono. According to the terms of the settlement, Serono, together with its U.S. subsidiaries and related entities, agreed to pay $704 million in connection with illegal schemes to promote, market, and sell its drug
Serostim. We cannot predict the impact, if any, that this settlement will have on the governments investigation relating to APPs purchases and sales of Serostim.



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ITEM 1A. RISK FACTORS

Not Applicable

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

Unregistered Sales of Equity Securities

On December 29, 2005,
in connection with a modification of our credit facility with Laurus Master Fund, Ltd., we granted to Laurus an additional warrant to purchase up to 51,000 shares of our common stock at an exercise price of $0.01 per share. We claimed exemption from
registration for this transaction under the Securities Act of 1933, as amended (the Securities Act), by virtue of Section 4(2) of the Securities Act and by virtue of Rule 506 of Regulation D. The grant of this warrant and the offer of
the underlying shares did not involve any public offering, was made without general solicitation or advertising, and Laurus was an accredited investor with access to all relevant information necessary to evaluate the investment and represented to us
that the warrant and underlying shares were being acquired for investment.

Use of Proceeds

We registered shares of our common stock in connection with our initial public offering under the Securities Act of 1933, as amended. (the IPO) Our
Registration Statement on Form S-1 (Reg. No. 333-122769) in connection with our initial public offering was declared effective by the SEC on October 27, 2005. The offering closed on November 2, 2005. The underwriters of the
offering were Jefferies & Company, Inc.; Ferris, Baker Watts incorporated; Stifel, Nicolaus & Company Incorporated; and GunnAllen Financial, Inc.

All 2.4 million shares of our common stock registered in the offering were sold at the initial public offering price (IPO) of $8.00 per share. The aggregate gross proceeds from the offering (before underwriting discounts and
commissions) were $19.2 million. The net offering proceeds to us after deducting underwriting discounts and commissions of $1.3 million and total offering expenses of $3.6 million were $14.3 million. No payments for such expenses were made
directly or indirectly to (i) any of our directors, officers or their associates, (ii) any person(s) owning 10% or more of any class of our equity securities or (iii) any of our affiliates.

Subsequent to our IPO and as of December 31, 2005, we had used the net proceeds of our IPO as follows:

(a) $1.1 million to fund milestone and similar product-related payments to our development partners in our specialty pharmaceuticals business for the
acquisition on maintenance of product rights.

(b) $4.3 million to fund debt reductions as part of a plan to restructure existing debt in
order to facilitate future financings. The restructuring plan included: (i) establishing a new credit facility with Missouri State Bank under which we borrowed $3.0 million; (ii) a series of transactions involving our revolving line of
credit with Laurus Master Funds Ltd. which resulted in a net payment to Laurus of $0.1 million; (iii) $2.0 million reduction in outstanding principal due under our credit agreement with Harbinger Mezzanine Partners and (iv) $5.2 million
reduction in our outstanding debt to McKesson Corporation. While not a specified use of our IPO proceeds, as described in our prospectus for the IPO we elected to make the debt reductions because of the availability of a new credit facility with
Missouri State Bank and because, we believe, the restructure plan will facilitate future debt and equity financing.

$2.5 million to fund
inter-company demand loans made to our subsidiary, Biovest, for its working capital, development and clinical trial activities. We anticipated that Biovest would have access to financing and accordingly we did not plan to use IPO proceeds to fund
Biovest beyond the commitment in the Investment Agreement. While not a planned use of IPO proceeds as described in our prospectus for the IPO, we elected to fund these inter-company demand loans because of the continuing positive nature of the
follow-up data from the Phase 2 clinical trial of BiovaxID XXX, the continued progress in developing the AutovaxID automated production instrument. We anticipate that we will call these demand loans if Biovest completes an adequate debt or equity
financing.

$2.4 million to fund our working capital and general corporate purposes.

Options Exercised

In the three
months ended December 31, 2005, 4,165 common stock options were exercised.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

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

None



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ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS

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



|         |  |   |  |                                                                                                                            
|-------- |  | - |  | ---------------------------------------------------------------------------------------------------------------------------
|Number   |  |   |  | Description of Document                                                                                                    
|10.1     |  | - |  | Trust Ratification dated February 13, 2006 between registrant and Laurus Master Fund, Ltd.                                 
|         |  |  
|10.2     |  | - |  | Second Amended and Restated Term Note dated February 13, 2006 between registrant and Laurus Master Fund, Ltd.              
|         |  |  
|10.3     |  | - |  | MSB Subordination Agreement dated February 13, 2006 between registrant and Laurus Master Fund, Ltd.                        
|         |  |  
|10.4     |  | - |  | Amended and Restated Security Agreement dated February 13, 2006 between registrant and Laurus Master Fund, Ltd.            
|         |  |  
|10.5     |  | - |  | Amended and Restated Registration Rights Agreement dated February 13, 2006 between registrant and Laurus Master Fund, Ltd. 
|         |  |  
|10.6     |  | - |  | Second Omnibus Amendment dated February 13, 2006 between Registrant and Laurus Master Fund, Ltd.                           
|         |  |  
|10.7     |  | - |  | Amended and Restated Non-Convertible Revolving Note dated February 13, 2006 between registrant and Laurus Master Fund, Ltd.
|         |  |  
|10.8     |  | - |  | Joinder Agreement dated February 13, 2006 between registrant and Laurus Master Fund Ltd. etc                               
|         |  |  
|10.9     |  | - |  | Revolving Credit Agreement dated December 30, 2005 between registrant and Missouri State Bank.                             
|         |  |  
|10.10    |  | - |  | Revolving Credit Note dated December 30, 2005 between registrant and Missouri State Bank.                                  
|         |  |  
|10.11    |  | - |  | Security Agreement dated December 30, 2005 between registrant and Missouri State Bank etc.                                 
|         |  |  
|10.12    |  | - |  | Continuing Contract of Guaranty dated December 30, 2005 between registrant and Missouri State Bank etc.                    
|         |  |  
|10.13    |  | - |  | Security Agreement of TEAMM Pharmaceuticals dated December 30, 2005 etc.                                                   
|         |  |  
|10.14    |  | - |  | Stock Pledge Agreement dated December 30, 2005 etc.                                                                        
|         |  |  
|10.15    |  | - |  | Securities Pledge Agreement dated December 30, 2005 etc.                                                                   
|         |  |  
|10.16(a) |  | - |  | Form of Incentive Option Grant under 2005 Equity Incentive Plan                                                            
|         |  |  
|10.17(a) |  | - |  | Form of Non-Qualified Option Grant under 2005 Equity Incentive Plan                                                        
|         |  |  
|10.18(a) |  | - |  | Form of Non-Employee Directors Option Grant under 2005 Equity Incentive Plan.                                              
|         |  |  
|10.19    |  | - |  | Warrant Dated February 13, 2006 from registrant to Laurus Master Fund Ltd.                                                 
|         |  |  
|31.1     |  | - |  | Certification of Chairman of the Board and Chief Executive Officer pursuant to Section 302 of Sarbanes  Oxley Act.        
|         |  |  
|31.2     |  | - |  | Certification of Chief Financial Officer pursuant to Section 302 of Sarbanes  Oxley Act.                                  
|         |  |  
|32.1     |  | - |  | Certification of Chairman of the Board and Chief Executive Officer pursuant to Section 906 of Sarbanes  Oxley Act.        
|         |  |  
|32.2     |  | - |  | Certification of Chief Financial Officer pursuant to Section 906 of Sarbanes  Oxley Act                                   

(a) Denotes management contract or compensatory plan.



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SIGNATURES

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



|                   |  |                                               
|------------------ |  | ----------------------------------------------
|                   |  | ACCENTIA BIOPHARMACEUTICALS, INC. (Registrant)
|                   | 
|Date: May 15, 2006 |  | /s/ Francis E. ODonnell, Jr., MD             
|                   |  | Francis E. ODonnell, Jr., MD                 
|                   |  | Chairman and Chief Executive Officer          
|                   |  | (Principal Executive Officer)                 
|                   | 
|Date: May 15, 2006 |  | /s/ Alan M. Pearce                            
|                   |  | Alan M. Pearce                                
|                   |  | Chief Financial Officer                       
|                   |  | (Principal Financial and Accounting Officer)  



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