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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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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, 2006

OR



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

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)



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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.    Yesx    No ̈

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 December 31, 2006, there were 31,733,678 shares of the registrants Common Stock outstanding.



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Forward-Looking Statements

Statements in this quarterly report on Form 10-Q that are not strictly historical in nature are forward-looking statements. These statements may include, but are not limited to, statements about: the timing of the commencement, enrollment,
and completion of our clinical trials for our product candidates; the progress or success of our product development programs; the status of regulatory approvals for our product candidates; the timing of product launches; our ability to protect our
intellectual property and operate our business without infringing upon the intellectual property rights of others; and our estimates for future performance, anticipated operating losses, future revenues, capital requirements, and our needs for
additional financing. In some cases, you can identify forward-looking statements by terms such as anticipates, believes, could, estimates, expects, intends, may,
plans, potential, predicts, projects, should, will, would, goal, 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.



2



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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, 2006 and September 30, 2006                    |  | 4 
|Consolidated Statements of Operations for the three months ended December 31, 2006 and 2005   |  | 7 
|Consolidated Statements of Stockholders Deficit for the three months ended December 31, 2006 |  | 8 
|Consolidated Statements of Cash Flows for the three months ended December 31, 2006 and 2005   |  | 9 
|Notes to Consolidated Financial Statements                                                    |  | 10



3



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ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



|                                                                                                                       |  |                              |            |   |                             |   |            |  
|---------------------------------------------------------------------------------------------------------------------- |  | ---------------------------- | ---------- | - | --------------------------- | - | ---------- | -
|                                                                                                                       |  | December 31, 2006(Unaudited) |            |   | September 30, 2006(Audited) |  
|ASSETS                                                                                                                 |  |                              |            |   |                             |   |            |  
|Current assets:                                                                                                        |  |                              |            |   |                             |   |            |  
|Cash and cash equivalents                                                                                              |  | $                            | 3,243,830  |   |                             | $ | 15,391,799 |  
|Cash, restricted, net of non-current portion of $2.3 million at December 31, 2006 and September 30, 2006,
respectively |  |                              | 5,085,118  |   |                             |   | 7,550,817  |  
|Accounts receivable:                                                                                                   |  |                              |            |   |                             |   |            |  
|Trade, net of allowance for doubtful accounts of $372,639 at December 31, 2006 and $366,309 at September 30, 2006      |  |                              | 3,695,466  |   |                             |   | 2,719,280  |  
|Stockholder                                                                                                            |  |                              |           |   |                             |   | 170,510    |  
|Inventories                                                                                                            |  |                              | 1,630,817  |   |                             |   | 1,500,185  |  
|Inventory deposits                                                                                                     |  |                              | 930,368    |   |                             |   | 997,149    |  
|Unbilled receivables                                                                                                   |  |                              | 1,547,311  |   |                             |   | 1,087,159  |  
|Prepaid expenses and other current assets                                                                              |  |                              | 1,507,454  |   |                             |   | 700,490    |  
|                                                                                                                       |  |                              |            |   |                             |   |            |  
|Total current assets                                                                                                   |  |                              | 17,640,364 |   |                             |   | 30,117,389 |  
|                                                                                                                       |  |                             
|Cash, restricted, non-current                                                                                          |  |                              | 2,328,584  |   |                             |   | 2,328,584  |  
|                                                                                                                       |  |                              |            |   |                             |   |            |  
|Goodwill                                                                                                               |  |                              | 1,193,437  |   |                             |   | 1,193,437  |  
|                                                                                                                       |  |                              |            |   |                             |   |            |  
|Other intangible assets:                                                                                               |  |                              |            |   |                             |   |            |  
|Product rights                                                                                                         |  |                              | 16,142,699 |   |                             |   | 19,914,707 |  
|Non-compete agreements                                                                                                 |  |                              | 2,104,000  |   |                             |   | 2,104,000  |  
|Trademarks                                                                                                             |  |                              | 1,634,659  |   |                             |   | 1,634,659  |  
|Purchased customer relationships                                                                                       |  |                              | 1,268,950  |   |                             |   | 1,268,950  |  
|Other intangible assets                                                                                                |  |                              | 648,288    |   |                             |   | 648,288    |  
|Accumulated amortization                                                                                               |  |                              | (556,331   | ) |                             |   | (7,783,227 | )
|                                                                                                                       |  |                              |            |   |                             |   |            |  
|Total other intangible assets                                                                                          |  |                              | 16,234,265 |   |                             |   | 17,787,377 |  
|                                                                                                                       |  |                             
|Furniture, equipment and leasehold improvements, net                                                                   |  |                              | 1,491,214  |   |                             |   | 1,535,978  |  
|Deferred finance costs                                                                                                 |  |                              | 4,546,998  |   |                             |   | 4,109,028  |  
|Other assets                                                                                                           |  |                              | 65,121     |   |                             |   | 64,449     |  
|                                                                                                                       |  |                              |            |   |                             |   |            |  
|                                                                                                                       |  | $                            | 43,499,983 |   |                             | $ | 57,136,242 |  
|                                                                                                                       |  |                              |            |   |                             |   |            |  

(Continued)



4



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ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(CONTINUED)



|                                                                                                                              |  |                              |            |                             |   |           
|----------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------- | ---------- | --------------------------- | - | ----------
|                                                                                                                              |  | December 31, 2006(Unaudited) |            | September 30, 2006(Audited)
|LIABILITIES AND STOCKHOLDERS DEFICIT                                                                                         |  |                              |            |                             |   |           
|Current liabilities:                                                                                                          |  |                              |            |                             |   |           
|Current maturities of long-term debt                                                                                          |  | $                            | 5,959,341  |                             | $ | 5,652,152 
|Lines of credit:                                                                                                              |  |                              |            |                             |   |           
|Related party                                                                                                                 |  |                              | 1,060,497  |                             |   | 1,060,497 
|Other                                                                                                                         |  |                              | 13,231,422 |                             |   | 13,925,473
|Accounts payable (including related party of $800,798 and $688,135 at December 31, 2006 and September 30, 2006,
respectively) |  |                              | 6,170,207  |                             |   | 8,016,559 
|Accrued expenses                                                                                                              |  |                              | 7,238,721  |                             |   | 10,160,946
|Unearned revenues                                                                                                             |  |                              | 1,691,097  |                             |   | 1,395,098 
|Dividends payable                                                                                                             |  |                              | 479,452    |                             |   | 479,452   
|Customer deposits                                                                                                             |  |                              | 1,893,420  |                             |   | 1,025,404 
|Deposits, related party                                                                                                       |  |                              | 3,000,000  |                             |   | 3,000,000 
|Derivative liability                                                                                                          |  |                              | 16,078,439 |                             |   | 5,870,088 
|                                                                                                                              |  |                              |            |                             |   |           
|Total current liabilities                                                                                                     |  |                              | 56,802,596 |                             |   | 50,585,669
|                                                                                                                              |  |                             
|Long-term debt, net of current maturities                                                                                     |  |                              | 31,691,633 |                             |   | 27,021,205
|Other liabilities, related party                                                                                              |  |                              | 2,356,717  |                             |   | 2,370,200 
|                                                                                                                              |  |                              |            |                             |   |           
|Total liabilities                                                                                                             |  |                              | 90,850,946 |                             |   | 79,977,074
|                                                                                                                              |  |                              |            |                             |   |           

(Continued)



5



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ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(CONTINUED)



|                                                                                                                                                                                  |  |                              |              |   |                             |   |              |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------- | ------------ | - | --------------------------- | - | ------------ | -
|                                                                                                                                                                                  |  | December 31, 2006(Unaudited) |              |   | September 30, 2006(Audited) |  
|Non-controlling interest in variable interest entities                                                                                                                            |  | $                            | 6,000,000    |   |                             | $ | 3,600,000    |  
|                                                                                                                                                                                  |  |                              |              |   |                             |   |              |  
|Commitments and contingencies (Note 10 )                                                                                                                                          |  |                              |             |   |                             |   |             |  
|Stockholders deficit:                                                                                                                                                            |  |                              |              |   |                             |   |              |  
|Common stock, $0.001 par value; 300,000,000 shares authorized; 31,733,678 and 31,716,279 shares issued and outstanding at December 31,
2006 and September 30, 2006, respectively. |  |                              | 31,734       |   |                             |   | 31,716       |  
|Additional paid-in capital                                                                                                                                                        |  |                              | 138,832,915  |   |                             |   | 135,102,051  |  
|Accumulated deficit                                                                                                                                                               |  |                              | (192,215,612 | ) |                             |   | (161,574,599 | )
|                                                                                                                                                                                  |  |                              |              |   |                             |   |              |  
|Total stockholders deficit                                                                                                                                                       |  |                              | (53,350,963  | ) |                             |   | (26,440,832  | )
|                                                                                                                                                                                  |  |                              |              |   |                             |   |              |  
|                                                                                                                                                                                  |  |                             
|                                                                                                                                                                                  |  | $                            | 43,499,983   |   |                             | $ | 57,136,242   |  
|                                                                                                                                                                                  |  |                              |              |   |                             |   |              |  

See notes to consolidated financial statements.



6



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ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



|                                                                           |      |                                        |             |      |  |   |            |  
|-------------------------------------------------------------------------- | ---- | -------------------------------------- | ----------- | ---- |  | - | ---------- | -
|                                                                           |      | For the Three Months EndedDecember 31, |            
|                                                                           | 2006 |                                        |             | 2005 | 
|Net Sales:                                                                 |      |                                        |             |      |  |   |            |  
|Products                                                                   |      | $                                      | 2,936,017   |      |  | $ | 2,146,678  |  
|Services                                                                   |      |                                        | 2,772,425   |      |  |   | 3,043,463  |  
|Related party, products                                                    |      |                                        | 173,301     |      |  |   | 1,627,825  |  
|                                                                           |      |                                        |             |      |  |   |            |  
|Total net sales                                                            |      |                                        | 5,881,743   |      |  |   | 6,817,966  |  
|                                                                           |      |                                        |             |      |  |   |            |  
|                                                                           |      |                                       
|Cost of sales:                                                             |      |                                        |             |      |  |   |            |  
|Products                                                                   |      |                                        | 834,740     |      |  |   | 928,561    |  
|Services                                                                   |      |                                        | 790,552     |      |  |   | 947,212    |  
|                                                                           |      |                                        |             |      |  |   |            |  
|Total cost of sales (exclusive of amortization of acquired product rights) |      |                                        | 1,625,292   |      |  |   | 1,875,773  |  
|                                                                           |      |                                        |             |      |  |   |            |  
|Gross margin                                                               |      |                                        | 4,256,451   |      |  |   | 4,942,193  |  
|                                                                           |      |                                        |             |      |  |   |            |  
|Operating expenses:                                                        |      |                                        |             |      |  |   |            |  
|Research and development                                                   |      |                                        | 3,798,672   |      |  |   | 3,065,890  |  
|Research and development, related party                                    |      |                                        | 592,086     |      |  |   | 93,982     |  
|Sales and marketing                                                        |      |                                        | 2,177,455   |      |  |   | 3,259,948  |  
|General and administrative                                                 |      |                                        | 6,792,458   |      |  |   | 5,365,723  |  
|Royalties                                                                  |      |                                        |            |      |  |   | 564,392    |  
|                                                                           |      |                                        |             |      |  |   |            |  
|Total operating expenses                                                   |      |                                        | 13,360,671  |      |  |   | 12,349,935 |  
|                                                                           |      |                                        |             |      |  |   |            |  
|Operating loss                                                             |      |                                        | (9,104,220  | )    |  |   | (7,407,742 | )
|Other income (expense):                                                    |      |                                        |             |      |  |   |            |  
|Interest expense                                                           |      |                                        | (3,222,704  | )    |  |   | (905,146   | )
|Interest expense, net, related party                                       |      |                                        |            |      |  |   | (100,834   | )
|Change in fair value of convertible debentures                             |      |                                        | (8,017,767  | )    |  |   |           |  
|Loss on sale of assets                                                     |      |                                        | (1,181,325  | )    |  |   |           |  
|Derivative gain (loss)                                                     |      |                                        | (649,931    | )    |  |   | 6,363,477  |  
|Loss on financing transaction (Note 12)                                    |      |                                        | (8,780,712  | )    |  |   |           |  
|Absorption of prior gains against minority interest                        |      |                                        | 269,401     |      |  |   | 1,689,800  |  
|Other income (expense)                                                     |      |                                        | 46,245      |      |  |   | 43,419     |  
|                                                                           |      |                                        |             |      |  |   |            |  
|Loss from operations before income taxes                                   |      |                                        | (30,641,013 | )    |  |   | (317,026   | )
|Income taxes                                                               |      |                                        |            |      |  |   |           |  
|                                                                           |      |                                        |             |      |  |   |            |  
|Net loss                                                                   |      |                                        | (30,641,013 | )    |  |   | (317,026   | )
|                                                                           |      |                                       
|Preferred stock dividends, other                                           |      |                                        |            |      |  |   | (40,739    | )
|                                                                           |      |                                        |             |      |  |   |            |  
|Loss attributable to common stockholders                                   |      | $                                      | (30,641,013 | )    |  | $ | (357,765   | )
|                                                                           |      |                                        |             |      |  |   |            |  
|Weighted average shares outstanding, basic and diluted                     |      |                                        | 31,720,472  |      |  |   | 20,695,219 |  
|                                                                           |      |                                        |             |      |  |   |            |  
|Per share amounts, basic and diluted:                                      |      |                                        |             |      |  |   |            |  
|Loss attributable to common stockholders per common share                  |      | $                                      | (0.97       | )    |  | $ | (0.02      | )
|                                                                           |      |                                        |             |      |  |   |            |  

See notes to consolidated financial statements.



7



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ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS DEFICIT
(Unaudited)

FOR THE THREE MONTHS ENDED DECEMBER 31, 2006



|                                                     |        |              |        |                           |        |                     |   |             |       |   |              |   |  |   |             |  
|---------------------------------------------------- | ------ | ------------ | ------ | ------------------------- | ------ | ------------------- | - | ----------- | ----- | - | ------------ | - |  | - | ----------- | -
|                                                     |        | Common Stock |        | AdditionalPaid-In Capital |        | Accumulated Deficit |   |             | Total |  
|                                                     | Shares |              | Amount |                           |        |                    
|Balances, September 30, 2006                         |        | 31,716,279   |        | $                         | 31,716 |                     | $ | 135,102,051 |       | $ | (161,574,599 | ) |  | $ | (26,440,832 | )
|Issuance of common stock for cash  options exercise |        | 10,550       |        |                           | 11     |                     |   | 17,454      |       |   |             |   |  |   | 17,465      |  
|Stock-based compensation                             |        |             |        |                           |       |                     |   | 2,301,710   |       |   |             |   |  |   | 2,301,710   |  
|Issuance of warrants for financing costs             |        |             |        |                           |       |                     |   | 1,389,448   |       |   |             |   |  |   | 1,389,448   |  
|Issuance of common stock for financing costs         |        | 6,849        |        |                           | 7      |                     |   | 22,252      |       |   |             |   |  |   | 22,259      |  
|Net loss for the period                              |        |             |        |                           |       |                     |   |            |       |   | (30,641,013  | ) |  |   | (30,641,013 | )
|                                                     |        |              |        |                           |        |                     |   |             |       |   |              |   |  |   |             |  
|Balances, December 31, 2006                          |        | 31,733,678   |        | $                         | 31,734 |                     | $ | 138,832,915 |       | $ | (192,215,612 | ) |  | $ | (53,350,963 | )
|                                                     |        |              |        |                           |        |                     |   |             |       |   |              |   |  |   |             |  



8



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ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



|                                                                               |      |                                         |             |      |  |   |            |  
|------------------------------------------------------------------------------ | ---- | --------------------------------------- | ----------- | ---- |  | - | ---------- | -
|                                                                               |      | For the Three Months EndingDecember 31, |            
|                                                                               | 2006 |                                         |             | 2005 | 
|Cash flows from operating activities:                                          |      |                                         |             |      |  |   |            |  
|Net loss                                                                       |      | $                                       | (30,641,013 | )    |  | $ | (317,026   | )
|Adjustments to reconcile net loss to net cash flows from operating activities: |      |                                         |             |      |  |   |            |  
|Loss on sale of assets                                                         |      |                                         | 1,181,325   |      |  |   |           |  
|Loss on financing transaction                                                  |      |                                         | 8,780,712   |      |  |   |           |  
|Change in fair market value adjustment of convertible debentures               |      |                                         | 8,017,767   |      |  |   |           |  
|Depreciation                                                                   |      |                                         | 148,918     |      |  |   | 186,643    |  
|Amortization                                                                   |      |                                         | 231,111     |      |  |   | 581,803    |  
|Stock-based compensation                                                       |      |                                         | 1,060,077   |      |  |   | 48,286     |  
|Accretion of debt discounts                                                    |      |                                         | 436,647     |      |  |   | 285,904    |  
|Derivative (gain) loss                                                         |      |                                         | 649,931     |      |  |   | (6,363,477 | )
|Issuance of common stock warrants for finance costs                            |      |                                         | 1,389,448   |      |  |   |           |  
|Issuance of common stock for finance costs                                     |      |                                         | 22,259      |      |  |   |           |  
|Absorption of prior losses against minority interest                           |      |                                         | (267,400    | )    |  |   | (1,689,800 | )
|Other non-cash charges                                                         |      |                                         | (6,997      | )    |  |   | 143        |  
|Increase (decrease) in cash resulting from changes in:                         |      |                                         |             |      |  |   |            |  
|Accounts receivable                                                            |      |                                         | (805,676    | )    |  |   | (686,157   | )
|Inventories                                                                    |      |                                         | (683,329    | )    |  |   | (377,138   | )
|Inventory deposits                                                             |      |                                         | 66,781      |      |  |   | 259,740    |  
|Unbilled receivables                                                           |      |                                         | (460,152    | )    |  |   | (44,403    | )
|Prepaid expenses and other current assets                                      |      |                                         | (806,964    | )    |  |   | (164,835   | )
|Other assets                                                                   |      |                                         | (305,894    | )    |  |   | (20,543    | )
|Accounts payable                                                               |      |                                         | (1,846,352  | )    |  |   | (1,379,715 | )
|Accrued expenses                                                               |      |                                         | (802,061    | )    |  |   | 1,823,869  |  
|Unearned revenues                                                              |      |                                         | 295,999     |      |  |   | 721,367    |  
|Customer deposits                                                              |      |                                         | 866,466     |      |  |   | (98,257    | )
|                                                                               |      |                                         |             |      |  |   |            |  
|Net cash flows from operating activities                                       |      |                                         | (13,478,397 | )    |  |   | (7,233,596 | )
|                                                                               |      |                                         |             |      |  |   |            |  
|                                                                               |      |                                        
|Cash flows from investing activities:                                          |      |                                         |             |      |  |   |            |  
|Proceeds from sale of assets                                                   |      |                                         | 4,811,143   |      |  |   |           |  
|Proceeds from financing carried in restricted cash                             |      |                                         | 2,391,329   |      |  |   |           |  
|Acquisition of furniture, equipment, and leasehold improvements                |      |                                         | (97,158     | )    |  |   | (226,488   | )
|Acquisition of product rights and other intangibles                            |      |                                         | (3,500,000  | )    |  |   | (1,068,087 | )
|                                                                               |      |                                         |             |      |  |   |            |  
|Net cash flows from investing activities                                       |      |                                         | 3,605,314   |      |  |   | (1,294,575 | )
|                                                                               |      |                                         |             |      |  |   |            |  
|                                                                               |      |                                        
|Cash flows from financing activities:                                          |      |                                         |             |      |  |   |            |  
|Deferred offering costs                                                        |      |                                         |            |      |  |   | 821,573    |  
|Payments on notes payable and long-term debt                                   |      |                                         | (3,460,195  | )    |  |   | (7,564,044 | )
|Proceeds from issuance of common stock                                         |      |                                         |            |      |  |   | 14,741,362 |  
|Proceeds from the exercise of stock options                                    |      |                                         | 17,465      |      |  |   | 8,069      |  
|Proceeds from non-controlling investment in variable interest equity           |      |                                         | 2,400,000   |      |  |   |           |  
|Due from related party                                                         |      |                                         | (13,483     | )    |  |   | (11,668    | )
|Proceeds from long-term debt                                                   |      |                                         | 28,990      |      |  |   |           |  
|Proceeds from (payments on a) line of credit, net                              |      |                                         | (1,247,663  | )    |  |   | 3,265,565  |  
|                                                                               |      |                                         |             |      |  |   |            |  
|Net cash flows from financing activities                                       |      |                                         | (2,274,886  | )    |  |   | 11,260,857 |  
|                                                                               |      |                                         |             |      |  |   |            |  
|                                                                               |      |                                        
|Net change in cash and cash equivalents                                        |      |                                         | (12,147,969 | )    |  |   | 2,732,686  |  
|                                                                               |      |                                         |             |      |  |   |            |  
|Cash and cash equivalents at beginning of period                               |      |                                         | 15,391,799  |      |  |   | 2,763,451  |  
|                                                                               |      |                                         |             |      |  |   |            |  
|                                                                               |      |                                        
|Cash and cash equivalents at end of period                                     |      | $                                       | 3,243,830   |      |  | $ | 5,496,137  |  
|                                                                               |      |                                         |             |      |  |   |            |  
|Supplemental cash flow information:                                            |      |                                         |             |      |  |   |            |  
|Cash paid for:                                                                 |      |                                         |             |      |  |   |            |  
|Interest                                                                       |      | $                                       | 690,630     |      |  | $ | 233,750    |  
|Income taxes                                                                   |      | $                                       |            |      |  | $ |           |  



9



---

ACCENTIA BIOPHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED DECEMBER 31, 2006 AND 2005



1. Description of the company

Accentia Biopharmaceuticals, Inc. and its subsidiaries, Analytica International, Inc. (Analytica), TEAMM Pharmaceuticals,
Inc., d/b/a Accentia Pharmaceuticals (Accentia Pharmaceuticals), Accent RX, Inc. (AccentRx), Biovest International, Inc. (Biovest or BVTI), and Accentia Specialty Pharmacy (ASP)
(collectively referred to as the Company or Accentia) is a vertically integrated 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 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 specialty pharmaceutical business with a portfolio of marketed products and a pipeline of 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 statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted pursuant to those rules and regulation, although the Company believes that the disclosures made are adequate to make the information presented not misleading. The financial
statements of the Company, in the opinion of management, include all normal and recurring adjustments necessary for a fair presentation of results as of the dates and for the periods covered by the financial statements.

Results of operations for the three months ended December 31, 2006 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 therto included in the Companys Annual Report on Form 10-K for the fiscal year ended September 30, 2006.

Consolidation policy

The consolidated financial statements represent
the consolidation of wholly and majority-owned companies and variable interest entities where the Company has a controlling financial interest or has been determined to be the primary beneficiary under FASB Interpretation No. 46R,
Consolidation of Variable Interest Entities. All significant intercompany balances and transactions have been eliminated

Financial instruments

Financial instruments, as defined in Financial Accounting Standard No. 107Disclosures about Fair Value of Financial Instruments (FAS 107),
consist of cash, evidence of ownership in an entity and contracts that both (i) impose on one entity a contractual obligation to deliver cash or another financial instrument to a second entity, or to exchange other financial instruments on
potentially unfavorable terms with the second entity, and (ii) conveys to that second entity a contractual right (a) to receive cash or another financial instrument from the first entity or (b) to exchange other financial instruments
on potentially favorable terms with the first entity. Accordingly, the Companys financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, long-term debt, derivative financial
instruments, and convertible debentures.

The Company carries cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities at
historical costs; their respective estimated fair values approximate carrying values due to their current nature. The Company also carries notes payable and convertible debt, included in long-term debt, at historical cost; however, fair values of
these debt instruments are estimated for disclosure purposes based upon the present value of the estimated cash flows at market interest rates applicable to similar instruments. The Company carries its convertible debentures at fair value pursuant
to Financial Accounting Standard No. 155Accounting for Certain Hybrid Financial Instruments (FAS 155).



10



---

ACCENTIA BIOPHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED DECEMBER 31, 2006 AND 2005



In February 2006, the FASB issued Statement of Financial Accounting Standard (SFAS) No. 155 (SFAS No. 155),
Accounting for Certain Hybrid Financial InstrumentsAn Amendment of FASB Statements No. 133 and 140, to simplify and make more consistent the accounting for certain financial instruments. Specifically, SFAS No. 155 amends
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, to permit fair value re-measurement for any hybrid financial instrument with an embedded derivative that otherwise would require bifurcation provided that
the whole instrument is accounted for on a fair value basis. Prior to fair value measurement, however, interests in securitized financial assets must be evaluated to identify interests containing embedded derivatives requiring bifurcation. SFAS
No. 155 applies to all financial instruments acquired or issued after the beginning of an entitys first fiscal year that begins after September 15, 2006, with earlier application allowed.

The Company generally does not use derivative financial instruments to hedge exposures to cash-flow, market or foreign-currency risks. However, the Company and its
consolidated subsidiaries have entered into certain other financial instruments and contracts, such as debt financing arrangements and freestanding warrants with features that are either (i) not afforded equity classification, (ii) embody
risks not clearly and closely related to host contracts, or (iii) may be net-cash settled by the counterparty. Except as provided in FAS 155, these instruments are required to be carried as derivative liabilities, at fair value, in the
consolidated financial statements. In instances, where the Company elects not to bifurcate embedded derivative features, the entire hybrid instrument is carried at fair value in the financial statements.

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

The following tabular presentation reflects the components of derivative financial instruments on the Companys balance sheet at:



|                                                                                                       |  |                  |            |                   |   |           
|------------------------------------------------------------------------------------------------------ |  | ---------------- | ---------- | ----------------- | - | ----------
|                                                                                                       |  | December 31,2006 |            | September 30,2006
|Freestanding derivative (warrants issued in connection with convertible debentures)                    |  | $                | 6,297,842  |                   | $ | 5,633,719 
|Freestanding derivative (warrants to purchase Biovest shares issued to Laurus Funds, LTD. by Accentia) |  |                  | 9,428,000  |                   |   |          
|Default Put Liability                                                                                  |  |                  | 352,597    |                   |   | 236,369   
|                                                                                                       |  |                  |            |                   |   |           
|                                                                                                       |  | $                | 16,078,439 |                   | $ | 5,870,0888
|                                                                                                       |  |                  |            |                   |   |           



11



---

ACCENTIA BIOPHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED DECEMBER 31,
2006 AND 2005



The following tabular presentation reflects the number of common shares into which the aforementioned derivatives are
indexed as of:



|                                                                                                       |      |              |      |          
|------------------------------------------------------------------------------------------------------ | ---- | ------------ | ---- | ---------
|                                                                                                       |      | December 31,
|                                                                                                       | 2006 |              | 2005
|Accentia Common shares indexed:                                                                        |      |              |      |          
|Embedded derivative instruments that have been bifurcated                                              |      |             |      | 2,680,254
|Freestanding derivative (warrants issued in connection with convertible debentures)                    |      | 3,681,656    |      | 1,328,778
|Default Put Liability                                                                                  |      |             |      |         
|                                                                                                       |      |              |      |          
|                                                                                                       |      | 3,681,656    |      | 4,009,032
|                                                                                                       |      |              |      |          
|                                                                                                       |      |             
|Biovest Common shares indexed:                                                                         |      |              |      |          
|Freestanding derivative (warrants to purchase Biovest shares issued to Laurus Funds, LTD. by Accentia) |      | 10,000,000   |      |         
|                                                                                                       |      |              |      |          

Derivative income (expense) in the accompanying statement of operations is related to the individual derivatives
as follows:



|                                    |      |                                  |          |      |  |   |          
|----------------------------------- | ---- | -------------------------------- | -------- | ---- |  | - | ---------
|                                    |      | Three Months Ending December 31,
|                                    | 2006 |                                  |          | 2005
|Embedded derivative instruments     |      | $                                |         |      |  | $ | 5,571,405
|Freestanding derivatives (warrants) |      |                                  | (664,123 | )    |  |   | 792,072  
|Default Put Liability               |      |                                  | 14,192   |      |  |   |         
|                                    |      |                                  |          |      |  |   |          
|                                    |      | $                                | (649,931 | )    |  | $ | 6,363,477
|                                    |      |                                  |          |      |  |   |          

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, warrants, and other convertible
instruments. 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, warrants, and other convertible instruments outstanding are anti-dilutive.

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



|                                                                         |                  |                            |             |                  |  |   |            |  
|------------------------------------------------------------------------ | ---------------- | -------------------------- | ----------- | ---------------- |  | - | ---------- | -
|                                                                         |                  | For the Three Months Ended |            
|                                                                         | December 31,2006 |                            |             | December 31,2005 | 
|Numerator:                                                               |                  |                            |             |                  |  |   |            |  
|Net loss applicable to common stockholders                               |                  | $                          | (30,641,013 | )                |  | $ | (357,765   | )
|                                                                         |                  |                            |             |                  |  |   |            |  
|Denominator:                                                             |                  |                            |             |                  |  |   |            |  
|For basic loss per shareweighted average shares                         |                  |                            | 31,720,472  |                  |  |   | 20,695,219 |  
|Effect of dilutive securities                                            |                  |                            |            |                  |  |   |           |  
|                                                                         |                  |                            |             |                  |  |   |            |  
|Weighted average shares for dilutive loss per share                      |                  |                            | 31,720,472  |                  |  |   | 20,695,219 |  
|                                                                         |                  |                            |             |                  |  |   |            |  
|Net loss per share applicable to common stockholders, basic and dilutive |                  | $                          | (0.97       | )                |  | $ | (0.02      | )
|                                                                         |                  |                            |             |                  |  |   |            |  



12



---

ACCENTIA BIOPHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED DECEMBER 31,
2006 AND 2005



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:



|                                              |  |                  |  |                 
|--------------------------------------------- |  | ---------------- |  | ----------------
|                                              |  | December 31,2006 |  | December 31,2005
|Options and warrants to purchase common stock |  | 9,666,697        |  | 3,034,105       
|Convertible debt                              |  | 11,121,551       |  | 1,743,358       

Stock based compensation

The Company uses the accounting provisions of Statement of Financial Accounting Standards No. FAS 123R  Accounting for Stock-Based Compensation (FASA 123R), which requires the use of the fair-value based
method to determine compensation for all arrangements under which employees and others receive shares of stock or equity instruments (warrants and options). The Company uses the Black-Scholes options-pricing model to determine the fair value of each
option grant

Recent accounting pronouncements

The
Financial Accounting Standards Board (FASB) has recently announced a new interpretation, FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), which will be effective for fiscal years
beginning after December 15, 2006. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes.
FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company has not determined the impact of the adoption of FIN 48 on its consolidated financial statements.

In September 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements (SFAS
157). SFAS 157 clarifies the definition of fair value, describes methods used to appropriately measure fair value, and expands fair value disclosure requirements. This statement is effective for fiscal years beginning after
November 15, 2007. The Company is currently in the process of assessing the impact that SFAS 157 will have on the consolidated financial statements.

In September, 2006 the SEC staff issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (SAB 108). SAB 108
provides guidance on the process of quantifying financial statement misstatements, advising companies to use both a balance sheet (iron curtain) and an income statement (rollover) approach when quantifying and evaluating the
materiality of a misstatement. The iron curtain approach quantifies a misstatement based on the effects of correcting the misstatement existing in the balance sheet at the end of the reporting period. The rollover approach quantifies a misstatement
based on the amount of the error originating in the current period income statement, including the reversing effect of prior year misstatements. The use of this method can lead to the accumulation of misstatements in the balance sheet.

Under the guidance of SAB 108, companies will be required to adjust their financial statements if either the iron curtain or rollover approach results in the
quantification of a material misstatement. Previously filed reports would not be amended, but would be corrected the next time the company files prior year financial statements. Companies are allowed to record a one-time cumulative effect adjustment
to correct errors in prior years that previously had been considered immaterial based on their previous approach. SAB 108 is effective for the Company upon issuance of its Fiscal 2008 annual financial statements. However, early application of SAB
108 is permitted for interim periods prior to the issuance of the annual financial statements. The Company is currently evaluating the effect of SAB 108 on its financial statements.



13



---

ACCENTIA BIOPHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED DECEMBER 31,
2006 AND 2005



3. Liquidity and managements plans

The accompanying financial statements have been prepared on a going concern basis, which assumes Accentia will realize its assets and discharge its liabilities in the normal course of business. As reflected in the
accompanying consolidated financial statements, the Company incurred net losses of $30.6 million and used cash from operations of $12.9 million during the three months ended December 31, 2006, and has a working capital deficit of $39.2 million
at December 31, 2006. The Company projects operating deficits for fiscal 2007 before consideration of potential funding sources for this same period. These conditions raise substantial doubt about the Companys ability to continue as a
going concern. Funding to date of the Companys working capital requirements has resulted principally from the issuance of common and preferred stock and proceeds from debt.

The Company is currently engaged in efforts to restructure certain existing indebtedness in order to increase available funds on a near-term basis, and is also seeking additional financing through public or 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, the
Company may be required to delay, reduce the scope of, or eliminate one or more of the research or development programs or commercialization efforts.

The
Company further anticipates that Biovest will seek additional financing during the next six months through public and private equity offerings, debt financings, corporate collaborations, or licensing transactions. As of January 31, 2007, an
aggregate of $8.9 million intercompany demand notes payable to Accentia by Biovest are outstanding, representing funds advanced to Biovest in excess of the funding commitment under an investment agreement plus intercompany obligations arising from
the conversion of Biovest notes into common stock of Accentia in accordance with the terms of such notes. Management does not anticipate that Accentia will continue to finance Biovests operations. In addition, upon the completion of a Biovest
financing transaction, or other contemplated arrangements Management anticipates that Biovest may repay some or all of the outstanding demand notes.

No
assurances can be given that such financing will be available. While management is confident that they 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 31,2006 |           | September 30,2006
|Pharmaceutical products held for sale                                                                                                           |  | $                | 1,180,821 |                   | $ | 1,266,732
|Finished goods, other, net of $0.6 million and $0.4 million allowance for obsolescence at December 31, 2006 and September 30, 2006
respectively |  |                  | 21,651    |                   |   | 34,253   
|Work-in-process                                                                                                                                 |  |                  | 69,814    |                   |   | 102,228  
|Raw materials                                                                                                                                   |  |                  | 358,531   |                   |   | 96,972   
|                                                                                                                                                |  |                  |           |                   |   |          
|                                                                                                                                                |  |                  | 1,630,817 |                   |   | 1,500,185
|                                                                                                                                                |  |                  |           |                   |   |          

5. Intangible assets



|                                               |  |                               |            |   |                              |   |            |  
|---------------------------------------------- |  | ----------------------------- | ---------- | - | ---------------------------- | - | ---------- | -
|                                               |  | December 31, 2006 (unaudited) |            |   | September 30, 2006 (audited) |  
|Goodwill                                       |  | $                             | 1,193,437  |   |                              | $ | 1,193,437  |  
|Other intangible assets:                       |  |                               |            |   |                              |   |            |  
|Product rights                                 |  |                               | 16,142,699 |   |                              |   | 19,914,707 |  
|Non-compete agreements                         |  |                               | 2,104,000  |   |                              |   | 2,104,000  |  
|Trademarks                                     |  |                               | 1,634,659  |   |                              |   | 1,634,659  |  
|Purchased customer relationships               |  |                               | 1,268,950  |   |                              |   | 1,268,950  |  
|Other intangible assets                        |  |                               | 648,288    |   |                              |   | 648,288    |  
|Accumulated amortization                       |  |                               | (5,564,327 | ) |                              |   | (7,783,227 | )
|                                               |  |                               |            |   |                              |   |            |  
|Total other intangible assets                  |  | $                             | 16,234,265 |   |                              | $ | 17,787,377 |  
|                                               |  |                               |            |   |                              |   |            |  
|                                               |  |                              
|Amortizable portion of other intangible assets |  | $                             | 14,483,698 |   |                              | $ | 16,036,807 |  

Future amortization of intangibles is as follows as of December 31, 2006:



|                          |  |   |           
|------------------------- |  | - | ----------
|Years ending December 31, |  |  
|2007                      |  | $ | 1,032,541 
|2008                      |  |   | 996,070   
|2009                      |  |   | 968,511   
|2010                      |  |   | 961,752   
|Thereafter                |  |   | 10,524,824
|                          |  |   |           
|Total                     |  | $ | 14,483,698

In October 2006, the Company entered into two separate transactions with two non-affiliated third party purchasers
to sell all rights to market and distribute the Xodol and Histex product lines. The sale of these assets required Laurus Master Funds, Ltd. consent. The loss recognized in the quarter ended December 31, 2006 included an allocated portion of the
expense associated with the warrants issued to Laurus Master Funds, Ltd. to gain their consent for these transactions.



14



---

ACCENTIA BIOPHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED DECEMBER 31,
2006 AND 2005



6. Lines of credit

Lines of credit consist of the following:



|                                                                                                                                                                                                                                                                                 |  |                  |            |                   |   |           
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ---------- | ----------------- | - | ----------
|                                                                                                                                                                                                                                                                                 |  | December 31,2006 |            | September 30,2005
|Related Party:                                                                                                                                                                                                                                                                   |  |                  |            |                   |   |           
|Bridge note related party, interest at 4.25%, unsecured, matures August 2007 (a)                                                                                                                                                                                                 |  | $                | 1,060,497  |                   | $ | 1,060,497 
|Other:                                                                                                                                                                                                                                                                           |  |                  |            |                   |   |           
|Secured revolving note, of which $2.5 million is convertible, due to Laurus Master Fund, Ltd., interest at prime plus 2% (10.25% at
December 31, 2006); matures April 2008; principal and accrued interest convertible at fixed conversion price of $6.80 per share (See Note 6) |  |                  | 9,442,422  |                   |   | 9,925,473 
|Revolving credit agreement, interest at prime rate (8.25% at December 31, 2006); matures January 2008; secured by Companys accounts
receivable and guarantee of major stockholder                                                                                               |  |                  | 3,789,000  |                   |   | 4,000,000 
|                                                                                                                                                                                                                                                                                 |  |                  |            |                   |   |           
|                                                                                                                                                                                                                                                                                 |  |                  | 14,291,919 |                   |   | 14,985,970
|Less current maturities                                                                                                                                                                                                                                                          |  |                  | 14,291,919 |                   |   | 14,985,970
|                                                                                                                                                                                                                                                                                 |  |                  |            |                   |   |           
|                                                                                                                                                                                                                                                                                 |  | $                |           |                   | $ |          
|                                                                                                                                                                                                                                                                                 |  |                  |            |                   |   |           

---

|(a) | This note was amended to provide up to $4.0 million in available borrowings from Hopkins II. The Company may prepay the bridge loan at any time without penalty or premium.
However, 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.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Company has the unconditional right to borrow up to $4.0 million in the aggregate upon ten days prior written
notice to Hopkins II. The Companys right to borrow any amounts in excess of $4.0 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, 2006, $1.1 million is outstanding under this bridge loan after conversion of $3.2 million in principal into common stock in May 2006, leaving potentially available borrowing capacity of $2.9 million. 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.

Dr. Francis E. ODonnell, the Companys 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.

Weighted average interest on
all short-term borrowings aggregated 9.27% and 9.29% at December 31, 2006 and September 30 2006, respectively. At December 31, 2006, the Company has an aggregate of $3.7 million available under its lines of credit.



15



---

ACCENTIA BIOPHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED DECEMBER 31,
2006 AND 2005



7. Long-term debt

Long-term debt consists of the following:



|                                                                                                                                                                                     |  |                  |            |   |                  |   |            |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---------------- | ---------- | - | ---------------- | - | ---------- | -
|                                                                                                                                                                                     |  | December 31,2006 |            |   | September 302006 |  
|Face value $25,000,000 convertible debentures, at fair value (e)                                                                                                                     |  | $                | 29,723,377 |   |                  | $ | 21,727,869 |  
|Convertible amortizing term note, due to Laurus Master Fund, LTD., interest payable monthly at prime rate plus 4%; due April 2008
(a)(c)                                             |  |                  | 5,611,987  |   |                  |   | 6,166,670  |  
|Convertible notes payable, Biovest 2000 bridge financing, interest at 10%, due in 2007(b)                                                                                            |  |                  | 92,126     |   |                  |   | 114,499    |  
|Convertible amortizing term note (owed by Biovest), due to Laurus Master Fund, Ltd., interest payable monthly at the greater of prime rate
plus 2% or 10.25%, due March 31, 2009 (c) |  |                  | 1,935,199  |   |                  |   | 2,354,128  |  
|Term note, Pulaski Bank and Trust Company, interest payable monthly at prime rate minus 0.05% or 8.20%, repaid December 2006
(d)                                                     |  |                  |           |   |                  |   | 2,000,000  |  
|Note payable, former employee settlement                                                                                                                                             |  |                  | 80,933     |   |                  |   | 119,950    |  
|Other                                                                                                                                                                                |  |                  | 101,416    |   |                  |   | 104,263    |  
|Long term accrued interest                                                                                                                                                           |  |                  | 105,936    |   |                  |   | 85,978     |  
|                                                                                                                                                                                     |  |                  |            |   |                  |   |            |  
|                                                                                                                                                                                     |  |                  | 37,650,974 |   |                  |   | 32,673,357 |  
|Less current maturities                                                                                                                                                              |  |                  | (5,959,341 | ) |                  |   | (5,652,152 | )
|                                                                                                                                                                                     |  |                  |            |   |                  |   |            |  
|                                                                                                                                                                                     |  | $                | 31,691,633 |   |                  | $ | 27,021,205 |  
|                                                                                                                                                                                     |  |                  |            |   |                  |   |            |  

---

Footnotes to long-term debt

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

|(b) | 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.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(c) | 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. The debt provides for monthly
payment provisions, a variable interest feature that includes a cap of 9.0% and a default put at 130% of face value for certain contingent events, including service defaults and changes in control, for the amortizing portion of the arrangement;
these features are not present for unreleased, non-amortizing balances. The Company evaluated all terms and conditions of the amortizing notes for indications of embedded derivative financial instruments. While the interest rate cap was found to be
clearly and closely related to the host instrument, the Company determined that the default put did not meet the clearly and closely related criteria as provided in FASB 133 Derivative Financial Instruments. Accordingly, upon release of funds
underlying the first tranche, the Company reclassified an amount of $306,750 which represents the estimated fair value of the default put liability to derivative liability. Upon release of funds under the second tranche, the Company reclassified
$122,700 to derivative liability. The default liability is initially and subsequently carried at fair value with changes recorded in income. Accordingly, $352,597 and $236,369 are recorded as a derivative liability in the accompanying balances sheet
on December 31, 2006 and September 30, 2006, respectively.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(d) | Upon issuance of the note, $50,000 of the principal amount was disbursed at the closing to Pulaski to cover closing fees relating to the loan transaction. The note was repaid in
December 2006. Biovest issued to Pulaski a warrant to purchase up to 66,667 shares of Biovests Common Stock, par value $0.01 per share, at an exercise price of $1.10 per share. The warrant will expire on September 5, 2011. The warrant
provides Pulaski with piggy-back registration rights for the shares underlying the warrant.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(e) | Private Placement of $25.0 million in principal amount of 8% Secured Convertible Debentures due September 29, 2010, resulting in gross proceeds of $23.5
million after placement agent fees of $1.5 million but before other expenses associated with the transaction. A total of $7.3 million of the proceeds from the Private Offering were placed into an escrow account and will be paid to Laurus when
certain amounts become due under the Companys credit facility with Laurus. The Debentures are convertible at any time, at the option of the holder, into shares of the Companys common stock at $2.60 per share, subject to adjustment for
stock splits, stock dividends, and the like. Debentures bear interest at 8% per annum with interest payable
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



16



---

ACCENTIA BIOPHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED DECEMBER 31,
2006 AND 2005



| | quarterly in arrears in cash, or, at the Companys option, in shares of Company common stock. The Debentures will bear default interest at a rate of
18% per annum. The increase from September 30, 2006 was due to an adjustment to fair market value at December 31, 2006.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Beginning October 1, 2007, and on the 1stof each month thereafter, the Company may elect to redeem 1/37thof the face value of the Debentures in cash or, at the Companys election, with shares of Company common stock, shares of BVTI common stock held by the Company, or a combination thereof. Any
unconverted Debentures will become due on September 29, 2010

As a part of the Private Placement, the Company issued Warrants to the
purchasers of the Debentures giving them the right to purchase up to an aggregate of 3,136,201 shares of the Companys common stock at an exercise price of $2.75 per share, provided that such Warrants may be alternatively exercised for shares
of BVTI common stock held by the Company at an exercise price of $1.10 per share. All of the Warrants (including the warrants granted to the Placement Agent) will expire on September 29, 2011.

Unless and until shareholder approval of the Private Placement is obtained by the Company, the aggregate number of shares of the Common Stock of the
Company issuable upon the conversion of any of the Debentures and upon the exercise of any of the Warrants is limited to 19.99% of the number of shares of Company common stock outstanding on the date of the closing of the Private Placement.

Future maturities of long-term debt are as follows as of December 31, 2006:



|                                                                                 |  |   |            |  
|-------------------------------------------------------------------------------- |  | - | ---------- | -
|Years ending December 31,                                                        |  |   |           
|2007                                                                             |  | $ | 9,185,046  |  
|2008                                                                             |  |   | 15,447,436 |  
|2009                                                                             |  |   | 9,144,333  |  
|2010                                                                             |  |   | 6,412,000  |  
|                                                                                 |  |   |            |  
|                                                                                 |  |   | 40,188,815 |  
|Less unamortized discount and adjustment to fair value on convertible debentures |  |   | (2,537,841 | )
|                                                                                 |  |   |            |  
|                                                                                 |  | $ | 37,650,974 |  
|                                                                                 |  |   |            |  



17



---

ACCENTIA BIOPHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED DECEMBER 31,
2006 AND 2005



Laurus Master Funds, Ltd.

The Laurus financings (owed by Accentia) included registration rights and certain other terms and conditions related to share settlement of the embedded derivatives and the warrants that the Company has determined are not within its
control. In addition, certain features associated with the financings, such as anti-dilution protection afforded the financing agreements render the number of shares issuable to be indeterminate. In these instances, EITF 00-19 Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a Companys Own Stock, requires allocation of the proceeds between the various instruments and the derivative elements carried at fair values. The following represents the
allocation of the proceeds:



|                                                                                                   |  |   |            |  
|-------------------------------------------------------------------------------------------------- |  | - | ---------- | -
|Original principal balance of Laurus notes                                                         |  | $ | 20,000,000 |  
|Less reduction for:                                                                                |  |   |            |  
|Fair value of beneficial conversion of options                                                     |  |   | (4,413,514 | )
|Fair value of warrants                                                                             |  |   | (3,989,610 | )
|                                                                                                   |  |   |            |  
|Recorded at closing                                                                                |  |   | 11,596,876 |  
|Accretion of discount (interest expense) through December 31, 2006 using effective interest method |  |   | 1,280,387  |  
|Loss on extinguishment of debt resulting from the August 2005 amendment                            |  |   | 4,808,782  |  
|Debt payments                                                                                      |  |   | (2,631,636 | )
|                                                                                                   |  |   |            |  
|Carrying value at December 31, 2006                                                                |  | $ | 15,054,409 |  
|                                                                                                   |  |   |            |  
|As presented on balance sheet:                                                                     |  |   |            |  
|Current maturities of long-term debt-other                                                         |  | $ | 2,506,651  |  
|Lines of credit-current                                                                            |  |   | 9,442,422  |  
|Long-term debt, net of current maturities-other                                                    |  |   | 3,105,336  |  
|                                                                                                   |  |   |            |  
|                                                                                                   |  | $ | 15,054,409 |  
|                                                                                                   |  |   |            |  

The discount to the debt instruments resulting from the aforementioned allocation is being amortized through
periodic charges to interest expense using the effective method for the Notes.

The fair value of convertible notes for disclosure purposes only are
estimated based upon the present value of the estimated cash flow at credit risk adjusted interest rates for convertible instruments. As of December 31, 2006, estimated fair values and respective carrying values for debt instruments are as
follows:



|                                                     |  |            |           |                |   |          
|---------------------------------------------------- |  | ---------- | --------- | -------------- | - | ---------
|                                                     |  | Fair Value |           | Carrying Value
|$10,000,000 Face Value Convertible Secured Term Note |  | $          | 7,741,934 |                | $ | 5,611,987
|$10,000,000 Revolving Line of Credit                 |  | $          | 9,499,120 |                | $ | 9,442,422

8. Stockholders equity

During the three months ended December 31, 2006, the following shares of common stock were issued:



|                                                  
|--------------------------------------------------
|10,550 for cash upon the exercise of stock options
|6,849 shares for financing costs                  



18



---

ACCENTIA BIOPHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED DECEMBER 31,
2006 AND 2005



9. Operational results for Biovest

The following is the results of Biovest on a stand-alone basis as compared to Accentia consolidated results with out Biovest.



|                                                         |         |                                         |             |                             |  |   |            |   |  |                             |            |   |  |   |            |  
|-------------------------------------------------------- | ------- | --------------------------------------- | ----------- | --------------------------- |  | - | ---------- | - |  | --------------------------- | ---------- | - |  | - | ---------- | -
|                                                         |         | For the three months ended December 31, |            
|                                                         | 2006    |                                         |             | 2005                        | 
|                                                         | Biovest |                                         |             | Consolidatedwithout Biovest |  |   | Biovest    |   |  | Consolidatedwithout Biovest |           
|Net sales                                                |         | $                                       | 1,327,108   |                             |  | $ | 4,554,635  |   |  | $                           | 1,084,975  |   |  | $ | 5,732,991  |  
|Cost of sales                                            |         |                                         | 766,092     |                             |  |   | 859,200    |   |  |                             | 602,903    |   |  |   | 1,272,870  |  
|                                                         |         |                                         |             |                             |  |   |            |   |  |                             |            |   |  |   |            |  
|Gross margin                                             |         |                                         | 561,016     |                             |  |   | 3,695,435  |   |  |                             | 482,072    |   |  |   | 4,460,121  |  
|Operating expenses                                       |         |                                         | 8,956,560   |                             |  |   | 4,404,111  |   |  |                             | 3,424,946  |   |  |   | 8,924,989  |  
|                                                         |         |                                         |             |                             |  |   |            |   |  |                             |            |   |  |   |            |  
|Loss from operations                                     |         |                                         | (8,395,544  | )                           |  |   | (708,676   | ) |  |                             | (2,942,874 | ) |  |   | (4,464,868 | )
|Interest expense                                         |         |                                         | (2,039,692  | )                           |  |   | (1,183,012 | ) |  |                             | (108,590   | ) |  |   | (897,390   | )
|Other income (expense)                                   |         |                                         | (13,529,752 | )                           |  |   | (4,403,807 | ) |  |                             | 37,500     |   |  |   | 5,919      |  
|Derivative gain (loss)                                   |         |                                         | 14,192      |                             |  |   | (664,123   | ) |  |                             |           |   |  |   | 6,363,477  |  
|Absorption of prior losses against minority interest     |         |                                         |            |                             |  |   | 269,401    |   |  |                             |           |   |  |   | 1,689,800  |  
|                                                         |         |                                         |             |                             |  |   |            |   |  |                             |            |   |  |   |            |  
|Net income (loss)                                        |         |                                         | (23,950,796 | )                           |  |   | (6,690,217 | ) |  |                             | (3,013,964 | ) |  |   | 2,696,938  |  
|Dividends                                                |         |                                         |            |                             |  |   |           |   |  |                             |           |   |  |   | (40,739    | )
|                                                         |         |                                         |             |                             |  |   |            |   |  |                             |            |   |  |   |            |  
|Income (loss) attributable to common shareholders        |         |                                         | (23,950,796 | )                           |  |   | (6,690,217 | ) |  |                             | (3,013,964 | ) |  |   | 2,656,199  |  
|                                                         |         |                                         |             |                             |  |   |            |   |  |                             |            |   |  |   |            |  
|Weighted average shares outstanding, basic and diluted   |         |                                         | 31,720,472  |                             |  |   | 31,720,472 |   |  |                             | 20,695,219 |   |  |   | 20,695,219 |  
|Loss attributable to common stockholder per common share |         |                                         | (0.76       | )                           |  |   | (0.21      | ) |  |                             | (0.15      | ) |  |   | 0.13       |  



19



---

ACCENTIA BIOPHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED DECEMBER 31,
2006 AND 2005



10. Segment information

We define our segment operating results as earnings (loss) before general and administrative costs, interest expense, interest income, other income, and income taxes. Inter-segment sales were $0.06 and $0.1 million
for the three months ended December 31, 2006 and 2005 respectively. Inter-segment sales 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, 2006 is as follows:



|                         |  |                                       |            |                          |   |           |  |   |           
|------------------------ |  | ------------------------------------- | ---------- | ------------------------ | - | --------- |  | - | ----------
|                         |  | BiopharmaceuticalProductsand Services |            | SpecialtyPharmaceuticals |   | Total    
|Net sales:               |  |                                       |            |                          |   |           |  |   |           
|Products                 |  | $                                     | 1,002,762  |                          | $ | 2,106,556 |  | $ | 3,109,318 
|Services                 |  |                                       | 2,772,425  |                          |   |          |  |   | 2,772,425 
|                         |  |                                       |            |                          |   |           |  |   |           
|Total net sales          |  |                                       | 3,775,187  |                          |   | 2,106,556 |  |   | 5,881,743 
|                         |  |                                       |            |                          |   |           |  |   |           
|                         |  |                                       |           
|Cost of sales:           |  |                                       |            |                          |   |           |  |   |           
|Products                 |  |                                       | 398,737    |                          |   | 436,003   |  |   | 834,740   
|Services                 |  |                                       | 790,552    |                          |   |          |  |   | 790,552   
|                         |  |                                       |            |                          |   |           |  |   |           
|Total cost of sales      |  |                                       | 1,189,289  |                          |   | 436,003   |  |   | 1,625,292 
|                         |  |                                       |            |                          |   |           |  |   |           
|                         |  |                                       |           
|Gross margin             |  |                                       | 2,585,898  |                          |   | 1,670,553 |  |   | 4,256,451 
|                         |  |                                       |           
|Sales and marketing      |  |                                       | 29,457     |                          |   | 2,147,998 |  |   | 2,177,455 
|Research and development |  |                                       | 4,390,758  |                          |   |          |  |   | 4,390,758 
|Total assets             |  |                                       | 38,212,456 |                          |   | 5,287,527 |  |   | 43,499,983
|Goodwill                 |  |                                       | 1,193,437  |                          |   |          |  |   | 1,193,437 



20



---

ACCENTIA BIOPHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED DECEMBER 31,
2006 AND 2005



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 

Domestic and foreign operations

Total assets and net losses of the Companys foreign subsidiary were insignificant; however, total revenues aggregated approximately 22% of total revenues of the Company in the three months ended
December 31, 2006. This entity, 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, 2006 is as follows:



|                  |  |          |             |   |                       |   |           |  |   |             |  
|----------------- |  | -------- | ----------- | - | --------------------- | - | --------- |  | - | ----------- | -
|                  |  | Domestic |             |   | International(Europe) |   | Total     | 
|Net sales         |  | $        | 4,603,901   |   |                       | $ | 1,277,842 |  | $ | 5,881,743   |  
|Net income (loss) |  |          | (31,160,866 | ) |                       |   | 519,853   |  |   | (30,641,013 | )
|Total Assets      |  |          | 39,759,118  |   |                       |   | 3,740,865 |  |   | 43,499,983  |  
|Goodwill          |  |          | 893,000     |   |                       |   | 300,437   |  |   | 1,193,437   |  

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  |  



21



---

ACCENTIA BIOPHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED DECEMBER 31,
2006 AND 2005



11. Commitments and contingencies

a) Operating leases

The Company has operating leases for various facilities, automobiles, machinery, and equipment,
which expire at various times through 2011. The annual aggregate rental commitments under non-cancelable leases are as follows:



|                         |  |   |          
|------------------------ |  | - | ---------
|Year ending December 31, |  |  
|2007                     |  | $ | 2,118,846
|2008                     |  |   | 1,922,339
|2009                     |  |   | 1,723,995
|2010                     |  |   | 658,047  
|2011                     |  |   | 330,363  
|                         |  |   |          
|                         |  | $ | 6,753,590
|                         |  |   |          

Rent expense for all operating leases was approximately $0.8 million, and $0.9 million, for the three months ended
December 31, 2006 and December 31, 2005, respectively

Rental income from subleases aggregated $0.1 million and $35,000 in the three months ended
December 31, 2006 and December 31, 2005, respectively.

b) Litigation

The Companys Analytica subsidiary is a party to a litigation brought against a former employee, alleging breach of covenants not to compete, breach of confidentiality agreements and misappropriation of
proprietary information. This matter is pending in the Supreme Court of New York, New York County. The defendant has filed an Answer containing counterclaims against Analytica, the Company and an officer of the Company. The Company has filed a
motion seeking to dismiss all claims naming the Company and the Companys officer personally, and to dismiss certain claims against all defendants. The Company has indicated that it plans to pursue its affirmative claims in this matter
vigorously and will assert all available defenses against the counterclaims, which the Company believes are without merit.

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

Further, from time to time the Company is subject to various legal proceedings in the normal course of business, some of which is covered by insurance. Management
believes that these proceedings will not have a material adverse effect on the financial statements.

12. New Market Tax Credits Financing

On December 8, 2006, Biovest through its wholly owned subsidiary, AutovaxID, Inc. (AutovaxID) closed a financing transaction (the
Transaction) that was structured in an effort to obtain certain perceived advantages and enhancements from the New Markets Tax Credit regulations adopted under the auspices of the United States Department of the Treasury in 2002 to
provide incentive for investing in businesses located in qualifying census tracts, or areas with a median income below the poverty line. AutovaxID is presently located in a qualifying census tract, and the New Plant (as defined below)
will be located in a qualifying census tract.

In the Transaction, AutovaxID entered into a QLICI Loan Agreement where St. Louis New Markets Tax Credit
Fund-II, LLC (the CDE) made a loan to AutovaxID, evidenced by a Subordinated Promissory Note dated as of December 8, 2006, in the principal amount of $7,700,000 (CDE Loan). The CDE Loan has a maturity date of
December 8, 2036 and is described in more detail below, qualified entirely by the QLICI Loan Agreement attached as an exhibit. The following parties were involved in the Transaction: AutovaxID, Accentia Biopharmaceuticals, Inc., Biovests
majority shareholder (Accentia), Biolender II, LLC (Biolender II), the CDE, St. Louis Development Corporation (SLDC), AutovaxID Investment LLC (Leverage Fund), U.S. Bancorp Community Investment
Corporation (USBCIC) and Laurus Master Fund, Ltd. (Laurus).



22



---

ACCENTIA BIOPHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED DECEMBER 31,
2006 AND 2005



Under a License and Asset Purchase Agreement dated as of December 8, 2006, Biovest granted a nonexclusive
license to the intellectual property enabling AutovaxID to manufacture and sell automated cell culture instruments in the United States, Canada and Mexico (the License), which license will become exclusive upon the occupancy by AutovaxID
of a space located at 1031 Macklind Avenue, St. Louis, Missouri (the New Plant). Biovest also agreed to sell AutovaxID certain equipment (the Equipment) to AutovaxID upon the occupancy by AutovaxID of the New Plant. AutovaxID
must use its best efforts to occupy the New Plant by March 31, 2007, and must occupy the new plant by June 15, 2007. As full purchase price for the License and related business opportunity, AutovaxID paid Biovest $5,600,000. Upon the
attainment of occupancy of the New Plant, AutovaxID will pay Biovest fair market value for the Equipment, which is estimated to be $896,100.

Previously,
on March 31, 2006 in contemplation of the Transaction and other prior New Markets Tax Credit financings and other financings, Biovest closed a financing transaction with Laurus pursuant to which Laurus purchased from Biovest a secured
promissory note in the principal amount of $7,799,000 (the Laurus Note). Under the terms of the Laurus Note, $7,500,000 of the principal amount was deposited into a restricted bank account of Biovest (the Restricted Account)
pursuant to a restricted account agreement between Biovest and Laurus. Accentia, Analytica International, Inc. (formerly The Analytica Group, Inc.) and Laurus also entered into an Amended and Restated Stock Pledge Agreement pledging Accentias
shares of TEAMM Pharmaceuticals, Inc., Analytica International, Inc., Biovest and others (including AutovaxID and Biolender II, who were added as obligors by way of joinder) to secure the obligations owed to Laurus as a result of the Laurus Note and
Transaction.

On December 8, 2006, Accentia loaned to Biovest $3,100,000 pursuant to a Secured Promissory Note (the Accentia Note). Under
the terms of the Accentia Note, interest shall accrue at a rate equal to prime rate, payable upon demand of Accentia. Biovest shall pay principal and interest as follows: (a) $1,100,000 was paid to Accentia upon the closing of the Transaction
and (b) the remaining $2,000,000 of principal and all accrued and unpaid interest shall be paid by Biovest upon demand by Accentia.

In contemplation
of the Transaction, Biovest formed Biolender II, LLC as a Delaware limited liability company. On December 8, 2006, $2,500,000 was released from the Restricted Account created under the Laurus Note, which together with the amount loaned to
Biovest under the Accentia Note funded the purchase of a 100% equity interest in Biolender II for the benefit of Biovest. The entire equity interest in Biolender II owned by Biovest has been pledged to Laurus as collateral to secure the Laurus Note.

Upon the completion of the funding of Biolender II by Biovest and receipt of $2,400,000 from USBCIC via an equity investment in the Leverage Fund,
Biolender II and the Leverage Fund entered into a Loan and Security Agreement pursuant to which Biolender II made a loan to the Leverage Fund in the principal amount of $5,600,000 (the Leverage Loan), evidenced by a promissory note dated
as of December 8, 2006 payable from the Leverage Fund to Biolender II (the Leverage Note). The Leverage Note becomes due on December 10, 2013.

Interest on the Leverage Loan accrues on the outstanding principal amount of the Leverage Loan at the rate of 8.00% per annum, non-compounding, commencing on December 8, 2006 until May 9, 2014; and
shall be payable in arrears on an annual basis commencing on the first business day after December 31, 2006. Any remaining accrued and unpaid interest shall be payable in one installment on the maturity date. All interest on the Leverage Loan
shall accrue based on the actual number of days elapsed and calculated based on a year of three hundred and sixty (360) days. The outstanding principal amount on the Leverage Loan is due on maturity in cash.

The Leverage Fund then contributed equity to the CDE (the QEI Contribution), which equity is expected to constitute a qualified equity investment
(QEI) under the New Markets Tax Credit Program authorized by Section 45D of the Internal Revenue Code of 1986, as amended, and the rules and regulations promulgated thereunder (collectively, the Code and the program the
NMTC Program) and administered by the Community Development Financial Institutions Fund of the United States Treasury Department (CDFI Fund). All of Leverage Funds interest in the CDE has been pledged to Biolender II as
collateral for the Leverage Note.

The proceeds of the QEI Contribution were used by the CDE to fund the CDE Loan, which is expected to constitute a
qualified low-income community investment (QLICI) under the NMTC Program. AutovaxIDs business is and will be conducted within a United States population census tract which constitutes a Low-Income Community under the
NMTC Program. As a condition of making the equity contribution to the Leverage Fund, USBCIC required AutovaxID to indemnify it under a Tax Credit and Reimbursement and Indemnity Agreement against any loss of the tax credits as a result of the CDE
Loan to constitute a QLICI and certain other conditions generally known as a recapture event.



23



---

ACCENTIA BIOPHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED DECEMBER 31,
2006 AND 2005



The following describes certain material terms of the CDE Loan and transactional warrants related to the Transaction:



| |  |  | The CDE Loan has a principal amount of $7,700,000 and matures on December 8, 2036. Pursuant to a call right, for a period of six months starting on
December 8, 2013, the CDE will have the right to call for the repayment of the CDE Loan in the amount of $5,721,000, in full satisfaction of the principal on the CDE Loan. Interest on the outstanding principal amount of the CDE Loan shall
accrue at the rate of 5.82% per annum, non-compounding and shall be payable in arrears on an annual basis commencing on January 2, 2007 and continuing until maturity. The CDE Loan is guaranteed by Biovest.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | The CDE Loan shall be due and payable by AutovaxID in full on the maturity date of the CDE Loan. However, if the CDE exercises its call right pursuant to the CDE
Loan, then the CDE Loan becomes due and payable on the date of such call for the amount of $5,721,000, in full satisfaction of the principal on the CDE Loan, together with all accrued but unpaid interest.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | AutovaxID has the right to prepay the CDE Loan at any time, provided that, if it prepays the CDE Loan on or before May 8, 2014, (i) it prepays the entire
CDE Loan amount, (ii) the CDE consents to such prepayment and USBCIC and the managing member of the CDE agree on the reinvestment of such proceeds in an alternative investment that would qualify as a QLICI and (iii) AutovaxID or the
Individual Guarantors (as defined below) under the Tax Credit and Reimbursement and Indemnity Agreement pay to USBCIC the recapture amount so specified is such agreement.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | Under a Put Option Agreement, starting on December 9, 2013, USBCIC will have the right to require Biolender II to purchase the equity interests of the Leverage
Fund during a three month exercise period. Biolender II shall have the obligation to acquire the members interest in the Leverage Fund under this Put Option Agreement for the payment to USBCIC of $120,000. Furthermore, under a Purchase Option
Agreement, for a three month period after the expiration of the put option and to the extent that the put option was not exercised, Biolender II will have the option to purchase USBCICs equity interests in the Leverage Fund based on the fair
market value of the equity interests at that time.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Accounting for the NMTC financing arrangement:

The Company evaluated the structure of the NMTC financing arrangement and entities so involved under the context of FIN46. FIN46 provides a framework for determining
whether certain entities should be consolidated (irrespective of equity ownership) based upon a variable interests model. This model determines the control and consolidation based upon potential variability in gains and losses of the entity being
evaluated for consolidation. Generally, a variable interest holder that absorbs a majority of the entitys expected losses, if they occur, receives a majority of the entitys expected residual return, if they occur, or both is identified
as the primary beneficiary for consolidation purposes.



24



---

ACCENTIA BIOPHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED DECEMBER 31,
2006 AND 2005



The Company concluded that the Fund and the CDE met the definition of variable interest entity. However, for the
Company to be required to apply the provisions of the Interpretation, it must have a variable interest in the entity. Variable interests in a variable interest entity are contractual, ownership or other money interests in an entity that change with
changes in the value of the net assets of the entity. The following table illustrates the variable interests have been identified in each of the entities considered by the Company and the related holder:



|                                  |  |                                                                                                            |  |                                              
|--------------------------------- |  | ---------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------
|Variable Interest Holder          |  | Variable Interests Fund                                                                                    |  | Variable Interests CDE                       
|Biovest and its Related Parties   |  | Senior beneficial interest Guaranty
Agreement Indemnification Agreement Put (VIE Equity)
Call (VIE Equity) |  | Senior beneficial interestGuarantee Agreement
|                                  |  |                                                                                                           
|Fund                              |  |                                                                                                            |  | VIE Equity (99.9%)                           
|                                  |  |                                                                                                           
|US Bancorp                        |  | VIE Equity (99.9%)                                                                                         |  | Tax Credit Rights                            
|                                  |  |                                                                                                           
|Autovax Investment LLC            |  | VIE Equity (0.01%)                                                                                         |  |                                              
|                                  |  |                                                                                                           
|St. Louis Development Corporation |  |                                                                                                            |  | VIE Equity (0.01%)                           

The above table illustrates the weight of the variable interests that are held by the Company. In addition, in
performing quantitative valuation, the Company afforded significant weight to the guarantee agreement, indemnification and put feature, the preponderance of which limit the equity investors risk of loss on the venture. In evaluating both
qualitative and quantitative considerations, the Company has concluded that its variable interests in the entity absorb most of the entities losses and should, therefore, consolidate the entities under the scope of FIN46.

Assets of $8.0 million and liabilities of $7.7 million of the variable interest entities identified above, are limited to the instruments referred to in the description
of the NMTC financing arrangement above. In accordance with consolidation principles, these assets and liabilities are eliminated in consolidation leaving the non-controlling interests of US Bancorp and St. Louis Development Corporation reflected on
the Companys December 31, 2006 condensed consolidated balance sheet as non controlling interests in variable interest entities. The warrants issued to the guarantors were expensed based upon their fair values. All intercompany accounts
will continue to be eliminated so long as (i) the entities meet the definition of variable interest entities and (ii) the Company is the primary beneficiary

13. Related party transactions

Accounts receivable, stockholder

Accounts receivable stockholder at September 30, 2006 consists of amounts due from McKesson, a holder of common stock. These amounts were collected during the three
months ended December 31, 2006.

See Notes 5 and 6 for related party notes payable

Related party license agreement and sale of royalty rights

On April 12, 2004, the Company entered into a
license agreement (as licensee) with BDSI relating to certain products. Accentias responsibilities included paying the costs associated with any of the commercial aspects, in keeping with its business plan (utilization of sales force,
education of the public and prescribing population, etc.). In connection therewith, BDSI is entitled to royalties of 12% for sales of all products covered under the MAYO agreement including but not limited to topical antifungal products that do not
require FDA approval and 14% of licensed products. The royalty obligations shall continue for each product for the term of the last to expire of the licensed patent rights covering the product.

Pharmaceutical Product Development, Inc. (PPD), a holder of our common stock, expressed an interest in purchasing certain royalty rights that BDSI possessed
in connection with its April 12, 2004 arrangement with the Company, but PPD did not wish to deal directly with BDSI since the original technology was licensed to the Company from MAYO. As a result the Company entered into an agreement to
acquire 50% of the royalty rights back from BDSI for $2.5 million.



25



---

ACCENTIA BIOPHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED DECEMBER 31,
2006 AND 2005



Simultaneous with the BDSI transaction, the Company entered into an agreement whereby PPD purchased from the Company
50% of said royalty rights based on the sale of certain products. The royalty rights are defined as 6% of net sales for all non-FDA products and 7% of all FDA product sales, which is 50% of the initial royalty calculations, respectively. The sales
price for these royalty rights was $2.5 million.

PPD acquired only the royalty rights and did not assume any liability or obligation of the Company.
Further, pursuant to the agreement, the Company has agreed to make minimum royalty payments through December 2009 of $2.5 million. Failure to make such minimum payments is deemed a material breach. In connection therewith, Accentia may make up such
shortfall to cure the breach. In addition, termination of the enabling agreements (BDSI and MAYO) constitutes a default as well as failure to maintain market exclusivity and failure to enforce Mayo Patent Rights. In the event of
termination, the Company is required to refund the purchase price less the aggregate royalties paid prior to termination, except that if aggregate royalties exceed $2.5 million, the Company has no obligation to refund the purchase price. The $2.5
million received from PPD is recorded as other liabilities, related party in the accompanying consolidated balance sheets. As such, other liabilities, related party includes $2.36 million and $2.37 million associated with this
transaction at December 31, 2006 and September 30, 2006, respectively (net of royalties earned through those respective dates). If royalties do materialize, they must be paid to PPD, at which time revenue from the sale of these rights to
PPD would be recognized.

Biologics distribution agreement with McKesson

In February 2004, the Company signed a biologics distribution agreement with McKesson (McKesson) Corporation to convey to McKesson exclusive rights to distribute all current and future biologic products
developed or acquired by the Company in the United States, Mexico and Canada. Pursuant to the agreement, McKesson remitted a $3.0 million non-interest bearing refundable deposit upon execution of the agreement and, as of December 31, 2006
and September 30, 2006, has been included in the accompanying consolidated balance sheets as deposits, related party. The refundable deposit will be returned to McKesson upon termination of the agreement and McKesson will then cease
to have the exclusive distribution rights. The Company may repurchase the rights granted McKesson prior to FDA approval of the Companys first biologic product upon payment of the greater of $6.0 million or 3% of the shareholders equity
of the Company at the time of termination. Pursuant to the agreement, the Company will pay a monthly royalty on all net revenues of all biologic products licensed by the Company and reimburse McKesson for all costs of distribution, as defined in the
agreement. The agreement shall continue until the first to occur of 1) mutual written termination, 2) written notice of material breach, not cured, 3) 180 days after McKesson requests termination, or 4) repurchase of the distribution rights by
Accentia prior to FDA approval. There were no biologics product sales subject to this agreement during the three months ended December 31, 2006 or 2005.

Agreements with Biovest

During the three months ended December 31, 2006, the following transactions occurred:



| |  |  | The Company and Biovest entered into a Royalty Agreement that terminated and superseded the Biologics Products Commercialization Agreement (the Biologics
Commercialization Agreement), dated August 17, 2004, between the two companies. The Biologics Commercialization Agreement had provided that the Company was the exclusive commercialization partner for Biovests biologic products and
was entitled to 49% of Biovests net profits from the sale of biologic products. Net revenue as used in the Biologics Commercialization Agreement included all receipts from the sale, license, sub-license, joint venture or other receipts from
each Biovest biologic product less all expenses including the costs of product acquisition, research, manufacture, sales, distribution, commercialization and governmental regulation. The new Royalty Agreement provides that the Company is no longer
Biovests exclusive commercialization partner and replaces the share of net profits with a 19.5% royalty based on net sales of biologics products. The products and territory subject to the Royalty Agreement remain identical to those terms as
previously contained in the Biologics Commercialization Agreement. In consideration for the Company entering into this Royalty Agreement, Biovest agreed to issue to the Company five million new shares of Biovest common stock, representing the
independently appraised value to Biovest of the new agreement.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



26



---

ACCENTIA BIOPHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED DECEMBER 31,
2006 AND 2005



| |  |  | The Company and Biovest entered into a Termination Agreement under which the Company agreed to immediately terminate its absolute anti-dilution rights that were
granted to the Company pursuant to the First Right of Refusal Agreement dated June 16, 2003 with Biovest. In consideration of the Companys termination of the First Right of Refusal Agreement, Biovest issued to the Company five million
additional new shares of Biovest common stock.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Company and Biovest entered into a Purchase Agreement whereby Biovest purchased the Companys 70.5% ownership interest in Biolender, LLC
(Biolender). Biolender is the entity that was formed by Biovest and the Company to participate in Biovests New Market Tax Credit enhanced financing that closed on April 25, 2006. Biolenders principal assets is a
promissory note in principal amount of $8.5 million which is anticipated to be repaid in approximately seven years when Biovest is required to repay the loan that it received as part of this New Market Tax Credit enhanced financing. In consideration
of the sale of this interest in Biolender, Biovest agreed to issue to the Company ten million additional new shares of Biovest common stock, representing the negotiated value of the purchased interest.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In order to consummate the foregoing transactions and other transactions as discussed in Note 14, the Company was required to obtain the consent of its senior
lender, Laurus Master Fund, Ltd. (Laurus), under the Companys loan agreements with Laurus. In consideration for providing such consent, the Company entered into an agreement with Laurus pursuant to which Laurus consented to certain
transactions and the Company issued to Laurus a warrant to purchase 10 million outstanding shares of Biovest common stock owned by the Company at an exercise price of $.01 per share. The warrant expires in October 2012.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The $9,428,000 fair value of the warrant has been recorded as Loss on financing transaction $8.8 million, and Loss on
sale of assets $0.6 million in the statement of operations for the three months ended December 31, 2006.

14. Stockholders equity

Stock options and warrants

The company provides
for two option plans, the 2003 Stock Option Plan (2003) per its second amendment on February 27, 2004, and the 2005 Equity Incentive Plan (2005). Both plans provide for the issuance of qualified and non-qualified options
as those terms are defined by the Internal Revenue Code.

The 2003 Plan, as amended, provides for the issuance of 3,500,000 shares of common stock, and
762,571 shares of Series D Preferred Stock. At December 31, 2006, all Series D Preferred options have been converted into common share options. All options issued, pursuant to the 2003 Plan, cannot have a term greater than ten years. Options
granted under this plan vest over periods established in the option agreement. As of December 31, 2006, 1,604,398 options are outstanding under the 2003 Plan.

On February 1, 2005, the Companys board of directors adopted the Accentia Biopharmaceuticals, Inc. 2005 Equity Incentive Plan. The 2005 Plan provides for the issuance of 3,000,000 shares of common stock. All options issued,
pursuant to the 2005 Plan, cannot have a term greater than ten years. Options granted under this plan vest over periods established in the option agreement. As of December 31, 2006, 1,947,144 options are outstanding under the 2005 Plan. The
Company may, at any time, amend or modify the Plan without limitation.



27



---

ACCENTIA BIOPHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED DECEMBER 31,
2006 AND 2005



Stock options and warrants issued, redeemed and outstanding during the quarter ended December 31, 2006 are as
follows:



|                                                     |  |             |   |  |                              
|---------------------------------------------------- |  | ----------- | - |  | -----------------------------
|                                                     |  | CommonStock |   |  | AverageExerciseprice pershare
|Options and warrants outstanding, September 30, 2006 |  | 8,302,147   |   |  | 4.06                         
|                                                     |  |             |   |  |                              
|Activity for the quarter ended December 31, 2006:    |  |             |   |  |                              
|Options issued                                       |  | 1,433,106   |   |  | 3.50                         
|Options terminated/forfeited                         |  | (58,005     | ) |  | 5.66                         
|Options exercised                                    |  | (10,550     | ) |  | 1.66                         
|                                                     |  |             |   |  |                              
|Options and warrants outstanding, December 31, 2006  |  | 9,666,698   |   |  | 3.97                         
|                                                     |  |             |   |  |                              
|Options outstanding                                  |  | 3,551,542   |   |  | 3.38                         
|Warrants outstanding                                 |  | 6,115,156   |   |  | 4.32                         
|                                                     |  |             |   |  |                              

The weighted average grant date fair values of stock options and warrants granted during the three months ended
December 31, 2006, were as follows:



|                                |  |                                       |      |          |   |  
|------------------------------- |  | ------------------------------------- | ---- | -------- | - | -
|                                |  | Weighted AverageGrant Date Fair Value
|                                |  | Options                               |      | Warrants
|Quarter ended December 31, 2006 |  | $                                     | 3.28 |          | $ | 

The following table summarizes information for options and warrants outstanding and exercisable at
December 31, 2006:



|                                 |  |             |  |                                 |  |                |  |                                |      |        |           |                                |   |                |  |           
|-------------------------------- |  | ----------- |  | ------------------------------- |  | -------------- |  | ------------------------------ | ---- | ------ | --------- | ------------------------------ | - | -------------- |  | ----------
|Options and Warrants Outstanding |  | Exercisable
|Range of Exercise Prices         |  | Number      |  | Weighted average remaining life |  | AggregateValue |  | Weightedaverage exercise price |      | Number |           | Weightedaverage exercise price |   | AggregateValue
|$0.00-1.05                       |  | 593,626     |  | 6.28 years                      |  |                |  | $                              | 1.05 |        | 593,626   |                                | $ | 1.05           |  |           
|$1.06-2.11                       |  | 580,124     |  | 6.79 years                      |  |                |  |                                | 2.11 |        | 580,124   |                                |   | 2.11           |  |           
|$2.12-2.63                       |  | 296,454     |  | 7.17 years                      |  |                |  |                                | 2.46 |        | 245,963   |                                |   | 2.43           |  |           
|$2.64-8.00                       |  | 8,196,494   |  | 5.73 years                      |  |                |  |                                | 4.37 |        | 6,880,320 |                                |   | 4.36           |  |           
|                                 |  |             |  |                                 |  |                |  |                                |      |        |           |                                |   |                |  |           
|                                 |  | 9,666,698   |  | 5.87 years                      |  | 5,448,825      |  | $                              | 3.97 |        | 8,300,033 |                                | $ | 3.91           |  | 2,916,043.
|                                 |  |             |  |                                 |  |                |  |                                |      |        |           |                                |   |                |  |           



28



---

ACCENTIA BIOPHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED DECEMBER 31,
2006 AND 2005



A summary of the status of the Companys nonvested options as of December 31, 2006, and changes during the
three months ended December 31, 2006, is summarized as follows:



|                               |  |           |   |  |                                      |      |                |        
|------------------------------ |  | --------- | - |  | ------------------------------------ | ---- | -------------- | -------
|Nonvested Options              |  | Shares    |   |  | Weighted-AverageGrant-DateFair Value |      | IntrinsicValue
|Nonvested at October 1, 2006   |  | 433,933   |   |  |                                      |      |                |        
|Granted                        |  | 744,945   |   |  |                                      |      |                |        
|Vested                         |  | (84,411   | ) |  |                                      |      |                |        
|Forfeited                      |  | (27,802   | ) |  |                                      |      |                |        
|                               |  |           |   |  |                                      |      |                |        
|Nonvested at December 31, 2006 |  | 1,066,665 |   |  | $                                    | 2.62 |                | 422,474
|                               |  |           |   |  |                                      |      |                |        

The total unearned compensation cost of $2,798,948 relating to the 1,066,665 nonvested options as of
December 31, 2006 will be recognized over a weighted average period of two years.

15. Subsequent Events

On January 16, 2007, Biovest closed an amended and restated loan transaction (the Loan) with Pulaski Bank and Trust Company of St. Louis, MO
(Pulaski), pursuant to which Pulaski loaned the sum of $1 million to Biovest pursuant to an unsecured Promissory Note (the Note). The Note is guaranteed by entities and individuals affiliated with the Company or Biovest. Biovest
has entered into Indemnification Agreements with each of the guarantors. Biovest issued to the guarantors warrants to purchase an aggregate total of 1,388,636 shares of Biovests Common Stock, par value $0.01 per share, at an exercise price of
$1.10 per share (the Warrants). The Warrants will expire on January 15, 2012. Under the terms of the Warrants, the guarantors shall have piggy-back registration rights for the shares underlying the Warrants.



29



---

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

When you read this section of this Quarterly 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, 2006 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
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 received fast track status for SinuNase April 2006. We
expect to commence 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 May
2006, the FDA granted fast track status to BiovaxID, which means that the Company is now eligible to submit a biologics license application (BLA) on a rolling basis, allowing the FDA to review sections of the BLA in advance of receiving the
Companys full submission and permitting the Company to apply for expedited review of its BLA. 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
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 September 30, 2006 consolidated financial statements, 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.



30



---

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 condensed 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 consist 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



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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 reserves currently reflect an adjustment of 8% of gross sales for charge-backs/rebates and 13% 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 December 31, 2006 and September 30, 2006 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 foreign
subsidiary 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 impairment to goodwill in the amount of $0.3 million in the fiscal quarter in which the acquisition occurred.



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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, last performed as of September 30, 2006, 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.

Stock-Based Compensation

We account for stock-based awards to employees and non-employees using the accounting provisions of SFAS No. 123R  accounting for Stock-Based Compensation. The
provision 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 provision requires a public entity to measure the cost of employee and non-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 and non-employee is required to provide service in exchange for the award.

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 for the three months ended December 31, 2006, we assumed no dividend yield, risk-free interest rates ranging
from 4.57% to 4.71%, expected option terms ranging from 5.0 to 6.5 years, a volatility factors of 68.75%, share prices ranging from $2.44 to $3.36, and option exercise prices ranging from $2.44 to $3.70.



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We recorded stock-based expense compensation of $1.1 million for the three months ended December 31, 2006, which was
related to employee and non-employee stock options. We recorded stock-based compensation expense of $0.1 million in the three months ended December 31, 2005. In all periods, stock-based compensation is classified in various categories.

Income Taxes

We incurred net operating losses
for the three months ended December 31, 2006 and 2005, 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 $169.7 million as of December 31, 2006, which expires through 2026. Of this amount $45.2 million is attributable to Biovest and will no longer be available to offset income generated by the other
members of the group.

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, 2006 Compared to the Three Months Ended December 31, 2005

Consolidated Results of Operations

Net Sales.Our net
sales for the three months ended December 31, 2006 were $5.9 million, a decrease of $0.9 million, or 14%, from the three months ended December 31, 2005. The decrease in our consolidated net sales for the three months ended
December 31, 2006 reflected a decrease of $0.8 million in net sales in our Specialty Pharmaceuticals segment due to the sale of our Xodol and Histex product lines, a decrease of $0.2 million in our compounding subsidiary due to the
discontinuance of its operations, and a decrease of $0.1 million in net sales of our Analytica International subsidiary. This was offset by a $0.2 million increase in net sales in our Biovest subsidiary.

Cost of Sales.Our cost of sales for the three months ended December 31, 2006 was $1.6 million, or 28% of net sales, compared to $1.9 million, or 28%
of net sales, during the three months ended December 31, 2005. This represented a decrease of $0.3 million, or 0%, over the three months ended December 31, 2005 attributable to the decrease in corresponding sales.

Research and Development Expenses.Our research and development costs were $4.4 million for the three months ended December 31, 2006; an increase of
$1.2 million, or 39%, over the three months ended December 31, 2005. This increase included $1.1 million in SinuNase development compared to $0.5 million in SinuNase development for the same period last year. Our Biovest subsidiary
research and development expense increased from $0.2 million in the three months ended December 31, 2006 due to increase emphasis on BiovaxID research and its phase 3 clinical trials from the same period last year. We expect that our research
and development costs will continue to increase as we continue our clinical trials for BiovaxID and commence our clinical trials for SinuNase.



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Sales and Marketing expenses.Our sales and marketing expenses were $2.2 million for the three months ended
December 31, 2006; a decrease of $1.1 million, or 33%, over the three months ended December 31, 2005. This decrease was primarily due to a $0.7 million reduction in sales related personnel in our Specialty Pharmaceuticals segment, and a
$0.3 million decrease in sales related personnel in our discontinued compounding subsidiary.

General and Administrative Expenses.Our
general and administrative expenses were $6.8 million for the three months ended December 31, 2006; an increase of $1.4 million, or 27%, over the three months ended December 31, 2005. An increase of 0.8 million was a result of the
growth of our corporate infrastructure to support an anticipated increase in our business activities and of increased expenses relating to the cost of maintaining our status as a public company. An increase of 1.0 million was due to stock
compensation expense. This was offset by a decrease of $0.4 million in amortization expense due to the sale of our Xodol and Histex products.

Royalty expenses.Our royalty expenses were $-0- million for the three months ended December 31, 2006; a decrease of $0.6 million, or 100%, over the three months ended December 31, 2005. This decrease was due to our
discontinued compounding subsidiary.

Interest Expense and change in fair value of convertible debentures, net.In the three months ended
December 31, 2006, our net interest expense and change in fair value of convertible debentures was $11.2 million, an increase of $10.2 million, over the three months ended December 31, 2005. The increase was due primarily to interest on
our existing Laurus term notes, existing Laurus revolver, Pulaski term note, and the adjustment to fair market value the convertible debentures. Interest income in both years was nominal.

Loss on sale of assets.Our loss on sale of assets was $1.2 million for the three months ended December 31, 2006; an increase of $1.2 million, or
100%, over the three months ended December 31, 2005. This increase was due to the sale of our Xodol and Histex products in our Specialty Pharmaceuticals segment.

Derivative gain (loss).Derivative loss was $0.6 million for the three months ended December 31, 2006 as compared to a gain of $6.4 million for the three months ended December 31, 2005. This
decrease was related to the Laurus financing arrangement that commenced in the 2005 fiscal year and results primarily from the decrease in our common stock price on which the derivative liabilities are based.

Loss on financing transaction.In the three months ended December 31, 2006, our loss on financing transaction was $8.8 million compared to no loss for
the three months ended December 31, 2005. This loss is attributable to warrants issued to Laurus Master Fund, Ltd. in order to obtain consent for various transactions including the termination of a first right of refusal agreement with Biovest,
the sale of our interest in Biolender, LLC, and termination of the Biologics Products Commercialization Agreement with Biovest.

Absorption of prior
gains against minority interest.Absorption of prior gains against minority interest was $0.3 million in the three months ended December 31, 2006, a decrease of $1.4 million, primarily due to the sale of Biovest stock to a third-party
in the NMTC 2 transaction.

Preferred Stock Dividends. In the three months ended December 31, 2006, we incurred no dividend costs,
compared to $0.04 in the three months ended December 31, 2005. There was no dividend cost in the three months ended December 31, 2006 due to the conversion of all Series E preferred stock to common stock at our Initial Public Offering in
November 2005. Dividends for the three months ended December 31, 2005 consisted of dividends accrued on our Series E preferred stock.



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Segment Operating Results



|                                              |        |                                         |                      |      |     |        |  |                      |           |  |     |  
|--------------------------------------------- | ------ | --------------------------------------- | -------------------- | ---- | --- | ------ |  | -------------------- | --------- |  | --- | -
|                                              |        | For the Three months ended December 31, |                     
|                                              | 2006   |                                         |                      | 2005 |    
|                                              | Amount |                                         | % ofSegmentNet Sales |      |     | Amount |  | % ofSegmentNet Sales |          
|Net Sales:                                    |        |                                         |                      |      |     |        |  |                      |           |  |     |  
|Biopharmaceutical Products and Services-      |        |                                         |                      |      |     |        |  |                      |           |  |     |  
|Biovest                                       |        | $                                       | 1,327,108            |      |     |        |  | $                    | 1,084,975 |  |     |  
|All other business units                      |        |                                         | 2,448,079            |      |     |        |  |                      | 2,829,948 |  |     |  
|                                              |        |                                         |                      |      |     |        |  |                      |           |  |     |  
|Total Biopharmaceutical Products and Services |        |                                         | 3,775,187            |      |     |        |  |                      | 3,914,923 |  |     |  
|Specialty Pharmaceuticals                     |        |                                         | 2,106,556            |      |     |        |  |                      | 2,903,043 |  |     |  
|                                              |        |                                         |                      |      |     |        |  |                      |           |  |     |  
|Total Net Sales                               |        | $                                       | 5,881,743            |      |     |        |  | $                    | 6,817,966 |  |     |  
|                                              |        |                                         |                      |      |     |        |  |                      |           |  |     |  
|                                              |        |                                         |                      |     
|Cost of Sales:                                |        |                                         |                      |      |     |        |  |                      |           |  |     |  
|Biopharmaceutical Products and Services-      |        |                                         |                      |      |     |        |  |                      |           |  |     |  
|Biovest                                       |        | $                                       | 766,092              |      |     |        |  | $                    | 602,903   |  |     |  
|All other business units                      |        |                                         | 423,197              |      |     |        |  |                      | 725,654   |  |     |  
|                                              |        |                                         |                      |      |     |        |  |                      |           |  |     |  
|Total Biopharmaceutical Products and Services |        |                                         | 1,189,289            |      | 32  | %      |  |                      | 1,328,557 |  | 34  | %
|Specialty Pharmaceuticals                     |        |                                         | 436,003              |      | 21  | %      |  |                      | 547,216   |  | 19  | %
|                                              |        |                                         |                      |      |     |        |  |                      |           |  |     |  
|Total Cost of Sales                           |        | $                                       | 1,625,292            |      |     |        |  | $                    | 1,875,773 |  |     |  
|                                              |        |                                         |                      |      |     |        |  |                      |           |  |     |  
|                                              |        |                                         |                      |     
|Gross Margin:                                 |        |                                         |                      |      |     |        |  |                      |           |  |     |  
|Biopharmaceutical Products and Services-      |        |                                         |                      |      |     |        |  |                      |           |  |     |  
|Biovest                                       |        | $                                       | 561,016              |      |     |        |  | $                    | 482,072   |  |     |  
|All other business units                      |        |                                         | 2,024,882            |      |     |        |  |                      | 2,104,294 |  |     |  
|                                              |        |                                         |                      |      |     |        |  |                      |           |  |     |  
|Total Biopharmaceutical Products and Services |        |                                         | 2,585,898            |      | 68  | %      |  |                      | 2,586,366 |  | 66  | %
|Specialty Pharmaceuticals                     |        |                                         | 1,670,553            |      | 79  | %      |  |                      | 2,355,827 |  | 81  | %
|                                              |        |                                         |                      |      |     |        |  |                      |           |  |     |  
|Total Gross Margin                            |        | $                                       | 4,256,451            |      |     |        |  | $                    | 4,942,193 |  |     |  
|                                              |        |                                         |                      |      |     |        |  |                      |           |  |     |  
|                                              |        |                                         |                      |     
|Research and Development Expenses:            |        |                                         |                      |      |     |        |  |                      |           |  |     |  
|Biopharmaceutical Products and Services       |        |                                         |                      |      |     |        |  |                      |           |  |     |  
|Biovest                                       |        | $                                       | 2,848,542            |      |     |        |  | $                    | 2,270,556 |  |     |  
|All other business units                      |        |                                         | 1,542,216            |      |     |        |  |                      | 889,316   |  |     |  
|                                              |        |                                         |                      |      |     |        |  |                      |           |  |     |  
|Total Biopharmaceutical Products and Services |        |                                         | 4,390,758            |      | 116 | %      |  |                      | 3,159,872 |  | 81  | %
|Specialty Pharmaceuticals                     |        |                                         |                     |      | 0   | %      |  |                      |          |  | 0   | %
|                                              |        |                                         |                      |      |     |        |  |                      |           |  |     |  
|Total Research and Development Expenses       |        | $                                       | 4,390,758            |      |     |        |  | $                    | 3,159,872 |  |     |  
|                                              |        |                                         |                      |      |     |        |  |                      |           |  |     |  
|                                              |        |                                         |                      |     
|Sales and Marketing Expenses:                 |        |                                         |                      |      |     |        |  |                      |           |  |     |  
|Biopharmaceutical Products and Services       |        |                                         |                      |      |     |        |  |                      |           |  |     |  
|Biovest                                       |        | $                                       | 29,457               |      |     |        |  | $                    | 42,076    |  |     |  
|All other business units                      |        |                                         |                     |      |     |        |  |                      | 320,946   |  |     |  
|                                              |        |                                         |                      |      |     |        |  |                      |           |  |     |  
|Total Biopharmaceutical Products and Services |        |                                         | 29,457               |      | 1   | %      |  |                      | 363,022   |  | 9   | %
|Specialty Pharmaceuticals                     |        |                                         | 2,147,998            |      | 102 | %      |  |                      | 2,896,926 |  | 100 | %
|                                              |        |                                         |                      |      |     |        |  |                      |           |  |     |  
|Total Sales and Marketing Expenses            |        | $                                       | 2,177,455            |      |     |        |  | $                    | 3,259,948 |  |     |  
|                                              |        |                                         |                      |      |     |        |  |                      |           |  |     |  



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Biopharmaceutical Products and Services

Net Sales.Our net sales in our Biopharmaceutical Products and Services segment for the three months ended December 31, 2006, including net sales to related parties, were $3.8 million, a decrease of
$0.1 million, or 4%, from the three months ended December 31, 2005. This decrease was attributable primarily to a decrease in sales of $0.2 million in our compounding subsidiary due to the discontinuance of its operations, and a decrease of
$0.1 million in net sales of our Analytica International subsidiary. This was offset by a $0.2 million increase in net sales in our Biovest subsidiary.

Cost of Sales.Our cost of sales in the Biopharmaceutical Products and Services segment for the three months ended December 31, 2006 was $1.2 million, or 32% of segment net sales, compared to $1.3 million, or 34% of
segment net sales, during the three months ended December 31, 2005.

Research and Development Expenses.Our research and development
costs were $4.4 million for the three months ended December 31, 2006; an increase of $1.2 million, or 39%, over the three months ended December 31, 2005. This increase included $1.1 million in SinuNase development compared to $0.5
million in SinuNase development for the same period last year. Our Biovest subsidiary research and development expense increased from $0.2 million in the three months ended December 31, 2006 due to increase emphasis on BiovaxID research and its
phase 3 clinical trials from the same period last year. We expect that our research and development costs will continue to increase as we continue our clinical trials for BiovaxID and commence our clinical trials for SinuNase.

Sales and Marketing Expenses.Our sales and marketing expenses in the Biopharmaceutical Products and Services segment were $0.03 million in the three ended
December 31, 2006; a decrease of $0.3 million, or 92%, over the three months ended December 31, 2005. This was attributable to a decrease in sales related personnel in our discontinued compounding subsidiary.

Specialty Pharmaceuticals

Net Sales.Net sales
in the Specialty Pharmaceuticals segment for the three months ended December 31, 2006, including net sales to related parties, were $2.1 million, a decrease of $0.8 million, or 27%, from the three months ended December 31, 2005 was
primarily attributable to the sales our Xodol and Histex product lines.

Cost of Sales.Our cost of sales in the Specialty Pharmaceuticals
segment for the three months ended December 31, 2006 was $0.4 million, or 21% of net sales, compared to $0.5 million, or 19% of net sales, during the three months ended December 31, 2005. The decrease in cost of sales as a percentage of
net sales was attributable to a decrease in corresponding sales.

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, 2006 or 2005.

Sales and Marketing
Expenses.Our sales and marketing expenses in the Specialty Pharmaceuticals segment were $2.1 million in the three months ended December 31, 2006; a decrease of $0.7 million, or 26%, over the three months ended December 31, 2005.
This decrease was primarily due to a reduction in sales related personnel.

Liquidity and Capital Resources

Sources of Liquidity

The accompanying financial statements
have been prepared on a going concern basis, which assumes Accentia will realize its assets and discharge its liabilities in the normal course of business. As reflected in the accompanying consolidated financial statements, the Company incurred net
losses of $30.6 million and used cash from operations of $12.9 million during the three months ended December 31, 2006, and has a working capital deficit of $39.2 million at December 31, 2006. The Company projects operating deficits for
fiscal 2007 before consideration of potential funding sources for this same period. These conditions raise substantial doubt about the Companys ability to continue as a going concern. Funding to date of the Companys working capital
requirements has resulted principally from the issuance of common and preferred stock and proceeds from debt.



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The Company is currently engaged in efforts to restructure certain existing indebtedness in order to increase available
funds on a near-term basis, and is also seeking additional financing through public or 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, the Company may be required to delay, reduce the scope of, or eliminate one or more of the research or development programs or commercialization efforts.

The Company further anticipates that Biovest will seek additional financing during the next six months through public and private equity offerings, debt
financings, corporate collaborations, or licensing transactions. As of January 31, 2007, an aggregate of $8.9 million intercompany demand notes payable to Accentia by Biovest are outstanding, representing funds advanced to Biovest in excess of
the funding commitment under an investment agreement plus intercompany obligations arising from the conversion of Biovest notes into common stock of Accentia in accordance with the terms of such notes. Management does not anticipate that Accentia
will continue to finance Biovests operations. In addition, upon the completion of a Biovest financing transaction, or other contemplated arrangements Management anticipates that Biovest may repay some or all of the outstanding demand notes.

No assurances can be given that such financing will be available. While management is confident that they 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.

Debt Financing

As of December 31, 2006, our long-term debt,
including accrued but unpaid interest, current maturities of long-term debt, and lines of credit, not including discount was $54.8 million. We currently have credit facilities with various lenders, including the following:

Credit Facility with Laurus Master Fund, Ltd.On April 29, 2005, we entered into a credit facility with Laurus Master Fund, Ltd., or Laurus. The Laurus
credit facility originally provided for total loan availability of $10 million, consisting of a $5 million term loan and a revolving credit facility of up to $5 million. As of September 30, 2005, a total of $5.0 million in principal amount was
outstanding under the term loan portion of the credit facility, while $9.7 million in principal amount was outstanding under the revolving loan portion of the credit facility. On August 16, 2005, the credit facility was amended to increase the
term loan portion of the credit facility from $5.0 million to $10.0 million in principal amount.

The term loan portion of the Laurus credit facility is
evidenced by an amended and restated secured convertible term note, dated August 16, 2005, in the principal amount of $10 million. The revolving loan portion of the credit facility is evidenced by an amended and restated secured convertible
minimum borrowing note in the amount of $2.5 million and a secured revolving note of up to $5 million, provided that the aggregate principal amount under both notes combined may not exceed $5 million. Both of the revolving loan notes are dated
as of April 29, 2005. Under the revolving loan, we have the right to borrow up to the sum of 85% of all of eligible accounts receivable and 50% of eligible inventory pledged to secure the loan (with the eligibility criteria being set forth in
the loan agreements), as well as 50% of the market value of publicly traded securities pledged by the Francis E. ODonnell Irrevocable Trust #1. Our initial advance under the revolving loans was $5.0 million, of which $2.5 million was repaid in
November 2005. Laurus waived our minimum collateral requirements under our borrowing base for a period of 180 days after April 29, 2005, provided that we pay an applicable over-advance interest rate of 10% per annum on any over-advanced
amount.

In connection with the Laurus credit facility, as amended, we issued to Laurus a warrant to purchase a number
of shares of our common stock that is equal to $8.0 million divided by our per share initial public offering price of $8.00. Based on the initial public offering price of $8.00 per share, a total of 1,000,000 shares of our common stock are subject
to this warrant agreement at an exercise price of $8.00 per share. The warrant will expire on the fifth anniversary of the date of warrant issuance. Laurus may exercise the warrant with cash, in a cashless exercise pursuant to the surrender of the
warrant or shares issuable under the warrant, or any combination of the foregoing. We have the right to require Laurus to exercise this warrant so long as (i) there is an effective current registration statement in place covering the resale of
all of the shares of our common stock issuable to Laurus pursuant to the credit facility and (ii) the average closing price of our common stock for the 20 consecutive trading days immediately preceding the forced exercise date is greater than
140% of our per share initial public offering price. As a part of the August 2005 amendment to the Laurus



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credit facility, we granted to Laurus an additional warrant to purchase up to 277,778 shares of our common stock at an exercise price of $.001 per share.
This additional warrant is immediately exercisable and, except for the absence of a forced exercise provision, has substantially the same terms and conditions as the other warrant granted to Laurus.

The principal and accrued but unpaid interest under each of the Laurus notes were convertible at the option of Laurus into shares of our common stock at an initial
conversion price of $6.95 per share. After the completion of our initial public offering, the conversion price became an amount equal to 85% of the per share initial public offering price or $5.91 per share. However, these notes cannot be converted
by Laurus until the earlier of 270 days after the date of the note or 180 days after our initial public offering. In connection with this credit facility, we entered into a registration rights agreement under which we agreed to register for
public resale all of the shares of our common stock into which the amended and restated secured convertible term note, amended and restated secured convertible minimum borrowing note, and the warrants granted to Laurus are convertible or
exercisable. However, these registration rights do not apply to the secured revolving note. At any time after the effectiveness of a registration statement covering the resale of the shares into which these notes are convertible, up to $2.5 million
in principal amount under the secured revolving note may be transferred by Laurus to the amended and restated secured convertible minimum borrowing note, thereby making such portion of the principal amount subject to the registration rights
agreement.

The amended and restated secured convertible term note accrues interest at a rate of the greater of 10% per annum or prime rate plus 4%.
The amended and restated secured convertible minimum borrowing note and secured revolving note accrue interest at a rate equal to the greater of 7.75% per year or prime rate plus 2%. However, provided that (i) there is an effective
registration statement in place covering the resale of the shares into which the notes are convertible and (ii) the market price of our common stock exceeds the conversion price by 25% for five consecutive trading days, then the interest rate
will be reduced by 2% for each 25% of increase in the market price of our common stock above the conversion price.

The amended and restated secured
convertible term note is payable through April 29, 2008 in equal monthly payments of principal and interest of $0.3 million. The secured revolving note and amended and restated secured convertible minimum borrowing note are due on
April 29, 2008 with all accrued but unpaid interest payable monthly. We have the right to redeem the notes (other than the secured revolving note) at any time at a redemption price equal to 130% of the principal amount of the note plus all
accrued but unpaid interest, subject to the right of Laurus to convert the note prior to a redemption. The secured revolving note may be prepaid at any time without penalty. On any date on which a payment is due under the amended and restated
convertible term note, Laurus is required to convert the monthly payment amount into shares of common stock so long as and to the extent that (i) there is an effective current registration statement in place covering the resale of all of the
shares of our common stock issuable to Laurus pursuant to the credit facility, (ii) the average closing price of our common stock for the five trading days immediately preceding the payment date is greater than 125% of the note conversion
price, and (iii) the number of shares of common stock to be issued as payment does not exceed 25% of the aggregate dollar trading volume of our common stock during the 22 immediately preceding trading days. Under the amended and restated
secured convertible term note and amended and restated secured convertible minimum borrowing note, Laurus is required to convert such note into a number of shares of our common stock equal to 20% of the aggregate trading volume of our common stock
during the five immediately trading days at the conversion price provided that (i) there is an effective current registration statement in place covering the resale of all for the shares of our common stock issuable to Laurus pursuant to the
credit facility, (ii) the average closing price of our common stock for the five trading days immediately preceding the conversion date is greater than 125% of the note conversion price, and (iii) the amount of the conversion does not
exceed 20% of the aggregate dollar trading volume of our common stock during the 20 immediately preceding trading days.

The Laurus notes are secured by a
first priority security interest in all of our tangible and intangible assets and our Analytica subsidiary (including the stock of their respective subsidiaries). This security interest does not extend to any assets of our Accentia Pharmaceuticals,
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.

On December 29, 2005, Laurus agreed to make a loan to us in excess of the Formula Amount under the Security Agreement dated April 29, 2005. This overadvance is in the amount of up to $2.5 million. In connection with this
overadvance, we granted Laurus a warrant to purchase up to 51,000 shares of common stock at an exercise price of $0.01 per share.

On July 31, 2006,
we repaid our loan to Harbinger Mezzanine Partners and increased the principal amount outstanding under our revolving credit line with Laurus to $7.5 million under an overadvance letter agreement with Laurus.



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Credit Facility with Laurus Master Fund, Ltd.,Biovest  On March 31, 2006, our majority-owned
subsidiary, Biovest closed a financing transaction (the Transaction) with Laurus, pursuant to which Laurus purchased from Biovest a secured promissory note in the principal amount of $7,799,000 (the Note) and a warrant to
purchase up to 18,087,889 shares of Biovests common stock at an exercise price of $.01 per share (the Warrant). Since June 2003, we have been the primary source of financing for Biovest; however, this Transaction with Laurus
represents the initial financing by Biovest from sources other than us.

The Note and Warrant were purchased pursuant to a Note and Warrant Purchase
Agreement between Biovest and Laurus (the Purchase Agreement). The following describes certain material terms of the Biovest Transaction:



| |  | Under the terms of the Note, $299,000 of the principal amount was disbursed at the closing of Laurus and other third parties to cover closing fees and expenses
relating to the transaction, and $7,500,000 of the principal amount was deposited into a restricted bank account of Biovest (the Restricted Account) pursuant to a restricted account agreement between Biovest and Laurus.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Under otherwise agreed by Laurus is expected to authorize disbursements from the Restricted Account as the Company is able to secure additional working capital
financing, including without limitation through financings involving New Market Tax Credits in the amounts and of the type more particularly described in the Transaction documents. On April 28, 2006, $2.5 million was released from the
restricted account as part of a financing transaction involving New Market Tax Credits.
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| |  | The Note will become due and payable on March 31, 2009, provided that any portion of the principal amount not contained in the Restricted Account will be
amortized in equal monthly payments of principal and interest beginning on July 1, 2006 and ending on the maturity date. The initial monthly payment amount will be $9,060.61 per month, provided that as amounts are released from the Restricted
Account from time to time, such amounts will be added to the amortizing portion of the Note, and the monthly payments will increase accordingly. The Note can be prepaid by Biovest at any time without penalty.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The outstanding principal amount of the Note will bear interest at a rate equal to the greater of the prime rate plus 2% or 9% per annum, except that any
portion of the principal amount contained in the Restricted Account will bear interest at prime rate.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Sixty-four percent (64%) of the Note is guaranteed by us. We also have a separate credit facility with Laurus pursuant to which we pledged our assets as
collateral, and pursuant to the Transaction documents, this pledge of collateral by us will also secure our guarantee of the Note. Additionally, all of the assets of Biovest, including its intellectual property and the stock of Biovax, Inc.
subsidiary, were pledged by Biovest as collateral of the Note and Obligations to Laurus.
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| |  | The Warrant provides that Laurus may purchase up to 18,087,889 shares of Biovests common stock at an exercise price equal to $.01 per share. The Warrant will
expire on March 31, 2021.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | In connection with the Transaction, Laurus and Biovest entered into a registration rights agreement providing that Laurus will have the right to require Biovest to
file a registration statement with the U.S. Securities and Exchange Commission to register the resale of the shares issuable to Laurus pursuant to the exercise of the warrant. Biovest will be required to file such registration statement within sixty
(60) days after written demand by Laurus, provided that in no event will Biovest be required to file such registration statement earlier than ninety (90) days after the closing of the Transaction.
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The note payable provides for monthly payment provisions, a variable interest feature that includes a cap of 9.0% and a default put at 130% of face value for certain
contingent events, including service defaults and changes in control, for the amortizing portion of the arrangement; these features are not present for unreleased, non-amortizing balances. We evaluated all terms and conditions of the amortizing
notes for indications of embedded derivative financial instruments. While the interest rate cap was found to be clearly and closely related to the host instrument, we determined that the default put did not meet the clearly and closely related
criteria as provided in FASB 133 Derivative Financial Instruments. Accordingly, upon release of funds underlying the first tranche, we reclassified an amount of $306,750 which represents the estimated fair value of the default put liability to
derivative liability. Upon release of funds under the second tranche, we reclassified $122,700 to derivative liability. The default liability is initially and subsequently carried at fair value with changes recorded in income. Accordingly, $352,597
is recorded as a derivative liability in the accompanying balance sheet on December 31, 2006.

New Market Tax Credit Financing. On
April 25, 2006, Biovest, through its wholly-owned subsidiary, Biovax, Inc. (Biovax) became the recipient of $3.0 million in net-funds under a qualified New Market Tax Credit Program (NMTC). The NMTC was provided for in
the Community Renewal Tax Relief Act of 2000 (the Act) and is intended to induce investment capital in underserved and impoverished areas of the United States. The Act permits taxpayers (whether companies or individuals) to claim credits
against their Federal income taxes for up to 39% of qualified investments in qualified, active low-income businesses or ventures. Biovax is a qualified, active low-income business and is eligible to receive investment capital under the NMTC.



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NMTC investments are made though Community Development Entities (CDE); such entities are qualified for this
purpose through the U.S. Department of the Treasury. The CDE investor in the Companys financing arrangement is Telesis CDE II, LLC, which was established solely for this investment. Telesis CDE II, LLC is managed and partially owned (0.01%) by
Telesis CDE Corporation, which is a private financial institution. The remaining equity interest in Telesis CDE II, LLC (99.99%) is owned by Biovax Investments, LLC (the Fund), a company established solely for the purpose of
facilitating this NMTC financing arrangement. The Fund equity is owned 99.99% by US Bancorp and 0.01% by Telesis CDE Corporation.

The fund was capitalized
with $3.6 million equity from US Bancorp and a nominal equity investment by Telesis CDE Corporation. In addition, Biovest and the Company, through a consolidated subsidiary, loaned $8.5 million to the Fund pursuant to a 5.18%, annual rate,
senior-secured, convertible note receivable, due in seven and one-half years. The note is convertible at the option of the Fund into shares of Biovests common stock at a price based upon trading market prices of Biovests common stock
near the maturity date in seven and one-half years. These proceeds received by the Fund from the aforementioned financing transactions were used to make a contemporaneous 99.99% equity investment in Telesis CDE II, LLC ($12.0 million) and payment
for management, legal and accounting fees ($0.1 million).

Telesis CDE II, LLC, upon receipt of its equity funding, contemporaneously issued $11.5 million
to Biovax for (a) a 1.0% convertible promissory note payable, due in seven and one-half years, (b) warrants to purchase 1.2 million shares of Biovests common stock over a period of nine-years at a fixed price of $9.00 and
(c) warrants to purchase 0.2 million shares of the Companys common stock over a period of seven years at a fixed price of $1.30. The convertible promissory note is convertible into common stock at the option of Telesis CDE II, LLC
within 5 days of the maturity date at a conversion price equaling the then trading market price of the common stock. The overall arrangement provides that in the event Telesis CDE II, LLC converts the note payable, the aforementioned note receivable
is subject to immediate conversion at the same conversion price.

New Market Tax Credit Financing 2. On December 8, 2006, Biovest, through its
subsidiary, AutovaxID, closed a second NMTC financing transaction (the Transaction). In the Transaction, AutovaxID entered into a QLICI Loan Agreement in which St. Louis New Markets Tax Credit Fund-II, LLC (the CDE) made
a loan to AutovaxID, evidenced by a Subordinated Promissory Note dated as of December 8, 2006, in the principal amount of $7,700,000 (CDE Loan). The CDE Loan has a maturity date of December 8, 2036 and is described in more
detail below, qualified entirely by the QLICI Loan Agreement attached as an exhibit. The following parties were involved in the Transaction: AutovaxID, Accentia, Biolender II, LLC, the CDE, St. Louis Development Corporation (SLDC),
AutovaxID Investment LLC (Leverage Fund), U.S. Bancorp Community Investment Corporation (USBCIC) and Laurus.

Under a License and
Asset Purchase Agreement dated as of December 8, 2006, Biovest granted a nonexclusive license to the intellectual property enabling AutovaxID to manufacture and sell automated cell culture instruments in the United States, Canada and Mexico
(the License), which license will become exclusive upon the occupancy by AutovaxID of a space located at 1031 Macklind Avenue, St. Louis, Missouri (the New Plant). Biovest also agreed to sell AutovaxID certain equipment (the
Equipment) to AutovaxID upon the occupancy by AutovaxID of the New Plant. AutovaxID must use its best efforts to occupy the New Plant by March 31, 2007, and must occupy the new plant by June 15, 2007. As full purchase price for
the License and related business opportunity, AutovaxID paid us $5,600,000. Upon the attainment of occupancy of the New Plant, AutovaxID will pay us fair market value for the Equipment, which is estimated to be $896,100.

On December 8, 2006, Accentia loaned to us $3,100,000 pursuant to a Secured Promissory Note (the Accentia Note). Under the terms of the Accentia Note,
interest shall accrue at a rate equal to prime rate, payable upon demand of Accentia. Biovest shall pay principal and interest as follows: (a) $1,100,000 paid to Accentia upon the closing of the Transaction and (b) the remaining $2,000,000
of principal and all accrued and unpaid interest shall be paid by us upon demand by Accentia.

In contemplation of the Transaction, Biovest formed
Biolender II, LLC (Biolender II) as a Delaware limited liability company. On December 8, 2006, $2,500,000 was released from the Restricted Account created under the Laurus Note, which together with the amount loaned to us under the
Accentia Note funded the purchase of a 100% equity interest in Biolender II for our benefit. The entire equity interest in Biolender II owned by us has been pledged to Laurus as collateral to secure the Laurus Note.



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Upon the completion of the funding of Biolender II by us and receipt of $2,400,000 from USBCIC via an equity investment
in the Leverage Fund, Biolender II and the Leverage Fund entered into a Loan and Security Agreement pursuant to which Biolender II made a loan to the Leverage Fund in the principal amount of $5,600,000 (the Leverage Loan), evidenced by a
promissory note dated as of December 8, 2006 payable from the Leverage Fund to Biolender II (the Leverage Note). The Leverage Note becomes due on December 10, 2013.

Interest on the Leverage Loan accrues on the outstanding principal amount of the Leverage Loan at the rate of 8.00% per annum, non-compounding, commencing on December 8, 2006 until May 9, 2014; and
shall be payable in arrears on an annual basis commencing on the first business day after December 31, 2006. Any remaining accrued and unpaid interest shall be payable in one installment on the maturity date. All interest on the Leverage Loan
shall accrue based on the actual number of days elapsed and calculated based on a year of three hundred and sixty (360) days. The outstanding principal amount on the Leverage Loan is due on maturity in cash.

The Leverage Fund then contributed equity to the CDE (the QEI Contribution), which equity is expected to constitute a qualified equity investment
(QEI) under the New Markets Tax Credit Program authorized by Section 45D of the Internal Revenue Code of 1986, as amended, and the rules and regulations promulgated thereunder (collectively, the Code and the program the
NMTC Program) and administered by the Community Development Financial Institutions Fund of the United States Treasury Department (CDFI Fund). All of Leverage Funds interest in the CDE has been pledged to Biolender II as
collateral for the Leverage Note.

The proceeds of the QEI Contribution were used by the CDE to fund the CDE Loan, which is expected to constitute a
qualified low-income community investment (QLICI) under the NMTC Program. AutovaxIDs business is and will be conducted within a United States population census tract which constitutes a Low-Income Community under the
NMTC Program. As a condition of making the equity contribution to the Leverage Fund, USBCIC required AutovaxID to indemnify it under a Tax Credit and Reimbursement and Indemnity Agreement against any loss of the tax credits as a result of the CDE
Loan to constitute a QLICI and certain other conditions generally known as a recapture event.

The following describes certain material
terms of the CDE Loan and transactional warrants related to the Transaction:



| |  |  | The CDE Loan has a principal amount of $7,700,000 and matures on December 8, 2036. Pursuant to a call right, for a period of six months starting on
December 8, 2013, the CDE will have the right to call for the repayment of the CDE Loan in the amount of $5,721,000, in full satisfaction of the principal on the CDE Loan. Interest on the outstanding principal amount of the CDE Loan shall
accrue at the rate of 5.82% per annum, non-compounding and shall be payable in arrears on an annual basis commencing on January 2, 2007 and continuing until maturity. The CDE Loan is guaranteed by us.
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| |  |  | The CDE Loan is secured by second lien on all assets of AutovaxID for the benefit of the CDE pursuant to a Second-Lien Security Agreement between AutovaxID and the
CDE dated as of December 8, 2006. Laurus has a senior lien on the assets of AutovaxID through the security agreement from us to Laurus, which AutovaxID joined by way of a Joinder Agreement.
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| |  |  | The CDE Loan shall be due and payable by AutovaxID in full on the maturity date of the CDE Loan. However, if the CDE exercises its call right pursuant to the CDE
Loan, then the CDE Loan becomes due and payable on the date of such call for the amount of $5,721,000, in full satisfaction of the principal on the CDE Loan, together with all accrued but unpaid interest.
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| |  |  | AutovaxID has the right to prepay the CDE Loan at any time, provided that, if it prepays the CDE Loan on or before May 8, 2014, (i) it prepays the entire
CDE Loan amount, (ii) the CDE consents to such prepayment and USBCIC and the managing member of the CDE agree on the reinvestment of such proceeds in an alternative investment that would qualify as a QLICI and (iii) AutovaxID or the
Individual Guarantors (as defined below) under the Tax Credit and Reimbursement and Indemnity Agreement pay to USBCIC any recapture amount as so specified in such agreement.
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| |  |  | All indebtedness owed by AutovaxID and its subsidiaries to the CDE, including its right to receive payments of principal and interest under the CDE Loan, is
expressly subordinate to the extent set forth under the Telesis Subordination Agreement dated as of December 8, 2006 entered into by Laurus, the CDE, USBCIC, AutovaxID and us.
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| |  |  | Under a Put Option Agreement, starting on December 9, 2013, USBCIC will have the right to require Biolender II to purchase the equity interests of the Leverage
Fund during a three month exercise period. Biolender II shall have the obligation to acquire the members interest in the Leverage Fund under this Put Option Agreement for the payment to USBCIC of $120,000. Furthermore, under a Purchase Option
Agreement, for a three month period after the expiration of the put option and to the extent that the put option was not exercised, Biolender II will have the option to purchase USBCICs equity interests in the Leverage Fund based on the fair
market value of the equity interests at that time.
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| |  |  | NMTC compliance expenses of the CDE and the Fund, to the extent not pertaining to an investment other than the CDE Loan, are to be paid by us pursuant to a
Reimbursement Agreement between us and SLDC, the manager of both the Fund and the CDE. These reimbursable expenses are limited to $32,000 annually. Any expenses in excess of such amount will be paid by AutovaxID.
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| |  |  | All amounts payable by AutovaxID under the CDE Loan are guaranteed by us. In addition, Biovest and certain officers, directors and shareholders of the Company
and/or Accentia (and related trusts) (Individual Guarantors) guarantee the payment of all obligations under AutovaxIDs indemnity to USBCIC. The Individual Guarantors obligations are proportionate and provide for a maximum
aggregate liability for each of the Individual Guarantors as set forth in the Guaranty Agreement. Biovest entered into Indemnity Agreements with the Individual Guarantors, and, in consideration of such guaranties, has granted warrants to the
Individual Guarantors for the purchase of a total of 2,629,543 shares of our common stock at $1.10 per share in proportion to the amounts of their guaranties.
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In connection with the Transaction, seven individuals personally guaranteed certain of Biovests obligations regarding the Transaction. This included the guarantees of Francis E. ODonnell, Chairman and CEO,
together with certain related entities, for $1,150,000, Ronald E. Osman, Esq., a Director of Biovest, for $1,000,000, and Steven Arikian, our President, Biopharmaceutical Products & Services and Director for $50,000. In addition, Biovest
received guarantees by four other individual common shareholders of the Company. As consideration for these guarantees, Biovest issued seven warrants on December 8, 2006 to issue a total of 2,629,543 shares of common stock at an exercise price
of $1.10 per share, vesting in their entirety on December 14, 2006 and expiring on December 13, 2006. These include warrants to ODonnell, Osman and Arikian for the purchase of 679,545, 590,909, and 29,545 shares of common stock,
respectively.

Loans from Pulaski Bank. On September 5, 2006, Biovest closed a loan transaction with Pulaski Bank and Trust Company of St.
Louis, MO (Pulaski), pursuant to which Pulaski loaned the sum of $2 million to Biovest pursuant to an unsecured Promissory Note (the Note). The Note will become due and payable on January 5, 2007. The Note bears interest
at prime rate minus .05%. The Note is guaranteed by entities and individuals that are stockholders, officers or directors of Biovest and/or Accentia. Biovest entered into Indemnification Agreements with each of the guarantors.
As additional consideration, Biovest issued Pulaski a warrant (the Warrant) to purchase 66,667 shares of Biovest Common Stock at an exercise price of $1.10 per share through September 5, 2011. Under the terms of the Warrant,
Pulaski was granted piggy-back registration rights. The Note is an unsecured obligation of Biovest and is subordinated to Biovests outstanding loan to Laurus.

Loans from McKesson Corporation.On September 29, 2006, we made a $0.4 million payment to the McKesson Corporation (McKesson) to extinguish all remaining outstanding debt and accrued interest
with the McKesson.

Bridge Loans from Hopkins Capital Group II, LLC.In June 2005, we borrowed an aggregate of $0.6 million in the form of a
bridge loan 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. The June 2005 bridge loan was evidenced by an unsecured interest-free promissory note that was due on the earlier of August 31, 2005 or the closing of
this offering. A total of $0.6 million in principal was outstanding under this bridge loan as of June 30, 2005, and from July 1, 2005 through August 16, 2005, additional advances in the amount of $3.6 million were made by Hopkins II
under this loan.

In August 2005, we 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 at an interest rate of 4.25% per annum. 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 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.



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Under the August 2005 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. 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. The Hopkins II
bridge loan is subordinate to the Laurus credit facility and the McKesson loans, 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. On
May 15, 2006, Hopkins Capital Group II, LLC elected to convert $3.3 million of debt and accrued interest into 412,892 shares at $8.00 per share. The outstanding balance on December 31, 2006 was $1.1 million.

Credit Facility with Southwest Bank of St. Louis f/k/a Missouri State Bank. In addition to the Laurus credit facility, in December 2005, we secured a $3.0 million
subordinated revolving credit agreement with Southwest Bank of St. Louis f/k/a Missouri State Bank and Trust Company. In March of 2006 we were granted an incremental $1.0 million expansion of the existing credit facility, bringing to total credit
facility to $4.0 million. 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 Accentia Pharmaceuticals 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, 2006, $3.8 million of the $4.0
million credit facility had been drawn and was outstanding.

Our level of debt affects our operations in several important ways, including
the following:



| |  |  | a significant portion of our cash flow from operations is likely to be dedicated to the payment of the principal of and interest on our indebtedness;
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| |  |  | our ability to obtain additional financing in the future for working capital, capital expenditures or acquisitions may be limited;
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| |  |  | we may be unable to refinance our indebtedness on terms acceptable to us or at all;
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| |  |  | our cash flow may be insufficient to meet our required principal and interest payments; and we may default on our obligations and the lenders may foreclose on their
security interests that secure their loans.
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Private Placement of Convertible Debentures

On September 29, 2006, we entered into definitive agreements relating to a private placement (the Private Placement) of $25.0 million in principal amount
of 8% Secured Convertible Debentures due September 29, 2010 (the Debentures). The Private Placement resulted in gross proceeds of $23.5 million after placement agent fees of $1.5 million but before other expenses associated with the
transaction. To secure certain amounts payable by us to Laurus, our senior lender, a total of $7.3 million of the proceeds from the Private Offering were placed into an escrow account and paid to Laurus when certain amounts become due under our
credit facility with Laurus.

The Debentures will be convertible at any time at the option of the holder into shares of our common stock at $2.60 per
share, subject to adjustment for stock splits, stock dividends, and the like. In the event that we issue or grant in the future any rights to purchase any of our common stock, or other security convertible into our common stock, for an effective per
share price less than the conversion price then in effect, the conversion price of all unconverted Debentures will be decreased to equal such lower price. The Debentures are also exchangeable for shares of common stock of Biovest held by us at an
exchange price of $1.00 per share, subject to adjustment for stock splits, stock dividends, and the like, at any time after the earlier to occur of (i) September 29, 2007 or (ii) such time as the closing price of Biovests common
stock exceeds $2.25 for each of 20 consecutive trading days, subject to certain volume requirements and other conditions. In the event that Biovest issues or grants in the future any rights to purchase any of Biovests common stock, or other
security convertible into Biovests common stock, for a per share price less than the exchange price then in effect, the exchange price for all unconverted Debentures will be decreased to equal such lower price. The above-described adjustments
to the conversion price or exchange price for future stock issuances by us or Biovest will not apply to certain exempt issuances, including stock issuances pursuant to employee stock option plans and strategic transactions.

Prior to maturity the Debentures will bear interest at 8% per annum with interest payable quarterly in arrears in cash, or, at our option, in shares of our common
stock. Our ability to pay interest with shares of our common stock will be subject to specified conditions, including the existence of an effective registration statement covering the resale of the shares issued in payment of interest and certain



44



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minimum trading volumes in the stock to be issued. Shares delivered in payment of interest will be valued at 90% of the average of the daily volume weighted
average price of the shares for the 20 trading days prior to the interest payment date. From and after an event of default under the Debentures and for so long as the event of default is continuing, the Debentures will bear default interest at a
rate of 18% per annum.

Beginning October 1, 2007, and on the 1stof each month thereafter, we may elect to redeem 1/37thof the face value of the Debentures in cash or, at our election, with shares of our common stock , shares of Biovest common stock held by us , or a combination thereof. Our ability to pay interest
with shares of our or Biovest common stock will be subject to specified conditions, including the existence of an effective registration statement covering the resale of the shares issued in payment of the redemption amount and certain minimum
trading volumes in the stock to be issued. Any payment in common stock of either us or Biovest may not exceed 15% of the total dollar traded volume in the applicable stock for the 20 trading days prior to the amortization payment. Any of our common
stock or Biovest common stock delivered in satisfaction of an amortization payment will be valued at the lesser of (i) the conversion price or the exchange price, as the case may be, in effect at the time of the amortization payment or
(ii) 90% of the average of the daily volume weighted average price of the applicable shares for the 20 trading days prior to the amortization payment. Any unconverted Debentures will become due on September 29, 2010.

In the event that the average of the daily volume weighted average price of the shares of our common stock for any 20 consecutive trading days exceeds $6.50, we will
have the right, but not the obligation, to require the holders of the Debentures to convert into our common stock at the conversion price then in effect up to 50% of any outstanding Debentures (or 100% of any outstanding Debentures, in the event
that the average of the daily volume weighted average price of the shares of our common stock for any 20 consecutive trading days exceeds 300% of the then-effective conversion price). Such a mandatory conversion is subject to specified conditions,
including the existence of an effective registration statement covering the resale of the shares into which the Debentures are converted and certain minimum trading volumes in the stock to be issued. The registration statement was declared effective
on November 17, 2006.

At any time beginning on the first anniversary of the effectiveness of a registration statement covering the resale of the
shares of our common stock issuable upon conversion of the Debentures, we may redeem, subject to specified conditions and upon 20 trading days written notice, any or all of the outstanding Debentures for a redemption price of (i) cash of
120% of par plus accrued and unpaid interest on the Debentures to be redeemed and (ii) warrants to subscribe for a number of shares of our common stock equal to the principal amount of the Debentures to be redeemed, divided by the conversion
price then in effect. Such warrants will have an exercise price equal to the average of the daily volume weighted average price for the shares of our common stock for the 20 trading day period immediately preceding the redemption and a term equal to
the weighted average remaining term of the Debentures.

As a part of the Private Placement, we issued Warrants to the purchasers of the Debentures giving
them the right to purchase up to an aggregate of 3,136,201 shares of our common stock at an exercise price of $2.75 per share, provided that such Warrants may be alternatively exercised for shares of Biovest common stock held by us at an exercise
price of $1.10 per share. The warrant exercise prices are subject to adjustment for stock splits, stock dividends, and the like. The Warrants may not be exercised for any shares of Biovest common stock until the earlier to occur of
(i) September 29, 2007 or (ii) such time as the closing price of Biovests common stock exceeds $2.25 for each of 20 consecutive trading days, subject to certain volume requirements and adjustments. In the event that we in the
future issues or grants any rights to purchase any of our common stock, or other security convertible into our common stock, for a per share price less than the exercise price then in effect, the exercise price of the Warrant with respect to shares
of our common stock will be reduced to equal such lower price and the number of shares of our common stock for which the Warrant may be exercised will be increased so that the total aggregate exercise price remains constant. In the event that
Biovest in the future issues or grants any rights to purchase any of Biovests common stock, or other security convertible into Biovests common stock, for a per share price less than the exercise price then in effect, the exercise price
of the Warrant with respect to shares of Biovests common stock will be reduced to equal such lower price. The foregoing adjustments to the exercise price for both our common stock and Biovests common stock for future stock issues will
not apply to certain exempt issuances, including issuances pursuant to employee stock option plans and strategic transactions. In connection with the Private Placement, we also issued to the placement agent for the transaction warrants to purchase
an aggregate of 545,455 shares of our common stock at an exercise price of $2.75 per share. All of the Warrants (including the warrants granted to the Placement Agent) will expire on September 29, 2011.

Unless and until shareholder approval of the Private Placement is obtained by us, the aggregate number of shares of our Common Stock issuable upon the conversion of any
of the Debentures and upon the exercise of any of the Warrants is limited to 19.99% of the number of shares of our common stock outstanding on the date of the closing of the Private Placement. We agreed to include a



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proposal for shareholder approval of the Private Placement at its next annual meeting of shareholders, and shareholders holding more than 50% of our common
stock have entered into voting agreements agreeing to vote their respective shares in favor of such proposal. In addition, the total number of shares of Biovest common stock held by us that may be transferred to the investors in the Private
Placement pursuant to the Debentures or Warrants may not exceed 18,000,000 shares in the aggregate. Pursuant to a Pledge Agreement among us and all of the purchasers of the Debentures, the Debentures are also secured by these 18,000,000 shares of
Biovest common stock held by the Company.

In connection with the Private Placement, we and the purchasers of the Debentures entered into a Registration
Rights Agreement under which we are required, on or before November 1, 2006, to file a registration statement with the SEC covering the resale of the shares of our common stock issuable pursuant to the Debentures and Warrants and to use its
best efforts to have the registration declared effective at the earliest date (but in no event later than 90 days after filing if there is no SEC review of the registration statement, or 120 days if there is an SEC review). We will be subject
to certain monetary penalties, as set forth in the Registration Rights Agreement, if the registration statement is not filed or does not become effective on a timely basis. Biovest and the purchasers of the Debentures have entered into a similar
registration rights agreement under which Biovest is required to file with the SEC and seek to have declared effective a registration statement covering the resale of the shares of Biovest common stock transferable by us pursuant to the Debentures
and Warrants.

Cash Flows for the Three Months Ended December 31, 2006

For the three months ended December 31, 2006, we used $12.9 million in cash to fund our operating activities. This consisted primarily of a net loss of $30.6 million and a net decrease in working capital of $3.9
million primarily due from $1.9 million accounts payable, $0.8 million accounts receivable, $0.8 million prepaid expenses, $0.3 million other assets, $0.1 million net inventory, $0.8 million accrued expenses, $0.1 million in net unbilled
receivables, offset by an $0.9 million increase in customer deposits. This use of cash was offset by non-cash increases of approximately $21.0 million related to a $8.8 million loss on financing transaction, $8.0 million for change in fair market
value of convertible debentures, $1.4 million to the issuance of common stock warrants, $1.1 million of stock-based compensation, $1.1 million loss on sales of assets, $0.7 million derivative loss, $0.4 million accretion of debt discount, $0.2
million in amortization of intangibles, $0.1 million of depreciation.

We had net cash flows from investing activities of $3.1 million for the three months
ended December 31, 2006, primarily consisting of $2.4 million proceeds from restricted cash, and $0.8 million in proceeds from the sale of assets. This was offset by payments for improvements to our Worcester laboratory facility, computer
equipment, and office improvement of $0.1 million.

We used net cash flows from financing activities of $2.3 million for the three months ended
December 31, 2006, by reduced debt $3.5 million, net payments to lines of credit of $1.2 million. This was offset by $2.4 million in net proceeds form a non-controlling investment in a variable interest entity.

Our net working capital deficit at December 31, 2006 decreased from September 30, 2006 by $19.2 million to $39.1 million, which was attributed largely to our
fiscal quarter 2007 loss.

Cash Flows for the Three Months Ended December 31, 2005

For the three months ended December 31, 2005, we used $7.2 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, and received proceeds from a minority interest investment in our Subsidiary of $1.7 million.

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 of common stock, and funding from lines of credit of $3.3 million. We reduced debt by $7.6 million.



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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.

Contractual Obligations and Off-Balance Sheet Arrangements

The following chart summarizes our contractual payment obligations as of December 31, 2006. The long- and short-term debt is reflected as liabilities on our balance
sheet as of December 31, 2006. Operating leases are accrued and paid on a monthly basis.

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)           |                   | $                      | 12,655          |  | $                  | 27,475 |                 | $ | 6,623 |  | $ |  |  | $ | 46,753
|Employment agreements       |                   |                        | 2,892           |  |                    | 4,196  |                 |   | 47    |  |   |  |  |   | 7,135 
|Operating lease obligations |                   |                        | 2,119           |  |                    | 3,646  |                 |   | 989   |  |   |  |  |   | 6,754 
|                            |                   |                        |                 |  |                    |        |                 |   |       |  |   |   |  |   |       
|                            |                   | $                      | 17,666          |  | $                  | 35,317 |                 | $ | 7,659 |  | $ |  |  | $ | 60,642
|                            |                   |                        |                 |  |                    |        |                 |   |       |  |   |   |  |   |       

---

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

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 $4.0 million and $6.0 million in twelve months ended 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 Pharmaceutical Products Development (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 the $2.5 million that PPD paid to us upon the execution
of the agreement in consideration of the future royalty rights granted to them under the agreement.

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 September 30, 2005, and have advanced approximately $8.7 million in
additional funds subsequent to that date through December 31, 2006.



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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
|------- | -----------------

Our Analytica subsidiary is a party to a
litigation brought against a former employee, alleging breach of covenants not to compete, breach of confidentiality agreements and misappropriation of proprietary information. This matter is pending in the Supreme Court of New York, New York
County. The defendant has filed an Answer containing counterclaims against Analytica, the Company and an officer of the Company. We have filed a motion seeking to dismiss all claims naming the Company and the Companys officer personally, and
to dismiss certain claims against all defendants. We have indicated that we plan to pursue our affirmative claims in this matter vigorously and will assert all available defenses against the counterclaims, which we believe are without merit.

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

Further, from time to time the Company is subject to various legal
proceedings in the normal course of business, some of which may be covered by insurance. Management believes that these proceedings will not have a material adverse effect on our business.



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

Not Applicable



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

Unregistered Sales of Equity Securities

None.

Options Exercised

In the three months ended December 31, 2006, 10,550 common stock options were exercised.



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

None



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

None



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

None



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|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                                                                                            
|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                           



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SIGNATURE

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 BIOPHARMCEUTICALS, INC.                                                      
|                        |  | (Registrant)                                                                          
|Date: February 14, 2007 |  | /s/ Francis E. ODonnell, Jr.                                                         
|                        |  | Francis E. ODonnell, Jr., M.D.                                                       
|                        |  | Chief Executive Officer; Chairman of the Board; Director (Principal Executive Officer)



|                        |  |                                                                                                 
|----------------------- |  | ------------------------------------------------------------------------------------------------
|Date: February 14, 2007 |  | /s/ Alan M. Pearce                                                                              
|                        |  | Alan M. Pearce                                                                                  
|                        |  | Chief Financial Officer; Director (Principal
Financial Officer and Principal Accounting Officer)



51